THE MEET GROUP, INC. Company Overview
The Meet Group, Inc. ("Company," "The Meet Group ," "us" or "we") is a leading provider of interactive live-streaming solutions. We leverage a powerful live video platform ("Live"), empowering our global community to forge meaningful connections. Our primary applications ("apps") are MeetMe®, Skout®, Tagged®, LOVOO® and Growlr®. We operate location-based social networks for meeting new people - primarily on mobile platforms, including on iPhone, Android, iPad and other tablets - that facilitate interactions among users and encourage users to connect, communicate and engage with each other. Over the past three years we have transformed our business from an advertising-based revenue model to one where the majority of our revenue is derived from user pay monetization and subscriptions. The fastest-growing component of user pay monetization comes from in-app purchases, including virtual gifts associated with Live. We began developing Live in 2016 with the belief that we could successfully pair live streaming and dating - a model that we had seen work effectively for Asian dating app providers. We first launched Live on theMeetMe app in early 2017, and, inOctober 2017 , we began to monetize the feature by enabling virtual gifting within live video broadcasts. During this time period, we also executed on our strategy of acquiring other properties -Skout, Inc. ("Skout"),Ifwe, Inc. ("if(we)") andLOVOO GmbH ("LOVOO") - where we believed Live would fit naturally. We launched the monetized version of Live on the Skout app in the fourth quarter of 2017, and the Tagged and LOVOO apps in the second quarter of 2018. We have also continued to add features and enhancements intended to drive video engagement and increase monetization across all of our apps, and we recently launched and intend to monetize Live on the Growlr app - which we acquired in 2019 as part of our acquisition ofInitech LLC ("Initech") - in 2020. Live has become the fastest-growing revenue product in our history. Looking ahead, we intend to leverage Live by making it available to third-party apps (and users of third-party apps) as a video-as-a-service platform ("vPaaS"). With vPaaS, we intend that users of Live will appear on and be able to interact with users of other mobile apps and vice versa, leading to mutually-beneficial revenue-share arrangements with the owners of these other third-party apps. We also offer online marketing capabilities, which enable marketers to display their advertisements on our apps. We offer significant scale to our advertising partners, delivering more than 10 billion monthly advertising impressions across our active global user base, and sophisticated programmatic strategies for effective targeting. We work with advertising partners to maximize the effectiveness of their campaigns by optimizing advertisement formats and placements for maximum performance and return on investment. Just as Facebook has established itself as the social network of friends and family, and LinkedIn has established itself as the social network of colleagues and business professionals, we have created the social entertainment network not of the people you know, but of the people you want to know. Nimble, fast-moving and already in more than 100 countries, we are differentiating ourselves from other dating brands with Live, which is not offered by many of our direct competitors. Modeled after the live video platforms offered by Asian dating app providers, but enhanced in order to appeal to Western audiences, Live is aimed at the nexus of entertainment and community, where we believe our apps exhibit a natural strength. Our vision extends beyond dating and entertainment. We focus on building quality products to satisfy the universal need for human connection among all people, everywhere - not just paying subscribers. We believe meeting new people is a basic human need, especially for users aged 18 to 34, when so many long-lasting relationships are made. We use advanced technology to engineer serendipitous connections among people who otherwise might never have met - a sort of digital coffeehouse, where everyone belongs. Over the years, our apps have originated untold numbers of chats, shares, good friendships, dates and romantic relationships - even marriages. We believe we have significant growth opportunities enabled through our social entertainment platform. We believe our scale provides unique advantages to grow video monetization, while also establishing a high density of users within the geographic regions we serve. As our networks grow and the number of users in a location increases, we believe that users who are seeking to meet new people will incrementally benefit from the quantity of relevant connections.
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Cautionary Note Regarding Forward-looking Statements
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" ("MD&A") and the rest of this Quarterly
Report on Form 10-Q ("Quarterly 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;
• anticipations and expectations regarding mobile usage and monetization.
• the closing of the transactions contemplated by the Merger Agreement
(defined below), including the Merger (defined below); and
• the potential impact of the 2019 novel coronavirus ("COVID-19").
All statements other than statements of historical facts contained in this
Quarterly 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.
