Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

For the transition period from                      to                     

 

Commission file number 001-38975

 

 

Wanda Sports Group Company Limited

(Exact name of Registrant as specified in its charter)

 

 

Not applicable

(Translation of Registrant’s name into English)

Hong Kong

(Jurisdiction of incorporation or organization)

9/F, Tower B, Wanda Plaza

93 Jianguo Road, Chaoyang District

100022, Beijing

People’s Republic of China

(Address of principal executive offices)

Honghui Liao, Chief Financial Officer

Telephone: +86-10-8558-8813

Email: brianliao@wanda.cn

At the address of the Company set forth above

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Trading
Symbol(s)

  

Name of each exchange
on which registered

American depositary shares, every two American depositary shares representing three Class A ordinary shares    WSG   

The Nasdaq Stock Market LLC

(The Nasdaq Global Select Market)

Class A ordinary shares, no par value*      

 

 

*

Not for trading, but only in connection with the listing of the American depositary shares on The Nasdaq Stock Market LLC (Nasdaq Global Select Market).

Securities Registered Pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covering by the annual report:

As of December 31, 2019, there were 205,031,173 ordinary shares outstanding, no par value, out of which (i) 58,063,466 Class A ordinary shares and (ii) 146,967,707 Class B ordinary shares.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.     Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☐   Accelerated filer  ☐    Non-accelerated filer  ☒       Emerging growth company  ☐   

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐           International Financial Reporting Standards as issued        Other  ☐
          by the International Accounting Standards Board  ☒       

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ☐            Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    ☐  Yes    ☐  No

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

PART I

  

ITEM 1.

  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      5  

ITEM 2.

  OFFER STATISTICS AND EXPECTED TIMETABLE      5  

ITEM 3.

  KEY INFORMATION      5  

ITEM 4.

  INFORMATION ON THE COMPANY      42  

ITEM 4A.

  UNRESOLVED STAFF COMMENTS      70  

ITEM 5.

  OPERATING AND FINANCIAL REVIEW AND PROSPECTS      70  

ITEM 6.

  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      103  

ITEM 7.

  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      112  

ITEM 8.

  FINANCIAL INFORMATION      116  

ITEM 9.

  THE OFFER AND LISTING      117  

ITEM 10.

  ADDITIONAL INFORMATION      118  

ITEM 11.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT CREDIT, MARKET AND OTHER RISK      125  

ITEM 12.

  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      126  

PART II

  

ITEM 13.

  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      128  

ITEM 14.

  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      128  

ITEM 15.

  CONTROLS AND PROCEDURES      128  

ITEM 16A.

  AUDIT COMMITTEE FINANCIAL EXPERT      131  

ITEM 16B.

  CODE OF ETHICS      131  

ITEM 16C.

  PRINCIPAL ACCOUNTANT FEES AND SERVICES      131  

ITEM 16D.

  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      131  

ITEM 16E.

  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      131  

ITEM 16F.

  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT      131  

ITEM 16G.

  CORPORATE GOVERNANCE      132  

ITEM 16H.

  MINE SAFETY DISCLOSURE      132  

PART III

  

ITEM 17.

  FINANCIAL STATEMENTS      133  

ITEM 18.

  FINANCIAL STATEMENTS      133  

ITEM 19.

  EXHIBITS      133  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

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RELIANCE ON SEC RELIEF FROM FILING REQUIREMENTS

We are filing this annual report on Form 20-F for the year ended December 31, 2019, or annual report, in reliance on the Order, or the Order, issued by the Securities and Exchange Commission, or the SEC, issued March 25, 2020 pursuant to Section 36 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, granting exemptions from specified provisions of the Exchange Act and certain rules thereunder (Release No. 34-88465).

On April 7, 2020, we furnished a Current Report on Form 6-K to the SEC to indicate our intention to rely on the relief granted by the Order. As a result of the outbreak and spread of COVID-19, and government and business continuity measures adopted in response thereto, we closed our corporate offices across the group and requested that all employees either work remotely or work at office premises in shifts for limited periods of time. Restrictions on access to our facilities resulted in delays by us in the preparation of our financial statements and by our independent public accountant in the completion of the necessary audit procedures. This, in turn, hampered our ability to complete our financial statements and annual report by the April 30, 2020 filing deadline.

CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT ON FORM 20-F

On March 26, 2020, we entered into a definitive stock purchase agreement, or the WEH sale agreement, with Advance, a private family-owned business, as buyer for the sale of 100% of the shares of WEH, through which we conduct a substantial part of our mass participation sports business, or the WEH business. This transaction, or the WEH sale, is subject to various closing conditions, including regulatory approval, but excluding approval of our shareholders. See “Item 4.A. History and development of the Company – The WEH Sale.”

The historical financial information included in this annual report has not been restated or otherwise modified to reflect the WEH sale. A description of the WEH business has been retained because there is no assurance that the WEH sale will be completed and because an understanding of the WEH business remains relevant to the discussion and analysis of our historical results. As of and for the year ended December 31, 2019, the WEH business represented 25% of our revenue and 27% of our gross profit for the period, and 47% of our total assets, and recorded a net loss of €259.5 million, mainly due to impairment losses. The mass participation sports business that will remain ours immediately following the completion of the WEH sale is referred to herein as the retained mass participation business.    

Except for references in “Item 3.D. Risk Factors” and “Item 4.B. Business Overview – Our Segments – Mass Participation,” and except as stated otherwise, “we,” “us,” “our” and “our company” refer to our holding company, Wanda Sports Group Company Limited, and its subsidiaries as of the completion of the group restructuring in March 2019, and to the predecessor operations of Infront, WEH and WSC prior to the group restructuring. In the context of describing our operations and consolidated financial information following the group restructuring, such terms also refer to our consolidated VIE and its subsidiaries. In “Item 3. Key Information – D. Risk Factors” and in “Item 4.B. Business Overview – Our Segments – Mass Participation,” “we,” “us,” “our” and “our company” refer to our business excluding the WEH business and the retained mass participation business, respectively.

In addition, except where the context otherwise requires and for purpose of this annual report:

 

   

“ADSs” refers to American depositary shares, with every two ADSs representing three Class A ordinary shares;

 

   

“China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this annual report only, Taiwan, Hong Kong and Macau;

 

   

“Chinese yuan” and “RMB” refer to the legal currency of China;

 

   

“Class A ordinary shares” refers to our class A ordinary shares;

 

   

“Class B ordinary shares” refers to our class B ordinary shares;

 

   

“Companies Ordinance” refers to Chapter 622 of the Laws of Hong Kong, which came into force on March 3, 2014;

 

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“Cooperation Agreement” refers to the cooperation agreement we entered into with Dalian Wanda GCL and Wanda Culture Holding Co. Limited, a subsidiary of Wanda Culture, in 2019;

 

   

“Dalian Wanda GCL” refers to Dalian Wanda Group Co., Ltd., which was founded and controlled by its chairman and president, Mr. Jianlin Wang;

 

   

“Dalian Wanda Group” refers to Dalian Wanda GCL and its consolidated subsidiaries (excluding us);

 

   

“digital media partner” refers to a partner to which we provide services through our in-house DPSS capabilities through a separate service contract (namely, outside the scope of a rights-in arrangement with a rights owner or a rights-out arrangement with a rights-out client), to generate revenue in our DPSS segment;

 

   

“DPSS” refers to Digital, Production, Sports Solutions;

 

   

“event” is defined by the venue or location of a sport and, in connection with our mass participation sports business, includes owned events, licensed events and/or licensed-in events (unless the context requires otherwise). One or more race(s) or other sports activities occurring at the same venue or location over a short period (often over a weekend) are considered a single event, except that an IRONMAN event and an IRONMAN 70.3 event scheduled in the same location on the same weekend are considered two separate events;

 

   

“event day” is a day per location where at least one of our spectator sports or DPSS employees is actively contributing to the event occurring in that location;

 

   

“EUR” or “euro” or “€” is the lawful currency of the European Economic and Monetary Union;

 

   

“FIFA” refers to the Fédération Internationale de Football Association, the world’s governing body of football;

 

   

“fiscal year” refers, in any given year, to the period from January 1 to December 31;

 

   

“gross-paid athlete” refers to every person who pays an entry fee to participate in an owned event in our mass participation sports business;

 

   

“group restructuring” refers to the creation of Wanda Sports Group Company Limited, our holding company, and a series of related steps that completed in March 2019 and resulted in Wanda Sports Group Company Limited beneficially holding 100% of the equity interests in Infront and WEH, and having control over and consolidating the operating results of WSC through a VIE structure;

 

   

“HK$” or “Hong Kong dollars” refers to the legal currency of the Hong Kong;

 

   

“Hong Kong” refers to Hong Kong, Special Administrative Region of China;

 

   

“IFRS” refers to International Financial Reporting Standards as issued by the International Accounting Standards Board;

 

   

“Infront” refers to Infront Holding AG and its subsidiaries;

 

   

“Infront China” refers to Infront Sports & Media (China) Co., Ltd., an indirect wholly-owned subsidiary of Infront Holding AG in China;

 

   

“licensed event” refers to an event for which we or WEH, as the case may be, own the underlying intellectual property but do not organize or operate the event (but instead license the organization and operation of the event to third parties against the payment of a license fee);

 

   

“licensed-in event” refers to an event for which the retained mass participation business did not, and does not, own the underlying intellectual property but which it organizes or operates itself pursuant to a license agreement, such as, for example, (i) the IRONMAN 70.3 events, the Rock ‘n’ Roll Marathon Series and the Epic Series in China (these licensing arrangements are currently intra-group and will continue after the completion of the WEH sale in accordance with the terms of the WEH License Agreement) and (ii) the Chengdu Marathon (which is licensed by WSC from the Chengdu government) and the Shenyang International Marathon (which is licensed by WSC from the Shenyang government);

 

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“ordinary shares” or “shares” refers to our Class A ordinary shares and our Class B ordinary shares;

 

   

“owned event” refers to an event for which we or WEH, as the case may be, own the underlying intellectual property and that we or WEH, as the case may be, organize and operate ourselves or themselves;

 

   

“participating athletes” refers, unless the context otherwise requires, to persons who participate in an owned event, including gross-paid athletes and individuals participating due to complimentary entry;

 

   

“partner” means a rights-in partner, rights-out client, digital media partner or other stakeholder in the sports ecosystem;

 

   

“project” refers to each contract-based arrangement undertaken by us in our spectator sports and DPSS businesses with a rights owner or other partner relating to a particular event, which provides an annual revenue contribution of at least €100,000;

 

   

“rights-in contract” or “rights-in arrangement” refers to a contractual arrangement entered into with a rights-in partner providing us with certain rights to use the intellectual property to a sports event, which is the basis on which we, in turn, enter into rights-out contracts, and under which we may also provide services through our in-house DPSS capabilities to generate revenue in our Spectator Sports segment;

 

   

“rights-in partner” refers to a rights owner with which we have entered into a rights-in contract;

 

   

“rights-out client” refers to a contractual counterparty, such as brands and media companies, with which we have entered into a rights-out contract;

 

   

“rights-out contract” or “rights-out arrangement” refers to a contractual arrangement entered into with a rights-out client pursuant to which we monetize, through media distribution, sponsorship and/or marketing, the rights acquired through a rights-in contract, and, as the case may be, provide services through our in-house DPSS capabilities, to generate revenue in our Spectator Sports segment;

 

   

“rights owner” refers to an owner of intellectual property to a sports event, such as ourselves for our owned events, a sports federation, a sports league or a sports club;

 

   

“Swiss francs” refers to the legal currency of Switzerland;

 

   

“US$” or “US dollar” or “$” or “dollars” refers to the legal currency of the United States;

 

   

“United States” or “U.S.” refers to the United States of America;

 

   

“Wanda Culture” refers to Beijing Wanda Culture Industry Group Co., Ltd., a subsidiary of Dalian Wanda GCL;

 

   

“WEH” refers to World Endurance Holdings, Inc. and its subsidiaries;

 

   

“WEH License Agreement” refers to the exclusive multi-event license agreement entered into in March 2020 by and between WEH, as licensor, and Guangzhou Wanda Sports Development Co. Ltd., as licensee; and

 

   

“WSC” refers to Wanda Sports Co., Ltd., which is our VIE, and its subsidiaries.

Our reporting currency is the euro. This annual report contains translations of euro amounts into US dollars and of US dollars amounts into euros at specific rates solely for the convenience of the reader. The conversion of euro into US dollars in this annual report is based on the exchange rate set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System.

Unless otherwise noted or in connection with specific dates mentioned in this annual report (in which case the translation was made at the exchange rate applicable at such specific date), all translations from euro to US dollars and from US dollars to euro in this annual report were made at a rate of €0.8907 to US$1.00, the exchange rate on December 31, 2019 set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System. We make no representation that any euro or US dollar amounts could have been, or could be, converted into US dollars or euro, as the case may be, at any particular rate, the rates stated below, or at all.     

 

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FORWARD-LOOKING STATEMENTS

This annual report contains statements that constitute forward-looking statements, including statements concerning our industry, our operations, our anticipated financial performance and financial condition, and our business plans and growth strategy and product development efforts. All statements other than statements of historical facts are forward-looking statements. Known and unknown risks, uncertainties and other factors, including those listed under “Item 3. Key Information – D. Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements

You can identify forward-looking statements by words or phrases such as “may,” “might,” “will,” “should,” “estimate,” “is/are likely to,” “potential,” “project,” “plan,” “anticipate,” “expect,” “intend,” “outlook,” “believe” and other similar expressions. These forward-looking statements include, but are not limited to, statements about:

 

   

the impact of the COVID-19 pandemic on our business, operations, results of operations, financial condition, cash flows and liquidity;

 

   

our goals and strategies, including following the completion of the WEH sale;

 

   

the expected growth in our industry;

 

   

our expectations regarding our ability to attract rights-in partners and monetize their rights through rights-out arrangements;

 

   

our future business development, results of operations and financial condition;

 

   

competition in our industry;

 

   

general economic and business conditions; and

 

   

assumptions underlying or related to any of the foregoing.

We have based forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you are cautioned not to place undue reliance on forward-looking statements, which relate only to events or information as of the date on which the statements are made and involve various risks and uncertainties. Our forward-looking statements do not reflect the potential impact of any future acquisitions or investments we may make.

Failure of our industry to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. In addition, due to the significant changes affecting the sports ecosystem, projections or estimates about our business and financial prospects involve significant risks and uncertainties. If any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we refer to in this annual report and have filed as exhibits hereto completely and with the understanding that our actual future results may be materially different from what we expect.

 

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PART I

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3.

KEY INFORMATION

 

A.

SELECTED FINANCIAL DATA

The following selected consolidated statements of operations data for the years ended December 31, 2019, 2018 and 2017, the selected consolidated balance sheet data as of December 31, 2019 and 2018, and the selected consolidated cash flow data for the years ended December 31, 2019, 2018 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this annual report. Our selected consolidated balance sheet data as of December 31, 2017 have been derived from our audited consolidated financial statements not included in this annual report. Our consolidated financial statements have been prepared in accordance with IFRS. Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read this section together with our consolidated financial statements and the related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.

Selected Consolidated Statement of Profit or Loss Data

The following table presents our selected consolidated profit or loss data for the periods indicated.

 

     For the year ended December 31,  
     2019      2019      2018      2017  
     (US$ ‘000s,
unless
indicated
otherwise
and except
for per
share data)
     (€ ‘000s, unless
indicated otherwise and
except for per share
data)
 

Revenue

     1,156,484        1,030,080        1,129,186        954,598  

Cost of sales

     (770,585      (686,360      (763,793      (624,093
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit(1)

     385,899        343,720        365,393        330,505  
  

 

 

    

 

 

    

 

 

    

 

 

 

Personnel expenses

     (183,656      (163,582      (144,433      (135,105

Selling, office and administrative expenses

     (77,105      (68,677      (52,043      (54,710

Depreciation and amortization

     (40,749      (36,295      (32,846      (22,129

Impairment of goodwill

     (285,535      (254,326      —          —    

Other operating income/(expense), net

     2,730        2,432        (26,801      2,882  

Finance costs

     (89,819      (80,002      (53,711      (53,300

Finance income

     2,599        2,315        11,842        27,871  

Share of profit of associates and joint ventures

     1,979        1,763        5,566        509  
  

 

 

    

 

 

    

 

 

    

 

 

 

(Loss)/profit before tax

     (283,657      (252,652      72,967        96,523  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income tax

     (23,784      (21,184      (18,955      (17,731
  

 

 

    

 

 

    

 

 

    

 

 

 

(Loss)/profit for the period

     (307,441      (273,836      54,012        78,792  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin(2) (%)

     33.4        33.4        32.4        34.6  

Earnings/(loss) per share

           

Basic

     (1.63      (1.45      0.31        0.46  

Diluted

     (1.63      (1.45      0.30        0.44  

Weighted average number of ordinary shares used in computing earnings/(loss) per share, basic

     189,480        189,480        169,331        169,331  

Weighted average number of ordinary shares used in computing earnings/(loss) per share, diluted

     198,673        198,673        169,331        169,331  

 

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(1)

Cyclicality driven by the timing cycle of sports events has a significant impact on the comparability of our results from one period to the next. In 2018, both total revenue and total cost of sales were impacted significantly due to media production activities in connection with the 2018 FIFA World Cup RussiaTM accounted for in our DPSS segment. These activities are undertaken pursuant to our cost-plus contractual model under which both revenue and costs are fully accounted for in our consolidated statement of profit or loss, including reimbursement revenues and reimbursement costs. Reimbursement revenues represent revenue that has associated costs of a similar, generally matching, amount (reimbursement costs), thereby resulting in a negligible gross margin impact. The negligible gross margin impact from reimbursement revenues and reimbursement costs (as opposed to a zero gross margin impact as may be otherwise expected) is due to temporary timing differences mainly resulting from foreign exchange effects on invoice settlements. See “Item 5. Operating and Financial Review and Prospects” for further information including the amounts of reimbursement revenues and reimbursement costs for each of 2019, 2018 and 2017.

(2)

Represents gross profit as a percentage of total revenue for the relevant period.

Selected Consolidated Balance Sheet Data

The following table presents our selected consolidated balance sheet data for the periods indicated.

 

     As of December 31,  
     2019      2019      2018      2017  
     (US$ ‘000s)      (€ ‘000s)  

Total current assets

     677,468        603,420        619,446        654,466  

Total non-current assets

     1,338,992        1,192,641        1,263,065        1,167,897  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     2,016,460        1,796,061        1,882,511        1,822,363  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     803,227        715,434        1,172,530        1,094,564  

Total non-current liabilities

     957,239        852,613        718,996        787,172  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     1,760,466        1,568,047        1,891,526        1,881,736  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total shareholders’ equity/(deficit)

     255,994        228,014        (9,015      (59,373
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liability and shareholders’ equity

     2,016,460        1,796,061        1,882,511        1,822,363  
  

 

 

    

 

 

    

 

 

    

 

 

 

Selected Consolidated Cash Flow Data

The following table presents our selected consolidated cash flow data for the periods indicated.

 

     For the year ended December 31,  
     2019      2019      2018      2017  
     (US$ ‘000s)      (€ ‘000s)  

Selected Consolidated Cash Flow Data

           

Net cash flows from/(used in) operating activities

     31,127        27,725        66,588        145,678  

Net cash flows from/(used in) investing activities

     (153,348      (136,587      (57,120      (104,142

Net cash flows from/(used in) financing activities

     104,539        93,113        (65,449      76,976  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase/(decrease) in cash and cash equivalents

     (17,682      (15,749      (55,981      118,512  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at beginning of year

     198,774        177,048        230,419        124,344  

Effect of foreign exchange rate changes, net

     2,470        2,199        2,610        (12,437

Transfer to assets held for sale

     (307      (273      —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of year

     183,255        163,225        177,048        230,419  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Non-IFRS Financial Measures

We use EBITDA and Adjusted EBITDA, each a non-IFRS financial measure, in evaluating our operating results and for financial and operational decision-making purposes.

We believe that these measures help identify underlying trends in our business that could otherwise be distorted by the effect of certain expenses that we include in our profit/(loss) from operations and net profit/(loss). We believe that EBITDA and Adjusted EBITDA each provide useful information about our results of operations, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.

These non-IFRS financial measures should not be considered in isolation or construed as an alternative to profit/(loss) from operations and net profit/(loss) or any other measure of performance, or as an indicator of our operating performance. Investors are encouraged to review EBITDA, Adjusted EBITDA and the reconciliation to the most directly comparable IFRS measure as set forth below. EBITDA and Adjusted EBITDA presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

The following table shows the reconciliation of EBITDA and Adjusted EBITDA to our (loss)/profit of the period for the periods indicated.

 

     For the year ended
December 31,
 
     2019      2018  
     (US$ ‘000s)      (€ ‘000s)      (€ ‘000s)  

(Loss)/profit for the period

     (307,441      (273,836      54,012  

Income tax expense

     23,784        21,184        18,955  

Net interest expenses

     76,112        67,793        24,587  

Depreciation and amortization

     40,749        36,295        32,846  
  

 

 

    

 

 

    

 

 

 

EBITDA

     (166,796      (148,564      130,400  
  

 

 

    

 

 

    

 

 

 

Goodwill impairment(1)

     285,535        254,326        —    

Share-based compensation(2)

     28,610        25,483        8,723  

Expenses or charges relating to acquisition(3)

     5,314        4,733        5,055  

Expenses or charges relating to IPO or financing(4)

     7,457        6,642        3,850  

Restructure and disposal of investments / subsidiaries(5)

     3,120        2,779        —    

Loss from termination of customers(6)

     —          —          1,928  

Change in fair value of investments(7)

     (1,376      (1,226      445  

Bad debt expenses relating to specific customer(8)

     —          —          27,122  

Loss on foreign exchange and derivatives, and other financial charges(9)

     11,108        9,894        17,282  

Estimated client compensation relating to fraudulent activities(10)

     13,967        12,440        —    

Expenses or charges relating to Sarbanes-Oxley compliance(11)

     186        166        —    

Remeasurement of contingent consideration(12)

     631        562        —    

Net loss on disposal of assets(13)

     168        149        —    
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     187,924        167,384        194,805  
  

 

 

    

 

 

    

 

 

 

 

(1) 

Represents one-time impairment losses of goodwill where the annual goodwill impairment test indicated that there were two out of nine cash-generating units (“CGUs”) (WEH North America CGU and WEH Oceania CGU) having a value in use lower than their respective carrying amounts.

(2)

Share-based compensation in 2019 consisted of share-based compensation and social insurance expenses related to the equity incentive plan adopted at the Infront level and borne by us. This line item has been excluded as it is a non-recurring expense.

(3) 

Represents expenses incurred for professional fees such as legal counsel, auditors, underwriters, valuation experts and consultants mainly in respect of strategic acquisitions in our mass participation sports business.

(4) 

Represents professional fees of legal counsel, auditors, due diligence experts, consultants, and related expenses for our IPO and financing.

 

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(5) 

Represents expenses or costs incurred in the restructuring and disposal of investments and subsidiary companies. In 2019, the expenses or costs mainly represented business optimization and other reorganization expenses incurred in WEH and Infront. While event and contract performance reviews are performed as a normal course of business, these larger restructuring processes are considered non-recurring.

(6) 

Eliminates the impact from the extraordinary loss of certain rights-in partners following their insolvency.

(7) 

Eliminates the net investment loss on investments.

(8) 

Eliminates expenses reflecting expected credit losses in trade account receivables that we had outstanding from a sports marketing and media rights firm (MP & Silva) as well as contract assets, as a result of the initiation of MP & Silva’s insolvency process.

(9) 

Represents the loss on foreign exchange, derivative financial instruments at fair value through profit or loss, termination of the cross-currency swap and other financial charges.

(10) 

Represents the amount estimated to be paid by Infront as compensation in connection with fraudulent activities presumably undertaken by a former senior employee of Infront.

(11) 

Represents Sarbanes-Oxley Act consulting charges paid to third parties.

(12) 

Represents fair value change of contingent consideration from business combination.

(13) 

Represents net loss on disposal of property, plant and equipment and intangible assets.

 

B.

CAPITALIZATION AND INDEBTEDNESS

Not applicable.

 

C.

REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

 

D.

RISK FACTORS

Overriding Risks Related to the Outbreak and Spread of COVID-19The outbreak and global spread of COVID-19 could have a material adverse impact on our business, results of operations, financial condition, cash flows or liquidity.

The outbreak of a novel coronavirus (which causes the disease known as COVID-19), was first identified in December 2019 in Wuhan, China, and has since been declared a pandemic by the World Health Organization as it has spread around the world. Government efforts to contain the spread of COVID-19 through city lockdowns or “stay-at-home” orders, widespread business closures, restrictions on travel and emergency quarantines, among others, and responses by businesses and individuals to reduce the risk of exposure to infection in themselves or others, including reduced travel, cancelation of meetings and events, self-isolation, and implementation of work-at-home policies, among others, have caused significant and unprecedented disruptions to the global economy and normal business operations across sectors and countries. The foregoing will likely adversely affect business confidence and consumer sentiments, continue to be accompanied by significant volatility in financial and commodity markets, and have macro-economic implications, including increased unemployment levels, reduced levels of economic growth and possibly a global recession, the effects of which could be felt well beyond the time the spread of infection is contained.

In terms of our business, sports events throughout the world, including the Tokyo 2020 Summer Olympics and European football league seasons, have been postponed or canceled, and few currently have plans to resume in the near future. Postponement or cancelation of test or qualifying events, as well as disruptions to training schedules for athletes and event volunteers across all sports, are likely to affect the timing and quality of events scheduled to be held months in the future. We expect that the foregoing developments will adversely affect our Mass Participation as well as our Spectator Sports and DPSS segments, and that adverse effect could be material. The impact on us, and the entire sports ecosystem, will depend in part on the duration of the pandemic and the containment responses, and the accompanying restrictions on public gatherings. Moreover, we expect that when stay-at-home restrictions are lifted, they will be lifted in phases, and that restrictions on large public gatherings may well be lifted later than others. Once stay-at-home orders and restrictions on public gatherings are lifted more broadly, it is unclear what ongoing restrictions will be imposed on, or expected of, sports venues in terms of capacity and physical distancing, and what the implications of those restrictions may be on re-engagement with live sports events. In addition, the level of fan re-engagement with live sports events is impossible to predict. We have no control over the timing, scope or content of the restrictions that will impact our business, and expect that these will be affected by a patchwork of regional, national, municipal and local laws and regulations.

 

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With respect to our mass participation events, we gradually postponed or canceled substantially all of our events, beginning in January in China and expanding to Europe and North America as the pandemic spread. By April 2020, substantially all of our remaining sports events had been canceled or postponed, and there has been a corresponding impact on registrations for upcoming events. The decision to continue, restrict or otherwise modify, postpone, cancel or resume a postponed event will be based on availability of local community resources, ongoing event-specific risk assessment in coordination with the relevant healthcare and government authorities, and any relevant local regulatory restrictions.

With respect to our spectator sports and DPSS operations, sports events of all kinds have been postponed or canceled, which will have an adverse impact on our results of operations in our Spectator Sports and DPSS segments. Broader macro-economic implications, including reduced consumer confidence, could, following the direct disruption of events due to cancelations or postponements, adversely affect attendance at sports events and discretionary spending, which in turn would also adversely affect sponsorship opportunities, as advertisers reduce budgets. Moreover, as we are regularly engaged in negotiations with rights-in partners, rights-out clients, digital media partners, broadcasters, sponsors and other stakeholders, our ability to engage in these negotiations (for new contracts, to extend existing contracts or for acquisitions) may be adversely affected by any of the foregoing as well as the more practical impediments to scheduling and holding meetings, including restrictions on travel, office closures, business continuity concerns and other disruptions. We may also be compelled to accept contract terms that are less favorable to us than those we currently enjoy. Less favorable or unsuccessful contract negotiations could have short-, medium- or longer-term revenue implications for us. To the extent that any of our key counterparties are also adversely affected by the spread of COVID-19 and responses thereto, we could also be adversely affected in any number of respects. Lengthy or renewed shut downs could have an adverse impact on sports clubs due to significant liquidity pressures. In addition, the current and evolving environment raises untested issues, such as contingency plans for games without live audiences and theories of contractual interpretation in relation to a pandemic. More fundamental shifts may see changes in distribution models (including to direct-to-consumer) or acceleration of trends to move distribution activities in-house.

COVID-19 and the responses thereto could have a range of other effects on us. For example, the implementation of business continuity plans in a fast-moving public health emergency could have an adverse effect on our internal controls (potentially giving rise to significant deficiencies or material weaknesses in future years) and could increase our vulnerability to information technology and other systems disruptions.

We currently are unable to predict the duration and severity of the spread of COVID-19, and responses thereto, on our business and operations, and on our results of operations, financial condition, cash flow and liquidity, as these depend on rapidly evolving developments, which are highly uncertain and will be a function of factors beyond our control, such as the continued spread or recurrence of contagion, the implementation of effective preventative and containment measures, the development of effective medical solutions, the extent to which governmental restrictions on travel, public gatherings, mobility and other activities remain in place or are augmented, financial and other market reactions to the foregoing, and reactions and responses of communities and societies. While we expect we will suffer adverse effects, the more severe the outbreak and the longer it lasts, the more likely it is that the effects on us and our business will be materially adverse.

Certain of our contracts have capital commitments and minimum revenue guarantees (see “Item 5. Operating and Financial Review and Prospects – A. Operating Results – Our Revenue-Generation Models – Our Spectator Sports and DPSS Segments”), which are tied to events taking place. Where events have already taken place in 2020 under arrangements providing for a series events, we are in negotiations with rights owners to reduce our capital commitment and minimum revenue guarantee obligations in light of COVID-19 postponements and cancelations. We also are in negotiations with rights owners on how to modify capital commitments and minimum revenue guarantees to reflect potential changes in revenue streams due post-COVID-19 adjustments (for example, hospitality and sponsorship).

 

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Infront Sports and Media AG has a credit facility, or the Infront credit facility, under which €469.5 was outstanding at April 30, 2020. That credit facility has a leverage ratio covenant (see “Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Indebtedness”), from which we expect we will need relief due to the impact of COVID-19 on our revenue. Failure to do so could result in an acceleration of the debt outstanding under the Infront credit facility unless we and the lenders reach agreement to avoid a default and acceleration. We are in discussion with our lenders with respect to covenant relief.

Each of the following risk factors should be read in the context of the foregoing uncertain trends, events and developments as they affect us (collectively, the COVID-19 Risks), whether or not we make specific reference to the COVID-19 Risks, given the potentially pervasive and fundamental effects of the pandemic on our business.

Efforts to mitigate the impact of the COVID-19 pandemic on our business through new services and solutions may prove unsuccessful.

We are working closely with our partners, rights holders, sponsors and event organizers to assess the impact of COVID-19 on timing and the protocols for future sports events and to manage the financial impact across our value chain. In anticipation that sports events might proceed in the medium- to longer-term without spectators, we are seeking to develop additional digital and broadcast solutions to offer to, and prepare partners for, the expected demand for new forms of live and digital sports consumption. We are also partnering with leading sports organizations to provide innovative online racing and event experiences to keep our athlete communities connected and engaged. These include virtual and eSports events. These efforts to mitigate the impact of the COVID-19 pandemic involve new digital, broadcast and production services for new forms of live and digital sports consumption, and the extent to which audiences and athletes will be willing to engage in virtual and eSports events remains to be seen, and it is therefore unclear whether these efforts ultimately will have a significant positive impact on our business, results of operations, financial condition, cash flows or liquidity and sufficiently offset reductions in historical services and solutions. In addition, these efforts may cause us to incur new costs that could outweigh their ultimate benefit.

Risks Related to Potential Sale

We may be unable to complete the WEH sale.

On March 26, 2020, we entered into the WEH sale agreement with Advance for the sale of 100% of the shares of WEH, through which we conduct the WEH business. The WEH sale is subject to various closing conditions, including regulatory approval, but excluding approval of our shareholders. See “Item 4.A. History and development of the Company – The WEH Sale.” The closing of the WEH sale may not occur as expected, or at all. Should the WEH sale not close, we would retain and continue to operate the WEH business. Should that be the case, however, the WEH business and we, indirectly as the ongoing owners, may suffer from a reputational perspective or otherwise by reason of the failure to have sold the WEH business.

We will now rely on a license agreement with WEH to organize and operate events in China.

We rely on the WEH License Agreement to organize and operate, until the end of 2025, IRONMAN, IRONMAN 70.3, Rock ‘n’ Roll Marathon Series and Epic Series events in China. If WEH were to develop or acquire new sports events during the term of the WEH License Agreement, WEH has agreed to negotiate with us prior to licensing any such new events in China to a third party. The WEH License Agreement subjects us to various qualitative standards (for example, with respect to the usage of trademarks and quality of branded materials and insurance), quantitative standards (for example, with respect to minimum and maximum events per year), as well as to financial obligations and various other obligations relating to the organization, administration and operation of the licensed-in events.

The licensed-in events under the WEH License Agreement represented approximately 20% of our 2019 mass participation sports business globally (excluding the WEH business).

Under the WEH License Agreement, we are obligated to pay damages to WEH in the event of cancelation of licensed-in events other than due to force majeure. It is unclear how this force majeure clause will be interpreted if licensed-in events are canceled due to COVID-19, particularly those sports events that are canceled without a government order to do so. License fees remain due even if events are canceled due to force majeure.

 

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Risks Related to our Expected Ongoing Business and Industry

Our inability to adapt our business to changing conditions that affect the sports ecosystem could have a material adverse effect on us.

We seek to create value for stakeholders in all parts of the sports ecosystem, from rights owners to brands and advertisers, and from fans to athletes. The sports ecosystem is undergoing significant transformation at the expense of traditional distribution channels as a result of changes in consumer behavior, and in particular the ways in which sports fans consume sports events. We attribute the behavioral change in large part to emerging digital technologies, as well as other alternative distribution platforms. More recently, these changes have been exacerbated by the COVID-19 pandemic, which has encouraged us and other sports organizations to provide more virtual and eSport options, among other digital content, in order to allow athletes and fans to participate in sports events that would otherwise be canceled or that might appear unsafe. Digital cable, internet and wireless content providers continue to improve technologies, content offerings, user interfaces and business models that allow consumers to access video-on-demand and internet-based content with interactive capabilities. As the technology evolves to accommodate multimedia services and products, we need to adapt to, and support, these services and products. However, we may be unable to identify and capitalize on opportunities that present themselves in a timely manner, or at all. For example, our ability to leverage new technologies could suffer if we are unable to offer digital solutions that achieve market acceptance across our sports categories and our markets.

In addition, innovative new technologies, models and platforms have the potential to provide significant opportunities for rights owners to engage more directly and comprehensively with fans and other sports enthusiasts through a wide variety of platforms and technologies, rather than through us. Particularly for sports that have significant global appeal, rights owners may have the financial resources, organizational capability and/or strategic focus to develop in-house capabilities to monetize their rights themselves, to terminate their relationships with us or reduce their level of engagement with us and monetize their rights in-house. For example, we previously worked with FIFA to manage the distribution of the extensive FIFA Films archive dating back to 1930, including film and television coverage of previous editions of FIFA World Cup events and other FIFA events. In 2018, this contract was not renewed as FIFA decided to bring this management capability in-house. The Chinese Basketball Association, or CBA, in 2017, decided to reduce the scope of the relationship between them and us in relation to the CBA League and the CBA All-Star Game. As a result, we are no longer the exclusive partner to the CBA for the sale of sponsorship and media rights for these events. To the extent that FIFA, the CBA or other rights owners choose to develop further in-house capabilities and otherwise engage the ecosystem more directly through such capabilities, it would likely have a material adverse effect on our business, results of operations or prospects.

The impact of the COVID-19 Risks are difficult to predict, and that extends to assessing what the impact will be across the sports ecosystem.    

Our business is sports-centric, and our success is tied to sports generally and, in particular, to changes in popularity of the sports on which we choose to focus.

We are largely dependent on the continued popularity of sports generally and, in particular, the popularity of the sports upon which we have chosen to focus. Changes in popularity of these sports globally or in particular countries or regions could be influenced by competition from other sports or alternative forms of entertainment. A change in sports fans’ or athletes’ tastes, a change in perceptions relating to particular sports (for example, if a particular aspect of such sports become unpopular due to safety or other considerations), or a popularity shift towards sports events that are currently under-represented or not represented at all in our portfolio, could result in reduced engagement in our events or otherwise reduce the value of our rights portfolio. This, in turn, could reduce sponsorship or other advertising demand relating to the sports.

We could also be adversely affected by developments or trends affecting rights owners or other stakeholders in a particular sport. For example, several European football clubs in recent years with whom we have entered into rights-in arrangements have subsequently been relegated to lower level leagues or have suffered financial difficulty. Overall, football accounted for 31%, 48% and 47% of our Spectator Sports segmental revenue in 2019, 2018 and 2017, respectively. Further, the creation of new and/or expansion of existing sports events, such as the envisaged expansion of the 2021 FIFA Club World Cup, could draw away some of the attention and appetite for existing sports events in our portfolio. Our inability to acquire the rights to such new and/or expanded sports events could have a material adverse effect on our business, results of operations or prospects.

 

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Adverse developments relating to a sport or to key stakeholders in a sport, including but not limited to the COVID-19 Risks, could affect our ability to monetize acquired rights or possibly recover investments we have made in the relationships with the rights owners, and to the extent that any such sport is material to our revenue, could have a material adverse effect on our business, results of operations or prospects.

We may be unable to maintain or enhance our portfolio of sports rights, which is a key component of our growth strategy.

We own, or otherwise have contractual rights to, an extensive portfolio of global, regional and national sports properties from which we seek to generate revenue across the value chain, including events operation, media production and media distribution, sponsorship and marketing, digital solutions and ancillary services. The contractual rights portion of our portfolio is derived from rights-in arrangements and rights-out arrangements, which generally are for fixed terms. We are dependent upon relationships with key rights owners and other stakeholders throughout the sports ecosystem, from which we benefit, including with the leadership of sports federations, to maintain or obtain new rights. We have in the past been, and may in the future be, subject to risks that our partners in our spectator sports or DPSS businesses cease to work with us, develop their own service offerings or products instead of using ours, use alternative intermediaries for certain products or services, or fail to renew existing contracts on terms favorable to us, or at all.

Certain of our key rights-in contracts currently are scheduled to end over the next few years, in particular our contracts with Lega Serie A for media sales relating to Lega Serie A games (by the end of the 2020/21 season), with the German Football Association (Deutscher Fussball-Bund, or DFB) for media and sponsorship rights relating to the DFB Cup (by the end of the 2021/22 season) and with FIFA for Asian media sales and host broadcasting for FIFA World CupTM and other FIFA events (by the end of 2022). While we seek to enhance and broaden our portfolio of sports rights, we may not ultimately be able to secure new long-term relationships or maintain our existing relationships (in the latter case, for example, because of changes in leadership and priorities of the relevant rights owners, changes in operating models that contemplate moving monetization efforts in-house, liquidity issues affecting rights owners or other adverse consequences arising from the COVID-19 Risks, or our own management changes) and, if we are able to renew or extend rights-in contracts, the terms we are able to negotiate may not be as profitable as they were before. See also “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Our Revenue-Generation Models—Our Spectator Sports and DPSS Segments.”

