6-K 1 ck0001639920-6k_20190429.htm 6-K ck0001639920-6k_20190429.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of April, 2019

Commission File Number: 001-38438

Spotify Technology S.A.

(Translation of registrant’s name into English)

42-44, avenue de la Gare

L- 1610 Luxembourg

Grand Duchy of Luxembourg

(Address of principal executive office)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F      Form 40-F  

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes      No  

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes      No  

 

 

 

 

 


 

 

 

 

 

 

 

 

 

Spotify Technology S.A.

Interim condensed consolidated financial statements

For the three months ended March 31, 2019

 


Table of contents

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

1

Interim condensed consolidated statement of operations

 

1

Interim condensed consolidated statement of comprehensive income/(loss)

 

2

Interim condensed consolidated statement of financial position

 

3

Interim condensed consolidated statement of changes in equity

 

4

Interim condensed consolidated statement of cash flows

 

5

Notes to the interim condensed consolidated financial statements

 

6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

38

PART II – OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

40

Item 1A. Risk Factors

 

41

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

41

Item 3. Defaults Upon Senior Securities

 

41

Item 5. Other Information

 

41

Signatures

 

42

 

 

 


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Interim condensed consolidated statement of operations

(Unaudited)

(in € millions, except share and per share data)

 

 

 

 

 

Three months ended March 31,

 

 

 

Note

 

2019

 

 

2018

 

Revenue

 

5

 

 

1,511

 

 

 

1,139

 

Cost of revenue

 

 

 

 

1,138

 

 

 

856

 

Gross profit

 

 

 

 

373

 

 

 

283

 

Research and development

 

 

 

 

155

 

 

 

115

 

Sales and marketing

 

 

 

 

172

 

 

 

138

 

General and administrative

 

 

 

 

93

 

 

 

71

 

 

 

 

 

 

420

 

 

 

324

 

Operating loss

 

 

 

 

(47

)

 

 

(41

)

Finance income

 

6

 

 

34

 

 

 

15

 

Finance costs

 

6

 

 

(156

)

 

 

(154

)

Finance income/(costs) - net

 

 

 

 

(122

)

 

 

(139

)

Loss before tax

 

 

 

 

(169

)

 

 

(180

)

Income tax benefit

 

7

 

 

(27

)

 

 

(11

)

Net loss attributable to owners

   of the parent

 

 

 

 

(142

)

 

 

(169

)

 

 

 

 

 

 

 

 

 

 

 

Loss per share attributable to owners

   of the parent

 

 

 

 

 

 

 

 

 

 

   Basic and diluted

 

8

 

 

(0.79

)

 

 

(1.01

)

Weighted-average ordinary shares outstanding

 

 

 

 

 

 

 

 

 

 

   Basic and diluted

 

8

 

 

180,613,539

 

 

 

167,778,952

 

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 


-1-


Interim condensed consolidated statement of comprehensive income/(loss)

(Unaudited)

(in € millions)

 

  

 

 

 

Three months ended March 31,

 

 

 

Note

 

2019

 

 

2018

 

Net loss attributable to owners

   of the parent

 

 

 

 

(142

)

 

 

(169

)

Other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

Items that may be subsequently reclassified to

   condensed consolidated statement of operations

   (net of tax):

 

 

 

 

 

 

 

 

 

 

   Gains/(losses) on short term investments

 

13, 19

 

 

3

 

 

 

(1

)

   (Losses)/gains on cash flow hedging instruments

 

13, 19

 

 

(3

)

 

 

1

 

   Exchange differences on translation of foreign

     operations

 

 

 

 

4

 

 

 

(15

)

Items not to be subsequently reclassified to

   condensed consolidated statement of operations

  (net of tax):

 

 

 

 

 

 

 

 

 

 

   Gain in the fair value of long term investments

 

13, 19

 

 

518

 

 

 

45

 

Other comprehensive income for the

   period (net of tax)

 

 

 

 

522

 

 

 

30

 

