NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—
Description of Business, Basis of Presentation and Summary of Significant Accounting Policies
The Meet Group, Inc. (the “Company,” “The Meet Group,” “us,” or “we”) is a leading provider of interactive livestreaming solutions. We leverage a powerful live-streaming video platform, empowering our global community to forge meaningful connections. Our primary apps are MeetMe®, LOVOO®, Skout®, Tagged® and Growlr®.
We operate location-based social networks for meeting new people, primarily on mobile platforms, including on iPhone, Android, iPad and other tablets, that facilitate interactions among users and encourage users to connect, communicate and engage with each other. Over the past two years, we have transformed our business from an advertising based revenue model to one where the majority of our revenue is derived from user pay monetization and subscriptions. The fastest growing component of user pay monetization comes from in-app purchases, including virtual gifts associated with our live video product.
We began developing our live video platform in 2016 with the belief that we could successfully pair live-streaming and dating – a model that we had seen work effectively for Asian dating app providers. We first launched video on MeetMe early in 2017, and, in October of 2017, we began to monetize the feature by enabling gifting within the video streams. During this time period, we also executed on our strategy of acquiring other properties: Skout, Inc. (“Skout”), Ifwe Inc. (“if(we)”) and Lovoo GmbH (“Lovoo”) – where we believed our live-streaming platform would fit naturally. We then integrated live video into each app. We launched the monetized video platform on Skout in the fourth quarter of 2017, Tagged in the second quarter of 2018 and Lovoo beginning in the second quarter of 2018. We have also continued to add features and enhancements intended to drive video engagement and increase monetization for all the apps. Live video has become the fastest growing revenue product in our history.
We also offer online marketing capabilities, which enable marketers to display their advertisements on our apps. We offer significant scale to our advertising partners, with hundreds of millions of daily impressions across our active global user base, and sophisticated data science for effective targeting. We work with our advertisers and advertising networks to maximize the effectiveness of their campaigns by optimizing advertisement formats and placements.
Just as Facebook has established itself as the social network of friends and family, and LinkedIn as the social network of colleagues and business professionals, The Meet Group is creating the social entertainment network not of the people you know, but of the people you want to know. Nimble, fast-moving and already in more than
100
countries, we are challenging the dominant player in our space, Match Group, Inc., and differentiating ourselves with live video, which is not offered by many of our direct competitors. Modeled after the video products offered by Asian dating app providers, but enhanced in order to appeal to Western audiences, our live video product is aimed at the nexus of entertainment and community, where we believe our apps exhibit natural strength.
Our vision extends beyond dating and entertainment. We focus on building quality products to satisfy the universal need for human connection among all people, everywhere – not just paying subscribers. We believe meeting new people is a basic human need, especially for users aged 18-34, when so many long-lasting relationships are made. We use advanced technology to engineer serendipitous connections among people who otherwise might never have met – a sort of digital coffeehouse where everyone belongs. Over the years, The Meet Group’s apps have originated untold numbers of chats, shares, good friendships, dates, romantic relationships – even marriages.
We believe that we have significant growth opportunities enabled through our social entertainment platform. We believe our scale provides unique advantages to grow video monetization, while also establishing a high density of users within the geographic regions we serve. As The Meet Group’s networks grow and the number of users in a location increases, we believe that users who are seeking to meet new people will incrementally benefit from the quantity of relevant connections.
Basis of Presentation
The Company’s unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The condensed consolidated financial statements include the accounts of all subsidiaries and affiliates in which the Company holds a controlling financial interest as of the date of the condensed consolidated financial statements.
The condensed consolidated financial statements include the accounts of The Meet Group and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The unaudited condensed consolidated financial statements have been prepared by the Company and reflect all normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the interim financial information. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the year ending
December 31, 2019
. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted under the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
, filed with the SEC on
March 8, 2019
.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in revenue recognition, accounting for business combinations, accounts receivable valuation, the fair value of financial instruments, the valuation of long-lived assets, valuation of deferred tax assets, income taxes, contingencies, goodwill and intangible assets, video broadcaster fees and stock-based compensation. Some of these judgments can be subjective and complex and, consequently, actual results may differ from these estimates. The Company’s estimates often are based on complex judgments, probabilities and assumptions that it believes to be reasonable but that are inherently uncertain and unpredictable. For any given individual estimate or assumption made by the Company, there may also be other estimates or assumptions that are reasonable.
The Company regularly evaluates its estimates and assumptions using historical experience and other factors, including the economic environment. As future events and their effects cannot be determined with precision, the Company’s estimates and assumptions may prove to be incomplete or inaccurate, or unanticipated events and circumstances may occur that might cause it to change those estimates and assumptions. Market conditions, such as illiquid credit markets, volatile equity markets, dramatic fluctuations in foreign currency rates and economic downturn, can increase the uncertainty already inherent in its estimates and assumptions. The Company adjusts its estimates and assumptions when facts and circumstances indicate the need for change. Those changes generally will be reflected in the Company’s condensed consolidated financial statements on a prospective basis unless they are required to be treated retrospectively under the relevant accounting standard. It is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. The Company is also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts, such as changes in competition, litigation, legislation and regulations.
During the
three and six months ended June 30, 2019
, the Company started to take breakage on video broadcaster rewards based on historical levels of activity of video broadcasters and their corresponding video broadcaster reward balances. Based on this analysis, the Company reduced its accrual for video broadcaster rewards by
$1.9 million
. This reduction of expense is recognized in product development and content expense in the condensed consolidated statements of operations and comprehensive income (loss) for the
three and six months ended June 30, 2019
. The Company will continue to regularly evaluate the likelihood of a user redeeming video broadcaster rewards and adjust breakage accordingly.
Fair Value Measurements
The fair values of the Company’s financial instruments reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).
The carrying amounts of the Company’s financial instruments of cash, cash equivalents, accounts receivable, accounts payable, accrued liabilities and deferred revenue approximate fair value due to their short maturities. The Company has evaluated the estimated fair value of financial instruments using available market information and management’s estimates. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts.
In addition, the Company carries its contingent consideration liabilities related to acquisitions at fair value. In accordance with the three-tier fair value hierarchy, the Company determined the fair value of its contingent consideration liabilities using the income approach with assumed discount rates and payment probabilities. The income approach uses Level 3, or unobservable inputs as defined under the accounting guidance for fair value measurements. At
June 30, 2019
, the Company’s contingent consideration liability had a fair value of
$1.8 million
. See
Note 2—
Acquisitions
for more information regarding the Company’s contingent consideration liability.
The Company carries a term loan facility with an outstanding balance at
June 30, 2019
and
December 31, 2018
of
$25.9 million
and
$36.9 million
, respectively. As part of the Growlr Acquisition (as defined in
Note 2—
Acquisitions
), the Company drew down
$7.0 million
on its revolving credit facility. The outstanding balance on the Company’s revolving credit facility at
June 30, 2019
was
$7.0 million
. The outstanding balances of the Company’s term loan and revolving credit facilities as of
June 30, 2019
and
December 31, 2018
approximate fair value due to the variable market interest rates and relatively short maturity associated with them. See
Note 6—
Long-Term Debt
for more information regarding the Company’s credit facilities.
The Company leases its operating facilities in the U.S. and Germany under certain noncancelable operating leases that expire through 2023. The Company also leases certain fixed assets under capital leases that expire through 2021. The capital leases are for the Company's data centers, printers and other furniture in the Company's German offices. The outstanding balance of operating and finance leases as of
June 30, 2019
and
December 31, 2018
approximates fair value due to their relatively short maturities.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The Company is measuring the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. See
Note 10—
Derivatives and Hedging Activities
for further details.
