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 fast-growing portfolio of mobile apps that brings together people around the world for new connections. Our mission is to meet the universal need for human connection. We operate location-based social networks for meeting new people on mobile platforms, including on iPhone, Android, iPad and other tablets, and on the web that facilitate interactions among users and encourage users to connect and chat with each other. Given consumer preferences to use more than a single mobile application, we have adopted a brand portfolio strategy, through which we offer products that collectively appeal to the broadest spectrum of consumers. We are consolidating the fragmented mobile meeting sector through strategic acquisitions, leveraging economies and innovation to drive growth. On
October 3, 2016
, we completed our acquisition of Skout, Inc. (“Skout”), and on
April 3, 2017
, we completed our acquisition of Ifwe Inc. (“if(we)”), both of which owned leading global mobile networks for meeting new people. On
October 19, 2017
, we completed our acquisition of Lovoo GmbH (“Lovoo”) to expand our global footprint, increase our scale and profitability, and diversify our business model by adding expertise in subscription and in-app purchasing.
The Meet Group’s platforms monetize through advertising, in-app purchases, and paid subscriptions. The Company offers online marketing capabilities, which enable marketers to display their advertisements in different formats and in different locations. We offer significant scale to our advertising partners, with hundreds of millions of daily impressions across our active and growing global user base, and sophisticated data science for highly effective hyper-targeting. The Company works with its advertisers to maximize the effectiveness of their campaigns by optimizing advertisement formats and placement.
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 network not of the people you know but of the people you want to know. Nimble and fast-moving, already in more than
100
countries, we are challenging the dominant player in our space, Match Group, Inc. Our vision extends beyond dating. 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 friends, dates, romantic relationships - even marriages.
We believe that we have significant growth opportunities as people increasingly use their mobile devices to discover the people around them. Given the importance of establishing connections within a user’s geographic proximity, we believe it is critical to establish 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 (formerly known as MeetMe) and its wholly-owned subsidiaries, Quepasa.com de Mexico, Quepasa Serviços em Solucoes de Publicidade E Tecnologia Ltda (inactive), MeetMe Online S/S Ltda, which was dissolved during the fourth quarter of 2016, Skout, and if(we). 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, 2017
. 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, 2016
, filed with the SEC on
March 9, 2017
.
Use of Estimates
The preparation of the Company’s condensed 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 the determination of revenue recognition, 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 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.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company earns revenue from the display of advertisements on its mobile apps and website, primarily based on a cost per thousand (“CPM”) model. The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605, “
Revenue
Recognition,
” and ASC 605-45 “
Principal
Agent Considerations”
(together, the “ASC Guidance”). Revenue from advertising on the Company’s website and mobile apps is generally recognized on a net basis, since the majority of its advertising revenues come from advertising agencies. The guidance provides indicators for determining whether “gross” or “net” presentation is appropriate. While all indicators should be considered, the Company believes that whether it acted as a primary obligor in its agreements with advertising agencies is the strongest indicator of whether gross or net revenue reporting is appropriate.
During the
nine months ended September 30, 2017 and 2016
, the Company had transactions with several partners that qualify for principal agent considerations. The Company recognizes revenue, net of amounts retained by third party entities, pursuant to revenue sharing agreements with advertising networks for advertising and with other partners for royalties on product sales. The Company considered
two
key factors when making its revenue recognition determinations: (1) whether the Company performed a service for a fee, similar to an agent or a broker; and (2) whether the Company was involved in the determination of product or service specifications. The Company focused on the substance of the agreements and determined that net presentation was representationally faithful to the substance, as well as the form, of the agreements. The form of the agreements was such that the Company provided services in exchange for a fee. In addition, the Company has no latitude in establishing price, and the advertising agencies were solely responsible for determining pricing with third party advertisers. The Company determined only the fee for providing its services to advertising agencies.
In instances in which 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.
During the
nine months ended September 30, 2017 and 2016
, the Company’s revenue was generated from
two
principal sources: revenue earned from the sales of advertising on the Company’s mobile applications and website and revenue earned from in-app products.
Advertising Revenue
Advertising and custom sponsorship revenues consist primarily of advertising fees earned from the display of advertisements on the Company’s mobile applications and website. Revenue from advertising is generally recognized as advertisements are delivered. The Company recognizes advertising revenue from customers that are advertising networks on a net basis, while advertising revenues earned directly from advertisers are recognized on a gross basis. Approximately
73%
and
87%
of the Company’s revenue came from advertising during the
nine months ended September 30, 2017 and 2016
, respectively.
In-App Purchases
Revenue is earned from in-app purchase products sold to our mobile application and website users. The Company offers in-app products such as Credits, Points and Gold. Users buy Credits, Points or Gold to purchase the Company’s virtual products. These products put users in the spotlight, helping users to get more attention from the community in order to meet more people faster. Revenue from these virtual products is recognized over time. Credits, Points or Gold can be purchased using iTunes and Google checkout on mobile applications. Platform users do not own the Credits, Points or Gold but have a limited right to use them on virtual products offered for sale on the Company’s platforms. Credits, Points and Gold are non-refundable, the Company may change the purchase price of them at any time, and the Company reserves the right to stop issuing Credits, Points or Gold in the future. Except for only in-app products used to purchase certain virtual gifts, the Company’s in-app products are not transferable, cannot be sold or exchanged outside our platform, are not redeemable for any sum of money, and can only be used on the Company’s platforms. In-app products are recorded in deferred revenue when purchased and recognized as revenue when: (i) the Credits, Points or Gold are used by the customer; or (ii) the Company determines the likelihood of the Credits, Points or Gold being redeemed by the customer is remote (Breakage) and there is not a legal obligation to remit the unredeemed Credits, Points or Gold to the relevant jurisdiction. The determination of the breakage rate is based upon Company-specific historical redemption patterns. Breakage is recognized in revenue as the Credits, Points and Gold are used on a pro rata basis over a
three
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. Breakage recognized during the
nine months ended September 30, 2017 and 2016
was
$1,029,705
and
$988,000
, respectively. For “MeetMe+” and other subscription based products, the Company recognizes revenue over the term of the subscription.