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 Quarterly 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 in our Annual Report on
Form 10-K ("Annual Report") for the year ended December 31, 2019 . 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.
This MD&A is provided as a supplement to, and should be read in conjunction
with, our audited "Consolidated Financial Statements" and the related notes
thereto and the MD&A included in our Annual Report for the year ended
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Merger Agreement
OnMarch 5, 2020 , we announced that we entered into a definitive agreement to be acquired by ProSiebenSat.1 Media SE's and General Atlantic Coöperatief U.A.'s joint company, NCG - NUCOM GROUP SE, a European stock corporation ("NuCom"), through eHarmonyHolding, Inc. , a subsidiary of NuCom's platform companyParship Group GmbH ("Buyer"). Pursuant to the Agreement and Plan of Merger ("Merger Agreement"), dated as ofMarch 5, 2020 , by and among us, Buyer,Holly Merger Sub, Inc. , aDelaware corporation and a direct, wholly-owned subsidiary of 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 General Corporation Law of theState of Delaware , Merger Sub shall merge with and into us ("Merger"). As a result of the Merger, the separate corporate existence of Merger Sub shall cease, we shall continue as the surviving corporation in the Merger ("Surviving Corporation") and theSurviving Corporation shall become a wholly-owned subsidiary of Buyer. Pursuant to the Merger Agreement, we filed a definitive proxy statement and notice of a special meeting to solicit stockholder approval of the Merger Agreement with theU.S. Securities and Exchange Commission ("SEC") onApril 22, 2020 . At the effective time of the Merger, and subject to the terms and conditions of the Merger Agreement, all shares of our common stock, other than (i) shares with respect to which appraisal rights are properly exercised and not withdrawn underDelaware law, or (ii) as otherwise provided in the Merger Agreement, will automatically be converted into the right to receive$6.30 in cash, without interest. Additionally, (i) each outstanding stock option to acquire shares of our common stock, (ii) each outstanding share of restricted stock and (iii) each outstanding restricted stock unit that is subject to performance-based vesting will be cancelled in exchange for a cash payment, as established in the Merger Agreement.
We expect the Merger will be completed in the second half of 2020, subject to the satisfaction of all closing conditions.
Impact of the 2019 Novel Coronavirus
We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business. In the first quarter of 2020, we took a number of precautionary measures designed to help minimize the risk of the spread of the virus to our employees, including suspending all non-essential travel worldwide for our employees, temporarily closing our offices in theU.S. andGermany and requiring all employees to work remotely. InMarch 2020 , we experienced an increase in demand for our services as more people around the world practiced social distancing. We saw an increase in the demand for Live, which was partially offset by a slight decrease in demand for our dating products. As a result of these shifts in users' behavior, video daily active users ("vDAU") and average daily video revenue per video daily active user ("vARPDAU") increased, yielding an increase in video revenue. Starting inMarch 2020 , we also saw lower industry demand for advertising, which we attribute to the global macroeconomic effects of the COVID-19 pandemic. As a result of this lower demand for advertising, advertising rates within the industry declined for the three months endedMarch 31, 2020 , and we saw a decrease in our advertising revenue. Our advertising products yield a higher margin when compared to Live and our dating products. Given the differential in margin, if this increased customer demand for Live and lower advertising rates continues, we expect our margins may be negatively impacted for the duration of 2020 or longer unless offset by rising Live revenue and we are unable to predict the duration or degree of such impact with any certainty. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods. One should review "Part II, Item 1A -Risk Factors" in this Quarterly Report for a description of the material risks that we currently face in connection with COVID-19.
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 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 three
months ended March 31, 2020 and 2019, total MAUs were 18.63 million and 17.59
million, total DAUs were 4.75 million and 4.93 million and total vDAUs were 0.95
million and 0.88 million, respectively.
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The following table sets forth our average MAU, DAU and vDAU for the three
months ended
Average for the
Three Months Ended March 31,
(in thousands) 2020 2019
MAU 18,628 17,585
DAU 4,749 4,931
vDAU 954 876
First Quarter of 2020 Highlights
• Revenue: Our revenue was
31, 2020, up 11.2% from
2019.
• Net Loss: We incurred a net loss of
ended
acquisition, restructuring and other expenses related to the Merger
Agreement and the aforementioned impacts of the COVID-19 pandemic. Our
comparative net income for the three months ended March 31, 2019 was $1.3
million .
