BUMBLE INC. You should read the following discussion and analysis of the financial condition and results of operations ofBuzz Holdings L.P. ("Bumble Holdings " or the "Successor") andWorldwide Vision Limited (the "Predecessor"), the accounting predecessor ofBuzz Holdings L.P. , in conjunction with our consolidated financial statements and the related notes included in Part II, "Item 8-Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties about our business and operations. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include without limitation those discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations and those identified in Part I, "Item 1A-Risk Factors."
Overview
Today, Bumble operates two apps, Bumble and Badoo. We are a leader in the fast-growing online dating space, which has become increasingly popular over the last decade. We launched the Bumble app in 2014 to address antiquated gender norms and a lack of kindness and accountability on the internet. By placing women at the center - where women make the first move - we are building a platform that is designed to be safe and empowering for women, and in turn, provide a better environment for everyone. The Badoo app, launched in 2006, was one of the pioneers of web and mobile free-to-use dating products. Badoo's mantra of "Date Honestly" extends our focus on building meaningful connections to everyone. How We Generate Revenue We monetize both the Bumble and Badoo apps via a freemium model where the use of our service is free and a subset of our users pay for subscriptions or in-app purchases to access premium features. These features maximize the probability of developing meaningful connections, improving their experience and saving them valuable time. On the Bumble app, our subscription offerings are called Bumble Boost and Bumble Premium. These subscription plan offerings currently include 1-day, 7-day, 1-month, 3-month, 6-month, or lifetime packages. Bumble users, both subscribers and non-subscribing users, can also access additional features through in-app purchases. On the Badoo app, our subscription offering is called Badoo Premium. Badoo Premium subscription plan offerings currently include 1-day, 7-day, 1-month, 3-month, 6-month, or lifetime packages. In addition, Badoo users, both subscribers and non-subscribing users, can also purchase Badoo Credits which they can use to acquire in-app features such as one-off popularity boosts. We also selectively monetize through video and banner advertising.
Overview of Financial Results
For the period from
• Total Revenue of $542.2 million , $40.0 million and $488.9 million ,
respectively;
• Bumble App Revenue of
respectively;
• Badoo App and Other Revenue of $205.0 million , $16.7 million and
$213.4 million , respectively;
• Net (Loss) Earnings of
respectively, representing Net (Loss) Earnings Margins of (20.3)%, (81.4)%
and 17.6% respectively;
• Adjusted EBITDA of $143.1 million , $9.4 million and $101.8 million
respectively, representing Adjusted EBITDA Margins of 26.4%, 23.4% and
20.8%, respectively;
• Net cash provided by (used in) operating activities of
$(3.3) million and$101.4 million , respectively, and Operating Cash Flow Conversion of (51.1%), 10.2% and 118.1%, respectively; and • Free Cash Flow of$45.6 million ,$(4.4) million and$91.7 million , respectively, representing Free Cash Flow Conversion of 31.9%, (46.4)% and 90.1%, respectively 51
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Key Operating Metrics
We regularly review a number of metrics, including the following key operating
metrics, to evaluate our business, measure our performance, identify trends in
our business, prepare financial projections and make strategic decisions. We
believe these operational measures are useful in evaluating our performance, in
addition to our financial results prepared in accordance with GAAP. Refer to the
section "Certain Definitions" at the beginning of this Annual Report for the
definitions of our Key Operating Metrics.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,(in thousands, except ARPPU) 2020 2019 2018 Key Operating Metrics Bumble App Paying Users 1,142.1 855.6 574.1 Badoo App and Other Paying Users 1,363.4 1,195.0 1,319.0 Total Paying Users 2,505.5 2,050.6 1,893.1 Bumble App Average Revenue per Paying User$ 26.30 $ 26.84 $ 23.57 Badoo App and Other Average Revenue per Paying User$ 12.69 $ 13.77 $ 11.80 Total Average Revenue per Paying User$ 18.89 $
19.22
Key Factors Affecting our Performance
Our results of operations and financial condition have been, and will continue to be, affected by a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Part I, "Item 1A-Risk Factors".
Growth in Users
We acquire new users through investments in marketing and brand as well as through word of mouth from existing users and others. We convert these users to Paying Users by introducing premium features which maximize the probability of developing meaningful connections and improving their experience. As we scale and our community grows larger, we are able to facilitate more meaningful connections as a result of the wider selection of potential matches. This in turn increases our brand awareness and increases conversion to one of our premium products. Our revenue growth primarily depends on Paying Users. While we believe we are in the early days of our opportunity, at some point we may face challenges increasing our Paying Users, including competition from alternative products and a lack of appealing product features. We may also at some point find that growth in Paying Users slows due to saturation of the online dating market.
Expansion into New Geographic Markets
We are focused on growing our platform globally, including through entering new markets and investing in under-penetrated markets. As we introduce the Bumble app to new markets throughoutEurope ,Asia , andLatin America we can leverage the local insights, scale, and infrastructure of Badoo's existing global footprint to efficiently enter new markets. The Badoo app can also leverage Bumble's marketing expertise and strength inNorth America to support growth in that market.
Expanding into new geographies will require increased costs related to marketing, as well as localization of product features and services. Potential risks to our expansion into new geographies will include competition and compliance with foreign laws and regulations.
As we expand into certain new geographies, we may see an increase in users who prefer to access premium features through our in-app purchase options rather than through our subscription packages which could impact our ARPPU. We may also see a lower propensity to pay as we enter certain new markets.
Growth in Monetization
We continually develop new monetization features and improve existing features
in order to increase adoption of in-app purchases and our subscription programs
striking a balance between the number of Paying Users and ARPPU. We also test
new pricing strategies, including different pricing tiers and user segmentation
and share those insights across our apps to optimize monetization.
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Many variables will impact our ARPPU, including the number of Paying Users and
mix of monetization offerings on our platform, as well as the effect of
demographic shifts and geographic differences on all of these variables. Our
pricing is in local currency and may vary between markets. As foreign currency
exchange rates change, translation of the statements of operations into U.S.
dollars could negatively impact revenue and distort year-over-year comparability
of operating results.
To the extent our ARPPU growth slows, our revenue growth will become
increasingly dependent on our ability to increase our Paying Users. In addition,
changes in mobile app store policies, including the recently announced change to
Google Play's in-app billing system policy, may adversely affect our results of
operations over time.
Investing in Growth While Driving Long-Term Profitability
Our mission-first strategy ensures that values guide our business decisions and our business performance enables us to drive impact through investment in technology, marketing and product innovation, balancing growth with long-term margins. We expect to continue to invest in technology, marketing and product innovation, while balancing driving growth with long-term margins. Key investment areas for our platform include machine learning capabilities, including continually improving our matching technology; features that prioritize security and privacy; and new premium offerings that add incremental value to Paying Users.
Attracting and Retaining Talent
Our business relies on our ability to attract and retain our talent, including engineers, data scientists, product designers and product developers. We believe that people want to work at a company that has purpose and aligns with their personal values, and therefore our ability to recruit talent is aided by our mission and brand reputation. We compete for talent within the technology industry.