The Company also earns revenue from advertisement products from currency engagement actions (i.e. sponsored engagement advertisements) by users on all of the Company’s platforms, including cost-per-action (“CPA”) currency incented promotions and sales on its proprietary cross-platform currency monetization product, “Social Theater.” The Company controls and develops the Social Theater product and CPA promotions and acts as a user’s principal in these transactions and recognizes the related revenue on a gross basis when collections are reasonably assured and upon delivery of the Credits to the user’s account. When a user performs an action, the user earns Credits and the Company earns product revenue from the advertiser.
Social Theater is a product that allows the Company to offer advertisers a way to leverage the third party platforms through guaranteed actions by their user bases. Social Theater is also hosted on the Company’s platform. Typical guaranteed actions available to advertisers are video views, fan page growth, quizzes and surveys. Social Theater revenue is recognized when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, collectability is reasonably assured, and the service has been rendered. Social Theater prices are both fixed and determinable based on the contract with the advertiser. The user completes an action and the electronic record of the transaction triggers the revenue recognition. The collection of the Social Theater revenue is reasonably assured by contractual obligation and historical payment performance. The delivery of virtual currency from the hosting platform to a user evidences the completion of the action required by the customer that the service has been rendered for Social Theater revenue recognition.
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 and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities. Certain common stock warrants are carried at fair value as disclosed in
Note 3-
Fair Value Measurements
.
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
September 30, 2017
and
December 31, 2016
, the Company’s contingent consideration liability had a fair value of
$2.9 million
and
$3.0 million
, respectively. See
Note 2-
Acquisitions
for more information regarding the Company’s contingent consideration liability. As part of the Lovoo Acquisition, as defined in Note 11- Subsequent Events, the Company amended and restated its term loan and revolving credit facility. As of
September 30, 2017
, the Company did not have an outstanding balance for either facility. See
Note 6-
Long-Term Debt
for more information regarding the Company’s credit facilities.
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. Net gains and losses resulting from foreign exchange transactions are included in other income (expense). The Company’s foreign operations were substantially liquidated in the first quarter of 2015. Due to our current reporting metrics, providing revenues from users attributed to the U.S. and revenues from users attributed to all other countries is impracticable.
Net Income per Share
Basic net income per share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing net income 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 and warrants using the average market prices during the period.
The following table shows the computation of basic and diluted net income per share for the following:
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Three Months Ended September 30,
|
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Nine Months Ended September 30,
|
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2017
|
|
2016
|
|
2017
|
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2016
|
Numerator:
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|
|
|
|
|
|
Net income
|
$
|
2,222,722
|
|
|
$
|
4,392,409
|
|
|
$
|
3,525,163
|
|
|
$
|
36,365,696
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|
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|
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|
Denominator:
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|
|
|
|
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Weighted-average shares outstanding
|
71,800,274
|
|
|
53,231,369
|
|
|
67,711,324
|
|
|
49,649,221
|
|
Effect of dilutive securities
|
4,278,289
|
|
|
5,817,452
|
|
|
4,714,539
|
|
|
5,955,645
|
|
Weighted-average diluted shares
|
76,078,563
|
|
|
59,048,821
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|
|
72,425,863
|
|
|
55,604,866
|
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|
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Basic income per share
|
$
|
0.03
|
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
$
|
0.73
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Diluted income per share
|
$
|
0.03
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$
|
0.07
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$
|
0.05
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|
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$
|
0.65
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|
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:
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Three Months Ended September 30,
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|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock options
|
4,579,555
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|
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2,480,228
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|
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4,143,305
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2,427,662
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Warrants
|
—
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|
391,015
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|
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—
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|
305,388
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Total
|
4,579,555
|
|
|
2,871,243
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|
|
4,143,305
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|
|
2,733,050
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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, restricted cash, 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 equivalents, including restricted cash or 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
nine months ended September 30, 2017 and 2016
,
two
and
three
customers (all of which were advertising aggregators, which represent thousands of advertisers), respectively, comprised approximately
31%
and
54%
of total revenues, respectively.
Four
and
three
customers (which were primarily advertising aggregators), respectively, comprised of approximately
59%
and
49%
of accounts receivable as of
September 30, 2017
and
December 31, 2016
, 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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers.
ASU 2014-09 supersedes the revenue recognition requirements of FASB ASC Topic 605,
Revenue Recognition
and most industry-specific guidance throughout the ASC, resulting in the creation of FASB ASC Topic 606,
Revenue from Contracts with Customers
. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This ASU provides alternative methods of adoption.
In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers, Deferral of the Effective Date
. ASU 2015-14 defers the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017 and interim periods within those reporting periods beginning after that date, and permits early adoption of the standard, but not before the original effective date for fiscal years beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
clarifying the implementation guidance on principal versus agent considerations. Specifically, an entity is required to determine whether the nature of a promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). The determination influences the timing and amount of revenue recognition. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing
clarifying the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments reduce the cost and complexity of identifying promised goods or services and improves the guidance for determining whether promises are separately identifiable. The amendments also provide implementation guidance on determining whether an entity's promise to grant a license provides a customer with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a right to access the entity's intellectual property (which is satisfied over time). The effective date and transition requirements for ASU 2016-08 and ASU 2016-10 are the same as the effective date and transition requirements for ASU 2014-09. In May 2016, the FASB issued ASU No. 2016-12
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, which clarifies guidance in certain narrow areas and adds a practical expedient for certain aspects of the guidance. In September 2017, the FASB issued ASU No. 2017-13,
Revenue from Contracts with Customers, Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments,
which adds SEC paragraphs pursuant to an SEC Staff Announcement at the July 20, 2017 EITF meeting. The amendments do not change the core principle of the guidance in ASU 2014-09.
The Company continues to evaluate the ASU 2014-09 disclosure requirements to enhance the Company’s financial statements that will enable users to better understand the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers, including significant judgments, changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The Company has determined that its adoption of ASU 2014-09 will have an impact on its financial reporting disclosures and internal controls over financial reporting (“ICFR”).
As part of its implementation plan executed by a working group of internal and external resources, the Company has developed a project plan and controls that allow the Company to properly and timely adopt the new revenue recognition standard on its effective date. The phased implementation project plan includes an assessment of the Company’s revenue streams and contracts disaggregated into categories in accordance with Topic 606. The Company will continue monitoring modifications, clarifications and interpretations issued by the FASB, which may impact its assessment of the standard.
