THE MEET GROUP, INC. Cautionary Note Regarding Forward-looking Statements
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" ("MD&A") is set forth below. Certain statements in this report may
be considered to be "forward-looking statements" as that term is defined in the
U.S. Private Securities Litigation Reform Act of 1995.
In particular, these forward-looking statements include, among others, statements about:
• liquidity; • capital expenditures;
• opportunities for our business;
• growth of our business; and
• anticipations and expectations regarding mobile usage and monetization.
All statements other than statements of historical facts contained in this
report, including statements regarding our future financial position, liquidity,
business strategy, plans and objectives of management for future operations, are
forward-looking statements. The words "believe," "may," "estimate," "continue,"
"anticipate," "intend," "should," "plan," "could," "target," "potential," "is
likely," "expect" and similar expressions, as they relate to us, are intended to
identify forward-looking statements. We have based these forward-looking
statements largely on our current expectations and projections about future
events and financial trends that we believe may affect our financial condition,
results of operations, business strategy and financial needs.
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Important factors that could cause actual results to differ from those in the forward-looking statements include users' willingness to try new product offerings and engage in our app upgrades and new features, the risk that unanticipated events affect the functionality of our apps with popular mobile operating systems, any changes in such operating systems that degrade our apps' functionality and other unexpected issues which could adversely affect usage on mobile devices, the risk that the mobile advertising market will not grow, the ongoing existence of such demand and the willingness of our users to complete mobile offers or pay for Credits, Points, Gold, Icebreakers, Flash! and Shout!. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. One should read the following discussion in conjunction with our audited historical consolidated financial statements. MD&A contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in "Part I, Item 1A - Risk Factors" included elsewhere in this Annual Report. Additional risks that we do not presently know or that we currently believe are immaterial could materially and adversely affect any of our business, financial position, future results or prospects. The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements are contained in "Part I, Item 1A - Risk Factors" included elsewhere in this Annual Report. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see "Part I, Item 1A - Risk Factors" included elsewhere in this Annual Report and our other filings with theSEC .
Recent Developments
OnMarch 5, 2020 , we announced that we entered into a definitive agreement to be acquired by ProSieben's and General Atlantic's joint company NuCom, through Buyer. Pursuant to the Merger Agreement, dated as ofMarch 5, 2020 , by and among us, Buyer, Merger Sub and NuCom, solely for the purpose of guaranteeing Buyer's obligations under the Merger Agreement as set forth therein, and upon the terms and subject to the conditions thereof and in accordance with Section 251 of the DGCL, Merger Sub shall merge with and into us. See "Merger Agreement" in "Part I, Item 1 - Business" included elsewhere in this Annual Report for more details related to the Merger. Operating Metrics We measure website and app activity in terms of monthly active users ("MAUs") and daily active users ("DAUs"). We define an MAU as a registered user of one of our platforms who has logged in and visited within the last month of measurement. We define a DAU as a registered user of one of our platforms who has logged in and visited within the day of measurement. We define a video daily active user ("vDAU") as a registered user of one of our platforms who has logged in and visited Live, either as a broadcaster or a viewer, on the day of measurement. For the quarters endedDecember 31, 2019 , 2018 and 2017, total MAUs were 18.38 million, 17.58 million and 16.70 million, total DAUs were 4.77 million, 4.86 million and 4.95 million and total vDAUs were 0.84 million, 0.92 million and 0.30 million, respectively. 33
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The following table sets forth our average MAU, DAU and vDAU for the quarters
ended
Average for the Quarter Ended
December 31,
(in thousands) 2019 2018 2017
MAU 18,380 17,578 16,695
Average for the Quarter Ended
December 31,
(in thousands) 2019 2018 2017
DAU 4,771 4,865 4,953
Average for the Quarter Ended
December 31,
(in thousands) 2019 2018 2017
vDAU 843 916 299
2019 Highlights
• Revenue: Total revenue was
2019, up 18.5% from $178.6 million for the year ended December 31, 2018 .
• Net Income: Net income was
• Adjusted EBITDA: Adjusted EBITDA was
the heading "Non-GAAP Financial Measure" included in this MD&A.
• Cash and Cash Equivalents: Cash and Cash Equivalents totaled
as of
Trends in Our Metrics
In addition to MAUs and DAUs, we measure activity on our apps in terms of
average revenue per user ("ARPU"), average daily revenue per daily active user
("ARPDAU") and average daily video revenue per video daily active user
("vARPDAU"). We define ARPU as the quarterly revenue per average MAU. We define
ARPDAU as the average daily revenue per DAU. We define vARPDAU as the average
daily video revenue per vDAU. We define a mobile MAU as a user who accessed our
sites by one of our mobile apps or by the mobile optimized version of our
websites for MeetMe , Skout and LOVOO, whether on a mobile phone or tablet during
the month of measurement. We define a mobile DAU as a user who accessed our
sites by one of our mobile apps or by the mobile optimized version of our
websites for MeetMe , Skout and LOVOO, whether on a mobile phone or tablet during
the day of measurement.