Seasonality
We experience seasonality in user growth, user engagement, Paying User growth, and monetization on our platform. Historically, we see an increase in all of these metrics in the first quarter and during the Northern Hemisphere summer of the calendar year, and a slowdown in the rest of the calendar year. Our activity is also elevated in key seasonal calendar highs such as the January and February lead up toValentine's Day and the lead up to major holidays.
Impact of COVID-19
InMarch 2020 , theWorld Health Organization declared the COVID-19 a global pandemic. The COVID-19 outbreak has reached across the globe, resulting in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans intended to control the spread of the virus. While some of these measures have been relaxed in certain parts of the world, ongoing social distancing measures, and future prevention and mitigation measures, as well as the potential for some of these measures to be reinstituted in the event of repeat waves or mutations of the virus, are likely to have an adverse impact on global economic conditions and consumer confidence and spending, and could materially adversely affect demand, or users' ability to pay, for our products and services. In response to the COVID-19 outbreak, we have taken several precautions that may adversely impact employee productivity, such as requiring employees to work remotely, imposing travel restrictions, and temporarily closing office locations. We continue to monitor the rapidly-evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, and there may be developments outside our control requiring us to adjust our operating plan. As such, given the unprecedented uncertainty around the duration and severity of the impact on market conditions and the business environment, we cannot reasonably estimate the full impacts of the COVID-19 pandemic on our operating results in the future. For additional information, see "Item 1A-Risk Factors-General Risk Factors-Our business and results of operations" may be materially adversely affected by the recent COVID-19 outbreak or other similar outbreaks
Factors Affecting the Comparability of Our Results of Operations
As a result of a number of factors, our historical results of operations may not
be comparable from period to period or going forward. Set forth below is a brief
discussion of the key factors impacting the comparability of our results of
operations.
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--------------------------------------------------------------------------------The Sponsor Acquisition
OnJanuary 29, 2020 , we completed the Sponsor Acquisition, pursuant to which, among other things,Bumble Holdings acquiredWorldwide Vision Limited and its consolidated subsidiaries. For additional information, see Note 1, Organization and Basis of Preparation, within the audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The Sponsor Acquisition was accounted for as a business combination under Accounting Standards Codification 805, Business Combinations. The purchase consideration was allocated to the identifiable assets and liabilities ofWorldwide Vision Limited measured at their fair value as of the effective date of the Sponsor Acquisition. Any excess of the purchase consideration over the fair value of the identifiable assets and liabilities ofWorldwide Vision Limited was recognized as goodwill in our consolidated financial statements. In addition, we have recorded an increase in depreciation and amortization. In connection with the Sponsor Acquisition, inJanuary 2020 , we entered into a 7-year senior secured term loan facility in an original aggregate principal amount of$575.0 million (the "Initial Term Loan Facility") and a 5-year senior secured revolving credit facility in an aggregate principal amount of up to$50.0 million (the "Revolving Credit Facility"). The borrower under the Initial Term Loan Facility and the Revolving Credit Facility is a wholly owned subsidiary ofBumble Holdings ,Buzz Finco L.L.C. Accordingly, in periods after the Sponsor Acquisition, we have recorded an increase in interest expense. Concurrent with the Sponsor Acquisition, the Company also decided to no longer actively maintain and market certain platforms, including Chappy, Lumen and Huggle ("Inactive Platforms"). The decision to do so was based on the Company's greater focus on, and decision to use its resources for strengthening, its brands Bumble and Badoo. During the period fromJanuary 29, 2020 toDecember 31, 2020 , the period fromJanuary 1, 2020 toJanuary 28, 2020 and the years endedDecember 31, 2019 and 2018, the revenue associated with the Inactive Platforms is deemed immaterial. As a result of the Sponsor Acquisition, the Company incurred significant transaction costs such as legal, accounting, consulting, shadow equity and other expenses. These were incurred both in the period fromJanuary 1, 2020 toJanuary 28, 2020 and the period fromJanuary 29, 2020 toDecember 31, 2020 and resulted primarily in an increase in general and administrative expense.
The Distribution Financing Transaction
InOctober 2020 , we entered into an incremental senior secured term loan facility (the "Incremental Term Loan Facility" and, together with the Initial Term Loan Facility, the "Term Loan Facility"; the Term Loan Facility, together with the Revolving Credit Facility, the "Senior Secured Credit Facilities") with the same maturity as the Initial Term Loan Facility in an original aggregate principal amount of$275.0 million . The Incremental Term Loan provides for additional senior secured term loans with substantially identical terms as the Initial Term Loan Facility (other than the applicable margin). The borrower under the Incremental Term Loan Facility is a wholly owned subsidiary ofBumble Holdings ,Buzz Finco L.L.C. Bumble Holdings used the proceeds from the incremental borrowings under the Incremental Term Loan Facility, together with available cash, to declare a distribution of$360.0 million , of which approximately$334.3 million was paid to our pre-IPO owners onOctober 28, 2020 and$25.6 million was used to partially repay the loan to our Founder, and to pay related fees and expenses in connection therewith.
Initial Public Offering and Offering Transactions
OnFebruary 10, 2021 , our registration statement on Form S-1 relating to our initial public offering ("IPO") was declared effective by theSEC , and our Class A common stock began trading on the NASDAQ onFebruary 11, 2021 . Our IPO closed onFebruary 16, 2021 . For additional information, see Note 1, Organization and Basis of Preparation, to our consolidated financial statements included in Part II, "Item 8-Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.Bumble Inc. issued and sold 57.5 million shares of its Class A common stock in the IPO, including 7.5 million shares sold pursuant to the exercise in full by the underwriters of their option to purchase additional shares.Bumble Inc. used the proceeds (net of underwriting discounts) from the issuance of 9 million shares ($369.6 million ) to acquire an equivalent number of newly-issued Common Units from Buzz Holdings L.P, whichBuzz Holdings L.P. will in turn use to repay outstanding indebtedness under our Term Loan Facility totaling approximately$200.0 million in aggregate principal amount and approximately$148.3 million for general corporate purposes, and to bear all of the expenses of the IPO.Bumble Inc. used the proceeds (net of underwriting discounts) from the issuance of 48.5 million shares ($1,991.6 million ) to purchase or redeem an equivalent aggregate number of shares of Class A common stock and Common Units from our pre-IPO owners. We refer to the foregoing transactions as the "Offering Transactions". 54 --------------------------------------------------------------------------------
Reorganization Transactions Prior to the completion of the IPO, we undertook certain reorganization transactions (the "Reorganization Transactions") such thatBumble Inc. is now a holding company, and its sole material asset is a controlling equity interest inBumble Holdings . As the general partner ofBumble Holdings ,Bumble Inc. now operates and controls all of the business and affairs ofBumble Holdings , has the obligation to absorb losses and receive benefits fromBumble Holdings and, throughBumble Holdings and its subsidiaries, conduct our business. The Reorganization Transactions were accounted for as a reorganization of entities under common control. As a result, the consolidated financial statements ofBumble Inc. will recognize the assets and liabilities received in the Reorganization Transactions at their historical carrying amounts, as reflected in the historical financial statements ofBumble Holdings , the accounting predecessor.Bumble Inc. will consolidateBumble Holdings on its consolidated financial statements and record a non-controlling interest, related to the Common Units and the Incentive Units held by our pre-IPO owners, on its consolidated balance sheet and statement of operations.Bumble Inc. is a corporation forU.S. federal and state income tax purposes. Each ofBumble Inc.'s accounting predecessor,Bumble Holdings , andBumble Holdings' accounting predecessor,Worldwide Vision Limited , is, and has been since the Sponsor Acquisition, treated as a flow-through entity forU.S. federal income tax purposes, and as such, has generally not been subject toU.S. federal income tax at the entity level. Accordingly, the historical results of operations and other financial information set forth in this Annual Report do not include any material provisions forU.S. federal income tax. Following our initial public offering,Bumble Inc. paysU.S. federal and state income taxes as a corporation on its share ofBumble Holdings' taxable income. In addition, in connection with the Reorganizations Transactions and our IPO, we entered into the tax receivable agreement as described under "Item 13-Certain Relationships and Related Transactions, and Director Independence-Tax Receivable Agreement". Public Company Costs In preparation for our IPO, we incurred significant one-off costs such as legal, accounting, consulting, investor relations and other expenses. Accordingly, in the period fromJanuary 29, 2020 toDecember 31, 2020 , we have recorded an increase in general and administrative expense. As a result of becoming a public company, we expect to incur additional costs such as personnel, legal, regulatory, insurance, accounting, investor relations and other expenses that we did not incur as a private company.