In monetizing our rights-in arrangements and otherwise engaging with rights owners, we believe we enjoy a competitive advantage to the extent we can offer a portfolio of sports rights covering key aspects of the relevant sports, and can supplement our engagement with rights owners by applying our in-house DPSS capabilities. For example, for winter sports, we are able to offer a broad range of rights while representing each of the seven Olympic Winter Sports federations. Were we to fail to maintain a particular part of a portfolio, we would not only lose the benefit of the particular contract, but could lose the benefit of the portfolio effect as well.

We may be locked into certain forms of monetization and miss out on other opportunities due to our failure to properly adapt to future developments in our contracts.

We generally seek broad scope in our rights-in contractual provisions to monetize rights. However, the evolving nature of the sports ecosystem may result in new forms of media distribution, sponsorship and/or other forms of potential rights monetization (perhaps unforeseen when the contract was entered into). If we have not provided adequate scope to capture such developments, we may lose out on potential opportunities and the value of our acquired rights may be diminished.

 

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We derive significant revenue from the monetization of the rights we acquire from rights owners, and our profitability will be adversely affected if we are unable to enter into attractive rights-out arrangements.

For rights we do not own (generally, in our spectator sports business), we seek to monetize rights acquired on a rights-in basis through rights-out arrangements. We seek to leverage our network of relationships with, among others, rights owners, rights-out clients, broadcasters, advertisers and local governments to secure and monetize the rights that are critical to our success. We rely on estimates, third party evaluations, systematic analysis and projections of the market share and future value of licensable content controlled by each content partner, as well as our own models and in-house expertise, to forecast our ability to recoup our investment on the rights-in side, taking into account actual content acquisition costs to be incurred over the duration of the arrangement. To the extent that our actual revenue from rights-out arrangements, which often are of a shorter duration than our rights-in arrangements, underperforms relative to our expectations, our profitability may be materially adversely affected. These risks are heightened when we seek to monetize rights under commission-based rights-in contracts (often for media distribution) that obligate us to provide rights-in partners with minimum revenue guarantees or under full rights buy-out contracts with future payment obligations (as opposed to arrangements providing only for a commission for rights-out deals closed), which could reduce our profit on any such contracts, or in fact trigger a loss on any such contract. See also “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Our Revenue-Generation Models—Our Spectator Sports and DPSS Segments.” Moreover, any time lag between payments we make under our rights-in arrangements and the payments we receive in monetizing such rights through rights-out arrangements could have a material adverse effect on our levels of working capital. The COVID-19 Risks will likely impact both the rights-in arrangements (potentially reducing the rights to monetize) as well as the rights-out arrangements (potentially reducing the alternatives for monetization opportunities as well as our ability to be paid on a timely basis).

The contracts on which we depend in our Spectator Sports and DPSS segments impose numerous obligations on us.

In our Spectator Sports and DPSS segments, which collectively accounted for 68.3%, 74.8% and 73.7% of our revenue in 2019, 2018 and 2017, respectively, we rely on contractual arrangements to obtain the rights we can then monetize, and otherwise to provide a comprehensive suite of sports-related services through our DPSS capabilities, either as part of a rights-in or rights-out arrangement (accounted for under our Spectator Sports segment) or as part of a separate service contract (accounted for under our DPSS segment).

The contracts with our partners that underpin these arrangements are complex, come in a number of different forms and impose numerous obligations on us, including obligations to:

 

   

provide, with respect to our rights-in contracts, future payment obligations, recorded as capital commitments, under our full rights buy-out contracts (€1.9 billion as of December 31, 2019) and minimum revenue guarantees under commission-based contracts (€1.2 billion as of December 31, 2019);

 

   

take adequate measures to monitor and prevent third parties (including rights-out clients) from infringing or misusing intellectual property of our rights-in partners;

 

   

meet detailed and sports event specific minimum transmission, live coverage quality, host broadcaster and media production requirements;

 

   

maintain records of financial activities and grant rights-in partners access to and rights to audit our records;

 

   

adopt and implement effective anti-piracy, data protection and geo-blocking measures; and

 

   

comply with certain security and technical specifications.

If we are unable to meet our obligations or if we breach any of the other terms of our contractual arrangements, we could be subject to monetary penalties and our rights under such arrangements could be terminated, or could be subject to other remedies including obligations to renegotiate terms. Any of the foregoing could have a material adverse effect on our business, results of operations, financial condition or prospects.

Moreover, our contracts are governed by the laws of a variety of jurisdictions, which laws may differ in significant respects from laws in the United States. For example, under Swiss law, the governing law of some of our rights-in contracts, a contract may be terminated at any time with immediate effect for cause, which includes unforeseeable changes in factual circumstances that make it objectively unbearable for a party to continue a contractual relationship. If our contracts are terminated, this could have a material adverse effect on our business, results of operations, financial condition or prospects.

 

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It is unclear how contractual provisions, including force majeure clauses, will be interpreted in any particular jurisdiction, let alone across our contract base, in light of the COVID-19 Risks.    

We depend on the success of live sports events, which are inherently susceptible to risks, and our exposure to such risks is potentially heightened as a result of the nature of mass participation sports events and the athlete experiences we seek to create.

Live sports events, and, in particular those involving large numbers of athletes or fans, require significant logistical capabilities, including substantial resources for safety and security, and sufficient infrastructure, which can be complex, difficult to coordinate and costly to have in place. In particular, many of our mass participation sports events take place in open-air locations across long distances that are easily accessible to the general public. Even where logistics and infrastructure have been appropriately planned for, public live events, including our owned events, involve risks that may be beyond our control or the control of the relevant organizer (if not us). Such risks may include terrorist attacks, gun violence or other security threats (such as the 2013 Boston Marathon bombing), travel interruption or accidents, traffic incidents, weather-related interruptions, natural catastrophes, public health emergencies (such as the outbreaks of SARS-CoV, MERS-CoV and, most recently, the coronavirus and the attendant COVID-19 Risks), equipment malfunction, labor strikes or other disturbances. Due to the COVID-19 Risks, the industry faces significant rethinking of live sports events, which could be restricted in size or format, or replaced by virtual events.

Over and above the COVID-19 Risks, any of the foregoing could result in personal injuries or deaths, canceled events and other disruptions to events adversely affecting the success of the events. They could also adversely affect our ability to stage events in the future, such as if host cities choose not to partner with us given event-related risks. In certain cases, they could otherwise impact the profitability of our events. We could also be exposed to liability or other losses for which we may not have insurance or suffer reputational harm. As a result of the COVID-19 Risks, it might also become more expensive for us to obtain insurance in the future, and insurance against certain risks, including those related to a pandemic, may be unavailable.

In the case of our mass participation sports events, we focus on creating inspirational sports event experiences for athletes and cultivating highly engaged and dedicated communities of athletes. As a result, factors adversely impacting the enjoyment of athletes during such events, even relatively minor issues, such as adverse weather conditions or poorly functioning infrastructure, to the extent they become associated with, and undercut, our events or, more generally, our brands, could lead to declining popularity of our events in future periods. As we coordinate all aspects of these events, including executing the events on-site, and undertaking the many items in preparation for each event, event cancelations or poor execution could also lead to declining popularity of our events in the future. In addition, our events typically require us to obtain permits from the relevant host cities or municipalities, and restrictive permit conditions, poor delivery of services (including those not directly under our control) or the widespread cancelation of sports events could also harm our brands. Even prior to the sports events cancelations related to the outbreak and global spread of COVID-19, in 2018, two of our sports events in China were canceled on short notice due to circumstances beyond our control. Although in certain jurisdictions we may not be legally required to reimburse athletes for canceled (or otherwise adversely affected) events, we may choose to do so for reputational or other considerations, adversely impacting our results of operations.

Our mass participation sports business could be harmed if the relationships on which we depend were to change adversely or terminate.

In our mass participation sports business, each of our events typically involves an exhaustive checklist of items to be organized and coordinated among numerous parties. Thus, good relationships with these parties are key to a successful event. In particular, for the successful operation and execution of our sports events, we often are dependent on relationships with local authorities and government agencies. Local authorities or government agencies provide us funding (such as in the form of host city fees for our events) and essential services (such as police and security services, traffic control and assistance in obtaining the required approvals and permits) that are integral to the success of the event. For the registration of athletes for many of our mass participation sports events, we use third-party providers. We are also heavily reliant on volunteers for the organization of our mass participation sports events, and a decline in numbers of volunteers or any restrictions on volunteers assisting with events would have a material adverse effect on the profitability of these events. If we are unable to rely on providers or volunteers for services in our mass participation sports business, it could cause disruptions to our events or otherwise adversely impact our relationships with our community of athletes. Any adverse changes in or termination of any of these relationships could have a material adverse effect on our business, results of operations, financial condition or prospects.

 

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We could be adversely affected by a failure to protect our intellectual property or the intellectual property of our partners.

We have significant intellectual property rights, in particular with respect to our business brands, such as the Infront brand. We regard our intellectual properties as critical to our success, and we depend, to a large extent, on our ability to develop and maintain our intellectual property rights. To do so, we rely upon a combination of trade secrets, confidentiality policies, nondisclosure and other contractual arrangements and copyright, software copyright, trademark, and other intellectual property laws. We also make use of the intellectual property rights from our rights-in partners to monetize the rights acquired through rights-out arrangements. Despite our efforts to protect our or our partners’ intellectual property rights, the steps we take in this regard might not be adequate to prevent, or deter, infringement or other misappropriation of our or our partners’ intellectual property by competitors, former employees or other third parties.

Monitoring and preventing any unauthorized use of our or our partners’ intellectual property is difficult and costly, and any of our or our partners’ intellectual property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient to provide us with competitive advantages. Litigation or proceedings before governmental authorities, or administrative and judicial bodies may be necessary to enforce our intellectual property rights and to determine the validity and scope of our rights. Our efforts to protect our intellectual property in such litigation and proceedings may be ineffective and could result in substantial costs and diversion of resources and management time, each of which could substantially harm our operating results. In addition, because of the rapid pace of technological change in our industry, parts of our business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms, or at all. Any failure in protecting or enforcing our or our partners’ intellectual property rights could have a material adverse effect on our business, results of operations, financial condition or prospects.

We are focused on expanding our business in China, which exposes us to certain risks arising from economic, public health or political developments and regulatory uncertainties.

We intend to continue to grow our presence in China. Economic conditions in China are sensitive to global economic conditions, changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. While China’s economy has grown significantly over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing down in recent years. As a result of the COVID-19 Risks, China’s economic growth is likely to decline, and any severe or prolonged slowdown in the Chinese economy could adversely affect our efforts in China and our growth strategy and could result in a material adverse effect on our business, results of operations, financial condition or prospects. There have also been concerns on the relationship among China and other Asian countries, which may result in or intensify potential conflicts in relation to territorial disputes. In addition to the COVID-19 Risks, the Chinese economy was negatively impacted by the tariffs on exports that China and the United States each imposed on the other in an escalating trade war in 2019 and early 2020. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term.

In addition, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of our economic activities in China. In particular, the PRC legal system is based on written statutes and prior court decisions have limited value as precedent. Since these laws and regulations are relatively new and the PRC legal system continues to evolve, the interpretations of many laws, regulations and rules may not be uniform and enforcement of these laws, regulations and rules involves uncertainties. Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis, or at all, and may have a retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. Any claim, investigation or proceeding against us could result in a material adverse effect on our business, results of operations, financial condition or prospects. See also “—We are subject to a range of laws, including anti-corruption, anti-money laundering, antitrust/competition and sanctions laws and regulations, and business conduct rules, across a number of jurisdictions and could be adversely affected by failures to be fully compliant” as to the impact of regulation in China.

 

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We may be unable to expand successfully into new countries and new markets or expand within countries and markets in which we already are present.

Expansion into new countries and new markets, or expansion within countries and markets in which we already are present, could expose us to significant legal and regulatory challenges, political and economic instability or other adverse consequences. Such expansion may require the building of new relationships with stakeholders, which may have different interests or standards (for example, compliance standards) than stakeholders for which our operations have otherwise been designed and for which we may have limited capabilities to leverage. Our lack of experience and operational expertise in these countries or markets could put us in a disadvantageous position relative to our competitors with more experience or capabilities to address the relevant challenges. In addition, we might not be able to register and secure our brands and related intellectual property rights in these markets (for example due to pre-existing trademarks) which would prevent us from operating, or make it very difficult or costly to operate our branded events in these markets. These factors, among others, could cause our expansion into new countries or markets to be unsuccessful or less profitable than what we are otherwise able to achieve, could cause our operating costs to increase unexpectedly or our revenue to decrease or, in general, could otherwise negatively affect our global ambitions.

The markets in which we operate are highly competitive.

While there are a limited number of competitors that cover essentially the entire value chain of the sports ecosystem as we currently do, including offering event organization, media production, media distribution, sponsorship and marketing, digital solutions and sports-related ancillary services, each component of the sports ecosystem is highly competitive. This is the case for various aspects of our business, including our mass participation sports events (the rights to which we generally own), and the monetization of rights through a combination of our rights-in and rights-out arrangements, which depends on our ability to acquire the rights and to monetize profitably such rights and the other services we offer.

In the case of mass participation sports events, we face competition principally from other providers of competitive events. These events may offer athletes the ability to participate in events that represent or are perceived to represent better value for money than what we offer (and there may be low barriers of entry in offering a particular activity to athletes). We may face competition in countries or markets from competitors that have or are able to establish a more significant local presence than we can. In addition, we face competition from other sports and non-sports events that may be more attractive or appealing to potential athletes.

In acquiring rights from rights owners and monetizing those rights through rights-out contracts, we seek to build strong audiences, raise the value of media rights, create effective communication platforms for brands, events and organizations, and ultimately provide the vital link between sports events and consumers. We face competition both in acquiring the rights and in seeking to monetize the rights we do acquire. Notwithstanding prior relationships, rights owners might choose alternative partners. If we are unable to acquire rights, our ability to broaden our rights portfolio and grow our business will be limited. In a competitive environment, we may lose existing business or we may win less profitable business, including to the extent we may be required to increase the prices we pay to our rights-in partners for the rights or to accept lower prices from our rights-out clients.

We also face potential competition from in-house solutions and non-traditional media service providers, such as Facebook, Amazon, Apple, Netflix and Google, and, if they increase their focus on sports-related content, including through over-the-top, or OTT, platforms, we may find it difficult to compete, particularly as some of the potential competition has greater financial, technical and other resources than we do. In China, certain large companies, such as Alibaba, Tencent and Suning, are increasingly investing in sports businesses, including in sports-related content and media channel development. While we are developing our own digital solutions through our in-house DPSS capabilities for existing and new partners in response to competitive threats, it may impact the profitability or effectiveness of the part of our business focused on the traditional sports value chain, which has been built to a significant degree on creating a bridge between our rights-in partners and rights-out clients. Even if we are successful in competing in offering digital solutions, the profitability of such solutions may be less than what we have been able to achieve through traditional rights-in and rights-out arrangements historically, which could have a material adverse effect on our business, results of operations, financial condition or prospects. We could also experience similar competition in ancillary services we provide to the sports ecosystem from existing or new competitors.

 

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Our partners may expand their internal capabilities or otherwise integrate themselves vertically and more systematically, which could result in a reduction in (high volume) opportunities available to us (thereby potentially increasing competition for opportunities that do exist) or otherwise lead to potential new competitors. See also “—Our inability to adapt our business to changing conditions that affect the sports ecosystem could have a material adverse effect on us.”

Our results of operations are also subject to cyclicality and our financial performance in any one fiscal year is unlikely to be indicative of, or comparable to, our financial performance in different fiscal years.

We experience cyclical trends in our results of operation, particularly in our Spectator Sports and DPSS segments. Some major sports events for which we hold rights or provide services only take place on a biennial basis. This includes the FIS Ski World Championships and the CEV European Volleyball Championships, which occur only in odd years, and the EHF EURO Championships in handball, which occur in even years. Other major sports events occur on a quadrennial basis (such as the FIFA World Cup and UEFA EURO football events). For these events, we may record a portion of the revenue in the years leading up to the event pursuant to our revenue recognition policy. However, the revenue from such events tends to be most significant in the year the event is taking place, which results in significant fluctuations in our results of operations between years. For example, FIFA-related revenue increased in line with the FIFA event cycle, including the 2017 FIFA Confederations Cup Russia, leading up to, and including, the 2018 FIFA World Cup Russia. The comparability of our results of operations from our DPSS segment is particularly impacted by cyclicality due to our media production contracts for key events held every four years, such as the FIFA World Cup and the FIFA Women’s World Cup. Our agreements as host broadcaster for such events are mainly on a cost-plus basis where we are reimbursed for our expensed production costs. As a result, the reimbursement revenues and the reimbursement costs reflected on our consolidated statement of profit or loss can have a significant impact on the comparability of our results of operations, in terms of revenue and cost of sales, but not net income. See also “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Other Factors Affecting our Results of Operations across Segments” for a discussion of the cyclicality of our business and the impact on our results of operations.

Comparing our operating results on a year-to-year basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Moreover, we are unable to predict the impact of the COVID-19 Risks on timing of events, let alone on cyclicality more broadly.

Our results of operations are subject to seasonality and our financial performance in any one interim period is unlikely to be indicative of, or comparable to, our financial performance in subsequent interim periods.

Ultimately, we generate revenue from sports events, and these events occur at different times throughout the year. Most of our event-related revenue as well as event-related expenses are recognized in the month in which an event occurs. In our Mass Participation segment, revenue and direct expenses tend to be higher in the second and third quarters of our fiscal year given our event calendar. In our Spectator Sports segment, revenue and expenses tends to be lower in the third quarter as winter sports events have not yet commenced and there is less activity in European football compared with other quarters. Over the course of the four quarters, fluctuations in gross profit shows a largely similar pattern to fluctuations in revenue. Other than in years of a FIFA World Cup, our results of operations in our DPSS segment tend to have less seasonal fluctuations compared to our other segments. See also “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Other Factors Affecting our Results of Operations across Segments” for a discussion of the seasonality of our business and the impact on our results of operations. Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.

 

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Failure to effectively manage changes in our business could place a significant strain on our management and operations.

The successful expansion of our business, both in terms of new countries and new markets, and further penetration into existing countries or markets, requires that we have effective planning and management processes in place and could place a strain on our management systems, infrastructure and other resources. To manage our growth successfully, we must continue to improve and expand our systems and infrastructure in a timely and efficient manner. Our controls, systems, procedures and resources may not be adequate to support a changing and growing company. Failure to respond effectively to growth and other changes in our business, including as a result of acquisitions, could have a material adverse effect on our business, results of operations, financial condition or prospects.

We may be unable to pursue strategic partnerships, acquisitions and investment opportunities to further complement our service offerings.

We may selectively partner with, invest in or acquire companies that complement or enhance our existing operations as well as those that are strategically beneficial to our long-term goals, including opportunities that help broaden our customer base, expand our service offerings and grow the number of our events. The costs of identifying and consummating partnerships, acquisitions and investments may be significant, and we may not be able to find suitable opportunities at reasonable prices, or at all, in the future. Finding and consummating partnerships, acquisitions or investments requires management time and effort, and finding and consummating such opportunities in new markets can be affected by foreign ownership restrictions, availability of suitable targets, concerns over the possibility of a global recession and uncertain business cases in ways that pose greater risk than initiatives that target established markets. More broadly, opportunities in markets in which we have limited or no prior experience may pose a greater risk. Failure to further expand our service offerings through strategic partnerships, acquisitions and investment opportunities could have a material adverse effect on our business, results of operations, financial condition or prospects.

We may have difficulties integrating completed acquisitions or may face other risks as a result of acquiring new operations.

To the extent we pursue further strategic acquisitions or other investment opportunities to extend or complement our operations, we may be exposed to additional risks, including:

 

   

an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;

 

   

an acquisition may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;

 

   

we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;

 

   

an acquisition, whether or not consummated, may disrupt our ongoing business, divert resources, increase our expenses and distract our management;

 

   

we may not be able to successfully integrate our business and we may not be able to fully realize the anticipated strategic benefits of the acquisition;

 

   

we may face challenges inherent in effectively managing an increased number of employees in diverse locations;

 

   

we may be affected by potential strains on our financial and managerial controls and reporting systems and procedures;

 

   

we may be subject to potential known and unknown liabilities associated with an acquired business;

 

   

use of cash to pay for acquisitions could limit other potential uses for our cash;

 

   

we may need to record impairment losses related to potential write-downs of acquired assets or goodwill in future acquisitions; or

 

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to the extent that we issue a significant amount of equity or convertible debt securities relating to future acquisitions, existing stockholders may be diluted and earnings per share may decrease.

We may not succeed in addressing these or other risks or any other problems encountered relating to the integration of any acquired business. The inability to integrate successfully the business, technologies, products, personnel or operations of any acquired business, or any significant delay in achieving integration, could have a material adverse effect on our business, results of operations, financial condition or prospects.

A decline in general economic conditions or a disruption of financial markets may affect advertising markets or the discretionary income of consumers, which in turn could adversely affect our profitability.

Our operations are affected by general economic conditions and, in particular, conditions that have a direct impact on the demand for entertainment and leisure activities. Declines in general economic conditions could reduce the level of discretionary income that our sports fans and athletes have to spend on attending or participating in sports events (including our mass participation sports events) or on sports-related programming or consumer products more generally (thereby potentially reducing sponsorship and advertising spending), any of which could adversely impact our revenue. Adverse economic conditions, including volatility and disruptions in financial markets, may also affect other stakeholders in the sports ecosystem, thereby reducing their engagement. For example, declines in consumer spending more broadly could affect advertising spend, which in turn could adversely affect broadcasters. These factors could reduce the prices we can obtain in our rights-out arrangements. The COVID-19 Risks already have had, and are expected to continue to have, adverse impacts on the financial markets and it is expected that they also will have significant adverse impacts on economic conditions, including possibly a global recession, which, in turn, could have a significant impact on consumer and business sentiment.

Security breaches could result in economic loss, damage our reputation, deter athletes and fans from attending the sports events we organize or could result in other negative consequences.

We collect, process and store significant amounts of data concerning our athletes and fans, as well as data pertaining to our business partners and employees. Our systems are vulnerable to software bugs, computer viruses, internet worms, break-ins, phishing attacks, attempts to overload servers with denial-of-service, or other attacks or similar disruptions from unauthorized use of our and third-party computer systems, any of which could lead to system interruptions, delays, or shutdowns, causing loss of critical data, the unauthorized access of data or the inability to access our own data. Functions that facilitate interactivity with other internet platforms could increase the scope of access of hackers to user accounts. Although we have in place systems and processes that are designed to protect our data, prevent data loss, disable undesirable accounts and activities on our platform and prevent or detect security breaches, such measures may not be sufficient, particularly as techniques used to gain unauthorized access to data and systems (or make our own data or systems unavailable to us), disable or degrade service, or sabotage systems, are constantly evolving. If an actual or perceived breach of security occurs to our systems or a third party’s systems, we also could be required to expend significant resources to mitigate the breach of security and to address matters related to any such breach, including notifying users or regulators. In addition, we are subject to various regulatory requirements relating to the security and privacy of such data, including restrictions on the collection and use of personal information of users and are required to take steps to prevent personal data from being divulged, stolen, or tampered with. We are subject, for example, to the EU General Data Protection Regulation, which is significantly more stringent than other similar regulation on the subject matter in the United States, as well as the Cybersecurity Law of the PRC, which became effective in June 2017 and is subject to uncertainties as to the interpretation and application of the law.

Any failure, or perceived failure, by us to maintain the security of our user data or to comply with privacy or data security laws, regulations, policies, legal obligations, or industry standards, may result in governmental enforcement actions and investigations (including fines and penalties, or enforcement orders requiring us to cease operating in a certain way), litigation or adverse publicity. This may expose us to potential liability and may require us to expend significant resources in responding to and defending allegations and claims. Moreover, claims or allegations that we have violated laws and regulations relating to privacy and data security, or have failed to adequately protect data, may result in damage to our reputation and a loss of confidence in us by our athletes, fans or our partners, and could have a material adverse effect on our business, results of operations, financial condition or prospects. If the third parties we work with violate applicable laws or contractual obligations or suffer a security breach, such circumstances also may put us in breach of our obligations under privacy laws and regulations and could in turn have a material adverse effect on our business, results of operations, financial condition or prospects.

 

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We could be adversely affected by assertions or allegations, even if untrue, that we infringed or violated intellectual property rights of third parties.

Third parties may in the future assert that we have infringed, misappropriated or otherwise violated their copyright or other intellectual property rights, and as we face increasing competition, the possibility of intellectual property rights claims against us grows. Third parties may take action against us if they believe that certain content available on our platform violates their copyright or other intellectual property rights. We may be adversely affected to the extent we are alleged to have infringed on the rights, contractual or otherwise, of third parties, including in our pursuit of new revenue-generating opportunities relating to our brands.

We may also face contractual liability to our licensees in connection with a failure to adequately protect the trademark and other rights granted under licenses, which could have a material adverse effect on our reputation, business, results of operations, financial condition or prospects.

Demand for our content would be adversely affected by unauthorized distribution of that content.

To the extent that live sports events are made available on the internet by pirates or other unauthorized re-broadcasters and these are illegally streamed, demand for our products and services could decline and we could lose the benefit of any associated revenue, which could have a material adverse effect on our reputation, business, results of operations, financial condition or prospects.

We depend upon our strong brands and, therefore, could be adversely affected by any failure to maintain, protect and enhance those brands.

Strong brands and brand recognition are key to our increasing the number of strategic relationships and the level of engagement of our athletes, and, in general, enhancing our attractiveness to various stakeholders in the sports ecosystem, such as rights owners, brands, advertisers, fans and athletes. Since we operate in highly competitive markets, brand maintenance and enhancement, in addition to providing consistent, high quality customer experiences, are key to and directly affect our ability to maintain our market position. We rely on brands, including for our licensed-in events, as well as on our business brands such as Infront, to maintain our market leadership in various areas. Maintaining and enhancing our brands depends largely on our ability to continue to deliver comprehensive, high-quality content and service offerings, which may not always be successful. Our branding efforts may not be successful and not receive anticipated results, and we may incur significant branding costs along the way. In addition, these activities may not be successful or we may be unable to achieve the brand promotion effect we expect. If we do not successfully maintain our brands, our reputation and business prospects could be harmed.

Our brands may be impaired by a number of factors, including any failure to keep pace with technological advances, a decline in the quality or breadth of our offerings (including live sports events organization), any failure to protect our intellectual property rights, or alleged violations by us of law and regulations or public policy. Additionally, if our partners fail to maintain high standards, our business brands, Infront in particular, could be adversely affected. Such factors could be the direct result of negative media coverage. See “—We could be adversely affected by negative media coverage of illegal or unethical conduct of participants in the sports ecosystem or of other negative developments affecting individual sports or individual events.”

Our brands and our business may also be harmed by aggressive marketing and communications strategies of our competitors, as well as by a decline in confidence in our industry and its participants as a result of one or more such participants facing financial difficulties. Any negative, inaccurate, false or malicious publicity relating to our company, our products and services, or our industry, regardless of its veracity, could harm our reputation and brands and materially deter our partners, athletes and fans from seeking our services or participating in or attending our sports events.

 

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We have a relatively limited history operating as an integrated business and our business and prospects would be adversely affected were we to fail to properly integrate our operations and processes.

Our structure changed significantly in 2019 in anticipation of our initial public offering, or IPO, and is expected to change further following completion of the WEH sale. We have a relatively limited history of operating under our new configuration as an integrated business. Prior to the implementation of the significant changes to our structure, which included a corporate reorganization and the establishment of the VIE structure for our operating entities in China, our constituent business units operated relatively independently of one another as part of a privately owned group, with their own management, financial reporting and internal control and compliance structures. In addition, there were certain areas in which our business units were in direct competition with one another. We continue to work on integrating WSC and Infront China to improve organizational effectiveness and combine the resources and experience of Infront China and WSC to further unlock value in China. In addition, we now present financial statements on a consolidated basis, and although we are not currently planning to integrate our legacy information systems, we have harmonized our management reporting processes. Were we to fail to make the transition to an integrated public company timely and effectively, whether in terms of coordinated operations, effective internal reporting and controls, or otherwise, it could have a material adverse effect on our business or prospects.

We could be adversely affected by negative media coverage of illegal or unethical conduct of participants in the sports ecosystem or of other negative developments affecting individual sports or individual events.

We could be subject to, or otherwise affected by, negative publicity about us or our business, shareholders, affiliates, directors, officers or other employees, as well as our partners, including rights owners, governing bodies that oversee sports or athletes in sports with which we are involved or, more broadly, host cities, our competitors or others who share any of our various business models, or other participants in the sports ecosystem. For example,

 

   

Accidents or other situations involving serious harm or even death to one or more athletes or spectators could lead to negative publicity about us or our events. The increasing popularity of mass participation sports events also means an increasing number of inexperienced participants who may be more prone to injury or heart attacks, which can be fatal.

 

   

Negative publicity could be prompted by actual or alleged criminal activities, such as money laundering, tax evasion or bribery, or other misconduct affecting one or more sports. Corruption in sports, including use by athletes of performance- and image-enhancing drugs and fraudulent medical procedures to avoid detection, match-fixing and host-rights corruption, has been a feature of the sports landscape over time. In 2015, for example, U.S. federal prosecutors alleged the use of bribery, fraud and money laundering in connection with the award of media and marketing rights for high-profile international competitions, including the Americas’ FIFA World Cup qualifying tournaments, and showpiece tournaments, such as the CONCACAF Gold Cup and Copa América. By the end of 2015, according to the U.S. Department of Justice, charges had been brought against 41 individuals and entities, including at the time 12 individuals and two sports marketing companies that had already been convicted. Other regulators launched investigations, including criminal proceedings brought by the Office of the Attorney General of Switzerland, or OAG. In December 2017, two high-ranking football officials were convicted of racketeering conspiracy and related crimes arising from acceptance of bribes in exchange for media and marketing rights to various football tournaments. In 2018, there were press reports that U.S. federal prosecutors had issued grand jury subpoenas in what was described as a broad investigation of international sports corruption. In 2016, it was reported that the OAG had launched investigations of bribery in connection with the award of the 2006 FIFA World Cup to Germany, as part of a broader probe of FIFA, which also involved allegations against the founder and former chairman of Infront, the late Robert Louis-Dreyfus.

 

   

From time to time reports have appeared in the press citing rumors of conflicts of interest or nepotism involving a member of our senior management and his relationship with FIFA and, in particular, its former president.

 

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The then President of Infront Italy (a subsidiary of Infront) and two of his associates, including the then Managing Director and a former manager of Infront Italy, were the subjects of an investigation in 2015 by the office of the Milan prosecutor in connection with allegations of improper conduct in the sale of Serie A television rights for 2015-2018, including collusion in the tendering/bid process, money laundering, obstructing the investigation and criminal conspiracy. The investigation was accompanied by searches of Infront Italy’s office premises. The engagements of the President and the Managing Director were subsequently terminated by mutual agreement. While the investigations were dropped, an antitrust proceeding in Italy against various Italian companies, including Infront Italy, is ongoing. In 2016, an administrative court annulled the decision of the Italian Competition Authority against the defendants, including Infront Italy. An appeal by the Italian Competition Authority before the court of last instance (Consiglio di Stato) was heard in December 2019. As a result of the COVID-19 outbreak, the Italian government temporarily suspended administrative court proceedings, and it remains unclear when a judgment in the appeal proceedings can be expected.

 

   

Athletes have been accused of using performance-enhancing drugs and fraudulent medical procedures, which has impacted individual sports, such as cycling, or broader events, such as allegations against Russian athletes at the London 2012 Summer Olympic Games.

 

   

Press reports have noted that the increasing popularity of marathon running in China has been marred by complaints and scandals, including reports of large-scale cheating at the Shenzhen half-marathon in November 2018.

 

   

In May 2019, Infront announced via press release, or the Infront Announcement, that it had discovered fraudulent activities relating to perimeter board advertising for football matches in Germany governed by the DFB that are presumed to have been committed by one of its former senior employees. See “Item 15. Controls and Procedures—Internal Control over Financial Reporting—Lack of sufficient segregation of duties between sales and execution of contracts, invoicing and implementation of services to prevent and detect fraud.” The Infront Announcement also mentions that gifts, at Infront’s cost, were provided by the former employee to employees of at least one of Infront’s clients that exceeded reasonable and customary values. The former employee made certain formal allegations involving certain senior Infront employees as to their involvement in the fraudulent activities, which we believe, based on Infront’s internal investigations, are without merit and the State Attorney for the Canton of Thurgau, Switzerland has terminated its formal inquiry into the former employee’s allegations. The former employee may, in the future, continue to make these, or other, allegations. Infront has reached settlements with the vast majority of affected advertising clients and continues to follow up with a small number of others (including some that have not responded despite repeated outreach). The overall investigation of the State Attorney is ongoing, and Infront continues to cooperate with the investigation.

We cannot predict the impact on our business or the broader sports ecosystem of future negative publicity arising from COVID-19 concerns, for example, as to the risks to spectators in close quarters.

The impact of negative publicity can be exacerbated by the increasing popularity of instant messaging applications and social media platforms, which provide individuals with access to a broad audience of users and other interested persons. The availability of information through these applications and platforms is virtually immediate as is its impact, without affording us an opportunity for redress or correction. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. The effect of instant communications on social media can be exacerbated by the increasing prevalence on social media of “influencers.”

Negative publicity of the types described above, even in circumstances where the connection with us is remote, could have a material adverse effect on our reputation, business, results of operations, financial condition or prospects.

We rely on the skills, experience and relationships of our senior management team and other key personnel, the loss of which could adversely affect us.

We believe that our future success depends significantly on our continuing ability to attract, develop, motivate and retain our senior management and a sufficient number of international sports and media specialists and other experienced and skilled employees. We benefit from the track record of our senior management team, including Philippe Blatter, in building strategic personal relationships with key stakeholders throughout the sports ecosystem and successfully growing our operations through acquisitions and strategic partnerships. Our senior management team works closely with seasoned international sports and media specialists who offer deep execution and operational experience combined with their relationships with various stakeholders. Our combined team offers deep industry experience throughout the sports ecosystem, as well as in-depth knowledge of the Chinese sports market.

 

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Qualified individuals are in high demand, particularly in the sports ecosystem, and we may have to incur significant costs to attract and retain them. The loss of any member of the senior management team or such specialists could be highly disruptive and adversely affect our business operations in respect of a particular stakeholder or more broadly impact our future growth. Moreover, if any of these individuals joins a competitor or undertakes a competing business, we may lose crucial business secrets, personal relationships, technological know-how and other valuable resources, notwithstanding our contractual arrangements designed to mitigate this loss.

We are subject to a range of laws, including anti-corruption, anti-money laundering, antitrust/competition and sanctions laws and regulations, and business conduct rules, across a number of jurisdictions and could be adversely affected by failures to be fully compliant.

As of December 31, 2019, we had offices across three continents and 16 countries. The global nature of our business requires us to comply with a wide variety of laws and regulations in each of the jurisdictions in which we operate. Such laws and regulations vary significantly from jurisdiction to jurisdiction. If we fail to comply with the laws and regulations of a particular jurisdiction, we may be prohibited from promoting and conducting our sports events in that jurisdiction or suffer other adverse consequences. The inability to present sports events over an extended period of time or in a number of jurisdictions could lead to a decline in the revenue streams generated from such events. In addition, our rights-out activities and the marketability of our sports portfolio can be adversely affected by laws and regulations in certain jurisdictions that restrict the advertising of specified products and services, including betting, alcohol, tobacco and over-the-counter pharmaceutical products. In China in particular, governmental authorities promulgate and enforce laws and regulations that cover many aspects of our operations, including the organization of events, the scope of permitted business activities, licenses and permits for various activities and foreign investments. Operators in China are required to obtain various government approvals, licenses and permits to operate. If we fail to obtain and maintain approvals, licenses or permits required for our business, we could be subject to liabilities, penalties and operational disruption and our business could be materially adversely affected. Such failures in China could adversely affect our ability to grow our business in China.

We also are subject to anti-corruption, anti-money laundering and sanctions laws and regulations, and business conduct rules, such as the U.S. Foreign Corrupt Practices Act of 1977, the United Kingdom Bribery Act of 2010, the PRC Anti-Unfair Competition Law of 2017 and the Provisional Regulations on Anti-Commercial Bribery of 1996, as well as economic sanctions programs, including those administered by the United Nations, the European Union and the Office of Foreign Assets Control in the United States and antitrust/competition laws. In Switzerland, we are subject to international economic sanctions implemented through domestic legislation. While we seek to apply a strong culture of compliance and control, our policies and procedures may not be followed at all times or effectively detect and prevent violations of the applicable laws by one or more of our employees, consultants, agents or partners. In addition, some of the countries in which we operate lack a legal system as developed as other locations in which we operate and are perceived to have high levels of corruption. Our continued geographical diversification, including in some emerging markets, development of joint venture relationships and our employment of local agents in the countries in which we operate increase the risk of violations of anti-corruption laws, sanctions or similar laws.

In late June 2019, we received a request for information from the European Commission, DG Competition in connection with an antitrust investigation into sports media rights. The request seeks general information as well as information about certain specific contacts with a competitor. We believe the request is part of an ongoing investigation that included so-called “dawn raid” inspections in April 2018 at the premises of some of our competitors, but which did not include Infront. Following an internal review with the assistance of outside counsel we have responded within the deadline, on September 30, 2019, to the request for information and intend to continue to cooperate fully with the investigation. We understand that DG Competition is still in the process of analyzing our responses. We are unable to predict the outcome of the investigation, the timetable for any action on the part of the competition authorities and any potential adverse consequences for us. Based on what is publicly available about the investigation and the timing of the request for information, we do not believe Infront is a primary target of the investigation at this time.

 

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Violations of anti-corruption and economic sanctions laws and regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts (and termination of existing contracts) and revocations or restrictions of licenses, as well as criminal fines and imprisonment. Violations of antitrust/competition laws could subject us to fines, criminal sanctions and/or civil claims and damages. In addition, any major violations could have a significant impact on our reputation and consequently on our ability to win future business and maintain long-term commercial relationships with our partners. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations or prospects.

Misconduct and errors by our employees, seasonal workers, volunteers or outsourced personnel could harm our business and reputation.

We are exposed to a range of operational risks, including the risk of misconduct and errors by our employees, seasonal workers, volunteers or outsourced personnel. We could be materially adversely affected if personal and business information were disclosed to unintended recipients. Also, we could be materially adversely affected if our employees, seasonal workers, volunteers or outsourced personnel were to abscond with our proprietary data, use our know-how to compete with us or carry out their duties in an inappropriate or fraudulent manner. For example, following the discovery in 2019 of the fraudulent activities set out in the Infront Announcement presumed to have been committed by one of Infront’s former senior employees, Infront took various external actions, including alerting affected advertising clients and offering compensation. Infront has reached settlements with the vast majority of affected advertising clients and continues to follow up with a small number of others (including some that have not responded despite repeated outreach). See “Item 15. Controls and Procedures—Internal Control over Financial Reporting.” In addition, considering the manner in which we store and use certain personal information, it is not always possible to identify and deter misconduct or errors by employees, seasonal workers, volunteers or outsourced personnel, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses, or prevent corruption by our employees (see also “—We are subject to a range of laws, including anti-corruption, anti-money laundering, antitrust/competition and sanctions laws and regulations, and business conduct rules, across a number of jurisdictions and could be adversely affected by failures to be fully compliant”). Any of these occurrences could result in our diminished ability to operate our business, reputational damage, regulatory intervention and financial harm, which could negatively impact our reputation, business, financial condition, results of operations or prospects.