Significant assessment and implementation matters that are being addressed prior to adopting ASU 2014-09 are reviews of customer contracts and related policies and procedures, determining the impact the new accounting standard will have on the Company’s financial statements and related disclosures, and updating, throughout the implementation efforts, the Company’s business policies, processes, systems, and controls required to comply with ASU 2014-09 upon its effective date of January 1, 2018.
The assessment and implementation procedures performed through September 30, 2017 have not included Lovoo, which the Company acquired on
October 19, 2017
. During the quarter ending December 31, 2017, the Company will assess the impact of the acquisition on its implementation plan and procedures, which may result in the identification of additional revenue streams.
Specific considerations made to date on the impact of adopting ASU 2014-09 include:
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•
|
Arrangements with Multiple Performance Obligations
- ASU 2014-09 states that the transaction price for contracts with more than one performance obligation should be allocated to each performance obligation. This guidance may impact the application of the revenue recognition standard on certain of the Company’s contracts which include multiple performance obligations.
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•
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Principal vs Agent Relationships
- ASU 2014-09 modified some of the existing principal and agent considerations. This update may result in changes to gross vs net treatment of revenue and expenses; however, it would not have an impact on net income.
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•
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Contract Costs
-
The Company continues to assess the impact of ASU 2014-09 on the costs to acquire and fulfill its customer contracts, including whether the Company can apply the practical expedient of expensing contract costs when incurred if the amortization period of the asset that would have been recognized is one year or less. Currently, the Company’s accounting policy is to expense contract costs as they are incurred.
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•
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Breakage
- ASU 2014-09 guidance on breakage requires that an entity establish a liability for the full amount of the prepayment and recognize breakage on that liability into revenue proportionate to the pattern of rights exercised by the customer. Consistent with the new guidance, the Company currently recognizes breakage in revenue as Credits, Points and Gold are redeemed on a pro rata basis over a three-month period (life of the user) beginning at the date of the sale.
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Upon completion of the Company’s implementation plan and evaluation of the remaining revenue contracts, the Company plans to adopt additional controls around ICFR and its business processes for any new revenue arrangements that the Company enters. The Company is on target to complete its assessment of ASU 2014-09 and its impact on the Company’s consolidated financial statements and related disclosures as of January 1, 2018. While the Company is still in the process of completing its analysis of the impact this guidance will have on its consolidated financial statements, related disclosures, and ICFR, the Company does not expect the impact to be material. As such, the Company plans to adopt the new standard using the modified retrospective method.
In February 2016, the FASB issued ASU No. 2016-2,
Leases
(Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record an 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 2016-2 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 required 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. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, providing additional guidance on several cash flow classification issues, with the goal of the update to reduce the current and potential future diversity in practice. The amendments in this update are effective for fiscal years beginning after December 15, 2017, 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.
In November 2016, the FASB issued ASU No. 2016-18
, Statement of Cash Flows (Topic 230): Restricted Cash,
which amended the existing accounting standards for the statement of cash flows by requiring restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. The Company has early adopted this new standard beginning in the fourth quarter of 2016 and it has been applied retrospectively to all periods presented.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805) Clarifying the Definition of a Business
, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment
. ASU No. 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-01 will be effective in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation (Topic 718) Scope of Modification Accounting
, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. ASU 2017-09 will be effective in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
Note 2-
Acquisitions
if(we)
On March 3, 2017, the Company, and its wholly-owned subsidiary, Two Sub One, Inc., a Delaware corporation, entered into a definitive agreement and plan of merger with if(we), a Delaware corporation and leading global mobile network for meeting new people, pursuant to which the Company agreed to acquire
100%
of the outstanding shares of capital stock of if(we) for total consideration of
$74.5 million
in cash, subject to closing adjustments (the “if(we) Acquisition”). The if(we) Acquisition closed on
April 3, 2017
. The Company does not expect goodwill to be deductible for tax purposes.
The Company funded the if(we) Acquisition from cash on hand, and from a
$15.0 million
term credit facility from J.P. Morgan Chase Bank, N.A., pursuant to a Credit Agreement entered into on
March 3, 2017
. See
Note 6-
Long-Term Debt
for further details.
At the closing of 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.
The acquisition-date fair value of the consideration transferred is as follows:
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At April 3, 2017
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Cash consideration
(1)
|
$
|
60,000,000
|
|
Net working capital adjustment
|
14,467,379
|
|
Total estimated consideration
|
$
|
74,467,379
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(1) Cash consideration includes a
$6.0 million
escrow payment to be paid out
12 months
from the date of the transaction.
The following is a purchase price allocation as of the
April 3, 2017
acquisition date:
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At April 3, 2017
|
Cash and cash equivalents
|
$
|
8,164,587
|
|
Accounts receivable
|
2,961,593
|
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Prepaid expenses and other current assets
|
5,588,308
|
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Restricted cash
|
500,000
|
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Property and equipment
|
1,476,010
|
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Other assets
|
394,037
|
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Intangible assets
|
23,830,000
|
|
Accounts payable
|
(1,632,306
|
)
|
Accrued expenses and other current liabilities
|
(783,096
|
)
|
Deferred revenue
|
(809,244
|
)
|
Deferred tax liability
|
(1,135,739
|
)
|
Net assets acquired
|
$
|
38,554,150
|
|
Goodwill
|
35,913,229
|
|
Total consideration
|
$
|
74,467,379
|
|
The fair values of the if(we) trademarks were determined using an income approach, the fair value of software acquired, which represents the primary platform on which the if(we) apps operate, was determined using a cost approach and the fair value of customer relationships was determined using an excess earnings approach. These values are subject to change based on the final assessment of the deferred taxes acquired. The preliminary amounts assigned to the identifiable intangible assets are as follows:
|
|
|
|
|
|
Fair Value
|
Trademarks
|
$
|
9,895,000
|
|
Software
|
13,205,000
|
|
Customer relationships
|
730,000
|
|
Total identifiable intangible assets
|
$
|
23,830,000
|
|
The operating results of if(we) for the period from
April 3, 2017
to
September 30, 2017
, including revenues of
$13.0 million
and
$24.2 million
and net income of
$1.8 million
and
$0.9 million
, have been included in the Company’s condensed consolidated statements of operations and comprehensive income for the
three and nine months ended September 30, 2017
, respectively. The Company incurred a total of
$1.7 million
in transaction costs in connection with the if(we) Acquisition, which were included in acquisition and restructuring costs within the condensed consolidated statement of operations and comprehensive income for the
nine months ended September 30, 2017
.