• Adjusted EBITDA: Our adjusted earnings before interest, taxes,
depreciation and amortization ("Adjusted EBITDA") was
three months ended
three months ended
please refer to the heading "Non-GAAP Financial Measure" included in this
MD&A.
• Cash and Cash Equivalents: We had cash and cash equivalents of
million 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 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.
For the three months ended March 31, 2020 , we averaged 16.63 million mobile MAUs
and 18.63 million total MAUs, compared with 15.18 million mobile MAUs and 17.59
million total MAUs on average for the three months ended March 31, 2019 , which
amounted to an increase of 1.45 million, or 9.6%, for mobile MAUs, and an
increase of 1.04 million, or 5.9%, for total MAUs. Mobile DAUs averaged 4.25
million for the three months ended March 31, 2020 , compared with average mobile
DAUs of 4.35 million for the three months ended March 31, 2019 , which amounted
to a decrease of 0.10 million, or 2.3%, for mobile DAUs. In the three months
ended March 31, 2020 , we averaged 4.75 million total DAUs, compared with 4.93
million total DAUs on average in the three months ended March 31, 2019 , which
amounted to a decrease of 0.18 million, or 3.7%, for total DAUs. In the three
months ended March 31, 2020 , we averaged 0.95 million vDAUs, compared with 0.88
million vDAUs on average in the three months ended March 31, 2019 , which
amounted to an increase of 0.08 million, or 8.9%, for vDAUs.
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The following graphs set forth our average DAU, mobile DAU, MAU, mobile MAU and vDAU by quarter from the three months endedMarch 31, 2019 to the three months endedMarch 31, 2020 : [[Image Removed: chart-b336e5a31839516e96a.jpg]] [[Image Removed: chart-e7e420b4064e588e9c2.jpg]] [[Image Removed: chart-102043a6892d54c3a86.jpg]] [[Image Removed: chart-8eab1963d7d650789e9.jpg]] [[Image Removed: chart-4d6d129b1f6f5ebeb9e.jpg]] 28
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In the three months endedMarch 31, 2020 , we earned ARPU of$1.21 on the web and APRU of$3.04 on our mobile apps, compared with ARPU of$1.45 on the web and ARPU of$2.89 on our mobile apps for the three months endedMarch 31, 2019 , which amounted to a decrease of$0.24 , or 16.6%, on the web and an increase of$0.15 , or 5.2%, on our mobile apps. In the three months endedMarch 31, 2020 , we earned ARPDAU of$0.07 on the web and ARPDAU of$0.13 on our mobile apps, compared with APRDAU of$0.08 on the web and ARPDAU of$0.11 on our mobile apps for the three months endedMarch 31, 2019 , which amounted to a decrease of$0.01 , or 12.5%, on the web and an increase of$0.02 , or 18.2%, on our mobile apps. In the three months endedMarch 31, 2020 , we earned vARPDAU of$0.33 , compared with vARPDAU of$0.26 for the three months endedMarch 31, 2019 , which amounted to an increase of$0.07 , or 26.9%. The following graphs set forth our web ARPU, mobile ARPU, web ARPDAU, mobile ARPDAU and vARPDAU by quarter from the three months endedMarch 31, 2019 to the three months endedMarch 31, 2020 : [[Image Removed: chart-03edb5fe6ee65f8e9bc.jpg]] [[Image Removed: chart-758848550f185870b73.jpg]] [[Image Removed: chart-1b62b8dce7fb525292e.jpg]] [[Image Removed: chart-ae9e023abcf45d369e3.jpg]] [[Image Removed: chart-bfa7dff75a1a52129fc.jpg]] 29
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As our 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.
• 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 the cost perthousand advertising impressions 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 typical seasonality. 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.
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• Business Combinations: Acquisitions have been an important part of our
growth 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.
• The Merger: Failure to complete the previously announced Merger could
adversely impact the market price of our common stock as well as our
business and operating results. This risk, as well as other risks
associated with the Merger, are identified further in "Part I, Item 1A -
Risk Factors" included in our Annual Report for the year ended
December 31, 2019 .
