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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
 
SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended September 30, 2019
 
 
 
 
 
OR
 
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
 
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from   to  
Commission file number: 001-33105
The Meet Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
86-0879433
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
100 Union Square Drive
 
New Hope, Pennsylvania
18938
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number: (215) 862-1162
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock
 
MEET
 
NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ 
Accelerated filer ☒ 
 
 
Non-accelerated filer ☐
Smaller reporting company ☐ 
 
 
 
Emerging growth company ☐ 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for comply with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Class
 
Outstanding as of November 4, 2019
Common Stock, $0.001 par value per share
 
71,709,378

shares





THE MEET GROUP, INC. AND SUBSIDIARIES
INDEX

 
 
 
 
 
 
 
Item 1B.
Unresolved Staff Comments


2




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE MEET GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2019 (UNAUDITED) AND DECEMBER 31, 2018

 
(Unaudited)
 
 
 
September 30,
2019
 
December 31,
2018
Assets:
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
27,488,790

 
$
28,365,725

Accounts receivable, net of allowance of $600,070 and $383,579 as of September 30, 2019 and December 31, 2018, respectively
23,922,049

 
27,148,484

Prepaid expenses and other current assets
5,177,333

 
4,911,057

Total current assets
56,588,172

 
60,425,266

Goodwill
155,307,593

 
148,132,873

Property and equipment, net
3,832,875

 
4,633,764

Operating lease right-of-use assets
4,995,799

 

Intangible assets, net
31,444,141

 
36,558,439

Deferred taxes
15,380,576

 
15,648,572

Other assets
1,541,514

 
2,453,255

Total assets
$
269,090,670

 
$
267,852,169

Liabilities and Stockholders' Equity:
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
4,672,207

 
$
9,071,193

Accrued liabilities
20,070,961

 
19,112,303

Current portion of long-term debt, net
3,500,000

 
18,566,584

Current portion of finance lease obligations
12,913

 
134,067

Current portion of operating lease liabilities
2,138,029

 

Deferred revenue
4,071,239

 
4,620,690

Total current liabilities
34,465,349

 
51,504,837

Long-term finance lease obligations
8,323

 
58,683

Long-term debt, net
31,251,928

 
18,087,956

Long-term operating lease liabilities
2,900,105

 

Long-term derivative liability
636,612

 
940,216

Other liabilities
871,084

 
39,651

Total liabilities
70,133,401

 
70,631,343

Commitments and contingencies


 


Stockholders' Equity:
 
 
 
Preferred stock, $0.001 par value; authorized - 5,000,000 shares; no shares issued and outstanding as of September 30, 2019 and December 31, 2018

 

Common stock, $0.001 par value; authorized - 100,000,000 shares; 72,834,032 and 74,697,526 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
72,834

 
74,700

Additional paid-in capital
428,106,985

 
419,455,818

Accumulated deficit
(226,077,248
)
 
(220,276,025
)
Accumulated other comprehensive loss
(3,145,302
)
 
(2,033,667
)
Total stockholders equity
198,957,269

 
197,220,826

Total liabilities and stockholders equity
$
269,090,670

 
$
267,852,169


See notes to condensed consolidated financial statements.


3




THE MEET GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues
$
52,621,250

 
$
45,716,053

 
$
154,134,591

 
$
126,155,591

Operating costs and expenses:
 
 
 
 
 
 
 
Sales and marketing
8,748,021

 
8,753,156

 
25,648,417

 
23,554,635

Product development and content
30,573,574

 
26,134,682

 
91,846,746

 
72,647,507

General and administrative
5,320,424

 
4,938,844

 
16,140,643

 
15,562,125

Depreciation and amortization
3,451,197

 
3,423,929

 
10,079,319

 
10,558,712

Acquisition and restructuring
244,432

 
416,141

 
748,881

 
4,802,694

Total operating costs and expenses
48,337,648

 
43,666,752

 
144,464,006

 
127,125,673

Income (loss) from operations
4,283,602

 
2,049,301

 
9,670,585

 
(970,082
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
28,752

 
3,823

 
88,746

 
13,773

Interest expense
(300,319
)
 
(559,345
)
 
(1,031,379
)
 
(1,838,325
)
(Loss) gain on foreign currency transactions
(27,051
)
 
(6,229
)
 
(94,640
)
 
101,030

Gain on disposal of assets
40,376

 

 
40,376

 

Other items of income, net
2,030

 
6,527

 
4,792

 
28,154

Total other expense
(256,212
)
 
(555,224
)
 
(992,105
)
 
(1,695,368
)
Income (loss) before income tax expense
4,027,390

 
1,494,077

 
8,678,480

 
(2,665,450
)
Income tax expense
(1,036,410
)
 
(196,146
)
 
(2,226,075
)
 
(484,552
)
Net income (loss)
$
2,990,980

 
$
1,297,931

 
$
6,452,405

 
$
(3,150,002
)
 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share:
 
 
 
 
 
 
 
Basic net income (loss) per share
$
0.04

 
$
0.02

 
$
0.09

 
$
(0.04
)
Diluted net income (loss) per share
$
0.04

 
$
0.02

 
$
0.08

 
$
(0.04
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
74,674,981

 
73,362,467

 
75,056,593

 
72,704,205

Diluted
76,205,022

 
79,365,576

 
77,836,975

 
72,704,205

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
2,990,980

 
$
1,297,931

 
$
6,452,405

 
$
(3,150,002
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Reclassification of gains on derivative financial instruments, net of tax of $574,692, $175,545, $814,946 and $684,236, respectively
(1,262,499
)
 
(400,745
)
 
(1,806,097
)
 
(1,454,523
)
Unrealized gains on derivative financial instruments, net of tax of $461,803, $170,715, $797,363 and $586,918, respectively
1,013,311

 
386,200

 
1,709,074

 
1,483,256

Foreign currency translation adjustment
(956,987
)
 
(127,725
)
 
(1,014,612
)
 
(711,810
)
Other comprehensive loss
(1,206,175
)
 
(142,270
)
 
(1,111,635
)
 
(683,077
)
Comprehensive income (loss)
$
1,784,805

 
$
1,155,661

 
$
5,340,770

 
$
(3,833,079
)

See notes to condensed consolidated financial statements.


4




THE MEET GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED) 

 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders

Equity
 
Shares
 
Amount
 
 
 
 
Balance-June 30, 2019
76,227,583

 
$
76,228

 
$
425,075,744

 
$
(216,814,600
)
 
$
(1,939,127
)
 
$
206,398,245

Stock-based compensation expense

 

 
3,031,292

 

 

 
3,031,292

Issuance of common stock for vested restricted stock awards
51,716

 
51

 
(51
)
 

 

 

Repurchase and retirement of common stock
(3,445,267
)
 
(3,445
)
 

 
(12,253,628
)
 

 
(12,257,073
)
Other comprehensive loss

 

 

 

 
(1,206,175
)
 
(1,206,175
)
Net income

 

 

 
2,990,980

 

 
2,990,980

Balance-September 30, 2019
72,834,032

 
$
72,834

 
$
428,106,985

 
$
(226,077,248
)
 
$
(3,145,302
)
 
$
198,957,269

 
 
 
 
 
 
 
 
 
 
 
 
Balance-December 31, 2018
74,697,526

 
$
74,700

 
$
419,455,818

 
$
(220,276,025
)
 
$
(2,033,667
)
 
$
197,220,826

Stock-based compensation expense

 

 
8,321,345

 

 

 
8,321,345

Exercise of stock options
157,334

 
156

 
702,561

 

 

 
702,717

Issuance of common stock for vested restricted stock awards
1,424,439

 
1,423

 
(1,423
)
 

 

 

Restricted stock awards withheld to cover taxes

 

 
(371,316
)
 

 

 
(371,316
)
Repurchase and retirement of common stock
(3,445,267
)
 
(3,445
)
 

 
(12,253,628
)
 

 
(12,257,073
)
Other comprehensive loss

 

 

 

 
(1,111,635
)
 
(1,111,635
)
Net income

 

 

 
6,452,405

 