Components of Results of Operations
Our business is organized into a single reportable segment.
Revenue
We monetize both the Bumble and Badoo apps via a freemium model where the use of our service is free and a subset of our users pay for subscriptions or in-app purchases to access premium features. Subscription revenue is presented net of taxes, refunds and credit card chargebacks. This revenue is initially deferred and is recognized using the straight-line method over the term of the applicable subscription period. Revenue from lifetime subscriptions is deferred over the average estimated expected period of the subscriber relationship, which is currently estimated to be twelve months. Revenue from the purchase of in-app features is recognized based on usage. We also earn revenue from online advertising and partnerships, which are not a significant part of our business. Online advertising revenue is recognized when an advertisement is displayed. Revenue from partnerships is recognized according to the contractual terms of the partnership.
Cost of revenue
Cost of revenue consists primarily of in-app purchase fees due on payments processed through theApple App Store andGoogle Play Store . Purchases on Android, mobile web and desktop have additional payment methods, such as credit card or via telecom providers. These purchases incur fees which vary depending on payment method. Purchase fees are deferred and expensed over the same period as revenue. 55
-------------------------------------------------------------------------------- Cost of revenue also includes data center expenses such as rent, power and bandwidth for running servers and associated employee costs. Expenses relating to customer care functions such as customer service, moderators and other auxiliary costs associated with providing services to customers such as fraud prevention are also included within cost of revenue.
Selling and marketing expense
Selling and marketing expense consists primarily of brand marketing, digital and social media spend, field marketing and compensation expense (including stock-based compensation) and other employee-related costs for personnel engaged in sales and marketing functions.
General and administrative expense
General and administrative expense consists primarily of compensation (including stock-based compensation) and other employee-related costs for personnel engaged in executive management, finance, legal, tax and human resources. General and administrative expense also consists of transaction costs, changes in fair value of contingent earn-out liability, expenses associated with facilities, information technology, external professional services, legal costs and settlement of legal claims and other administrative expenses.
Product development expense
Product development expense consists primarily of compensation (including stock-based compensation) and other employee-related costs for personnel engaged in the design, development, testing and enhancement of product offerings and related technology.
Depreciation and amortization expense
Depreciation and amortization expense is primarily related to computer equipment, leasehold improvements, furniture and fixtures, developed technology, user base, white label contracts, trademarks and other definite-lived intangible assets. Interest (expense) income Interest (expense) income consists of interest income received on related party loans receivables and interest expense incurred in connection with our long-term debt. Other expense, net
Other expense, net consists of insurance reimbursement proceeds, fair value changes in derivatives and equity investments and impacts from foreign exchange transactions.
Income tax provision Income tax provision represents the income tax expense associated with our operations based on the tax laws of the jurisdictions in which we operate. These foreign jurisdictions have different statutory tax rates thanthe United States . Our effective tax rates will vary depending on the relative proportion of foreign to domestic income, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. 56 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth our consolidated statement of operations information for the periods presented:
Successor Predecessor
Period from Period from
January 29, January 1,
through through Year Ended Year Ended
December 31, January 28, December 31, December 31,
(in thousands) 2020 2020 2019 2018
Revenue $ 542,192 $ 39,990 $ 488,940 $ 360,105
Operating costs and expenses:
Cost of revenue 146,629 10,790 139,767 110,259
Selling and marketing expense 152,588 11,157 142,902 93,605
General and administrative expense 178,615 44,907 67,079 128,981
Product development expense 46,994 4,087 39,205 37,517
Depreciation and amortization expense 91,767 408 6,734 5,957
Total operating costs and expenses 616,593 71,349 395,687 376,319
Operating (loss) income (74,401 ) (31,359 ) 93,253 (16,214 )
Interest (expense) income (22,134 ) 50 202 4
Other expense, net (5,525 ) (882 ) (1,473 ) (4,428 )
(Loss) earnings before tax (102,060 ) (32,191 ) 91,982 (20,638 )
Income tax provision (8,126 ) (365 ) (6,138 ) (3,031 )
Net (loss) earnings (110,186 ) (32,556 ) 85,844 (23,669 )
Net earnings (loss) attributable to
noncontrolling interests 808 1,917 19,698 (2,150 )
Net (loss) earnings attributable to
Buzz Holdings L.P. owners / Worldwide
Vision Limited shareholders $ (110,994 ) $ (34,473 ) $ 66,146 $ (21,519 ) The following table sets forth our consolidated statement of operations information as a percentage of revenue for the periods presented:
Successor Predecessor
Period from Period from
January 29, January 1,
through through Year Ended Year Ended
December 31, January 28, December 31, December 31,
2020 2020 2019 2018
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Operating costs and expenses:
Cost of revenue 27.0 % 27.0 % 28.6 % 30.6 %
Selling and marketing expense 28.1 % 27.9 % 29.2 % 26.0 %
General and administrative expense 32.9 % 112.3 % 13.7 % 35.8 %
Product development expense 8.7 % 10.2 % 8.0 % 10.4 %
Depreciation and amortization expense 16.9 % 1.0 % 1.4 % 1.7 %
Total operating costs and expenses 113.7 % 178.4 % 80.9 % 104.5 %
Operating (loss) income (13.7 )% (78.4 )% 19.1 % (4.5 )%
Interest (expense) income (4.1 )% 0.1 % 0.0 % 0.0 %
Other expense, net (1.0 )% (2.2 )% (0.3 )% (1.2 )%
(Loss) earnings before tax (18.8 )% (80.5 )% 18.8 % (5.7 )%
Income tax provision (1.5 )% (0.9 )% (1.3 )% (0.8 )%
Net (loss) earnings (20.3 )% (81.4 )% 17.6 % (6.6 )%
Net earnings (loss) attributable to
noncontrolling interests 0.1 % 4.8 % 4.0 % (0.6 )%
Net (loss) earnings attributable to
Buzz Holdings L.P. owners / Worldwide
Vision Limited shareholders (20.5 )% (86.2 )% 13.5 % (6.0 )%
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The following table sets forth the stock-based compensation expense included in operating costs and expenses:
Successor Predecessor