In the quarter ended December 31, 2019 , we averaged 16.18 million mobile MAUs
and 18.38 million total MAUs, compared with 15.18 million mobile MAUs and 17.58
million total MAUs on average in the quarter ended December 31, 2018 , which
amounted to an increase of 0.99 million (or 6.6%) for mobile MAUs, and an
increase of 0.80 million (or 4.6%) for total MAUs. Mobile DAUs averaged 4.24
million for the quarter ended December 31, 2019 , compared with average mobile
DAUs of 4.27 million in the quarter ended December 31, 2018 , which amounted to a
decrease of 0.03 million (or 0.7%) for mobile DAUs. In the quarter ended
December 31, 2019 , we averaged 4.77 million total DAUs, compared with 4.86
million total DAUs on average in the quarter ended December 31, 2018 , which
amounted to a decrease of 0.09 million (or 1.9%) for total DAUs. In the quarter
ended December 31, 2019 , we averaged 0.84 million vDAUs, compared with 0.92
million vDAUs on average in the quarter ended December 31, 2018 , which amounted
to a decrease of 0.07 million (or 8.0%) for vDAUs.
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The following graphs set forth our average DAU, Mobile DAU, MAU, Mobile MAU and
vDAU by quarter for the years ended
[[Image Removed: chart-e6d5f5968b47cefe5e2.jpg]]
[[Image Removed: chart-d1ecd328f48fa437b2d.jpg]]
[[Image Removed: chart-326600d683fa9b05fb7.jpg]]
[[Image Removed: chart-25333e033935c481c3d.jpg]]
[[Image Removed: chart-e2208c85fdc899b0e13.jpg]]
In the quarter ended December 31, 2019 , we earned ARPU of $1.42 on the web and
ARPU of $3.22 on our mobile apps, compared with ARPU of $1.78 on the web and
ARPU of $2.92 on our mobile apps in the quarter ended December 31, 2018 , which
amounted to a decrease of $0.36 (or 20.2%) on the web and an increase of $0.30
(or 10.3%) on our mobile apps. In the quarter ended December 31, 2019 , we earned
ARPDAU of $0.08 on the web and ARPDAU of $0.13 on our mobile apps, compared with
ARPDAU of $0.10 on the web and ARPDAU of $0.11 on our mobile apps in the quarter
ended December 31, 2018 , which amounted to a decrease of $0.02 (or 20.0%) on the
web and an increase of $0.02 (or 18.2%) on our mobile apps. In the quarter ended
December 31, 2019 , we earned vARPDAU of $0.29 , compared with vARPDAU of $0.18 in
the quarter ended December 31, 2018 , which amounted to an increase of $0.11 (or
61.1%).
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The following graphs set forth our web ARPU, mobile ARPU, web ARPDAU, mobile ARPDAU and vARPDAU by quarter for the years endedDecember 31, 2019 and 2018: [[Image Removed: chart-4bf6371d291a9bbf60b.jpg]] [[Image Removed: chart-f937c3ad5155cd05c08.jpg]] [[Image Removed: chart-a67d399c258196396da.jpg]] [[Image Removed: chart-73e056ef9b66e5ac708.jpg]] [[Image Removed: chart-57109421880307d030f.jpg]] As the business continues to evolve and as subscription and in-app purchases contribute to a larger portion of revenue, we may choose to report new or additional metrics that are more closely tied to key business drivers or stop reporting metrics that are no longer relevant.
Factors Affecting Our Performance
We believe the following factors affect our performance: • Number of MAUs, DAUs and vDAUs: We believe our ability to grow web and
mobile MAUs, DAUs and vDAUs affects our revenue and financial results by
influencing the number of advertisements we are able to show, the value of
those advertisements and the volume of subscriptions and in-app purchases,
as well as our expenses and capital expenditures.
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• User Engagement: We believe changes in user engagement patterns affect our
revenue and financial performance. Specifically, the number of visits and
the amount of time spent by each MAU, DAU or vDAU generates affects the
number of advertisements we are able to display and therefore the rate
at which we are able to monetize our active user base. In addition, the
number of users that make in-app purchases and the amounts that theypurchase directly impact our revenue. We continue to create new features
and enhance existing features to drive additional engagement. The percent
of MAU and DAU that engage with our video products and their conversion to
paying users also affects the amount of in-app purchases revenue we are
able to earn.
• Advertising Rates: We believe our revenue and financial results are
materially dependent on industry trends, and any changes to CPM could
affect our revenue and financial results. In 2017, we experienced
declining advertising rates, which negatively affected our revenue. In
2018, we saw some stabilization in advertising rates and a return to
normal seasonality in advertising trends. In 2019, we saw continued
stabilization in advertising rates and another year of typicalseasonality. We expect to continue investing in new types of advertising
and new placements. Additionally, we are prioritizing initiatives that
generate revenue directly from users, including new in-app purchases
products and a premium subscription product, in part to reduce our
dependency on advertising revenue.
• User Geography: The geography of our users influences our revenue and
financial results because we currently monetize users in distinct
geographies at varying average rates. For example, ARPU in the U.S. and
Canada is significantly higher than in Latin America .
• New User Sources: The percentage of our new users that are acquired
through inorganic, paid sources impacts our financial performance,
specifically with regard to ARPU for web and mobile.