 
6,452,405

Balance-September 30, 2019
72,834,032

 
$
72,834

 
$
428,106,985

 
$
(226,077,248
)
 
$
(3,145,302
)
 
$
198,957,269

 
 
 
 
 
 
 
 
 
 
 
 
Balance-June 30, 2018
73,121,962

 
$
73,118

 
$
412,213,959

 
$
(225,867,346
)
 
$
(1,665,345
)
 
$
184,754,386

Stock-based compensation expense

 

 
2,767,196

 

 

 
2,767,196

Exercise of stock options
235,912

 
233

 
591,651

 

 

 
591,884

Issuance of common stock for vested restricted stock awards
65,146

 
72

 
(72
)
 

 

 

Issuance of common stock for vested performance share units
111,350

 
111

 
(111
)
 

 

 

Other comprehensive loss

 

 

 

 
(142,270
)
 
(142,270
)
Net income

 

 

 
1,297,931

 

 
1,297,931

Balance-September 30, 2018
73,534,370

 
$
73,534

 
$
415,572,623

 
$
(224,569,415
)
 
$
(1,807,615
)
 
$
189,269,127

 
 
 
 
 
 
 
 
 
 
 
 
Balance-December 31, 2017
71,915,018

 
$
71,918

 
$
408,029,068

 
$
(221,435,888
)
 
$
(1,124,538
)
 
$
185,540,560

Adoption of Accounting Standards Codification Topic 606

 

 

 
16,475

 

 
16,475

Stock-based compensation expense

 

 
7,026,991

 

 

 
7,026,991

Exercise of stock options
366,963

 
364

 
823,943

 

 

 
824,307

Issuance of common stock for vested restricted stock awards
1,141,039

 
1,141

 
(1,141
)
 

 

 

Issuance of common stock for vested performance share units
111,350

 
111

 
(111
)
 

 

 

Restricted stock awards withheld to cover taxes

 

 
(306,127
)
 

 

 
(306,127
)
Other comprehensive loss

 

 

 

 
(683,077
)
 
(683,077
)
Net loss

 

 

 
(3,150,002
)
 

 
(3,150,002
)
Balance-September 30, 2018
73,534,370

 
$
73,534

 
$
415,572,623

 
$
(224,569,415
)
 
$
(1,807,615
)
 
$
189,269,127


See notes to condensed consolidated financial statements.


5




THE MEET GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 
(UNAUDITED)

 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
6,452,405

 
$
(3,150,002
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 
 
Depreciation and amortization
10,079,319

 
10,558,712

Amortization of right-of-use assets
1,902,760

 

Stock-based compensation expense
8,321,345

 
7,026,991

Deferred tax expense (benefit)
211,533

 
(694,951
)
Gain on disposal of assets
(40,376
)
 

Loss (gain) on foreign currency transactions
94,640

 
(101,030
)
Bad debt expense
1,661,987

 
408,998

Non-cash interest expense
214,063

 
261,373

Changes in derivative financial instruments

 
(18,412
)
Changes in contingent consideration obligations
111,417

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
1,878,915

 
1,302,954

Prepaid expenses, other current assets and other assets
2,355,628

 
(2,326,004
)
Accounts payable and accrued liabilities
(6,080,069
)
 
4,414,400

Deferred revenue
(510,352
)
 
515,743

Net cash provided by operating activities
26,653,215

 
18,198,772

Cash flows from investing activities:

 
 
Purchases of property and equipment
(1,158,070
)
 
(404,446
)
Acquisition of business, net of cash acquired
(11,807,925
)
 

Net cash used in investing activities
(12,965,995
)
 
(404,446
)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options
702,717

 
824,307

Repurchases of common stock
(12,257,073
)
 

Payments of finance leases
(167,378
)
 
(211,290
)
Proceeds from revolving loan
7,000,000

 

Proceeds from term loan, net
34,954,373

 

Payments for restricted stock awards withheld for taxes
(371,316
)
 
(306,127
)
Payments of loan origination costs
(125,170
)
 

Payments of revolving loan
(7,000,000
)
 

Payments of contingent consideration

 
(5,000,000
)
Payments of term loan
(36,940,158
)
 
(15,559,842
)
Net cash used in financing activities
(14,204,005
)
 
(20,252,952
)
Change in cash and cash equivalents prior to effect of foreign currency exchange rate
(516,785
)
 
(2,458,626
)
Effect of foreign currency exchange rate
(360,150
)
 
(271,982
)
Net decrease in cash and cash equivalents
(876,935
)
 
(2,730,608
)
Cash and cash equivalents at beginning of period
28,365,725

 
25,052,995

Cash and cash equivalents at end of period
$
27,488,790

 
$
22,322,387

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
865,260

 
$
1,598,781

See notes to condensed consolidated financial statements.

6




THE MEET GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1— Description of Business, Basis of Presentation and Summary of Significant Accounting Policies 

The Meet Group, Inc. (the “Company,” “The Meet Group,” “us,” or “we”) is a leading provider of interactive livestreaming solutions.  We leverage a powerful livestreaming video platform, empowering our global community to forge meaningful connections. Our primary apps are MeetMe®, LOVOO®, Skout®, Tagged® and Growlr®.

We operate location-based social networks for meeting new people, primarily on mobile platforms, including on iPhone, Android, iPad and other tablets, that facilitate interactions among users and encourage users to connect, communicate and engage with each other. Over the past two years, we have transformed our business from an advertising-based revenue model to one where the majority of our revenue is derived from user pay monetization and subscriptions. The fastest growing component of user pay monetization comes from in-app purchases, including virtual gifts associated with our live video product.

We began developing our live video platform in 2016 with the belief that we could successfully pair livestreaming and dating – a model that we had seen work effectively for Asian dating app providers. We first launched video on MeetMe early in 2017, and, in October of 2017, we began to monetize the feature by enabling gifting within the video streams. During this time period, we also executed on our strategy of acquiring other properties – Skout, Inc. (“Skout”), Ifwe Inc. (“if(we)”) and Lovoo GmbH (“Lovoo”) – where we believed our livestreaming platform would fit naturally. We then integrated live video into each app. We launched the monetized video platform on Skout in the fourth quarter of 2017, Tagged in the second quarter of 2018 and Lovoo beginning in the second quarter of 2018. We have also continued to add features and enhancements intended to drive video engagement and increase monetization for all the apps. Live video has become the fastest growing revenue product in our history.

We also offer online marketing capabilities, which enable marketers to display their advertisements on our apps. We offer significant scale to our advertising partners, with hundreds of millions of daily impressions across our active global user base, and sophisticated data science for effective targeting. We work with our advertisers and advertising networks to maximize the effectiveness of their campaigns by optimizing advertisement formats and placements.

Just as Facebook has established itself as the social network of friends and family, and LinkedIn as the social network of colleagues and business professionals, The Meet Group is creating the social entertainment network not of the people you know, but of the people you want to know. Nimble, fast-moving and already in more than 100 countries, we are differentiating ourselves from other dating brands with live video, which is not offered by many of our direct competitors. Modeled after the video products offered by Asian dating app providers, but enhanced in order to appeal to Western audiences, our live video product is aimed at the nexus of entertainment and community, where we believe our apps exhibit natural strength.

Our vision extends beyond dating and entertainment. We focus on building quality products to satisfy the universal need for human connection among all people, everywhere – not just paying subscribers. We believe meeting new people is a basic human need, especially for users aged 18 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, The Meet Group’s apps have originated untold numbers of chats, shares, good friendships, dates, romantic relationships – even marriages.

We believe that we have significant growth opportunities enabled through our social entertainment platform. We believe our scale provides unique advantages to grow video monetization, while also establishing a high density of users within the geographic regions we serve. As The Meet Group’s networks grow and the number of users in a location increases, we believe that users who are seeking to meet new people will incrementally benefit from the quantity of relevant connections.

Basis of Presentation 

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The condensed consolidated financial statements include the accounts of all subsidiaries and affiliates in which the Company holds a controlling financial interest as of the date of the condensed consolidated financial statements.

The condensed consolidated financial statements include the accounts of The Meet Group and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.