Our current insurance policies may not provide adequate levels of coverage against all claims and we may incur losses that are not covered by our insurance.

We believe we maintain insurance coverage that is customary for businesses of our size and type. However, we may be unable to insure against certain types of losses or claims, or the cost of such insurance may be prohibitive. Uninsured losses or claims, if they occur, could have a material adverse effect on our reputation, business, results of operations, financial condition or prospects. While we have some event cancelation insurance, that insurance covers only a portion of the events in our Spectator Sports segment. While this coverage may offset some of our losses, including those we anticipate from the COVID-19 Risks, we nonetheless expect a material adverse impact on our 2020 revenues and profitability from the COVID-19 Risks. In addition, as a result of the COVID-19 Risks, it may become more expensive for us to obtain insurance in the future, and insurance against certain risks, including those related to a pandemic, may be unavailable.

Our mass participation sports events are physically demanding. The physical nature of our events exposes our athletes to the risk of serious injury or death. Liability to us resulting from any death or serious injury sustained by one of our athletes while racing, or by spectators or passersby watching or being in proximity to our races, regardless of whether or not covered by our insurance, could have a material adverse effect on our business, results of operations, financial condition or prospects.

Changes and uncertainties in the tax regimes in the countries in which we operate could reduce net returns to our shareholders.

Our tax position could be adversely impacted by changes in tax rates, tax laws, tax practices, tax treaties or tax regulations or changes in the interpretation thereof by the tax authorities in the jurisdictions in which we operate, as well as being affected by certain changes currently proposed by the Organization for Economic Co-operation and Development and its action plan on Base Erosion and Profit Shifting. Such changes may become more likely as a result of recent economic trends in the jurisdictions in which we operate, particularly if such trends continue. See also “—Contractual arrangements in relation to our VIE may be subject to scrutiny by PRC tax authorities and they may determine that we or our VIE owes additional taxes, which could negatively affect our financial condition.”

 

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Our actual effective tax rate may vary from our expectation and that variance may be material. A number of factors may increase our future effective tax rates, including:

 

   

the jurisdictions in which profits are determined to be earned and taxed;

 

   

the resolution of issues arising from any future tax audits with various tax authorities;

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

increases in expenses not deductible for tax purposes, including transaction costs and impairments of goodwill in connection with acquisitions;

 

   

changes in the taxation of share-based compensation;

 

   

changes in tax laws or the interpretation of such tax laws, and changes in generally accepted accounting principles; and

 

   

challenges to the transfer pricing policies related to our structure.

A tax authority may disagree with tax positions that we have taken or could assert that we are subject to tax in a jurisdiction where we believe we have not established a taxable connection, often referred to as a “permanent establishment” under international tax treaties, and such an assertion, if successful, could increase our expected tax liability in one or more jurisdictions. In addition, a tax authority may take the position that material income tax liabilities, interest and penalties are payable by us. Contesting such an assessment may be lengthy and costly and if we were unsuccessful in disputing the assessment, the implications could increase our anticipated effective tax rate, where applicable.

We are exposed to foreign currency risk.

We conduct our business in numerous countries and expect to continue to expand our geographic footprint. Because we own assets overseas and derive revenue from our international operations, our exposure to fluctuations in foreign exchange rates relates primarily to our operating activities (when cash flows are denominated in a currency other than euros, resulting in potential transaction exposure risk) and our net investments in subsidiaries with a functional currency other than euros (resulting in potential translation exposure risk). We are also subject to foreign currency fluctuations on our intercompany balances that arise from normal operations and working capital needs, as well as foreign currency fluctuations in cash balances and cash equivalents.

Our reporting currency is the euro and, as we incur expenditures in other currencies, the movement of any of these currencies against the euro could have a material adverse effect on our revenue, cost of revenue and operating margins and could result in exchange losses. We may, from time to time, hedge a portion of our currency exposures and requirements to try to limit any adverse effect of exchange rate fluctuations, but such hedging may not be successful nor sufficient. See also “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Foreign currency risk.”

Our existing indebtedness could adversely affect our financial health and competitive position.

As of December 31, 2019, we had total indebtedness (total interest-bearing liabilities) of €845.7 million, including under the Infront credit facility, under a credit facility entered into by World Triathlon Corporation, or WTC, and under an unsecured senior 364-day term loan facility entered into in March 2019 at the holding company level, which we refinanced in March 2020 (see “Item 5. Operating and Financial Review and Prospects–B. Liquidity and Capital Resources – Indebtedness”). Following the WEH sale, we will no longer include the WTC credit facility (under which €274.6 million was outstanding at April 30, 2020) on our consolidated balance sheet.

 

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Our indebtedness increases the risk that we may be unable to generate cash sufficient to pay interest and principal when due. In addition, the level and terms of our indebtedness could:

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

   

require us to dedicate a material portion of our cash flows from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, acquisitions, capital expenditures and other general corporate purposes;

 

   

limit our ability to pay dividends;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the sports ecosystem; and

 

   

limit our ability to borrow additional funds.

The Infront credit facility has a leverage ratio covenant (see “Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Indebtedness”), from which we expect we will need relief due to the impact of COVID-19 on our revenue. Failure to do so could result in an acceleration of the debt outstanding under the Infront credit facility unless we and the lenders reach agreement to avoid a default and acceleration. We are in discussion with our lenders with respect to covenant relief. In the future, we may be unable to refinance any of our indebtedness on commercially reasonable terms, or at all. Failure to refinance our indebtedness on terms we believe to be acceptable could have a material adverse effect on our business, financial condition, results of operations and cash flow. The COVID-19 Risks heighten this refinancing risk.

The agreements evidencing or governing our indebtedness contain, and any agreements evidencing or governing other future indebtedness may contain, certain restrictive covenants that may limit our ability to engage in certain activities that may otherwise be in our best interests, including to pursue growth strategies, for example, to the extent their require the incurrence of additional indebtedness. We have not previously breached and are not in breach of any of the covenants under any of these facilities; however our failure to comply with any of those covenants could result in an event of default, which, if not cured or waived, could result in the acceleration of all of our indebtedness.

As a result of our net current liabilities position as of December 31, 2019, we were required to consider our ability to continue as a going concern.

As we recorded net current liabilities as of December 31, 2019, the directors have given careful consideration to our future liquidity and performance and our available sources of finance in assessing whether we will have sufficient financial resources to continue as a going concern. Having considered that our cash flow management forecast and analysis for 2020 has presented as a positive result, the directors are confident that we are able to meet in full our financial obligations as they fall due for the next 12 months. Our inability to maintain sufficient liquidity to fund our future operations and meet our obligations would result in substantial doubt about our ability to continue as a going concern.

We have granted, and expect to continue to grant, share-based incentives, which will result in share-based compensation expenses that could have a material adverse effect on our results of operations in affected periods.

We have adopted a Management Equity Incentive Plan, or the option plan, pursuant to which we have granted options, and expect to grant options, as a result of which we recognized share-based compensation expense, beginning in the third quarter of 2019. See “Item 6. Directors, Senior Management and Employees Management—B. Compensation.” We account for expenses for share-based compensation using a fair-value based method and recognize expenses in our consolidated statement of profit or loss in accordance with IFRS. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Judgments and Estimates—Share-based compensation” for further information. We believe the granting of share-based compensation is of significant importance to our ability to attract and retain key personnel and employees, and we expect to continue to grant share-based awards in the future. Expense associated with share-based compensation could have a material adverse effect on our results of operations for the periods in which such expense is recognized.

Risks Related to Our Relationship with Dalian Wanda Group

Dalian Wanda GCL, our controlling shareholder, has had, and is expected to continue to have, effective control over the outcome of shareholder actions in our company, which may be inconsistent with the interests of other shareholders.

Dalian Wanda GCL is our controlling shareholder, with effective voting power, by reason of beneficially owning 100% of our Class B ordinary shares, representing 90.75% of our total voting power. This voting power gives it the power to control certain actions that require shareholder approval under Hong Kong law and our articles of association, including approval of mergers and other business combinations, changes to our articles of association and the number of shares available for issuance. This voting control may cause transactions to occur that might not be beneficial to you as a holder of the ADSs and may prevent transactions that would be beneficial to you. For example, this voting control may prevent a transaction involving a change of control in us, including transactions in which you as a holder of the ADSs might otherwise receive a premium for the ADSs over the then-current market price. In addition, Dalian Wanda GCL is not precluded from causing our direct parent company to sell the controlling interest in us to a third party and may do so without your approval and without providing for a purchase of your ADSs.

 

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Any adverse change, or perceived adverse change, in our relationship with, or any negative developments affecting, Dalian Wanda Group could have an adverse effect on us.

Wanda Culture is a PRC-based multinational conglomerate. We believe our business has benefited from our association with Dalian Wanda Group, including its brand name and its extensive relationships and resources in China. Over time, we may be unable to continue to benefit from the level of historical cooperation with Dalian Wanda Group. If Dalian Wanda Group were to, or were perceived to, distance itself from us, for example by decreasing its equity stake in us or pursuing activities in China in competition with us, or if there were any other adverse change in Dalian Wanda Group’s relationship with us, it could have a material adverse effect on our business, the effectiveness of the further roll-out of our business in China, our results of operations, our financial condition or prospects.

Adverse developments affecting the Dalian Wanda brand name or reputation, including as a result of negative publicity concerning the Dalian Wanda Group or its chairman, could have an adverse impact on our corporate image or reputation, and have an adverse effect on our marketing efforts. Such developments could involve political or economic events or internal matters within the Dalian Wanda Group, including the departure of its chairman.

We have the right to use trademarks owned by Dalian Wanda Group, including the Wanda name, in our legal entities and for marketing and brand purposes, under a royalty free license with no expiration date; provided, however, that if Dalian Wanda GCL ceases to own, directly or indirectly, a majority of the total voting power of our ordinary shares, the license will terminate. If this were to occur, we would lose our right to use the relevant marks under the agreement, which could have an adverse impact on the effectiveness of our marketing efforts and brands. We also benefit from a support services arrangement, the termination of which would require us to incur costs to replicate the covered services. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Cooperation Agreement with Dalian Wanda Group.”

We may be adversely impacted by conflicts of interest with Dalian Wanda Group.

Conflicts of interest may arise between Dalian Wanda Group and us and, because of Dalian Wanda Group’s controlling ownership interest in us, we may be unable to resolve such conflicts on terms favorable to us, which could have a material adverse effect on our business, results of operations, financial condition or prospects. For example, there may be business opportunities in the future that both we and Dalian Wanda Group are interested in which it decides it wishes to pursue on its own, or we may be limited in our ability to do business with companies viewed by Dalian Wanda Group as competitors. Certain of our directors are also employees of Dalian Wanda Group, which could create, or appear to create, conflicts of interest if and when these directors are faced with decisions with potentially different implications for Dalian Wanda Group and us.

Risks Related to Our Corporate Structure

We are a holding company and our sole material asset is our equity interest in our subsidiaries. Accordingly, we will depend on distributions from our subsidiaries to pay dividends and cover our corporate and other expenses.

We are a holding company and have no material assets other than our equity interest in our subsidiaries. Because we have no independent means of generating revenue, our ability to pay dividends, if any, and cover our corporate and other expenses is dependent on the ability of our subsidiaries to generate revenue to pay such dividends and expenses and then distribute them up to us. The ability of our subsidiaries to make any distributions will be subject, among others, to restrictions in our exiting or future credit facilities or other debt instruments and applicable law and regulations, which could impose withholding taxes on internal distributions. Our existing credit facilities, for example, significantly restrict our ability to pay dividends. To the extent that we need funds and our subsidiaries are restricted from making such distributions or payments under the terms of any financing arrangements or under applicable law or regulation, or otherwise are unable to provide such funds, our liquidity and financial condition could be materially adversely affected.

Risks Related to our Operations in China

While the revenue we derive from our operations in China is relatively low, we expect our operations in China to continue to grow, which presents the following additional risks.

 

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Risks Related to our VIE Arrangements

If the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply with applicable PRC regulations, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

Certain business sectors in the PRC are restricted from foreign investment under the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2019 Version) promulgated by MOFCOM and NDRC in 2019, which replaced the prior Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2018 Version). Our VIE and its subsidiaries are involved in the production and distribution of radio and television programs in China, which is restricted from foreign investment. Due to such foreign investment restrictions in the PRC and other regulatory considerations, we acquired control over, and consolidate the operating results of, WSC through a VIE structure. Our indirectly wholly-owned PRC subsidiary (Infront China), has entered into a series of contractual arrangements with our VIE and its shareholders, which enable us to exercise effective control over our VIE, receive substantially all of the economic benefits of our VIE and have an exclusive option to purchase all or part of the equity interests in our VIE. As a result of these contractual arrangements, we have control over, and are the primary beneficiary of, our VIE and, hence, consolidate its and its subsidiaries’ operating results in our consolidated financial statements.

In the opinion of our PRC legal counsel, Jingtian & Gongcheng, (i) the ownership structure of Infront China and its VIE does not contravene any applicable PRC laws and regulations and (ii) the contractual arrangements with WSC and its nominee shareholders are valid and binding upon each party to such arrangements and enforceable against each party thereto in accordance with their terms and applicable PRC laws and regulations, and will not contravene any explicit provision of any applicable PRC laws and regulations. However, our PRC legal counsel has advised us that there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations and future PRC laws and regulations, and there can be no assurance that the PRC regulatory authorities will not take a view that is contrary to, or otherwise different from, its opinion stated above. Thus, the PRC government could ultimately take a view contrary to, or otherwise different from, the opinion of our PRC legal counsel. If the PRC government finds that our contractual arrangements do not comply with its applicable restrictions, including restrictions on foreign investment, or if the PRC government otherwise finds that we, our VIE or our or its respective subsidiaries are in violation of PRC laws or regulations or lack the necessary permits or licenses to operate certain business in China, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations or failures, including:

 

   

revoking the business licenses and/or operating licenses of such entities;

 

   

discontinuing or placing restrictions or onerous conditions on our operation through any transactions between our PRC subsidiary and our VIE;

 

   

imposing fines, confiscating the income from our PRC subsidiary or our VIE, or imposing other requirements with which we or our VIE may not be able to comply; or

 

   

requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIE and terminating the equity pledges of our VIE’s shareholders, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over, our VIE.

Any of these events could cause disruption to our business operations in China and damage our reputation, which could in turn have a material adverse effect on our business, results of operations, financial condition or prospects. If occurrences of any of these events results in our inability to direct the activities of our VIE that most significantly impact it or its subsidiaries’ economic performance and/or our failure to receive the economic benefits of our VIE and its subsidiaries, we may not be able to consolidate their operating results in our consolidated financial statements.

 

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We are subject to Chinese foreign exchange controls that could limit our access to cash from our operations in China.

The PRC government imposes foreign exchange controls on the convertibility of the Chinese yuan and, in certain cases, the remittance of currency out of China. Under our current corporate structure, our Hong Kong holding company primarily relies on dividend payments from our subsidiaries, including our PRC subsidiary (Infront China) to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of State Administration of Foreign Exchange by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of State Administration of Foreign Exchange, cash generated from the operations of our PRC subsidiary in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Chinese yuan is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain State Administration of Foreign Exchange approval or registration to use cash generated from the operations of our PRC subsidiary and our VIE to pay off their respective debt in a currency other than the Chinese yuan owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than the Chinese yuan. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future.

Substantial uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law, and it may have a potential impact on the viability of our current corporate structure, corporate governance and business operations.

The Foreign Investment Law, or the FIL, formally adopted by the 2nd session of the thirteenth National People’s Congress of China on March 15, 2019, and the Regulation on Implementing the Foreign Investment Law approved by the State Council, became effective on January 1, 2020 and replaced the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Contractual Joint Ventures and the Law on Foreign-Capital Enterprises to become the legal foundation for foreign investment in China.

Conducting operations through contractual arrangements has been adopted by many PRC-based companies, including us, to obtain and maintain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions or prohibitions in China. The FIL stipulates three forms of foreign investment. However, the FIL does not explicitly stipulate the contractual arrangements as a form of foreign investment. If any other laws, regulations and rules do not incorporate contractual arrangements as a form of foreign investment, our contractual arrangements with our consolidated affiliated entities, as a whole and each of the agreements comprising such contractual arrangements, will not be affected.

Notwithstanding the foregoing, the FIL stipulates that foreign investment includes “foreign investors invest in China through any other methods under laws, administrative regulations, or provisions prescribed by the State Council.” Therefore, there are possibilities that future laws, administrative regulations or provisions of the State Council may stipulate contractual arrangements as a way of foreign investment, and substantial uncertainties exist with respect to whether our contractual arrangements will be recognized as foreign investment, whether our contractual arrangements will be deemed to be in violation of the access requirements for foreign investment and how our contractual arrangements will be treated. There are possibilities that we may be required to unwind the contractual arrangements and/or dispose of our consolidated affiliated entities, which could have a material and adverse impact on our business, financial condition and result of operations.

We rely on contractual arrangements with our VIE and its shareholders for a portion of our business operations, which may not be as effective as direct ownership in providing operational control.

While the revenue contribution of our operations in China is relatively small, we expect to continue to grow our presence in China and hence our revenue from China over time. We will rely on contractual arrangements with our VIE, its shareholders and its subsidiaries to operate our business in China. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE. For example, our VIE and its shareholders could breach their contractual arrangements with us by, among others, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests.

 

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If we had direct ownership of our VIE, we would be able to exercise our rights as a shareholder to effect changes in its board of directors, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our VIE and its shareholders of their respective obligations under the contracts to exercise control over our VIE. The shareholders of our VIE may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we operate a certain portion of our business through the contractual arrangements with our VIE and its shareholders. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation or other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “—Any failure by our VIE or its shareholders to perform their respective obligations under our contractual arrangements with them would have a material adverse effect on our business in China.” Therefore, our contractual arrangements with our VIE and its shareholders may not be as effective in controlling our business operations as direct ownership.

Any failure by our VIE or its shareholders to perform their respective obligations under our contractual arrangements with them would have a material adverse effect on our business in China.

If our VIE or its shareholders fail to perform their respective obligations under their contractual arrangements with us that give us effective control over our business operations in China, we could be limited in our ability to enforce such contractual arrangements and we may have to incur substantial costs and expend additional resources to enforce such contractual arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which may not be effective under PRC law. In addition, if any third parties claim any interest in such shareholders’ equity interests in our VIE, our ability to exercise shareholders’ rights or foreclose the share pledges pursuant to the contractual arrangements may be impaired. If these or other disputes between the shareholders of our VIE and third parties were to impair our control over our VIE, we may not be able to maintain effective control over our business operations in the PRC and thus would not be able to continue to consolidate our VIE’s financial results, which in turn could adversely affect our efforts in China and could have a material adverse effect on our results of operations.

Contractual arrangements in relation to our VIE may be subject to scrutiny by PRC tax authorities and they may determine that we or our VIE owes additional taxes, which could negatively affect our financial condition.

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by PRC tax authorities within ten years after the taxable year when the transactions were conducted. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between us and our VIE were not entered into on an arm’s-length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the income of our VIE in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among others, result in a reduction of expense deductions recorded by our VIE for PRC tax purposes, which could in turn increase its tax liabilities without reducing our PRC subsidiary’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on our VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially adversely affected if our VIE’s tax liabilities increase or if it is required to pay late payment fees and other penalties.

The shareholders of our VIE may have actual or potential conflicts of interest with us, which may materially adversely affect our business and financial condition.

The shareholders of our VIE may have actual or potential conflicts of interest with us. These shareholders may breach, or cause our VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIE, which could have a material and adverse effect on our ability to effectively control our VIE and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with our VIE to be performed in a manner adverse to us by, among others, failing to remit payments due under the contractual arrangements to us on a timely basis. If conflicts of interest arise, any or all of these shareholders may not act in our best interests and/or such conflicts may not be resolved in our favor.

 

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Risks Related to PRC Regulatory Issues

Uncertainties with respect to the PRC legal system could adversely affect us.

The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value.

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past four decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and judicial authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.

Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have a retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.

Government control of currency conversion may limit our ability to use our operating revenue effectively and affect the value of your investment.

The PRC government imposes controls on the convertibility of the Chinese yuan into foreign currencies and, in certain cases, the remittance of currency out of China. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration on Foreign Exchange, or SAFE, by complying with certain procedural requirements. Our PRC subsidiary is able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial owners of our company who are PRC residents. Approval from, or registration with, appropriate government authorities is required when the Chinese yuan is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies.

Because of substantial capital outflows from China in 2016 due to the weakening of the Chinese yuan relative to other currencies, the PRC government imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement. More restrictions and substantial vetting processes have been put in place by SAFE to regulate cross-border transactions falling under the capital account. The PRC government may at its discretion further restrict access to foreign currencies in the future for current account transactions. If the foreign exchange control system prevents us from converting the Chinese yuan into foreign currency and remitting the funds out of China, our ability to pay dividends in foreign currencies to our shareholders, including holders of our ADSs, attributable to our operations in China will be adversely affected.

PRC regulations relating to foreign exchange registration and outbound investment approval of overseas investment by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into this subsidiary, limit our PRC subsidiary’s ability to increase its registered capital or distribute profits to us, limit our ability to make distributions to you, or may otherwise adversely affect us.

Under regulations promulgated by SAFE, including the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, and its appendices, PRC residents are required to register with qualified banks in connection with their direct establishment or indirect control of an offshore entity, established for the purpose of raising overseas financing based on such PRC residents’ assets or equity interests in PRC domestic enterprises or offshore assets or interests, which is referred to in SAFE Circular 37 as a “special purpose company.” These regulations also require amendment to the registration in the event of any significant changes with respect to the special purpose company, such as an increase or decrease of capital contributed by PRC residents, share transfer or exchange, merger, division or other material events. In the event that a PRC resident holding interests in a special purpose company fails to complete the required SAFE registration, the PRC subsidiary of that special purpose company may be prohibited from making profit distributions and from carrying out subsequent cross-border foreign exchange activities, and the special purpose company may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with the requirements described above may result in liability under PRC law for evasion of foreign exchange controls.

 

 

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We may not at all times be fully aware or informed of the identities of all our shareholders or beneficial owners that are required to make such registrations, and we may not always be able to compel them to comply with all relevant foreign exchange regulations. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents will at all times comply with, or in the future make or obtain any applicable registrations or approvals required by all relevant foreign exchange regulations. The failure or inability of such individuals to comply with the registration requirements set forth in these regulations may subject us to fines or legal sanctions, restrictions on our cross-border investment activities in China or our PRC subsidiary’s ability to distribute dividends to, or obtain investments or loans from, our company, or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially adversely affected.

In August 2014, MOFCOM promulgated the Measures for the Administration of Overseas Investment. In December 2017, the National Development and Reform Committee, or NDRC, promulgated the Administrative Measures of Overseas Investment of Enterprises. Pursuant to these regulations, any outbound investment of PRC enterprises is required to be registered with NDRC and MOFCOM or their local branches. These regulations also require amendment to the registration in the event of certain significant changes to the investment. Wanda Culture completed those registrations, as well as the foreign exchange registration in connection with its acquisitions of Infront and WEH, in 2015. In a restructuring of the shareholding in one of our shareholders (Infront International Holdings AG) in 2017, Wanda Sports Industry (Guangzhou) Co., Ltd., a newly established company in the PRC, was inserted into the ownership chain above Infront International Holdings AG and became its direct shareholder. See “Item 4. Information on the Company—A. History and Development of the Company” and “Item 4. Information on the Company—C. Organizational Structure.” It is uncertain whether such restructuring of shareholding needs to be registered with NDRC and MOFCOM or their local branches. We understand that neither Wanda Culture nor Wanda Sports Industry (Guangzhou) Co., Ltd. has made such registration, which may adversely affect the ability of Wanda Sports Industry (Guangzhou) Co., Ltd. to exchange the proceeds of any dividend it may receive from Infront International Holdings AG into Chinese yuan and bring them into China, which may in turn affect our dividend distributions.

As these foreign exchange and outbound investment related regulations are relatively new and their interpretation and implementation have been evolving, it is uncertain how these regulations, and any future regulations concerning outbound investments by PRC companies will be interpreted, amended and implemented by the relevant government authorities. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends to our shareholders and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations and our ability to make distributions to you.

Finally, due to the complexity and constantly changing nature of the foreign exchange and outbound investment related regulations as well as the uncertainties involved, we cannot assure you that we and our controlling shareholder have complied or will be able to comply with all such applicable regulations. This may adversely affect our ability to make distributions to you.

Any failure to comply with PRC regulations regarding the legal requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

In 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, replacing earlier rules promulgated in 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted options will be subject to these regulations now that we are an overseas-listed company following the completion of our IPO. Failure to complete SAFE registrations may subject them to fines of up to RMB 300,000 for entities and up to RMB 50,000 for individuals, and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us.

 

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Furthermore, the Ministry of Finance and the State Administration of Taxation, or SAT, has issued circulars concerning employee stock options and restricted shares. Under these circulars, employees working in the PRC who exercise stock options or transfer share options or are granted restricted shares will be subject to PRC individual income tax. The PRC subsidiaries of an overseas listed company are required to file documents related to employee stock options and restricted shares with the relevant tax authorities and to withhold individual income taxes of employees who exercise their stock option or purchase restricted shares. If the employees fail to pay or the PRC subsidiaries fail to withhold income tax in accordance with relevant laws and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities or other PRC governmental authorities.

We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law.

We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.

Under the modified PRC Enterprise Income Tax Law and its implementing rules, enterprises established under the laws of jurisdictions outside of the PRC with “de facto management bodies” located in the PRC may be considered a PRC tax resident enterprise for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global income. “De facto management body” refers to a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise. SAT issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in the PRC. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. If we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and cash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe that none of our entities outside of the PRC is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.”

If the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, we could be subject to PRC tax at a rate of 25% on our worldwide income, which could materially reduce our net income, and we could be required to withhold 10% withholding on dividends we pay to our shareholders that are non-PRC resident enterprises. In addition, non-resident enterprise shareholders could be subject to PRC tax on gains realized on the sale or other disposition of ordinary shares, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to our non-PRC individual shareholders and any gain realized on the transfer of ordinary shares by such shareholders could be subject to PRC tax at a rate of 20%. It is unclear whether our non-PRC shareholders would be able to claim the benefits of any tax treaties between their respective countries of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs.

 

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We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

In 2009, SAT issued the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, with retroactive effect from January 1, 2008. Pursuant to SAT Circular 698, where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that has an effective tax rate less than 12.5% or does not tax foreign income of its residents, such non-resident enterprise, being the transferor, must report to the competent tax authority of the PRC resident enterprise this Indirect Transfer.

In 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Public Notice 7. SAT Public Notice 7 extends SAT’s tax jurisdiction to not only Indirect Transfers set forth under SAT Circular 698 but also transactions involving transfers of other taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice 7 provides clearer criteria than SAT Circular 698 for assessment of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

In 2017, the SAT released Public Notice Regarding Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Public Notice 37, effect from December 1, 2017. SAT Public Notice 37 replaced a series of important circulars, including SAT Circular 698, and revised the rules governing the administration of withholding tax on China-source income derived by the non-resident enterprise.

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as the transaction through which we acquired Infront. We may be subject to a filing obligation or taxes if we are deemed a transferor in such transactions and may be subject to withholding obligations if we are deemed a transferor in such transactions. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiary may be required to expend time and effort to comply with these regulations, which may increase our operating expenses.

Risks Related to being a Public Company

Our management team has limited experience managing a public company.

We completed our IPO in July 2019, and at that time most members of our management team had limited experience managing a publicly-traded company, interacting with public company investors, and complying with the complex and ever-changing laws, rules, regulations and pronouncements pertaining to public companies. Our management team continues to transition to a public company model subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors, and may not successfully or efficiently manage that transition. These obligations and constituents require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could have a material adverse effect on our business, results of operations, financial condition or prospects.

We could be adversely affected if satisfactory progress is not made in discussions between the SEC and the Public Company Accounting Oversight Board, or PCAOB, on the one hand, and Chinese regulators, on the other, regarding improved access to information and audit inspections of accounting firms, including our auditors, by the SEC and PCAOB.

In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, against the Chinese affiliates of the “big four” accounting firms (including our auditors). The Rule 102(e) proceedings initiated by the SEC relate to these firms’ inability to produce documents, including audit work papers, in response to the request of the SEC pursuant to Section 106 of the Sarbanes-Oxley Act, as the auditors located in China are not in a position to lawfully produce documents directly to the SEC because of restrictions under PRC law and specific directives issued by the China Securities Regulatory Commission, or CSRC. The issues raised by the proceedings are not specific to our auditors or to us, but affect all audit firms based in China and all companies listed in the United States with significant operations in China.

 

 

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In January 2014, the administrative judge reached an initial decision that the Chinese affiliates of the “big four” accounting firms should be barred from practicing before the SEC for six months. Thereafter, the accounting firms filed a petition for review of the initial decision, prompting the SEC Commissioners to review the initial decision, determine whether there had been any violation and, if so, determine the appropriate remedy to be placed on these audit firms. In February 2015, these Chinese affiliates each agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and audit US-listed companies. The settlement requires the firms to follow detailed procedures and to seek to provide the SEC with access to the Chinese firms’ audit documents via the CSRC. If future document productions fail to meet the specified criteria, the SEC retains the authority to impose a variety of additional measures (for example, imposing penalties such as suspensions, restarting the administrative proceedings).

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, companies listed in the United States with significant operations in China may find it difficult or impossible to retain auditors in respect of their operations in China, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act and could result in delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding companies listed in the United States with significant operations in China and the market price of our ADSs may be adversely affected.

In December 2018, the SEC and the PCAOB staff issued a joint statement on regulatory access to audit and other information internationally that cites the ongoing challenges faced by them in overseeing the financial reporting of companies listed in the United States with operations in China, the absence of satisfactory progress in discussions on these issues with Chinese authorities and the potential for remedial action if significant information barriers persist. If our independent registered public accounting firm was denied, whether temporarily or otherwise, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined to not be in compliance with the requirements of the Exchange Act. In a second joint statement issued on April 21, 2020, SEC and PCAOB staff highlighted that the PCAOB’s inability to inspect audit work papers in China continues.

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, and in the context of broader concerns over accounting and disclosure practices, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of Congress that would lead to eventual delisting from U.S. stock exchanges of issuers whose financial statements are audited by accounting firm branches or offices that are not subject to PCAOB inspection. On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act, which in effect would result in the delisting of non-U.S. companies (particularly from China) whose financial statements have, for a period of three years, been audited by an accounting firm branch or office that is not subject to PCAOB inspection. Were this bill to be passed by the House of Representatives and become law, or were other legislative or regulatory action taken to restrict the ability of Chinese issuers to list, or remain listed, in the United States, it could cause investor uncertainty for affected issuers, including us, and the market price of our ADSs could be adversely affected. It is unclear if this bill will be enacted and, if it is, what the ultimate resolution, over which we have no control, of the PCAOB inspection issue will be. Concurrently, Nasdaq has proposed to codify its existing discretion in considering whether to deny initial or continued listing or to apply more stringent criteria when the auditor of a Nasdaq-listed company has not been, or cannot be, inspected by the PCAOB or the auditor does not demonstrate sufficient resources, geographic reach or experience as it relates to the audit. Nasdaq also has proposed to clarify that it may use its discretionary authority to impose additional or more stringent criteria for continued listing where the local jurisdiction restricts access by U.S. securities regulators to information.

The requirements of being a public company, including compliance with the reporting requirements and the requirements of the Sarbanes-Oxley Act, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

We are a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company prior to our IPO in July 2019. As a public company, we need to comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC and the requirements of the Nasdaq Global Select Market with which we were not required to comply as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of time of our board of directors and management and will increase our costs and expenses. As a result of becoming a public company, among others:

 

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we have instituted a more comprehensive compliance function, including the adoption of policies regarding internal controls and disclosure controls and procedures;

 

   

we have increased the number of independent directors;

 

   

we prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;

 

   

we have established new internal policies, such as those relating to insider trading;

 

   

we have hired, and need to hire yet more, additional financial reporting, internal control and other finance personnel to develop and implement appropriate internal control and reporting procedures; and

 

   

we have involved and retained to a greater degree outside counsel and accountants for assistance in relation to the above activities.

We continue to evaluate and monitor developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs these rules and regulations may cause us to incur or the timing of such costs. In addition, being a public company subject to these rules and regulations makes it more difficult and more expensive for us to obtain director and officer liability insurance and we may in the future be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers.

If we fail to implement and maintain an effective system of internal controls, including through the remediation of any material weaknesses or significant deficiencies that have been or may be identified, we may be unable to report our results of operations accurately, meet our reporting obligations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.

As a newly public reporting company upon the completion of our IPO, we need to have developed, established and maintained internal controls and procedures that will allow our management to report on, and our independent registered public accounting firm to attest to, our internal control over financial reporting when required to do so under Section 404 of the Sarbanes-Oxley Act, beginning with our annual report for the fiscal year ending December 31, 2020. For the year ended December 31, 2019 (that is, the last period covered by this annual report), we are not required to provide a report of management on our internal control over financial reporting and our independent registered public accounting firm is not required to conduct an audit of our internal control over financial reporting due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. However, in connection with the audit of our consolidated financial statements for the years ended December 31, 2019, 2018 and 2017, we and our independent registered public accounting firm identified a material weakness and two significant deficiencies in our internal control over financial reporting. See “Item 15. Controls and Procedures – Internal Control over Financial Reporting – Insufficient quantity of dedicated resources and experienced personnel involved in designing and reviewing internal controls.” In addition, following the discovery of the fraudulent activities set out in the Infront Announcement, we and our independent registered public accounting firm identified a second material weakness in our internal control over financial reporting. See “Item 15. Controls and Procedures—Internal Control over Financial Reporting—Lack of sufficient segregation of duties between sales and execution of contracts, invoicing and implementation of services to prevent and detect fraud.” These internal controls ultimately may not prevent future fraudulent activities.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, we may identify other material weaknesses or significant deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, or if we experience delays in the implementation of adequate internal controls over financial reporting due to the COVID-19 outbreak or otherwise, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Generally, if we fail to achieve and maintain an effective internal control environment including those identified to date, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could, in turn, limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from Nasdaq, regulatory investigations and civil or criminal sanctions.

 

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We are a “controlled company” within the meaning of the rules of the Nasdaq Global Select Market and as a result, can rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.

We are a “controlled company” as defined under the Nasdaq Stock Market Rules because Dalian Wanda GCL beneficially owns more than 50% of our total voting power. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and intend to rely, on certain exemptions from corporate governance rules, including an exemption from the rule that a majority of our board of directors must be independent directors. Even if we cease to be a “controlled company,” Nasdaq Stock Market Rules permit a foreign private issuer like us to follow the corporate governance practices of its home country, or would permit for a phase-in period to comply with the Nasdaq Stock Market Rules. Certain corporate governance practices in Hong Kong, which is our home country, differ significantly from the Nasdaq Global Select Market corporate governance listing standards. We follow Hong Kong corporate governance practices in lieu of the corporate governance requirements of the Nasdaq Global Select Market, with respect to the composition of our board of directors that we are exempt from due to our “controlled company” status.

To the extent we continue to follow home country practice in the future, you may be afforded less protection than you otherwise would enjoy under the Nasdaq Global Select Market corporate governance listing standards applicable to U.S. domestic issuers.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.

Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic reporting companies, including:

 

   

the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q and current reports on Form 8-K;

 

   

the provisions of the Exchange Act regulating the solicitation of proxies for annual and other meetings of shareholders;

 

   

the provisions of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

 

   

the rules under Regulation FD governing selective disclosure of material nonpublic information.

We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we publish our results on a quarterly basis as press releases distributed pursuant to the rules of the Nasdaq Global Select Market. Press releases relating to financial results and material events are furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC is less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic reporting companies. As a result, you may not be afforded the same protections or be provided with the same information that would be made available to you were you investing in a U.S. domestic reporting company.

The obligation to disclose information publicly may put us at a disadvantage relative to competitors that are private companies.

We are a public company and, as such, are subject to public disclosure obligations, including as part of our reporting obligations to the SEC in periodic reports. This means that we will be providing financial and other information that we would not be required to disclose were we a private company. Many of our competitors are private companies and all our competitors will have access to information we make public, which otherwise would be confidential. These disclosures could give competitors advantages in competing with us. To the extent compliance with our reporting obligations decreases our competitiveness, our public company status could affect our business, prospects and results of operations.

 

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Risks Related to our ADSs

The trading price of our ADSs is likely to be volatile, which could result in substantial losses to investors.

The trading prices of our ADSs have fluctuated since our ADSs became listed on the Nasdaq Global Select Market in July 2019. The trading price of our ADSs has ranged from US$ 2.45 to US$ 6.24 per ADS, and the last reported trading price on May 21, 2020 was US$2.58 per ADS. The trading price of our ADSs may continue to fluctuate widely in response to a variety of factors, many of which are beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations similar to ours that have listed their securities in the United States, including as a result of concerns over the impact of COVID-19 Risks. In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for specific business reasons, including, among others:

 

   

variations in our revenue, operating costs and expenses, earnings and cash flow, including due to the cyclicality and seasonality inherent in our results of operations;

 

   

concerns over actual or perceived competitors;

 

   

changes in financial estimates by securities analysts;

 

   

detrimental adverse publicity about us, our shareholders, affiliates, directors, officers or employees, our content, our business model, our services, our industry or one or more sports categories with which we are involved;

 

   

announcements of new regulations, rules or policies relevant for our business;

 

   

additions or departures of key personnel;

 

   

release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;

 

   

potential litigation or regulatory investigations; and

 

   

speculation in the media about our business.

Any of these factors may result in large and sudden changes in the volume and trading price of our ADSs.

We cannot rule out being named as a defendant in a future putative shareholder class action lawsuit that could have a material adverse impact on our business, financial condition, results of operation, cash flows and reputation.

As noted in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Administrative Proceedings,” we were until recently the subject of a putative shareholder class action. While the lead plaintiff in that case has filed a notice of voluntary dismissal, the case has been dismissed in its entirety without prejudice and we cannot rule out the possibility that additional claims or lawsuits may be filed in the future. An adverse outcome of any such litigation could have a material adverse effect on our business, financial condition and reputation. In addition, there can be no assurance that our insurance carriers would cover all or part of the defense costs, or any liabilities that could arise from such matters. Defending against putative shareholder class action lawsuits may require us to use a significant portion of our resources and divert management’s attention from the day-to-day operations of our company, all of which could harm our business. We also may be subject to claims for indemnification related to any such litigation, and we cannot predict the impact that indemnification claims may have on our business or financial results.

 

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Under our dual-class share structure with different voting rights, Dalian Wanda GCL, our controlling shareholder, has complete control of the outcome of matters put to a vote of shareholders, which will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and our ADSs may view as beneficial.

Dalian Wanda GCL indirectly holds 100% of our Class B ordinary shares, which entitle their holders to four votes per share (compared with one vote per Class A ordinary share), representing 90.75% of our total voting power.