Period from Period from
January 29, January 1,
through through Year Ended Year Ended
December 31, January 28, December December 31,
(in thousands) 2020 2020 31, 2019 2018
Cost of revenue $ 615 $ - $ - $ -
Selling and marketing expense 2,055 75 421 -
General and administrative expense 17,318 3,997 1,229 148
Product development expense 7,480 84 510 107
Total stock-based compensation expense
Comparison of the Period fromJanuary 29, 2020 toDecember 31, 2020 (Successor), the Period fromJanuary 1, 2020 toJanuary 28, 2020 (Predecessor) and Year EndedDecember 31, 2019 (Predecessor) Revenue Successor Predecessor Period from Period from January 29, January 1, Year through through Ended December 31, January 28, December 31, (in thousands) 2020 2020 2019 Bumble App$ 337,237 $ 23,256 $ 275,545 Badoo App and Other 204,955 16,734 213,395 Total Revenue$ 542,192 $ 39,990 $ 488,940 Revenue was$542.2 million for the period fromJanuary 29, 2020 toDecember 31, 2020 ,$40.0 million for the period fromJanuary 1, 2020 toJanuary 28, 2020 , and$488.9 million for the year endedDecember 31, 2019 . Revenue in the period fromJanuary 29, 2020 toDecember 31, 2020 was impacted by a reduction in deferred revenue of$15.0 million recorded in purchase accounting. Bumble App Revenue was$337.2 million for the period fromJanuary 29, 2020 toDecember 31, 2020 ,$23.3 million for the period fromJanuary 1, 2020 toJanuary 28, 2020 , and$275.5 million for the year endedDecember 31, 2019 . This change was primarily driven by a 33.5% increase in the number of Bumble App Paying Users to 1.1 million.Badoo App and Other Revenue was$205.0 million for the period fromJanuary 29, 2020 toDecember 31, 2020 ,$16.7 million for the period fromJanuary 1, 2020 toJanuary 28, 2020 , and$213.4 million for the year endedDecember 31, 2019 . This change was primarily driven by a 14.1% increase in the number ofBadoo App and Other Paying Users to 1.4 million for the year endedDecember 31, 2020 . In addition,Badoo App and Other Revenue includes advertising and partnership revenue of$13.0 million ,$1.2 million , and$16.0 million for the period fromJanuary 29, 2020 toDecember 31, 2020 , for the period fromJanuary 1, 2020 toJanuary 28, 2020 , and for the year endedDecember 31, 2019 , respectively. Cost of revenue Successor Predecessor Period from Period from January 29, January 1, through through Year Ended December 31, January 28, December 31, (in thousands, except percentages) 2020 2020 2019 Cost of revenue$ 146,629 $ 10,790 $ 139,767 Percentage of revenue 27.0 % 27.0 % 28.6 % Cost of revenue was$146.6 million for the period fromJanuary 29, 2020 toDecember 31, 2020 ,$10.8 million for the period fromJanuary 1, 2020 toJanuary 28, 2020 , and$139.8 million for the year endedDecember 31, 2019 . This change was primarily driven by growth in in-app purchase fees due to increasing revenue. 58 --------------------------------------------------------------------------------
Selling and marketing expense
Successor Predecessor
Period from Period from
January 29, January 1,
through through Year Ended
December 31, January 28, December 31,
(in thousands, except percentages) 2020 2020 2019
Selling and marketing expense
28.1 % 27.9 % 29.2 %
Selling and marketing expense was $152.6 million for the period from January 29,
2020 to December 31, 2020 , $11.2 million for the period from January 1, 2020 to
January 28, 2020 , and $142.9 million for the year ended December 31, 2019 . This
change was primarily due to an increase in digital and social media marketing
costs. In addition, selling and marketing expense also increased due to
stock-based compensation which was $2.1 million in the period from January 29,
2020 to December 31, 2020 , compared to $0.1 million in the period from January
1, 2020 to January 28, 2020 and $0.4 million for the year ended December 31,
2019 .
General and administrative expense
Successor Predecessor
Period from Period from
January 29, January 1,
through through Year Ended
December 31, January 28, December 31,
(in thousands, except percentages) 2020 2020 2019
General and administrative expense
32.9 % 112.3 % 13.7 %
General and administrative expense was $178.6 million for the period from
January 29, 2020 to December 31, 2020 , $44.9 million for the period from January
1, 2020 to January 28, 2020 , and $67.1 million for the year ended December 31,
2019 . The change was primarily due to transaction costs of $66.3 million and
$40.3 million in the period from January 29, 2020 to December 31, 2020 and the
period from January 1, 2020 to January 28, 2020 , respectively. The increase in
the Successor Period was also driven by a $27.8 million change in the fair value
of the contingent earn-out liability, increased personnel-related expense driven
by headcount and stock-based compensation, which was $17.3 million in the period
from January 29, 2020 to December 31, 2020 , $4.0 million in the period from
January 1, 2020 to January 28, 2020 driven by the shadow equity awards of $3.8
million in connection with the Sponsor Acquisition and $1.2 million in the year
ended December 31, 2019 .
Product development expense
Successor Predecessor
Period from Period from
January 29, January 1,
through through Year Ended
December 31, January 28, December 31,
(in thousands, except percentages) 2020 2020 2019
Product development expense 46,994 4,087 39,205
Percentage of revenue 8.7 % 10.2 % 8.0 %
Product development expense was $47.0 million for the period from January 29,
2020 to December 31, 2020 , $4.1 million for the period from January 1, 2020 to
January 28, 2020 , and $39.2 million for the year ended December 31, 2019 . The
change was primarily due to increased personnel-related expense as a result of
higher employee headcount in product development functions and stock-based
compensation, which was $7.5 million in the period from January 29, 2020 to
December 31, 2020 , $0.1 million in the period from January 1, 2020 to January
28, 2020 and $0.5 million in the year ended December 31, 2019 .
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--------------------------------------------------------------------------------Depreciation and amortization expense
Successor Predecessor
Period from Period from
January 29, January 1,
through through Year Ended
December 31, January 28, December 31,
(in thousands, except percentages) 2020 2020 2019
Depreciation and amortization expense $ 91,767 $ 408 $ 6,734
Percentage of revenue 16.9 % 1.0 % 1.4 %
Depreciation and amortization expense was $91.8 million for the period from
January 29, 2020 to December 31, 2020 , $0.4 million for the period from January
1, 2020 to January 28, 2020 , and $6.7 million for the year ended December 31,
2019 . The increase was primarily due to increased expense in the period from
January 29, 2020 to December 31, 2020 related to the amortization of
finite-lived intangible assets recognized in connection with the Sponsor
Acquisition.