• COVID-19: While the COVID-19 pandemic has had a minimal impact on our
operations and financial results to date, the future impacts of thepandemic and any resulting economic impact are largely unknown and rapidly
evolving. It is possible that the COVID-19 pandemic, the measures taken by
the governments of countries affected and the resulting economic impact
may negatively impact our results of operations, cash flows and financial
position as well as our vendors, advertising partners and users. As a
result, the effects of COVID-19 may not be fully reflected in our
financial results until future periods. Refer to "Part II, Item 1A - Risk
Factors" in this Quarterly Report for a description of the material risks
that the Company currently faces in connection with COVID-19. The impact
of the COVID-19 pandemic may also exacerbate other risks discussed in
"Part I, Item 1A - Risk Factors" included in the Company's Annual Report
for the year ended
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.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in the MD&A included in our Annual Report for the year endedDecember 31, 2019 . We believe there have been no new critical accounting policies, or material changes to our existing critical accounting policies and estimates during the three months endedMarch 31, 2020 .
Recent Accounting Pronouncements
For detailed information regarding recently-adopted and recently-issued
accounting pronouncements and their actual or expected impacts to our unaudited
consolidated financial statements, see "Note 1 - Description of Business, Basis
of Presentation and Summary of Significant Accounting Policies" to the unaudited
"Consolidated Financial Statements" and the related notes thereto included
elsewhere in this Quarterly Report.
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Comparison of Our Operating Results for the Three Months Ended
The following table sets forth our unaudited consolidated statements of
operations for the three months ended
Three Months Ended March 31, Change From Prior Year
(in thousands) 2020 2019 ($) %
Revenue $ 55,066 $ 49,513 $ 5,553 11.2 %
Operating costs and expenses:
Sales and marketing 7,714 7,841 (127 ) (1.6 )%
Product development and content 37,671 31,123 6,548 21.0 %
General and administrative 5,030 4,928 102 2.1 %
Depreciation and amortization 2,820 3,198 (378 ) (11.8 )%
Acquisition, restructuring and
other 3,370 479 2,891 603.5 %
Total operating costs and
expenses 56,605 47,569 9,036 19.0 %
(Loss) income from operations (1,539 ) 1,944 (3,483 ) (179.2 )%
Other income (expense):
Interest income 13 32 (19 ) (59.4 )%
Interest expense (396 ) (403 ) 7 (1.7 )%
Loss on foreign currency
transactions (7 ) (65 ) 58 (89.2 )%
Loss on disposal of assets (108 ) - (108 ) (100.0 )%
Other items of income, net 2 4 (2 ) (50.0 )%
Total other expense (496 ) (432 ) (64 ) 14.8 %
(Loss) income before income tax
expense (2,035 ) 1,512 (3,547 ) (234.6 )%
Income tax expense (373 ) (254 ) (119 ) 46.9 %
Net (loss) income $ (2,408 ) $ 1,258 $ (3,666 ) (291.4 )%
Revenue
Our revenue was
The following table sets forth our revenue disaggregated by revenue source for
the three months ended
Three Months Ended March 31,
2020 2019
(in thousands) $ % $ %
User pay revenue:
Video $ 28,633 52.0 % $ 20,229 40.9 %
Subscription and other in-app products 14,395 26.1 % 15,596 31.5 %
Total user pay revenue 43,028 78.1 % 35,825 72.4 %
Advertising revenue 12,038 21.9 % 13,688 27.6 %
Total revenue $ 55,066 100.0 % $ 49,513 100.0 %
The increase in revenue for the three months ended March 31, 2020 was primarily
attributable to a $7.2 million increase in user pay revenue, which was partially
offset by a $1.7 million decrease in advertising revenue. The increase in user
pay revenue was primarily attributable to the continued growth and improved
monetization of users on Live across all of our apps, as well as the increase in
demand for our services as more people around the world practiced social
distancing in response to the COVID-19 pandemic. The decrease in advertising
revenue was primarily attributable to lower advertising rates for the three
months ended March 31, 2020 , and lower industry demand for advertising starting
in March 2020 , which were both negatively impacted by the global macroeconomic
effects of the COVID-19 pandemic.