The following pro forma information shows the results of the Company’s operations for the
three and nine months ended September 30, 2017 and 2016
as if the if(we) Acquisition had occurred on January 1, 2016. The pro forma information also includes the results of Skout as if the Skout Aquisition, as defined below, occurred on January 1, 2015 for comparability purposes. The pro forma information is presented for information purposes only and is not necessarily indicative of what would have occurred if the Skout Acquisition and if(we) Acquisition had been made as of that date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues
|
$
|
32,246,472
|
|
|
$
|
34,834,671
|
|
|
$
|
94,415,702
|
|
|
$
|
98,969,801
|
|
Net income
|
$
|
2,222,722
|
|
|
$
|
1,031,420
|
|
|
$
|
2,844,422
|
|
|
$
|
31,235,947
|
|
Basic earnings per share
|
$
|
0.03
|
|
|
$
|
0.02
|
|
|
$
|
0.04
|
|
|
$
|
0.63
|
|
Diluted earnings per share
|
$
|
0.03
|
|
|
$
|
0.02
|
|
|
$
|
0.04
|
|
|
$
|
0.56
|
|
Skout
On June 27, 2016, The Meet Group, and its wholly-owned subsidiaries, MeetMe Sub I, Inc., a Delaware corporation, and MeetMe Sub II, LLC, a Delaware limited liability corporation, (together, “The Meet Group”) entered into a merger agreement with Skout, a California corporation, pursuant to which The Meet Group agreed to acquire
100%
of the issued and outstanding shares of common stock of Skout for estimated cash consideration of
$30.3 million
, net of cash acquired of
$2.9 million
,
5,222,017
shares of The Meet Group common stock, and
$3.0 million
in contingent consideration liability (the “Skout Acquisition”). The Skout Acquisition closed
October 3, 2016
. The Company does not expect goodwill to be deductible for tax purposes.
The following is a summary of the consideration transferred:
|
|
|
|
|
|
At October 3,
2016
|
Cash consideration
(1)
|
$
|
33,155,532
|
|
Equity consideration
|
32,376,505
|
|
Contingent consideration
|
3,000,000
|
|
Total consideration
|
$
|
68,532,037
|
|
(1) Cash consideration includes a
$2.9 million
escrow payment to be paid out
18 months
from the date of the transaction.
The following is the purchase price allocation as of the
October 3, 2016
acquisition date:
|
|
|
|
|
|
At October 3,
2016
|
Cash and cash equivalents
|
$
|
2,851,338
|
|
Accounts receivable
|
4,146,927
|
|
Prepaid expenses and other current assets
|
280,379
|
|
Restricted cash
|
393,261
|
|
Property and equipment
|
396,998
|
|
Deferred tax asset
|
157,111
|
|
Intangible assets
|
18,230,000
|
|
Accounts payable
|
(1,055,802
|
)
|
Accrued expenses and other current liabilities
|
(208,628
|
)
|
Deferred revenue
|
(189,066
|
)
|
Net assets acquired
|
$
|
25,002,518
|
|
Goodwill
|
43,529,519
|
|
Total consideration
|
$
|
68,532,037
|
|
The fair value of the Skout trademark was determined using an income approach, the fair value of software acquired, which represents the primary platform on which the Skout apps operate, was determined using a cost approach and the fair value of customer relationships was determined using an excess earnings approach. The amounts assigned to the identifiable intangible assets are as follows:
|
|
|
|
|
|
Fair Value
|
Trademark
|
$
|
7,155,000
|
|
Software
|
2,500,000
|
|
Customer relationships
|
8,575,000
|
|
Total identifiable intangible assets
|
$
|
18,230,000
|
|
The Skout Acquisition called for contingent consideration of up to
$1.5 million
for each founder,
$3.0 million
in total, based on the Company achieving certain financial targets. The payment of the contingent consideration was due
one
year from closing. See
Note 3-
Fair Value Measurements
for further details on the payout of this contingent consideration. The Company incurred a total of
$2.5 million
in transaction costs in connection with the Skout Acquisition, which were included in acquisition and restructuring costs within the consolidated statement of operations and comprehensive income for the year ended
December 31, 2016
.
Note 3-
Fair Value Measurements
Accounting Standards Codification Topic 820,
Fair Value Measurement
(“ASC 820”), 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.
Recurring Fair Value Measurements
Items measured at fair value on a recurring basis include money market mutual funds, restricted cash, warrants to purchase common stock, 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
|
September 30, 2017
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Money market
|
$
|
2,890,770
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,890,770
|
|
Restricted cash
|
894,305
|
|
|
—
|
|
|
—
|
|
|
894,305
|
|
Total assets
|
$
|
3,785,075
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,785,075
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,897,266
|
|
|
$
|
2,897,266
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,897,266
|
|
|
$
|
2,897,266
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Money market
|
$
|
7,586,810
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,586,810
|
|
Restricted cash
|
393,484
|
|
|
—
|
|
|
—
|
|
|
393,484
|
|
Total assets
|
$
|
7,980,294
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,980,294
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,000,000
|
|
|
$
|
3,000,000
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,000,000
|
|
|
$
|
3,000,000
|
|
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, 2016
|
$
|
3,000,000
|
|
Changes in estimated fair value
|
(102,734
|
)
|
Balance as of September 30, 2017
|
$
|
2,897,266
|
|
The change in the estimated fair value is recorded in accrued expenses and changes in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheet as of
September 30, 2017
and condensed consolidated statement of cash flows for the
nine months ended September 30, 2017
, respectively.
The following table sets forth a summary of changes in the fair value of the Company’s Common Stock warrant liability, which represents a recurring measurement that was classified within Level 3 of the fair value hierarchy, wherein fair value is estimated using significant unobservable inputs. On June 30, 2016, Venture Lending & Leasing VI and VII provided notification of the surrender of their outstanding
341,838
liability classified warrants, which were net settled into common shares in the third quarter of 2016. As a result of the warrant exercise, no remeasurement of the warrant liability occurred subsequent to the exercise, and
no
warrants were outstanding as of September 30, 2016.
|
|
|
|
|
|
Convertible
Common Stock
Warrant
Liability
|
Balance as of December 31, 2015
|
$
|
1,035,137
|
|
Changes in estimated fair value
|
864,596
|
|
Warrant exercise
|
(1,899,733
|
)
|
Balance as of September 30, 2016
|
$
|
—
|
|
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 hierarchy during the
nine months ended September 30, 2017
and the year ended
December 31, 2016
.