Interest (expense) income
Successor Predecessor
Period from Period from
January 29, January 1,
through through Year Ended
December 31, January 28, December 31,
(in thousands, except percentages) 2020 2020 2019
Interest (expense) income $ (22,134 ) $ 50 $ 202
Percentage of revenue (4.1 )% 0.1 % 0.0 %
Interest (expense) income was $(22.1) million for the period from January 29,
2020 to December 31, 2020 , $0.1 million for the period from January 1, 2020 to
January 28, 2020 and $0.2 million for the year ended December 31, 2019 . The
change was primarily due to interest expense and amortization of deferred
financing fees on our long-term debt obligation in connection with the Sponsor
Acquisition.
Other expense, net
Successor Predecessor
Period from Period from
January 29, January 1,
through through Year Ended
December 31, January 28, December 31,
(in thousands, except percentages) 2020 2020 2019
Other expense, net $ 5,525 $ 882 $ 1,473
Percentage of revenue 1.0 % 2.2 % 0.3 %
Other expense, net was $5.5 million for the period from January 29, 2020 to
December 31, 2020 , $0.9 million for the period from January 1, 2020 to January
28, 2020 , and $1.5 million for the year ended December 31, 2019 . The change was
primarily due to net foreign exchange losses, which were $14.2 million in the
period from January 29, 2020 to December 31, 2020 , $0.5 million in the period
from January 1, 2020 to January 28, 2020 and $1.2 million in the years ended
December 31, 2019 , $1.6 million of fair value loss on derivatives during the
period from January 29, 2020 to December 31, 2020 and partially offset by a $9.3
million insurance reimbursement related to the putative class action lawsuit in
the period from January 29, 2020 to December 31, 2020 .
Income tax provision
Successor Predecessor
Period from Period from
January 29, January 1,
through through Year Ended
December 31, January 28, December 31,
(in thousands, except percentages) 2020 2020 2019
Income tax provision $ 8,126 $ 365 $ 6,138
Effective income tax rate (8.0 )% (1.1 )% 6.7 %
60
-------------------------------------------------------------------------------- For further detail of income tax matters, see Note 4, Income Taxes, within the audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Income tax provision was$8.1 million for the period fromJanuary 29, 2020 toDecember 31, 2020 ,$0.4 million for the period fromJanuary 1, 2020 toJanuary 28, 2020 , and$6.1 million for the year endedDecember 31, 2019 . The increase in income tax provision was primarily driven by the results of operations, nondeductible expenses incurred, including those incurred in connection with the Sponsor Acquisition, and incremental tax expense incurred as a result of tax rate increase from 17% to 19% in theUnited Kingdom . For a comparative discussion of our results of operations for the years endedDecember 31, 2019 andDecember 31, 2018 , see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations" in our Prospectus, datedFebruary 10, 2021 , filed with theSEC pursuant to Rule 424(b)(4) onFebruary 12, 2021 .
Non-GAAP Financial Measures
We report our financial results in accordance with GAAP, however, management believes that certain non-GAAP financial measures provide users of our financial information with useful supplemental information that enables a better comparison of our performance across periods. We believe Adjusted EBITDA provides visibility to the underlying continuing operating performance by excluding the impact of certain expenses, including income tax provision, interest (income) expense, depreciation and amortization, stock-based compensation expense, foreign exchange loss (gain), changes in fair value of contingent earn-out liability and interest rate swaps, transaction costs and one-time litigation costs, as management does not believe these expenses are representative of our core earnings. We also provide Adjusted EBITDA Margin, which is calculated as Adjusted EBITDA divided by revenue. In addition to Adjusted EBITDA and Adjusted EBITDA Margin, we believe Free Cash Flow and Free Cash Flow Conversion provide useful information regarding how cash provided by operating activities compares to the capital expenditures required to maintain and grow our business, and our available liquidity, after funding such capital expenditures, to service our debt, fund strategic initiatives and strengthen our balance sheet, as well as our ability to convert our earnings to cash. Additionally, we believe such metrics are widely used by investors, securities analysis, ratings agencies and other parties in evaluating liquidity and debt-service capabilities. We calculate Free Cash Flow and Free Cash Flow Conversion using methodologies that we believe can provide useful supplemental information to help investors better understand underlying trends in our business. Our non-GAAP financial measures may not be comparable to similarly titled measures used by other companies, have limitations as analytical tools and should not be considered in isolation, or as substitutes for analysis of our operating results as reported under GAAP. Additionally, we do not consider our non-GAAP financial measures as superior to, or a substitute for, the equivalent measures calculated and presented in accordance with GAAP. Some of the limitations are:
• Adjusted EBITDA and Adjusted EBITDA Margin exclude the recurring, non-cash
expenses of depreciation and amortization of property and equipment and
definite-lived intangible assets and, although these are non-cash expenses,
the assets being depreciated and amortized may have to be replaced in the
future;
• Adjusted EBITDA and Adjusted EBITDA Margin do not reflect changes in, or
cash requirements for, our working capital needs;
• Adjusted EBITDA and Adjusted EBITDA Margin excludes the non-cash expense of
stock-based compensation, which has been, and will continue to be for the
foreseeable future, an important part of how we attract and retain our
employees and a significant recurring expense in our business;
• Adjusted EBITDA and Adjusted EBITDA Margin do not reflect the interest
(income) expense or the cash requirements to service interest or principal
payments on our indebtedness, and Free Cash Flow does not reflect the cash
requirements to service principal payments on our indebtedness;
• Adjusted EBITDA and Adjusted EBITDA Margin do not reflect income tax
(benefit) provision we are required to make; and
• Free Cash Flow and Free Cash Flow Conversion do not represent our residual
cash flow available for discretionary purposes and does not reflect our
future contractual commitments.
Adjusted EBITDA is not a liquidity measure and should not be considered as
discretionary cash available to us to reinvest in the growth of our business or
to distribute to stockholders or as a measure of cash that will be available to
us to meet our obligations.
To properly and prudently evaluate our business, we encourage you to review the
financial statements included elsewhere in this Annual Report, and not rely on a
single financial measure to evaluate our business. We also strongly urge you to
review the reconciliation of net earnings (loss) to Adjusted EBITDA, the
computation of Adjusted EBITDA Margin as compared to net (loss) earnings margin
which is net earnings as a percentage of revenue, the reconciliation of net cash
provided by (used in) operating
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activities to Free Cash Flow, and the computation of Free Cash Flow Conversion
as compared to Operating Cash Flow Conversion, which is net cash provided by
operating activities as a percentage of net earnings (loss) in each case set
forth below.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net earnings (loss) excluding income tax provision,
interest (income) expense, depreciation and amortization, stock-based
compensation expense, foreign exchange loss (gain), changes in fair value of
contingent earn-out liability, loss on fair value of interest rate swaps,
transaction costs and one-time litigation costs. Adjusted EBITDA
Margin represents Adjusted EBITDA as a percentage of revenue. The following
table reconciles net earnings (loss) and net earnings (loss) margin, the most
comparable GAAP financial measures, to Adjusted EBITDA and Adjusted EBITDA
Margin for the periods presented:
Successor Predecessor
Period from Period from
January 29, January 1,
through through Years Ended Year Ended
December 31, January 28, December 31, December 31,
(in thousands, except percentages) 2020 2020 2019 2018
Net (loss) earnings $ (110,186 ) $ (32,556 ) $ 85,844 $ (23,669 )
Add back:
Income tax provision 8,126 365 6,138 3,031
Interest expense (income) 22,134 (50 ) (202 ) (4 )
Depreciation and amortization 91,767 408 6,734 5,957
Stock-based compensation expense 27,468 336 2,160 255
Litigation costs (recoveries), net of
insurance proceeds(1) (6,008 ) - - 75,738
Foreign exchange loss (2) 14,133 523 1,160 4,458
Changes in fair value of interest rate
swaps(3) 1,586 - - -
Transaction costs(4) 66,251 40,345 - -
Changes in fair value of contingent
earn-out liability 27,800 - - -
Adjusted EBITDA $ 143,071 $ 9,371 $ 101,834 $ 65,766
Net (loss) earnings margin (20.3 )% (81.4 )% 17.6 % (6.6 )%
Adjusted EBITDA Margin 26.4 % 23.4 % 20.8 % 18.3 %
(1) Represents certain litigation costs and insurance proceeds associated with
pending litigations or settlements of litigation. For additional information,
refer to Note 17, Commitments and Contingencies, within the audited
consolidated financial statements and "Item 3- Legal Proceedings".