7




Unaudited Interim Financial Information

The unaudited condensed consolidated financial statements have been prepared by the Company and reflect all normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the interim financial information. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the year ending December 31, 2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted under the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the audited consolidated financial statements and notes included therein in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on March 8, 2019.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in revenue recognition, accounting for business combinations, accounts receivable valuation, the fair value of financial instruments, the valuation of long-lived assets, the valuation of deferred tax assets, income taxes, contingencies, goodwill and intangible assets, video broadcaster rewards and stock-based compensation. Some of these judgments can be subjective and complex and, consequently, actual results may differ from these estimates. The Company’s estimates often are based on complex judgments, probabilities and assumptions that it believes to be reasonable but that are inherently uncertain and unpredictable. For any given individual estimate or assumption made by the Company, there may also be other estimates or assumptions that are reasonable.

The Company regularly evaluates its estimates and assumptions using historical experience and other factors, including the economic environment. As future events and their effects cannot be determined with precision, the Company’s estimates and assumptions may prove to be incomplete or inaccurate, or unanticipated events and circumstances may occur that might cause it to change those estimates and assumptions. Market conditions, such as illiquid credit markets, volatile equity markets, dramatic fluctuations in foreign currency rates and economic downturn, can increase the uncertainty already inherent in its estimates and assumptions. The Company adjusts its estimates and assumptions when facts and circumstances indicate the need for change. Those changes generally will be reflected in the Company’s condensed consolidated financial statements on a prospective basis unless they are required to be treated retrospectively under the relevant accounting standard. It is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. The Company is also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts, such as changes in competition, litigation, legislation and regulations.

During 2019, the Company started to take breakage on video broadcaster rewards based on historical levels of activity of video broadcasters and their corresponding video broadcaster reward balances. Based on this analysis, the Company reduced its accrual for video broadcaster rewards by $2.8 million. This reduction of expense is recognized in product development and content expense in the consolidated statements of operations and comprehensive income (loss) for the nine months ended September 30, 2019. The Company will continue to regularly evaluate the likelihood of a user redeeming video broadcaster rewards and adjust breakage accordingly.

Fair Value Measurements

The fair values of the Company’s financial instruments reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price).

The carrying amounts of the Company’s financial instruments of cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities. The Company has evaluated the estimated fair value of these financial instruments using available market information and management’s estimates. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts.

In addition, the Company carries its contingent consideration liability related to the Growlr Acquisition (defined in Note 2— Acquisition) at fair value. In accordance with the three-tier fair value hierarchy, the Company determined the fair value of its contingent consideration liability using the income approach with assumed discount rates and payment probabilities. The income approach uses Level 3, or unobservable inputs, as defined under the accounting guidance for fair value measurements. As of September 30, 2019, the Company’s contingent consideration liability had a fair value of $1.8 million. See Note 2— Acquisition for more information regarding the Company’s contingent consideration liability.

8





The Company carries a term loan facility with an outstanding balance as of September 30, 2019 and December 31, 2018 of $35.0 million and $36.9 million, respectively. As part of the Growlr Acquisition, the Company drew down $7.0 million on its previous revolving credit facility. In August 2019, the Company refinanced its credit facilities. See Note 6— Debt for further details. The outstanding balances of the Company’s term loan facility as of September 30, 2019 and December 31, 2018 approximate fair value due to the variable market interest rates and relatively short maturity associated with them. See Note 6— Debt for more information regarding the Company’s credit facilities.

The Company leases its operating facilities in the U.S. and Germany under certain non-cancelable operating leases that expire through 2023. The Company also leases certain assets under finance leases that expire through 2021. The finance leases are for the Company's data centers, printers and other furniture in the Company's German offices. The outstanding balances of operating and finance leases as of September 30, 2019 and December 31, 2018 approximate fair value due to their relatively short maturities.

The Company records all derivative financial instruments on the consolidated balance sheets at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

The Company measures the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. See Note 10— Derivatives and Hedging Activities for further details.

Foreign Currency

The functional currency of the Company’s foreign subsidiaries is the local currency. The financial statements of these subsidiaries are translated to U.S. dollars using period-end rates of exchange for assets and liabilities and average quarterly rates of exchange for revenues and expenses. Translation gains and losses are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity on the consolidated balance sheets. Net gains and losses resulting from foreign exchange transactions are included in other income (expense) in the Company’s consolidated statements of operations and comprehensive income (loss).

Net Income (Loss) per Share

Basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted- average number of common shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares and common stock equivalents outstanding, calculated using the treasury stock method for options, unvested restricted stock awards (“RSAs”) and unvested in-the-money performance share units (“PSUs”) using the average market prices during the period.


9




The following table shows the computation of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2019 and 2018:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
2,990,980

 
$
1,297,931

 
$
6,452,405

 
$
(3,150,002
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding— basic
74,674,981

 
73,362,467

 
75,056,593

 
72,704,205

Effect of dilutive securities
1,530,041

 
6,003,109

 
2,780,382

 

Weighted-average shares outstanding— diluted
76,205,022

 
79,365,576

 
77,836,975

 
72,704,205

 


 
 
 


 
 
Basic net income (loss) per share
$
0.04

 
$
0.02

 
$
0.09

 
$
(0.04
)
Diluted net income (loss) per share
$
0.04

 
$
0.02

 
$
0.08

 
$
(0.04
)

The following table summarizes the number of dilutive securities, which may dilute future earnings per share, outstanding for each of the periods presented, but not included in the calculation of diluted earnings per share:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Stock options
3,220,477

 
3,632,484

 
2,873,675

 
4,833,809

Unvested RSAs
3,651,598

 

 
2,841,097

 
3,782,184

Unvested PSUs
441,223

 

 
348,185

 
1,019,600

Total
7,313,298

 
3,632,484

 
6,062,957

 
9,635,593


Significant Customers and Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. The Company invests its excess cash in high-quality, liquid money market funds maintained by major U.S. banks and financial institutions. The Company has not experienced any losses on its cash and cash equivalents, including its money market funds.

The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company does not have a significant history of material losses from uncollectible accounts. During the nine months ended September 30, 2019 and 2018, two customers, both of which were advertising aggregators (which represent thousands of advertisers) and customer payment processors, comprised 60% and 48% of total revenues, respectively. Two and three customers, which were advertising aggregators and customer payment processors, comprised 41% and 36% of accounts receivable as of September 30, 2019 and December 31, 2018, respectively.

The Company does not expect its current or future credit risk exposure to have a significant impact on its operations; however, there can be no assurances that the Company’s business will not experience any adverse impact from credit risk in the future.












10




Recent Issued Accounting Standards

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02,” or “Accounting Standards Codifications (“ASC”) Topic 842”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU No. 2016-02 was effective for annual periods beginning after December 15, 2018, and annual and interim periods thereafter, and early adoption was permitted. A modified retrospective transition approach was an option for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842) (“ASU No. 2018-11”), which added an optional transition method allowing entities to apply the new lease accounting rules through a cumulative-effect adjustment to the opening balance of retained earnings in the initial year of adoption.

The Company adopted ASU No. 2016-02 as of January 1, 2019, using the transition method per ASU No. 2018-11. Accordingly, all periods prior to January 1, 2019 were presented in accordance with the previous ASC Topic 840, Leases (“ASC Topic 840”), and no retrospective adjustments were made to the comparative periods presented. Finance leases were not impacted by the adoption of ASC Topic 842, as finance lease liabilities and the corresponding ROU assets were already recorded in the Company’s consolidated balance sheets under the previous guidance, ASC Topic 840.

The Company elected the package of practical expedients permitted under the new standard which, among other things, allowed the Company to not reassess the lease classification, the lease identification and the initial direct costs for any existing leases. Further, as permitted by the standard, the Company made an accounting policy election not to record ROU assets or lease liabilities for leases with a term of 12 months or less. Instead, consistent with legacy accounting guidance, the Company will recognize payments for such leases in the consolidated statements of operations and comprehensive income (loss) on a straight-line basis over the lease term. Upon adoption on January 1, 2019, this standard resulted in the recognition of additional assets of $3.2 million and liabilities of $3.3 million on the Company’s consolidated balance sheets. The new standard did not have a material impact on the Company’s results of operations or cash flows.