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Operating Costs and Expenses
• Sales and Marketing: Sales and marketing expenses decreased
or 1.6%, to
compared with sales and marketing expenses of
months ended
for the three months ended March 31, 2020 was primarily attributable to a
$0.4 million decrease in user acquisition expense and a $0.2 million
decrease in employee-related expense, which were partially offset by a
$0.4 million increase in other sales and marketing expense and a $0.1
million increase in stock-based compensation expense.
• Product Development and Content: Product development and content expenses
increased
ended
expenses of
increase in product development and content expenses for the three months
ended
mobile content costs, net of broadcaster rewards breakage, of
due to increased revenue from Live, a
moderation expense, a
increase in stock-based compensation expense and a
in other product development and content expense.
• General and Administrative: General and administrative expenses were
largely unchanged at $5.0 million for the three months ended March 31 ,
2020, compared with general and administrative expenses of
for the three months ended
and administrative expenses for the three months ended
primarily attributable to a $0.3 million increase in stock-based
compensation expense, which was partially offset by a $0.2 million
decrease in the provision for expected credit losses.
• Depreciation and Amortization: Depreciation and amortization expense
decreased
ended
of
depreciation and amortization expense for the three months ended
2020 was primarily attributable to lower amortization expense for certain
intangible assets acquired in our acquisitions of if(we) and LOVOO, which
was partially offset by higher amortization expense for the intangible
assets acquired in our acquisition of Initech.
• Acquisition, Restructuring and Other: Acquisition, restructuring and other
expenses amounted to $3.4 million for the three months ended March 31,
2020 , compared with acquisition, restructuring and other expenses of $0.5
million for the three months ended March 31, 2019 . Acquisition,
restructuring and other expenses for the three months ended
were primarily attributable to investment banking, legal, professional
service and other transaction-related costs incurred in connection with
the Merger Agreement. Further, we expect to continue to incur
Merger-related costs, and acquisition, restructuring and other expenses
could increase if we incur litigation-related expenses associated with our
defense against legal claims related to the Merger. Acquisition,
restructuring and other expenses for the three months ended
were primarily attributable to legal, professional service and other
transaction-related costs incurred in connection with our acquisition of
Initech.
Interest Expense
Interest expense was largely unchanged at $0.4 million for the three months
ended March 31, 2020 and 2019. Interest expense for the three months ended March
31, 2020 was primarily attributable to $0.3 million in interest charges for our
credit facilities, a $0.2 million unrealized loss for the changes in the fair
values of our dedesignated interest rate derivatives and $0.1 million in other
non-cash interest expense, which were partially offset by $0.2 million in
counterparty receipts from our cross-currency swap. Interest expense for the
three months ended March 31, 2019 was primarily attributable to $0.6 million in
interest charges for our prior credit facilities, which was partially offset by
$0.2 million in counterparty receipts from our cross-currency swap.
Income Tax Expense
Income tax expense was$0.4 million and$0.3 million for the three months endedMarch 31, 2020 and 2019, respectively. For the three months endedMarch 31, 2020 , our effective tax rate ("ETR") was (18.3)%, compared with an ETR of 16.8% for the three months endedMarch 31, 2019 . The increase in our income tax expense and ETR for the three months endedMarch 31, 2020 were primarily attributable to certain non-deductible transaction costs incurred in connection with the Merger Agreement, the geographic mix of earnings between theU.S. andGermany , which has a higher statutory tax rate, and a decrease in windfall tax benefits on stock-based compensation. These increases were partially offset by the discrete impact of certain deductible transaction costs incurred in connection with the Merger Agreement.
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Comparison of Our Stock-based Compensation Expense for the Three Months Ended
Stock-based compensation expense, included in our operating costs and expenses by category, increased$0.8 million , or 31.3%, to$3.2 million for the three months endedMarch 31, 2020 , compared with stock-based compensation expense of$2.4 million for the three months endedMarch 31, 2019 . Stock-based compensation expense represented 5.6% and 5.1% of operating costs and expenses for the three months endedMarch 31, 2020 and 2019, respectively.