Inorganically-acquired users tend to have lower engagement rates, tend to
generate fewer visits and advertisement impressions and to be less likely
to make in-app purchases. When paid marketing campaigns are ongoing, our
overall usage and traffic increases due to the influx of
inorganically-acquired users, but the rate at which we monetize the
average active user overall declines as a result.
• Advertisement Inventory Management: Our revenue trends are affected by
advertisement inventory management changes affecting the number, size or
prominence of advertisements we display. In general, more
prominently-displayed advertising units generate more revenue per
impression.
•
through the Apple App Store and the Google Play Store . Our business will
suffer if we are unable to maintain good relationships with Apple andif we violate, or either company believes that we have violated, its terms
and conditions or if either of these platforms are unavailable for a
prolonged period of time.
• Seasonality: Historically, advertising spending has been seasonal with a
peak in the fourth quarter of each year. With the decline in advertising
rates in 2017, we did not experience this seasonality consistent with
prior years. In 2018 and 2019, we saw some stabilization in advertising
rates and a return to normal seasonality in advertising trends. We believe
this seasonality in advertising spending affects our quarterly results,
which historically have reflected a growth in advertising revenue between
the third and fourth quarters and a decline in advertising revenue between
the fourth and subsequent first and second quarters each year. Growth
trends in web and mobile MAUs, DAUs and vDAUs affect our revenue and
financial results by influencing the number of advertisements we are able
to show, the value of those advertisements, the volume of payments
transactions and our expenses and capital expenditures.
• Business Combinations: Acquisitions have been an important part of ourgrowth strategy. In 2016 and 2017, we acquired three companies (Skout,
if(we) and LOVOO), representing four significant brands for our portfolio
(Skout, Tagged, Hi5 and LOVOO). In 2019, we acquired Initech and the
Growlr app. Our ability to integrate acquired apps into our portfolio will
impact our financial performance. As a consequence of the contributions of
these businesses and acquisition-related expenses, our consolidated
results of operations may not be comparable between periods.
Changes in user engagement patterns from web to mobile, international
diversification and the rollout of Live also affect our revenue and financial
performance. We believe overall engagement as measured by the percentage of
users who create content (such as video broadcasts, status posts, messages or
photos) or generate feedback increases as our user base grows. We continue to
create new and improved features to drive social sharing and increase
monetization.
We believe our revenue trends are also affected by advertisement inventory management changes affecting the number, size or prominence of the advertisements we display and traditional seasonality.
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Comparison of Our Operating Results for the Years Ended
The following table sets forth our consolidated statements of operations for the years endedDecember 31, 2019 and 2018 and is used in the following discussions of our results of operations: Year Ended December 31, Change from Prior Year (in thousands) 2019 2018 ($) % Revenue$ 211,701 $ 178,613 $ 33,088 18.5 % Operating costs and expenses: Sales and marketing 34,332 32,086 2,246 7.0 % Product development and content 124,425 102,757 21,668 21.1 % General and administrative 21,931 21,094 837 4.0 % Depreciation and amortization 13,131 13,776 (645 ) (4.7 )% Acquisition, restructuring and other 414 5,038 (4,624 ) (91.8 )% Total operating costs and expenses 194,233 174,751 19,482 11.1 % Income from operations 17,468 3,862 13,606 352.3 % Other income (expense): Interest income 107 24 83 345.8 % Interest expense (1,301 ) (2,322 ) 1,021 (44.0 )% Gain (loss) on disposal of assets 41 (95 ) 136 (143.2 )% (Loss) gain on foreign currency transactions (51 ) 97 (148 ) (152.6 )% Other items of (expense) income, net (1 ) 44 (45 ) (102.3 )% Total other expense (1,205 ) (2,252 ) 1,047 (46.5 )% Income before income tax expense 16,263 1,610 14,653 910.1 % Income tax expense (4,929 ) (467 ) (4,462 ) 955.5 % Net income$ 11,334 $ 1,143 $ 10,191 891.6 % Revenue
Our revenue was
The following table sets forth our revenue disaggregated by revenue source for
the years ended
Year Ended December 31,
2019 2018
(in thousands) $ % $ %
User pay revenue:
Video $ 84,113 39.7 % $ 39,282 22.0 %
Subscription and other in-app products 61,683 29.2 % 68,048 38.1 %
Total user pay revenue 145,796 68.9 % 107,330 60.1 %
Advertising 65,905 31.1 % 71,283 39.9 %
Total revenue $ 211,701 100.0 % $ 178,613 100.0 %
The increase in revenue for the year ended December 31, 2019 was primarily
attributable to a $38.5 million increase in user pay revenue, which was
partially offset by a $5.4 million decrease in advertising revenue. The increase
in user pay revenue was primarily attributable to the continued growth in
revenue on Live across all of our apps. The decrease in advertising revenue was
primarily attributable to lower Social Theater revenue and lower web advertising
revenue, which were partially offset by a slight increase in mobile advertising
revenue for the year ended December 31, 2019 .
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Operating Costs and Expenses
• Sales and Marketing: Sales and marketing expenses increased
(or 7.0%) to
with sales and marketing expenses of $32.1 million for the year ended
December 31, 2018 . The increase in sales and marketing expenses for the
year ended
increased advertising expense to attract more users to our apps.