Foreign Currency
The functional currency of our foreign subsidiaries is the local currency. The financial statements of these subsidiaries are translated to U.S. dollars using period-end rates of exchange for assets and liabilities and average quarterly rates of exchange for revenues and expenses. Translation gains (losses) are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity. Net gains and losses resulting from foreign exchange transactions are included in other income (expense).
Net Income (Loss) per Share
Basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares and common stock equivalents outstanding, calculated under the treasury stock method for options, unvested restricted stock awards (“RSAs”), unvested in-the-money performance share units (“PSUs”) and warrants using the average market prices during the period.
The following table shows the computation of basic and diluted net income (loss) per share for the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
2,203,826
|
|
|
$
|
(235,272
|
)
|
|
$
|
3,461,425
|
|
|
$
|
(4,447,933
|
)
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average shares outstanding— basic
|
75,648,621
|
|
|
72,753,487
|
|
|
75,250,562
|
|
|
72,369,619
|
|
Effect of dilutive securities
|
2,859,938
|
|
|
—
|
|
|
3,405,553
|
|
|
—
|
|
Weighted-average shares outstanding— diluted
|
78,508,559
|
|
|
72,753,487
|
|
|
78,656,115
|
|
|
72,369,619
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
$
|
0.03
|
|
|
$
|
—
|
|
|
$
|
0.05
|
|
|
$
|
(0.06
|
)
|
Diluted income (loss) per share
|
$
|
0.03
|
|
|
$
|
—
|
|
|
$
|
0.04
|
|
|
$
|
(0.06
|
)
|
The following table summarizes the number of dilutive securities, which may dilute future earnings per share, outstanding for each of the periods presented, but not included in the calculation of diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Stock options
|
2,876,703
|
|
|
5,081,890
|
|
|
2,700,275
|
|
|
5,081,890
|
|
Unvested RSAs
|
2,741,221
|
|
|
3,805,547
|
|
|
2,372,049
|
|
|
3,805,547
|
|
Unvested PSUs
|
146,483
|
|
|
1,046,350
|
|
|
146,467
|
|
|
1,046,350
|
|
Total
|
5,764,407
|
|
|
9,933,787
|
|
|
5,218,791
|
|
|
9,933,787
|
|
Significant Customers and Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. The Company invests its excess cash in high-quality, liquid money market funds maintained by major U.S. banks and financial institutions. The Company has not experienced any losses on its cash and cash equivalents, including money market funds.
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company has no recent history of significant losses from uncollectible accounts. During the
six months ended June 30, 2019 and 2018
,
two
customers, both of which were advertising aggregators (which represent thousands of advertisers) and customer payment processors, comprised approximately
61%
and
49%
of total revenues, respectively.
Two
and
three
customers, which were advertising aggregators and customer payment processors, comprised approximately
44%
and
36%
of accounts receivable as of
June 30, 2019
and
December 31, 2018
, respectively.
The Company does not expect its current or future credit risk exposure to have a significant impact on its operations, however, there can be no assurance that the Company’s business will not experience any adverse impact from credit risk in the future.
Recent Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,
Leases
(Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than
12 months
. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, and annual and interim periods thereafter, with early adoption permitted. A modified retrospective transition approach is an option for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. In July 2018, the FASB issued ASU No. 2018-11,
Leases
(Topic 842), which adds an optional transition method allowing entities to apply the new lease accounting rules through a cumulative-effect adjustment to the opening balance of retained earnings in the initial year of adoption.
The Company adopted ASU No. 2016-02 as of January 1, 2019, using the transition method per ASU No. 2018-11 issued in July 2018 wherein entities were allowed to initially apply the new leases standard at adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Accordingly, all periods prior to January 1, 2019 were presented in accordance with the previous ASC Topic 840, Leases, and no retrospective adjustments were made to the comparative periods presented. Finance leases were not impacted by the adoption of ASC 842, as finance lease liabilities and the corresponding ROU assets were already recorded in the balance sheet under the previous guidance, ASC 840.
The Company elected the package of practical expedients permitted under the new standard which, among other things, allowed the Company to not reassess the lease classification, the lease identification and the initial direct costs for any existing leases. Further, as permitted by the standard, the Company made an accounting policy election not to record ROU assets or lease liabilities for leases with a term of 12 months or less. Instead, consistent with legacy accounting guidance, the Company will recognize payments for such leases in the consolidated statement of operations on a straight-line basis over the lease term. Upon adoption on January 1, 2019, this standard resulted in the recognition of additional assets of
$3.2 million
and liabilities of
$3.3 million
on its accompanying condensed consolidated balance sheet. The new standard did not have a material impact on the Company’s results of operations or cash flows.
In August 2018, the FASB issued ASU 2018-13,
Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
. This amendment removes, modifies, and makes certain additions to the disclosure requirements on fair value measurement. The amendments in ASU 2018-13 are effective for fiscal years beginning after on December 15, 2019 and interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.
Note 2—
Acquisitions
Growlr
On
March 5, 2019
, the Company acquired
100%
of the issued and outstanding units of Initech, LLC, a privately held company that owns and operates Growlr (“Growlr”), a leading same-sex social app, for cash consideration of
$11.8 million
, plus an earnout of up to
$2.0 million
(the “Growlr Acquisition”). The Growlr Acquisition was funded by
$4.8 million
of cash on hand and a draw down of
$7.0 million
from the Company’s Revolving Credit Facility. See
Note 6—
Long-Term Debt
for further details on the Revolving Credit Facility. The earnout of
$2.0 million
is to be paid in annual
$1.0 million
installments over the next
two
years if certain revenue metrics are achieved in each year. The Company expects goodwill to be deductible for tax purposes.
The acquisition-date fair value of the consideration transferred is as follows:
|
|
|
|
|
|
At March 5, 2019
|
|
|
Cash consideration
(1)
|
$
|
11,807,925
|
|
Contingent consideration
|
1,718,000
|
|
Total consideration
|
$
|
13,525,925
|
|
(1) Cash consideration includes a
$1.0 million
escrow payment to be paid out
18
months from the date of the transaction.
The following is the preliminary purchase price allocation as of the
March 5, 2019
acquisition date:
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|
|
|
|
|
At March 5, 2019
|
Accounts receivable
|
$
|
544,632
|
|
Intangible assets
|
3,480,000
|
|
Accrued expenses and other current liabilities
|
(10,000
|
)
|
Deferred revenue
|
(102,058
|
)
|
Net assets acquired
|
3,912,574
|
|
Goodwill
|
9,613,351
|
|
Total consideration
|
$
|
13,525,925
|
|
The preliminary fair values of the Growlr trademarks were determined using an income approach. The preliminary fair value of software acquired, which represents the primary platform on which the Growlr apps operate, was determined using a cost approach. The preliminary fair value of customer relationships was determined using an excess earnings approach. The amounts assigned to the identifiable intangible assets are as follows:
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|
|
|
|
|
|
Fair Value
|
|
Weighted Average
Amortization Period
(Years)
|
Trademark
|
$
|
1,200,000
|
|
|
10.0
|
Software
|
865,000
|
|
|
3.0
|
Customer relationships
|
1,415,000
|
|
|
3.6
|
Total identifiable intangible assets
|
$
|
3,480,000
|
|
|
5.7
|
The operating results of Growlr for the period from
March 5, 2019
to
June 30, 2019
are included in the Company’s consolidated statements of operations and comprehensive income (loss) for the
three and six months ended June 30, 2019
. Results include revenues of
$0.9 million
and
$1.1 million
and net income of approximately
$0.2 million
for each of the
three and six months ended June 30, 2019
, respectively. The Company incurred a total of
$0.3 million
in transaction costs in connection with the Growlr Acquisition, which were included in acquisition and restructuring costs within the consolidated statement of operations and comprehensive income (loss) for the
six months ended June 30, 2019
.