Note 4 - Intangible Assets
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Trademarks and domain names
|
$
|
22,909,494
|
|
|
$
|
13,014,494
|
|
Customer relationships
|
10,470,000
|
|
|
9,740,000
|
|
Software
|
17,430,000
|
|
|
4,225,000
|
|
|
50,809,494
|
|
|
26,979,494
|
|
Less accumulated amortization
|
(15,951,388
|
)
|
|
(9,968,929
|
)
|
Intangible assets - net
|
$
|
34,858,106
|
|
|
$
|
17,010,565
|
|
Amortization expense was approximately
$2.4 million
and
$0.4 million
for the
three months ended September 30, 2017 and 2016
and
$6.0 million
and
$1.1 million
for the
nine months ended September 30, 2017 and 2016
, respectively. The weighted average amortizable life of the intangible assets was approximately
6.7 years
as of
September 30, 2017
.
Annual future amortization expense for the Company’s intangible assets is as follows:
|
|
|
|
|
Year ending December 31,
|
Amortization
Expense
|
Remaining in 2017
|
$
|
2,245,062
|
|
2018
|
8,391,414
|
|
2019
|
6,946,377
|
|
2020
|
5,797,947
|
|
2021
|
4,964,280
|
|
Thereafter
|
6,513,026
|
|
Total
|
$
|
34,858,106
|
|
Note 5 - Property and Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Servers, computer equipment and software
|
$
|
12,588,560
|
|
|
$
|
10,273,823
|
|
Office furniture and equipment
|
319,847
|
|
|
232,217
|
|
Leasehold improvements
|
571,787
|
|
|
443,123
|
|
|
13,480,194
|
|
|
10,949,163
|
|
Less accumulated depreciation
|
(10,120,179
|
)
|
|
(8,483,053
|
)
|
Property and equipment - net
|
$
|
3,360,015
|
|
|
$
|
2,466,110
|
|
Property and equipment depreciation expense was approximately
$0.6 million
and
$0.4 million
for the
three months ended September 30, 2017 and 2016
and
$1.6 million
and
$1.1 million
for the
nine months ended September 30, 2017 and 2016
, respectively.
Note 6-
Long-Term Debt
Credit Facilities
On
September 18, 2017
, in connection with the Lovoo Acquisition, as defined and discussed in Note 11- Subsequent Events, 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 “New Revolving Credit Facility”) and a
$60.0 million
delayed draw term loan facility (the “New Term Loan Facility,” and together with the “New Revolving Credit Facility”, the “New Credit Facilities”). The Company did not draw down on the New Credit Facilities as of
September 30, 2017
. Fees and direct costs incurred for the New Credit Facilities were
$0.6 million
and are included in other assets on the accompanying balance sheet as of
September 30, 2017
.
The Company intends to use the proceeds under the New Credit Facilities for general purposes, including the Lovoo Acquisition. The Company will also use proceeds of the New Revolving Credit Facility to finance working capital needs and for general corporate purposes. Amounts under the New 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 New 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 New 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 New Credit Facilities. The obligations of the Company and its subsidiaries under the New 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.
On
March 3, 2017
, in connection with the if(we) Acquisition discussed in
Note 2-
Acquisitions
, the Company entered into a credit agreement (the “Credit Agreement”) with the several banks and other financial institutions party thereto and JPMorgan Chase Bank, N.A., the Agent. The Credit Agreement provides for a
$15.0 million
revolving credit facility (the “Revolving Credit Facility”) and a
$15.0 million
term loan facility (the “Term Loan Facility,” and together with the “Revolving Credit Facility,” the “Credit Facilities”). On
April 3, 2017
, the Company drew down
$15.0 million
from its Term Loan Facility in connection with the if(we) Acquisition. On
September 18, 2017
, the Company paid in full the outstanding balance on the Term Loan Facility and recorded a loss on extinguishment of debt of approximately
$0.1 million
related to the debt issuance costs written off related to the Credit Facilities. This loss is included in interest expense for the
three and nine months ended September 30, 2017
and amortization of loan origination costs for the
nine months ended September 30, 2017
on the accompanying statement of operations and comprehensive income and statement of cash flows, respectively.
Note 7-
Commitments and Contingencies
Operating Leases
The Company leases its operating facilities in the U.S. under certain noncancelable operating leases that expire through 2022. These leases are renewable at the Company’s option.
Rent expense for the operating leases was approximately
$1.1 million
and
$0.4 million
for the
three months ended September 30, 2017 and 2016
and
$3.5 million
and
$1.2 million
for the
nine months ended September 30, 2017 and 2016
, respectively.
Capital Leases
The Company leases certain fixed assets under capital leases that expire in 2017. In 2012, the Company executed
two
noncancelable master lease agreements,
one
with Dell Financial Services and
one
with HP Financial Services. Both are for the purchase or lease of equipment for the Company’s data centers. Principal and interest are payable monthly at interest rates ranging from
4.5%
to
8.0%
per annum, rates varying based on the type of equipment purchased. The capital leases are secured by the leased equipment, and outstanding principal and interest are due monthly through October 2017. During the
nine months ended September 30, 2017
, the Company did
not
enter into any new capital lease agreements.
A summary of minimum future rental payments required under capital and operating leases as of
September 30, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating
Leases
|
Remaining in 2017
|
$
|
18,972
|
|
|
$
|
1,177,615
|
|
2018
|
—
|
|
|
3,959,618
|
|
2019
|
—
|
|
|
1,827,943
|
|
2020
|
—
|
|
|
432,758
|
|
2021
|
—
|
|
|
445,741
|
|
2022
|
—
|
|
|
112,253
|
|
Total minimum lease payments
|
$
|
18,972
|
|
|
$
|
7,955,928
|
|
Less: Amount representing interest
|
71
|
|
|
|
Total present value of minimum payments
|
18,901
|
|
|
|
Less: Current portion of such obligations
|
18,901
|
|
|
|
Long-term capital lease obligations
|
$
|
—
|
|
|
|
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.