(2) Represents foreign exchange loss due to foreign currency transactions.
(3) Represents fair value loss on interest rate swaps.
(4) Represents transaction costs and professional service fees related to the
Sponsor Acquisition and the IPO.
Free Cash Flow and Free Cash Flow Conversion
We define Free Cash Flow as net cash provided by (used in) operating activities
less capital expenditures. Free Cash Flow Conversion represents Free Cash Flow
as a percentage of Adjusted EBITDA. The following table reconciles net cash
provided by (used in) operating activities, the most comparable GAAP financial
measure, to Free Cash Flow for the periods presented:
Successor Predecessor
Period from Period from
January 29, January 1, Year Year
through through Ended Ended
December 31, January 28, December 31, December 31,
(in thousands, except percentages) 2020 2020 2019 2018
Net cash provided by (used in)
operating activities $ 56,261 $ (3,306 ) $ 101,392 $ 71,766
Less:
Capital expenditures (10,632 ) (1,045 ) (9,674 ) (8,047 )
Free Cash Flow $ 45,629 $ (4,351 ) $ 91,718 $ 63,719
Operating Cash Flow Conversion (51.1 )% 10.2 % 118.1 % (303.2 )%
Free Cash Flow Conversion 31.9 % (46.4 )% 90.1 % 96.9 %
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Liquidity and Capital Resources
Overview
The Company's principal sources of liquidity are our cash and cash equivalents and cash generated from operations. Our primary uses of liquidity are operating expenses and capital expenditures. As ofDecember 31, 2020 , we had$128.0 million of cash and cash equivalents, an increase of$70.6 million fromDecember 31, 2019 . In connection with our IPO, we used the proceeds (net of underwriting discounts) from the issuance of 9 million shares of Class A common stock ($369.6 million ) in the IPO to purchase an equivalent number of newly issued Common Units fromBumble Holdings , whichBumble Holdings in turn will use to repay outstanding indebtedness under our Term Loan Facility totaling approximately$200.0 million in aggregate principal amount and approximately$148.3 million for general corporate purposes, and to bear all of the expenses of the IPO. We expect that our future principal uses of cash will also include funding our debt service obligations, paying income taxes and obligations under our tax receivable agreement. Based on current conditions, we believe that we have sufficient financial resources to fund our activities and execute our business plans during the next twelve months. Cash Flow Information The following table summarizes our consolidated cash flow information for the periods presented: Successor Predecessor Period from Period from January 29, January 1, through through Year Ended Year Ended December 31, January 28, December 31, December 31, (in thousands) 2020 2020 2019 2018 Net cash provided by (used in): Operating activities$ 56,261 $ (3,306 ) $ 101,392 $ 71,766 Investing activities (2,850,651 ) (1,029 ) (11,396 ) (8,394 ) Financing activities 2,866,236 - (65,196 ) (37,225 ) Operating activities Net cash provided by (used in) operating activities was$56.3 million in the Successor Period,$(3.3) million for the period fromJanuary 1, 2020 toJanuary 28, 2020 , and$101.4 million for the year endedDecember 31, 2019 . The decrease in the Successor Period and the period fromJanuary 1, 2020 toJanuary 28, 2020 compared to the year endedDecember 31, 2019 was primarily due to net loss of$(110.2) million and$(32.6) million in the Successor Period and fromJanuary 1, 2020 toJanuary 28, 2020 , respectively compared to net earnings of$85.8 million in the year endedDecember 31, 2019 . Net loss in the period fromJanuary 29, 2020 toDecember 31, 2020 and in the period fromJanuary 1, 2020 toJanuary 28, 2020 were impacted by transaction costs of$66.3 million and$40.3 million , respectively, and by depreciation and amortization of$91.8 million in the period fromJanuary 29, 2020 toDecember 31, 2020 ,$0.4 million in the period fromJanuary 1, 2020 toJanuary 28, 2020 and$6.7 million in the year endedDecember 31, 2019 , as well as changes in assets and liabilities, which were$9.4 million ,$25.1 million and$7.1 million in the period fromJanuary 29, 2020 toDecember 31, 2020 , the period fromJanuary 1, 2020 toJanuary 28, 2020 and the year endedDecember 31, 2019 , respectively.
Investing activities
Net cash used in investing activities was$2,850.7 million for the period fromJanuary 29, 2020 toDecember 31, 2020 ,$1.0 million for the period fromJanuary 1, 2020 toJanuary 28, 2020 , and$11.4 million for the year endedDecember 31, 2019 . The change in the Successor Period was primarily due to acquisition of the business (net of cash acquired) of$2,837.7 million in the period fromJanuary 29, 2020 toDecember 31, 2020 .