The following pro forma information shows the results of the Company’s operations for the
three and six months ended June 30, 2019 and 2018
as if the Growlr Acquisition had occurred on January 1, 2018. The pro forma information is presented for informational purposes only and is not necessarily indicative of what would have occurred if the Growlr Acquisition had been made as of that date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues
|
$
|
52,232,377
|
|
|
$
|
43,978,616
|
|
|
$
|
102,819,067
|
|
|
$
|
82,788,321
|
|
Net income (loss)
|
2,387,322
|
|
|
26,823
|
|
|
4,052,879
|
|
|
(3,904,885
|
)
|
Note 3—
Fair Value Measurements
Accounting Standards Codification (“ASC”) Topic 820,
Fair Value Measurement
establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances.
ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes among the following:
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.
Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Derivative Financial Instruments
Currently, the Company uses an interest rate swap, interest rate cap and a cross currency swap
to manage its interest rate
risk.
The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of the interest rate swap and the cross currency swap are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
The fair value of the interest rate cap is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the cap. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.
To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of the Company’s derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. The Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. The Company has determined that the impact of the credit valuation adjustments made to its derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of the Company’s derivatives held as of
June 30, 2019
and
December 31, 2018
were classified as Level 2 of the fair value hierarchy. See
Note 10—
Derivatives and Hedging Activities
for further discussion on derivative financial instruments.
Recurring Fair Value Measurements
Items measured at fair value on a recurring basis include money market mutual funds, derivatives and hedging instruments and contingent consideration. During the periods presented, the Company has not changed the manner in which it values assets and liabilities that are measured at fair value using Level 3 inputs. The following fair value hierarchy table presents information about each major category of the Company’s financial assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Items
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
June 30, 2019
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Money market
|
$
|
8,164,197
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,164,197
|
|
Derivative assets
|
—
|
|
|
762,757
|
|
|
—
|
|
|
762,757
|
|
Total assets
|
$
|
8,164,197
|
|
|
$
|
762,757
|
|
|
$
|
—
|
|
|
$
|
8,926,954
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,781,667
|
|
|
$
|
1,781,667
|
|
Derivative liability
|
—
|
|
|
231,092
|
|
|
—
|
|
|
231,092
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
231,092
|
|
|
$
|
1,781,667
|
|
|
$
|
2,012,759
|
|
December 31, 2018
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Money market
|
$
|
7,639,866
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,639,866
|
|
Derivative asset
|
—
|
|
|
972,784
|
|
|
—
|
|
|
972,784
|
|
Total assets
|
$
|
7,639,866
|
|
|
$
|
972,784
|
|
|
$
|
—
|
|
|
$
|
8,612,650
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative liability
|
$
|
—
|
|
|
$
|
940,216
|
|
|
$
|
—
|
|
|
$
|
940,216
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
940,216
|
|
|
$
|
—
|
|
|
$
|
940,216
|
|
The following table sets forth a summary of changes in the fair value of the Company’s contingent consideration liability, which represents a recurring measurement that is classified within Level 3 of the fair value hierarchy, wherein fair value is estimated using significant unobservable inputs:
|
|
|
|
|
|
Contingent
Consideration
|
Balance as of December 31, 2018
|
$
|
—
|
|
Amounts acquired
|
1,718,000
|
|
Accretion
|
63,667
|
|
Balance as of June 30, 2019
|
$
|
1,781,667
|
|
The Company determined the fair value of its contingent consideration liabilities using the income approach with assumed discount rates and payment probabilities. The income approach uses Level 3, or unobservable inputs, as defined under the accounting guidance, for fair value measurements. Based on the Company’s projected results, the Company estimated the probability of success to be
100%
for the contingent consideration related to the Growlr Acquisition as of
June 30, 2019
. The contingent consideration is recorded in accrued expenses and other long-term liabilities on the accompanying condensed consolidated balance sheet as of
June 30, 2019
.
The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were
no
transfers within the levels of the fair value hierarchy during the
six months ended June 30, 2019
and as of the year ended
December 31, 2018
.
Note 4— Intangible Assets and Goodwill
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Trademarks and domain names
|
$
|
35,798,758
|
|
|
$
|
(15,474,450
|
)
|
|
$
|
20,324,308
|
|
Customer relationships
|
15,293,096
|
|
|
(8,629,061
|
)
|
|
6,664,035
|
|
Software
|
19,578,444
|
|
|
(11,918,253
|
)
|
|
7,660,191
|
|
Total
|
$
|
70,670,298
|
|
|
$
|
(36,021,764
|
)
|
|
$
|
34,648,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Trademarks and domain names
|
$
|
34,636,802
|
|
|
$
|
(13,406,226
|
)
|
|
$
|
21,230,576
|
|
Customer relationships
|
13,901,313
|
|
|
(7,130,285
|
)
|
|
6,771,028
|
|
Software
|
18,722,187
|
|
|
(10,165,352
|
)
|
|
8,556,835
|
|
Total
|
$
|
67,260,302
|
|
|
$
|
(30,701,863
|
)
|
|
$
|
36,558,439
|
|
Amortization expense was approximately
$2.8 million
and
$3.0 million
for the
three months ended June 30, 2019 and 2018
, respectively, and
$5.3 million
and
$6.0 million
for the
six months ended June 30, 2019 and 2018
, respectively.
Annual future amortization expense for the Company’s intangible assets is as follows:
|
|
|
|
|
Year ending December 31,
|
Amortization
Expense
|
Remaining in 2019
|
$
|
5,210,855
|
|
2020
|
8,590,701
|
|
2021
|
7,108,018
|
|
2022
|
4,164,598
|
|
2023
|
2,762,863
|
|
Thereafter
|
6,811,499
|
|
Total
|
$
|
34,648,534
|
|
The changes in the carrying amount of goodwill for the
six months ended June 30, 2019
are as follows:
|
|
|
|
|
|
June 30, 2019
|
Balance at December 31, 2018
|
$
|
148,132,873
|
|
Goodwill acquired from Growlr Acquisition
|
9,613,351
|
|
Foreign currency translation adjustments
|
(357,904
|
)
|
Balance at June 30, 2019
|
$
|
157,388,320
|
|
Note 5— Property and Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Servers, computer equipment and software
|
$
|
14,287,458
|
|
|
$
|
13,656,176
|
|
Office furniture and equipment
|
621,800
|
|
|
574,559
|
|
Leasehold improvements
|
648,134
|
|
|
646,123
|
|
|
15,557,392
|
|
|
14,876,858
|
|
Less accumulated depreciation
|
(11,530,359
|
)
|
|
(10,243,094
|
)
|
Property and equipment - net
|
$
|
4,027,033
|
|
|
$
|
4,633,764
|
|
Property and equipment depreciation expense was approximately
$0.7 million
and
$0.6 million
for the
three months ended June 30, 2019 and 2018
, respectively, and
$1.3 million
and
$1.1 million
for the
six months ended June 30, 2019 and 2018
, respectively.
Note 6—
Long-Term Debt
Credit Facilities
On
September 18, 2017
, in connection with the Company’s acquisition of all of the outstanding shares of Lovoo (the “Lovoo Acquisition”), the Company entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) with the several banks and other financial institutions party thereto and JPMorgan Chase Bank, N.A., as administrative agent (the “Agent”), amending and restating the Credit Agreement, dated March 3, 2017. The Amended and Restated Credit Agreement provides for a
$20.0 million
revolving credit facility (the “Revolving Credit Facility”) and a
$60.0 million
delayed draw term loan facility (the “Term Loan Facility,” and together with the “Revolving Credit Facility”, the “Credit Facilities”). On
October 18, 2017
, the Company drew down
$60.0 million
from its Term Loan Facility in connection with the Lovoo Acquisition. Fees and direct costs incurred when the Company entered into the Credit Facilities were
$0.6 million
. Fees and direct costs incurred are offset against long-term debt on the accompanying condensed consolidated balance sheets.