Because we do not expect to pay dividends in the foreseeable future after our IPO, you must rely on a price appreciation of our ADSs for a return on your investment.

Subject to our possibly distributing a portion of the proceeds from the WEH sale, we currently do not expect to pay any cash dividends on our ordinary shares in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

Our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Hong Kong law. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain the price at which you purchased our ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price and trading volume for our ADSs could decline.

The trading market for our ADSs will be influenced by research or reports that securities or industry analysts publish about our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades our ADSs or publishes inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline significantly.

The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.

Sales of substantial amounts of our ADSs or other equity securities in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs. In addition, we may issue additional ordinary shares or ADSs for future acquisitions. If we pay for our future acquisitions in whole or in part with additionally issued ordinary shares or ADSs, your ownership interest in our company would be diluted and this, in turn, could have a material adverse effect on the price of our ADSs.

The sale of a substantial number of ordinary shares by our controlling shareholder or the co-investors in the public market after the expiration of applicable lock-up restrictions, or the perception that these sales may occur, may depress the market price of our ADSs and could impair our ability to raise capital through the sale of additional equity securities. Certain holders of our ordinary shares will have the right to cause us to register under the Securities Act the sale of their shares, subject to applicable lock-up periods.

Your protections and rights of redress as shareholders differ from the protections and rights you would have were we incorporated in the United States.

We are incorporated in Hong Kong. Most of our directors and members of our senior management team are nationals of, and reside in, jurisdictions outside the United States, including China, and a significant portion of our assets, and the assets of most of our directors and members of senior management, are located outside the United States. As a result, it may be difficult for you to effect service of process on us or individual directors or officers who reside outside the United States and, in the case of China, to obtain recognition and enforcement of judgments in China rendered in courts outside of China.

 

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The rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors would largely be governed by Hong Kong law. The rights of our shareholders and the fiduciary duties of our directors under Hong Kong law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States, particularly Delaware. Certain corporate governance practices in Hong Kong differ significantly from requirements for companies incorporated in other jurisdictions such as the United States and shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers. Moreover, ADS holders, so long as they hold ADSs and not the underlying Class A shares, are not shareholders of record and would not have standing to bring legal actions available to shareholders under Hong Kong law.

Shareholder claims that may be brought in the United States, including securities law class actions and breach of fiduciary duty or fraud claims, generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities. Although local authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such regulatory cooperation with the securities regulatory authorities in the Unities States have not been efficient in the absence of mutual and practical cooperation mechanism.

Moreover, as the SEC and PCAOB staff noted in an April 21, 2020 joint statement, or the April joint statement, in which they highlighted various concerns, among others, over disclosure standards, quality of information and standards, and ability of regulators to effectively bring enforcement actions in emerging markets, including China, the PCAOB continues to be unable to inspect audit work papers in China, which would include the audit work papers that relate to the audit of our financial statements. See “– Risks Relating to Being a Public Company – We could be adversely affected if satisfactory progress is not made in discussions between the SEC and the Public Company Accounting Oversight Board, or PCAOB, on the one hand, and Chinese regulators, on the other, regarding improved access to information and audit inspections of accounting firms, including our auditors, by the SEC and PCAOB.” In addition, Article 177 of the Securities Law of the PRC (which became effective March 1, 2020) provides that no overseas securities regulator is allowed to conduct investigations, collect evidence or undertake other activities directly within the territory of the PRC. It further provides that, without the consent of the competent PRC securities regulator and other relevant authorities, no entity or individual may provide documents and materials relating to securities business activities to overseas regulators, which presumably would include the SEC, the Department of Justice and other regulators outside of China in connection with securities fraud or other investigations or enforcement actions.

Certain judgments obtained against us by our shareholders may not be enforceable.

We are incorporated in Hong Kong. Most of our directors and our executive officers reside outside the United States and a substantial portion of our and their assets are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the event that you believe that your rights have been infringed under the federal securities laws of the United States or otherwise. Even if you are successful in bringing an action of this kind, the laws of Hong Kong may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct the voting of the ordinary shares underlying the ADSs.

Holders of ADSs do not have the same rights as our registered shareholders. As a holder of the ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which attach to the ordinary shares underlying the ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying ordinary shares in accordance with these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise any right to vote with respect to the underlying ordinary shares unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to enable you to withdraw the shares underlying the ADSs and become the registered holder of such shares prior to the record date for the general meeting to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. For the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the ordinary shares underlying the ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. The depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the shares underlying the ADSs are voted and you may have no legal remedy if the shares underlying the ADSs are not voted as you requested.

 

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ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing our ADSs provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial for any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws. If we or the depositary were to oppose a jury trial based on this waiver, the court would have to determine whether the waiver was enforceable based on the facts and circumstances of the case in accordance with applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, or by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this would be the case with respect to the deposit agreement and our ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in our ADSs.

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have, including outcomes that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or our ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

Techniques employed by short sellers may drive down the trading price of our ADSs.

Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions and allegations regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in the market. If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality.

 

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You may experience dilution of your holdings due to the inability to participate in rights offerings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

 

ITEM 4.

INFORMATION ON THE COMPANY

 

A.

HISTORY AND DEVELOPMENT OF THE COMPANY

We were incorporated in Hong Kong on November 28, 2018, as a private company limited by shares under the Companies Ordinance. Following the IPO, our status changed from a private company to a public company. We were incorporated to enable Wanda Culture to spin-off and take public its sports-related business units, namely, Infront, WEH and WSC.

The Group

Infront. Infront has been active in the sports marketing industry for more than 30 years. Infront was formed through the consolidation of a number of established sports-focused businesses. In 2000, CWL Telesport & Marketing AG (founded in 1980) and Prisma Sports & Media AG (founded in 1996), merged into Kirch Sport. In 2002, the merged group was further consolidated with Host Broadcast Services AG, or HBS, a single-purpose company founded in 1999 to deliver the host broadcast of the 2002 FIFA World Cup Korea/Japan and the 2006 FIFA World Cup Germany. Following a management buy-out in 2003 of Kirch Sport, the group changed its name to Infront Sports & Media.

Starting in 2003, the newly formed Infront continued to focus principally on providing European football-related services, including for prestigious events and series like the FIFA World Cup and the German Bundesliga, and other European national federations and clubs. Infront established Infront China in 2004. Under newly appointed management in 2005, Infront further diversified and expanded its business (both geographically as well as the sports it covered) through acquisitions and strategic partnerships. A private equity firm acquired Infront in 2011 and then sold it to Dalian Wanda GCL in 2015. Since then, Infront has continued to diversify and expand, both organically and through acquisitions.

A key focus has been to develop and strengthen its digital capabilities. To this end:

 

   

Infront acquired in January 2016 a majority stake in Omnigon, which is a leader in the development of digital platforms and social products as well as in the provision of related professional services, including live event support and implementation of digital advertising solutions. Infront has since increased its stake in Omnigon to 72% in February 2018 and acquired the remaining 28% in April 2019.

 

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In 2018, Infront complemented its mass participation sports business by acquiring XLETIX and its XLETIX Challenge and Muddy Angel Run obstacle course racing events. In February 2019, Infront acquired Youthstream, the owner of the exclusive media, sponsorship and global promotional rights to the International Motorcycling Federation’s, or FIM, MXGP Motocross World Championship until the 2036 season.

 

   

In the second quarter of 2019, Infront completed the acquisition of London-based Threshold Sports, the organizer of unique events such as a nine-day 1,500 km cycling challenge; Germany-based Megamarsch, the organizer of non-competitive long-distance hiking events across Germany; and the Vienna Business Run, a popular annual 4.1-km road race.

 

   

In the third quarter of 2019, Infront completed its investment in Level99, an eSports creative agency, and acquired a controlling stake, with existing management holding the remainder. We believe this acquisition will further complement our digital agency and eSports service offering.

 

   

In the fourth quarter of 2019, Infront entered the sports fitness market by acquiring a 20% stake in the mass participation company HYROX, a Germany-based indoor fitness competition designed for both amateurs and professional athletes. The investment is part of Infront’s strategic roadmap to broaden its mass participation footprint, complementing the summer portfolio with events during the winter season.

World Endurance Holdings. WEH’s business has been operating for over 40 years, since the first IRONMAN triathlon, which took place in Hawaii in 1978. During its initial decades, this business mainly licensed the IRONMAN brand to third parties who, as licensees, would organize and operate triathlons under the IRONMAN brand. Following its acquisition by a private equity firm in 2008, the business changed its focus and strategy to become principally an event organizer and operator. As such, it began to own, organize and operate more of the triathlons under the IRONMAN brand and other brands, such as the IRONMAN 70.3 and 5150 brand, and used less frequently, but did not eliminate, licensing.

Under Dalian Wanda GCL’s ownership, in the second half of 2015, WEH embarked on an effort to increase the number of sports events, the number of participating athletes and the range of mass participation sports events offered, eventually adding running, mountain biking, road cycling and trail running events to its portfolio. In 2016, WEH acquired Lagardère Sports’ Endurance Division, adding various triathlon, running, cycling and mountain biking events to the portfolio. In 2017, WEH added to its portfolio the Cape Epic mountain biking event in South Africa and, through the acquisition of Competitor Group Holdings, Inc., the Rock ‘n’ Roll Marathon Series. In May 2019, WEH acquired the Sun-Herald City2Surf, among other events, from Nine’s events and entertainment division (formerly Fairfax Events and Entertainment).

On March 26, 2020, we entered into the WEH sale agreement to dispose of the WEH business. The transaction is expected to close in the second quarter of 2020 and is subject to customary conditions, including regulatory approval. See also “—The WEH Sale.”

Wanda Sports China. Since its establishment in 2015, WSC has developed opportunities for sports events in China, such as the China Cup International Football Tournament and the UCI Tour of Guangxi. To expand our Chinese footprint in running events, WSC acquired Double Heritage Series in 2017, adding marathons in China to our portfolio, such as the Dun Huang Marathon, Wen Jiang Marathon and Cheng Du Double Heritage International Marathon, and partnered with Chengdu City to operate the Chengdu International Marathon in 2018. In the third quarter of 2019, we also secured the operating rights for the Shenyang International Marathon. WSC also has leveraged our mass participation sports portfolio to expand our presence in China by licensing IRONMAN 70.3 triathlons and the Rock ‘n’ Roll Marathon Series in China. In 2018, WSC also acquired a majority stake in Yongda, which focuses on media production related services in China, in particular the production of professional cycling races, such as the UCI Tour of Guangxi. We acquired control over, and consolidate the operating results of, WSC through a VIE structure in 2019.

 

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The Initial Public Offering

On July 26, 2019, in connection with our IPO, our ADSs commenced trading on the Nasdaq Global Select Market under the symbol “WSG.” We raised approximately US$179.4 million (€160.9 million) in proceeds from the issuance of new shares from our IPO after deducting underwriting commissions.

The WEH Sale

On March 26, 2020, we entered into the WEH sale agreement to sell the WEH business. After giving effect to the WEH sale, we will continue to operate our three business segments, though the Mass Participation segment will only reflect the retained mass participation business. The WEH sale is subject to various customary closing conditions, including regulatory approval, but excluding approval of our shareholders. We expect the WEH sale to close in the second quarter of 2020.

We intend to use the proceeds from the WEH sale to repay the principal amount of US$230 million (€211.5 million) and related interest and fees outstanding under our Senior Term Loan Facility as well as US$50 million (€46.0 million) remaining outstanding under a promissory note issued to Wanda Sports & Media (Hong Kong) Holding Co. Limited, or the pre-IPO promissory note (see “Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Indebtedness”). As for the balance of the proceeds, in light of the many and significant uncertainties we and the broader sports ecosystem face due to the COVID-19 Risks, we continue to evaluate (in the context of developing business conditions) whether we should apply the proceeds to strengthen our balance sheet, use the proceeds for general corporate purposes or, subject to shareholder approval, return capital to our shareholders.

In advance of the WEH sale, we entered into the WEH License Agreement under which we have the right, as licensee, to organize and operate, until the end of 2025, IRONMAN, IRONMAN 70.3, Rock ‘n’ Roll Marathon Series and Epic Series events in China. If WEH were to develop or acquire new sports events during the term of the WEH License Agreement, WEH has agreed to negotiate first with us prior to licensing any such new events in China to a third party. The WEH License Agreement further states that in the course of 2023 the parties shall in good faith negotiate regarding an extension of the term beyond December 31, 2025. Until the consummation of the WEH sale, these licensing arrangements are intra-group.

The WEH License Agreement subjects us to various qualitative standards (e.g., with respect to the usage of trademarks and quality of branded materials and insurance), quantitative standards (e.g., with respect to minimum and maximum events per year), as well as various other obligations relating to the organization, administration and operation of the licensed-in events.

Our payment obligations under the WEH License Agreement are guaranteed by Wanda Sports & Media (Hong Kong) Holding Co. Limited.

Additional Information

The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.

Our principal executive offices are located at 9/F, Tower B, Wanda Plaza, 93 Jianguo Road, Chaoyang District, 100022, Beijing, PRC. Our telephone number at this address is +86-10-8585-7456. Our registered office in Hong Kong is located at Room 1903, 19/F, Lee Garden One, 33 Hysan Avenue, Causeway Bay, Hong Kong. We maintain our website at www.wsg.cn. Our agent for service of process in the United States is WEH.

See “Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources —Capital Expenditures” for a discussion of our capital expenditures.

 

B.

BUSINESS OVERVIEW

We describe below our spectator sports, DPSS and mass participation business. With respect to the mass participation business, we describe separately the retained mass participation business and (under “—Expected Disposal”) the WEH business, which we expect to dispose of following completion of the WEH sale. Due to the significant uncertainties associated with the COVID-19 Risks, the following does not reflect the potential impact of the COVID-19 Risks. See “Item 3. Key Information – D. Risk Factors – Overriding Risks Related to the Outbreak and Spread of COVID-19.”

 

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Overview

We are a leading global sports events, media and marketing platform with significant intellectual property rights, long-term relationships and broad execution capabilities through which we create value for stakeholders in all parts of the sports ecosystem, from rights owners, to brands and advertisers and to fans and athletes. We own, or otherwise have contractual rights to, an extensive portfolio of global, regional and national sports properties from which we seek to generate revenue across the value chain, including events operation, media production and media distribution, sponsorship and marketing, digital solutions and ancillary services.

Through Infront, we are the partner of choice for some of the world’s most significant sports federations, leagues and clubs, as well as premier corporate sponsor brands, broadcasters and media companies. We act on behalf of a range of rights owners through long-term rights agreements and have established successful long-term relationships with many of these partners. We connect these rights owners to fans and brands, enabling them to deliver their events and maximize coverage with solutions to achieve the widest possible promotion of their events. To do so, we have built a network of rights-in partners, rights-out clients, digital media partners, broadcasters, advertisers and other stakeholders throughout the sports ecosystem. We deliver media solutions such as host broadcasting, media production and the distribution of sports content in the form of live coverage, programming, archive services and digital solutions, and offer the right fit for brands to reach their target markets through sponsorship arrangements. We delivered approximately 3,700 event days for our partners of our spectator sports and DPSS businesses in 2019.

Through Infront and WSC, we have a global sports event portfolio built around our intellectual property across a range of mass participation sports, including triathlon, running, trail running, corporate fitness, road cycling and obstacle course racing. We seek to own brand-driven, inspirational mass participation sports events across a range of sports and seek to create inspirational sports experiences for athletes and establish engaged and dedicated communities for athletes. We believe that, through our in-depth knowledge of mass participation sports and our technical capabilities, we are well-placed to deliver engaging mass participation sports events to our athletes, partners and fans.

We generate revenue from the following principal sources:

 

   

Where we do not own the intellectual property relating to sports events, generally in our spectator sports business, we enter into rights-in arrangements and, in turn, enter into rights-out arrangements to engage the rest of the sports ecosystem, deriving revenue principally from media distribution, sponsorship and marketing activities.

 

   

We also derive revenue by providing our partners a comprehensive suite of specialized sports-related services, drawing on our in-house DPSS capabilities, including event operation and support, innovative digital media solutions, media and program production, host broadcasting, marketing services, event operations services, brand development services, advertising solutions and ancillary services (such as sponsorship and broadcaster servicing, venue advertising solutions, hospitality and ticketing).

 

   

Where we own intellectual property relating to sports events, principally in our mass participation sports business, we derive a significant proportion of our revenue from event entry fees and other event-related fees, such as host city fees, and otherwise monetize our intellectual property through sponsorship, merchandising and media distribution opportunities.

In both our spectator sports and DPSS businesses, we rely on contractual rights to obtain the rights we can then monetize, and otherwise provide a comprehensive suite of sports-related services using our in-house DPSS capabilities, either as part of a rights-in or rights-out arrangement (accounted for under our Spectator Sports segment) or as part of a separate service contract (accounted for under our DPSS segment). See also “Item 5. Operating and Financial Review and Prospects.”

 

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The Sports Ecosystem in which We Operate

The sports ecosystem consists of multiple, unique sports-related assets, opportunities and stakeholders that, collectively, contribute to a successful and thriving global sports-focused economy.

Historically, the sports and marketing / media industries have been closely interconnected in a value chain connecting live sports events with brands, advertisers, fans and athletes through linear media distribution (television and radio broadcasting). More recently, the sports ecosystem has begun to undergo transformation caused, in large part, by technological developments and related changes in consumer behaviors. See “—The Evolving Sports Ecosystem” for further discussion as to these developments.

Traditional Value Chain

Events. Live sports events (and the intellectual property with respect thereto) are the foundation of the sports ecosystem. The organization of sports events (and, ultimately, consumer interest in participating in or viewing such events) is the primary driver for the creation of value in the sports ecosystem. The types of sports events on offer worldwide vary widely, ranging from local, small-scale events with primarily amateur athletes and families, to premier international sports events, such as the FIFA World Cup and the Olympic Games. The key stakeholders in respect of sports events are the rights owners to those events, which can include international sport federations (such as the International Olympic Committee, FIFA or UCI), national sport federations (such as the DFB), leagues (such as the Lega Serie A or Bundesliga), clubs and other sports event organizers, which, for our mass participation and other sports events include us, as well as the athletes themselves.

Media Production. Media production companies produce audio and visual content in a range of formats allowing for the potential mass enjoyment of a live sports event, which they provide together with production-related services to their clients. These companies coordinate the broadcast signal in an event location, manage the necessary preparations for the broadcasts and produce the actual audio-visual content. These companies also provide post-production services, such as archive management and creation of highlight videos. Market participants differentiate themselves, not only in their ability to distribute and transmit the content while meeting high quality standards, but also in their ability to produce different formats for multiple channels and platforms with specific requirements. The quality and versatility of media production has a direct impact on the value of the media and marketing rights, with higher quality and greater versatility fostering greater audience and sponsorship appeal.

Linear Media Distribution. Media coverage is the engine that drives the exposure for, and interest in, live sports events. Event rights owners seek to add value and generate revenue by selling the media rights to their events, including the sale of television and radio broadcasting rights and, more recently, digital media rights. Broadcasters, including television channels and other media platforms, acquire rights to broadcast sports events. The broadcast of such media allows for further monetization of sports rights through sponsorship and advertising, among others. Media distribution related services and solutions include broadcaster servicing, the handling of technical media distribution and archive services.

Sponsorship and Marketing. We consider sports to be one of the most sought-after markets for brands, as audiences connect emotionally to sports across socio-economic groupings. Through sponsorship arrangements, rights owners can achieve significant value, while brands can benefit from significant potential exposure to achieve brand enhancement. Marketing rights that can be monetized include the acquisition and sale of rights relating to sponsorship, advertising, hospitality, licensing, stadium naming and endorsements.

Ancillary Services. The sports ecosystem provides numerous opportunities to provide value-added services to sports events, strategic partners, athletes and fans. Ancillary services include digital solutions services, sponsor and broadcaster servicing, venue advertising solutions and ticketing for the benefit of rights owners and other stakeholders in the sports ecosystem.

The Evolving Sports Ecosystem

The sports ecosystem continues to evolve. New technologies and models have an impact across the traditional sports value chain, providing significant opportunities for rights owners to engage more directly and fully with fans and other sports enthusiasts through a wide variety of platforms and technologies. At the same time, changes in consumer behavior, such as the development of new sports categories and the trend toward more healthy and active lifestyles and changes in media consumption, continue to change the sports ecosystem.

 

 

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Digital disruption. One significant contributor to the evolution of the sports ecosystem is the digital disruption, brought on by emerging digital technologies and related business models. As a result, content distribution is no longer solely linear. Audiences increasingly consume media on mobile and other digital devices, and brands are shifting advertisement budgets towards these platforms. Integration of content on digital platforms provides unprecedented levels of analytical insight of end-users. Data analytics (which is back-end driven based on artificial intelligence, leading to more precise targeting, higher conversion and more income per impression), as well as social media, ad technology and e-commerce are becoming increasingly relevant. We believe sports content, and live events in particular, remains among the most watched programming across distribution channels, even among younger fans who tend to be more digitally focused.

Enhanced consumer engagement. Traditional and emerging sports are increasingly taking advantage of digital distribution channels to reach fans. For example, information about sports can be compiled and integrated through a single platform such as digital hubs, which can be readily accessed on mobile devices. Such direct interaction leads to consumption and sharing of the content that the community cares most about, and deep engagement for consumers is enabled by providing platforms for them to engage with sports in novel ways.

Virtual events. We are partnering with leading sports organizations to provide innovative online racing and event experiences to keep our athlete communities connected and engaged during the continuation of mitigation events due to the COVID-19 pandemic. We recently hosted several virtual IRONMAN races and organized the Chengdu Shuangyi Online Marathon and the Nanning Online Marathon. We are also working to virtualize part of the racing trail for the UCI World Tour of Guangxi.

Emerging sports. The digital realm also allows new types of sports to evolve. For example, eSports, which is generally defined as competitive, professional video game playing, is evolving from a niche activity to a mainstream sport, largely as a result of social media and live streaming, with, we believe, the potential to become a global sport without borders. In anticipation that sports events and games might proceed in the medium- or long-term without spectators as a result of the COVID-19 pandemic, we are developing additional digital and broadcast solutions to offer to, and prepare partners for, the expected demand for new forms of live and digital sports consumption. Our active support of rights holders’ efforts to develop eSports events has enabled us to benefit from rapid growth of the industry. For example, we are currently providing post-production services for La Liga’s EA FIFA tournament, supporting the Lega Serie A’s eSports tournaments and working with the IIHF to organize and promote a virtual world championship for ice hockey fans. In addition, we are also focused on identifying and capturing new consumer groups from drone sports and fantasy sports through new technical capabilities. Niche sports such as surfing, mind games (such as chess) and martial arts that historically did not enjoy much television coverage and were therefore hard to monetize, are now becoming preferred hubs for brands with the growth of technology and digital channels. Emerging digital channels have allowed niche sports to reach a broader audience, which in turn has altered the way fans consume sports content.

Change towards a more healthy and active lifestyle. Products and services focused on a healthier and better active lifestyle are growing globally and becoming increasingly popular. New formats in personal and corporate health events, such as obstacle course races, themed runs and cycling are attracting new consumer groups. Also, wearables and digital services allow for new dimensions in the area of personalized fitness solutions.

Our Role in the Sports Ecosystem and our Value Proposition

We believe that the winners in the evolving sports ecosystem will be the ones able to balance efficient operations tailored to the traditional value chain with targeted initiatives and investments focused on evolving market trends.

Overview of Our Business Model

As a global sports events, media and marketing platform, we create value for stakeholders in all parts of the sports ecosystem, from rights owners to brands and advertisers, and from fans to athletes. We own or otherwise have contractual rights to a portfolio of global, regional and national sports properties and are able to commercialize and deliver high-quality services in relation to all relevant aspects of major international sports events, top-ranked sports leagues and competitions. As the sports ecosystem evolves, we have sought to tailor our capabilities to capture opportunities, including by focusing on innovative digital solutions, expanding our own portfolio of mass participation sports events and, in general, providing digital solutions and services, using our in-house DPSS capabilities, to further develop our sports events, media and marketing platform.

 

 

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We seek to develop inspirational events for athletes in our mass participation sports events and to understand the unique nature of each sport to be able to deliver the best media and marketing solutions. In addition, we handle media, sponsorship and marketing rights for international, regional and national sports federations, sports leagues, sports clubs and various other rights owners. We have dedicated teams covering all aspects of event organization and execution and providing a comprehensive suite of specialized sports services, including media production, media distribution, live event and coverage, host broadcasting, innovative digital media solutions, programming, archive services, marketing services, event operations, brand development and advertising solutions.

We have also identified eSports and community sports as new strategic growth areas that complement and also intersect with our other sports-focused businesses. We see various opportunities in the gamification of sports that underpins eSports and community sports. The chance to target fan communities is proving a huge asset for marketers. Being cognizant of this growth area, we established a presence in smaller, community-driven sports as well as in fan-driven communities for more popular sports.

For further information on our business model with respect to the execution process for our Mass Participation segment, see “—Our Segments—Mass Participation—Operations and Key Capabilities.” For further information on our business model with respect to the execution process for our Spectator Sports and DPSS segments, see “—Our Segments—Spectator Sports—Operations and Key Capabilities” and “—Our Segments—Digital, Production, Sports Solutions (DPSS).”

Our Value Proposition

Our goal is to provide value to key stakeholders across the sports ecosystem.

Rights owners. We seek to assist rights owners to build the big moments in sports by developing commercial strategies, utilizing traditional and digital media to produce exciting events, maximizing coverage to achieve a wider promotion, creating effective communication platforms, and recruiting broadcast partners, brands, advertising and other clients, and, in return, promoting financial stability including through the development of long-term relationships.

Media companies and broadcasters. We help create the link between the sports event and the viewer, with the goal to transform the way sports are being perceived. Based on our understanding of the needs of the global media community, our understanding of the unique nature of individual sports and our experience and capacity to tailor productions of any scale, we seek to develop compelling, high quality content that can be effectively delivered.

Brands and advertisers. We create a bridge between the stakeholders and the brands and media rights. We provide brands with a wide network of opportunities, with the goal of creating brand-related conversations across all media through sponsorship and activation strategies. Key to this is developing customized presentation and fan engagement approaches. In addition, we leverage our brands through sponsorship arrangements and monetize our brand ownership accordingly.

Athletes. We seek to create inspirational sports event experiences for athletes and cultivate a highly engaged and dedicated community.

Fans. We seek to deliver unmatched sports event experiences for fans, offering them easy access to engaging content relating to the sports for which they are passionate and the opportunity to engage more fully with their preferred sport.

Host cities and governments. We provide host cities with economic and related benefits, as a result of the influx of athletes and their families and friends, as well as sports fans, attending our events. Athletes may travel to cities for training in advance of events as well as for the events themselves. Cities are particularly interested in the prestige associated with world class events such as ours. For cities that measure visits by foreign visitors, our events can be particularly attractive given the broad range of nationalities of our athletes for many of our events.

 

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Our Segments

The nature of our engagement with the sports ecosystem depends on whether or not we are the rights owner of the relevant sports events. This split in turn is reflected in our three segments: Spectator Sports and DPSS, where we are generally not the rights owner but offer a range of capabilities and services for the benefit of rights owners, rights-out clients, such as brands and media companies, and other stakeholders, and Mass Participation, where we are generally the rights owner (in other words, we own the relevant intellectual property for the sports event).

Spectator Sports. Our Spectator Sports segment is primarily focused on business where we do not own the intellectual property. We enter into contractual arrangements with a wide range of leading rights owners such as international and national sports federations, sports leagues, sports clubs and various other rights owners in the sports ecosystem (which we refer to as “rights-in” arrangements) and, in turn, enter into, or facilitate, contractual arrangements (which we refer to as “rights-out” arrangements) with clients (which we refer to as “rights-out clients”) to engage the rest of the sports ecosystem. Accordingly, we monetize such rights through media distribution, sponsorship and marketing activities. We also provide services to our rights-in partners and rights-out clients drawing on our in-house DPSS capabilities, including event operation and support, media production, digital solutions and ancillary services. Our Spectator Sports segment includes an extensive portfolio of sports, including football, winter sports and summer sports.

Digital, Production, Sports Solutions (DPSS). We focus on maximizing the potential of our sports events, media and marketing platform by providing a comprehensive suite of specialized sports-related services, including innovative digital media solutions, media and program production, host broadcasting, marketing services, event operations services, brand development services and advertising solutions. Structurally, we have united digital, media production and sports events service-related initiatives and capabilities to drive innovation in traditional media production, deliver growth in new digital properties, create new content formats, new distribution models and partnerships, and revolutionize advertising solutions. We also seek to leverage existing social platforms to increase audiences and revenue streams. We derive our revenue in this area from providing these services to our rights-in partners, rights-out clients and other stakeholders in the sports ecosystem.

In both our Spectator Sports and DPSS segments, we apply our in-house DPSS capabilities. Revenue and costs with respect to these services are generally allocated to our Spectator Sports segment if provided in the same contract that includes a rights-in arrangement with a rights-in partner or as part of a rights-out arrangement with a rights-out client. If we enter into a separate service contract with a rights-in partner, rights-out client or other stakeholder, the related revenue and costs are allocated to our DPSS segment. See also “Item 5. Operating and Financial Review and Prospects.”

Mass Participation. Our Mass Participation segment is built around our intellectual property across a range of mass participation sports, including triathlon, running, road cycling, obstacle course racing and fitness. We seek to own brand-driven, inspirational mass participation sports events across a range of sports. We generally organize, operate and monetize the events ourselves, and derive a significant portion of our revenue from event entry fees and other event-related fees, such as host city fees, and otherwise monetize our intellectual property through sponsorship, merchandising and media distribution opportunities

See “Item 5. Operating and Financial Review and Prospects – A. Operating Results – Segmental Results of Operations,” for our segmental revenue and segmental gross profit (revenue minus cost of sales only) for the years ended December 31, 2019, 2018 and 2017.

Spectator Sports

Our Spectator Sports segment benefits from our full-service sports marketing platform principally in relation to football, winter sports and summer sports events. We handle the media, sponsorship and marketing rights on behalf of a wide variety of leading rights owners, such as international and national sports federations, sports leagues, sports clubs and various other rights owners in the sports ecosystem. Our sports-centric approach allows us to have our fingers on the pulse of each sport and it enables us to develop a network of relationships across multiple levels of client organizations while, at the same time, providing access to top decision-makers in sports and business.

 

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Operations and Key Capabilities

Our spectator sports business is supported by our full-service sports management and marketing capabilities. These operations are focused on handling of media, sponsorship and marketing rights on behalf of a wide variety of leading rights owners, such as international and national sports federations, sports leagues, sports clubs and various other rights owners in the sports ecosystem.

Rights Acquisition (Rights-In). Our media rights business is fundamentally built on fostering long-term relationships through which we provide services with respect to media, sponsorship and marketing rights. The following table sets out the key performance indicators for our Spectator Sports segment as of the dates indicated.

 

     As of
December 31,
 
     2019      2018      2017  
     (#)  

Rights-in partners

        

Football

     51        48        50  

Winter Sports

     73        81        72  

Summer Sports

     34        31        31  
  

 

 

    

 

 

    

 

 

 

Total

     158        160        153  
  

 

 

    

 

 

    

 

 

 

Rights-in contracts

        

Football

     64        60        68  

Winter Sports

     156        138        137  

Summer Sports

     42        53        49  
  

 

 

    

 

 

    

 

 

 

Total

     262        251        254  
  

 

 

    

 

 

    

 

 

 

For a discussion of the contractual models that we use for our rights-in arrangements, see “Item 5. Operating and Financial Review and Prospects – A. Operating Results – Our Revenue-Generation Models – Our Spectator Sports and DPSS Segments.”

Generating Revenue from Rights (Rights Out). The key element to our rights-in/rights-out business model is identifying and exploiting opportunities to generate revenue from the rights we handle on a rights-in basis.

Media Distribution. We distribute content produced by ourselves or by others, and, in doing so, seek to build strong audiences, raise media rights value, create effective communication platforms for brands, events and organizations, and, ultimately, provide the vital link between sports events and the consumer. Our value creation is based on our partnerships with major traditional media providers and broadcasters worldwide as well as digital platforms, with whom we enter into rights-out arrangements for the distribution of content.

Our media distribution organization is organized in a market-based territorial media sales structure, in which teams are typically led by individuals with decades of relevant experience. The organization is designed so that personnel are dedicated to particular sports categories, such as football, as well as to a geographical territory, such as Germany. This structure facilitates an in-depth understanding of the potential markets for media rights and our rights portfolio, which we can leverage to identify and pursue territorial sales opportunities, including through the identification of optimal timing, packaging, and tendering in these territories. In addition to our dedicated territorial sports-focused teams, we also have senior personnel dedicated to specifically targeted clients, such as pan-regional broadcasters, social media outlets, international news agencies and betting agencies.

Our global media sales coordination steering committee meets regularly to discuss effective strategies for media sales across sports or territories, such as potential tenders, sales coordination aspects, movements in the markets with respect to new business and additional rights-in opportunities. The committee also discusses on a regular basis the alignment and the exchange that covers the media sales process which include the coordination between the persons responsible for the market and the persons responsible for our global portfolio.

 

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Sponsorship and Marketing. We are well-positioned to find brands and provide them with a wide range of sponsorship opportunities, including by providing brands with attractive sports-related platforms to market their products or services. We help companies create brand-related conversations across wide-ranging media through sponsorship and activation strategies by developing customized presentation and fan engagement approaches. We also provide on-site activation through branding as well as through expositions where our partners have the opportunity to have one-on-one interactions with their consumers.

Brands 360. Our spectator sports business has increasingly moved away from a purely traditional rights-in, rights-out business as our rights-in partners and rights-out clients seek our services, using our DPSS capabilities, in a variety of areas. As a result, our engagements with rights-in partners or rights-out clients, in general, have, in many cases, became broader and more sophisticated than was historically the case. We supplement our traditional rights-in, rights-out arrangements with event operation and support, media production, digital solutions and ancillary services.

We established our Brands 360 division in 2018 to promote proximity to brands through three main points: international sales, business intelligence and strategy as well as activation consulting. Our Brands 360 team focuses on supporting companies with large-scale sponsorship engagements to maximize value from these partnerships. The main focus of the team in 2019 was the FIFA Women’s World Cup France and FIBA Basketball World Cup 2019, as well as the implementation of a wide variety of related sponsorship activation programs.

International sales. The Brands 360 international sales department is focused on reaching brands in markets where we do not have a consistent presence or that we have identified as having additional potential. The primary objectives of the international sales department are to create new revenue source through sponsorship sales, establish a well-positioned and profitable virtual ad sales unit and drive additional revenue for our current rights. As secondary objectives, we seek to position us for future rights, establish a testing ground for our sales and create an integrated team. To fulfill its objectives the international sales team continues to work to establish a new offering of sponsorship capabilities, such as through virtual or digital sponsorship packaging on behalf of rights owners, and to offer meaningful international sales solutions and advice for global rights owners.

Business intelligence. The Brands 360 business intelligence department assists our media, sponsorship and digital sales teams by providing optimized value based upon fact-based data analytics. The research analytics section focuses on sales, business and valuation. The marketing and industry expertise section focuses on advisory solutions, sales coordination, best practices, trends, prospecting and the relevant tools. In 2019, the department also focused on building a team of experts that deliver fact-based data and conduct research to enhance rights-in acquisition accuracy as well as rights-out sales tools.

Strategy and activation consulting. The Brands 360 strategy and activation consulting department aims to create a unique brand strategy and activation offering with new unique selling points for our current portfolio. We believe we will be able to differentiate ourselves through our focus on new brands, new markets and new partnerships. In 2019, the department was also focused on delivering successful activation at our key sponsorship events, including the 2019 FIFA Women’s World Cup France and FIBA Basketball World Cup 2019.

Planning & Compliance. We apply a sophisticated and well-integrated planning process in entering into new relationships with our partners. In assessing a particular opportunity and across this business, we utilize a decentralized and detailed bottom-up project-by-project (financial) planning strategy. For every potential and existing project, a plan is developed and maintained to track both anticipated levels of income and cash flows to be generated over the next five years (or if longer, the end of the contractual term) in consideration of relevant contractual terms, revenue recognition principles and other factors. To assess the feasibility of achieving the plan, we factor in both historical contract performance and visibility of future developments.

In entering into new relationships and otherwise, we believe that compliance with relevant laws and regulations is a key feature of how we conduct our business and is fundamental to our success. To this end, we have developed the Infront Compliance Management System, or ICMS, which is based on the UK Bribery Act and has been in place since 2012. The ICMS is designed to promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. It is tailored to our spectator sports and DPSS businesses and the compliance-related risks, with dedicated guidelines for associated persons and issues, for example, relating to gifts and hospitality. Compliance management is also embedded within the organization through a compliance board and compliance desks with dedicated compliance officers. In addition, compliance whistle-blower hotlines have been set up in the major locations and in multiple languages, and are managed by external law firms. We also provide training on compliance to new employees. Further, each year every Infront employee has to certify that he/she has completed related web-based e-learning programs. Infront also has a biannual compliance week to provide additional information and insights on the topic.

 

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Our Sports and Strategic Partners

Our Spectator Sports segment is built around football (distinguished from American football), winter sports and summer sports and the related rights owners and other stakeholders.

Football. Football is the most popular sport around the world and features countless tournaments, league and league cup matches as well as friendly matches globally. With 51 rights-in partners as of December 31, 2019, we are engaged at all levels of football, including partnerships with global football federations, regional and national football associations, leagues, competitions and clubs.

We believe that we serve some of the most prestigious clients in the business. Our rights have been obtained in many cases as a result of long-term, successful partnerships with high-profile rights owners, such as FIFA, as well as top European leagues, national football associations and over 30 football clubs across Europe. We also co-own, organize and develop the China Cup International Football Tournament, an annual international football event in China at which the Chinese national team plays against national teams from Europe, Asia and South-America.

FIFA. Since 1999, we have been involved in various specialized areas supporting FIFA, including FIFA World Cup events and other FIFA events. Today, we continue our partnership with FIFA, delivering capabilities in a variety of areas, which together, are designed to extend the frontiers of the world’s most popular football event. As part of our Spectator Sports segment, we handle the exclusive sale of all television, radio, broadband internet and mobile broadcasting rights in 26 Asian territories (not including Japan, North and South Korea, Malaysia and the Middle-East) to FIFA events until the end of 2022. This contract, which relates to FIFA events since 2015 including the 2018 FIFA World Cup Russia, covers such rights also for the current FIFA event cycle, including the 2019 Women’s FIFA World Cup France and the 2022 FIFA World Cup Qatar.

In addition to this arrangement, we provide a number of additional services to FIFA through our DPSS segment. This includes the host broadcasting of the FIFA World Cup and other FIFA events (more than 100 such events have been broadcasted since 1999), as well as LED advertising solutions. See “—Our Segments—Digital, Production, Sports Solutions (DPSS).”