On April 30, 2015, plaintiff F. Stephen Allen served a complaint on the Company that he filed on April 23, 2015, in the United States District Court for the Northern District of Oklahoma accusing the Company of breach of contract for its alleged failure to maintain the effectiveness of a registration statement for warrant shares. The complaint sought damages of not less than
$4 million
. On December 22, 2015, the Company entered into a Settlement Agreement and Release of Claims (the “Settlement and Release of Claims”) with F. Stephen Allen, resolving all claims relating to F. Stephen Allen v. MeetMe, Inc., Cause No. 4:15-cv-210-GKF-TLW. Pursuant to the Settlement and Release of Claims, the Company (i) paid F. Stephen Allen
$225,000
, (ii) entered into a
one
-year consulting agreement in exchange for a grant of
50,000
stock options, (iii) modified the terms of his outstanding Series 2 and Series 3 warrants, to reduce the amount outstanding under the Series 2 by
50,000
and to extend the expiration date on both Series 2 and Series 3 by
15 months
to June 21, 2017, prior to which all Series 2 and Series 3 warrants were exercised. On December 23, 2015, the Court dismissed the litigation with prejudice.
On September 29, 2015, the Company filed suit in the Court of Common Pleas of Philadelphia County, Pennsylvania, against Beanstock Media, Inc. (“Beanstock”) and Adaptive Medias, Inc. (“Adaptive”) for collection of approximately
$10 million
, in the aggregate, due under the Media Publisher Agreement (the “Web Agreement”) entered into on September 25, 2013 and the Advertising Agreement (the “Mobile Agreement”) entered into on December 23, 2014.
Pursuant to the Web Agreement, Beanstock had the exclusive right and obligation to fill all of the Company’s remnant desktop in-page display advertising inventory on www.meetme.com (the “Site”), excluding, (i) any inventory sold to a third party under an insertion order that was campaign or advertiser specific, (ii) any inventory the Company reserved in existing and future agreements with third parties for barter transactions and as additional consideration as part of larger business development transactions, and (iii) any inventory reserved for premium advertising for the Site. Pursuant to the Mobile Agreement, Beanstock had the right and obligation to fill substantially all of the Company’s advertising inventory on its MeetMe mobile app for iOS and Android, as well as the Site when accessed using a mobile device and as optimized for mobile devices (collectively, the “App”). The Mobile Agreement did not apply to interstitially placed advertisements, advertisements on versions of the App specific to the iPad and other Apple tablet devices, other mobile apps or in-app products or features on the App, including, without limitation, offer wall features and the Company’s Social Theater business.
On September 28, 2015, Adaptive filed suit in the Superior Court of California, County of Orange, against the Company, Beanstock, et al., alleging, in pertinent part, that the Company “aided and abetted” an individual who was an officer and director of Adaptive to breach his fiduciary duty to Adaptive with respect to Adaptive’s joining the Mobile Agreement. Adaptive’s complaint seeks from the Company
$600,000
plus unspecified punitive damages. The Company believes Adaptive’s allegations against it are without merit, and intends to defend against them and to pursue its collection action against Beanstock and Adaptive vigorously. On January 20, 2016, the Company received notice from the United States Bankruptcy Court, District of Delaware, that a Chapter 7 bankruptcy case against Beanstock had been filed on October 7, 2015. Both of the state court actions have been stayed by the courts as a result of the bankruptcy filing against Beanstock.
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 MeetMe, 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 company matching contributions to the Plan, based on a participant’s contribution. The Company’s 401(k) match expense totaled
$0.5 million
and
$0.3 million
for the
nine months ended September 30, 2017 and 2016
, 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.
Note 8-
Stockholder’s 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.
On March 1, 2017, the Company filed with the Secretary of State of the State of Delaware a Certificate of Elimination of the
1,000,000
shares of Series A-1 Preferred Stock that effectuated the elimination of the Series A-1 Preferred Stock, which then resumed the status of authorized but unissued shares of preferred stock. As of
September 30, 2017
, there were
no
longer any Series A-1 shares authorized or 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
.
In March 2017, the Company completed the underwritten public offering and sale of
9,200,000
shares (the “Shares”) of common stock at a price to the public of
$5.00
per share. The net proceeds from the sale of the Shares, after deducting the underwriters’ discount and other offering expenses, were approximately
$43.0 million
.
The Offering was conducted pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-190535) filed with the SEC under the Securities Act of 1933, as amended (the “Securities Act”) and declared effective on April 18, 2014.
The Company issued shares of common stock of
2,070,964
and
4,693,918
related to exercises of stock options,
913,195
and
934,991
related to restricted stock awards and
675,000
and
1,763,340
related to the exercise of warrants during the
nine months ended September 30, 2017
and the year ended
December 31, 2016
, respectively. During the year ended
December 31, 2016
,
200,000
warrants expired.
No
warrants expired during the
nine months ended September 30, 2017
.
On August 29, 2016, the Board of Directors authorized a
$15 million
share repurchase program (the “2016 Repurchase Program”). Repurchases under the 2016 Repurchase Program will be made in the open market or through privately negotiated transactions intended to comply with SEC Rule 10b-18, subject to market conditions, applicable legal requirements, and other relevant factors. The 2016 Repurchase Program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended at any time at the Company’s discretion. During the year ended
December 31, 2016
, the Company repurchased
848,145
shares for an aggregate purchase price of
$5.0 million
. These shares were immediately retired. The Company did
no
t repurchase any shares during the
nine months ended September 30, 2017
. The 2016 Repurchase Program was terminated on August 29, 2017.