Financing activities
Net cash provided by (used in) financing activities was$2,866.2 million for the period fromJanuary 29, 2020 toDecember 31, 2020 , nil for the period fromJanuary 1, 2020 toJanuary 28, 2020 , and$(65.2) million for the year endedDecember 31, 2019 . The Company received cash of$2,360.4 million in relation to limited partners' interest, net proceeds from external debt of$828.9 million , proceeds from the repayment of loan from the Founder of$25.6 million and proceeds from the repayment of loans to related companies of$41.9 million in the period fromJanuary 29, 2020 toDecember 31, 2020 , offset by cash payments of$360.0 million in dividends and repayment of long-term debt principal of$5.0 million in the period fromJanuary 29, 2020 toDecember 31, 2020 . 63 --------------------------------------------------------------------------------
Indebtedness
Senior Secured Credit Facilities
In connection with the Sponsor Acquisition, inJanuary 2020 , we entered into the Initial Term Loan Facility in an original aggregate principal amount of$575.0 million and the Revolving Credit Facility in an aggregate principal amount of up to$50.0 million . In connection with the Distribution Financing Transaction, inOctober 2020 , we entered into the Incremental Term Loan Facility in an original aggregate principal amount of$275.0 million . The borrower under the Senior Secured Credit Facilities is a wholly owned subsidiary ofBumble Holdings ,Buzz Finco L.L.C. (the "Borrower"). Borrowings under the Senior Secured Credit Facilities bear interest at a rate equal to, at the Borrower's option, either (i) LIBOR for the relevant interest period, adjusted for statutory reserve requirements (subject to a floor of 0.0% on the Initial Term Loan and 0.50% on the Incremental Term Loan), plus an applicable margin or (ii) a base rate equal to the highest of (a) the rate of interest in effect as last quoted by theWall Street Journal as the "Prime Rate" inthe United States , (b) the federal funds effective rate plus 0.50% and (c) adjusted LIBOR for an interest period of one month plus 1.00% (subject to a floor of 0.00% per annum), in each case, plus an applicable margin. The applicable margin for loans under the Revolving Credit Facility is subject to adjustment based upon the consolidated first lien net leverage ratio of the Borrower and its restricted subsidiaries and is subject to reduction after the consummation of our initial public offering. In addition to paying interest on the outstanding principal under the Senior Secured Credit Facilities, the Borrower is required to pay a commitment fee of 0.50% per annum (which is subject to a decrease to 0.375% per annum based upon the consolidated first lien net leverage ratio of the Borrower and its restricted subsidiaries) to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder. The Borrower must also pay customary letter of credit fees and an annual administrative agency fee. The Initial Term Loan Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1.00% of the principal amount of the Initial Term Loan Facility outstanding as of the date of the closing of the Initial Term Loan Facility, with the balance being payable at maturity onJanuary 29, 2027 . The Incremental Term Loan Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1.00% of the principal amount of the Incremental Term Loan Facility outstanding as of the date of the closing of the Incremental Term Loan Facility, with the balance being payable at maturity onJanuary 29, 2027 . Principal amounts outstanding under the Revolving Credit Facility are due and payable in full at maturity onJanuary 29, 2025 . InOctober 2020 , we entered into an incremental Senior Secured Term Loan Facility (the "Incremental Term Loan Facility") in an original aggregate principal amount of$275.0 million . The Incremental Term Loan provides for additional senior secured term loans with substantially identical terms as the Initial Term Loan Facility (other than the applicable margin). We plan to use a portion of the net proceeds from the initial public offering to repay$200 million aggregate principal amount of our outstanding indebtedness under our Term Loan Facility. The Senior Secured Credit Facilities contain affirmative and negative covenants and customary events of default. Tax Receivable Agreement In connection with the IPO, inFebruary 2021 , we entered into a tax receivable agreement with certain of our pre-IPO owners that provides for the payment byBumble Inc. to such pre-IPO owners of 85% of the benefits thatBumble Inc. realizes, or is deemed to realize, as a result ofBumble Inc.'s allocable share of existing tax basis acquired in our initial public offering and other tax benefits related to entering into the tax receivable agreement. We estimate the amount of existing tax basis with respect to which our pre-IPO owners will be entitled to receive payments under the tax receivable agreement (assuming all Pre-IPO Common Unitholders exchanged their Common Units for shares of Class A common stock on the date of the initial public offering, and assuming all vested Incentive Units were converted to Common Units and subsequently exchanged for shares of Class A common stock at the initial public offering price of$43.00 per share of Class A common stock) is approximately$2,562.0 million , which includesBumble Inc.'s allocable share of existing tax basis acquired in this IPO, which we have determined to be approximately$1,675.2 million . In determiningBumble Inc.'s allocable share of existing tax basis acquired in the IPO, we have given retrospective effect to certain exchanges of Common Units for Class A shares that will occur 64 --------------------------------------------------------------------------------
following the IPO that were contemplated to have occurred pursuant to the Blocker Restructuring. The payments under the tax receivable agreement are not conditioned upon continued ownership of the Company by the pre-IPO owners.
Contractual Obligations and Contingencies
The following table summarizes our contractual obligations as ofDecember 31, 2020 : Payments due by period Less than 1 to 3 3 to 5 More than 1 year years years 5 years Total (in thousands) Long-term debt$ 8,500 $ 17,000 $ 17,000 $ 802,500 $ 845,000 Operating leases 5,132 6,688 - - 11,820 Other 777 600 - - 1,377 Total$ 14,409 $ 24,288 $ 17,000 $ 802,500 $ 858,197 The payments that we may be required to make under the Tax Receivable Agreement to the pre-IPO owners may be significant and are not reflected in the contractual obligations table set forth above as they are dependent upon future taxable income. Assuming no material changes in the relevant tax law, and that we earn sufficient taxable income to realize all tax benefits that are subject to the tax receivable agreement, we expect future payments under the tax receivable agreement related to the Offering Transactions to aggregate$520.9 million and to range over the next 15 years from approximately$15.8 million to$47.6 million per year and decline thereafter. In determining these estimated future payments, we have given retrospective effect to certain exchanges of Common Units for Class A shares that will occur following the IPO that were contemplated to have occurred pursuant to the Blocker Restructuring. The foregoing numbers are merely estimates, and the actual payments could differ materially. See "- Tax Receivable Agreement" in this section and "Item 13-Certain Relationships and Related Transactions, and Director Independence-Tax Receivable Agreement". In connection with the Sponsor Acquisition inJanuary 2020 , we entered into a contingent consideration arrangement, consisting of an earn-out payment to the former shareholders ofWorldwide Vision Limited of up to$150 million . The timing and amount of such payment, that we may be required to make, is not reflected in the contractual obligations table set forth above as it is dependent upon our Sponsor achieving a specified return on invested capital. See Note 5, Business Combination, for additional information.
Off-Balance Sheet Arrangements
Other than the items described above, we have no significant off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with GAAP, which often require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. Our estimates are based on historical experience, current conditions and various other assumptions that we believe to be reasonable under the circumstances. We evaluate our critical estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting estimates, assumptions, and judgments that we believe to have the most significant impact on our consolidated financial statements are described below. This discussion is provided to supplement the descriptions of our accounting policies contained in Note 2, Summary of Selected Significant Accounting Policies, within the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Business Combination
We estimate the fair value of assets acquired and liabilities assumed in a business combination.Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable, and as a result, actual results may differ from estimates. 65
--------------------------------------------------------------------------------Goodwill is tested for impairment at a minimum on an annual basis, as well as upon an indicator of impairment.Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then quantitative assessment is performed to compare the reporting unit's carrying value to its fair value. Alternatively, we are permitted to bypass the qualitative assessment and proceed directly to performing the quantitative assessment.Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The fair value of the reporting unit is based on a discounted cash flow model involving several assumptions. Contingent consideration arrangements are recognized at their acquisition date fair value and included as part of purchase price at the acquisition date. These contingent consideration arrangements are classified as liabilities and are remeasured to fair value at each reporting period, with any change in fair value being recognized in "General and administrative expense" in the consolidated statement of operations. The estimated fair value of the contingent consideration is based primarily on estimates of meeting the applicable contingency conditions as per the terms of the applicable agreements.