Total comprehensive income/(loss) for the period

   attributable to owners of the parent

 

 

 

 

380

 

 

 

(139

)

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

-2-


Interim condensed consolidated statement of financial position

(in € millions)

 

 

 

Note

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

 

 

 

 

 

Lease right-of-use assets

 

 

9

 

 

 

430

 

 

 

 

Property and equipment

 

 

10

 

 

 

235

 

 

 

197

 

Goodwill

 

 

11

 

 

 

424

 

 

 

146

 

Intangible assets

 

 

11

 

 

 

54

 

 

 

28

 

Long term investments

 

 

19

 

 

 

2,299

 

 

 

1,646

 

Restricted cash and other non-current assets

 

 

12

 

 

 

70

 

 

 

65

 

Deferred tax assets

 

 

7

 

 

 

10

 

 

 

8

 

 

 

 

 

 

 

 

3,522

 

 

 

2,090

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

Trade and other receivables

 

 

15

 

 

 

391

 

 

 

400

 

Income tax receivable

 

 

 

 

 

 

2

 

 

 

2

 

Short term investments

 

 

19

 

 

 

660

 

 

 

915

 

Cash and cash equivalents

 

 

 

 

 

 

966

 

 

 

891

 

Other current assets

 

 

 

 

 

 

52

 

 

 

38

 

 

 

 

 

 

 

 

2,071

 

 

 

2,246

 

Total assets

 

 

 

 

 

 

5,593

 

 

 

4,336

 

Equity and liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

Share capital

 

 

 

 

 

 

 

 

 

 

Other paid in capital

 

 

 

 

 

 

3,834

 

 

 

3,801

 

Treasury shares

 

 

13

 

 

 

(198

)

 

 

(77

)

Other reserves

 

 

13

 

 

 

1,491

 

 

 

875

 

Accumulated deficit

 

 

 

 

 

 

(2,665

)

 

 

(2,505

)

Equity attributable to owners of the parent

 

 

 

 

 

 

2,462

 

 

 

2,094

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Lease liabilities

 

 

9

 

 

 

555

 

 

 

 

Accrued expenses and other liabilities

 

 

17

 

 

 

1

 

 

 

85

 

Provisions

 

 

18

 

 

 

7

 

 

 

8

 

Deferred tax liabilities

 

 

7

 

 

 

61

 

 

 

2

 

 

 

 

 

 

 

 

624

 

 

 

95

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Trade and other payables

 

 

16

 

 

 

397

 

 

 

427

 

Income tax payable

 

 

 

 

 

 

4

 

 

 

5

 

Deferred revenue

 

 

 

 

 

 

273

 

 

 

258

 

Accrued expenses and other liabilities

 

 

17

 

 

 

1,298

 

 

 

1,076

 

Provisions

 

 

18

 

 

 

44

 

 

 

42

 

Derivative liabilities

 

 

19

 

 

 

491

 

 

 

339

 

 

 

 

 

 

 

 

2,507

 

 

 

2,147

 

Total liabilities

 

 

 

 

 

 

3,131

 

 

 

2,242

 

Total equity and liabilities

 

 

 

 

 

 

5,593

 

 

 

4,336

 

 

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

-3-


Interim condensed consolidated statement of changes in equity

(Unaudited)

(in € millions)

 

 

 

Note

 

Share

capital

 

 

Treasury

Shares

 

 

Other

paid in

capital

 

 

Other

reserves

 

 

Accumulated

deficit

 

 

Equity

attributable to

owners of the parent

 

Balance at January 1, 2018

 

 

 

 

 

 

 

 

 

 

2,488

 

 

 

177

 

 

 

(2,427

)

 

 

238

 

Loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(169

)

 

 

(169

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

 

 

 

 

 

30

 

Issuance of ordinary shares

 

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Issuance of shares upon exercise of stock

   options and restricted stock units

 

14

 

 

 

 

 

 

 

 

 

39

 

 

 

 

 

 

 

 

 