On March 7, 2018, the Company entered into an amendment to the Amended and Restated Credit Agreement, that among other things, amends the definition of “Applicable Rate” and “EBITDA” and makes certain changes to the financial covenants. On July 27, 2018, the Company entered into an amendment to the Amended and Restated Credit Agreement that amends the Company’s obligation to use certain of its excess cash flow to prepay its obligations under the Credit Agreement by limiting the applicable period for the fiscal year ended December 31, 2017 to the period commencing October 31, 2017 and ended December 31, 2017. The Company made an excess cash flow payment of approximately
$4.3 million
in the third quarter of 2018.
In March 2019, the Company made an excess cash flow payment of
$3.6 million
related to the fiscal year end December 31, 2018. On
March 5, 2019
, in connection with the Growlr Acquisition, as discussed in
Note 2—
Acquisitions
, the Company drew down
$7.0 million
from its Revolving Credit Facility. Borrowings on the Revolving Credit Facility are included in long-term debt, less current portion, net, on the accompanying condensed consolidated balance sheets.
The Company intends to use the remaining proceeds of the Revolving Credit Facility to finance working capital needs and for general corporate purposes. Amounts under the Revolving Credit Facility may be borrowed, repaid and re-borrowed from time to time until the maturity date of the Credit Agreement on
September 18, 2020
. The Term Loan Facility is subject to quarterly payments of principal in an amount equal to
$3,750,000
commencing December 31, 2017 and continuing through maturity. At the Company’s election, loans made under the Credit Facilities will bear interest at either (i) a base rate (“Base Rate”) plus an applicable margin or (ii) a London interbank offered rate (“LIBO Rate”) plus an applicable margin, subject to adjustment if an event of default under the Amended and Restated Credit Agreement has occurred and is continuing. The Base Rate means the highest of (a) the Agent’s “prime rate,” (b) the federal funds effective rate plus
0.50%
and (c) the LIBO Rate for an interest period of one month plus
1%
. The Company’s present and future domestic subsidiaries (the “Guarantors”) will guarantee the obligations of the Company and its subsidiaries under the Credit Facilities. The obligations of the Company and its subsidiaries under the Credit Facilities are secured by all of the assets of the Company and the Guarantors, subject to certain exceptions and exclusions as set forth in the Amended and Restated Credit Agreement and other loan documents.
The Credit Facilities consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Credit Facilities
|
|
|
|
Term Loan Facility
|
$
|
25,873,574
|
|
|
$
|
36,940,158
|
|
Revolving Credit Facility
|
7,000,000
|
|
|
—
|
|
Total Credit Facilities
|
32,873,574
|
|
|
36,940,158
|
|
Less: Debt discount, net
|
(191,612
|
)
|
|
(285,618
|
)
|
Net carrying amount
|
$
|
32,681,962
|
|
|
$
|
36,654,540
|
|
Less: current portion
|
15,000,000
|
|
|
18,566,584
|
|
Long-term debt, net
|
$
|
17,681,962
|
|
|
$
|
18,087,956
|
|
The weighted average interest rate on the Credit Facilities at
June 30, 2019
was
5.83%
.
Note 7—
Commitments and Contingencies
Cloud Data Storage
The Company stores a portion of its user and business data using Amazon Web Services in the U.S. with a minimum commitment agreement that expires in 2021. Lovoo stores a majority of its user and business data in the Google Cloud Platform in Germany under a noncancelable minimum commitment agreement that expires in 2023.
A summary of minimum future commitments required under the Company’s cloud data storage contracts as of
June 30, 2019
are as follows:
|
|
|
|
|
|
For the Years Ending December 31,
|
|
Cloud Data Storage
|
Remaining in 2019
|
|
$
|
2,654,058
|
|
2020
|
|
5,706,469
|
|
2021
|
|
6,895,895
|
|
2022
|
|
1,057,227
|
|
2023
|
|
1,162,950
|
|
Thereafter
|
|
—
|
|
Total minimum lease payments
|
|
$
|
17,476,599
|
|
Credit Facility
A summary of minimum future principal payments under our Credit Facilities as of
June 30, 2019
are as follows:
|
|
|
|
|
|
For the Years Ending December 31,
|
|
Credit Facilities
(1)
|
Remaining in 2019
|
|
$
|
7,500,000
|
|
2020
|
|
25,373,574
|
|
Total minimum loan payments
|
|
$
|
32,873,574
|
|
|
|
(1)
|
Interest rates on the Credit Facilities are variable in nature, however, the Company is party to a fixed-pay amortizing interest rate swap having a remaining notional amount of
$18.8 million
and a non-amortizing interest rate cap with a notional amount of
$10.7 million
. If interest rates were to remain at the
June 30, 2019
level, we would receive interest payments of
$0.04 million
in
2019
and
$0.02 million
in
2020
of net settlements on the fixed-pay amortizing interest rate swap and non-amortizing interest rate cap.
|
Litigation
From time to time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. We operate our business online, which is subject to extensive regulation by federal and state governments. Future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.
Retirement Plan
The Company maintains The Meet Group, Inc. 401(k) Retirement Plan (the “Plan”), which is a savings and investment plan intended to be qualified under the Internal Revenue Code. The Plan covers the majority of the employees of the Company. In January 2014, the Company began providing matching contributions to the Plan, based on a participant’s contribution. The Company’s 401(k) match expense totaled
$0.4 million
for each of the
six months ended June 30, 2019 and 2018
, respectively. The expense is included in sales and marketing, product development and content, and general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).
Note 8—
Stockholders’ Equity
Preferred Stock
The total number of shares of preferred stock,
$.001
par value, that the Company is authorized to issue is
5,000,000
.
The Board of Directors may, without further action by the stockholders, issue a series of preferred stock and fix the rights and preferences of those shares, including the dividend rights, dividend rates, conversion rights, exchange rights, voting rights, terms of redemption, redemption price or prices, liquidation preferences, the number of shares constituting any series and the designation of such series.
As of
June 30, 2019
and
December 31, 2018
there were
no
shares of preferred stock issued and outstanding.
Common Stock
The total number of shares of common stock,
$0.001
par value, that the Company is authorized to issue is
100,000,000
.
The Company issued shares of common stock of
157,334
and
1,079,496
related to exercises of stock options and
1,372,723
and
1,591,662
related to restricted stock awards in the
six months ended June 30, 2019
and the year ended
December 31, 2018
, respectively.
On June 14, 2019, the Company announced that its Board of Directors had approved a share repurchase program that authorizes the Company to purchase up to
$30.0 million
of common stock in the open market or through negotiated transactions intended to comply with SEC Rule 10b-18, which may be facilitated through one or more 10b5-1 share repurchase plans with a third party broker. The share repurchase program is effective through 2021. During the three and six months ended June 30, 2019, the Company did
no
t repurchase any shares under this program.
Stock-Based Compensation
The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model, based on weighted average assumptions. Expected volatility is based on historical volatility of the Company’s common stock. The risk-free rate is based on the U.S. Treasury yield curve in effect over the expected term at the time of grant. Compensation expense is recognized on a straight-line basis over the requisite service period of the award. The Company uses the simplified method to determine the expected option term since the Company’s stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term.
The Company began granting RSAs to its employees in April 2013. The fair value of RSAs is determined using the fair value of the Company’s common stock on the date of grant. Stock-based compensation expense for RSAs is amortized on a straight-line basis over the requisite service period. RSAs generally vest over a
three
-year period with
33%
vesting at the end of
one year
and the remaining vesting annually thereafter.