Recoverability of Intangible Assets with Definite Lives and Other Long-Lived Assets
We evaluate definite-lived intangible assets and other long-lived assets whenever events or changes of circumstance indicate that the carrying amounts may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset group to future undiscounted net cash flows expected to be generated. We group assets for purposes of such review at the lowest level for which identifiable cash flows of the asset group are largely independent of the cash flows of the other groups of assets and liabilities. If this comparison indicates impairment, the amount of impairment to be recognized is calculated as the difference between the carrying value and the fair value of the asset group. Unforeseen events, changes in circumstances and market conditions and material differences in estimates of future cash flows could adversely affect the fair value of our assets and could result in an impairment charge. Fair value can be estimated utilizing a number of techniques including quoted market prices, prices for comparable assets, or other valuation processes involving estimates of cash flows, multiples of earnings or revenues, and we may make various assumptions and estimates when performing our impairment assessments, particularly as it relates to cash flow projections. Cash flow estimates are by their nature subjective and include assumptions regarding factors such as recent and forecasted operating performance, revenue trends and operating margins. These estimates could also be adversely impacted by changes in federal, state, or local regulations, economic downturns or developments, or other market conditions affecting our industry.
We incur costs to develop software to be used solely to meet internal needs and applications used to deliver our services. These software development costs meet the criteria for capitalization once the preliminary project stage is complete and it is probable that the project will be completed, and the software will be used to perform the function intended. Development costs that meet the criteria for capitalization were not material to date.
Stock-based Compensation
Prior to the Sponsor Acquisition
Prior to the Sponsor Acquisition,Worldwide Vision Limited granted stock-based awards consisting primarily of share options and restricted stock units ("WVL RSUs") to employees and certain non-employee advisors. Outstanding share options generally vested over four years or upon the achievement of certain performance conditions, such as revenue growth. Outstanding WVL RSUs generally vested over 4 years and participated in dividends once gross dividend payments to ordinary shareholders exceeded$150 million and in an exit event. No WVL RSUs were granted in 2018 and 2019, and the expense arising from WVL RSUs was not material for the periods presented. Between 2015 and 2018,Bumble Holdings Limited issued shadow equity to employees and non-employee to provide a bonus to be paid upon an exit event ofBumble Holdings Limited , with the bonus amount to vary based on the exit value. Certain of the awards were payable in the event of an exit ofBumble Holdings Limited only, while one award was payable in the event of an exit event within the group. As the payment was contingent upon the achievement of a liquidity event, no compensation expense was recognized in connection with these awards during the years endedDecember 31, 2018 and 2019. These awards issued byBumble Holdings Limited were settled in connection with the Acquisition, including$3.8 million that was recognized as stock-based compensation expense in "General and administrative expense" in the period fromJanuary 1, 2020 toJanuary 28, 2020 . We measured share options based on their estimated grant date fair values and recognized stock-based compensation expense over the requisite service period (the "vesting period"). Stock-based compensation expense reflected our best estimate of the number of equity instruments that will ultimately vest, including the impact of estimated forfeitures. 66 -------------------------------------------------------------------------------- The fair value of each share option was estimated on the date of grant using aMonte Carlo model, which is impacted by a number of variables, including the fair value of our underlying shares, our expected share price volatility over the term of the share option, the expected life of the option, risk-free interest rates, and the expected dividend yield of our shares.
• Dividend yield. The expected annual dividend per share was based on the
Company's expected dividend rate.
• Expected Volatility. The expected volatility was calculated based on the
historical volatility of the Company's shares and measures for a set of
peer companies of the Company.
• Risk-free interest rate. The risk-free interest rate is based on
life assumed at the date of grant.
• Expected life of options. The average expected life is based on the
contractual term of the option and expected employee exercise and
post-vesting employment termination behavior.
The predecessor stock-based compensation plans were terminated in connection with the Sponsor Acquisition.
Subsequent to the Sponsor Acquisition
From the time of the Sponsor Acquisition until our IPO, we had three active plans under which awards were granted to various employees and other service providers of the Company, including key management personnel, based on their management grade. For the Successor Period, total stock-based compensation expense recognized was$27.5 million . The three active plans include the Employee Incentive Plan ("Non-US Plan"), the Equity Incentive Plan ("US Plan"), and the incentive plan adopted forWhitney Wolfe Herd (the "Founder Plan"). Awards granted under the Founder Plan and US Plan were in the form of ClassB Units inBuzz Holdings L.P. and ClassB Units held byBuzz Management Aggregator L.P. , respectively (collectively, the "ClassB Units "). Under the Non-US Plan, participants received phantom awards of ClassB Units inBuzz Management Aggregator L.P. (the "Phantom ClassB Units ") that were liability-classified and settled in cash equal to the notional value of the Buzz Management Aggregator ClassB Units at the settlement date. Awards under all three plans were comprised of Time-Vesting and Exit-Vesting awards. Time-Vesting awards were based upon service-based conditions and generally vested over a period of five years, while Exit-Vesting awards were based on certain performance conditions in which affiliates of The Blackstone Group Inc. receive cash proceeds in respect of its Class A units in the Company prior to the termination of the participant. The performance conditions were not considered probable as ofDecember 31, 2020 and therefore no expense has been recognized for the Exit-Vesting awards. In connection with the IPO, these awards were all converted into awards under our 2021 Omnibus Incentive Plan as described under "Item 11-Executive Compensation-Conversion of ClassB Units and Phantom ClassB Units ".
Time-Vesting Class
Expense for the Time-Vesting ClassB Units and Exit-Vesting ClassB Units was based on the grant date fair value of the ClassB Units . The grant date fair value was measured using aMonte Carlo model, which incorporates various assumptions noted in the following table. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the observed equity volatility for comparable companies. The expected time to liquidity event was based on management's estimate of time to an expected liquidity event. The dividend yield was based on the Company's expected dividend rate. The risk-free interest rate was based onU.S. Treasury zero-coupon issues. Forfeitures were accounted for as they occurred.December 31 , Assumptions by Grant Date 2020 Dividend yield (%) - Expected volatility (%) 55 Risk-free interest rate (%) 0.30 Expected time to liquidity (years) 4.1 The valuations for awards granted inJanuary 2020 andJune 2020 were based on the purchase price from the Sponsor Acquisition of$2.9 billion as the estimated equity value as of these dates and, therefore, did not rely on establishing an estimated equity value based on an income or market multiple approach. The implied multiple based on the purchase price was 19.2x.
As of
67
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Time-Vesting Phantom Class
As of
For additional information around the Company's stock-based compensation plans, refer to Note 13, Stock-based Compensation, within the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Income Taxes
We are subject to income tax in most of the jurisdictions in which we operate. Management is required to exercise significant judgment in determining our provision for income taxes. The provision for income taxes is determined by taking into account guidance related to uncertain tax positions. Judgment is required in assessing the timing and amounts of deductible and taxable items. Deferred tax assets are amounts available to reduce income taxes payable on taxable income in future years and are initially recognized at enacted tax rates. To the extent deferred tax assets are not expected to be realized, we record a valuation allowance. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized upon settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences may affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and results of operations.
Accounting Pronouncements Not Yet Adopted
Recently-issued accounting pronouncements that may be relevant to our operations but have not yet been adopted are outlined in Note 2, Summary of Selected Significant Accounting Policies, within the audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
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