• Product Development and Content: Product development and content expenses
increased
of $102.8 million for the year ended December 31, 2018 . The increase in
product development and content expenses for the year ended December 31 ,2019 was primarily attributable to: an increase in variable mobile content
expense of
partially offset by a reduction for broadcaster rewards-breakage (a contra
expense) of
compensation expense;
expense;
increased safety and moderation expense. These increases were partially
offset by a $3.5 million decrease in Social Theater expenses.
• General and Administrative: General and administrative expenses increased
2019, compared with general and administrative expenses of
for the year ended
administrative expenses for the year ended
attributable to increases in bad debt expense of
stock-based compensation expense of
partially offset by decreases in office-related expense of
employee-related expense of
• Depreciation and Amortization: Depreciation and amortization expense
decreased
depreciation and amortization expense for the year ended
was primarily attributable to lower amortization of the intangible assets
recognized in our acquisitions of if(we) and LOVOO, which was partially
offset by the amortization of the intangible assets recognized in our
acquisition of Initech.
• Acquisition, Restructuring and Other: Acquisition, restructuring and other
expenses decreased $4.6 million (or 91.8%) to $0.4 million for the year
ended December 31, 2019 , compared with acquisition, restructuring and
other expenses of $5.0 million for the year ended December 31, 2018 .Acquisition, restructuring and other expenses included transaction costs,
including legal and diligence costs for acquisitions and other
non-recurring transactions, the accrual of the exit costs of
non-cancellable leases, employee-related restructuring costs and employee
exit and relocation costs. The decrease in acquisition, restructuring and
other expenses for the year ended
attributable to a decrease in employee exit costs of
current period non-recurring gain for a change in the fair value of the
contingent consideration liability for the Initech Acquisition of $0.9
million .
Interest Expense
Interest expense decreased $1.0 million (or 44.0%) to $1.3 million for the year
ended December 31, 2019 , compared with interest expense of $2.3 million for the
year ended December 31, 2018 . The decrease in interest expense for the year
ended December 31, 2019 was primarily attributable to a lower average debt
balance and lower effective interest rate.
Income Tax Expense
Income tax expense increased$4.5 million (or 955.5%) to$4.9 million for the year endedDecember 31, 2019 , which amounted to an effective tax rate ("ETR") of 30.3%, compared with income tax expense of$0.5 million for the year endedDecember 31, 2018 , which amounted to an ETR of 29.0%. The increase in our ETR for the year endedDecember 31, 2019 was primarily attributable to a change in the valuation allowance for certain state NOL carryforwards, higher state tax expenses and the geographic mix of our earnings in theU.S. andGermany . These increases were partially offset by windfall benefits associated with our stock-based compensation. 39
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Comparison of Our Operating Results for the Years Ended
The following table sets forth our consolidated statements of operations for the years endedDecember 31, 2018 and 2017 and is used in the following discussions of our results of operations: Year Ended December 31, Change From Prior Year (in thousands) 2018 2017 ($) % Revenue$ 178,613 $ 123,754 $ 54,859 44.3 % Operating costs and expenses: Sales and marketing 32,086 20,356 11,730 57.6 % Product development and content 102,757 60,704 42,053 69.3 % General and administrative 21,094 19,550 1,544 7.9 % Depreciation and amortization 13,776 11,574 2,202 19.0 %
Acquisition, restructuring and other 5,038 12,151 (7,113 ) (58.5 )%
- 56,429 (56,429 ) (100.0 )%
Total operating costs and expenses 174,751 180,764 (6,013 ) (3.3 )%
Income (loss) from operations 3,862 (57,010 ) 60,872 (106.8 )%
Other income (expense):
Interest income 24 6 18 300.0 %
Interest expense (2,322 ) (860 ) (1,462 ) 170.0 %
Loss on disposal of assets (95 ) - (95 ) (100.0 )%
Gain (loss) on foreign currency
transactions 97 (33 ) 130 (393.9 )%
Other items of income, net 44 9 35 388.9 %
Total other expense (2,252 ) (878 ) (1,374 ) 156.5 %
Income (loss) before income tax
expense 1,610 (57,888 ) 59,498 (102.8 )%
Income tax expense (467 ) (6,704 ) 6,237 (93.0 )%
Net income (loss) $ 1,143 $ (64,592 ) $ 65,735 (101.8 )%
Revenue
Our revenue was
The following table sets forth our revenue disaggregated by revenue source for
the years ended
Year Ended December 31,
2018 2017(1)
(in thousands) $ % $ %
User pay revenue:
Video $ 39,282 22.0 % $ 1,927 1.6 %
Subscription and other in-app products 68,048 38.1 % 31,865 25.7 %
Total user pay revenue 107,330 60.1 % 33,792 27.3 %
Advertising 71,283 39.9 % 89,962 72.7 %
Total revenue $ 178,613 100.0 % $ 123,754 100.0 %
(1) Prior period amounts have not been adjusted under the modified retrospective adoption method for the adoption of Accounting Standards Codification Topic 606.