Accounting Standards Issued and Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”), which requires the measurement and recognition of expected credit losses for certain financial assets, including trade accounts receivable. ASU No. 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of relevant information, including an entity’s historical experience, current conditions and other reasonable and supportable forecasts that affect collectability over the life of a financial asset. The amendments in ASU No. 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU No. 2018-13”). This amendment removes, modifies and makes certain additions to the disclosure requirements on fair value measurement. The amendments in ASU No. 2018-13 are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.



11




Note 2— Acquisition

Growlr

On March 5, 2019, the Company acquired 100% of the issued and outstanding units of Initech, LLC, a privately held company that owns and operates Growlr (“Growlr”), a leading same-sex social app, for cash consideration of $11.8 million, plus an earnout of up to $2.0 million (the “Growlr Acquisition”). The Growlr Acquisition was funded by $4.8 million of cash on hand and a draw down of $7.0 million from the Company’s Prior Revolving Credit Facility. See Note 6— Debt for further details on the Prior Revolving Credit Facility. The earnout of $2.0 million is to be paid in annual $1.0 million installments over the next two years if certain revenue metrics are achieved in each year. The Company expects goodwill to be fully deductible for tax purposes, due to the fact that the Company elected to treat the Growlr Acquisition as an asset acquisition under the relevant sections of the Internal Revenue Code (“IRC”).

The acquisition-date fair value of the consideration transferred is as follows:

 
At March 5, 2019
 
 
Cash consideration (1)
$
11,807,925

Contingent consideration
1,718,000

Total consideration
$
13,525,925

(1) Cash consideration includes a $1.0 million escrow payment to be paid out 18 months from the acquisition date.

The following is the preliminary purchase price allocation as of the March 5, 2019 acquisition date:

 
March 5, 2019
Accounts receivable
$
544,632

Intangible assets
3,480,000

Accrued expenses and other current liabilities
(10,000
)
Deferred revenue
(102,058
)
Net assets acquired
3,912,574

Goodwill
9,613,351

Total consideration
$
13,525,925


The fair value of the Growlr trademarks was determined using an income approach. The fair value of software acquired, which represents the primary platform on which the Growlr apps operate, was determined using a cost approach. The fair value of customer relationships was determined using an excess earnings approach. These amounts are subject to further adjustment as additional information is obtained during the applicable measurement period, which includes the finalization of a third-party appraisal. The Company expects to complete its assessment by the end of 2019.

The amounts assigned to the identifiable intangible assets as of the March 5, 2019 acquisition date are as follows:

 
Fair Value
 
Weighted-average
Amortization Period
(Years)
Trademarks
$
1,200,000

 
10.0
Software
865,000

 
3.0
Customer relationships
1,415,000

 
3.6
Total identifiable intangible assets
$
3,480,000

 
5.7


12




The operating results of Growlr for the period from March 5, 2019 to September 30, 2019 are included in the Company’s consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2019. Growlr contributed revenues of $1.1 million and $2.1 million and net income of $0.4 million and $0.6 million for the three and nine months ended September 30, 2019, respectively. The Company also incurred a total of $0.3 million in transaction costs in connection with the Growlr Acquisition, which is included in acquisition and restructuring costs within the consolidated statements of operations and comprehensive income (loss) for the nine months ended September 30, 2019.

The following pro forma financial information shows the Company’s operating results for the three and nine months ended September 30, 2019 and 2018 as if the Growlr Acquisition had occurred on January 1, 2018. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of what would have occurred if the Growlr Acquisition had been made as of that date.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues
$
52,732,847

 
$
46,999,711

 
$
155,551,914

 
$
129,788,032

Net income (loss)
$
3,079,141

 
$
1,649,629

 
$
7,132,020

 
$
(2,255,256
)

Note 3— Fair Value Measurements

ASC Topic 820, Fair Value Measurement (“ASC Topic 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances.

ASC Topic 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a three-tier fair value hierarchy that distinguishes among the following:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Derivative Financial Instruments

Currently, the Company uses an interest rate swap, interest rate cap and a cross-currency swap to manage its interest rate and foreign exchange risks, respectively.  The valuation of these derivative financial instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of the interest rate swap and the cross-currency swap are determined using the market-standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.


13




The fair value of the interest rate cap is determined using the market-standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the cap. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.

To comply with the provisions of ASC Topic 820, the Company incorporates credit valuation adjustments to appropriately reflect both its non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of the Company’s derivative contracts for the effect of non-performance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. The Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. The Company has determined that the impact of the credit valuation adjustments made to its derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of the Company’s derivatives held as of September 30, 2019 and December 31, 2018 were classified as Level 2 of the fair value hierarchy. See Note 10— Derivatives and Hedging Activities for further discussion on derivative financial instruments.

Recurring Fair Value Measurements

Items measured at fair value on a recurring basis include money market funds, derivatives and contingent consideration. During the periods presented, the Company has not changed the manner in which it values assets and liabilities that are measured at fair value using Level 3 inputs.

The following fair value hierarchy table presents information about each major category of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018:

 
Quoted Prices
in Active
Markets for
Identical
Items
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
September 30, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Money market funds
$
8,091,654

 
$

 
$

 
$
8,091,654

Derivative assets

 
688,529

 

 
688,529

Total assets
$
8,091,654

 
$
688,529

 
$

 
$
8,780,183

Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
1,829,417

 
$
1,829,417

Derivative liabilities

 
650,329

 

 
650,329

Total liabilities
$

 
$
650,329

 
$
1,829,417

 
$
2,479,746

December 31, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Money market funds
$
7,639,866

 
$

 
$

 
$
7,639,866

Derivative assets

 
972,784

 

 
972,784

Total assets
$
7,639,866

 
$
972,784

 
$

 
$
8,612,650

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
940,216

 
$

 
$
940,216

Total liabilities
$

 
$
940,216

 
$

 
$
940,216



14




The following table presents a summary of changes in the fair value of the contingent consideration liability, which represents a recurring measurement that is classified within Level 3 of the fair value hierarchy, wherein fair value is estimated using significant unobservable inputs:


Nine Months Ended September 30, 2019
Balance as of December 31, 2018
$

Amounts acquired
1,718,000

Accretion
111,417

Balance as of September 30, 2019
$
1,829,417


The Company determined the fair value of its contingent consideration liability using the income approach with assumed discount rates and payment probabilities. The income approach uses Level 3, or unobservable inputs, as defined under the accounting guidance for fair value measurement. Based on the Company’s projected results, the Company estimated the probability of success to be 100% for the contingent consideration related to the Growlr Acquisition as of September 30, 2019. The contingent consideration is recorded in accrued expenses and other long-term liabilities on the accompanying consolidated balance sheets as of September 30, 2019.

The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the levels of the fair value hierarchy during the nine months ended September 30, 2019 and as of the year ended December 31, 2018.

Note 4— Intangible Assets, Net and Goodwill

Intangible assets, net consist of the following as of September 30, 2019 and December 31, 2018:

 
September 30, 2019
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Trademarks and domain names
$
35,296,154

 
$
(16,397,484
)
 
$
18,898,670

Customer relationships
15,158,124

 
(9,364,193
)
 
5,793,931

Software
19,527,615

 
(12,776,075
)
 
6,751,540

Total
$
69,981,893

 
$
(38,537,752
)
 
$
31,444,141


 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Trademarks and domain names
$
34,636,802

 
$
(13,406,226
)
 
$
21,230,576

Customer relationships
13,901,313

 
(7,130,285
)
 
6,771,028

Software
18,722,187

 
(10,165,352
)
 
8,556,835

Total
$
67,260,302

 
$
(30,701,863
)
 
$
36,558,439


Amortization expense was $2.8 million and $2.9 million for the three months ended September 30, 2019 and 2018, respectively, and $8.1 million and $8.9 million for the nine months ended September 30, 2019 and 2018, respectively.