39

 

Share-based payments

 

14

 

 

 

 

 

 

 

 

 

 

 

18

 

 

 

 

 

 

18

 

Income tax impact associated with

   share-based payments

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Balance at March 31, 2018

 

 

 

 

 

 

 

 

 

 

2,531

 

 

 

226

 

 

 

(2,596

)

 

 

161

 

Balance at December 31, 2018

 

 

 

 

 

 

 

(77

)

 

 

3,801

 

 

 

875

 

 

 

(2,505

)

 

 

2,094

 

Cumulative effect adjustment in connection

   with the adoption of IFRS 16

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18

)

 

 

(18

)

Balance at January 1, 2019

 

 

 

 

 

 

 

(77

)

 

 

3,801

 

 

 

875

 

 

 

(2,523

)

 

 

2,076

 

Loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(142

)

 

 

(142

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

522

 

 

 

 

 

 

522

 

Issuance of share-based payments in

   conjunction with business combinations

 

4

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

13

 

Repurchases of ordinary shares

 

13

 

 

 

 

 

(121

)

 

 

 

 

 

 

 

 

 

 

 

(121

)

Issuance of shares upon exercise of stock

   options and restricted stock units

 

14

 

 

 

 

 

 

 

 

33

 

 

 

 

 

 

 

 

 

33

 

Share-based payments

 

14

 

 

 

 

 

 

 

 

 

 

 

27

 

 

 

 

 

 

27

 

Income tax impact associated with

   share-based payments

 

 

 

 

 

 

 

 

 

 

 

 

 

54

 

 

 

 

 

 

54

 

Balance at March 31, 2019

 

 

 

 

-

 

 

 

(198

)

 

 

3,834

 

 

 

1,491

 

 

 

(2,665

)

 

 

2,462

 

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

-4-


Interim condensed consolidated statement of cash flows

(Unaudited)

(in € millions)

 

 

 

 

Three months ended March 31,

 

 

 

Note

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

(142

)

 

 

(169

)

Adjustments to reconcile net loss to net cash flows

 

 

 

 

 

 

 

 

 

 

Depreciation of property and equipment and lease right-of-use assets

 

9, 10

 

 

17

 

 

 

9

 

Amortization of intangible assets

 

11

 

 

4

 

 

 

2

 

Share-based payments expense

 

14

 

 

26

 

 

 

18

 

Finance income

 

6

 

 

(34

)

 

 

(15

)

Finance costs

 

6

 

 

156

 

 

 

154

 

Income tax benefit

 

7

 

 

(27

)

 

 

(11

)

Other

 

 

 

 

8

 

 

 

1

 

Changes in working capital:

 

 

 

 

 

 

 

 

 

 

Decrease in trade receivables and other assets

 

 

 

 

35

 

 

 

15

 

Increase in trade and other liabilities

 

 

 

 

155

 

 

 

70

 

Increase in deferred revenue

 

 

 

 

13

 

 

 

9

 

Decrease in provisions

 

18

 

 

 

 

 

(3

)

Interest received

 

 

 

 

4

 

 

 

10

 

Interest paid on lease liabilities

 

9

 

 

(4

)

 

 

 

Income tax paid

 

 

 

 

(2

)

 

 

(6

)

Net cash flows from operating activities

 

 

 

 

209

 

 

 

84

 

Investing activities

 

 

 

 

 

 

 

 

 

 

Business combinations, net of cash acquired

 

4

 

 

(288

)

 

 

 

Purchases of property and equipment

 

10

 

 

(37

)

 

 

(6

)

Purchases of short term investments

 

19

 

 

(104

)

 

 

(271

)

Sales and maturities of short term investments

 

19

 

 

383

 

 

 

430

 

Change in restricted cash

 

12

 

 

1

 

 

 

(4

)

Other

 

 

 

 

(4

)

 

 

(10

)

Net cash flows (used in)/from investing activities

 

 

 

 

(49

)

 

 

139

 