The increase in revenue for the year endedDecember 31, 2018 was primarily attributable to a$73.5 million increase in user pay revenue, which was partially offset by an$18.7 million decrease in advertising revenue. The overall increase in revenue was primarily attributable to our acquisitions of if(we) and LOVOO, which occurred in the second and fourth quarters of 2017, respectively. The increase in user pay revenue was primarily attributable to the increased adoption of Live on ourMeetMe and Skout apps, where it was launched in 2017, and the launch of Live on our Tagged and LOVOO apps in 2018. The decrease in advertising revenue was primarily attributable to the decrease in CPM advertising rates. 40
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Operating Costs and Expenses
• Sales and Marketing: Sales and marketing expenses increased
(or 57.6%) to
with sales and marketing expenses of
December 31, 2017 . The increase in sales and marketing expenses for the year endedDecember 31, 2018 , which included a full year of sales and marketing expenses for if(we) and LOVOO, was primarily attributable to
apps,
of increased stock-based compensation expense. The increases in
employee-related expense and stock-based compensation expense were
primarily attributable to the if(we) and LOVOO acquisitions.
• Product Development and Content: Product development and content expenses
increased
of $60.7 million for the year ended December 31, 2017 . The increase in
product development and content expenses for the year ended December 31,
2018 , which included a full year of product development and contentexpenses for if(we) and LOVOO, was primarily attributable to an increase
in variable mobile content expense of $33.6 million , $3.1 million of
increased professional fees expense, $2.0 million of increased
employee-related expense, $1.4 million of increased data center and
technical operations expense, $0.8 million of increased safety and
moderation expense and
expense. The increase in variable mobile content expense was primarily
attributable to the if(we) and LOVOO acquisitions, as well as the
increased adoption and/or launch of Live on our apps. The increases in
employee-related expense, data center and technical operations expense and
stock-based compensation expense were primarily attributable to the if(we)
and LOVOO acquisitions.
• General and Administrative: General and administrative expenses increased
2018, compared with general and administrative expenses of
for the year ended
administrative expenses for the year ended
included a full year of general and administrative expenses for if(we) and
LOVOO, was primarily attributable to an increase in employee-related
expense of $1.5 million . The increase was primarily attributable to the
LOVOO acquisition.
• Depreciation and Amortization: Depreciation and amortization expense
increased
depreciation and amortization expense for the year ended
was primarily attributable to the amortization of intangible assets
recognized in the if(we) and LOVOO acquisitions.
• Acquisition, Restructuring and Other: Acquisition, restructuring and other
expenses decreased $7.2 million (or 58.5%) to $5.0 million for the year
ended December 31, 2018 , compared with acquisition, restructuring and
other expenses of $12.2 million for the year ended December 31, 2017 .Acquisition, restructuring and other expenses included employee retention
bonuses in connection with our acquisitions, transaction costs, including
legal and diligence costs for acquisitions, employee-related restructuring
costs, the accrual of the exit costs of non-cancellable leases and
employee exit and relocation costs. The decrease in acquisition,
restructuring and other expenses for the year ended
primarily attributable due to our acquisitions in 2017, which were not
repeated in 2018.
• Goodwill Impairment: In the fourth quarter of 2017, we determined a
million one-time, non-cash impairment charge was required for our
reporting unit, due predominantly to the market-driven impacts on
advertising revenue resulting from lower CPMs, which negatively affected
our results and outlook. We believe this non-cash impairment charge does
not impact our ability to generate cash flow in the future, and it is not
tax deductible.
Interest Expense
Interest expense increased $1.4 million (or 169.9%) to $2.3 million for the year
ended December 31, 2018 , compared with interest expense of $0.9 million for the
year ended December 31, 2017 . The increase in interest expense for the year
ended December 31, 2018 was primarily attributable to a higher average debt
balance and higher effective interest rate.
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Income Tax Expense
Income tax expense decreased$6.2 million (or 93.0%) to$0.5 million for the year endedDecember 31, 2018 , which amounted to an ETR of 29.0%, compared with income tax expense of$6.7 million for the year endedDecember 31, 2017 , which amounted to an ETR of 11.6%. The increase in our ETR for the year endedDecember 31, 2018 was primarily attributable to the geographic mix of our earnings in theU.S. andGermany , which was partially offset by an additional income tax benefit for the anticipated use of state NOLs and a reduction in the statutoryU.S. federal tax rate. Our income tax expense for the year endedDecember 31, 2017 included the effects of the enactment of the Tax Act and included additional expense of$7.7 million for the remeasurement of our deferred tax assets at the new statutoryU.S. federal tax rate of 21%, as well as a non-deductible goodwill impairment charge of$56.4 million .
Comparison of Our Stock-based Compensation Expense for the Years Ended
Stock-based compensation expense, included in our operating costs and expenses by category, increased$1.8 million (or 19.6%) to$11.1 million for the year endedDecember 31, 2019 , compared with stock-based compensation expense of$9.3 million for the year endedDecember 31, 2018 . Stock-based compensation expense represented 5.7% and 5.3% of operating costs and expenses for the years endedDecember 31, 2019 and 2018, respectively.