15




Annual future amortization expense on intangible assets for the next five years and thereafter as of September 30, 2019 is as follows:

Year Ending December 31,
Amortization
Expense
Remaining in 2019
$
2,393,758

2020
8,511,663

2021
7,046,314

2022
4,109,278

2023
2,713,675

Thereafter
6,669,453

Total amortization expense
$
31,444,141


The change in the carrying amount of goodwill for the nine months ended September 30, 2019 is as follows:

 
Nine Months Ended September 30, 2019
Balance as of December 31, 2018
$
148,132,873

Goodwill acquired from the Growlr Acquisition
9,613,351

Foreign currency translation adjustments
(2,438,631
)
Balance as of September 30, 2019
$
155,307,593


Note 5— Property and Equipment, Net

Property and equipment, net consists of the following as of September 30, 2019 and December 31, 2018:

 
September 30,
2019
 
December 31,
2018
Servers, computer equipment and software
$
14,691,590

 
$
13,656,176

Office furniture and equipment
662,420

 
574,559

Leasehold improvements
644,522

 
646,123

 
15,998,532

 
14,876,858

Less: Accumulated depreciation
(12,165,657
)
 
(10,243,094
)
Property and equipment, net
$
3,832,875

 
$
4,633,764


Depreciation expense was $0.7 million and $0.5 million for the three months ended September 30, 2019 and 2018, respectively, and $1.9 million and $1.6 million for the nine months ended September 30, 2019 and 2018, respectively.

Note 6— Debt

Debt consists of the following as of September 30, 2019 and December 31, 2018:

 
September 30, 2019
 
December 31, 2018
Term loan facility
$
35,000,000

 
$
36,940,158

Less: Debt discount, net
(185,568
)
 
(152,767
)
Less: Debt issuance costs, net
(62,504
)
 
(132,851
)
Net carrying amount
34,751,928

 
36,654,540

Less: Current portion
3,500,000

 
18,566,584

Long-term debt, net
$
31,251,928

 
$
18,087,956


16





Credit Facilities

On September 18, 2017, the Company entered into an amended and restated credit agreement that provided for a $20.0 million revolving credit facility (the “Prior Revolving Credit Facility”) and a $60.0 million delayed draw term loan facility, which was drawn in full on October 18, 2017 to partially fund the Lovoo Acquisition (the “Prior Term Loan Facility,” and together with the “Prior Revolving Credit Facility,” the “Prior Credit Facilities”). The Prior Credit Facilities were amended several times since issuance and were scheduled to mature on September 18, 2020.

Principal payments on the Prior Term Loan Facility amounted to $3.8 million per quarter, and outstanding borrowings on the Prior Credit Facilities bore a variable interest rate, at the Company’s election, of either (i) the base rate, as defined, plus an applicable margin, or (ii) the London Interbank Offered Rate (“LIBOR”), plus an applicable margin. The applicable margin was based on the Company’s total leverage ratio, as defined, and ranged from 1.25% to 2.25% for base rate loans and from 2.25% to 3.25% for LIBOR loans. Unused commitment fees on the Prior Revolving Credit Facility were assessed at a rate of 0.35% per annum. The Company was also required in certain circumstances to use its excess cash flow, as defined, to prepay its obligations under the Prior Credit Facilities. The Prior Credit Facilities were guaranteed and secured by all of the assets of the Company and its domestic subsidiaries, subject to the certain exceptions and exclusions set forth in the amended and restated credit agreement.

On August 29, 2019, the Company entered into a credit agreement that provides for a $25.0 million revolving credit facility (the “New Revolving Credit Facility”) and a $35.0 million term loan facility (the “New Term Loan Facility”) (collectively, the “New Credit Facilities”). Proceeds from the New Term Loan Facility were used to pay, in full, the Company’s outstanding obligations under the Prior Credit Facilities in the amount of $32.9 million, which included $7.0 million in draws under the Prior Revolving Credit Facility to partially fund the Growlr Acquisition. The remaining proceeds under the New Term Loan Facility are available for general corporate purposes. Future draws on the New Revolving Credit Facility are available to fund the Company’s working capital needs or for general corporate purposes. The New Credit Facilities will mature on August 29, 2022, and are subject to mandatory prepayment with 100% of the net cash proceeds from the Company’s issuance of debt or equity, as well as certain other circumstances, subject to the exceptions and limitations set forth in the credit agreement.

Principal payments on the New Term Loan Facility amount to $0.9 million and are due quarterly, beginning on December 31, 2019. Outstanding borrowings on the New Credit Facilities bear a variable interest rate, at the Company’s election, of either (i) the base rate, as defined, plus an applicable margin, or (ii) LIBOR, plus an applicable margin. The applicable margin is based on the Company’s total leverage ratio, as defined, and ranges from 0.75% to 2.00% for base rate loans and from 1.75% to 3.00% for LIBOR loans. Unused commitment fees on the New Revolving Credit Facility are assessed at a rate that ranges from 0.25% to 0.40% per annum, based on the Company’s total leverage ratio. For the period ended September 30, 2019, the weighted-average interest rate on the New Term Loan Facility amounted to 3.87%, and the unused commitment fee on the New Revolving Credit Facility was 0.25%. There were no outstanding borrowings under the New Revolving Credit Facility as of September 30, 2019.

The New Credit Facilities are guaranteed and secured by all of the assets of the current and future domestic subsidiaries of the Company, subject to the certain exceptions and exclusions set forth in the credit agreement. The credit agreement contains customary representations and warranties and events of default, as well as certain affirmative and negative covenants, which include, but are not limited to, restrictions on the Company’s and its domestic subsidiaries’ abilities to incur indebtedness, create liens, merge or consolidate, make dispositions, make restricted payments, such as those for dividends, distributions and share repurchases, make investments, prepay other indebtedness, enter into transactions with affiliates, enter into burdensome agreements and/or make other changes in its business, subject to the exceptions and limitations set forth therein. The Company is also required to meet certain financial covenants, including: (i) a total leverage ratio, as defined, of less than 2.25:1.00 as of the last day of any fiscal quarter, except for the four fiscal quarters following a qualified acquisition, as defined, where the Company is required to maintain a total leverage ratio of less than 2.50:1.00; and, (ii) a fixed charge coverage ratio, as defined, of more than 1.25:1.00 as of the last day of any fiscal quarter. The Company was in compliance with its debt covenants as of September 30, 2019.

The New Credit Facilities were entered into with a syndication of participating financial institutions, some of whom were participants in the Prior Credit Facilities. Accordingly, management applied the framework for modification or extinguishment under GAAP. In connection with its entry into the New Credit Facilities, the Company recognized $0.1 million of expense for third-parties’ fees and incurred a loss on extinguishment of debt of less than $0.1 million, which are included in acquisition and restructuring costs and interest expense, respectively, in the consolidated statements of operations and comprehensive income (loss). The Company also capitalized $0.2 million of debt issuance costs for the New Revolving Credit Facility, which are included as a component of other assets in the consolidated balance sheets, and $0.2 million of debt discount and debt issuance costs for the New Term Loan Facility, which are included as a component of the Company’s long-term debt, net.


17




Scheduled Principal Payments

Prior to its entry into the New Credit Facilities, the Company made $11.1 million of principal payments under the Prior Credit Facilities during the nine months ended September 30, 2019, which included scheduled principal payments of $7.5 million, and an excess cash flow payment of $3.6 million related to the year ended December 31, 2018 that was paid in March 2019.

Minimum future principal payments under the New Credit Facilities as of September 30, 2019 are as follows: 

Years Ending December 31,
 
Credit Facilities
Remaining in 2019
 
$
875,000

2020
 
3,500,000

2021
 
3,500,000

2022
 
27,125,000

Total minimum principal payments
 
$
35,000,000


Note 7— Commitments and Contingencies

Cloud Data Storage

The Company stores a portion of its user and business data using Amazon Web Services in the U.S. with a minimum commitment agreement that expires in 2021. Lovoo stores a majority of its user and business data in the Google Cloud Platform in Germany under a non-cancelable minimum commitment agreement that expires in 2023.