Financing activities

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of share options

 

14

 

 

33

 

 

 

39

 

Payments of lease liabilities

 

9

 

 

(5

)

 

 

 

Repurchases of ordinary shares

 

13

 

 

(126

)

 

 

 

Other

 

 

 

 

 

 

 

4

 

Net cash flows (used in)/from financing activities

 

 

 

 

(98

)

 

 

43

 

Net increase in cash and cash equivalents

 

 

 

 

62

 

 

 

266

 

Cash and cash equivalents at beginning of the period

 

 

 

 

891

 

 

 

477

 

Net foreign exchange gains/(losses) on cash and cash equivalents

 

 

 

 

13

 

 

 

(10

)

Cash and cash equivalents at March 31

 

 

 

 

966

 

 

 

733

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

 

 

Recognition of lease right-of-use asset in exchange for lease liabilities

 

9

 

 

27

 

 

 

 

Purchases of property and equipment in trade and

   other liabilities

 

10

 

 

25

 

 

 

4

 

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

-5-


Notes to the interim condensed consolidated financial statements

(Unaudited)

1.

Corporate information

Spotify Technology S.A. (the “Company” or “parent”) is a public limited company incorporated and domiciled in Luxembourg. The Company’s registered office is 42-44 avenue de la Gare, L1610, Luxembourg, Grand Duchy of Luxembourg.

The principal activity of the Company and its subsidiaries (the “Group,” “we,” “us,” or “our”) is music streaming. The Group’s premium service (“Premium Service”) provides users with unlimited online and offline high-quality streaming access to its catalog. The Premium Service offers a commercial-free music experience. The Group’s ad-supported service (“Ad-Supported Service,” and together with the Premium Service, the “Service”) has no subscription fees and provides users with limited on-demand online access to the catalog. The Group depends on securing content licenses from a number of major and minor content owners and other rights holders in order to provide its service.

2.

Basis of preparation and summary of significant accounting policies

The interim condensed consolidated financial statements of Spotify Technology S.A. for the three months ended March 31, 2019 and 2018 have been prepared in accordance with IAS 34 Interim Financial Reporting. The interim financial information is unaudited. The interim financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim condensed consolidated financial statements should be read in conjunction with the Group’s consolidated financial statements for the year ended December 31, 2018, as they do not include all the information and disclosures required in the annual consolidated financial statements. Interim results are not necessarily indicative of the results for a full year. The interim condensed consolidated financial statements are presented in millions of Euros.

Except for the first-time application of IFRS 16, Leases, described in Note 9, the accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group’s consolidated financial statements for the year ended December 31, 2018. The adoption of IFRS 16 resulted in the derecognition of deferred rent liabilities of €90 million, the recognition of lease right-of-use assets of €396 million, lease liabilities of €541 million, lease incentive receivables of €37 million, and a cumulative-effect adjustment in accumulated deficit of €18 million on the condensed consolidated statement of financial position. There was no impact to the condensed consolidated statement of operations upon adoption. Except for the first-time application of IFRS 16, Leases, none of the new or amended standards and interpretations as of January 1, 2019 have had a material impact on the Group’s financial result or position.

3.

Critical accounting estimates and judgments

In preparing these interim condensed consolidated financial statements, the significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation and uncertainty, except those relating to business combinations noted below, were the same as those applied to the consolidated financial statements for the year ended December 31, 2018.

In business combinations, the Group allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identified assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates, assumptions, and judgments, especially with respect to intangible assets. See Note 4.

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events.

-6-


4.Business combinations

Anchor FM Inc.

On February 14, 2019, the Group acquired Anchor FM Inc. (“Anchor”), a software company that enables users to create and distribute their own podcasts. The acquisition allows the Group to leverage Anchor’s creator-focused platform to accelerate the Group’s path to becoming the world’s leading audio platform.  