Stock-based compensation expense increased
As ofDecember 31, 2019 , there was$0.4 million ,$13.2 million and$3.0 million of total unrecognized stock-based compensation expense that is expected to be recognized over a weighted-average vesting period of 0.4 years, 1.8 years and 1.8 years for stock options, restricted stock awards ("RSAs") and performance share units ("PSUs"), respectively. Stock-based compensation expense includes incremental stock-based compensation expense and is allocated on the consolidated statements of operations and comprehensive income (loss) for the years endedDecember 31, 2019 , 2018 and 2017 as follows: For the Years Ended December 31, 2019 to 2018 2018 to 2017 (in thousands) 2019 2018 2017 Changes ($) Changes ($) Sales and marketing $ 412$ 904 $ 440 $ (492 ) $ 464 Product development and content 6,495 4,768 4,008 1,727 760 General and administrative 4,200 3,614 4,019 586 (405 ) Total stock-based compensation expense$ 11,107 $ 9,286 $ 8,467 $ 1,821 $ 819
The following table sets forth the composition of stock-based compensation
expense for the years ended
2019 2018 2017
Stock options $ 1,389 $ 2,097 $ 3,377
RSAs 8,428 6,560 5,090
PSUs 1,290 629 -
Total stock-based compensation expense
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Liquidity and Capital Resources
Cash Flows
The following table sets forth the changes in our cash and cash equivalents for the years endedDecember 31, 2019 , 2018 and 2017: (in thousands) 2019 2018
2017
Net cash provided by operating activities
$ 31,273 Net cash used in investing activities (13,323 ) (2,507 ) (128,004 ) Net cash (used in) provided by financing activities (25,314 ) (22,409 )
99,922
Change in cash and cash equivalents prior to effect of foreign currency exchange rate$ (1,021 ) $ 3,681 $ 3,191 Operating Activities We received$37.6 million ,$28.6 million and$31.3 million in cash flows from our operating activities for the years endedDecember 31, 2019 , 2018 and 2017, respectively.
The
The$2.7 million decrease in our operating cash inflows for the year endedDecember 31, 2018 was primarily attributable to lower working capital inflows, and the impact of non-cash tax expense for certain changes in our deferred tax assets resulting from the enactment of the Tax Act during the year endedDecember 31, 2017 . These decreases were partially offset by increased profitability, as well as higher depreciation and amortization expense and stock-based compensation expense over the year endedDecember 31, 2017 .
Investing Activities
We used
For the year endedDecember 31, 2019 , our cash used for investing activities was primarily attributable to cash consideration payments of$11.8 million for the Initech Acquisition, and$1.5 million in purchases of property and equipment.
For the year ended
For the year endedDecember 31, 2017 , our cash used for investing activities was primarily attributable to cash consideration payments of$126.2 million , which is presented net of cash acquired of$28.9 million , for the if(we) and LOVOO acquisitions, and$1.8 million in purchases of property and equipment.
Financing Activities
We used$25.3 million and$22.4 million in cash flows for our financing activities for the years endedDecember 31, 2019 and 2018, respectively, and received$99.9 million in cash flows from our financing activities for the year endedDecember 31, 2017 . For the year endedDecember 31, 2019 , our cash used for financing activities was primarily attributable to$22.5 million in purchases of our issued and outstanding common stock under our Share Repurchase Program, and the net repayment of any outstanding borrowings on our prior amended and restated credit agreement in connection with ourAugust 2019 debt refinancing. For the year endedDecember 31, 2018 , our cash used for financing activities was primarily attributable to$19.3 million of debt repayments, and a$5.0 million payment of contingent consideration for the achievement of certain financial targets set in connection with the LOVOO Acquisition. These financing cash outflows were partially offset by$2.6 million in proceeds from the exercise of employee stock options for the year endedDecember 31, 2018 . 43
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For the year endedDecember 31, 2017 , our cash received from financing activities was primarily attributable to$75.0 million in proceeds from the issuance of debt and$43.0 million in proceeds from the issuance of common stock to fund, in part, our acquisitions of if(we) and LOVOO. These financing cash inflows were partially offset by$18.8 million of debt repayments.
Cash and Cash Equivalents
The following table sets forth our cash and cash equivalents as a percentage of
our total assets as of
2019 2018
Cash and cash equivalents
$ 272,721 $ 271,253
Percentage of total assets 10.0 % 10.5 %
Our cash and cash equivalents are kept liquid to support our growing infrastructure needs for operational expansion. The majority of our cash and cash equivalents are concentrated in two large financial institutions.
As of
Sources of Liquidity
Our primary sources of liquidity are cash generated from operations, available cash, receivables and borrowings under our credit facilities, which are described in further detail in "Note 10 - Debt" to the "Consolidated Financial Statements" and the related notes thereto included elsewhere in this Annual Report. We believe these sources are sufficient to fund our planned operations and to meet our contractual obligations. As ofDecember 31, 2019 , we had an outstanding balance of$34.1 million on our term loan facility. The weighted-average interest rate on our term loan facility as ofDecember 31, 2019 was 3.76%. We also have a revolving credit facility with a borrowing capacity of$25.0 million , of which there were no outstanding borrowings as ofDecember 31, 2019 . Unused commitment fees on our revolving credit facility were 0.25% per annum as ofDecember 31, 2019 Capital Expenditures We have budgeted capital expenditures of$3.0 million for 2020, which we believe will support our growth of domestic and international business through increased capacity, performance improvement and expanded content.