Stock-Based Compensation
The fair values of share-based payments are 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. During
2017
and
2016
, the Company continued to use 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 restricted stock awards (“RSAs”) to its employees in April 2013. The cost of the 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 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 includes incremental stock-based compensation expense and is allocated on the condensed consolidated statement of operations and comprehensive income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Sales and marketing
|
$
|
123,549
|
|
|
$
|
94,997
|
|
|
$
|
325,853
|
|
|
$
|
250,729
|
|
Product development and content
|
1,182,802
|
|
|
368,150
|
|
|
3,112,845
|
|
|
1,075,803
|
|
General and administrative
|
993,345
|
|
|
448,343
|
|
|
2,363,348
|
|
|
1,228,310
|
|
Total stock-based compensation expense
|
$
|
2,299,696
|
|
|
$
|
911,490
|
|
|
$
|
5,802,046
|
|
|
$
|
2,554,842
|
|
As of
September 30, 2017
, there was approximately
$6.8 million
of total unrecognized compensation cost relating to stock options, which is expected to be recognized over a period of approximately
2.3 years
. As of
September 30, 2017
, the Company had approximately
$11.0 million
of unrecognized stock-based compensation expense related to RSAs, which will be recognized over the remaining weighted-average vesting period of approximately
2.2 years
.
Stock Option Plans
Amended and Restated 2012 Omnibus Incentive Plan
On December 16, 2016, the Company’s stockholders approved the Amended and Restated 2012 Omnibus Incentive Plan (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 Amended and Restated 2006 Stock Incentive Plan (the “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
September 30, 2017
, there were approximately
1.9 million
shares of common stock available for grant.
The Company recorded stock-based compensation expense related to options of approximately
$0.6 million
and
$0.4 million
for the
three months ended September 30, 2017 and 2016
, respectively, and
$1.6 million
and
$1.0 million
for the
nine months ended September 30, 2017 and 2016
, respectively. A summary of stock option activity under the 2012 Plan during the
nine months ended September 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Number of
Stock
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic Value
|
Outstanding at December 31, 2016
|
|
2,822,855
|
|
|
$
|
2.42
|
|
|
|
|
|
Granted
|
|
1,140,351
|
|
|
4.93
|
|
|
|
|
|
Exercised
|
|
(90,332
|
)
|
|
2.11
|
|
|
|
|
|
Forfeited or expired
|
|
(47,466
|
)
|
|
3.53
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
3,825,408
|
|
|
$
|
3.16
|
|
|
7.9
|
|
$
|
3,329,666
|
|
Exercisable at September 30, 2017
|
|
2,094,706
|
|
|
$
|
2.34
|
|
|
7.2
|
|
$
|
2,749,687
|
|
The total intrinsic values of options exercised were
$0.2 million
and
$3.2 million
during the
nine months ended September 30, 2017 and 2016
, respectively.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the
nine months ended September 30, 2017 and 2016
:
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
Risk-free interest rate
|
1.89%
|
|
1.39%
|
Expected term (in years)
|
6.0
|
|
6.0
|
Expected dividend yield
|
—
|
|
—
|
Expected volatility
|
83%
|
|
84%
|
Restricted Stock Awards Under 2012 Omnibus Incentive Plan
The Company granted
1,383,771
RSAs during the
nine months ended September 30, 2017
. 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 of approximately
$1.1 million
and
$0.5 million
for the
three months ended September 30, 2017 and 2016
, respectively, and
$2.7 million
and
$1.6 million
for the
nine months ended September 30, 2017 and 2016
, respectively. A summary of RSA activity under the 2012 Plan during the
nine months ended September 30, 2017
is as follows:
|
|
|
|
|
|
|
|
RSAs
|
Number of
RSAs
|
|
Weighted-Average
Stock Price
|
Outstanding at December 31, 2016
|
1,794,115
|
|
|
$
|
2.46
|
|
Granted
|
1,383,771
|
|
|
4.91
|
|
Vested
|
(999,832
|
)
|
|
2.34
|
|
Forfeited or expired
|
(93,450
|
)
|
|
3.79
|
|
Outstanding and unvested at September 30, 2017
|
2,084,604
|
|
|
$
|
4.08
|
|
2006 Stock Incentive Plan
On June 27, 2007, the Company’s stockholders approved the 2006 Stock Plan, providing for the issuance of up to
3,700,000
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
nine months ended September 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Number of
Stock
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted Average
Remaining
Contractual Life
|
|
Aggregate Intrinsic
Value
|
Outstanding at December 31, 2016
|
|
3,041,686
|
|
|
$
|
2.62
|
|
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
(1,664,176
|
)
|
|
1.31
|
|
|
|
|
|
Forfeited or expired
|
|
(183,428
|
)
|
|
4.94
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
1,194,082
|
|
|
$
|
4.08
|
|
|
4.0
|
|
$
|
54,747
|
|
Exercisable at September 30, 2017
|
|
1,149,902
|
|
|
$
|
4.09
|
|
|
4.1
|
|
$
|
54,747
|
|
The total intrinsic values of options exercised were
$6.3 million
and
$15.3 million
during the
nine months ended September 30, 2017 and 2016
, respectively.
Amended and Restated 2016 Inducement Omnibus Incentive Plan
On October 3, 2016, in connection with the closing of the Skout Acquisition, 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 Skout Acquisition, 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”) authorized an additional
2,000,000
shares of common stock under the 2016 Stock Plan. At the closing of 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.
Options under the 2016 Stock Plan
The Company recorded stock-based compensation expense related to options of approximately
$0.3 million
and
$0.6 million
for the
three and nine months ended September 30, 2017
, respectively. A summary of stock option activity under the 2016 Stock Plan during the
nine months ended September 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Number of
Stock
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic Value
|
Outstanding at December 31, 2016
|
|
310,000
|
|
|
$
|
6.02
|
|
|
|
|
|
Granted
|
|
575,000
|
|
|
4.95
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited or expired
|
|
(67,500
|
)
|
|
5.92
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
817,500
|
|
|
$
|
5.27
|
|
|
9.3
|
|
|
$
|
—
|
|
Exercisable at September 30, 2017
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the
nine months ended September 30, 2017
:
|
|
|
|
Nine Months Ended September 30,
|
|
2017
|
Risk-free interest rate
|
1.89%
|
Expected term (in years)
|
6.0
|
Expected dividend yield
|
—
|
Expected volatility
|
84%
|
Restricted Stock Awards under the 2016 Stock Plan
The Company granted
1,007,750
RSAs during the
nine months ended September 30, 2017
. 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 of approximately
$0.4 million
and
$0.9 million
for the
three and nine months ended September 30, 2017
, respectively. A summary of RSA activity under the 2016 Stock Plan during the
nine months ended September 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
RSAs
|
|
Number of
RSAs
|
|
Weighted-Average
Stock Price
|
Outstanding at December 31, 2016
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
1,007,750
|
|
|
5.47
|
|
Vested
|
|
—
|
|
|
—
|
|
Forfeited or expired
|
|
(71,500
|
)
|
|
5.74
|
|
Outstanding and unvested at September 30, 2017
|
|
936,250
|
|
|
$
|
5.45
|
|
Non-Plan Options
The Board of Directors has approved and our stockholders have ratified the issuance of stock options outside of our stock incentive plans. All options granted and outstanding have been fully expensed prior to 2016. A summary of non-plan option activity during the
nine months ended September 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Number of
Stock
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic Value
|
Outstanding at December 31, 2016
|
|
316,456
|
|
|
$
|
1.34
|
|
|
|
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
(316,456
|
)
|
|
1.34
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
The total intrinsic values of options exercised were
$1.0 million
and
$0.4 million
during the
nine months ended September 30, 2017 and 2016
, respectively.