The total purchase consideration was €136 million which consisted of €125 million in cash and €11 million related to the fair value of partially vested share-based payment awards replaced. The replacement of Anchor’s share-based payment awards with share-based payments awards of the Company has been measured in accordance with IFRS 2, Share-based Payment, at the acquisition date. The acquisition was accounted for under the acquisition method. Of the total purchase consideration, €126 million has been recorded to goodwill, €9 million to acquired intangible assets, €2 million to deferred tax liabilities, €4 million to cash and cash equivalents, and €1 million to other liabilities. The Group incurred €1 million in acquisition related costs, which were recognized as general and administrative expenses.

The goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including expected future synergies and technical expertise of the acquired workforce. None of the goodwill recognized is expected to be deductible for tax purposes. The goodwill was included in the Ad-Supported segment.

The intangible assets acquired primarily relate to existing technology and have a useful life of 3 years. The Group valued the existing technology using the replacement cost method under the cost approach.

Included in the arrangement are €20 million of equity instruments granted to certain employees that have vesting conditions contingent on continued employment and are accounted for as equity-settled share-based payment transactions. Of the value of these instruments, €11 million is included in purchase consideration as discussed above, with the remaining amount of up to €9 million to be recorded as post-combination expense over service periods of up to four years, if not forfeited by the employees.

Gimlet Media Inc.

On February 15, 2019, the Group acquired Gimlet Media Inc. (“Gimlet”), an independent producer of podcast content. The acquisition allows the Group to leverage Gimlet’s in-depth knowledge of original content production and podcast monetization.

The total purchase consideration was €172 million which consisted of €170 million in cash and €2 million related to the fair value of partially vested share based payment awards replaced. The replacement of Gimlet’s share-based payment awards with share-based payments awards of the Company has been measured in accordance with IFRS 2, Share-based Payment, at the acquisition date.

The acquisition was accounted for under the acquisition method. Of the total purchase consideration, €148 million has been recorded to goodwill, €18 million to acquired intangible assets, €5 million to deferred tax liabilities, €3 million to cash and cash equivalents, and €8 million to other tangible net assets. The Group incurred €3 million in acquisition related costs, which were recognized as general and administrative expenses.

The goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including an increase in content development capabilities, an experienced workforce, and expected future synergies. None of the goodwill recognized is expected to be deductible for tax purposes. The goodwill was included in the Ad-Supported segment.

-7-


The intangibles assets relate to trade name and content assets and were valued by the Group using the relief from royalty method under the income approach. This method is based on the application of a royalty rate to forecasted revenue under the trade names and content assets. The intangible assets have useful lives ranging from 2 to 8 years.

Included in the arrangement are payments that are contingent on continued employment. The payments are recognized as remuneration for post-combination services and are automatically forfeited if employment terminates. A total of up to €40 million of post-combination cash pay-outs will be recorded as compensation expense over a service period of up to four years.  

 

For the three months ended March 31, 2019, revenues and operating losses of Gimlet and Anchor were not significant to the Group’s condensed consolidated statement of operations.

5.

Segment information

 

The Group has two reportable segments: Premium and Ad-Supported. The Premium Service is a paid service in which customers can listen on-demand and offline. Revenue is generated through subscription fees. The Ad-Supported Service is free to the user. Revenue is generated through the sale of advertising. Royalty costs are primarily recorded in each segment based on specific rates for each segment agreed to with rights holders. The remaining royalties that are not specifically associated to either of the segments are allocated based on user activity or the revenue recognized in each segment. No operating segments have been aggregated to form the reportable segments.