The following table sets forth the allocation of stock-based compensation
expense in our unaudited consolidated statements of operations and comprehensive
(loss) income for the three months ended
Change from
Three Months Ended March 31, Prior Year
(in thousands) 2020 2019 ($)
Sales and marketing $ 124 $ 70 $ 54
Product development and content 1,928 1,500 428
General and administrative 1,133 855 278
Total stock-based compensation expense $ 3,185
Liquidity and Capital Resources
Cash Flows
The following table sets forth the changes in our cash and cash equivalents for
the three months ended
Three Months Ended March 31 ,
(in thousands) 2020 2019
Net cash provided by operating activities$ 5,551 $ 3,362 Net cash used in investing activities (87 ) (12,091 ) Net cash (used in) provided by financing activities (467 ) 234
Change in cash and cash equivalents prior to effect of foreign currency exchange rate
$ 4,997 $ (8,495 ) Operating Activities We received$5.6 million and$3.4 million in cash flows from our operating activities for the three months endedMarch 31, 2020 and 2019, respectively. The increase in our operating cash flows for the three months endedMarch 31, 2020 was primarily attributable to a$5.3 million increase in working capital inflows, which was partially offset by a$3.7 million decrease in net income.
Investing Activities
We used$0.1 million and$12.1 million in cash flows for our investing activities for the three months endedMarch 31, 2020 and 2019, respectively. For the three months endedMarch 31, 2020 , our cash used for investing activities was fully attributable to$0.1 million in purchases of property and equipment. For the three months endedMarch 31, 2019 , our cash used for investing activities was fully attributable to cash consideration payments of$11.8 million for our acquisition of Initech, and$0.3 million in purchases of property and equipment.
Financing Activities
We used$0.5 million in cash flows for our financing activities for the three months endedMarch 31, 2020 and received$0.2 million in cash flows from our financing activities for the three months endedMarch 31, 2019 . For the three months endedMarch 31, 2020 , our cash used for financing activities was primarily attributable to payments of$0.9 million on our term loan facility, which was partially offset by$0.6 million in proceeds received from the exercise of employee stock options. For the three months endedMarch 31, 2019 , our cash received from financing activities was primarily attributable to a$7.0 million draw on our prior revolving credit facility to finance a portion of our acquisition of Initech and$0.7 million in proceeds received from the exercise of employee stock options, which were partially offset by payments of$7.3 million on our prior term loan facility.
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Cash and Cash Equivalents
The following table sets forth our cash and cash equivalents as a percentage of
our total assets as of
March 31, 2020 December 31, 2019
Cash and cash equivalents
$ 271,780 $ 272,721 Percentage of total assets 11.8 % 10.0 %
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 ofMarch 31, 2020 andDecember 31, 2019 , we had positive working capital of$25.9 million and$23.6 million , respectively. We define working capital as total current assets less total current liabilities as shown on our consolidated balance sheets. Sources of Liquidity Our primary sources of liquidity are cash generated from operations, available cash, accounts receivable and borrowings under our credit facilities, which are described in further detail in "Note 9 - Debt" to the "Consolidated Financial Statements" included in our Annual Report for the year endedDecember 31, 2019 . We believe these sources are sufficient to fund our planned operations and to meet our contractual obligations. As ofMarch 31, 2020 , we had an outstanding balance of$33.3 million on our term loan facility. The weighted-average interest rate as ofMarch 31, 2020 was 3.69%. We also have a revolving credit facility with a borrowing capacity of$25.0 million , of which, there were no outstanding borrowings as ofMarch 31, 2020 . Unused commitment fees on our revolving credit facility were 0.25% per annum as ofMarch 31, 2020 .
Capital Expenditures
We have budgeted capital expenditures of
Off Balance Sheet Arrangements
As ofMarch 31, 2020 , 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 withU.S. generally accepted accounting principles ("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. 35
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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, provision for expected credit losses 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 (loss) income, 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. The following table sets forth a reconciliation of net (loss) income, a GAAP financial measure, to Adjusted EBITDA for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, (in thousands) 2020 2019 Net (loss) income$ (2,408 ) $ 1,258 Interest expense 396 403 Income tax expense 373 254 Depreciation and amortization expense 2,820 3,198 Stock-based compensation expense 3,185 2,425 Acquisition, restructuring and other 3,370 479 Loss on disposal of assets 108 - Loss on foreign currency transactions 7 65 Adjusted EBITDA $ 7,851$ 8,082
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