The minimum future commitments required under cloud data storage contracts as of September 30, 2019 are as follows:

Years Ending December 31,
 
Cloud Data Storage
Remaining in 2019
 
$
1,316,580

2020
 
5,677,682

2021
 
6,854,644

2022
 
1,015,358

2023
 
1,116,893

Total minimum commitment payments
 
$
15,981,157


Litigation

From time to time, the Company is party to certain legal proceedings that arise in the ordinary course and are incidental to its business. The Company operates its business online, which is subject to extensive regulation by federal and state governments. Future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on the Company’s consolidated financial position, liquidity or results of operations in any future reporting periods.

Retirement Plan

The Company maintains The Meet Group, Inc. 401(k) Retirement Plan (the “Plan”), which is a savings and investment plan intended to be qualified under the IRC. The Plan covers the majority of the employees of the Company. In January 2014, the Company began providing matching contributions to the Plan, based on a participant’s contribution. The Company’s 401(k) match expense totaled $0.7 million and $0.6 million for the nine months ended September 30, 2019 and 2018, respectively. The expense is included in sales and marketing, product development and content and general and administrative expenses in the consolidated statements of operations and comprehensive income (loss).

Note 8— Stockholders’ Equity

Preferred Stock

The total number of shares of preferred stock, $0.001 par value, that the Company is authorized to issue is 5,000,000.

18





The Company’s Board of Directors may, without further action by the stockholders, issue a series of preferred stock and fix the rights and preferences of those shares, including the dividend rights, dividend rates, conversion rights, exchange rights, voting rights, terms of redemption, redemption price or prices, liquidation preferences, the number of shares constituting any series and the designation of such series.

As of September 30, 2019 and December 31, 2018 there were no shares of preferred stock issued and outstanding.

Common Stock

The total number of shares of common stock, $0.001 par value, that the Company is authorized to issue is 100,000,000.

The Company issued shares of common stock of 157,334 and 1,079,496 related to exercises of stock options and 1,424,439 and 1,591,662 related to RSAs in the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively. The Company issued shares of common stock of 111,350 related to PSUs in the year ended December 31, 2018. No shares of common stock related to PSUs were issued in the nine months ended September 30, 2019.

Share Repurchase Program

On June 14, 2019, the Company announced that its Board of Directors had approved a share repurchase program that authorizes the Company to purchase up to $30.0 million of the Company’s issued and outstanding common stock (the “Share Repurchase Program”). Under the Share Repurchase Program, the Company may, from time to time, at management’s discretion and subject to other legal, regulatory and market conditions, purchase shares of its issued and outstanding common stock in the open market or through negotiated transactions intended to comply with SEC Rule 10b-18, which may be facilitated through one or more 10b5-1 share repurchase plans with a third-party broker. The Share Repurchase Program will continue through the earlier of its expiration date on December 31, 2021, or upon the completion of its authorization limit. Management reserves the right to suspend or discontinue the Share Repurchase Program at any time.

The Company purchased 3,445,267 shares of its issued and outstanding common stock under the Share Repurchase Program through September 30, 2019, which amounted to $12.2 million at an average share price of $3.53 per share. All shares purchased under the Share Repurchase Program were formally retired, or will be retired as soon as administratively feasible. Purchases under the Share Repurchase Program have been accounted for as an increase to the Company’s accumulated deficit in its consolidated balance sheets, and all retired or constructively retired shares have been reflected as authorized and unissued shares. The remaining authorization for the Share Repurchase Program was $17.8 million as of September 30, 2019.

Stock-Based Compensation

The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model, based on weighted- average assumptions. Expected volatility is based on historical volatility of the Company’s common stock. The risk-free rate is based on the U.S. Treasury yield curve in effect over the expected term at the time of grant. Compensation expense is recognized on a straight-line basis over the requisite service period of the award. The Company uses the simplified method to determine the expected option term since the Company’s stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term.

The Company began granting RSAs to its employees in April 2013. The fair value of RSAs is determined using the fair value of the Company’s common stock on the date of grant. Stock-based compensation expense for RSAs is amortized on a straight-line basis over the requisite service period. RSAs generally vest over a three-year period with 33% vesting at the end of one year and the remaining vesting annually thereafter.

The Company began granting PSUs to certain employees in April 2018. PSUs are based on a relative total shareholder return (“TSR”) metric over a performance period spanning three years from the grant date of the PSU. PSUs will vest at the end of the performance period and will be paid immediately in shares of common stock. Stock-based compensation expense for PSUs is estimated on the date of grant and amortized on a straight-line basis over the performance period. PSUs are forfeited if the participant is no longer employed on the third anniversary of the grant date, except in the event of an involuntary termination, death, disability or change in control. The Company estimated the fair value of the PSUs using a Monte-Carlo simulation model utilizing several key assumptions including expected Company and Russell 2000 Peer Group share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features.


19




The assumptions used in calculating the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future.

Stock-based compensation expense is recognized on a straight-line basis over the requisite service period of all awards given by the Company.

Stock-based compensation expense includes incremental stock-based compensation expense and is allocated on the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2019 and 2018 as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Sales and marketing
$
117,610

 
$
592,979

 
$
294,108

 
$
823,748

Product development and content
1,815,991

 
1,232,823

 
4,958,315

 
3,508,753

General and administrative
1,097,691

 
941,394

 
3,068,922

 
2,694,490

Total stock-based compensation expense
$
3,031,292

 
$
2,767,196

 
$
8,321,345

 
$
7,026,991


As of September 30, 2019, there was $0.7 million, $14.9 million and $3.4 million of total unrecognized compensation cost, which is expected to be recognized over a weighted-average vesting period of 0.6 years, 2.0 years and 2.3 years relating to stock options, RSAs and PSUs, respectively.

Stock Compensation Plans

2018 Omnibus Incentive Plan

On June 1, 2018, the Company’s stockholders approved the 2018 Omnibus Incentive Plan (the “2018 Plan”), providing for the issuance of up to 8.8 million shares of the Company’s common stock, including 0.3 million shares previously approved by the Company’s stockholders under the Company’s Amended and Restated 2012 Omnibus Incentive Plan (the “2012 Plan”), minus one share of common stock for every one share of common stock that was subject to an option granted after April 9, 2018 but before June 1, 2018 under the 2012 Plan, plus an additional number of shares of common stock equal to the number of options previously granted under the 2012 Plan and the Amended and Restated 2006 Stock Incentive Plan (the “2006 Stock Plan”) that either terminate, expire or are forfeited after April 9, 2018 and any restricted stock awards that either terminate, expire or are forfeited equal to the number of awards granted under the 2012 Plan and 2006 Stock Plan multiplied by the fungible ratio of 1.4. As of September 30, 2019, there were 3.1 million shares of common stock available for grant.

Restricted Stock Awards Under 2018 Omnibus Incentive Plan

RSA activity under the 2018 Plan for the nine months ended September 30, 2019 is as follows:

RSAs
 
Number of
RSAs
 
Weighted-average
Stock Price
Outstanding as of December 31, 2018
 
1,677,227

 
$
4.18

Granted
 
2,454,860

 
$
5.21

Vested
 
(647,621
)
 
$
4.16

Forfeited or expired
 
(118,390
)
 
$
4.97

Outstanding and unvested as of September 30, 2019
 
3,366,076

 
$
4.91


Shares are forfeited if not vested within three years from the date of grant and vest in three equal annual increments. The Company recorded stock-based compensation expense related to RSAs under the 2018 Plan of $1.8 million and $0.7 million for the three months ended September 30, 2019 and 2018, respectively, and $4.3 million and $0.8 million for the nine months ended September 30, 2019 and 2018, respectively.


20




Performance Share Units Under 2018 Omnibus Incentive Plan

PSU share payouts range from a threshold of 33% to a maximum of 170% based on the relative ranking of the Company’s TSR as compared to the TSR of the companies in the Russell 2000 Peer Group. The PSUs stipulate certain limitations to the payout in the event the payout reaches a defined ceiling level or the Company’s TSR is negative. The Company estimated the fair value of the PSUs at the date of grant using a Monte-Carlo simulation model utilizing several key assumptions including expected Company and Russell 2000 Peer Group share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features.