The Company began granting PSUs to certain employees in April and July 2018. PSUs are based on a relative Total Shareholder Return (“TSR”) metric over a performance period spanning
three years
from the grant date of the PSU. PSU awards will vest at the end of the performance period and will be paid immediately in shares of common stock. Stock-based compensation expense for PSUs is estimated on the date of grant and amortized on a straight-line basis over the performance period. PSU awards are forfeited if the participant is no longer employed on the third anniversary of the grant date, except in the event of an involuntary termination, death, disability or change in control. The Company estimated the fair value of the PSU awards using a Monte-Carlo simulation model utilizing several key assumptions including expected Company and Russell 2000 Peer Group share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features.
The assumptions used in calculating the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future.
Stock-based compensation expense is recognized on a straight-line basis over the requisite service period of all awards given by the Company. Stock-based compensation expense includes incremental stock-based compensation expense and is allocated on the condensed consolidated statements of operations and comprehensive income (loss) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Sales and marketing
|
$
|
106,323
|
|
|
$
|
112,222
|
|
|
$
|
176,498
|
|
|
$
|
230,769
|
|
Product development and content
|
1,642,931
|
|
|
1,161,863
|
|
|
3,142,324
|
|
|
2,275,930
|
|
General and administrative
|
1,116,082
|
|
|
816,785
|
|
|
1,971,231
|
|
|
1,753,096
|
|
Total stock-based compensation expense
|
$
|
2,865,336
|
|
|
$
|
2,090,870
|
|
|
$
|
5,290,053
|
|
|
$
|
4,259,795
|
|
As of
June 30, 2019
, there was approximately
$1.0 million
,
$16.9 million
and
$3.5 million
of total unrecognized compensation cost which is expected to be recognized over a weighted-average vesting period of approximately of
0.8 years
,
2.2 years
and
2.5 years
relating to stock options, RSAs and PSUs, respectively.
Stock Compensation Plans
2018 Omnibus Incentive Plan
On June 1, 2018, the Company’s stockholders approved the 2018 Omnibus Incentive Plan (the “2018 Plan”), providing for the issuance of up to
8.8 million
shares of the Company’s common stock, including approximately
0.3 million
shares previously approved by the Company’s stockholders under the Company’s Amended and Restated 2012 Omnibus Incentive Plan (the “2012 Plan”), minus one share of common stock for every one share of common stock that was subject to an option granted after April 9, 2018 but before June 1, 2018 under the 2012 Plan, plus an additional number of shares of common stock equal to the number of options previously granted under the 2012 Plan and the Amended and Restated 2006 Stock Incentive Plan (the “2006 Stock Plan”) that either terminate, expire, or are forfeited after April 9, 2018 and any restricted stock awards that either terminate, expire, or are forfeited equal to the number of awards granted under the 2012 Plan and 2006 Stock Plan multiplied by the fungible ratio of
1.4
. As of
June 30, 2019
, there were approximately
3.4 million
shares of common stock available for grant.
Restricted Stock Awards Under 2018 Plan
A summary of RSA activity under the 2018 Plan during the
six months ended June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
RSAs
|
|
Number of
RSAs
|
|
Weighted-Average
Stock Price
|
Outstanding at December 31, 2018
|
|
1,677,227
|
|
|
$
|
4.18
|
|
Granted
|
|
2,289,591
|
|
|
5.34
|
|
Vested
|
|
(606,623
|
)
|
|
4.16
|
|
Forfeited or expired
|
|
(85,961
|
)
|
|
4.90
|
|
Outstanding and unvested at June 30, 2019
|
|
3,274,234
|
|
|
4.97
|
|
Shares are forfeited if not vested within
three years
from the date of grant and vest in
three
equal annual increments. The Company recorded stock-based compensation expense related to RSAs under the 2018 Plan of approximately
$1.6 million
and
$0.1 million
for the
three months ended June 30, 2019 and 2018
, respectively, and
$2.5 million
and
$0.1 million
for the
six months ended June 30, 2019 and 2018
, respectively.
Performance Share Awards Under 2018 Omnibus Incentive Plan
PSU share payouts range from a threshold of
33%
to a maximum of
170%
based on the relative ranking of the Company’s TSR as compared to the TSR of the companies in the Russell 2000 Peer Group. The PSU award stipulates certain limitations to the payout in the event the payout reaches a defined ceiling level or the Company’s TSR is negative. The Company estimated the fair value of the PSU awards at the date of grant using a Monte-Carlo simulation model utilizing several key assumptions including expected Company and Russell 2000 Peer Group share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features.
A summary of PSU awards under the 2018 Plan during the
six months ended June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
PSUs
|
|
Number of
PSUs
|
|
Weighted-Average
Stock Price
|
Outstanding at December 31, 2018
|
|
60,000
|
|
|
$
|
4.65
|
|
Granted
|
|
416,100
|
|
|
6.18
|
|
Vested
|
|
—
|
|
|
—
|
|
Forfeited or expired
|
|
—
|
|
|
—
|
|
Outstanding at June 30, 2019
|
|
476,100
|
|
|
5.99
|
|
The Company recorded stock-based compensation expense related to PSUs under the 2018 Plan of approximately
$0.2 million
for each of the
three and six months ended June 30, 2019
.
Amended and Restated 2012 Omnibus Incentive Plan
On December 16, 2016, the Company’s stockholders approved the 2012 Plan, providing for the issuance of up to
10.5 million
shares of the Company’s common stock, including approximately
2.1 million
shares previously approved by the Company’s stockholders under the Company’s 2006 Stock Plan, less one share of common stock for every one share of common stock that was subject to an option or other award granted after December 31, 2011 under the 2006 Stock Plan, plus an additional number of shares of common stock equal to the number of shares previously granted under the 2006 Stock Plan that either terminate, expire, or are forfeited after December 31, 2011. As of June 1, 2018, grants are no longer issued from the 2012 Plan.
A summary of stock option activity under the 2012 Plan during the
six months ended June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Number of
Stock
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic Value
|
Outstanding at December 31, 2018
|
|
2,447,315
|
|
|
$
|
3.27
|
|
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
(106,903
|
)
|
|
4.33
|
|
|
|
|
|
Forfeited or expired
|
|
(8,333
|
)
|
|
5.35
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
2,332,079
|
|
|
3.22
|
|
|
6.6
|
|
$
|
1,714,956
|
|
Exercisable at June 30, 2019
|
|
2,028,441
|
|
|
3.04
|
|
|
6.4
|
|
1,642,040
|
|
The total intrinsic values of options exercised under the 2012 Plan was
$0.2 million
during each of the
six months ended June 30, 2019 and 2018
. The Company recorded stock-based compensation expense related to options under the 2012 Plan of approximately
$0.3 million
and
$0.4 million
for the
three months ended June 30, 2019 and 2018
, respectively, and
$0.6 million
and
$0.8 million
for the
six months ended June 30, 2019 and 2018
, respectively.
Restricted Stock Awards Under Amended and Restated 2012 Omnibus Incentive Plan
A summary of RSA activity under the 2012 Plan during the
six months ended June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
RSAs
|
|
Number of
RSAs
|
|
Weighted-Average
Stock Price
|
Outstanding at December 31, 2018
|
|
1,166,535
|
|
|
$
|
3.58
|
|
Granted
|
|
—
|
|
|
—
|
|
Vested
|
|
(758,337
|
)
|
|
3.30
|
|
Forfeited or expired
|
|
(10,066
|
)
|
|
4.73
|
|
Outstanding and unvested at June 30, 2019
|
|
398,132
|
|
|
4.08
|
|
Shares are forfeited if not vested within
three years
from the date of grant and vest in
three
equal annual increments. The Company recorded stock-based compensation expense related to RSAs under the 2012 Plan of approximately
$0.4 million
and
$1.1 million
for the
three months ended June 30, 2019 and 2018
, respectively, and
$1.1 million
and
$2.2 million
for the
six months ended June 30, 2019 and 2018
, respectively.