Note 9- Warrant Transactions
Below is a summary of the number of shares issuable upon exercise of outstanding warrants and the terms and accounting treatment for the outstanding warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants as of
|
|
Weighted-Average Exercise Price
|
|
|
|
Balance Sheet Classification as of
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
Expiration
|
|
December 31, 2016
|
Allen, F. Stephen Series 3
|
—
|
|
|
425,000
|
|
|
$
|
3.55
|
|
|
6/21/2017
|
|
Equity
|
OTA LLC Series 2
|
—
|
|
|
250,000
|
|
|
$
|
3.55
|
|
|
6/21/2017
|
|
Equity
|
All warrants
|
—
|
|
|
675,000
|
|
|
|
|
|
|
|
In March 2006, the Company issued warrants to purchase
1,000,000
shares of common stock each at exercise prices of
$4.00
and
$7.00
as compensation for certain strategic initiatives. On February 19, 2010, the Company reduced the exercise price of the remaining
1,000,000
outstanding warrants to
$3.55
per share. On December 22, 2015, in conjunction with a litigation settlement, the Company repurchased
50,000
Series 2 warrants and extended the warrant expiration date to June 21, 2017. The fair value of the warrant modification was determined by comparing the fair value of the modified warrant with the fair value of the unmodified warrant on the modification date.
In 2016, F. Stephen Allen exercised
275,000
warrants with an exercise price of
$3.55
per share, with the Company issuing
275,000
shares of common stock. He sold
250,000
warrants to Warberg WF IV LP (“Warberg”), and as of December 31, 2016, Allen had
425,000
remaining warrants outstanding. In March, April and May 2017, F. Stephen Allen exercised the remaining
425,000
warrants with an exercise price of
$3.55
resulting in the Company issuing
425,000
shares of common stock.
In 2016, Warberg sold all of its
250,000
warrants to OTA LLC. In June 2017, OTA LLC exercised the remaining
250,000
warrants with an exercise price of
$3.55
resulting in the Company issuing
250,000
shares of common stock.
A summary of warrant activity for the
nine months ended September 30, 2017
is as follows:
|
|
|
|
|
|
|
|
Warrants
|
Number of warrants
|
|
Weighted-Average
Exercise Price
|
Outstanding at December 31, 2016
|
675,000
|
|
|
$
|
3.55
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
(675,000
|
)
|
|
$
|
3.55
|
|
Forfeited or expired
|
—
|
|
|
—
|
|
Outstanding and exercisable at September 30, 2017
|
—
|
|
|
$
|
—
|
|
Note 10- Income Taxes
As of
September 30, 2017
, the Company’s annual effective tax rate (AETR) from operations is
115.6%
, which is higher than the previous year due to increased permanent items as well as a lower level of earnings for the
nine months ended September 30, 2017
. For the
nine months ended September 30, 2016
, the AETR was less due to the release of the valuation allowance. The Company’s AETR is higher than the previous quarter due to an increase in permanent differences, mainly transaction costs, related to the if(we) Acquisition and the Lovoo Acquisition, as well as a lower level of earnings.
The Company recorded a net income tax benefit of approximately
$2.2 million
for the
three months ended September 30, 2017
and
$4.9 million
and
$27.1 million
for the
nine months ended September 30, 2017 and 2016
, respectively. The net income tax benefit recorded during the
nine months ended September 30, 2016
is primarily related to a release of the entire valuation allowance.
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). In the second quarter of
2016
, in part because the Company achieved three years of cumulative pretax income in the U.S. federal tax jurisdiction, management determined that there is sufficient positive evidence to conclude that it is more likely than not that net deferred tax assets of
$33.6 million
are realizable. As of
September 30, 2017
and
December 31, 2016
, the Company did
no
t record any valuation allowances related to deferred tax assets.
During the
three and nine months ended September 30, 2017 and 2016
, the Company had
no
material changes in uncertain tax positions.
Note 11- Subsequent Events
On September 18, 2017, the Company, TMG Holding Germany GmbH, a limited liability company organized under the laws of Germany and a wholly-owned subsidiary of the Company, entered into a Share Purchase Agreement (the “Purchase Agreement”) with Bawogo Ventures GmbH & Co. KG, a limited partnership organized under the laws of Germany and the seller guarantors, to purchase all of the outstanding shares of Lovoo GmbH (“Lovoo”), a limited liability company incorporated under the laws of Germany (the “Lovoo Acquisition”), for total consideration of
$70.0 million
plus working capital. The Lovoo Acquisition closed on
October 19, 2017
.
Included in the total consideration of
$70.0 million
is a
$5.0 million
contingent consideration in the form of an earn-out which is subject to certain conditions set forth in the Purchase Agreement, including the successful achievement of an Adjusted EBITDA target by Lovoo for the year ended December 31, 2017. At the closing of the Lovoo Acquisition, the Company granted restricted stock awards representing an aggregate of
534,500
shares of common stock to
97
former Lovoo employees as an inducement material to becoming non-executive employees of the Company.
The Company funded the Lovoo Acquisition from cash on hand and from a
$60.0 million
term credit facility from several banks and other financial institutions party thereto and JP Morgan Chase Bank, N.A., as administrative agent. See
Note 6-
Long-Term Debt
for more information regarding the Company’s credit facilities.
The Company has not provided an allocation of the preliminary purchase price as the initial accounting for the Lovoo Acquisition is incomplete.