PSU activity under the 2018 Plan for the nine months ended September 30, 2019 is as follows:

PSUs
 
Number of
PSUs
 
Weighted-average
Stock Price
Outstanding as of December 31, 2018
 
60,000

 
$
4.65

Granted
 
476,100

 
$
5.91

Vested
 

 
$

Forfeited or expired
 

 
$

Outstanding and unvested as of September 30, 2019
 
536,100

 
$
5.77


The Company recorded stock-based compensation expense related to PSUs under the 2018 Plan of $0.2 million and less than $0.1 million for three months ended September 30, 2019 and 2018, respectively, and $0.5 million and less than $0.1 million for the nine months ended September 30, 2019 and 2018, respectively.

Amended and Restated 2012 Omnibus Incentive Plan

On December 16, 2016, the Company’s stockholders approved the 2012 Plan, providing for the issuance of up to 10.5 million shares of the Company’s common stock, including 2.1 million shares previously approved by the Company’s stockholders under the Company’s 2006 Stock Plan, less one share of common stock for every one share of common stock that was subject to an option or other award granted after December 31, 2011 under the 2006 Stock Plan, plus an additional number of shares of common stock equal to the number of shares previously granted under the 2006 Stock Plan that either terminate, expire or are forfeited after December 31, 2011. As of June 1, 2018, grants are no longer issued from the 2012 Plan.

Stock option activity under the 2012 Plan during the nine months ended September 30, 2019 is as follows:

Stock Options
 
Number of
Stock
Options
 
Weighted-
average
Exercise
Price
 
Weighted-
average
Remaining
Contractual Life
 
Aggregate
Intrinsic Value
Outstanding as of December 31, 2018
 
2,447,315

 
$
3.27

 
 
 
 
Granted
 

 
$

 
 
 
 
Exercised
 
(106,903
)
 
$
4.33

 
 
 
 
Forfeited or expired
 
(8,333
)
 
$
5.35

 
 
 
 
Outstanding as of September 30, 2019
 
2,332,079

 
$
3.22

 
6.3
 
$
1,397,720

Exercisable as of September 30, 2019
 
2,063,770

 
$
3.07

 
6.1
 
$
1,336,471


The total intrinsic value of options exercised under the 2012 Plan was $0.2 million and $0.6 million for the nine months ended September 30, 2019 and 2018, respectively. The Company recorded stock-based compensation expense related to options under the 2012 Plan of $0.2 million and $0.6 million for the three months ended September 30, 2019 and 2018, respectively, and $0.8 million and $1.3 million for the nine months ended September 30, 2019 and 2018, respectively.


21




Restricted Stock Awards Under Amended and Restated 2012 Omnibus Incentive Plan

RSA activity under the 2012 Plan for the nine months ended September 30, 2019 is as follows:

RSAs
 
Number of
RSAs
 
Weighted-average
Stock Price
Outstanding as of December 31, 2018
 
1,166,535

 
$
3.58

Granted
 

 
$

Vested
 
(769,055
)
 
$
3.32

Forfeited or expired
 
(18,400
)
 
$
3.87

Outstanding and unvested as of September 30, 2019
 
379,080

 
$
4.11


Shares are forfeited if not vested within three years from the date of grant and vest in three equal annual increments. The Company recorded stock-based compensation expense related to RSAs under the 2012 Plan of $0.4 million and $0.9 million for the three months ended September 30, 2019 and 2018, respectively, and $1.4 million and $3.2 million for the nine months ended September 30, 2019 and 2018, respectively.

Performance Share Units Under Amended and Restated 2012 Omnibus Incentive Plan

PSU share payouts range from a threshold of 33% to a maximum of 170% based on the relative ranking of the Company’s TSR as compared to the TSR of the companies in the Russell 2000 Peer Group. The PSUs stipulate certain limitations to the payout in the event the payout reaches a defined ceiling level or the Company’s TSR is negative. The Company estimated the fair value of the PSUs at the date of grant using a Monte-Carlo simulation model utilizing several key assumptions including expected Company and Russell 2000 Peer Group share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features.

PSU activity under the 2012 Plan for the nine months ended September 30, 2019 is as follows:

PSUs
 
Number of
PSUs
 
Weighted-average
Stock Price
Outstanding as of December 31, 2018
 
550,000

 
$
2.94

Granted
 

 
$

Vested
 

 
$

Forfeited or expired
 

 
$

Outstanding and unvested as of September 30, 2019
 
550,000

 
$
2.94


The Company recorded stock-based compensation expense related to PSUs under the 2012 Plan of $0.1 million and $0.3 million for the three months ended September 30, 2019 and 2018, respectively, and $0.4 million for each of the nine months ended September 30, 2019 and 2018.

Amended and Restated 2006 Stock Incentive Plan

On June 27, 2007, the Company’s stockholders approved the 2006 Stock Plan, providing for the issuance of up to 3.7 million shares of common stock plus an additional number of shares of common stock equal to the number of shares previously granted under the 1998 Stock Option Plan that either terminate, expire or lapse after the date of its Board of Directors’ approval of the 2006 Stock Plan. All options granted and outstanding have been fully expensed prior to 2016.


22




Stock option activity under the 2006 Stock Plan for the nine months ended September 30, 2019 is as follows:

Stock Options
 
Number of
Stock
Options
 
Weighted-
average
Exercise
Price
 
Weighted-average
Remaining
Contractual Life
 
Aggregate Intrinsic
Value
Outstanding as of December 31, 2018
 
1,074,411

 
$
4.00

 
 
 
 
Granted
 

 
$

 
 
 
 
Exercised
 
(23,764
)
 
$
3.78

 
 
 
 
Forfeited or expired
 

 
$

 
 
 
 
Outstanding as of September 30, 2019
 
1,050,647

 
$
4.00

 
2.0
 
$
400

Exercisable as of September 30, 2019
 
1,006,468

 
$
4.02

 
2.1
 
$
400


The total intrinsic value of options exercised under the 2006 Stock Plan was less than $0.1 million for the each of the nine months ended September 30, 2019 and 2018.

Amended and Restated 2016 Inducement Omnibus Incentive Plan

On October 3, 2016, in connection with the closing of the acquisition of Skout, the Company’s Board of Directors adopted the 2016 Inducement Omnibus Incentive Plan in accordance with NASDAQ Listing Rule 5635(c)(4). At the closing of the acquisition of Skout, the Company granted stock options to purchase an aggregate of up to 355,000 shares of its common stock to 25 former Skout employees as an inducement material to becoming non-executive employees of the Company. On February 27, 2017, the Company amended and restated the 2016 Inducement Omnibus Incentive Plan (as so amended and restated, the “2016 Stock Plan”) and authorized an additional 2,000,000 shares of common stock under the 2016 Stock Plan. At the closing of the acquisition of if(we), the Company granted options to purchase an aggregate of up to 75,000 shares of its common stock and RSAs representing an aggregate of 717,500 shares of common stock to 83 former if(we) employees as an inducement material to becoming non-executive employees of the Company. At the closing of the acquisition of Lovoo, the Company granted RSAs representing an aggregate of 531,500 shares of common stock to 96 former Lovoo employees as an inducement material to becoming non-executive employees of the Company.

Stock Options Under The 2016 Stock Plan

Stock option activity under the 2016 Stock Plan for the nine months ended September 30, 2019 is as follows:

Stock Options
 
Number of
Stock
Options
 
Weighted-
average
Exercise
Price
 
Weighted-
average
Remaining
Contractual Life
 
Aggregate
Intrinsic Value
Outstanding as of December 31, 2018
 
444,168

 
$
5.10

 
 
 
 
Granted
 

 
$

 
 
 
 
Exercised
 
(26,667
)
 
$
5.69

 
 
 
 
Forfeited or expired
 
(97,501
)
 
$
5.02

 
 
 
 
Outstanding as of September 30, 2019
 
320,000

 
$
5.07

 
7.3
 
$

Exercisable as of September 30, 2019
 
213,333

 
$
5.07

 
7.3
 
$


The total intrinsic value of options exercised under the 2016 Stock Plan was less than $0.1 million during the nine months ended September 30, 2019. No options under the 2016 Stock Plan were exercised during the nine months ended September 30, 2018. The Company recorded stock-based compensation expense related to options under the 2016 Stock Plan of $0.1 million for each of the three months ended September 30, 2019 and 2018 and $0.3 million for each of the nine months ended September 30, 2019 and 2018.