 

Key financial performance measures of the segments including revenue, cost of revenue, and gross profit are as follows:

 

  

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(in € millions)

 

Premium

 

 

 

 

 

 

 

 

Revenue

 

 

1,385

 

 

 

1,037

 

Cost of revenue

 

 

1,026

 

 

 

767

 

Gross profit

 

 

359

 

 

 

270

 

Ad-Supported

 

 

 

 

 

 

 

 

Revenue

 

 

126

 

 

 

102

 

Cost of revenue

 

 

112

 

 

 

89

 

Gross profit

 

 

14

 

 

 

13

 

Consolidated

 

 

 

 

 

 

 

 

Revenue

 

 

1,511

 

 

 

1,139

 

Cost of revenue

 

 

1,138

 

 

 

856

 

Gross profit

 

 

373

 

 

 

283

 

 

-8-


Reconciliation of gross profit

 

General expenditures, finance income, and finance costs are not allocated to individual segments as these are managed on an overall group basis. The reconciliation between reportable segment gross profit to the Group’s loss before tax is as follows:

 

  

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(in € millions)

 

Segment gross profit

 

 

373

 

 

 

283

 

Research and development

 

 

(155

)

 

 

(115

)

Sales and marketing

 

 

(172

)

 

 

(138

)

General and administrative

 

 

(93

)

 

 

(71

)

Finance income

 

 

34

 

 

 

15

 

Finance costs

 

 

(156

)

 

 

(154

)

Loss before tax

 

 

(169

)

 

 

(180

)

 

Revenue by country

 

  

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(in € millions)

 

United States

 

 

559

 

 

 

416

 

United Kingdom

 

 

164

 

 

 

128

 

Luxembourg

 

 

1

 

 

 

1

 

Other countries

 

 

787

 

 

 

594

 

 

 

 

1,511

 

 

 

1,139

 

 

Premium revenue is attributed to a country based on where the membership originates. Ad-Supported revenue is attributed to a country based on where the advertising campaign is viewed. There are no countries that individually make up greater than 10% of total revenue included in “Other countries.”

 

6.

Finance income and costs

 

  

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(in € millions)

 

Finance income

 

 

 

 

 

 

 

 

Fair value movements on derivative liabilities (Note 19)

 

 

 

 

 

2

 

Interest income

 

 

9

 

 

 

5

 

Other financial income

 

 

 

 

 

8

 

Foreign exchange gains

 

 

25

 

 

 

 

Total

 

 

34

 

 

 

15

 

Finance costs

 

 

 

 

 

 

 

 

Fair value movements on derivative liabilities (Note 19)

 

 

(145

)

 

 

(59

)

Fair value movements on Convertible Notes (Note 19)

 

 

 

 

 

(78

)

Interest expense on lease liabilities

 

 

(9

)

 

 

 

Other finance costs

 

 

(2

)

 

 

 

Foreign exchange losses

 

 

 

 

 

(17

)

Total

 

 

(156

)

 

 

(154

)

 

-9-


7.

Income tax

The effective tax rates for the three months ended March 31, 2019 and 2018 were 16.2% and 6.0%, respectively. Drivers of the Group’s effective tax rate include permanent differences, withholding taxes, discrete benefit due to fair value gains, and unrecognized tax losses in certain jurisdictions. The Group operates in a global environment with significant operations in various jurisdictions outside Luxembourg. Accordingly, the consolidated income tax rate is a composite rate reflecting the Group’s earnings and the applicable tax rates in the various jurisdictions where the Group operates.

For the three months ended March 31, 2019 and 2018, the income tax benefit of €27 million and €11 million, respectively, was due primarily to the recognition of deferred taxes as a result of the unrealized increase in the fair value of the Group’s long term investment in Tencent Music Entertainment Group (“TME”), and non-tax deductible intangibles recognized through the acquisitions of Gimlet and Anchor.

Gross tax provisions were €2 million and €2 million as of March 31, 2019 and December 31, 2018, respectively. The gross tax provisions, if recognized, will result in a reduction of approximately €2 million to the provision for income taxes, therefore favorably impacting the Group’s effective tax rate. The Group includes interest and penalties related to tax provisions within income tax benefit on the condensed consolidated statements of operations and income tax payable in the condensed consolidated statement of financial position. Interest and penalties included in income tax benefit were not material in any of the periods presented. Transactions recorded through other comprehensive income have been shown net of their tax impact, as applicable, based on currently enacted tax laws.