Performance Share Awards Under Amended and Restated 2012 Omnibus Incentive Plan
PSU share payouts range from a threshold of
33%
to a maximum of
170%
based on the relative ranking of the Company’s TSR as compared to the TSR of the companies in the Russell 2000 Peer Group. The PSU award stipulates certain limitations to the payout in the event the payout reaches a defined ceiling level or the Company’s TSR is negative. The Company estimated the fair value of the PSU awards at the date of grant using a Monte-Carlo simulation model utilizing several key assumptions including expected Company and Russell 2000 Peer Group share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features.
A summary of PSU awards under the 2012 Plan during the
six months ended June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
PSUs
|
|
Number of
PSUs
|
|
Weighted-Average
Stock Price
|
Outstanding at December 31, 2018
|
|
550,000
|
|
|
$
|
2.94
|
|
Granted
|
|
—
|
|
|
—
|
|
Vested
|
|
—
|
|
|
—
|
|
Forfeited or expired
|
|
—
|
|
|
—
|
|
Outstanding at June 30, 2019
|
|
550,000
|
|
|
2.94
|
|
The Company recorded stock-based compensation expense related to PSUs under the 2012 Plan of approximately
$0.1 million
and
$0.3 million
for the
three and six months ended June 30, 2019
, respectively, and
$0.1 million
in each of the
three and six months ended June 30, 2018
.
Amended and Restated 2006 Stock Incentive Plan
On June 27, 2007, the Company’s stockholders approved the 2006 Stock Plan, providing for the issuance of up to
3.7 million
shares of common stock plus an additional number of shares of common stock equal to the number of shares previously granted under the 1998 Stock Option Plan that either terminate, expire, or lapse after the date of the Board of Directors’ approval of the 2006 Stock Plan. All options granted and outstanding have been fully expensed prior to 2016.
A summary of stock option activity under the 2006 Stock Plan during the
six months ended June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Number of
Stock
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted Average
Remaining
Contractual Life
|
|
Aggregate Intrinsic
Value
|
Outstanding at December 31, 2018
|
|
1,074,411
|
|
|
$
|
4.00
|
|
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
(23,764
|
)
|
|
3.78
|
|
|
|
|
|
Forfeited or expired
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
1,050,647
|
|
|
4.00
|
|
|
2.3
|
|
$
|
25,200
|
|
Exercisable at June 30, 2019
|
|
1,006,468
|
|
|
4.02
|
|
|
2.3
|
|
25,200
|
|
The total intrinsic values of options exercised under the 2006 Stock Plan were
$0.05 million
during the
six months ended June 30, 2019
.
No
options under the 2006 Stock Plan were exercised during the
six months ended June 30, 2018
.
Amended and Restated 2016 Inducement Omnibus Incentive Plan
On October 3, 2016, in connection with the closing of the acquisition of Skout, the Company’s Board of Directors adopted the 2016 Inducement Omnibus Incentive Plan in accordance with NASDAQ Listing Rule 5635(c)(4). At the closing of the acquisition of Skout, the Company granted stock options to purchase an aggregate of up to
355,000
shares of its common stock to
25
former Skout employees as an inducement material to becoming non-executive employees of the Company. On February 27, 2017, the Company amended and restated the 2016 Inducement Omnibus Incentive Plan (as so amended and restated, the “2016 Stock Plan”) and authorized an additional
2,000,000
shares of common stock under the 2016 Stock Plan. At the closing of the acquisition of if(we), the (“if(we) Acquisition”), the Company granted options to purchase an aggregate of up to
75,000
shares of its common stock and restricted stock awards representing an aggregate of
717,500
shares of common stock to
83
former if(we) employees as an inducement material to becoming non-executive employees of the Company. At the closing of the Lovoo Acquisition, the Company granted restricted stock awards representing an aggregate of
531,500
shares of common stock to
96
former Lovoo employees as an inducement material to becoming non-executive employees of the Company.
Options Under The 2016 Stock Plan
A summary of stock option activity under the 2016 Stock Plan during the
six months ended June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Number of
Stock
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic Value
|
Outstanding at December 31, 2018
|
|
444,168
|
|
|
$
|
5.10
|
|
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
(26,667
|
)
|
|
5.69
|
|
|
|
|
|
Forfeited or expired
|
|
(97,501
|
)
|
|
5.02
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
320,000
|
|
|
5.07
|
|
|
7.6
|
|
$
|
—
|
|
Exercisable at June 30, 2019
|
|
213,333
|
|
|
5.07
|
|
|
7.6
|
|
—
|
|
The total intrinsic values of options exercised under the 2016 Stock Plan were
$0.01 million
during the
six months ended June 30, 2019
.
No
options under the 2016 Stock Plan were exercised during the
six months ended June 30, 2018
. The Company recorded stock-based compensation expense related to options under the 2016 Stock Plan of approximately
$0.1 million
for each of the
three months ended June 30, 2019 and 2018
and
$0.2 million
for each of the
six months ended June 30, 2019 and 2018
.
Restricted Stock Awards Under The 2016 Stock Plan
A summary of RSA activity under the 2016 Stock Plan during the
six months ended June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
RSAs
|
|
Number of
RSAs
|
|
Weighted-Average
Stock Price
|
Outstanding at December 31, 2018
|
|
474,686
|
|
|
$
|
4.25
|
|
Granted
|
|
—
|
|
|
—
|
|
Vested
|
|
(93,332
|
)
|
|
5.25
|
|
Forfeited or expired
|
|
(63,002
|
)
|
|
3.83
|
|
Outstanding and unvested at June 30, 2019
|
|
318,352
|
|
|
4.04
|
|
Shares are forfeited if not vested within
three years
from the date of grant, and vest in
three
equal annual increments. The Company recorded stock-based compensation expense related to RSAs under the 2016 Stock Plan of approximately
$0.2 million
and
$0.3 million
for the
three months ended June 30, 2019 and 2018
, respectively, and
$0.4 million
and
$0.7 million
for the
six months ended June 30, 2019 and 2018
, respectively.
Note 9— Income Taxes
The Company recorded a net income tax expense of approximately
$0.9 million
and
$0.5 million
for the
three months ended June 30, 2019 and 2018
, respectively. The net income tax expense recorded during the
three months ended June 30, 2019
is primarily related to the mix of earnings between the US and Germany, the estimated GILTI tax and the discrete tax impact of stock based compensation.
The Company recorded a net income tax expense of approximately
$1.2 million
and
$0.3 million
for the
six months ended June 30, 2019 and 2018
, respectively. The net income tax expense recorded during the
six months ended June 30, 2019
is primarily related to the mix of earnings between the US and Germany and the estimated GILTI tax, partially offset by discrete tax benefits related to an excess benefit on stock-based compensation.
For the
six months ended June 30, 2019
, the Company’s effective tax rate (“ETR”) from operations is
25.6%
, compared to
1.0%
for the
six months ended June 30, 2018
. The difference between the Company’s ETR and the current U.S. statutory rate of
21%
, as well as the difference in the ETR for the
six months ended June 30, 2019
compared to the
six months ended June 30, 2018
, are primarily related to permanent addback items, the difference in tax rates between the U.S. and Germany, the discrete tax impact of stock-based compensation and income during the
six months ended June 30, 2019
as opposed to loss during the
six months ended June 30, 2018
.
As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets (primarily federal and state net operating losses (“NOLs”). As of
June 30, 2019
and
December 31, 2018
, the Company has a valuation allowance related to acquired state NOLs that the Company believes it is not more likely than not will be realized.
During the
three and six months ended June 30, 2019 and 2018
, the Company had
no
material changes in uncertain tax positions.