Critical Accounting Policies and Estimates
To understand our financial statements, it is important to understand our critical accounting policies and estimates. The preparation of consolidated financial statements in conformity withU.S. generally accepted accounting principles ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions are required in the determination of business combinations and contingent consideration arrangements, income taxes, the valuation of long-lived assets, including property and equipment, definite-lived intangible assets and goodwill and accounting for contingencies. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. Our estimates are often based on complex judgments, probabilities and assumptions that we believe are reasonable but are inherently uncertain and unpredictable. For any given individual estimate or assumption made by us, there may also be other estimates or assumptions that are reasonable.
Our accounting policies and estimates are more fully described in "Note 1 - Description of Business, Basis of Presentation and Summary of Significant Accounting Policies" to the "Consolidated Financial Statements" and the related notes thereto included elsewhere in this Annual Report.
We consider an accounting policy or estimate to be critical if the accounting
policy or estimate requires us to make assumptions about matters that were
highly uncertain at the time the accounting estimate was made, and changes in
the estimate that are reasonably likely to occur from period to period, or the
use of different estimates that we reasonably could have used in the current
period, would have a material impact on our financial condition, results of
operations or cash flows.
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The following sets forth our most critical accounting policies and estimates.
Business Combinations and Contingent Consideration Arrangements
We account for all business combinations at fair value and expense acquisition costs as they are incurred. Any identifiable assets acquired and liabilities assumed are recognized and measured at their respective fair values as of the acquisition date. If information about facts and circumstances existing as of the acquisition date is incomplete at the end of the reporting period in which a business combination occurs, we will report provisional amounts for the items for which the accounting is incomplete. The measurement period ends once we receive sufficient information to finalize the fair values; however, the period will not exceed one year from the acquisition date. In connection with certain business combinations, we enter into agreements to transfer additional consideration based on the achievement of certain performance measures for a stated period after the acquisition date. We measure this contingent consideration at fair value as of the acquisition date and record such contingent consideration as a liability on our consolidated balance sheets. The fair value of each contingent consideration liability is remeasured at each reporting period with any change in fair value recognized as income or expense within operations in our consolidated statements of operations and comprehensive income (loss). See "Note 2 - Acquisition" to the "Consolidated Financial Statements" and the related notes thereto included elsewhere in this Annual Report for further information related to our business combinations and contingent consideration arrangements. Income Taxes We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We record deferred tax assets to the extent we believe these assets will more-likely-than-not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In the event we determine that we will not be able to realize our deferred tax assets in the future in excess of our net recorded amount, we will make an adjustment to the valuation allowance, which will increase the provision for income taxes.
See "Note 4 - Income Taxes" to the "Consolidated Financial Statements" and the related notes thereto included elsewhere in this Annual Report for further information related to our accounting for income taxes.
Long-lived Assets, Including Property and Equipment and Definite-lived Intangible Assets
Property and equipment is stated at cost, unless acquired in a business combination where such property and equipment is recorded at its acquisition-date fair value, and consists of servers, computer equipment, purchased software, office furniture and equipment and leasehold improvements. Depreciation is recorded using the straight-line method over the useful life of an asset, or at the lesser of the asset's useful life or the lease term for a leasehold improvement. Our definite-lived intangible assets consist of acquired trademarks, domain names, software for mobile apps and customer relationships and are initially recorded at their acquisition-date fair value. Amortization is recorded using an accelerated method based on projected revenue related to each asset over its respective estimated useful life. Property and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If an analysis is necessitated by the occurrence of a so-called "triggering event," then we compare the carrying amount of the asset with the estimated future undiscounted cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds its estimated expected undiscounted future cash flows, then we measure the amount of the impairment charge by comparing the carrying amount of the asset with its estimated fair value. Such analyses necessarily involve significant judgments and estimates on the part of us. For the years endedDecember 31, 2019 , 2018 and 2017, we did not recognize any impairment charges related to our property and equipment or our definite-lived intangible assets. See "Note 5 - Property and Equipment, Net" and "Note 7 - Intangible Assets, Net" to the "Consolidated Financial Statements" and the related notes thereto included elsewhere in this Annual Report for further information related to our property and equipment and definite-lived intangible assets. 45
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Goodwill reflects the cost of a business combination in excess of the fair values assigned to the identifiable net assets acquired.Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. We perform our annual impairment test as ofOctober 1st of a given calendar year, or more frequently if events or changes in circumstances indicate that goodwill might be impaired.Goodwill is tested for impairment at a level of reporting referred to as a reporting unit. Accounting for business combinations requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values.Goodwill as of the acquisition date is measured as the excess of the consideration transferred and the net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While we use best estimates and assumptions to accurately value all assets acquired and liabilities assumed as of the acquisition date, the estimates are inherently uncertain and subject to refinement. We have the option to first qualitatively assess whether it is more-likely-than-not that an impairment exists for one of our reporting units. Such qualitative factors include, but are not limited to, prevailing macroeconomic conditions, industry and market conditions, changes in costs, our financial performance and other entity-specific events and circumstances that impact our reporting units. When performing a quantitative test, we evaluate the recoverability of goodwill by estimating the fair value of our reporting units using multiple techniques, including an income-based approach using a discounted cash flows model, and a market-based approach using the guideline public company method and the guideline company transactions method. Based on a weighting of the results of these two techniques, a conclusion of fair value is estimated. The fair value is then compared to the carrying value of our reporting units. If the fair value of a reporting unit is less than its carrying value, we would recognize the excess of the reporting unit's carrying value over its fair value as an impairment charge, limited to the total amount of goodwill allocated to the reporting unit. In the fourth quarter of 2017, we determined a$56.4 million one-time, non-cash impairment charge was required for ourU.S. reporting unit, due predominantly to the market-driven impacts on advertising revenue resulting from lower CPMs, which negatively affected our results and outlook. We believe this non-cash impairment charge does not impact our ability to generate cash flow in the future, and it is not tax deductible. No such goodwill impairment charge was recognized for the years endedDecember 31, 2019 and 2018.