German football. At the center of our engagement with German football is our over 35 years long-standing relationship with the DFB, which is the largest single country sports federation worldwide, with over seven million members. We manage until the end of the 2021/22 season the advertising and marketing rights of the DFB Cup (the German football cup competition), and other DFB events. Under our existing contract with DFB, we also distribute all DFB media rights for the DFB Cup until the end of the 2021/22 season, which consists of live and delayed media rights that are available for all platforms across the international market including German speaking territories. For the same period, we also acquired the sponsorship rights for the DFB Cup. We have also built a significant German football club marketing business. We currently manage the portfolio of marketing rights (advertising boards, shirts, hospitality, etc.), up until 2031 depending on the club, for 11 clubs in the top four German football leagues:

 

   

1. Bundesliga: SV Werder Bremen, SC Freiburg, FSV Mainz 05, 1. FC Köln, SC Paderborn 07, Fortuna Düsseldorf

 

   

2. Bundesliga: SV Sandhausen, Vfl Osnabrück

 

   

3. Liga: FC Hansa Rostock, TSV 1860 München

 

   

Regionalliga: Energie Cottbus

 

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Italian football. We have a broad-based engagement with Italian football, underpinned by significant client relationships with the Lega Serie A, the premier Italian football league. Through our agreement with Lega Serie A, which was entered into in 2009 (current contract is in effect until the end of the 2020/21 season), we serve as the league’s exclusive strategic media advisor for the sale of domestic and international media rights for the Lega Serie A games, as well as the Coppa Italia (the annual Italian football cup competition) and the Supercoppa Italiana (the annual football competition usually held the week before the Italian football season begins between the winner of the Lega Serie A and the Coppa Italia). We also provide media production services to the Lega Serie A, see “—Our Segments—Digital, Production, Sports Solutions (DPSS)—Media Production.”

We are also actively involved in Italian football through club marketing and media agreements entered into with Italian football clubs running up until 2025 (depending on the club). These agreements include marketing and/or media rights for several leading football teams, including Lazio Roma, Inter Milan and AC Milan. We believe that these partnerships not only strengthen our assets in the Italian football market, but also serve as a strategic relationship tool to support our partnership with Lega Serie A noted above. Further, we also handle on behalf of various Italian football clubs Lega Serie A-related archive sales.

French football. Since 2012, we have focused on establishing a portfolio of club marketing rights and media agreements with French football clubs. In addition to the services we provide to various football clubs and the premier French football league (Ligue de Football Professionnel), or LFP, through our DPSS segment (see “—Our Segments—Digital, Production, Sports Solutions (DPSS)—Sports Services”), we also provide assistance to the LFP on their marketing activities, sponsorship and stadium advertising.

Chinese football. We co-own (together with the Chinese Football Association), organize and develop the China Cup International Football Tournament. The 2019 edition of the tournament took place in Guangxi, China with the national football teams of China, Uzbekistan, Uruguay and Thailand participating.

Other football. We also enjoy partnerships with other national leagues and teams. For example, in October 2019, we extended our partnership with the Scottish Professional Football League, or SPFL, to the end of the 2024/25 season, and will act as its exclusive international media rights partner for its four leagues (SPFL Ladbrokes Premiership, SPFL Ladbrokes Championship and SPFL Ladbrokes League One & Two) and two cup competitions (Tunnock’s Caramel Wafer Cup and Betfred Cup). As part of this extended partnership, we also cover the development of a dedicated eSports league for the SPFL. We also exploit the full global rights until the end of the 2021/22 season for all media types relating to the Portuguese Allianz Cup, the cup competition contested exclusively by Portuguese football clubs competing in the first and second leagues of Portuguese football. All matches for the Portuguese Allianz Cup are produced in HD. We also entered into a new partnership with the English Premier League, for free-to-air rights across sub-Saharan Africa for three years commencing with the 2019/20 season.

Winter Sports. We represent all seven Olympic Winter Sports federations (being all winter sports federations recognized by the International Olympic Committee) and various other major rights owners in winter sports through long-standing relationships. As of December 31, 2019, we had business relating to all important winter sports through 73 rights-in partners. We believe we have deep connections with a broad portfolio of partners, from international federations to local organizing committees.

The following provides an overview of our relationships relating to winter sports as part of our Spectator Sports segment.

Ice Hockey. Since 1981, we have had a relationship with the IIHF which is the worldwide governing body for ice hockey. Our ice hockey activities include two key properties on an international level: the IIHF Ice Hockey World Championships and the Champions Hockey League (CHL), an ice hockey tournament featuring top hockey teams from the first-tier leagues of countries across Europe. We are engaged to handle the global media rights, marketing and media production for the IIHF Ice Hockey World Championships and the CHL until the end of 2033 (further to a 10-year prolongation agreed in September 2019) and until June 2028, respectively. We also obtained the right to produce and organize the IIHF’s first eSports tournament at the 2021 competition in Finland.

 

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In addition, we provide various digital and media production services to the IIHF in connection with the IIHF Ice Hockey World Championships as well as to the CHL, see “—Our Segments—Digital, Production, Sports Solutions (DPSS).”

Skiing. We are involved in media and sponsorship marketing for many of the most prestigious international skiing properties. We have had a relationship with the FIS, which is the worldwide governing body for skiing, since 1992. We handle on behalf of the FIS the worldwide media, marketing, media production and hospitality rights to 2019-2025 FIS Alpine and Nordic Ski, Freestyle Skiing and Snowboard World Championships, including of television, internet and mobile, both for linear and on-demand. We also manage the entire production operation and all marketing-related activities.

In addition, we have established relationships directly with 28 national ski federations and many organizing committees in the top skiing countries of the world across various ski disciplines. Through these relationships, we handle the commercial rights (for durations up to 2031), ranging from advertising, media and broadcasting rights, for all FIS-sanctioned World Cup events (except those staged in Austria and Switzerland) across the disciplines of alpine skiing, ski jumping, cross-country, Nordic-combined and snowboard and freestyle skiing covering, in aggregate, over 200 races per season. We also have the sponsorship and marketing rights until 2022 for the Four Hills Tournament (Vierschanzentournee), an annual ski jumping tournament composed of four ski jumping events, of which two take place in Germany and two in Austria.

Biathlon. Since 1992, we have had a relationship with the International Biathlon Union, or IBU, which is the worldwide governing body for biathlons. We handle all marketing rights to the IBU World Cup, IBU World Championship Biathlon, IBU Cup and the IBU Junior Cup until the end of the 2028/29 season pursuant to an extension of the exclusive marketing partnership agreement with the IBU.

Bobsleigh/Skeleton. Since 1999, we have had a relationship with the International Bobsleigh and Skeleton Federation, or IBSF, which is the sports’ worldwide governing body. Until 2022, we have the right to market the key sponsorship packages and manage the worldwide distribution of media rights to the top IBSF-sanctioned events, being the BMW IBSF Bobsleigh and Skeleton World Championships and the BMW IBSF World Cup Bob and Skeleton, a multi-race series over a season for bobsleigh.

Curling. Since 2008, we have had a relationship with the World Curling Federation, or WCF, which is the worldwide governing body for curling, and our current arrangement was renewed in 2018 through to 2022. Under this contract we handle, on behalf of the WCF, the media rights worldwide (with the exception of Canada, the United States and Japan) related to the World Curling Championships and the European Curling Championships, the media rights related to the Pacific Asia Curling Championships in China, Hong Kong and South Korea, and the marketing rights worldwide for the World Curling Championships and European Curling Championships.

Luge. Since 1998, we have had a relationship with the International Luge Federation (Fédération Internationale de Luge de Course), or FIL, which is the worldwide governing body for the sport, and have an agreement with FIL under which we provide until the end of the luge season in 2022 for sponsorship and marketing services relating to the luge World Championships, World Cup and European Championships.

Skating. In January 2019, we entered into an agreement with the International Skating Union, or ISU, which is the worldwide governing body for skating. Under this agreement we, as the ISU’s exclusive media rights partner, handle from the 2019/20 season until the 2022/23 season the worldwide media rights (excluding China, Korea, Japan, the United States and Canada) relating to the ISU’s flagship events, such as the ISU World Championships and ISU European Championships across all disciplines (for example, figure skating, speed skating and short track), as well as the World Cups and Grand Prix competitions.

In addition to these Olympic winter sports, our winter sports portfolio also includes engagements in ski mountaineering in cooperation with the International Ski Mountaineering Federation, or ISMF, the sport’s worldwide governing body. We are responsible for sponsorship, marketing, media distribution and production opportunities relating to the ISMF World Cup, World Championships and European Championships.

 

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Summer Sports. As of December 31, 2019, we had 34 rights-in partners creating an extensive summer sports portfolio, which covers handball, volleyball, basketball, badminton, motorsport, professional cycling, rugby, tennis and golf with long-term partnerships. We believe we benefit from a well-balanced portfolio of summer sports with varying geographical focus and a strong position in emerging markets.

The following provides an overview of our relationships relating to summer sports as part of our Spectator Sports segment.

Basketball. In 2016, we entered into a long-term business partnership (until the end of 2033) with the International Basketball Federation, or FIBA, which is the worldwide governing body for basketball. We serve as FIBA’s exclusive partner for the sale and marketing of the worldwide sponsorship rights and licensing rights outside of the host country of the relevant FIBA competitions. We handle these rights in relation to the FIBA Basketball World Cups and their qualifiers, the FIBA continental cups (for example the FIBA AsiaCup and the FIBA AmeriCup) and their qualifiers, and the Youth World Cups. In addition, we became in 2017 FIBA’s exclusive domestic commercial rights partner in China for FIBA’s flagship competition, the FIBA Basketball World Cup 2019, held from August 31 to September 15, which was staged across eight Chinese cities and represents the first time that such an event was held in China. In addition, we delivered the commercial program of the FIBA Basketball World Cup 2019, serving as their exclusive partner for their worldwide sponsorship, merchandising, licensing and hospitality.

We are also the exclusive commercial partner to the Turkish Basketball Federation in relation to the development and sale of certain commercial rights related to various Turkish national basketball teams, leagues and events active in the Turkish Basketball League (Basketbol Süper Ligi), the top professional Turkish basketball division. We also entered into two agreements with the National Basketball Association, or NBA, in 2019. Under one agreement, we will represent the NBA with respect to the sale of its sponsorship rights in Italy until June 30, 2021. This marks the NBA’s first agreement with a sports marketing company to represent its sponsorship business in Italy. Under the other agreement, we distributed hospitality packages for the NBA’s first-ever regular season game in France as part of the NBA Global Games series, in which the Charlotte Hornets faced the Milwaukee Bucks in Paris in January 2020.

Handball. We have worked with the European Handball Federation, or EHF, which is the governing body for handball in Europe, since the first EHF Handball European Championship in 1994. Currently, we, together with Perform Group, are the exclusive media and marketing partner to the EHF, offering a full range of services across media rights, sponsorship and marketing solutions until 2030. This partnership relates to EHF’s EURO competitions (including the EHF Handball European Championships (which Infront co-founded in 1992) and their qualifiers, the EHF EURO Youth competitions and EHF EURO Beach competitions) and the EHF’s club team competitions (including for the EHF Champions League and the EHF European Cup and their respective qualifiers). In addition, we provide various digital and media production services to the EHF in connection with the EHF EURO Competitions and their qualifiers, see “—Our Segments—Digital, Production, Sports Solutions (DPSS).”

Volleyball. Our relationship with the European Volleyball Federation (Confédération Européenne de Volleyball), or CEV, which is the governing body for volleyball in Europe, started in 1993 when we became their exclusive media rights partner. In February 2020 we entered into a 12-year expansion with the CEV until 2033, for its flagship national team competitions and club tournaments. For the first time the media rights for all CEV events across all three disciplines will be distributed by us. The scope covers all national men’s and women’s volleyball events including the EuroVolley, CEV European Volleyball Leagues and Olympic Qualification as well as the club competitions CEV Champions League, CEV Cup and CEV Challenge Cup. It also includes the CEV European Championships in Beach Volleyball and Snow Volleyball as well as all CEV-run continental events in both disciplines as of July 1, 2020. In addition to media rights distribution, we provide various digital and media production services to the CEV, see “—Our Segments—Digital, Production, Sports Solutions (DPSS).”

Badminton. In 2016, we became the commercial rights partner of the Badminton World Federation, or BWF, which is the worldwide governing body for badminton. This was the first time the BWF has worked with an exclusive partner for both media and sponsorship rights distribution. We acquired the rights to handle on behalf of the BWF, until the end of 2025, its commercial rights on a worldwide basis (including sponsorship, media (sales), marketing and betting rights) in relation to the BWF World Tour and other BWF major events (including the BWF World Championships, the Sudirman Cup and the finals of the Thomas & Uber Cup). In addition, we provide various digital and media production services to the BWF in connection with the BWF World Tour and other BWF major events, see “—Our Segments—Digital, Production, Sports Solutions (DPSS).”

 

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Professional Cycling. We have a partnership with UCI, the worldwide governing body for sports cycling, which covers various services. We handle the commercial rights relating to the nine-day Tour de Suisse until 2029 and the multi-stage UCI Tour of Guangxi until 2022.

Established in 2017, the UCI Urban Cycling World Championships are the world championship events for freestyle BMX, cross-country eliminator and trials, and take place in China. We entered into a partnership agreement with the UCI under which we, until 2019, are entitled to co-organize the UCI Urban Cycling World Championships and handle the domestic media rights in relation thereto.

Motorsport. We are responsible for the worldwide media rights distribution of the FIA World Endurance Championships, an auto racing world championship staged across Europe, the Americas, Asia and the Middle East, and sanctioned by the International Automobile Federation (Fédération Internationale de l’Automobile or FIA), which is the worldwide governing body for many auto racing events, until the end of the 2020 season. The cornerstone event of the FIA World Endurance Championships is the annual “24 Hours of Le Mans,” a race beginning in mid-afternoon and finishing the following day at the same hour the race started the previous day and is considered one of the most prestigious automobile races in the world. In 2017, we signed a long-term partnership agreement until the end of 2019, and further extended it until the end of 2021, with the General German Automobile Club (Allgemeiner Deutscher Automobil-Club e.V.), or ADAC, for the marketing of the ADAC motor racing series and classic events. This agreement allows us to market the ADAC GT Masters, one of the world’s leading grand tourer-based auto racing series, and a range of racing series from the broad portfolio of ADAC Motorsport, which is a division of ADAC. In February 2019, we acquired Youthstream, the owner of the exclusive media, sponsorship and global promotional rights to the FIM MXGP Motocross World Championship until the 2036 season. The agreement covers several other events including the Monster Energy FIM Motocross of Nations, the FIM Women’s Motocross World Championship, the FIM Snowcross World Championship, the European Motocross Championship and the Motocross of European Nations.

Other summer sports. In addition, we also entered into various long-term agreements with French rugby club Stade Toulousain (until 2027), the French National Rugby League, and the Italian and French Golf Federations to support their respective marketing rights. In September 2019, we expanded our portfolio through a long-term strategic partnership with World Athletics (formerly known as International Association of Athletics Federations), including international media rights relating to the Diamond League series events from 2025 for a period of five years, the right to organize an annual Diamond League in China for ten years, from 2020-2029, as well as the creation of a new annual World Athletics event in China to be organized by us, and a ten-year international media rights agreement for a second international tour known as the World Athletics Continental Tour, which will consist of a series of one-day meetings around the world due to be launched by World Athletics in 2020 (the majority of which are currently postponed or canceled). We also entered into a new six-year agreement with The International Olympic Committee for the media rights to Sub-Saharan Africa for all Olympic events until 2024.

Digital, Production, Sports Solutions (DPSS)

Our DPSS segment includes our digital solutions, media production and service-related initiatives and capabilities to drive innovation in traditional media production, deliver growth in new digital properties, create new content formats, new distribution models and partnerships, and revolutionize advertising solutions as well as to leverage existing social platforms to increase audiences and revenue streams. We assist sports federations, organizing committees and other rights owners to broadcast their events in the most engaging and effective way. For a discussion of the contractual models that we use for our DPSS business, see “Item 5. Operating and Financial Review and Prospects – A. Operating Results – Our Revenue-Generation Models – Our Spectator Sports and DPSS Segments.”

Digital Solutions

We have been in the forefront of innovation for over 10 years, as shown above. We view ourselves as an innovation leader in the digital evolution of sports, with an established digital solutions services platform that enables us to develop new and disruptive technology solutions to shape our business model and create further value for our partners in the evolving sports ecosystem.

 

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Our digital capabilities focus primarily on B2B (business-to-business) and some B2C (business-to-consumer) solutions designed to drive engagement and excitement with sports fans and enthusiasts and present monetization opportunities for rights owners. An example of the designed B2C solutions is the social media video content services we provide to FIFA, including in connection with the 2018 FIFA World Cup Russia. We believe that these solutions, which include the application of cutting-edge technologies in digital media solutions, such as virtual advertising, artificial intelligence and data science, allow us to apply our business model across sports categories and geographies efficiently, while capturing new customer groups and minimizing our service costs.

We seek to improve our digital solutions offerings and provide digital solutions services mainly through our iX.co platform and our Infront Lab. In addition, cognizant of the opportunities in eSports, we also seek growth in this field.

iX.co. We established Infront Digital in 2016 (following the acquisition of our interest in Omnigon) and rebranded it to “iX.co” in May 2019. iX.co has a dedicated and experienced team of over 308 members across seven global offices (as of December 31, 2019) that provide an expanding number of technological solutions to engage the sports ecosystem for the benefit of rights owners and brands. The platform has been designed to provide appealing digital content for both athletes and fans while at the same time allowing us to build a data repository to enable us to better understand the interests and demands of fans. Among other things, we are better able to target digital sponsorship packages and sell advertising to properly engaged audiences.

iX.co also includes platform development such as applications, websites, gamification, content services and fan engagement activations. Through iX.co, we provide our clients with efficient and scalable solutions to better capture audiences by leveraging our Corebine platform, a content management and fan engagement platform designed specifically for mobile websites and applications. iX.co’s offerings include the application of artificial intelligence to reduce production and service costs, increase volume and quality and enable new solutions that were previously deemed impossible.

In 2018, we acquired a 10% (economic) stake in COPA90, an independent football media business providing attractive digital football content offering the potential to engage new fans and communities. COPA90 provides us with the ability to reach volume targets on a global scale with a context that is driven by people, groups and publishers that hold influential standing amongst key audiences.

In the third quarter of 2019, Infront also completed its investment in Level99, an eSports creative agency, and acquired a controlling stake, with existing management holding the remainder. In the fourth quarter of 2019, we entered into a digital consultancy partnership with the French Rugby League (LNR), launching a new English-speaking website dedicated to the Top 14 league for the coverage of relevant key markets worldwide. The agreement, which comprises a 360° digital approach, also includes the launch of social accounts, editorial management and content activation.

We also are focused on identifying and applying digital solutions to promote our owned events. We believe that by using digital capabilities to develop innovative content and distribution mediums, we will capture higher engagement from our community, and at the same time help reach a wider global audience. For example, we boost community engagement in broadcasting through innovative digital channels (for example, OTT platforms) and official social media platforms (for example, Facebook, YouTube, Instagram, Snapchat and Twitter), which improves the stickiness of our athlete community, fosters greater loyalty and enhances the network effects.

Infront Lab. We established our Infront Lab to identify technologies and related collaborations, that can benefit from our market know-how and other capabilities, to offer new products and services for sports stakeholders. For example:

 

   

We have established a collaboration with Parquery, a technology spin-off from the Computer Vision Laboratory of ETH (Swiss Federal Institute of Technology) Zürich, to develop technology that could be applied in connection with mass participation sports events, such as to detect and categorize runner apparel.

 

   

To add further value in our long-standing partnership with the IIHF, we have worked together with WSC Sports Technologies, an Israeli start-up, to bring its AI-driven video generation capabilities to deliver content for fans relating to the IIHF Ice Hockey World Championship. The technology automatically analyzes live sports broadcasts and creates customized videos which can be shared across numerous online platforms, including social media, providing an efficient means to enhance event exposure.

 

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In February 2019, we acquired a 10% stake in Deep, a visual storytelling company producing automated content by combining engaging, interactive formats, rich, contextual, visual data, and efficient editing tools for data visualization. Using advanced machine learning and data curation technologies, the company developed a unique Visual Knowledge Graph that is vertical specific, meaning Deep thoroughly studies chosen content domains, such as certain sports, sports properties or events, with its specific audiences and their needs and interests in mind. This allows Deep to offer insights beyond the data, in a way that is visual, interactive, bite-sized and mobile-optimized to meet today’s user content preferences.

 

   

In May 2019, we acquired a 10% stake in Minute, a video optimization technology company providing viewers with smart highlights of the video content available online.

eSports. The eSports market, which generally refers to organized competitions of video games between professional players, emerged in the early 2000s and since has grown to become an influential industry, especially among the younger generation. The eSports audience has grown from 225.5 million in 2014 to 454.4 million in 2018, and is expected to achieve a CAGR of 14.3% from 2018 to 2022, reaching an estimated 777.2 million in 2022. We see various opportunities in eSports, depending on the partner, ranging from supporting eSports publishers, events and leagues though services we provide, to supporting teams, players and influencers and building our own eSports communities.

Media Production

We are a leading player in sports media production, providing rights owners and viewers with quality, exciting and innovative sports coverage. We provide a range of services, from basic services such as match streaming, video on demand, near-live clip based content to new, multi-media solutions such as white label applications and web players. Our media production projects have been recognized with prestigious industry awards, including the International Broadcasting Convention Awards (2006, 2010 and 2014), SPORTEL Golden Podium Awards (2002 and 2011) and others, acknowledging our innovative approaches and dedication to quality.

Our media production services include essentially every aspect and scale of sports multimedia production. We help sports federations, organizing committees and other rights owners to broadcast their events in the most engaging and effective way possible with support ranging from the host broadcast design and operation for all kinds of major sports events to digital media and post-production as well as archive management. We provide our large scale media production services through HBS, which was founded in 1999 as the host broadcaster of the 2002 FIFA World Cup Korea/Japan and since then also operated as the host broadcaster for, among others, the:

 

   

2006 FIFA World Cup Germany;

 

   

2010 FIFA World Cup South Africa;

 

   

2014 FIFA World Cup Brazil;

 

   

2018 FIFA World Cup Russia; and

 

   

FIFA Women’s World Cup 2019 France.

The number of HBS employees varies in accordance with the active projects, from approximately 60 employees to more than 3,000 employees when we are delivering major sports events.

We have been at the forefront of digital media production innovation for many years. In 2009, we broadcasted Europe’s first 3D football match, the French Ligue 1 match between Olympique Lyon and Paris Saint-Germain. In 2013, HBS broadcast the first 4K-resolution production at the FIFA Confederations Cup and, in 2018, HBS implemented the first production of all FIFA World Cup Russia matches in ultra HD with 360-degree for virtual reality experience.

 

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Our media production activities include the following:

Partnership with FIFA. Since 1999, we have worked with FIFA and served as FIFA’s host broadcaster for, among others, the:

 

   

2002 FIFA World Cup Korea/Japan;

 

   

2006 FIFA World Cup Germany;

 

   

2010 FIFA World Cup South Africa;

 

   

2014 FIFA World Cup Brazil;

 

   

2018 FIFA World Cup Russia; and

 

   

FIFA Women’s World Cup 2019 France.

We are also mandated by FIFA as host broadcaster for the 2022 FIFA World Cup Qatar.

Italian and French Football Production. In addition to the FIFA World Cup flagship projects, we also provide end-to-end media production services for most of Lega Serie A games as well as for the Italian Cup (Coppa Italia) and Italian Supercup (Supercoppa Italiana) under arrangements that are generally set to expire at the end of the 2020/21 season (June 2021), and we handle the quality control of the production of the French Ligue 1 matches until June 2020.

Other Media Production Business. We also focus on producing other single-sport or multi-sport events, including the:

 

   

EHF EURO Competitions and Qualifiers;

 

   

CEV European Volleyball Championships;

 

   

BWF World Tour and other BWF major events (including the BWF World Championships, the Sudirman Cup and the finals of the Thomas & Uber Cup);

 

   

IBSF Bobsleigh and Skeleton World Cup;

 

   

FIS World Championships and FIS-sanctioned World Cup events;

 

   

IIHF Ice Hockey World Championship and Champions Hockey League;

 

   

UCI World Tour series in China (including the Tour of Guangxi, Tour of Chongming Island, Tour of Taiyuan, and Tour of Fuzhou); and

 

   

FIA World Rally Championship.

We provided consulting services to the UEFA (planning and management of the International Broadcast Centre) in connection with UEFA EURO 2016, the European football championship, and UEFA has mandated us to provide similar services for UEFA EURO 2020.

International Games Broadcast Services. We set up in 2004 International Games Broadcast Services, or IGBS, a joint venture with IMG Media, which is dedicated to the production of multi-sport events. IGBS has been the host production partner for the:

 

   

Doha Asian Games 2006;

 

   

Guangzhou Asian Games 2010;

 

   

Astana/Almaty Asian Winter Games 2011;

 

   

Incheon Asian Games 2014;

 

   

Singapore Southeast Asian Games 2015;

 

   

Jakarta Asian Games 2018; and

 

   

Rugby World Cup 2019 in Japan.

For broadcasts of the Rugby World Cup 2019 games in Japan, for the first time we used 8K-resolution production, augmented reality graphics and Hawk-Eye Smart Replay technology.

 

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Sports Services

We provide a comprehensive set of support services designed to contribute to the operational success of our sports media and marketing capabilities. These services include:

 

   

hospitality services;

 

   

ticketing services;

 

   

broadcaster servicing/account management;

 

   

sponsorship implementation;

 

   

state-of-the-art LED perimeter board systems and other live advertising solutions;

 

   

communication, branding and design services, including event logo and mascot creation, concept and appearance, and venue dressing;

 

   

event and full-service hospitality management including elaborate concept, creative cuisine, design, decoration, lighting, entertainment and marketing; and

 

   

management of ticketing concept, policy, pricing strategy, administration, promotional campaign and sales.

We provide consulting and support services to clients in connection with the design, planning and creation of platform-specific content across multiple digital outlets. On the fan engagement side, we seek to provide solutions to enable clients to engage directly with fans by providing innovative and easy to implement gamification tools. For example, we worked together with the IIHF and created and implemented the new content strategy for the IIHF Ice Hockey World Championships 2017, including social media, editorial and multimedia content planning, and fan engagement campaigns. In addition, we also provide a number of other services to the IIHF, including overall venue and event management, marketing implementation responsibility, event services and consulting, commercial legal advice during the organizational phase, digital strategy, host broadcasting, online broadcast services, B2B client and VIP hospitality services and management of the television production. We are also engaged with the CHL’s digital offering, including, among others, the design and support of the CHL’s website and app, content creation for social media and numerous fan engagement tools including predictor games and fan votes. We also provide a number of additional services to the EHF, including the use of official event logo and composition of logo and official mascots, full digital, online and social media integration as well as VIP hospitality tickets.

We further support and provide services, including shirt sponsorship, hospitality services and LED advertising to a number of French football clubs, such as AS Monaco FC, Lille OSC, FC Nantes and Toulouse FC. In addition, we provide VIP hospitality services to the LFP and serve as hospitality sales agent for major sports events in the Stade de France, the national stadium of France located in Paris.

LED boards have emerged at the forefront of perimeter board advertising. We own 17 LED outdoor systems as of December 31, 2019. We provide these systems to major rights owners such as FIFA, UEFA, the EHF, national federations in various sports and football clubs, as well as for multi-day events, and other sports such as tennis, basketball and volleyball.

The latest addition to our advertising offering is an innovative, machine learning-driven virtual advertising solution, Viz Eclipse, one of our main collaborations in the artificial intelligence area. Viz Eclipse is a product developed through our partnership with Vizrt to increase value creation through virtual advertising. This solution enables us to create targeted, unobtrusive advertisements overlaid into content. Using Viz Eclipse, we are able to offer localization (marketing different products in different locations for the same client), regional sales (differentiating the brands marketed depending upon on the location of the consumer) and content access (differentiating the brands or products marketed depending on how the content is accessed (such as a live event, a replay, the highlights and the social media highlights)).

In 2019, we also made an investment in District Technologies (“District”), a Singapore-based company that harnesses technology to add augmented-reality and location-based technology, including GPS and Bluetooth beacons, to running and exploration. This strategic partnership allows us to operate as the exclusive partner of the District Race app and the associated District Races in Europe, which are currently planned for Berlin and London.

Mass Participation

In 2019, the retained mass participation business organized, operated and licensed 113 mass participation sports events in 12 countries on two continents. The following table sets out the key performance indicators for the Mass Participation segment for the periods indicated.

 

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     For the year ended
December 31,
 
     2019      2018      2017  

Retained mass participation business

        

Licensed-in events (#)

     18        16        7  

Licensed events (#)

     11        13        7  

Owned events (#)

     84        59        31  

Gross-paid athletes(1) (‘000s)

     716        555        279  

 

(1)

Includes gross-paid athletes participating in both owned events and licensed-in events (but excludes gross-paid athletes participating in licensed events).

Our focus is on the premium segment of the mass participation sports market where we believe athlete engagement is higher, price elasticity (which measures demand relative to a change in price) is lower and there are increased opportunities for further monetization of rights. To compete successfully in this segment of the market, we seek to deliver high levels of athlete satisfaction through top-tier event organization and execution.

We coordinate all aspects of mass participation sports events, from obtaining the permits to negotiating host venue agreements, marketing and driving athlete registration, managing and maintaining the respective websites, procuring staff, executing the events on-site, selling and managing sponsorship agreements, producing and selling of merchandise relating to our events, and managing all communications to athletes. We believe that, through our in-depth knowledge of sports event operations, our insights into our athletes and the mass participation ecosystem, and our excellent organizational and technical capabilities, we are well placed to deliver engaging mass participation sports events and related value-added services to our athletes, partners and fans.

Our Sports Events

Our Mass Participation segment covers a wide range of mass participation sports events, including elite, amateur and corporate properties. We are focused on the experience of the athletes, who are highly motivated and deeply engaged, and strive in our events to capture the imagination of endurance athletes worldwide.

We believe the breadth and diversity of our mass participation sports offerings allows individuals to participate in multiple types of events. Athletes can choose among a wide variety of mass participation sports events and enrich their experiences in, or objectives to compete in, one event by also participating in other events. This may include, for example, an athlete choosing to run a marathon, an obstacle course race or trail run.

Triathlons. Pursuant to the terms of the WEH License Agreement, we organize and operate IRONMAN 70.3 events in China (i.e., licensed-in events). Established in 2006, IRONMAN 70.3 is the half-distance version of the IRONMAN triathlon series and was created as a more accessible event requiring less training and thereby making it easier for athletes to race throughout the year. This event consists of a 70.3-mile race: a 1.2-mile (1.9 km) swim, a 56-mile (90 km) bike ride and a 13.1-mile (21.1 km) half-marathon. In 2019, we organized four IRONMAN 70.3 events in China (four events in 2018). There were approximately 4,300 gross-paid athletes in our IRONMAN 70.3 events in China in 2019 (compared to approximately 3,700 gross-paid athletes in 2018). The average entry fee for each gross-paid athlete for our licensed-in IRONMAN 70.3 events was €194 in 2019 (€190 in 2018).

We also organize and operate races affiliated with IRONMAN 70.3 series, such as the IRONKIDS events. IRONKIDS offers various events for children. These affiliated events take place often as part of an IRONMAN 70.3 weekend.

Running. Our running events portfolio includes a portfolio of marathons and half-marathons, and corporate fitness events. In 2019, we organized and operated 57 running events, with approximately 0.5 million gross-paid athletes in aggregate (59 events with approximately 0.6 million gross-paid athletes in 2018). We believe that, like triathlon events, running events create an appealing platform for brands and create opportunities to increase revenue through license fees, sponsorships and merchandising.

Road Running. Our road running portfolio includes a substantial array of marathons, including the Rock ‘n’ Roll Marathon Series in China (which we organize and operate pursuant to the WEH License Agreement), and shorter distance events. The Rock ‘n’ Roll Marathon Series is designed to provide a different feel from other marathons, by combining running, travel and entertainment for participating athletes. For example, live bands and cheer teams line the streets of these marathons and the events are concluded by a headliner music concert. In 2019, we organized and operated five Rock ‘n’ Roll Marathon Series events in China (five events in China in 2018).

 

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In addition to the licensed-in Rock ‘n’ Roll Marathon Series events, we also own and operate a significant number of other marathons. In China, we acquired the Double Heritage Series of marathons in 2017, which includes the Dun Huang Marathon, Wen Jiang Marathon and Chengdu Double Heritage International Marathon. We also acquired the exclusive rights (including management of the event as well as all marketing, commercial TV and media rights) to the Rome Marathon, one of the top 10 European marathons, from 2020 to 2023. Our portfolio also includes city marathons and half-marathons, among others, the Chengdu Marathon and the Shenyang International Marathon for which we secured the operating rights for a period of three years in the third quarter of 2019.

Our road running portfolio also includes a number of 5 km to 10 km races, such as the Vienna Night Run, which takes place annually in the center of Austria’s historic capital city as well as other 5-km and 10-km races that occur in conjunction with our city marathon or half-marathon weekends.

Trail running. We also consider trail running (races on hiking trails instead of roads or tracks) to be an increasingly popular mass participation sports event category. In April 2019 we acquired Threshold, which added trail running sports events to our portfolio.

Corporate Fitness. We also organize and operate our own short-distance running events in the corporate fitness market aimed at people of all ages and taking place in a non-competitive and community-oriented setting. Our B2Run running series took place in 38 host cities across seven countries in 2019, and attracted approximately 11,000 companies to rally their employees and approximately 250,000 participating athletes in 2019 (compared to approximately 11,000 companies and approximately 225,000 participating athletes in 36 host cities across seven countries in 2018). The average entry fee per gross-paid athlete for our B2Run running series events in Germany and Switzerland was €24 in 2019 and €25 in both 2018 and 2017. Strengthening our portfolio is the acquisition in April 2019 of the Vienna Business Run, a popular annual 4.1-km road race.

Road Cycling. In 2019, we organized two road cycling events with approximately 4,000 gross-paid athletes in aggregate. In a bid to expand our portfolio through the acquisition of promising sport event organizers, we acquired UK-based Threshold Sports in April 2019. The Deloitte Ride Across Britain took place in September 2019 with nearly 1,000 cyclists participating in the 980-mile (1,500 km) ride over nine days. It was the 10th edition of the event and the first time we have been involved following our acquisition of Threshold Sports. The other event in our portfolio is the Granfondo Campagnolo Roma, which we organize through an exclusive commercial agreement.

Obstacle Course Racing. A relative newcomer in our portfolio of mass participation sports events is obstacle course racing (races in which competitors, traveling on foot, must overcome various physical challenges in the form of obstacles). Our obstacle running portfolio is currently focused on Germany, with the intention to further expand internationally, and organized around two brands, XLETIX Challenges and Muddy Angel Runs (women-only 5km mud races), which we acquired in 2018. There were 25 obstacle course racing events under these brands in 2019 with approximately 190,000 participating athletes in aggregate (26 events with approximately 180,000 participating athletes in 2018).

Operations and Key Capabilities

We organize, operate and monetize our mass participation sports events ourselves, and derive a significant portion of our revenue from event entry fees and other event-related fees, such as host city fees, and otherwise monetize our intellectual property through sponsorship, event and product licensing, merchandising and media distribution opportunities. Our events revenue consists primarily of event entry fees, revenue generated by fees charged to participating athletes, expo fees, rentals at the events by outside parties, host city fees, amounts received from the city or local organizing committee to support a hosted event, photo commissions and revenue earned from an outside photography service for exclusive access to our athletes on course at events.

We have, over time, developed proprietary tools to improve efficiency and to create additional business and monetization opportunities. We have also developed unique capabilities in connection with our events including the development and use of measurement tools for athlete satisfaction, metrics around athlete retention and development, and systems for the accurate and timely budgeting and delivery of our events.

 

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Event Organization. We have the operational capabilities and efficiencies to successfully organize and operate events worldwide. We have established processes that we consider to be best-in-class, which provide full-service capabilities and know-how to match the complexities and minute organizational details required to operate and efficiently deploy events globally. As each event typically involves an exhaustive checklist of items to be organized and coordinated among numerous parties, good relationships with parties in the process are key to make our events a success. We believe that our success in putting on events is evident by the continued significant interest and engagement that we see from sports enthusiasts worldwide in our events.

We have built valuable relationships with host cities and local authorities. Our relationships with local authorities are vital to our event organization process, because we rely on their cooperation to receive necessary permits, obtain permission to block roads, and receive the necessary security coverage.

We benchmark all aspects of our performance. We believe our experience, proprietary capabilities and global scale allows us to provide safe, top-tier and highly engaging experiences for our athletes that lead them to compete in more events, thus driving further engagement and to foster our community of athletes while delivering events on time and on budget and offering the potential for scalability in terms of further expansion of our mass participation sports events portfolio.

Further Monetization of Brand and Event Rights. Many of our mass participation sports events attract favorable demographics of athletes from a sponsorship perspective. We seek to create further value from our events through sponsorship, merchandising and other activities.

For our mass participation sports events, we seek to enter into multiple-year sponsorship contracts and derive additional value from such relationships. Our merchandising revenue include the sale of apparel and other merchandise at events on-site as well as through e-commerce platforms.

We believe we can further enhance our events business by developing our in-house production of inspiring series, increasing the scale of our event production coverage and integrating generated content. We are currently also developing and further exploring our broadcasting and distributing possibilities to create live coverage for our portfolio of mass participation sports events. Through partnerships we believe we can create valuable sponsor assets and are better able to leverage our portfolio of mass participation sports events.

Competition

The full-service sports marketing industry is fragmented by nature, consisting of a small number of global full-service companies and numerous smaller companies focusing on specific sports. There are only a number of companies that compete with us on a global and all commercial lines basis. On the global level and with respect to all of our commercial lines, we compete with Endeavor and Lagardère Sports. From a business perspective, we compete across many different industries and within many different markets. We believe our primary sources of competition include, but are not limited to:

 

   

Events. We compete against other providers of competitive events as well as non-sports events, which potential athletes may perceive to be more appealing.

 

   

Media Production. For large scale media production, the main competition we face is from other large scale media production providers.

 

   

Media Distribution. We compete against sports marketing companies, digital and other non-traditional media providers and also in-house solutions with respect to media distribution.

 

   

Sponsorship and Marketing. Our main competition is other sports sponsorship and marketing companies in the sports ecosystem. This competition will affect our monetization of the rights-in that we have contractually acquired.

 

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Ancillary Services. Many of our competitors offer ancillary services to stakeholders within the sports ecosystem.

Information Technologies

We have focused on, and will continue to invest in, our technological infrastructure.

Infront has an integrated technology platform focusing on fan data, analytics and digital sports marketing. This technology platform includes a CRM for fan relationship management as well as data management capabilities for fan tracking, targeting and re-marketing, data analytics for fan segmentation, content optimization and profiling, content analytics for social listening, content automation and optimization and monetization from ad technologies, merchandising and subscriptions. Infront’s CRM solution further supports the process for contracts’ management from the initial negotiations to signing thereof. Infront also has consolidated financial systems in place focused on, among others, forecasting, (long-term liquidity) planning, accommodating increased reporting requirements under IFRS, periodic reporting of cash flows and creating visibility and control of bank balances and payment flows through an integrated treasury management system. Infront has processes in place for regular back-ups, including off-site storage of data, and the implementation of a data back up and replication concept. All core business applications are running on centralized servers on Infront’s headquarters in Zug, and key knowledge about Infront’s IT infrastructure and business applications is present in an in-house team.

Intellectual Property

In our Mass Participation segment, we are the owners of a portfolio of brands across a range of sports, including running, obstacle course races and road cycling.