23





Restricted Stock Awards Under The 2016 Stock Plan

RSA activity under the 2016 Stock Plan for the nine months ended September 30, 2019 is as follows:

RSAs
 
Number of
RSAs
 
Weighted-average
Stock Price
Outstanding as of December 31, 2018
 
474,686

 
$
4.25

Granted
 

 
$

Vested
 
(93,332
)
 
$
5.25

Forfeited or expired
 
(72,002
)
 
$
3.79

Outstanding and unvested as of September 30, 2019
 
309,352

 
$
4.06


Shares are forfeited if not vested within three years from the date of grant, and vest in three equal annual increments. The Company recorded stock-based compensation expense related to RSAs under the 2016 Stock Plan of $0.2 million for each of the three months ended September 30, 2019 and 2018, and $0.6 million and $1.0 million for the nine months ended September 30, 2019 and 2018, respectively.

Note 9— Income Taxes

The Company recorded a net income tax expense of $1.0 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively, and $2.2 million and $0.5 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in net income tax expense recorded during the three and nine months ended September 30, 2019 was primarily related to higher net income in the U.S., partially offset by lower estimated Global Intangible Low-Taxed Income (“GILTI”) tax and discrete tax benefits related to a windfall benefit on stock-based compensation.

For the nine months ended September 30, 2019, the Company’s effective tax rate (“ETR”) from operations was 25.7%, compared with (18.2)% for the nine months ended September 30, 2018. The difference between the Company’s ETR and the current U.S. statutory rate of 21% is primarily related to permanent addback items, the difference in tax rates between the U.S. and Germany and the discrete tax impacts of a windfall benefit on stock-based compensation. The increase in the ETR for the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018 was primarily related to higher net income in the U.S., partially offset by lower estimated GILTI tax and the discrete tax impacts related to a windfall benefit on stock-based compensation.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets (primarily federal and state net operating losses (“NOLs”)). As of September 30, 2019 and December 31, 2018, the Company has a valuation allowance related to acquired state NOLs that the Company believes it is not more likely than not will be realized.

During each of the three and nine months ended September 30, 2019 and 2018, the Company had no material changes in uncertain tax positions.

Note 10— Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.


24




Certain of the Company’s foreign operations expose the Company to fluctuations of foreign exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency. The Company enters into derivative financial instruments to protect the value or fix the amount of certain liabilities in terms of its functional currency, the U.S. dollar.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. During 2019 and 2018, the Company used such derivatives to hedge the variable cash flows associated with existing variable-rate debt.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company’s accounting policy election. The earnings recognition of excluded components is presented in interest expense. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next 12 months, the Company estimates that less than $0.1 million will be reclassified as an increase to interest expense.

The table below presents outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk as of September 30, 2019:

 
 
Number of
 
At Inception
 
As of September 30, 2019
Interest Rate Derivative
 
Instruments
 
Notional
 
Notional
Interest rate swaps
 
1
 
$45,000,000
 
$15,000,000
Interest rate caps
 
1
 
$15,000,000
 
$10,690,158

Cash Flow Hedges of Foreign Exchange Risk

The Company is exposed to fluctuations in various foreign currencies against its functional currency, the U.S. dollar. The Company uses foreign currency derivatives including cross-currency swaps to manage its exposure to fluctuations in the U.S. dollar to euro exchange rate. Cross-currency swaps involve exchanging fixed rate interest payments for fixed rate interest receipts both of which will occur at the U.S. dollar to euro forward exchange rates in effect upon entering into the instrument. The Company designates these derivatives as cash flow hedges of foreign exchange risks.

For derivatives designated and that qualify as cash flow hedges of foreign exchange risk, the gain or loss on the derivative is recorded in other comprehensive income (loss) and subsequently reclassified in the period(s) during which the hedged transaction affects earnings within the same income statement line item as the earnings effect of the hedged transaction. During the next 12 months, the Company estimates that an additional $0.5 million will be reclassified as a decrease to interest expense.
  

25




On August 29, 2019, the Company terminated its then-existing cross-currency swap and received a settlement of $1.9 million representing the fair value of the cross-currency swap and a net settlement of interest from the counterparty. The Company contemporaneously entered into a new cross-currency swap, of which details are disclosed below.
 
As of September 30, 2019, the Company had the following outstanding foreign currency derivatives that were used to hedge its foreign exchange risks:

Foreign Currency Derivative
 
Number of Instruments
 
Pay Fixed Notional
 
Receive Fixed Notional
Cross-currency swap
 
1
 
€37,772,551
 
$41,750,000
 
 
 
 
(amortizing to €36,867,819 as of September 30, 2019)
 
(amortizing to $40,750,000 as of September 30, 2019)

The table below presents the fair value of derivative financial instruments as well as their classification on the consolidated balance sheets as of September 30, 2019 and December 31, 2018:

 
 
 
 
Fair Value of Derivative Instruments
 
 
 
 
Asset Derivatives
 
Liability Derivatives
 
 
 
 
September 30, 2019
 
December 31, 2018
 
September 30, 2019
 
December 31, 2018
Derivatives Designated as Hedging Instruments
 
Balance Sheet Location
 
Fair Value
 
Fair Value
 
Fair Value
 
Fair Value
Interest rate products
 
Prepaid expenses and other current assets / Accrued expenses
 
$
109

 
$
166,058

 
$
(13,717
)
 
$

Interest rate products
 
Other assets / Long-term derivative liability
 

 
53,355

 

 

Cross-currency swap
 
Prepaid expenses and other current assets / Accrued expenses
 
688,420

 
753,371

 

 

Cross-currency swap
 
Other assets / Long-term derivative liability
 

 

 
(636,612
)
 
(940,216
)
Total derivatives designated as hedging instruments
 
 
 
$
688,529

 
$
972,784

 
$
(650,329
)
 
$
(940,216
)

The tables below present the effect of cash flow hedge accounting on accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2019 and 2018:

Derivatives in Cash Flow Hedging Relationships
 
Amount of Gain (Loss) Recognized in Other Comprehensive Loss from Derivatives
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Interest rate products
 
$
2,114

 
$
38,737

 
$
(128,883
)
 
$
402,522

Cross-currency contract
 
1,473,000

 
518,178

 
2,635,320

 
1,667,652

Total
 
$
1,475,114

 
$
556,915

 
$
2,506,437

 
$
2,070,174


26





Location of Gain Reclassified from Other Comprehensive Loss into Income or Loss
 
Amount of Gain Reclassified from Other Comprehensive Loss into Income or Loss
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Interest expense
 
$
(10,600
)
 
$
(51,661
)
 
$
(93,814
)
 
$
(30,679
)
Interest expense on foreign currency transactions
 
(173,144
)
 
(216,184
)
 
(575,994
)
 
(654,489
)
Gain on foreign currency transactions
 
(1,653,447
)
 
(308,444
)
 
(1,951,235
)
 
(1,453,590
)
Total
 
$
(1,837,191
)
 
$
(576,289
)
 
$
(2,621,043
)
 
$
(2,138,758
)

The tables below present the effect of derivative financial instruments on the consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018.

 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
Interest Expense
 
Foreign Currency Adjustment
 
Interest Expense
 
Foreign Currency Adjustment
Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded
$
(300,319
)
 
$
(27,051
)
 
$
(1,031,379
)
 
$
(94,640
)
Gain on cash flow hedging relationships:
 
 
 
 
 
 
 
Amount of gain reclassified from other comprehensive loss into income or loss
$
(183,744
)
 
$
(1,653,447
)
 
$
(669,808
)
 
$
(1,951,235
)

 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
Interest Expense
 
Foreign Currency Adjustment
 
Interest Expense
 
Foreign Currency Adjustment
Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded
$
(559,345
)
 
$
(6,229
)
 
$
(1,838,325
)
 
$
101,030

Gain on cash flow hedging relationships:
 
 
 
 
 
 
 
Amount of gain reclassified from other comprehensive loss into income or loss
$
(237,734
)
 
$
(308,444
)
 
$
(655,058
)