Net deferred tax (liabilities)/assets of €(51) million and €6 million have been recorded in the condensed consolidated statement of financial position as of March 31, 2019 and December 31, 2018, respectively. In evaluating the probability of realizing the deferred tax assets, the Group considered all available positive and negative evidence of future tax profit, including past operating results and the forecast of market growth and earnings. As of March 31, 2019 and December 31, 2018, deferred tax assets of €228 million and €276 million have not been recognized.

8.

Loss per share

Basic loss per share is computed using the weighted-average number of outstanding ordinary shares during the period. Diluted loss per share is computed using the treasury stock method to the extent that the effect is dilutive by using the weighted-average number of outstanding ordinary shares and potential ordinary shares during the period. The Group’s potential ordinary shares consist of incremental shares issuable upon the assumed exercise of stock options and warrants, and the incremental shares issuable upon the assumed vesting of unvested restricted stock units and restricted stock awards, excluding all anti-dilutive ordinary shares outstanding during the period. The computation of loss per share for the respective periods is as follows:

  

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(in € millions, except share and per share data)

 

Basic and diluted loss per share

 

 

 

 

 

 

 

 

Net loss attributable to owners

   of the parent

 

 

(142

)

 

 

(169

)

Shares used in computation:

 

 

 

 

 

 

 

 

   Weighted-average ordinary shares outstanding

 

 

180,613,539

 

 

 

167,778,952

 

Basic and diluted loss per share attributable

   to owners of the parent

 

 

(0.79

)

 

 

(1.01

)

-10-


Potential dilutive securities that were not included in the diluted loss per share calculations because they would be anti-dilutive were as follows:

 

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

Share options

 

 

13,340,362

 

 

 

14,891,965

 

Restricted stock units

 

 

347,027

 

 

 

191,986

 

Restricted stock awards

 

 

61,880

 

 

 

61,880

 

Other contingently issuable shares

 

 

162,320

 

 

 

 

Shares issued upon exchange of Convertible Notes

 

 

 

 

 

9,431,960

 

Warrants

 

 

6,720,000

 

 

 

6,720,000

 

 

9.

Leases

On January 1, 2019, the Group adopted IFRS 16, and all related amendments, using the modified retrospective transition method, under which the cumulative effect of initial application is recognized in accumulated deficit at January 1, 2019.  The new standard requires the recognition of right-of-use assets and lease liabilities on the Group's balance sheet for operating leases, along with the net impact on transition recorded to accumulated deficit. The Group is required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset.

The Group’s statement of operations for the three months ended March 31, 2019 reflect additional depreciation expense due to the right-of use assets, an increase in finance costs for effective interest expense on its lease liabilities, and is partially offset by a reduction in rental expenses.

There is no impact to the overall changes in cash flows. However, operating cash flows is positively impacted, while financing cash flows is negatively impacted due primarily to the classification of principal payments on lease liabilities.

The comparative information for 2018 has not been restated and continues to be reported under IAS 17 and related interpretations. The primary change in accounting policies as a result of the application of IFRS 16 is explained below. Such a change is made in accordance with the transitional provisions of IFRS 16.

Definition of a lease

Previously, the Group determined at contract inception whether an arrangement is or contains a lease under IAS 17 and IFRIC 4. Under IFRS 16, the Group assesses whether a contract is or contains a lease based on the definition of a lease, as explained in the accounting policy below.

The Group elected to use the transition practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application.  Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered into or changed on or after January 1, 2019.

As a lessee, the Group previously classified leases as operating or finance leases based on its assessment of whether the lease transferred significantly all of the risks and rewards incidental to ownership of the underlying asset to the Group. Under IFRS 16, the Group recognizes right-of-use assets and lease liabilities for most leases previously classified as operating under IAS 17.

The Group leases certain properties under non-cancellable operating lease agreements that relate to office space. The expected lease terms are between one and sixteen years.

The Group does not currently act in the capacity of a lessor.

-11-


Leases classified as operating leases under IAS 17