We own trademarks related to owned events such as the B2Run running series and XLETIX Challenges. Our trademarks are in the form of plain-text words or design logos, or both. Our trademark coverage varies by country, largely depending on whether we have events or licensees in that country. As at the end of 2019, excluding the WEH business, we held approximately four trademarks registered in the United States, and approximately 348 trademarks registered in jurisdictions outside of the United States.

Our trademark registrations apply to various specific classes of goods and services. Most of our trademark registrations relate to the conducting of athletic events. Others of our trademark registrations apply to apparel and other consumer products.

Seasonality

Most of the event-related revenue as well as event-related expenses are recognized in the month in which an event occurs. In our Mass Participation segment, revenue and direct expenses tend to be higher in the second and third quarters of our fiscal year given our event calendar. In our Spectator Sports segment, revenue and expenses tends to be lower in the third quarter as winter sports events have not yet commenced and there is less activity in European football compared with other quarters. Over the course of the four quarters, fluctuations in gross profit shows a largely similar pattern to fluctuations in revenue. Other than in years of a FIFA World Cup, our results of operations in our DPSS segment tend to have less seasonal fluctuations compared to our other segments as a result of limited seasonality in the event-related DPSS business, such as the Lega Serie A host broadcast production, which spans a large portion of the year, as well as lack of seasonality in other portions of the business, such as digital media advisory.

Generally, our overhead expenses, such as personnel as well as office and administration expenses, do not show the same volatility throughout the year compared with fluctuations in revenue and gross profit, as they are not primarily impacted by peaks in operational activities in the same way as direct project income and expenditure. Our depreciation and amortization expenses as well as our financial expenses are generally also stable throughout the year.

Expected Disposal

WEH’s Mass Participation Business

 

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WEH has a global mass participation sports event portfolio built principally around the strength of globally recognized brands and related intellectual property in mass participation sports owned by it, including triathlon, running and mountain biking. WEH seeks to create inspirational sports experiences for athletes and establish highly engaged and dedicated communities for athletes. WEH believes that, through its in-depth knowledge of mass participation sports, global insights into athletes and technical capabilities, WEH is well-placed to deliver engaging mass participation sports events to athletes, partners and fans worldwide. In addition, WEH is able to develop unique insights from the wealth of data generated from athletes enabling it to amplify athlete engagement, increase effectiveness of sponsorship arrangements and otherwise maximize the income potential for sports events, including through targeted services and cross-selling opportunities.

WEH generally organizes, operates and monetizes the events itself, and derives a significant portion of revenue from event entry fees and other event-related fees, such as host city fees, and otherwise monetizes its intellectual property through sponsorship, event and product licensing, merchandising and media distribution opportunities.

WEH’s portfolio includes iconic triathlon, running and mountain biking events globally and is built around a stable of globally recognized brands, including IRONMAN, IRONMAN 70.3, the Rock ‘n’ Roll Marathon Series, and the Cape Epic mountain biking event. In 2019, WEH owned 162 mass participation sports events in 20 countries on six continents. The following table sets out the key performance indicators for WEH’s mass participation business for the periods indicated.

 

     For the year ended
December 31,
 
     2019      2018      2017  

Licensed Events (#)

     75        80        68  

Owned and managed events (#)

     165        167        157  

Gross-paid athletes(1) (‘000s)

     808        767        707  

 

(1) 

Excluding, for the avoidance of doubt, gross-paid athletes participating in licensed events.

WEH’s focus is on the premium segment of the mass participation sports market where it believes athlete engagement is higher, price elasticity (which measures demand relative to a change in price) is lower and there are increased opportunities for further monetization of rights. To compete successfully in this segment of the market, WEH seeks to deliver high levels of athlete satisfaction through top-tier event organization and execution.

WEH undertakes its event organization and related activities relating to triathlon, running and mountain biking principally from its headquarters in Tampa, Florida.

Triathlons. WEH organizes, operates and licenses triathlons worldwide. In 2019, it organized or licensed 181 (out of which four were events licensed by WEH to WSC) triathlon events with over 273,000 gross-paid athletes (186 events with over 254,000 gross-paid athletes in 2018).

IRONMAN. Established in 1978, this full-distance event consists of a 140.6-mile race: a 2.4-mile (3.8 km) swim, a 112-mile (180 km) bike ride and a 26.2-mile (42.2 km) marathon. The completion of an IRONMAN triathlon is regarded by athletes as the pinnacle of endurance athletic accomplishments. In 2019, there were 41 IRONMAN full-distance events in 24 countries (41 events in 2018). The IRONMAN World Championship is held annually in Kailua-Kona, Hawaii and involves approximately 2,500 qualified and eligible athletes each year. Worldwide, there were approximately 80,000 gross-paid athletes in IRONMAN owned events in 2019 (approximately 73,000 gross-paid athletes in 2018). The average entry fee for each gross-paid athlete for IRONMAN events globally was €517 in 2019 (€494 in 2018 and €507 in 2017).

IRONMAN 70.3. Established in 2006, IRONMAN 70.3 is the half-distance version of the IRONMAN triathlon series and was created as a more accessible event requiring less training and thereby making it easier for athletes to race throughout the year. This event consists of a 70.3-mile race: a 1.2-mile (1.9 km) swim, a 56-mile (90 km) bike ride and a 13.1-mile (21.1 km) half-marathon. In 2019, there were 113 IRONMAN 70.3 events in 50 countries (109 events in 2018), including the IRONMAN 70.3 World Championship in Nice, France (unlike the full-distance IRONMAN World Championship, the location of the IRONMAN 70.3 World Championship changes from year to year, with recent championships in Canada, United States, Austria, Australia and South Africa). The IRONMAN 70.3 World Championship currently involves over 5,200 athletes. Worldwide, there were approximately 150,000 gross-paid athletes in IRONMAN 70.3 owned events in 2019 (compared to approximately 133,000 gross-paid athletes in 2018). The average entry fee for each gross-paid athlete for IRONMAN 70.3 events globally was €250 in 2019 (€229 in 2018 and €239 in 2017).

 

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5150. Established in 2012, the 5150 Series is our shorter distance triathlon series (Olympic triathlon distance), consisting of a 51.5-km race: a 1.5-km (0.9 mile) swim, a 40-km (24.8-mile) bike ride and a 10-km (6.2-mile) run.

WEH also owns, organizes and operates races affiliated with the IRONMAN or IRONMAN 70.3 series, such as the IRONKIDS and Iron Girl events. IRONKIDS offers various events for children. Iron Girl, a women-only event series, include running, walking, triathlon and duathlon races. These affiliated events take place globally, often as part of an IRONMAN or IRONMAN 70.3 weekend. In addition to IRONMAN-affiliated events, WEH also owns and operates the Noosa and Mooloolaba Triathlons, which are annual Olympic distance triathlons held in the Australian state of Queensland, and the Hamburg Triathlon, which includes both sprint and Olympic distance triathlons.

From time to time, WEH manages mass participation sports events for third parties, for example, ITU-sanctioned events as part of the ITU’s World Triathlon Series. It also has a cooperation framework with the International Triathlon Union, or ITU, to develop and grow the sport of triathlon globally. This cooperation focuses on standardizing rules, further collaborating on anti-doping efforts, fostering national federation relations, sanctioning, and developing collaborative marketing initiatives to grow the sport at the age-group level.

Running. WEH’s running events portfolio includes a portfolio of marathons and half-marathons and trail runs. In 2019, WEH organized or licensed 46 running events, with approximately 0.5 million gross-paid athletes in aggregate in these events (48 events with approximately 0.4 million gross-paid athletes in these events). We believe that, like triathlon events, running events create an appealing platform for brands and create opportunities to increase revenue through license fees, sponsorships and merchandising.     

Road Running. WEH’s road running portfolio includes a substantial array of marathons, including the Rock ‘n’ Roll Marathon Series, and shorter distance events. Established in 1998 and acquired by WEH in 2017, the Rock ‘n’ Roll Marathon Series is designed to provide a different feel from other marathons, by combining running, travel and entertainment for participating athletes. For example, live bands and cheer teams line the streets of these marathons and the events are concluded by a headliner music concert. In 2019, there were 30 Rock ‘n’ Roll Marathon Series events (including the licensed-in events) in ten countries (34 events in eight countries in 2018). Worldwide, there were over 300,000 gross-paid athletes in Rock ‘n’ Roll Marathon Series events in 2019 (over 350,000 gross-paid athletes in 2018).

In addition to the Rock ‘n’ Roll Marathon Series, WEH also owns and operates a significant number of other marathons globally. Its portfolio also includes a number of city marathons and half-marathons, among others, the Standard Chartered Singapore Marathon; the Auckland Marathon; the Hawkes Bay International Marathon; the Runaway Noosa Marathon; the Queenstown International Marathon; and the Santa Cruz Half Marathon.

Its road running portfolio also includes a number of 5 km to 10 km races, such as the Across the Bay 10 km race, which takes place annually in Maryland (United States), as well as other 5-km and 10-km races that occur in conjunction with our city marathon or half-marathon weekends.

In May 2019, WEH acquired a portfolio of events, including The Sun-Herald City2Surf, a fun run which takes place in Sydney, Australia, with participants running to Bondi Beach. In addition, the events portfolio included other mass participation sports events in Australia, including the Sydney Morning Herald Half Marathon, the Melbourne Corporate Triathlon and Carman’s Women’s Fun Run.

Trail running. WEH also has trail running (races on hiking trails instead of roads or tracks) in its portfolio. It hosts the Ultra Trail Australia, which includes, among other races, a 100km race taking place on trails located in some of Australia’s most scenic locations. In 2019, WEH acquired the Tarawera Ultra Trail in New Zealand, which includes a 160-km race, among other races.

 

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Mountain Biking. WEH’s mountain biking events aim to marry a passion for outdoor adventure and exploration with endurance riding, and all take place in iconic locations.

In 2019, WEH organized eight mountain biking events with approximately 7,600 gross-paid athletes in aggregate (nine events with approximately 8,900 gross-paid athletes in 2018). Among these events is the Cape Epic, an annual mountain bike stage race held in the Western Cape of South Africa, what we believe is the preeminent event of mountain biking. Its mountain biking portfolio also includes, among others, the Swiss Epic, The Pioneer (a six-day mountain bike stage race through New Zealand’s Southern Alps) and the Cape to Cape, an Australian mountain biking multi-stage endurance race. These events are complemented by ownership of other mountain biking events such as Port to Port, Motatapu and Wines2Whales.

Operations and Key Capabilities

WEH organizes, operates and monetizes its mass participation sports events itself, and derives a significant portion of our revenue from event entry fees and other event-related fees, such as host city fees, and otherwise monetizes its intellectual property through sponsorship, event and product licensing, merchandising and media distribution opportunities. WEH’s events revenue consists primarily of event entry fees, revenue generated by fees charged to participating athletes, expo fees, rentals at the events by outside parties, host city fees, amounts received from the city or local organizing committee to support a hosted event, photo commissions and revenue earned from an outside photography service for exclusive access to its athletes on course at events.

Information Technologies

WEH has an integrated CRM platform that contains over 3 million unique athletes and allows WEH to utilize tools for email marketing, customer service, e-commerce and captures all athlete event data with split timings. WEH’s CRM system also feeds its data warehouse that enables data analysis, business intelligence, or BI, reporting and market segmentation. Key knowledge about WEH’s IT infrastructure is present in an in-house team. The 2019 roadmap for information technology to enhance WEH’s business unit integration includes an athlete survey tool, new POS system for onsite merchandise, sales and inventory management with automated contract generation and social integration.

Intellectual Property

In its Mass Participation segment, WEH is the owner of a portfolio of iconic brands across a range of sports, including triathlon, running, mountain biking and trail running.

WEH holds the rights, in the United States and various other countries, to the name “IRONMAN” and its logo, and the associated “M-DOT” logo for marketing competitions involving swimming, biking, and running. WEH owns an additional number of trademarks around our mass participation sports events, including trademarks such as IRONMAN 70.3 as well as trademarks related to other owned events such as the Rock N’ Roll Marathon Series and the Cape Epic series. Trademarks are in the form of plain-text words or design logos, or both. WEH’s trademark coverage varies by country, largely depending on whether it has events or licensees in that country. As at the end of 2019, WEH held approximately 174 trademarks registered in the United States, and approximately 1,018 trademarks registered in jurisdictions outside of the United States.

Seasonality

Most of the event-related revenue as well as event-related expenses are recognized in the month in which an event occurs. In WEH’s mass participation business, revenue and direct expenses tend to be higher in the third and fourth quarters of its fiscal year given the event calendar.

Generally, WEH’s overhead expenses, such as personnel as well as office and administration expenses, do not show the same volatility throughout the year compared with fluctuations in revenue and gross profit, as they are not primarily impacted by peaks in operational activities in the same way as direct project income and expenditure. Depreciation and amortization expenses as well as financial expenses are generally also stable throughout the year.

 

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C.

ORGANIZATIONAL STRUCTURE

The following diagram illustrates our corporate structure, including our significant subsidiaries and our VIE, as of the date of this annual report.

 

LOGO

 

(1)

Expected to be dissolved following completion of the WEH sale.

(2)

Expected to be sold as part of the WEH sale.

(3)

Based on contractual arrangements.

Contractual Arrangements with our VIE and its Shareholders

While the revenue contribution of our operations in China is relatively small, we expect to continue to grow our presence in China and hence our revenue from China over time.

Due to foreign investment restrictions in the PRC and other regulatory considerations, we conduct certain business activities in China through our VIE, and its subsidiaries, based on a series of contractual arrangements. As a result of these contractual arrangements, we exert effective control over our VIE and consolidate its and its subsidiaries’ operating results in our consolidated financial statements under IFRS. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE. If our VIE or its shareholders fail to perform their respective obligations under the contractual arrangements, we could be limited in our ability to enforce the contractual arrangements that give us effective control over our business operations in the PRC and may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. For details of these and other risks associated with our corporate structure and contractual arrangements with our VIE, see “Item 3. Key Information – D. Risk Factors – Risks Related to Our Corporate Structure” and “ – Risks Related to our Operations in China – Risks Related to our VIE Arrangements.”

 

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We summarize below the contractual arrangements by and among Infront China, our VIE and its shareholders. In the opinion of Jingtian & Gongcheng Attorneys at Law, our PRC counsel:

 

   

the ownership structures of our VIE and Infront China do not and will not contravene any applicable PRC law or regulation currently in effect; and

 

   

the contractual arrangements among Infront China, our VIE and its shareholders, which are governed by the laws of the PRC, are valid and binding upon each party to such arrangements and are enforceable against each party thereto in accordance with their terms and applicable PRC laws and regulations currently in effect.

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations. We have been further advised by our PRC counsel that if the PRC government were to find that the contractual arrangements do not comply with applicable restrictions, including restrictions on foreign investment, or if the PRC government were to otherwise find that we, our VIE, or our or its respective subsidiaries are in violation of PRC law or regulations or lack the necessary permits or licenses to operate our business in China, we could be subject to severe penalties, including being prohibited from continuing operating the businesses currently operated by our VIE and its subsidiaries in China.

Pledge Contract

Pursuant to the pledge contract dated March 14, 2019 by and among Infront China, our VIE and its shareholders, the shareholders of our VIE pledged all of their equity interests in our VIE to Infront China, to secure our VIE’s and its shareholders’ performance of their respective obligations under, where applicable, the exclusive call option agreement, exclusive services agreement and powers of attorney (described below). Such pledge of equity interests in our VIE has been registered under PRC law. If our VIE or any of its shareholders breaches its contractual obligations under these agreements, Infront China will be entitled to certain rights, including but not limited to the rights to auction or privately sell the pledged equity interests. Without the prior written consent of Infront China, the shareholders of our VIE may not transfer the pledged equity interests, or place or permit the existence of any other encumbrance on the pledged equity interests.

Exclusive Call Option Contract

Pursuant to the exclusive call option contract dated March 14, 2019 by and among Infront China, our VIE and its shareholders, the shareholders of our VIE granted Infront China an irrevocable and exclusive right to purchase, or to designate one or more persons to purchase, all or part of the equity interests held by the shareholders of our VIE at a price equals to the lower of (i) the actual capital contributions paid in the portion of the registered capital by the relevant shareholder for the equity interests to be purchased and (ii) the lowest price permitted under PRC law. Without the prior written consent of Infront China, the shareholders of our VIE may not transfer their equity interests in our VIE, or create any other encumbrance on their equity interests in our VIE.

Exclusive Services Agreement

Pursuant to the exclusive services agreement dated March 14, 2019 by and between Infront China and our VIE, our VIE engaged Infront China as the exclusive provider of specified business support and technical and consulting services. Our VIE may not accept the same or similar services provided by any third party during the term of the agreement. Infront China is permitted to engage other persons to perform the services contemplated by the agreement. Our VIE agrees to pay to Infront China specified service fees equal to the sum of 100% of the net profit of our VIE (the amount can be adjusted by consent of Infront China) on an annual basis.

 

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Powers of Attorney

Pursuant to the respective powers of attorney dated March 14, 2019 issued by each shareholder of our VIE, each shareholder of our VIE irrevocably authorized Infront China to act on such shareholder’s behalf as his/her exclusive agent and attorney with respect to all matters concerning such shareholder’s shareholding in our VIE.

 

D.

PROPERTY, PLANTS AND EQUIPMENT

Our group’s principal office is in Tower B, Wanda Plaza, 93 Jianguo Road, Chaoyang District, Beijing, where we lease and occupy office space with an aggregate floor area of approximately 353.6 square meters. We also lease and occupy office space located in Tower C, Oriental Media Centre, 4 Guanghua Road, Chaoyang District, Beijing with an aggregate floor area of approximately 1,034.5 square meters.

Infront’s headquarters are in Zug (Switzerland), where we lease and occupy an aggregate floor area of approximately 5,613 square meters.

In addition to our headquarters, we (excluding the WEH business) have over 53 offices in 16 countries worldwide. We lease substantially all of the properties we use to operate our business. We believe that our facilities and offices are adequate to meet our needs for the foreseeable future, and we believe that we will be able to obtain adequate facilities, principally through leasing of additional properties, to accommodate our future expansion plans.

 

ITEM 4A.

UNRESOLVED STAFF COMMENTS

None.

 

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Introductory Note

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of various factors, include those we describe under “Item 3. Key Information D. Risk Factors” and elsewhere in this annual report on Form 20-F. See “Forward-Looking Statements.”

COVID-19. Due to the significant uncertainties associated with the COVID-19 Risks, the following discussion and analysis, to the extent it would otherwise address known trends, developments and uncertainties, does not reflect the potential impact of the COVID-19 Risks. As a result of extensive shutdowns of public activities, severe limitations on travel and mobility and other pervasive mitigation efforts, particularly social distancing orders, sports events have been canceled in our principal markets, and we expect these cancelations to have an adverse effect on our results operations and cash flows. The longer it takes for the infection to be contained on a global basis and the longer mitigation restrictions remain in place, the more significant the impact on our results of operations and cash flows. These factors will adversely affect participation in sports events as well as attendance at live sports events, and could have a fundamental impact on the sports ecosystem going forward in the short-, medium- and longer-term. Lengthy or renewed shut downs could have an adverse impact on sports clubs due to significant liquidity pressures. In addition, the current and evolving environment raises untested issues, such as contingency plans for games without live audiences and theories of contractual interpretations in relation to a pandemic. More fundamental shifts may see changes in distribution models (including to direct-to-consumer) or acceleration of trends to move distribution activities in-house.

 

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In addition, the COVID-19 Risks have begun to have broader macro-economic implications, including the possibility of a global recession, which could adversely impact discretionary spending and, in turn, product sponsorship.

We currently are unable to predict the extent and duration of the effects of the COVID-19 Risks. For a discussion of our cost management measures as well as our ongoing discussions with rights owners in respect of our capital commitment and minimum revenue guarantee obligations, see “Item 3. Key Information – D. Risk Factors – Overriding Risks Related to the Outbreak and Spread of COVID-19.”

We had €163.2 million in cash and cash equivalents as of December 31, 2019, and €198.1 million as of March 31, 2020. Our cash and cash equivalents primarily consist of cash placed with banks and cash on hand, as well as short-term deposits or other financial institutions, which have original maturities of three months or less at the time of purchase and are readily convertible to known amounts of cash. We expect the WEH sale to close in the second quarter of 2020. We intend to use the proceeds from the WEH sale to repay the principal amount of US$230 million (€211.5 million) and related interest and fees outstanding under our Senior Term Loan Facility as well as US$50 million (€46.0 million) remaining outstanding under the pre-IPO promissory note (see “– B. Liquidity and Capital Resources – Indebtedness”). As for the balance of the proceeds, in light of the many and significant uncertainties we and the broader sports ecosystem face due to the COVID-19 Risks, we continue to evaluate (in the context of developing business conditions) whether we should apply the proceeds to strengthen our balance sheet, use the proceeds for general corporate purposes or, subject to shareholder approval, return capital to our shareholders.

Our approach to managing liquidity is to ensure, as far as possible, that we are able to meet our liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to our reputation. In March 2020, we completed our 364-day term loan refinancing to reduce our finance costs in the context of the challenging global environment created by COVID-19. See “–B. Liquidity and Capital Resources – Indebtedness.” The Infront credit facility has a leverage ratio covenant (see “– B. Liquidity and Capital Resources – Indebtedness”), from which we expect we will need relief due to the impact of COVID-19 on our revenue. Failure to do so could result in an acceleration of the debt outstanding under the Infront credit facility unless we and the lenders reach agreement to avoid a default and acceleration. We are in discussion with our lenders with respect to covenant relief. As we recorded net current liabilities as of December 31, 2019, the directors have given careful consideration to our future liquidity and performance and our available sources of finance in assessing whether we will have sufficient financial resources to continue as a going concern. Having considered that our cash flow management forecast and analysis for 2020 has presented as a positive result, the directors are confident that we are able to meet in full our financial obligations as they fall due for the next 12 months.

WEH Sale. Following the completion of the WEH sale, our Mass Participation segment will no longer include the WEH business, namely the operations described under “Item 4.B. Business Overview – Expected Disposal.” Our historical financial statements have not been restated to give effect to the WEH sale and, accordingly, the following discussion covers our entire consolidated business during the periods indicated, without giving effect (pro forma or otherwise) to the WEH sale. As of and for year ended December 31, 2019, the WEH business represented 25% of our revenue and 27% of our gross profit for the period, and 47% of our total assets and recorded a net loss of €259.5 million, mainly due to impairment losses.

 

A.

OPERATING RESULTS

Overview

We are a global sports events, media and marketing platform with significant intellectual property rights, long-term relationships and broad execution capabilities through which we create value for stakeholders in all parts of the sports ecosystem, from rights owners to brands and advertisers, and from fans to athletes. We own, or otherwise have contractual rights to, an extensive portfolio of global, regional and national sports properties from which we seek to generate revenue across the value chain, including events operation and support, media production and media distribution, sponsorship and marketing, digital solutions and ancillary services.

The nature of our engagement with the sports ecosystem depends on whether or not we are the rights owner of the relevant sports events. This split, in turn, is reflected in our three segments: Mass Participation, where we are generally the rights owner (in other words, we own the relevant intellectual property for the sports event), and Spectator Sports and DPSS, where we are generally not the rights owner but offer a range of capabilities and services for the benefit of rights owners, rights-out clients, such as brands and media companies, and other stakeholders. For a more detailed description of our segments, see “Item 4. Information on the Company – B. Business Overview – Our Segments.”

 

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Spectator Sports. Our Spectator Sports segment is primarily focused on business where we do not own the intellectual property. We enter into contractual arrangements with a wide range of leading rights owners such as international and national sports federations, sports leagues, sports clubs and various other rights owners in the sports ecosystem (which we refer to as “rights-in” partners and “rights-in” arrangements) and, in turn, enter into, or facilitate, contractual arrangements (which we refer to as “rights-out” arrangements) with clients (which we refer to as “rights-out clients”) to engage the rest of the sports ecosystem. Through this activity, we monetize such rights through media distribution, sponsorship and marketing activities. We also provide services to our rights-in partners and rights-out clients drawing on our in-house DPSS capabilities, including event operation and support, media production, digital solutions and ancillary services. Our Spectator Sports segment includes an extensive portfolio of sports, including football, winter sports and summer sports.

 

   

Digital, Production, Sports Solutions (DPSS). We focus on maximizing the potential of our sports events, media and marketing platform by providing a comprehensive suite of specialized sports-related services, including innovative digital media solutions, media and program production, host broadcasting, marketing services, event operations services, brand development services and advertising solutions. Structurally, we have united digital, media production and sports events service-related initiatives and capabilities to drive innovation in traditional media production, deliver growth in new digital properties, create new content formats, new distribution models and partnerships, and revolutionize advertising solutions. We also seek to leverage existing social platforms to increase audiences and revenue streams. We derive our revenue in this area from providing these services to rights owners, rights-out clients and other stakeholders in the sports ecosystem.

 

   

Mass Participation. Our Mass Participation segment is built around our portfolio of globally recognized brands and other intellectual property across a range of mass participation sports, including triathlon, running, mountain biking, road cycling, obstacle course racing and trail running. We seek to own brand-driven, inspirational mass participation sports events across a range of sports. We generally organize, operate and monetize the events ourselves, and derive a significant portion of our revenue from event entry fees and other event-related fees, such as host city fees, and otherwise monetize our intellectual property through sponsorship, event and product licensing, merchandising and media distribution opportunities.

In both our Spectator Sports and DPSS segments, we apply our in-house DPSS capabilities. Revenue and costs with respect to these services are generally allocated to our Spectator Sports segment if provided in the same contract that includes a rights-in arrangement with a rights-in partner or as part of a rights-out arrangement with a rights-out client. If we enter into a separate service contract with a rights-in partner, rights-out client or other stakeholder, the related revenue and costs are allocated to our DPSS segment. As we provide DPSS services to our partners in our Spectator Sports segment in connection with rights-in or rights-out arrangements, we report cost of sales relating to the provision of such services. We often do not recognize additional revenue from the provision of these services.

The following table presents our segmental revenue and segmental gross profit (revenue minus cost of sales only) for the periods indicated.

 

     Revenue(1)      Gross profit  
     For the year ended December 31,      For the year ended December 31,  
     2019      2018      2017      2019      2018      2017  
     (€ ‘000s)      (€ ‘000s)  

Spectator Sports

     567,279        523,826        547,072        184,758        208,162        198,054  

DPSS

     135,884        321,279        156,076        41,546        56,375        42,169  

Mass Participation(2)

     326,917        284,081        251,450        117,416        100,856        90,282  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,030,080        1,129,186        954,598        343,720        365,393        330,505  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

For a discussion of reimbursement revenues and reimbursement expenses, and their impact on revenue and gross profit, see the discussion of our cost-plus contractual model in “– Our Revenue-Generation Models – Our Spectator Sports and DPSS Segments” and see “ – Other Factors Affecting our Results of Operations across Segments – Cyclicality.”

 

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(2) 

The following table sets forth a breakdown of our Mass Participation segment revenue and gross profit between the WEH business and the retained mass participation business.

 

     Revenue      Gross profit  
     For the year ended December 31,      For the year ended
December 31,
 
     2019      2018      2017      2019      2018      2017  
     (€ ‘000s)      (€ ‘000s)  

WEH business

     260,709        243,817        228,754        91,436        85,457        81,151  

Retained mass participation business

     66,208        40,264        22,696        25,980        15,399        9,131  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     326,917        284,081        251,450        117,416        100,856        90,282  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our Revenue-Generation Models    

We generate revenue based on various models, depending as a threshold matter on whether or not we own the intellectual property to be monetized.

Our Spectator Sports and DPSS Segments    

In our Spectator Sports and DPSS segments, we rely on contractual arrangements to obtain the rights we can then monetize, and otherwise to provide a comprehensive suite of sports-related services through our DPSS capabilities, either as part of a rights-in or rights-out arrangement (accounted for under our Spectator Sports segment) or as part of a separate service contract (accounted for under our DPSS segment).

We have built a contracts portfolio based on long-standing relationships. In our portfolio, we seek to maintain a well-diversified and balanced mix of rights-in arrangements and a comprehensive service offering, which we consider essential to reduce dependency on any single counterparty or revenue stream. No single rights-in or services contract in our current portfolio accounted for more than 10% of our revenue (excluding reimbursement revenues, see discussion below of the “cost-plus” model) in 2019, 2018 and 2017.

The following table sets forth the various contractual models from which we derive revenue in our Spectator Sports and DPSS segments, including examples of our relationships that apply to each model.

 

Contractual Model (Relevant
Segment)

  

Description

  

Examples

   No. of
existing
contracts as
of
December 31,
2019
 

Full rights buy-out (Spectator Sports)

  

We pay a guaranteed amount to the rights owner to acquire the rights.

 

We subsequently monetize the acquired rights for our own account (without needing further approvals from the rights owner).

   Arrangements with certain Italian football clubs and for Lega Serie A-related archive sales, the China Cup and UCI Tour of Guangxi as well as the CEV Volleyball and IBU Biathlon, IIHF, FIS-sanctioned World Cup events and FIS Ski World Championships in all disciplines.      214  

Commission with minimum revenue guarantee (Spectator Sports)

   We guarantee a certain amount of revenue to the rights owner and, in turn, are compensated in the form of a commission. Depending on the contract, the revenue in excess of the guaranteed minimum is split between us and the rights owner. For some contracts, we provide a signing fee to the rights owner.    Arrangements with FIFA for Asian media sales, with Lega Serie A for media sales, with the DFB for the DFB Cup, with FIBA for FIBA basketball competitions and with certain Italian and German football clubs.      17  

 

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Commission (Spectator Sports)

   We receive a commission from the rights owner for each rights-out arrangement concluded. The commission is generally a percentage of the revenue earned by the rights owner under the arrangement. For some contracts, we provide a signing fee to the rights owner.    Arrangements for the World Curling Federation and the Turkish Basketball League as well as with certain German football clubs.      31  

Sale of services—Cost-plus (DPSS)

   We pass on revenue received and are reimbursed for the overall costs incurred plus a mark-up. This type of contract is typically used in our DPSS business for media production agreements.    Agreements relating to FIFA host broadcasting production and Lega Serie A host broadcasting production.      4  

Sale of services—General Contractor (Spectator Sports / DPSS)

   We agree on a fixed amount upfront to produce an event or (digital) application.    Agreements from time to time relating to digital media solutions as well as Chinese media production related services provided by Beijing Evertop Sports Culture Media Co. Ltd, or Yongda (acquired in 2018).      3  

Service and Consulting (Spectator Sports / DPSS)

   We derive revenue based on consulting and other services provided to external partners. We invoice based on the services provided to our partner.   

LED services and advertising solutions provided to FIFA and UEFA.

 

Consulting services provided in connection with UEFA EURO (planning and management of the International Broadcast Centre) and with the IIHF Ice Hockey World Championship.

 

Consulting and services provided to Dalian Wanda Group in connection with their 2018 FIFA World Cup sponsorship activation.

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Our holistic approach to engaging with partners means that the requirements of our counterparties generally dictate the particular contract model used in each case. The determination of which contractual model is applied, can have significant implications for our results of operations, including due to the different accounting treatment applicable to each model.

 

   

Full rights buy-out contracts. The most common contract model in our spectator sports portfolio is the full rights buy-out contract. We estimate that revenue from full rights buy-out contracts, in the aggregate, accounted for 38%, 36% and 42% of our consolidated revenue (in each case, excluding reimbursement revenues) in 2019, 2018 and 2017, respectively. The lower percentages in 2019 and 2018 were primarily due to primarily attributable to the CBA’s decision in 2017 to reduce the scope of the relationship between them and us. This model gives us the ability to monetize the acquired rights independently with generally full upside and downside participation. A full rights buy-out contract is recorded in our consolidated statement of profit or loss on a gross basis such that all revenue and costs (including the costs relating to the acquisition of rights as well as other costs directly attributable to the project) associated with the project are accounted for in our consolidated statement of profit or loss. Payments to rights owners are generally expensed when the event occurs, but any upfront payment to the rights owner is expensed over the life of the contract. We record future payment obligations to the rights owner as capital commitments. See “Item 5. Operating and Financial Review and Prospects – F. Tabular Presentation of Contractual Obligations.”

 

   

Commission-based contracts (with and without minimum revenue guarantees). For a commission-based contract, generally we only recognize the commissions we earn as revenue. Usually, only project-related costs are recognized as cost of sales, with no costs relating to the acquisition of rights. Any signing fees, if due to be paid by us, are recognized as a revenue reduction. While the gross profit impact of commission-based contracts is comparable to full rights buy-out contracts, the impact on our revenue, cost of sales and gross margins is very different, with profit margins for commission-based contracts being generally higher compared with full rights buy-out contracts.

 

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Where we provide a minimum revenue guarantee, we record the contingent liabilities which arise as a result thereof similarly to capital commitments incurred as part of the full rights buy-out contractual model. See “Item 5. Operating and Financial Review and Prospects – F. Tabular Presentation of Contractual Obligations” for a discussion of such commitments. However, unlike the full rights buy-out model, payments of the minimum revenue guarantee to the rights owner are not, in general, expensed as cost of sales. Such costs are only reflected in our consolidated statement of profit or loss as revenue reduction in cases where the revenue achieved is below the minimum revenue guarantee and it is determined that such costs will not be reimbursed in future periods. Depending on the contract, the revenue in excess of the minimum revenue guarantee is split between us and the rights owner.

 

   

Cost-plus. The cost-plus contractual model is used for certain of our media production contracts. This model generates a significant part of our revenue in our DPSS segment, especially in the years of the FIFA World Cup. The agreements have detailed arrangements with the rights owners as to cost budgets and the mark-up. Both revenue and costs are fully accounted for in our consolidated statement of profit or loss, including reimbursement revenues and reimbursement costs. Reimbursement revenues represent revenue that has associated costs of a similar, generally matching, amount (reimbursement costs), thereby resulting in a negligible gross margin impact. Reimbursement revenues are either recognized as revenue when received from broadcasters and passed on to the rights owner, or through compensation by the rights owner of direct costs incurred depending on the contract terms. The negligible gross margin impact from reimbursement revenues and reimbursement costs (as opposed to a zero gross margin impact as may be otherwise expected) is due to temporary timing differences mainly resulting from foreign exchange effects on invoice settlements. Over the long term, these reimbursement revenues and reimbursement costs do not impact our net economics, either positively or negatively, to any significant extent.

While such amounts may have a negligible direct gross profit impact, to incentivize us to control costs, our rights-out clients generally consider the level of reimbursement revenues and reimbursement costs when assessing our performance and determining our compensation on the overall project, and can therefore indirectly lead to higher or lower commissions and gross margins.

Given the cyclical nature of the events for which we provide media production services on a cost-plus basis and the significance of such events, the reimbursement revenues and reimbursement costs reflected on our consolidated statement of profit or loss can have a significant impact on the comparability of our results of operations, in terms of revenue and cost of sales, but not (generally) gross profit, between periods. See “—Other Factors Affecting our Results of Operations across Segments—Cyclicality.”

 

   

General contractor. For the general contractor model, both revenue and costs related to an event are accounted for in our consolidated statement of profit or loss. There are usually no acquisition costs nor signing fees under this model. For these contracts, we would generally bear the financial risk of cost overruns which could result in an unprofitable project. On the other hand, cost savings and increased efficiencies have a positive impact on gross profit.

 

   

Service and Consulting. Invoiced revenue and costs associated with service and consulting contracts are accounted for in our consolidated statement of profit or loss. Typically, these contracts lead to minimal direct costs (cost of sales). However, overhead costs are incurred and such costs are not allocated to specific projects or segments and, as such, recorded below gross profit in our consolidated statement of profit or loss. We expect the share of this contractual model to increase in the future given the increasing complexity of the sports ecosystem. Various in-house initiatives (such as sponsorship activation, Brands 360, and increased focus on digitalization) should allow us to capitalize on this trend. For a description of our Brands 360 division, see “Item 4. Information on the Company – B. Business Overview – Our Segments – Spectator Sports – Operations and Key Capabilities.”

Our spectator sports and DPSS businesses are generally based on multi-year rights-in and services contracts and, accordingly, our results of operations from these businesses are impacted by the duration of the contracts in our portfolio, our ability to renegotiate terms prior to expiration, our ability to extend or renew contracts, and our ability to replace contracts that we are unable to, or chose not to, renew.

 

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The remaining duration as of December 31, 2019 of our rights-in contracts ranged from one month to 21 years. As of December 31, 2019, the remaining duration of our services contracts ranged from three months to 6.5 years. For a comprehensive overview of our contract portfolio and duration of such rights, see “Item 4. Information on the Company – B. Business Overview – Our Segments.” The following sets out the historical revenue from contractual arrangements from our spectator sports and DPSS businesses that are set to expire through 2022:

 

   

rights-in and services contracts set to expire in 2020, accounted for, in aggregate, €44.6 million, €18.2 million and €15.3 million of our revenue in 2019, 2018 and 2017, respectively;

 

   

rights-in and services contracts set to expire in 2021, including our contract with Lega Serie A for media sales relating to Lega Serie A games, accounted for, in aggregate, €145.1 million, €159.5 million and €165.6 million of our revenue in 2019, 2018 and 2017, respectively; and

 

   

rights-in and services contracts set to expire in 2022, including our contracts with FIFA for Asian media sales and for host broadcasting as well as with the DFB for media rights relating to the DFB Cup, accounted for, in aggregate, €89.4 million, €79.2 million and €68.7 million of our revenue in 2019, 2018 and 2017, respectively (in each case net of reimbursement revenues).

During the life of a contract, we engage with our counterparties to identify their needs and requirements going forward and how we can add value in addressing them. Through this process, we have historically had success in retaining and expanding existing relationships. As we enter into new contracts, the contractual model and the scope of our contractual relationship can change (the scope may either expand or contract), which can have significant implications on our levels of revenue and profitability achieved from a particular relationship. In the case of a full rights buy-out arrangement, we may, in return for wider rights, increase future payment obligations and, therefore, increase capital commitments going forward. In the case of commission with minimum revenue guarantee arrangement, we may change the risk-return profile if the minimum revenue guarantee is lowered or removed against a lower commission rate. Furthermore, profit share elements might be introduced or changed.

We might also shift contractual models in a particular relationship, for example a full rights buy-out model may switch to a commission-based model or vice versa. While, depending on the contractual parameters, the impact in terms of gross profit might not be affected by such changes, they can have a significant impact on the comparability of our results of operations from period to period. For example, if we shift from a full rights buy-out model to a commission-based model, revenue would be lower because, instead of the entire project revenue being recognized, only the commission earned would be accounted for. At the same time, the associated cost of sales will be lower as compared to a full rights buy-out model as no acquisition costs associated with the contract are incurred. Assuming the same gross profit, the absolute profit margin under the contract would be expected to increase significantly.

Reflecting the strength of the relationships that we have established with rights-in partners, rights-out clients and other stakeholders and the scope of capabilities we are able to offer in the evolving sports ecosystem, we currently anticipate that we will continue to derive significant business from many of the counterparties of contracts set to expire beyond the current term of the relevant contract, including with FIFA and Lega Serie A. We expect to continue to work with FIFA on various projects (including host broadcast production as well as media and sponsorship sales) and to leverage our long-term relationship with Lega Serie A beyond the terms of our existing contracts. We continue to engage with these and other counterparties to identify the nature and scope of our future business in anticipation of the expiry of current contracts.