See "Note 8 -
Contingencies
We accrue for contingencies when the obligation is probable and the amount can be reasonably estimated. As facts concerning contingencies become known, we reassess our position and make appropriate adjustments to the consolidated financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal and other regulatory matters that are subject to change as events evolve and additional information becomes available.
See "Note 11 - Commitments and Contingencies" to the "Consolidated Financial Statements" and the related notes thereto included elsewhere in this Annual Report for further information related to our contingencies.
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Contractual Obligations
Our principal commitments consist of obligations for finance and operating leases, cloud data storage and debt.
The following table sets forth our commitments to settle contractual obligations
in cash as of
Less Than 1 1-3 Years 3-5 Years More Than 5
(in thousands) Total Year Years
Operating leases(1)
1,019 $ 1,114
Finance leases(2) 72 12 24 24 12
Cloud data storage(3) 14,320 5,248 7,925 1,147 -
Term loan facility 37,121 4,738 32,383 - -
Interest on term loan
facility(4) 2,996 1,238 1,758 - -
Total contractual
obligations $ 62,439 $ 13,597 $ 45,526 $ 2,190 $ 1,126
(1) The operating lease obligations relate to facilities and equipment we
lease in the U.S. and Germany .
(2) The finance lease obligations relate to office equipment we lease in
Germany.
(3) The cloud data storage obligations relate to Amazon Web Services and
Google Cloud costs.
(4) Includes principal and projected interest using our weighted average
interest rate of 3.76% as of December 31, 2019 .
Off-balance Sheet Arrangements
As ofDecember 31, 2019 , we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually-narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Non-GAAP Financial Measure
The following discussion and analysis includes both financial measures in accordance with GAAP, as well as Adjusted EBITDA (defined below), which is a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to, net income, operating income and cash flows from operating activities, liquidity or any other financial measures. They may not be indicative of our historical operating results nor are they intended to be predictive of potential future results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP. We believe that both management and stockholders benefit from referring to Adjusted EBITDA (defined below) in planning, forecasting and analyzing future periods. We use this non-GAAP financial measure in evaluating our financial and operational decision-making and as a means to evaluate period to period comparison. We define Adjusted EBITDA as net income (or loss) before interest expense, benefit from or provision for income taxes, depreciation and amortization expense, stock-based compensation expense, non-recurring acquisition, restructuring or other expenses, gain or loss on foreign currency transactions, gain or loss on sale or disposal of assets, bad debt expense outside the normal range and goodwill and long-lived asset impairment charges. We exclude stock-based compensation expense because it is non-cash in nature. We believe Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and analysts to evaluate and assess our core operating results from period to period after removing the impact of acquisition-related costs, and other items of a non-operational nature that affect comparability. We recognize Adjusted EBITDA has inherent limitations because of the excluded items. We have included a reconciliation of our net income (loss), which is the most comparable financial measure calculated in accordance with GAAP to Adjusted EBITDA. We believe providing this non-GAAP financial measure, together with the reconciliation to GAAP, helps investors make comparisons between us and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measure and the corresponding GAAP measure provided by each company under applicableSEC rules. 47
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The following table sets forth a reconciliation of net income (loss), a GAAP financial measure, to Adjusted EBITDA for the years endedDecember 31, 2019 , 2018 and 2017: Year Ended December 31, (in thousands) 2019 2018 2017 Net income (loss)$ 11,334 $ 1,143 $ (64,592 ) Interest expense 1,301 2,322 860 Income tax expense 4,929 467 6,704
Depreciation and amortization expense 13,131 13,776 11,574 Stock-based compensation expense
11,107 9,286 8,467
Goodwill impairment - -
56,429
Acquisition, restructuring and other 414 5,038
12,151
(Gain) loss on disposal of assets (41 ) 95
-
Loss (gain) on foreign currency transactions 51 (97 )
33 Adjusted EBITDA$ 42,226 $ 32,030 $ 31,626
Recent Accounting Pronouncements
For detailed information regarding recently-issued accounting pronouncements and their expected impacts on our consolidated financial statements, see "Note 1 - Description of Business, Basis of Presentation and Summary of Significant Accounting Policies" to the "Consolidated Financial Statements" and the related notes thereto included elsewhere in this Annual Report.
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