Note 10—
Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
Certain of the Company’s foreign operations expose the Company to fluctuations of foreign exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency. The Company enters into derivative financial instruments to protect the value or fix the amount of certain liabilities in terms of its functional currency, the U.S. dollar.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. During
2019
and
2018
, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company’s accounting policy election. The earnings recognition of excluded components is presented in interest expense. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Between
June 30, 2019
and
June 30,
2020
, the Company estimates that an additional
$0.01 million
will be reclassified as an
increase
to interest expense.
As of
June 30, 2019
, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
|
|
|
|
|
|
|
|
|
|
Number of
|
|
At Inception
|
|
At June 30, 2019
|
Interest Rate Derivative
|
|
Instruments
|
|
Notional
|
|
Notional
|
Interest rate swaps
|
|
1
|
|
$45,000,000
|
|
$18,750,000
|
Interest rate caps
|
|
1
|
|
$15,000,000
|
|
$10,690,158
|
Cash Flow Hedges of Foreign Exchange Risk
The Company is exposed to fluctuations in various foreign currencies against its functional currency, the U.S. dollar. The Company uses foreign currency derivatives including cross-currency interest rate swaps to manage its exposure to fluctuations in the USD-EUR exchange rate. Cross-currency interest rate swaps involve exchanging fixed rate interest payments for fixed rate interest receipts both of which will occur at the USD-EUR forward exchange rates in effect upon entering into the instrument. The Company designates these derivatives as cash flow hedges of foreign exchange risks.
For derivatives designated and that qualify as cash flow hedges of foreign exchange risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified in the period(s) during which the hedged transaction affects earnings within the same income statement line item as the earnings effect of the hedged transaction. During the next 12 months, the Company estimates that an additional
$0.7 million
will be reclassified as a
decrease
to interest expense.
As of
June 30, 2019
, the Company had the following outstanding foreign currency derivatives that were used to hedge its foreign exchange risks:
|
|
|
|
|
|
|
|
Foreign Currency Derivative
|
|
Number of Instruments
|
|
Pay Fixed Notional
|
|
Receive Fixed Notional
|
Cross-currency interest rate swap
|
|
1
|
|
€42,000,517
|
|
$48,750,000
|
|
|
|
|
(amortizing to €35,969,673 as of June 30, 2019)
|
|
(amortizing to $41,750,000 as of June 30, 2019)
|
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of
June 30, 2019
and
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
June 30, 2019
|
|
December 31, 2018
|
Derivatives Designated as Hedging Instruments
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Fair Value
|
|
Fair Value
|
|
Fair Value
|
Interest rate products
|
|
Prepaid expenses and other current assets
|
|
$
|
1,451
|
|
|
$
|
166,058
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate products
|
|
Other assets - non-current
|
|
368
|
|
|
53,355
|
|
|
(3,540
|
)
|
|
—
|
|
Cross currency contract
|
|
Prepaid expenses and other current assets
|
|
760,939
|
|
|
753,371
|
|
|
—
|
|
|
—
|
|
Cross currency contract
|
|
Other assets - non-current / Long-term liability
|
|
—
|
|
|
—
|
|
|
(227,552
|
)
|
|
(940,216
|
)
|
Total derivatives designated as hedging instruments
|
|
|
|
$
|
762,758
|
|
|
$
|
972,784
|
|
|
$
|
(231,092
|
)
|
|
$
|
(940,216
|
)
|
The tables below presents the effect of cash flow hedge accounting on accumulated other comprehensive income (loss) for the
three and six months ended June 30, 2019 and 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Subtopic 815-20 Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in OCI on Derivatives
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
Interest rate products
|
|
$
|
(70,188
|
)
|
|
$
|
95,236
|
|
|
$
|
(130,997
|
)
|
|
$
|
363,785
|
|
Cross currency contract
|
|
(112,079
|
)
|
|
2,597,045
|
|
|
1,162,320
|
|
|
1,149,474
|
|
Total
|
|
$
|
(182,267
|
)
|
|
$
|
2,692,281
|
|
|
$
|
1,031,323
|
|
|
$
|
1,513,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss) Reclassified from Accumulated OCI into Income
|
|
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Interest expense
|
|
$
|
30,673
|
|
|
$
|
17,297
|
|
|
$
|
83,214
|
|
|
$
|
(20,982
|
)
|
Interest expense
|
|
200,025
|
|
|
218,805
|
|
|
402,850
|
|
|
438,305
|
|
Gain (loss) on foreign currency transactions
|
|
(569,158
|
)
|
|
2,428,813
|
|
|
297,788
|
|
|
1,145,146
|
|
Total
|
|
$
|
(338,460
|
)
|
|
$
|
2,664,915
|
|
|
$
|
783,852
|
|
|
$
|
1,562,469
|
|
The table below presents the effect of the Company’s derivative financial instruments on the income statement for the
three and six months ended June 30, 2019 and 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2019
|
|
Interest Expense
|
|
Foreign Currency Adjustment
|
|
Interest Expense
|
|
Foreign Currency Adjustment
|
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded
|
$
|
(328,196
|
)
|
|
$
|
(2,380
|
)
|
|
$
|
(731,060
|
)
|
|
$
|
(67,589
|
)
|
Gain (loss) on cash flow hedging relationships in Subtopic 815-20
|
|
|
|
|
|
|
|
Interest contracts
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income
|
$
|
230,698
|
|
|
$
|
(569,158
|
)
|
|
$
|
486,064
|
|
|
$
|
297,788
|
|
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income as a result that a forecasted transaction is no longer probable of occurring
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2018
|
|
Interest Expense
|
|
Foreign Currency Adjustment
|
|
Interest Expense
|
|
Foreign Currency Adjustment
|
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded
|
$
|
(671,294
|
)
|
|
$
|
4,216
|
|
|
$
|
(1,278,980
|
)
|
|
$
|
107,259
|
|
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
|
|
|
|
|
|
|
|
Interest contracts
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income
|
$
|
236,103
|
|
|
$
|
2,428,813
|
|
|
$
|
417,324
|
|
|
$
|
1,145,146
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
As of
June 30, 2019
, the fair value of derivatives in a net liability position related to these agreements, which includes accrued interest but excludes any adjustment for nonperformance risk, was
$0.002 million
. As of
June 30, 2019
, the Company had not posted any collateral related to these agreements. If the Company had breached any of credit-risk related provisions at
June 30, 2019
, it could have been required to settle its obligations under the agreements at their termination value of
$0.002 million
.
Note 11—
Revenue
The Company recognizes revenue when control of the promised good or service is transferred to the customer in an amount that the Company expects to be entitled in exchange for the good or service.