Our Mass Participation Segment

In our mass participation sports business, we derive a significant portion of our revenue directly from participating athletes themselves, principally in the form of entry fees, which accounted for 45%, 44% and 43% of our Mass Participation segmental revenue in 2019, 2018 and 2017, respectively.

 

   

Entry fees. Payments by athletes to participate in our events are recorded as entry fees. Entry fees vary significantly between types and locations of our owned events, see also “Item 4. Information on the Company – B. Business Overview – Our Segments – Mass Participation – Our Sports Events” and “Item 4. Information on the Company – B. Business Overview – Expected Disposal – WEH’s Mass Participation Business.”

 

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The table below presents a breakdown of our entry fees as between the WEH business and the retained mass participation business for the periods indicated. The increase between 2019 and 2018 for the WEH business was attributable to growth in the number of gross-paid athletes, resulting from, among others, the addition of new mass participation sports events, such as Sun-Herald City2Surf, and the continued strong demand for participation in IRONMAN and IRONMAN 70.3 events. The increase between 2019 and 2018 for the retained mass participation business was attributable to an increase in gross-paid athletes resulting from the addition of newly acquired mass participation sports events (such as Threshold events, Megamarsch and Vienna Business Run), as well as the organic growth of existing mass participation sports events.

 

     For the year ended
December 31,
 
     2019      2018      2017  
     (€ in millions)  

WEH business

     123.3        109.2        102.7  

Retained mass participation business

     23.2        14.9        5.8  
  

 

 

    

 

 

    

 

 

 

Total

     146.5        124.1        108.5  
  

 

 

    

 

 

    

 

 

 

 

   

Sponsorship. We also derive sponsorship revenue in connection with our events and brands. Some of our events in our portfolio, such as our B2Run running series, derive a greater proportion of their revenue from such sources compared with entry fees.

The table below presents a breakdown of our sponsorship revenue between the WEH business and the retained mass participation business for the periods indicated. The increase between 2019 and 2018 for the WEH business resulted primarily from higher gross-paid athlete counts registering through WEH’s partner, Active.com, driving revenue sharing commissions, which WEH recognizes as sponsorship revenue. The increase between 2019 and 2018 for the retained mass participation business was mainly attributable to a growing number of marathon events held in China in 2019, such as the Shenyang International Marathon, the Nanning Marathon and the Zhuhai Hengqin Marathon, and driven by newly acquired mass participation sports events (such as Threshold events, Megamarsch and the Vienna Business Run).

 

     For the year ended
December 31,
 
     2019      2018      2017  
     (€ in millions)  

WEH business

     58.7        54.8        50.4  

Retained mass participation business

     27.2        14.4        9.1  
  

 

 

    

 

 

    

 

 

 

Total

     85.9        69.2        59.5  
  

 

 

    

 

 

    

 

 

 

 

   

Host city fees. Cities and municipalities often provide fees to attract events. Such fees and other contributions are recorded as host city fees.

The table below presents a breakdown of our host city fees as between the WEH business and the retained mass participation business for the periods indicated. The decrease between 2019 and 2018 for the WEH business resulted primarily from WEH not operating the ITU World Championship in 2019, as well as reduced host city revenue for the 2019 IRONMAN 70.3 Championship (which took place in Nice, France) as compared to the 2018 edition (which took place in South Africa). The increase between 2019 and 2018 for the retained mass participation business was attributable to attributable to a growing number of marathon events held in China in 2019, such as the Shenyang International Marathon, the Nanning Marathon and the Zhuhai Hengqin Marathon.

 

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     For the year ended
December 31,
 
     2019      2018      2017  
     (€ in millions)  

WEH business

     17.3        19.8        17.9  

Retained mass participation business

     7.1        5.7        4.5  
  

 

 

    

 

 

    

 

 

 

Total

     24.4        25.5        22.4  
  

 

 

    

 

 

    

 

 

 

In addition to such fees, governmental entities also contribute to events through, for example, discounts on security and road closure costs.

 

   

Sales of apparel and other merchandise. We sell apparel and other merchandise on-site at events as well as through e-commerce platforms.

The table below presents a breakdown of our sales revenue as between the WEH business and the retained mass participation business for the periods indicated. The increase between 2019 and 2018 for the WEH business was attributable to increased revenue commensurate with the growth in gross-paid athletes, resulting from, among others, the addition of new mass participation sports events, such as Sun-Herald City2Surf, and the continued strong demand for participation in IRONMAN and IRONMAN 70.3 events.

 

     For the year ended
December 31,
 
     2019      2018      2017  
     (€ in millions)  

WEH business

     24.6        21.6        18.9  

Retained mass participation business

     0.2        0.2        0.1  
  

 

 

    

 

 

    

 

 

 

Total

     24.8        21.8        19.0  
  

 

 

    

 

 

    

 

 

 

 

   

Licensing fees for events. Revenue from licensing fees represents fees obtained through the licensing of events run by third parties. The table below presents a breakdown of our licensing fees as between the WEH business and the retained mass participation business for the periods indicated. The decrease between 2019 and 2018 for the WEH business was attributable to the acquisition of previously licensed events in the Philippines and the discontinuance of certain IRONMAN events in 2019 (for example, the Haugesund IRONMAN). The increase between 2019 and 2018 for the retained mass participation business was attributable to revenue generated by WSC in connection with IRONKIDS events.

 

     For the year ended
December 31,
 
     2019      2018      2017  
     (€ in millions)  

WEH business

     7.8        10.6        7.9  

Retained mass participation business

     0.1        —          —    
  

 

 

    

 

 

    

 

 

 

Total

     7.9        10.6        7.9  
  

 

 

    

 

 

    

 

 

 

 

   

Other revenue. The table below presents a breakdown of other revenue (such as product licensing revenue and media revenue) as between the WEH business and the retained mass participation business for the periods indicated. The increase between 2019 and 2018 for the WEH business was attributable primarily to increased Facebook Watch and related digital advertising revenue, increased sales of IRONMAN ProClub professional athlete memberships and increased revenue from The IRONMAN Foundation (comprising of entry donations paid by participating athletes and private and corporate contributions). The increase between 2019 and 2018 for the retained mass participation business was attributable to an increase in gross-paid athletes resulting from the addition of newly acquired mass participation sports events (such as Threshold events, Megamarsch and Vienna Business Run), as well as the organic growth of existing mass participation sports events.

 

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     For the year ended
December 31,
 
     2019      2018      2017  
     (€ in millions)  

WEH business

     29.0        26.8        29.3  

Retained mass participation business

     8.4        6.2        4.9  
  

 

 

    

 

 

    

 

 

 

Total

     37.4        33.0        34.2  
  

 

 

    

 

 

    

 

 

 

General Factors Affecting Our Results of Operations

Our results of operations have been, and will continue to be, affected by a number of general factors, many of which are beyond our control. Please also see “Item 3.Key Information – D. Risk Factors” and in particular the discussion of the COVID-19 Risks. General factors affecting our business and industry include the following:

 

   

consumer behavior and its impact on interest in sports;

 

   

development of technology and the application of such technology to the sports ecosystem;

 

   

the extent to which rights owners require, or otherwise are inclined to seek, external support to monetize their rights;

 

   

competition from other market participants for the products and services we provide and from other forms of entertainment in competition with the sports events on which we focus;

 

   

levels of sponsorship that we are able to attract;

 

   

legislation and other factors impacting advertising;

 

   

developments affecting live sports events, such as natural catastrophes, weather, terrorism and the level of host city and other governmental support for such events; and

 

   

growth in demand for sports content and athlete participation in various markets, including in China.

Specific Factors Affecting our Spectator Sports Results of Operations

As a full-service sports events, media and marketing platform, we believe we have the capabilities to provide solutions to our partners across the value chain of the sports ecosystem and maximize the revenue and profitability opportunities separate from and in addition to the compensation we receive through the traditional rights-in, rights-out arrangements, for example through our DPSS capabilities. See “Item 4. Information on the Company – B. Business Overview – Our Role in the Sports Ecosystem and Our Value Proposition” and “– Specific Factors Affecting our Spectator Sports Results of Operations – Provision of value-added services to rights owners and rights-out clients.”

Our Spectator Sports segment includes an extensive portfolio of sports, including football, winter sports and summer sports. The financial performance of our Spectator Sports segment is primarily affected by the mix of the rights-in arrangements in our portfolio and our ability to monetize such rights through rights-out arrangements as well as the scope of services that we provide rights owners and rights-out clients in connection with such arrangements. Our results of operations from our Spectator Sports segment are also affected by the cyclicality of major sports events. See “—Other Factors Affecting our Results of Operations across Segments—Cyclicality.”

Extent and mix of rights-in arrangements

We place high emphasis on our relationship with our rights-in partners and strive to build long-term relationships. Notwithstanding our success in achieving such relationships, our portfolio of rights-in contracts and the scope of rights provided for in those contracts change over time. As we enter into new contracts, the contractual model and the scope of our contractual relationship can change (the scope may either expand or contract), which can have significant implications on our levels of revenue and profitability achieved from a particular relationship, in positive or negative ways.

 

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In general, our portfolio of partners in our Spectator Sports segment has been relatively stable in recent years. As of December 31, 2019, we had in total 158 rights-in partners compared, with 160 and 153 rights-in partners as of December 31, 2018 and 2017, respectively. We had over 250 contracts across football, winter sports and summer sports as of each of December 2019, 2018 and 2017.

The following table sets forth a breakdown of the percentage of Spectator Sports segmental revenue represented by football, winter and summer sports.

 

     Percentage of Spectator Sports Segmental Revenue  
     For the year ended December 31,  
     2019      2018      2017  
     (%)  

Football

     31        48        47  

Winter Sports

     41        30        30  

Summer Sports

     28        22        23  
  

 

 

    

 

 

    

 

 

 

Total

     100        100        100  
  

 

 

    

 

 

    

 

 

 

Given the relatively higher ratio of commission-based contracts within our football portfolio, and the fact that only commission revenue for such contracts is accounted for in our consolidated statement of profit or loss, our football portfolio generally has higher gross margins compared with the rest of our Spectator Sports segment.

We have in recent years developed our portfolio by retaining and extending existing rights-in contracts, such as with the DFB, and by enhancing it through newly acquired rights, including in respect of basketball, badminton, rugby and professional cycling, which has had a positive development on our results of operations. Leveraging our relationships and expertise, we have also partnered and launched new events in our Spectator Sports segment across football (China Cup), winter sports (Champions Hockey League) and summer sports (Union Cycliste Internationale, or UCI, Tour of Guangxi). This offers revenue and profitability opportunities separate from, and in addition to, that which we receive through traditional rights-in, rights-out arrangements (for example, ticketing).

Our results of operations have been impacted by the decision of certain rights owners with the financial resources, organizational capabilities and/or strategic focus to develop in-house capabilities to monetize their rights themselves, reduce their level of engagement with us and monetize their rights in-house. For example, our contract with FIFA to manage the distribution of the extensive FIFA films archive was not renewed in 2018 as FIFA decided to bring this business in-house. In addition, in 2017, the CBA reduced the scope of the relationship between them and us in relation to the CBA League and the CBA All-Star Game. As a result, we are no longer the exclusive partner to the CBA for the sale of sponsorship and media rights for these events. This reduction adversely impacted our revenue in 2018 and 2017 compared with 2016. Notwithstanding this change in the scope of the relationship between the CBA and us, we have continued to engage with the CBA, for example as their partner for its 3x3 Road to Olympics tournament. In addition, football clubs Fiorentina and Fortuna Düsseldorf have indicated their plans to reduce their level of engagement with us following the expiration of the 2019/2020 season.

For our part, we continue to assess the profitability of our contract portfolio and may seek to end relationships, which we identify as no longer economically advantageous. For example, in 2016, we chose not to extend a loss-making contract relating to an Italian football club, as the relationship with the club had proven less strategic to us than originally expected. While this adversely impacted our revenue following the end of the relationship, it had a positive implication for our profitability.

Extent and mix of rights-out arrangements

A key element of our spectator sports business is identifying and exploiting opportunities to generate revenue from the rights we handle on a rights-in basis. See “Item 4. Information on the Company – B. Business Overview – Our Segments – Spectator Sports – Generating Revenue from Rights (Rights-Out).” As of December 31, 2019, we worked with more than 750 brands and more than 120 media broadcasters. We have built long-standing relationships with many rights-out clients worldwide and benefit from being able to offer such clients a wide array of services as well as a significant portfolio of rights, offering us a significant opportunity to cross-sell.

 

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Provision of value-added services to rights owners and rights-out clients

Our spectator sports business has been evolving away from a purely traditional rights-in, rights-out business as rights owners and rights-out clients seek our services, using our DPSS capabilities, in a variety of areas. As a result, our engagements with rights-in partners or rights-out clients, in general, have, in many cases, become broader and more complex than was historically the case.

In addition, we regularly review, develop and implement new partnership and monetization approaches which may include, for example, a direct-to-consumer, or D2C, business model (this may be through OTT or other digital distribution platforms), and distribution and/or representation partnerships with technology providers (conducted mainly through our Infront Lab).

Through iX.co (rebranded from Infront Digital in May 2019) and our Brands 360 division, our business mix increasingly reflects our ability to deliver brand value through a suite of brand-focused services and creative client-driven solutions. We seek to go beyond connecting rights owners and brands, and seek to enable brands to create meaningful and enduring relationships with consumers, both online and offline. Our enhanced approach follows a consultative philosophy – ensuring brand objectives dictate strategy and tactics – and access to industry-leading digital solutions and capabilities. As such, we service our existing and future partners with digital services ranging from strategy to activation to technology service. In addition, through iX.co we can diversify our revenue streams, for example by adding revenue from digital services, software and platform licensing, ad-supported video-on-demand / media buying, and ad tech and data science consulting. For a description of iX.co and Brands 360, see also “Item 4. Information on the Company – B. Business Overview – Our Segments – Spectator Sports – Operations and Key Capabilities.”

As we do not anticipate that many of our rights-in partners will have the inclination or financial resources to develop themselves many of the specialized services required in the evolving sports ecosystem, we consider our ability to provide such services as a potential key driver of retaining relationships with our partners and expand such relationships. For example, we have in recent years expanded our engagements with the FIS, FIBA, EHF and BWF by offering a wide range of sports-related services, such as digital solutions services, media production and broadcaster services. In introducing new services, however, we may lose the ability to provide more traditional services or may find that traditional services we are offering are obsolete or otherwise unattractive.

Acquisitions

The results of operations for our Spectator Sports segment have also been impacted by acquisitions. For example, in February 2019, we acquired Youthstream, the owner of the exclusive media, sponsorship and global promotional rights to the FIM MXGP Motocross World Championship until the 2036 season. This acquisition accounted for €19.5 million of our revenue in 2019.

Specific Factors Affecting our DPSS Results of Operations

Extent and mix of service contract portfolio

As of December 31, 2019, we had in total 84 service contracts in our DPSS segment, which are separate contracts entered into with partners for the provision of services (distinguishing them from our traditional Spectator Sports arrangements), including competence for host broadcast production, digital media as well as sports solutions. See “—Our Revenue-Generation Models—Our Spectator Sports and DPSS Segments” for an explanation of how we allocate revenue and costs between our Spectator Sports and DPSS segments.

Media production is the largest contributor to our DPSS segmental revenue and profit. Our media production is mainly focused on the provision of television and radio feeds used by broadcasters. Since 1999, we have been involved in various specialized production-related areas supporting FIFA, including FIFA World Cup events and other FIFA events. In recent years, we were responsible for the host broadcast production of the FIFA event cycle, including the 2017 FIFA Confederations Cup Russia, leading up to, and including, the 2018 FIFA World Cup Russia. See “—Other Factors Affecting our Results of Operations across Segments—Cyclicality” for a discussion of the impact of this business on the comparability of our results between periods. FIFA also mandated us to provide such services for FIFA’s current event cycle, including the 2019 Women’s FIFA World Cup France and the 2022 FIFA World Cup Qatar.

 

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Our revenue from media production in the past three years also relates to the end-to-end media production services we have provided for most of Lega Serie A games as well as for the Italian Cup (Coppa Italia) and Italian Supercup (Supercoppa Italiana) under arrangements that are generally set to expire at the end of the 2020/21 season (June 2021). At the end of the 2017/18 season, a component of our relationship with Lega Serie A (relating to selling access to TV signals) expired, which had generated reimbursement revenues.

In recent years, we have also achieved revenue growth in our digital media business. We have done so primarily by expanding the geographical focus (from the U.S. centric business of Omnigon at the time of its acquisition in 2016 (see “—Acquisitions”)), particularly into Europe, and offering digital solutions to existing partners to whom we previously did not offer such digital solutions as well as to new partners (namely outside the scope of a rights-in or rights-out arrangement). We have sought to focus in recent years on larger, more complex digital media opportunities, which has had a positive impact on revenue and profitability.

Acquisitions

We have sought to strengthen our digital media capabilities through acquisitions and investments. In January 2016, we acquired a majority stake in Omnigon, a leader in the development of digital platforms and social products as well as in the provision of related professional services. We increased our stake in Omnigon from 51% to 72% in February 2018 and acquired the remaining 28% in April 2019. In 2018, we also acquired a majority stake in Yongda, which focuses on media production related services in China, in particular the production of professional cycling races, such as the UCI Tour of Guangxi and the Tour of Qinghai.

Specific Factors Affecting our Mass Participation Results of Operations

Number of gross-paid athletes and revenue achieved per gross-paid athlete

As we derive a significant portion of our revenue directly from gross-paid athletes, the number of gross-paid athletes and the events in which they are participating is a significant factor affecting our mass participation results of operations. The table below presents a breakdown of the number of gross-paid athletes as between the WEH business and the retained mass participation business (excluding gross-paid athletes participating in licensed events) for the periods indicated. The increase between 2019 and 2018 for the retained mass participation business was attributable to an increase in gross-paid athletes resulting from the addition of newly acquired mass participation sports events (such as Threshold events, Megamarsch and Vienna Business Run), as well as the organic growth of existing mass participation sports events.

 

     For the year ended
December 31,
 
     2019      2018      2017  
     (in millions)  

WEH business

     0.8        0.8        0.7  

Retained mass participation business

     0.7        0.5        0.3  
  

 

 

    

 

 

    

 

 

 

Total

     1.5        1.3        1.0  
  

 

 

    

 

 

    

 

 

 

The number of gross-paid athletes for a particular event is mainly driven by factors such as:

 

   

the quality of event execution and/or athlete experience;

 

   

the strength and prestige of the event brand;

 

   

the type of mass participation sports event (for example, a 5km running event versus an IRONMAN or IRONMAN 70.3 event);

 

   

scheduling of alternative events in a given time window;

 

   

the level and effectiveness of event marketing and promotion;

 

   

the ease of registration for athletes; and

 

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the level of entry fees.

The popularity of mass participation sports events, which influences the number of gross-paid athletes in events, has in recent years generally benefitted from a trend for consumers in developed countries, and increasingly in developing countries, to be health and fitness conscious. We believe this trend is supported by employers, health insurance providers and governments encouraging physical activity in an effort to defray increasing costs caused by obesity and other related health issues.

The average revenue per gross-paid athlete for IRONMAN and IRONMAN 70.3 events, which together contributed 29% of our Mass Participation segmental revenue in 2019 (29% and 32% in 2018 and 2017, respectively), is significantly higher than most of our other mass participation sports events (albeit that certain events, such as the Cape Epic mountain biking event, also enjoy significant average revenue per gross-paid athlete). This is largely a reflection of higher entry fees we receive for these events, which we believe is a result of the high level of athlete engagement, the quality of event delivery, the strength of our brands and the attractive demographics of participating athletes in these events. Accordingly, these attributes increase the willingness of participants to pay a premium to take part in a coveted event.

While acquisitions have had the effect of significantly increasing our revenue from this segment (see below “—Acquisitions”), the resulting changes to the mix of our event portfolio have led to an increase in the average revenue per gross-paid athlete achieved between the periods to €131 in 2019 compared with €110 and €129 in 2018 and 2017, respectively.

Acquisitions

Consistent with our ongoing strategy of focusing on potential acquisition activities that offer us premium-branded events, we have engaged in a series of acquisitions of existing businesses, which together, have expanded the scope of our events business, including into new mass participation sports and new geographic regions, which together have significantly impacted the results of operations for our mass participation sports business in recent years and the comparability of such results between years. We believe we can leverage our existing industry and operational expertise to identify such acquisition opportunities and enhance profitability of the acquired business.

Over the past four years, we have acquired, among others:

 

   

2016: Lagardère Unlimited Events AG in January, which added various triathlon, running, cycling and mountain biking events to WEH’s business. This acquired business accounted for €9.7 million, €9.7 million, €11.3 million and €13.9 million of our revenue (including WEH’s business) in 2019, 2018, 2017 and 2016, respectively.

 

   

2017: CGI in June, which added the Rock ‘n’ Roll Marathon Series to WEH’s business, and Cape Epic (Pty) Ltd. in February, which added the Cape Epic mountain biking event to WEH’s business. These acquired businesses accounted for €45.3 million, €54.6 million and €47.2 million of our revenue (including WEH’s business) in 2019, 2018 and 2017, respectively.

 

   

2018: XLETIX in May, which added the XLETIX Challenge and Muddy Angel Run obstacle course racing events to our portfolio. This acquired business accounted for €12.0 million and €8.8 million of our revenue (including WEH’s business) in 2019 and 2018, respectively.

 

   

2019: Sun-Herald City2Surf in May, which added, among others, the Sydney Morning Herald Half Marathon, the Melbourne Corporate Triathlon and Carman’s Women’s Fun Run to WEH’s business. This acquired business accounted for €5.7 million of our revenue (including WEH’s business) in 2019. We also acquired Threshold in April 2019, which added road cycling and trail running sports events to our portfolio. This acquired business accounted for €8.1 million of our revenue in 2019.

Given our global scale and existing operating structure, we are frequently able to identify synergies to remove a significant amount of the existing cost base of an acquired business, which allows us to improve the profitability of the acquired business in a relatively short time. In addition, we seek to identify synergies between the acquired business and our existing portfolio to grow revenue from sponsorship and other sources, leveraging our existing client base and relationships throughout the sports ecosystem.

 

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Organic changes in event mix

The results of operations for our Mass Participation segment also have been impacted by the organic growth of our events portfolio realized through the development of new events, as well as through small “bolt-on” or “tuck-in” type acquisitions that are focused on one or several events in a city or nearby cities and are generally completed using cash from operations. These acquisitions tend to be opportunistic, as we identify events that could be readily converted into one of our branded events. While we can, and often do, develop new events ourselves, these types of acquisitions provide us the benefit of speed and simplicity as the events already have the permits and local relationships that are critical to our business. We view these types of acquisitions as organic growth (as opposed to acquisitions of existing businesses, see above “ —Acquisitions”) and, while we may retain personnel relating to the events we acquire, we generally integrate the operation of the events into our existing event portfolio.

We actively assess our event portfolio on an ongoing basis and from time to time strategically decide to shut down or move events generating lower profit margins and instead selectively focus on events that we believe offer our athletes a better experience and thereby generate the potential for higher levels of profitability.

Our ability to monetize our sport intellectual properties

We seek to create further value from our mass participation sports events through sponsorship, licensing and merchandising. The key value drivers of sponsorship revenue include the number and quality of the participating athletes as well as fit to attractive brands and sponsorship categories; access to the sponsorship network and corresponding sales capabilities; ability to create sponsorship value and extract value from sports brands.

Merchandising revenue drivers include the number of participating athletes competing in our events, the quality and breadth of assortment, the individual price point of key items and the strength of the sports brands. During the past three years, our merchandise revenue has benefitted from an expansion of the merchandise we offer to athletes and our efforts to emphasize merchandise opportunities at events.

Other Factors Affecting our Results of Operations across Segments

Cyclicality

Cyclicality driven by the timing cycle of sports events has a significant impact on the comparability of our results from one year to the next, particularly in our Spectator Sports and DPSS segments.

 

   

Some major sports events for which we hold rights or provide services only take place on a biennial basis. This includes the FIS Ski World Championships and the CEV European Championships in volleyball, which each occur only in odd years (most recently, 2019), and the EHF EURO Championships in handball, which occur in even years (most recently, 2018 and 2016).

 

   

Other major sports events occur on a quadrennial basis (such as the FIFA World Cup and UEFA EURO football events).

While some revenue from such events in accordance with our revenue recognition policy may be recorded in years leading up to the event, the revenue from such events tends to be most significant in the year of the event, resulting in significant fluctuations in our results of operations between years. For example, FIFA-related revenue increased in 2017 and 2018 in line with the FIFA event cycle, including the 2017 FIFA Confederations Cup Russia, leading up to, and including, the 2018 FIFA World Cup Russia, then decreased in 2019.

The comparability of our results of operations from our DPSS segment is particularly impacted by cyclicality due to our media production contracts for key events held every four years, such as the FIFA World Cup and the FIFA Women’s World Cup. Our agreements as host broadcaster for such events are mainly on a cost-plus basis where we pass on revenue received and are reimbursed fully for our expensed production costs and paid a profit margin on top. See “—Our Revenue-Generation Models—Our Spectator Sports and DPSS Segments” for a discussion of this contract model and the recognition of related revenue and costs (reimbursement revenues and reimbursement costs) in our consolidated statement of profit or loss. In 2019, our reimbursement revenues were €33.5 million, as compared to €219.2 and €62.8 million in 2018 and 2017, respectively, with this variance mainly due to media production activity in connection with the FIFA event cycle, including the 2017 FIFA Confederations Cup Russia and the 2018 FIFA World Cup Russia.

 

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Seasonality

Most of the event-related revenue as well as event-related expenses are recognized in the month in which an event occurs. In our Mass Participation segment, revenue and direct expenses tend to be higher in the second and third quarters of our fiscal year given our event calendar. In our Spectator Sports segment, revenue and expenses tend to be lower in the third quarter as winter sports events have not yet commenced and there is less activity in European football compared with other quarters. Over the course of the four quarters, fluctuations in gross profit shows a largely similar pattern to fluctuations in revenue. Other than in years of a FIFA World Cup, our results of operations in our DPSS segment tend to have less seasonal fluctuations compared to our other segments as a result of limited seasonality in the event-related DPSS business, such as the Lega Serie A host broadcast production, which spans a large portion of the year, as well as lack of seasonality in other portions of the business, such as digital media advisory.

Generally, our overhead expenses, such as personnel as well as office and administration expenses, do not show the same volatility throughout the year compared with fluctuations in revenue and gross profit, as they are not primarily impacted by peaks in operational activities in the same way as direct project income and expenditure. Our depreciation and amortization expenses as well as our financial expenses are generally also stable throughout the year.

Impairment of goodwill

We recorded a charge for impairment of goodwill in 2019 for €254.3 million. The annual goodwill impairment analysis performed as of December 31, 2019 indicated that the value in use of two (WEH North America CGU and WEH Oceania CGU) out of nine of our cash-generating units, or CGUs, was lower than their respective carrying values. See Note 23 to our consolidated financial statements.

Taxation

Our effective corporate income tax rate is driven and determined by the extent of our business in a particular period subject to the corporate income tax rate of a given jurisdiction and the corporate income tax rates in such jurisdictions.

We operate across various jurisdictions and our effective corporate income tax rate reflects our strong presence in some relatively high tax jurisdictions, such as Italy, Germany and China. Such high corporate income tax rates can only be partially offset by business generated in tax jurisdictions with moderate tax rates, such as Switzerland and Singapore. Our effective corporate tax rates for 2019 and 2018 benefitted from the reduction of the U.S. federal corporate income tax rate in the United States to 21% from 35% for the 2018 U.S. tax year as a result of the enactment of the U.S. Tax Cuts and Jobs Act in December 2017. This tax reform reduced our effective tax rate also in 2017 as it resulted in a release of deferred tax liabilities and a decrease in deferred tax expenses.

Foreign exchange fluctuations

We conduct our business primarily in several major currencies, most notably the euro, the U.S. dollar, the Swiss franc and, more recently, the Chinese yuan, while our reporting currency is the euro. Movements in foreign exchange rates between euros and such other currencies may materially impact our results of operations either due to transactional (receipt of revenue or incurrence of expenses, including in connection with our borrowings, in a currency other than euros) or translational (translation of foreign currency values into euros for the presentation of our consolidated financial results) effects.

For further information as to our foreign currency exposures, including a risk and sensitivity analysis in respect of the past three years, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk – Foreign currency risk” and Note 27 to our audited consolidated financial statements.

 

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Our Results of Operations

The following table presents consolidated profit or loss data for the periods indicated.

 

     For the year ended December 31,  
     2019     2019     2018     2017  
     (US$ ‘000s,
unless
indicated
otherwise)
    (€ ‘000s, unless
indicated otherwise)
 

Revenue(1)

     1,156,484       1,030,080       1,129,186       954,598  

Of which, reimbursement revenues(2)(3)

     37,645       33,530       219,231       62,820  

Cost of sales(4)

     (770,585     (686,360     (763,793     (624,093

Of which, reimbursement costs(2)(3)

     (37,386     (33,300     (216,419     (63,666
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     385,899       343,720       365,393       330,505  
  

 

 

   

 

 

   

 

 

   

 

 

 

Personnel expenses(5)

     (183,656     (163,582     (144,433     (135,105

Selling, office and administrative expenses(6)

     (77,105     (68,677     (52,043     (54,710

Depreciation and amortization

     (40,749     (36,295     (32,846     (22,129

Impairment of goodwill

     (285,535     (254,326     —         —    

Other operating income/(expense), net(7)

     2,730       2,432       (26,801     2,882  

Finance costs(8)

     (89,819     (80,002     (53,711     (53,300

Finance income(9)

     2,599       2,315       11,842       27,871  

Share of profit of associates and joint ventures(10)

     1,979       1,763       5,566       509  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/profit before income tax

     (283,657     (252,652     72,967       96,523  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax

     (23,784     (21,184     (18,955     (17,731
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/profit for the period

     (307,441     (273,836     54,012       78,792  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin(11) (%)

     33.4       33.4       32.4       34.6  

 

(1) 

For a description of our revenue and our revenue recognition policy, see Note 2.3(e) to our audited consolidated financial statements.

(2) 

Total reimbursement revenues and reimbursement costs generally match one another, resulting in a negligible gross margin impact. See discussion of our cost-plus contractual model in “—Our Revenue-Generation Models—Our Spectator Sports and DPSS Segments” and “—Other Factors Affecting our Results of Operations across Segments—Cyclicality.”

(3) 

The reimbursement revenues and reimbursement costs for the year ended December 31, 2019 relate to media production activities for FIFA-related events.

(4) 

For a description of our cost of sales (by segment), see Note 4 to our audited consolidated financial statements.

(5) 

Includes overhead personnel expenses including wages, salaries and payroll benefits as well as social security expenses, pension expenses, stock-based compensation expenses and other personnel expenses (such as board member fees, training and education), other than such expenses included in cost of sales.

(6) 

Includes professional service expenses, marketing expenses, travel expenses and other expenses (such as consulting, vehicle and communication-related expenses).

(7) 

Includes income from government grants, as well as re-measurement of contingent consideration (net), gain on financial instruments and other operating income and net of expenses relating to losses on the disposal of subsidiaries, various taxes other than income tax, legal claim expenses, bad debt expenses and other expenses.

(8) 

Consist primarily of interest expense on bank loans, overdrafts and other loans, as well as interest expense on lease liabilities, bank charges, losses on derivative financial instruments at fair value through profit or loss, foreign exchange losses and other finance costs.

(9) 

Consists of interest income, gains on derivative financial instruments at fair value through profit or loss, dividend income, foreign exchange gains and other finance income.

(10) 

Relates to income generated from companies in which we have significant influence but which are not controlled by us. Changes between the periods are due to the timing of the events to which these enterprises relate. The decrease in 2019 as compared to 2018 resulted from less production-related activities in connection with the Rugby World Cup Japan in 2019 as compared to the Jakarta Asian Games in 2018.

(11) 

Represents gross profit as a percentage of total revenue for the relevant period.

 

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Year ended December 31, 2019 compared with year ended December 31, 2018

Revenue

Our revenue was €1.0 billion in 2019, an 8.8% decrease compared with 2018 (€1.1 billion). This decrease principally reflected a €185.7 million decrease in reimbursement revenues, largely attributable to decreased media production activities in our DPSS segment as a result of the cyclicality effect of the 2018 FIFA World Cup Russia having occurred in 2018 (and not in 2019). Excluding reimbursement revenues, our revenue would have increased by 10% in 2019 as compared to 2018, principally due to higher revenue from our Mass Participation segment, driven largely by integration of acquisitions and organic growth, as well as from our Spectator Sports segment, largely driven by the FIS World Championships and FIBA Basketball World Cup, as well as the expansion of our summer sports portfolio. The increase in revenue from our Spectator Sports segment for the period more than offset the impact of the EHF European Championships and the 2018 FIFA World Cup RussiaTM having each occurred in 2018 (and not in 2019). See also “–Segmental Results of Operations.”

Cost of sales

Our cost of sales was €686.4 million in 2019, a 10.1% decrease compared with 2018 (€763.8 million). This decrease principally reflected a €183.1 million decrease in reimbursement costs, largely attributable to decreased media production activities in our DPSS segment as a result of the cyclicality effect of the 2018 FIFA World Cup Russia having occurred in 2018 (and not in 2019). Excluding reimbursement costs, our total cost of sales would have increased by 19.3% in 2019 as compared to 2018, principally due to the higher rights-in and service costs from our Spectator Sports segment in connection with the FIS World Championships and FIBA Basketball World Cup, which more than offset a reduction in cost of sales due to the EHF European Championships having occurred in 2018 (and not in 2019), as well as the higher cost of sales from our Mass Participation segment mainly driven by the growth of our business. See also “–Segmental Results of Operations.”

Gross margin

Our gross margin was 33.4% in 2019, a 1.0-percentage point margin increase compared with 2018 (32.4%). This increase was due principally to a margin improvement in our DPSS segment, largely reflecting the impact of lower reimbursement revenues and reimbursement costs in 2019, which was partially offset by a margin decline in our Spectator Sports segment, reflecting the event mix and event cyclicality in our portfolio. See also “–Segmental Results of Operations.”

Personnel expenses

Our personnel expenses were €163.6 million in 2019, a 13.3% increase as compared to 2018 (€144.4 million). This increase principally reflected the impact of stock-based compensation expense due to option grants under our Management Equity Incentive Plan and the accelerated vesting of outstanding restricted share unit grants at WEH, as well as the addition of new personnel as a result of our general business expansion, such as the further build-up of iX.co, and acquisitions in our Spectator Sports and Mass Participation segments.

Selling, office and administrative expenses

Our selling, office and administrative expenses were €68.7 million in 2019, a 32.0% increase as compared to 2018 (€52.0 million). This increase principally reflected IPO-related costs incurred in 2019 as well as higher third-party service fees.

Depreciation and amortization

Our depreciation and amortization expenses were €36.3 million in 2019, a 10.5% increase as compared to 2018 (€32.8 million), which principally reflected the additional amortization of purchase price allocations relating to the acquisitions in our Spectator Sports and Mass Participation segments, mainly relating to the acquisitions of Youthstream and Sun-Herald City2Surf.

 

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Impairment of goodwill

The impairment loss of goodwill amounted to €254.3 million in 2019. The annual goodwill impairment analysis performed as of December 31, 2019 indicated that the value in use of two (WEH North America CGU and WEH Oceania CGU) out of nine CGUs was lower than their respective carrying values.

Other operating income/(expense), net

Our other operating income, net, was €2.4 million in 2019, as compared to other operating expenses, net, in 2018 of €26.8 million. This improvement was principally due to the absence of expected credit losses of €25.0 million in trade accounts receivable that we had outstanding in 2018 relating to Italian football-related services provided to a sport marketing and media rights firm (MP & Silva).

Net finance costs

Our net finance costs (finance costs minus finance income) were €77.7 million in 2019, an 85.5% increase compared with 2018 (€41.9 million). This increase principally reflected interest expenses and the make-whole amount due in connection with the unsecured 364-day term loan facility entered into in March 2019 under which we borrowed US$400 million (€353.7 million), and which we have since repaid with the proceeds of the Senior Term Loan Facility (see also –B. Liquidity and Capital Resources – Indebtedness”).

Income tax

Our income tax expense was €21.2 million in 2019, an 11.8% increase compared with 2018 (€19.0 million). The increase principally reflected a valuation allowance for a deferred tax asset, which was partially offset by current income tax savings due to lower pre-tax profit in 2019. 

(Loss)/profit for the period

Our loss for the year in 2019 was €273.8 million, as compared to a profit of €54.0 million in 2018, principally due to the €254.3 million impairment loss of goodwill.

Year ended December 31, 2018 compared with year ended December 31, 2017

Revenue

Our revenue was €1.1 billion in 2018, an 18.3% increase compared with 2017 (€954.6 million). The increase principally reflected a €156.4 million increase in reimbursement revenues, principally attributable to our media production activities in our DPSS segment in connection with the 2018 FIFA World Cup Russia. Excluding reimbursement revenues, our revenue would have increased in 2018 compared with 2017 principally due to higher revenue from our Mass Participation segment due to the integration of acquisitions and organic growth as well as revenue growth from our DPSS segment. The increases in revenue from these segments were partially offset by the decrease in revenue in our Spectator Sports segment, from our summer sports portfolio and, to a lesser extent, our football and winter sports portfolios. See “—Segmental Results of Operations.”

Cost of sales

Our cost of sales was €763.8 million in 2018, a 22.4% increase compared with 2017 (€624.1 million). The increase principally reflected a €152.8 million increase in reimbursement costs between the periods principally attributable to our media production activities in our DPSS segment in connection with the 2018 FIFA World Cup Russia. Excluding reimbursement costs, our total cost of sales would have decreased in 2018 compared with 2017, principally due to lower cost of sales from our Spectator Sports segment reflecting the full year impact of the CBA’s decision in 2017 to reduce the scope of the relationship between them and us in relation to the CBA League and the CBA All-Star Game covering the sale of sponsorship and media rights. In addition, the decline in our cost of sales in 2018 compared with 2017 reflected a decrease in production costs relating to the Lega Serie A and FIFA events in our DPSS segment. Such factors were offset partially by higher cost of sales from our Mass Participation segment driven by the growth of our business.

 

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Gross margin

Our gross margin was 32.4% in 2018, a 2.2-percentage point margin decline compared with 2017 (34.6%). The decline was primarily attributable to a margin decline in the DPSS segment principally reflecting the impact of the higher reimbursement revenues in 2018 and a slight margin decline in the Mass Participation segment reflecting event mix, and was partially offset by margin improvement in our Spectator Sports segment. See “—Segmental Results of Operations.”

Personnel expenses

Our personnel expenses were €144.4 million in 2018, a 6.9% increase compared with 2017 (€135.1 million). The increase principally reflected higher staff numbers in 2018 (to 1,624 as of December 31, 2018, from 1,425 as of December 31, 2017) with average salary per employee remaining relatively stable between the periods. The higher staff numbers principally reflected further build-up of iX.co. The increase in personnel expenses also reflected the full year impact of new personnel who joined us as a result of the acquisitions in our Mass Participation segment in 2017 as well as the acquisition of XLETIX in 2018. The increase of salary was partially offset by the decrease in share-based compensation expenses in 2018. The decrease was mainly due to the relatively high level of such expenses incurred in 2017 both as a result of the adoption of an equity incentive plan for WEH in December 2017 and due to most of the expenses in respect of the equity incentive plan of Infront having been charged prior to 2018 based on the vesting schedule.

See Note 35 to our audited consolidated financial statements for further information on our historical share-based payments.

Selling, office and administrative expenses

Our selling, office and administrative expenses were €52.0 million in 2018, a 4.9% decrease compared with 2017 (€54.7 million). The decrease principally reflected lower office rent and maintenance expenses in 2018, reflecting the adoption of IFRS 16 effective January 1, 2018, which meant only short-term leases and low value assets were charged as expenses in this line item. The impact of this more than offset higher marketing expenses in 2018, reflecting the full year impact of marketing spend relating to the acquisition of CGI in 2017, as well as higher professional fees incurred in 2018, principally in relation to preparations for this offering.

Depreciation and amortization

Our depreciation and amortization expenses were €32.8 million in 2018, a 48.4% increase compared with 2017 (€22.1 million). The increase principally reflected the adoption of IFRS 16. In accordance with IFRS 16, we capitalize our right-to-use assets, and depreciate such assets using the straight-line method from the commencement date of the contract to the earlier of the end of the useful life of the right-to-use asset and the end of the lease term. See Note 2.4 to our audited consolidated financial statements for further information.

Other operating income/(expense), net

In 2018, our other operating expenses, net, were €26.8 million, compared with other operating income, net, in 2017 of €2.9 million. The decrease principally reflected expected credit losses of €25.0 million in trade accounts receivable that we had outstanding relating to Italian football-related services provided to a sport marketing and media rights firm (MP & Silva), as well as on contract assets, as a result of the initiation of MP & Silva’s insolvency process.    

 

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Net finance costs

Our net finance costs (finance costs minus finance income) were €41.9 million in 2018, a 64.7% increase compared with 2017 (€25.4 million). The increase principally reflected the foreign-exchange translation losses as well as the impact of the termination in May 2018 of a cross-currency swap which was entered into in July 2016 relating to a loan made to us by Dalian Wanda Group.    

Income tax

Our income tax expense was €19.0 million in 2018, a 6.9% increase compared with 2017 (€17.7 million). The increase principally reflected a higher effective tax rate in 2018 (26.0%) compared with 2017 (18.4%), principally due to the absence in 2018 of a release of a deferred tax liability as occurred in 2017 due to passage of the U.S. tax reforms in 2017.    

Segmental Results of Operations

Our reporting segments are Spectator Sports, DPSS and Mass Participation.

Spectator Sports

The following table presents our Spectator Sports segmental revenue, cost of sales, gross profit and gross margin for the periods indicated.

 

     For the year ended December 31,  
     2019     2019     2018     2017  
     (US$ ‘000s,
unless
indicated
otherwise)
    (€ ‘000s, unless indicated otherwise)  

Total segmental revenue

     636,891       567,279       523,826       547,072  

Total segmental cost of sales

     (429,461     (382,521     (315,664     (349,018
  

 

 

   

 

 

   

 

 

   

 

 

 

Segmental gross profit

     207,430       184,758       208,162       198,054  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segmental gross margin(1) (%)

     32.6       32.6       39.7       36.2  

 

(1) 

Represents segmental gross profit as a percentage of the total segmental revenue for the relevant period.

Year ended December 31, 2019 compared to year ended December 31, 2018

Segmental revenue. Total revenue in our Spectator Sports segment was €567.3 million in 2019, an 8.3% increase compared with 2018 (€523.8 million). The increase principally reflected increases in revenue driven by events that occurred in 2019 in both our winter sports portfolio, namely the 2019 FIS World Championships, and our summer sports portfolio, including the FIBA Basketball World Cup 2019, the FIM MXGP Motocross World Championships and the CEV European Volleyball Championships, which more than offset the cyclicality effect of the EHF European Championships having occurred in 2018 (and not in 2019). The increases in our winter sports and summer sports portfolios were partially offset by a decrease in revenue from our football portfolios in 2019, principally reflecting the cyclicality effect of the 2018 FIFA World Cup Russia having occurred in 2018 (and not in 2019), as well as a decrease in revenue in 2019 of €8.2 million (excluding legal fees) for compensation in connection with fraudulent activities committed by a former Infront employee. See also “Item 15. Controls and Procedures—Internal Control over Financial Reporting—Lack of sufficient segregation of duties between sales and execution of contracts, invoicing and implementation of services to prevent and detect fraud.”

Segmental gross margin. Our gross margin in our Spectator Sports segment was 32.6% in 2019, a 7.1-percentage point decrease compared with 2018 (39.7%). The decrease principally reflected event cyclicality in our portfolio, with the margin also having been significantly impacted by the higher cost of sales related to the 2019 FIS World Championships, as well as a decreased proportion of the commission-based business to our overall business mix principally in relation to the 2018 FIFA World Cup Russia.

 

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Year ended December 31, 2018 compared to year ended December 31, 2017

Segmental revenue. Total revenue in our Spectator Sports segment was €523.8 million in 2018, a 4.2% decrease compared with 2017 (€547.1 million). The decrease principally reflected a decrease in revenue from our summer sports portfolio and, to a lesser extent, our football and winter sports portfolios.

Revenue from summer sports decreased mainly due to the full year impact of the reduced scope of our relationship with the CBA relating to the CBA League and CBA All-Star Games covering the sale of sponsorship and media rights from 2017. This more than offset higher revenue in 2018 due to the cyclicality effect of the EHF EURO Championship in handball having occurred in 2018 (and not in 2017) as well as the full year impact in 2018 of properties that were newly acquired during 2017 (badminton and rugby).

The decrease in football-related revenue principally reflected decreased revenue generated from various European football properties, which more than offset higher revenue from the event cycle for the 2018 FIFA World Cup Russia. The lower revenue from European football properties reflected reduced scope in relation to one German football club and the insolvency of another club as well as reduced revenue relating to Lega Serie A-related archive sales as a result of the new Lega Serie A cycle having started only in July 2018. Our revenue was also adversely impacted by the non-qualification of the Italian National Team for the 2018 FIFA World Cup Russia.

Lower revenue from our winter sports portfolio principally reflected the cyclicality effect of the FIS Ski World Championships, which occurred in 2017 (and not in 2018) as well as lower revenues from the FIS World Cup, primarily due to the timing of races in the FIS event calendar.

Segmental gross margin. Our gross margin in our Spectator Sports segment was 39.7% in 2018, a 3.5-percentage point improvement compared with 2017 (36.2%). The improvement principally reflected an increased proportion of the commission-based business to our overall business mix principally in relation to the 2018 FIFA World Cup Russia and the full year impact of the reduced scope of the CBA relationship relating to the sale of sponsorship and media rights. See “—Specific Factors Affecting our Spectator Sports Results of Operations—Extent and mix of rights-in arrangements.”

Digital, Production, Sports Solutions (DPSS)

The following table presents our DPSS segmental revenue, cost of sales, gross profit and gross margin for the periods indicated.

 

     For the year ended December 31,  
     2019     2019     2018     2017  
     (US$ ‘000s,
unless
indicated
otherwise)
    (€ ‘000s, unless indicated otherwise)  

Total segmental revenue

     152,559       135,884       321,279       156,076  

Of which, reimbursement revenues(1)

     37,645       33,530       219,231       62,820  

Total segmental cost of sales

     (105,914     (94,338     (264,904     (113,907

Of which, reimbursement costs(1)

     (37,386     (33,300     (216,419     (63,666
  

 

 

   

 

 

   

 

 

   

 

 

 

Segmental gross profit

     46,645       41,546       56,375       42,169  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segmental gross margin(2) (%)

     30.6       30.6       17.5       27.0  

 

(1) 

The total reimbursement revenues and reimbursement costs generally match to one another, resulting in a negligible gross margin impact. See discussion of cost-plus contractual model in “—Our Revenue-Generation Models—Our Spectator Sports and DPSS Segments” and “—Other Factors Affecting our Results of Operations across Segments—Cyclicality.”

(2) 

Represents segmental gross profit as a percentage of the total segmental revenue for the relevant period.

 

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Year ended December 31, 2019 compared to year ended December 31, 2018

Segmental revenue. Total revenue in our DPSS segment was €135.9 million in 2019, a 57.7% decrease as compared to 2018 (€321.3 million). This decrease principally reflected a €185.7 million decrease in reimbursement revenues, principally attributable to decreased media production activities in our DPSS segment as a result of the cyclicality effect of the 2018 FIFA World Cup Russia having occurred in 2018 (and not in 2019). Excluding reimbursement revenues, revenue in our DPSS segment would have been substantially similar to revenue in 2018.

Segmental gross margin. Our gross margin in our DPSS segment was 30.6% in 2019, a 13.1-percentage point increase as compared to 2018 (17.5%). This increase principally reflected the impact of lower reimbursement revenues in 2019 as compared to 2018 as a result of the cyclicality effect of the 2018 FIFA World Cup Russia.

Year ended December 31, 2018 compared to year ended December 31, 2017

Segmental revenue. Total revenue in our DPSS segment was €321.3 million in 2018, a 105.8% increase compared with 2017 (€156.1 million). The increase principally reflected a €156.4 million increase in reimbursement revenues from our media production activities in connection with the 2018 FIFA World Cup Russia. Excluding such reimbursement revenues, our total revenue in our DPSS segment increased in 2018 compared with 2017 principally due to continued growth in our digital media business as well as higher contribution from services linked to the 2018 FIFA World Cup Russia (mainly broadcaster services and LED services).

Segmental gross margin. Our gross margin in our DPSS segment was 17.5% in 2018, a 9.5-percentage point decline compared with 2017 (27.0%). The decline principally reflected the impact of higher reimbursement revenues in 2018 compared with 2017 in relation to the 2018 FIFA World Cup Russia.

Mass Participation

The following table presents our Mass Participation segmental revenue, cost of sales, gross profit and gross margin for the periods indicated.

 

     For the year ended December 31,  
     2019     2019     2018     2017  
     (US$ ‘000s,
unless
indicated
otherwise)
    (€ ‘000s, unless indicated otherwise)  

Total segmental revenue(2)

     367,034       326,917       284,081       251,450  

Total segmental cost of sales(2)

     (235,209     (209,501     (183,225     (161,168
  

 

 

   

 

 

   

 

 

   

 

 

 

Segmental gross profit

     131,825       117,416       100,856       90,282  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segmental gross margin(1) (%)

     35.9       35.9       35.5       35.9  

 

(1) 

Represents segmental gross profit as a percentage of the total segmental revenue for the relevant period.

(2) 

The following table sets forth a breakdown of our Mass Participation segment revenue and cost of sales between the WEH business and the retained mass participation business.

 

     Total revenue      Total cost of sales  
     For the year ended December 31,      For the year ended December 31,  
     2019      2018      2017      2019      2018      2017  
     (€ ‘000s)      (€ ‘000s)  

WEH business

     260,709        243,817        228,754        169,273        158,360        147,603  

Retained mass participation business

     66,208        40,264        22,696        40,228        24,865        13,565  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     326,917        284,081        251,450        209,501        183,225        161,168  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Year ended December 31, 2019 compared to year ended December 31, 2018

Segmental revenue. Total revenue in our Mass Participation segment (including WEH’s business) was €326.9 million in 2019, a 15.1% increase compared with 2018 (€284.1 million). The increase between 2019 and 2018 for the WEH business was primarily due to growth in the number of gross-paid athletes, resulting from, among others, the continued strong demand for participation in IRONMAN and IRONMAN 70.3 events, and the addition of new mass participation sports events, such as Sun-Herald City2Surf. The increase between 2019 and 2018 for the retained mass participation business was primarily due to growth in the number of gross-paid athletes resulting from the addition of newly acquired mass participation sports events (such as Threshold events, Megamarsch and the Vienna Business Run) and a growing number of marathon events held in China in 2019 (such as the Shenyang International Marathon, the Nanning Marathon and the Zhuhai Hengqin Marathon, as well as the organic growth of existing mass participation sports events.

Segmental gross margin. Our gross margin in our Mass Participation segment (including WEH’s business) was 35.9% in 2019, a 0.4-percentage point increase compared with 2018 (35.5%). The 0.4-percentage point increase was principally due to increased sponsorship revenue from new mass participation sports events held in China in 2019 by the retained mass participation business. The gross margin from WEH business was flat between the periods.

Year ended December 31, 2018 compared to year ended December 31, 2017

Segmental revenue. Total revenue in our Mass Participation segment (including WEH’s business) was €284.1 million in 2018, a 13.0% increase compared with 2017 (€251.5 million). The increase for the WEH business principally reflected the full year impact of the CGI acquisition as well as further growth in the related business. The increase for the retained mass participation business principally reflected the acquisition of XLETIX in 2018. The increases also reflected organic growth, including the addition of a few new IRONMAN 70.3 events as well as increased sponsorship revenue.

Segmental gross margin. Our gross margin in our Mass Participation segment (including WEH’s business) was 35.5% in 2018, a 0.4-percentage point decline compared with 2017 (35.9%). The decline was principally due to the full year impact in 2018 of the acquisitions in 2017 conducted by both the WEH business and the retained mass participation business. The acquired events had generally lower profit margins as compared to IRONMAN and IRONMAN 70.3 events.

Critical Accounting Judgments and Estimates

We prepare our consolidated financial statements in accordance with IFRS. Preparing these financial statements in conformity with IFRS requires the use of certain critical accounting estimates and also requires us to exercise judgments in the process of applying our accounting policies. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.

The critical judgments and estimates that we believe to have the most significant impact on our consolidated financial statements are described below. They should be read in conjunction with our audited consolidated financial statements and accompanying notes, in particular Note 3, and other disclosures.

Impairment of goodwill

We determine whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. We have utilized the income approach to determine value in use of CGUs, and the key assumptions used in the income approach were financial projections and discount rates. The financial projections were a five-year forecast of the management’s budget and strategic plan. The discount rate was derived based on the capital asset pricing model using historical experience, market and industry data.

 

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Based on the goodwill impairment analysis performed as of December 31, 2019, the date of the most recent impairment test, we determined that the fair value of seven CGUs out of the total of nine CGUs substantially exceeded their carrying values because the fair value of these seven CGUs exceeded the carrying value by over 70%. The value in use of two out of nine CGUs (WEH North America CGU and WEH Oceania CGU) was lower than their respective carrying values resulting in an impairment loss of €254.3 million in 2019. Further details are given in Note 23 to our audited consolidated financial statements.

The probability of future goodwill impairment losses for the remaining CGUs, which we considered may be at risk, is subject to uncertainties inherent in the assumptions used, in particular:

 

   

The financial projections are based on management’s reasonable estimates as to the number of events per year across geographic locations, the number of athletes registering per event, the amount of host city funds available and the pricing of each event. Factors affecting such inputs include changes in demand for our events, which can be adversely affected by weather related issues, the condition of the relevant local economy, competition for customers’ time and money, and changing tastes, among other things.

 

   

Sponsorship revenue forecasts are dependent upon the number and size of sponsorships sold. Factors affecting this include the condition of the relevant local economy, the reputation and attendance level of our events, and our ability to identify and sell sponsorable assets at such events, among other things.

 

   

Direct costs as a percentage of revenue for each forecast period are considered to be consistent on a product type basis, which is based on our considerable experience in operating events around the world. While these costs are generally stable, they can be adversely affected by circumstances out of our control such as a need for additional security driven by terrorist or other events, weather related issues or other happenings.

If the assumptions used in the impairment analysis materially change, we may be required to recognize additional goodwill impairment losses, which may be material to our financial condition. Further details are given in Note 23 to our audited consolidated financial statements.

Impairment of non-financial assets (other than goodwill)

We assess whether there are any indicators of impairment for all non-financial assets at the end of each reporting period. Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. An impairment exists when the carrying value of an asset or a cash-generating unit exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The calculation of the fair value less costs of disposal is based on available data from binding sales transactions in an arm’s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows.

Further details, including a sensitivity analysis of key assumptions, are given in Note 27 to our audited consolidated financial statements.

Share-based compensation

Estimating fair value for share-based compensation requires determination of the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option or appreciation right, volatility and dividend yield and making assumptions about them. We initially measure the cost of cash-settled transactions with employees using the Black-Scholes or another appropriate model to determine the fair value of the liability incurred. For cash-settled share-based payment transactions, the liability needs to be re-measured at the end of each financial year up to the date of settlement, with any changes in fair value recognized in personnel expenses and cost of sales in the consolidated statements of profit or loss.

The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 35 to our audited consolidated financial statements.

 

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Expenses related to equity-settled share-based payment transactions are determined by the fair market value at the date of grant using the comparable market price. See Note 35 to our audited consolidated financial statements. The expense with respect to equity-settled share-based payment transactions is recognized in personnel expenses, together with a corresponding increase in equity reserves, over the period in which the service, and, where applicable, the performance conditions are fulfilled. See Notes 14 and 18 to our audited consolidated financial statements.

We incurred share-based compensation expense in 2019 in respect of options to acquire Class A ordinary shares granted to certain key members of management under our Management Equity Incentive Plan in connection with our IPO. These options will vest over a four-year period, with 20% of the options having vested following completion of our IPO, and 20% of the options vesting not later than May 31 of each year from 2020 to 2023 (inclusive), subject to the conditions in the Management Equity Incentive Plan. The maximum aggregate number of Class A ordinary shares that may be issued under the Management Equity Incentive Plan is 5% of our total outstanding ordinary shares on a fully diluted basis immediately after our IPO (subject to automatic increase if we issue additional ordinary shares for cash (other than under this plan or any other equity incentive plan we may adopt) until May 31, 2023). See “Item 6. Directors, Senior Management and Employees Management – B. Compensation.”    

Taxes

Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits, together with future tax planning strategies.

Our tax losses carried forward relate to subsidiaries that have a history of losses, do not expire, and may not be used to offset taxable income elsewhere in our group. The subsidiaries neither have any taxable temporary difference nor any tax planning opportunities available that could partly support the recognition of these losses as deferred tax assets. On this basis, we have determined that we cannot recognize deferred tax assets on the tax losses carried forward. Further details on taxes are disclosed in Note 17 to our audited consolidated financial statements.

We are subject to income taxes in numerous jurisdictions. Judgment is required in determining the provision for income taxes. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact current income tax and deferred income tax in the period in which such determination is made.

Defined benefit plans (pension benefits)

The cost of the defined benefit pension plan and other termination benefits and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexities involved in the valuation and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. Further details about these obligations are provided in Note 34 to our audited consolidated financial statements.

Fair value measurement of financial instruments

When the fair values of financial assets and financial liabilities recorded in the consolidated statements of financial position cannot be measured based on quoted prices in active markets or by financial institutions, their fair value is measured using valuation techniques, including the discounted cash flow, or DCF, model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. Judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments. See Note 10 to our audited consolidated financial statements for further disclosures.

 

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Contingent consideration and liabilities, resulting from business combinations, are valued at fair value at the acquisition date as part of the business combination. When the contingent consideration meets the definition of a financial liability, it is subsequently re-measured to fair value at each reporting date. The determination of the fair value is based on discounted cash flows. The key assumptions take into consideration the probability of meeting each performance target and the discount factor. See Note 10 to our audited consolidated financial statements for further disclosures.

 

B.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources

Our primary sources of liquidity have been issuance of equity securities, borrowings from trusts and banks and cash provided by operating activities, which have historically been sufficient to meet our working capital and substantially all of our capital expenditure requirements.

As of December 31, 2019, 2018 and 2017, our cash and cash equivalents were €163.2 million, €177.0 million and €230.4 million, respectively. Our cash and cash equivalents primarily consist of cash placed with banks and cash on hand, as well as short-term deposits, which have original maturities of three months or less at the time of purchase and are readily convertible to known amounts of cash. As of December 31, 2019, we had restricted cash of €0.5 million. Restricted cash represents money that is held in a separate bank account and legally restricted for the purpose of guaranteeing certain future payments. Such restricted cash is not available to fund our general liquidity needs. As of December 31, 2019, we had short-term debts of €204.6 million and long-term debts of €641.1 million.

Our approach to managing liquidity is to ensure, as far as possible, that we are able to meet our liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to our reputation. The Infront credit facility has a leverage ratio covenant (see “—B. Liquidity and Capital Resources—Indebtedness”), from which we expect we will need relief due to the impact of COVID-19 on our revenue. Failure to do so could result in an acceleration of the debt outstanding under the Infront credit facility unless we and the lenders reach agreement to avoid a default and acceleration. We are in discussion with our lenders with respect to covenant relief.

As we recorded net current liabilities as of December 31, 2019, the directors have given careful consideration to our future liquidity and performance and our available sources of finance in assessing whether we will have sufficient financial resources to continue as a going concern. Having considered that our cash flow management forecast and analysis for 2020 has presented as a positive result, the directors are confident that we are able to meet in full our financial obligations as they fall due for the next 12 months.

We may, however, need additional capital in the future to fund our continuing operations. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. The COVID-19 Risks heighten this (re)financing risk.

We are generally an asset light company with limited capital expenditure requirements, beyond capital expenditure relating to acquisitions. Most investments (other than acquisitions) relate to the further expansion and development of our DPSS capabilities and are technology driven, as most outflows are incurred for production equipment, LED boards and master control rooms. As high quality LED boards have become a key requirement for football sponsorships, we have invested in new systems to replace older ones. Investments in production equipment are mainly intended to replace old media production infrastructure in order to maintain the high quality and meet the expectations of our partners.

Indebtedness

As of December 31, 2019, our total indebtedness (total interest-bearing liabilities) was €845.7 million. Our primary sources of indebtedness are the Infront credit facility and the WTC credit facility. Each credit facility contains a term loan facility and a revolving credit facility. As of December 31, 2019, we had in aggregate €74.8 million of borrowing capacity under the revolving credit facilities. In the period ending December 31, 2019, we drew down €429 million under the Infront credit facility. Following the WEH sale, we will no longer include the WTC credit facility on our consolidated balance sheet.

 

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In March 2019, we issued the US$400 million (€353.7 million) pre-IPO promissory note to Wanda Sports & Media (Hong Kong) Holding Co. Limited in connection with the pre-IPO group restructuring, out of which US$50 million (€44.2 million) remains outstanding. On March 11, 2020, we entered into a senior term loan facility with Credit Suisse AG, Singapore Branch, as arranger, facility agent and security agent, or the Senior Term Loan Facility, under which we may borrow up to US$240 million (€211.7 million). The Senior Term Loan Facility provides for loans, or Loans, in two tranches (Tranche A, for US$230 million and Tranche B, for US$10 million). As of April 30, 2020, the amount outstanding under the Senior Term Loan Facility was US$230 million (€211.5 million). We intend to use the proceeds from the WEH sale to repay the principal amount of US$230 million (€211.5 million) and related interest and fees outstanding under our Senior Term Loan Facility, as well as US$50 million (€46.0 million) remaining outstanding under the pre-IPO promissory note. See also “Item 4.A. History and development of the Company – The WEH Sale.”

Senior Term Loan Facility

On March 11, 2020, or the Utilization Date, we borrowed approximately US$230 million (€202.9 million) under Tranche A of the Senior Term Loan Facility, US$223 million (€199.9 million) of which was applied on March 16, 2020 to repay principal and pay accrued and unpaid interest under a 364-day term loan facility entered into in March 2019. Tranche B of the Senior Term Loan Facility is reserved to repay interest on the Loans on the third to seventh interest payment dates. Interest on the Loans is equal to LIBOR (as defined) plus a margin that increases each month from the date of the Utilization Date from 3.00% per annum in the first month to 11.00% per annum in the twelfth month, payable monthly.

The Senior Term Loan Facility contains:

 

   

certain financial covenants, including a net debt/adjusted EBITDA leverage ratio covenant (which may not exceed 5.00x);

 

   

customary events of default;

 

   

a change of control clause triggered when (i) Mr. Wang Jianlin and his family members (taken together) cease to be, directly or indirectly, the single largest beneficial shareholder of Dalian Wanda GCL; (ii) Dalian Wanda GCL ceases to beneficially own (directly or indirectly) 100% of the issued share capital of any of Wanda Sports & Media and Infront International Holdings AG, or ceases to control any of Wanda Sports & Media and Infront International Holdings AG; or (iii) Dalian Wanda GCL ceases to beneficially own (directly or indirectly) 60% of our issued share capital, or ceases to control us; and

 

   

customary covenants, including restrictions on incurring additional indebtedness, making restricted payments (including dividends and other distributions), selling or otherwise disposing of assets, making acquisitions, entering into mergers or corporate reconstructions, entering into transactions that are not on arm’s length terms and a negative pledge.

A mandatory prepayment condition that would have been triggered had the WEH sale agreement not been entered into by eight months following the borrowing of the Loans has been satisfied. In the event the WEH sale is consummated, it is expected that a portion of the proceeds of the WEH sale will be applied to repay the Senior Term Loan Facility. There can, however, be no assurance as to the consummation of the WEH sale. See also “Item 4.A. History and development of the Company – The WEH Sale” and “Item 3. Key Information – D. Risk Factors – Risks Related to Potential Sale – We may be unable to complete the WEH sale.”

Certain events of default and covenants in the Senior Term Loan Facility are subject to certain thresholds and exceptions. We will be incurring fees in connection with the Senior Term Loan Facility, including an upfront fee and a sliding scale subsequent fee tied to the month in which the Loans are fully repaid (ranging from US$2.2 million to US$4.7 million). The Loans are guaranteed by Dalian Wanda GCL.

Credit facility of Infront Sports & Media AG

Infront Sports and Media AG, as borrower, is party to a secured credit facility, which was entered into on May 18, 2018 and amended on November 21, 2018 with UBS Switzerland and Unicredit Bank. The Infront credit facility is guaranteed by Infront Holding AG and secured through share pledges, share charges and security assignment agreements with various subsidiaries of Infront Sports & Media AG and the guarantors.

The Infront credit facility includes a term loan and revolving credit facility commitment.    

 

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The initial term loan portion of the credit facility amounts to €350 million. In September, the total commitments under the term loan portion of the Infront credit facility were increased by €52.5 million to €402.5 million, and as of December 31, 2019, €381.5 million was outstanding term loan portion of the Infront credit facility. We have the option to repay the loan at any time, however, mandatory bi-annual amortizations are agreed. The remaining balance of the loan is repayable on June 30, 2021, with an extension option of two one-year periods. Loans under the term loan facility bear interest at a rate per annum equal to EURIBOR plus the applicable margin. The applicable margin falls between 1.75% and 3.25%, depending on the leverage (as of December 31, 2019 and December 31, 2018, EURIBOR plus 2.75% and 2.25%, respectively).

 

   

The initial commitment under the revolving credit facility amounts to €100 million. We can draw in euros, Swiss francs, U.S. dollars (up to 50% of the facility amount) or any other currency which has been approved by all the lenders and is readily available and freely convertible into euros in the wholesale market. The minimum amount of each loan is €5 million (or the appropriate equivalent in another available currency) and no more than 10 loans can be outstanding. As of December 31, 2019, €47.5 million was outstanding under the revolving credit facility.

We have the right to increase the term loan amount by up to an additional €100 million and the commitments under the revolving facility by up to an additional €50 million, provided that the aggregate amount of such additional term loan or revolving credit commitments not exceed €100 million. After giving effect to the increase (noted above) of €52.5 million, the term loan or revolving credit commitments can be increased by an additional €47.5 million, in the aggregate.

The Infront credit facility contains:

 

   

certain financial covenants, including a leverage ratio covenant tested quarterly (which may not exceed 3.50x);

 

   

a minimum equity covenant with respect to Infront Holding AG (on a standalone basis), requiring the entity to have a minimum equity of 200 million Swiss francs at the end of each fiscal year;

 

   

customary events of default;

 

   

a change of control clause which is triggered when Dalian Wanda GCL ceases to hold, directly or indirectly, 50.1% of the voting rights of Infront; and

 

   

customary covenants, including restrictions on incurring additional indebtedness, paying dividends or making other distributions (tied to a leverage ratio of 2.50x), selling or otherwise disposing of assets, including capital stock of restricted subsidiaries, making acquisitions, entering into joint ventures, merging, entering into related party transactions or providing a negative pledge.

Certain events of default and covenants in the term loan facility are subject to certain thresholds and exceptions.

Credit facility of World Triathlon Corporation

In August 2019, WTC, as borrower, refinanced its existing credit facility by entering into a new secured credit facility with Deutsche Bank AG New York Branch as administrative agent. The credit facility is secured by all property of WTC, WEH and its wholly owned subsidiaries.

The credit facility includes a term loan commitment that matures on August 15, 2026 and a revolving line of credit that matures on August 15, 2024. The term loan portion of the credit facility is $275 million (€245.0 million) and the revolving line of credit is US$25 million (€22.3 million). As of December 31, 2019, US$274.3 million (€245.2 million) was outstanding under the term loan and no amount was outstanding on the revolving line of credit. WTC has the option to pay the loan in full at any time, subject to certain conditions. Interest on the term loan is either the alternate base rate (“ABR”) plus the applicable margin of 3.25% or 3.00%, or LIBOR plus the applicable margin of 4.25% or 4.00%, depending on the leverage ratio. Interest on the revolving line of credit is either ABR plus the applicable margin of 3.25% or 2.75%, or LIBOR plus the applicable margin of 4.25% or 3.75%, depending on the leverage ratio. As of December 31, 2019, WTC was paying interest at LIBOR plus 4.25% on the term loan.

 

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The credit facility contains:

 

   

a leverage ratio test that is applicable if the aggregate outstanding borrowings under the revolving line of credit and certain letter of credit obligations exceed 30% of the revolving line of credit commitment;

 

   

customary events of default;

 

   

a change of control clause which is triggered by the occurrence of the earlier of:

 

     

the acquisition by any person or group, other than Wanda Culture or its affiliates, of capital stock representing more than the greater of (i) 35% of the total voting power of all outstanding stock of WEH and (ii) the percentage of the total voting power of voting stock of WEH owned beneficially by Wanda Culture and its affiliates;

 

     

the acquisition by any person or group, other than Wanda Culture or its affiliates, of capital stock representing more than the greater of (i) 35% of the total voting power of all our outstanding shares and (ii) the percentage of the total voting power of our shares; and

 

     

WTC ceasing to be a direct or indirect wholly-owned subsidiary of WEH;

 

   

customary covenants, including restrictions on additional indebtedness, liens, negative pledges, restricted payments (including dividends and other distributions), investments, sales or other dispositions of assets, consolidation or merger, sale leasebacks and transactions with affiliates. There are various baskets on which WTC could rely to pay dividends and make other restricted payments to us, including if its leverage ratio on a pro forma basis does not exceed 3.5:1.0 and 6% per annum of net proceeds of an initial public offering contributed to WTC (provided at least US$50 million (€44.5 million) of such proceeds are contributed to WTC); and

 

   

an excess cash flow provision whereby a prepayment is required based on the excess cash flow calculated in accordance with the credit facility.

Certain events of default and covenants in the term loan facility are subject to certain thresholds and exceptions.

Cash Flows

Over the course of a year, we use our cash on hand to pay employee related expenses, other operating expenses, interest payments and other liabilities as they become due. This typically results in negative working capital movement at certain times during the year. In particular, for our Mass Participation segment, given that we receive much of our cash flows well in advance of the events to which they relate, we typically operate with negative working capital. In our Spectator Sports and DPSS segments, cash balances can vary significantly between months and between years due to the seasonal and cyclical nature of the business as well as due to the fact that the fiscal year end is in the middle of the winter sports and football seasons. In addition, the timing of individual payments made or received can vary between years. For example, cash flows relating to FIFA World Cup production has shown higher cash in than outflows in the years prior to the respective main event year during which the cash flow is usually negative. We compensate such cash balance swings with surplus cash or by short-term bank facility borrowings, such as our revolving credit facilities.

Our cost base not directly tied to revenue is more evenly spread throughout the fiscal year than our cash inflows. Generally, personnel not accounted for in cost of sales as well as other office and administration expenses do not show the same volatility throughout the year compared to revenue and gross profit, as they are not primarily impacted by peaks in operational activities in the same way as direct project income and expenditure. Employee expenses and fixed costs constitute the majority of our cash outflows and are generally paid throughout the 12 months of the fiscal year.

 

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In the last three years, our cash flows have reflected a number of related party transactions with Dalian Wanda Group. See “Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions.” Such transactions generally relate to the simplification of our holding company structure, downstream payments from Dalian Wanda Group in respect of existing indebtedness of Infront and WEH and upstream loans and payments to Dalian Wanda Group.

The following table sets forth a summary of our cash flows for the periods indicated.

 

     For the year ended December 31,  
     2019     2019     2018     2017  
     (US$ ‘000s)     (€ ‘000s)  

Selected Consolidated Cash Flow Data

        

Net cash flows from/(used in) operating activities

     31,127       27,725       66,588       145,678  

Net cash flows from/(used in) investing activities

     (153,348     (136,587     (57,120     (104,142

Net cash flows from/(used in) financing activities

     104,539       93,113       (65,449     76,976  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase/(decrease) in cash and cash equivalents

     (17,682     (15,749     (55,981     118,512  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at beginning of year

     198,774       177,048       230,419       124,344  

Effect of foreign exchange rate changes, net

     2,470       2,199       2,610       (12,437

Transfer to assets held for sale

     (307     (273     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

     183,255       163,225       177,048       230,419  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities

In 2019, we had a net cash inflow from operating activities of €27.7 million, principally due to operating income from our Spectator Sports and Mass Participation segments, partially offset by working capital requirements mainly relating to prepayments received in 2018 in respect of FIS Ski World Championships 2019 and payments made in 2019 in respect of media productions services to the Lega Serie A, cash used for interest payments relating to our borrowings, as well as cash used for tax payments (due primarily to increased operating income in higher tax jurisdictions).

In 2018, we had a net cash inflow from operating activities of €66.6 million, principally due to operating income from our Spectator Sports segment and Mass Participation segment, partially offset by working capital requirements relating to prepayments received in 2017 in respect of 2018 FIFA World Cup Russia, as well as cash used for tax payments due primarily to higher operating income relating to FIFA World Cup Russia and increased operating income in higher tax jurisdictions, such as Italy.

In 2017, we had a net cash inflow from operating activities of €145.7 million principally due to significant cash-related operating income from our Spectator Sports segment. In addition, we received prepayments in respect of the 2018 FIFA World Cup Russia in 2017. In 2017, there were also inflows in respect of receivables that arose in 2016.

Investing Activities

In 2019, we had a net cash outflow from investing activities of €136.6 million, principally due to cash used for acquisitions, net and capital expenditure. Cash used for acquisitions, net in 2019 of €118.4 million, was primarily attributable to the acquisition of Youthstream, Sun-Herald City2Surf and other events amounting to €95.8 million, as well as deferred purchase price and earnout payments in respect of previous acquisitions amounting to €22.5 million. Capital expenditure of €14.9 million in 2019 related principally to purchases of LED boards, host broadcasting equipment for production purposes, master control rooms and purchases of software. We also had net cash outflow of €5.5 million relating to various equity investments made at the level of our subsidiaries. These were partially offset by cash inflow from dividends of €4.9 million received from investments.

 

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In 2018, we had a net cash outflow from investing activities of €57.1 million, which was primarily attributable to cash used for acquisitions and capital expenditure. Cash used for acquisitions in 2018 of €25.9 million was primarily attributable to the acquisitions of XLETIX and Yongda amounting to €4.1 million, an investment in a minority stake in COPA90 amounting to €7.9 million, and deferred purchase price and earnout payments in respect of previous acquisitions amounting to €9.8 million. Capital expenditure of €14.2 million in 2018 related principally to purchases of LED boards, host broadcasting equipment for production purposes, master control rooms and purchases of software. We also had net cash outflows of €19.6 million mainly relating to our refinancing settlement in May 2018. These were partially offset by cash inflow from dividends of €1.7 million received from one of our joint ventures.

In 2017, we had a net cash outflow from investing activities of €104.1 million, which was primarily attributable to cash used for acquisitions and capital expenditure as well as our repayment to Dalian Wanda Group of €17.0 million representing amounts previously provided to us for an acquisition, which remained unused. Cash used for acquisitions in 2017 of €95.5 million was primarily attributed to the acquisition of CGI and Cape Epic (Pty) Ltd amounting to €79.3 million, and deferred purchase price and earnout payments of previous acquisitions amounting to €8.5 million. Capital expenditure of €13.0 million in 2017 related mainly to purchases of LED boards, television equipment for production purposes as well as purchase of software. We also had net cash outflows of €26.7 million relating to investments made in bank certificates of deposit in 2016 (the lower amount of net cash inflow in 2017 from such instruments compared to net cash outflow in 2016 reflecting foreign exchange movements).

Financing Activities

In 2019, we had a net cash inflow from financing activities of €93.1 million, principally due to IPO net proceeds and net cash outflows relating to payment of borrowings. We had proceeds of US$179.4 million (€160.9 million) from our IPO after deducting underwriting commissions. We had borrowings of US$400 million (€352.6 million) relating to the unsecured senior 364-day term loan facility entered into in March 2019 at the holding company level, €100.0 million under the Infront credit facility and €259.6 million under WEH credit facility entered into in August 2019 in connection with its refinancing with Deutsche Bank. These cash inflows were partially offset by the partial repayment of the US$400 million (€353.7 million) pre-IPO promissory note amounting to US$350 million (€308.0 million), the repayment of unsecured senior 364-day term loan facility amounting to US$200 million (€178.6 million), repayment of the WTC credit facility with UBS after its refinancing amounting to €234.0 million, as well as repayment of the Infront credit facility amounting to €21.0 million. We also had cash outflows relating to settlement of restricted stock units to local management amounting to €13.8 million.

In 2018, we had a net cash outflow from financing activities of €65.4 million, largely related to the repayment of amounts due to Dalian Wanda Group, amounting to €377.2 million, as a result of borrowings made to us in 2016, as well as €32.2 million paid in connection with the settlement of a cross currency swap related to these borrowings. We also had a net cash outflow relating to repayment of lease liabilities amounting to €9.9 million as a result of the application of IFRS 16. These cash outflows more than offset cash inflow of €350 million from borrowings under the term loan portion of the Infront Sports & Media AG credit facility entered into in May 2018.

In 2017, we had a net cash inflow from financing activities of €77.0 million. This reflected proceeds of €115.3 million, including a €88.8 million capital injection into WEH by Dalian Wanda Group and €26.5 million of additional borrowing by WEH. These cash inflows were partially offset by €38.6 million for the repayment of loans including a bilateral working capital line of €21.6 million at Infront and a revolving credit facility of €16.1 million at WEH.

Capital expenditures

We made capital expenditures of €14.9 million, €14.2 million and €13.0 million in 2019, 2018 and 2017, respectively. We expect to make such capital expenditures to support the expected growth of our business.

 

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C.

RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

See “Item 4. Information on the Company B. Business Overview Information Technologies” and “Item 4. Information on the Company B. Business Overview Intellectual Property.”

 

D.

TREND INFORMATION

Other than as disclosed elsewhere in this annual report, and in particular other than the impact of the COVID-19 Risks, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2019 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the reported financial information not necessarily to be indicative of future results of operations or financial conditions.

 

E.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements as defined in Item 5.E of SEC Form 20-F that have or are reasonably likel