The following table presents the Company’s revenues disaggregated by revenue source for the
three and six months ended June 30, 2019 and 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
User pay revenue
|
$
|
36,921,301
|
|
|
71.0
|
%
|
|
$
|
25,570,553
|
|
|
59.7
|
%
|
|
$
|
72,746,410
|
|
|
71.7
|
%
|
|
$
|
47,976,083
|
|
|
59.6
|
%
|
Advertising
|
15,078,803
|
|
|
29.0
|
%
|
|
17,231,192
|
|
|
40.3
|
%
|
|
28,766,931
|
|
|
28.3
|
%
|
|
32,463,455
|
|
|
40.4
|
%
|
Total revenue
|
$
|
52,000,104
|
|
|
100.0
|
%
|
|
$
|
42,801,745
|
|
|
100.0
|
%
|
|
$
|
101,513,341
|
|
|
100.0
|
%
|
|
$
|
80,439,538
|
|
|
100.0
|
%
|
User Pay Revenue
User pay revenue is earned from in-app purchase products and subscriptions sold to mobile application and website users. The Company offers in-app products such as Credits, Points, Gold, Icebreakers, Flash! and Shout! (collectively, the “In-App Products”). Users purchase the In-App Products to exchange for the Company’s virtual products. The In-App Products allow users to engage with other users on the applications and in live video. They also put users in the spotlight, helping them get more attention from the community in order to meet more people faster. Platform users do not own the In-App Products but have a limited right to use the In-App Products on virtual products offered for sale on the Company’s platforms. In-App Products may be used to purchase virtual gifts for other users. These virtual gifts are received by other users and converted into Diamonds. Diamonds represent an intermediary currency that the Company manages. Diamonds can either be converted back into credits or may be used to claim rewards, including in some instances cash rewards. The In-App Products are not transferable, cannot be sold or exchanged outside of our platforms, are not redeemable for any sum of money, cannot be gifted to other users and can only be used on our platforms. The In-App Products are recorded in deferred revenue when purchased and recognized as revenue over time when: (i) the In-App Products are used by the customer; or (ii) the Company determines the likelihood of the In-App Products being redeemed by the customer is remote (breakage) and there is not a legal obligation to remit the unredeemed In-App Products to the relevant jurisdiction. The breakage rate is based upon Company-specific historical redemption patterns. Breakage is recognized in revenue as the In-App Products are used on a pro rata basis over a
three
or
six
-month period (life of the user) beginning at the date of the sale and are included in revenue in the condensed consolidated statements of operations and comprehensive income (loss). Breakage recognized during each of the
three and six months ended June 30, 2019 and 2018
was
$0.9 million
and
$1.6 million
, respectively. For MeetMe+, Tagged, Skout and Lovoo subscription based products, the Company recognizes revenue over the term of the subscription.
Under ASC 606, user pay revenue has a single performance obligation. Subscriptions provide customers with premium access to the application and include credits on MeetMe+, while In-App Product purchases are satisfied by standing ready to allow users to exchange the In-App Products for virtual products. The consideration received for these services is fixed at the time of purchase. The customer simultaneously receives and consumes the benefits of user pay features as the Company performs the services. Revenue is recorded in deferred revenue when purchased by customer and recognized as revenue over time as the performance obligation is satisfied.
Advertising Revenue
Advertising revenue is comprised of mobile and web advertising. Within each revenue stream, the Company has one performance obligation to publish advertisements as specified by the respective contracts. The amount of consideration that the Company expects to receive for the services is variable based on the volume of advertisement impressions. The Company does not offer any discounts or free impressions and has not historically experienced any collectability issues.
The Company also recognizes revenue from cross-platform/social theater and cost-per-action (“CPA”) offers. Each of these revenue streams has one performance obligation. For cross-platform/social theater contracts, the consideration promised is fixed per ad campaign and term, and required services to be delivered. However, the monthly revenue could vary depending on the actual delivery of impressions throughout the contract term. These contracts are typically based on cost per thousand rates and number of impressions served due to traffic volume and the specific ad campaign. For CPA offers, the consideration promised is variable based on a revenue share rate, and/or based on the number of actions delivered per the agreement. As such, the Company recognizes all actual advertising revenues from impressions or actions delivered on a monthly basis rather than estimating revenue at the beginning of the period.
The Company has transactions with several partners that qualify for principal agent considerations. The Company recognizes revenue, net of amounts retained by the third-party partners, pursuant to revenue sharing agreements with advertising networks.
The form of the agreements is such that the Company provides services in exchange for a fee. The Company determines only the fee for providing its services to advertising agencies and has no latitude in establishing prices with third party advertisers.
In instances where the Company works directly with an advertiser, revenue is recognized on a gross basis. The Company is the primary obligor in arrangements made with direct advertisers, as there is no third-party facilitating or managing the sales process. The Company is solely responsible for determining price, product or service specifications, and which advertisers to use. The Company assumes all credit risk in the sales arrangements made with direct advertisers.
The Company has determined that the performance obligation under the advertising revenue streams is recognized ratably over time utilizing the “Right to Invoice” practical expedient as customers simultaneously consume and receive benefits of the advertisement impressions.
Deferred Revenue
The Company records deferred revenue when the consideration for a good or service is received in advance of its performing the obligation. The deferred revenue balance for the
six months ended June 30, 2019
increased
$72.7 million
due to subscription and in-app purchases consideration received in advance of providing the good or service to the customers. This amount was offset by
$72.7 million
revenue recognized from deferred revenue due to performance obligations satisfied during the
six months ended June 30, 2019
.
Note 12—
Leases
The Company has operating leases for its corporate offices and data centers in the U.S. and Germany, and finance leases for certain data centers, printers and other furniture in its German offices. The Company's lease terms include options to extend or terminate the lease and the Company includes these options in the lease term when it is reasonably certain to exercise that option.
The Company determines, at the inception of a contract, if the arrangement is a lease and whether it meets the classification criteria for a finance or operating lease. ROU assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of fixed lease payments over the lease term. ROU assets also include any advance lease payments and exclude lease incentives. As most of the Company's operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at commencement date in determining the present value of lease payments. Finance lease agreements generally include an interest rate that is used to determine the present value of future lease payments. Operating fixed lease expense and finance lease depreciation expense are recognized on a straight-line basis over the lease term.
Operating Leases
The Company leases its operating facilities, data center storage facilities and certain data storage equipment in the U.S. and Germany under certain noncancelable operating leases that expire at various times through 2022. These leases are renewable at the Company’s option.
Capital Leases
The Company leases certain fixed assets under capital leases that expire at various times through 2021. The capital leases are for the Company’s computer equipment and printers in its German offices. Principal and interest are payable monthly at interest rates ranging from
4.7%
to
7.0%
per annum, rates varying based on the type of leased asset. The Company did not enter into any new capital lease agreements during the
six months ended June 30, 2019
.
The following table presents the Company’s lease costs for the
three and six months ended June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2019
|
|
June 30, 2019
|
Lease Costs:
|
|
|
|
Operating lease cost*
|
$
|
655,033
|
|
|
$
|
1,380,269
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use assets
|
$
|
—
|
|
|
$
|
1,518
|
|
Interest on lease liabilities
|
1,444
|
|
|
3,746
|
|
Total finance lease cost
|
$
|
1,444
|
|
|
$
|
5,264
|
|
* Short term lease costs were immaterial.
Supplemental cash flow information is as follows:
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
1,373,309
|
|
Operating cash flows from finance leases
|
3,746
|
|
Financing cash flows from finance leases
|
77,507
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
Operating leases
|
6,440,016
|
|
The aggregate future lease payments for ROU assets and finance leases as of
June 30, 2019
are as follows:
|
|
|
|
|
|
|
|
|
|
For the Years Ending December 31,
|
|
ROU Assets
|
|
Financing
|
Remaining in 2019
|
|
$
|
1,308,078
|
|
|
$
|
79,173
|
|
2020
|
|
2,107,386
|
|
|
32,065
|
|
2021
|
|
1,816,930
|
|
|
4,773
|
|
2022
|
|
559,110
|
|
|
—
|
|
2023
|
|
43,559
|
|
|
—
|
|
Thereafter
|
|
—
|
|
|
—
|
|
Total minimum lease payments
|
|
5,835,063
|
|
|
116,011
|
|
Less: amount representing interest
|
|
290,377
|
|
|
2,560
|
|
Total present value of minimum payments
|
|
5,544,686
|
|
|
113,451
|
|
Less: current portion
|
|
2,203,055
|
|
|
101,446
|
|
Long-term obligations
|
|
$
|
3,341,631
|
|
|
$
|
12,005
|
|
Weighted average remaining lease terms and discount rates were as follows:
|
|
|
|
Weighted average remaining lease term (years)
|
June 30, 2019
|
Operating leases
|
2.67
|
|
Finance leases
|
0.81
|
|
|
|
Weighted average discount rate
|
|
Operating leases
|
4.87
|
%
|
Finance leases
|
5.56
|
%
|