NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.Organization
comScore, Inc., together with its consolidated subsidiaries (collectively, "Comscore" or the "Company"), headquartered in Reston, Virginia, is a global information and analytics company that measures audiences, consumer behavior and advertising across media platforms.
Operating segments are defined as components of a business that can earn revenues and incur expenses for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker ("CODM"). The Company's CODM is its Chief Executive Officer, who decides how to allocate resources and assess performance. The Company has one operating segment. A single management team reports to the CODM, who manages the entire business. The Company's CODM reviews consolidated results of operations to make decisions, allocate resources and assess performance and does not evaluate the profit or loss from any separate geography or product line.
Management Changes
On July 5, 2022, the Company's Board of Directors appointed Jonathan Carpenter as the Company's Chief Executive Officer, effective July 6, 2022. In connection with Mr. Carpenter's appointment, William Livek retired as the Company's Chief Executive Officer. Also on July 5, 2022, the Board of Directors appointed Mary Margaret Curry as the Company's Chief Financial Officer and Treasurer, effective July 6, 2022. Ms. Curry continues to serve as the Company's principal accounting officer.
2.Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned domestic and foreign subsidiaries. All intercompany transactions and balances are eliminated upon consolidation.
Reclassification
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. Specifically, change in fair value of financing derivatives, accretion of debt discount, and amortization of deferred financing costs have been aggregated within other operating activities on the Condensed Consolidated Statements of Cash Flows. In addition, principal payments on software license arrangements, revolving line of credit issuance costs, and payments for taxes related to net share settlement of equity awards have been aggregated within other financing activities on the Condensed Consolidated Statements of Cash Flows.
Unaudited Interim Financial Information
The interim Condensed Consolidated Financial Statements included in this quarterly report have been prepared by the Company and are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("GAAP") have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures contained in this quarterly report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for a quarterly report on Form 10-Q and are adequate to make the information presented not misleading. The interim Condensed Consolidated Financial Statements included herein reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. These interim Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 10-K"). The Condensed Consolidated Results of Operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be anticipated for the entire year ending December 31, 2022 or thereafter. All references to June 30, 2022 and 2021 in the Notes to Condensed Consolidated Financial Statements are unaudited. Use of Estimates and Judgments in the Preparation of the Condensed Consolidated Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expense during the reporting periods. Significant estimates and judgments are inherent in the analysis and the measurement of management's standalone selling price, principal versus agent revenue recognition, determination of performance obligations, determination of transaction price, including the determination of variable consideration and allocation of transaction price to performance obligations, deferred tax assets and liabilities, including the identification and quantification of income tax liabilities due to uncertain tax positions, the valuation and recoverability of goodwill, intangible and other long-lived assets, the determination of appropriate discount rates for lease accounting, the probability of exercising either lease renewal or termination clauses, the assessment of potential loss from contingencies, the fair value determination of contingent consideration from business combinations, financing-related liabilities and warrants, and the valuation of options, performance-based and market-based stock awards. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances.
Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates. The Company evaluates its estimates and assumptions on an ongoing basis.
Business Combination
In December 2021, the Company and two newly formed, wholly owned subsidiaries of the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Shareablee, Inc. ("Shareablee"), pursuant to which the Company acquired Shareablee (the "Merger"). Total consideration paid or payable by the Company related to the Merger (valued as of the closing date of the Merger) was $31.4 million, which included $5.6 million for the fair value of contingent consideration payable based on the achievement of certain contractual milestones or future revenue performance. The maximum amount of contingent consideration payable under the Merger is $8.6 million.
The contingent consideration is classified as a liability due to the fact it will be settled in cash or a variable number of shares of the Company's common stock, par value $0.001 ("Common Stock") (or a combination thereof), and the amount of the payment is not dependent upon the fair value of the Common Stock. The contingent consideration liability is measured at fair value on a recurring basis until the contingency is resolved.
The fair value of the contingent consideration liability is estimated using a combination of valuation techniques. One technique is an option pricing model within a Monte Carlo simulation that determines an average projected payment value across numerous iterations. This technique determines projected payments based on simulated revenues derived from an internal forecast, adjusted for a selected revenue volatility and risk premium based on market data for comparable guideline public companies. The other technique is a discounted cash flow model that assumes achievement of the contractual milestones, resulting in payment of the full deferred amount. In both techniques, the projected payments are then discounted back to the valuation date at the Company's cost of debt using a term commensurate with the contractual payment dates.
In March 2022, the Company determined sufficient achievement of the milestones had been demonstrated and the full amount of the contingent consideration was reasonably certain to be payable. In April 2022, the contingency was resolved and the full amount was deemed payable, subject to reduction for any pending indemnification claims and other terms set forth in the Merger Agreement. The resolution of this contingency eliminated the option pricing model as a valuation technique, and as a result the fair value was remeasured using only the discounted cash flow model. The Company expects to settle the liability in three installments of $3.7 million, $3.7 million and $1.2 million payable in any combination of cash and Common Stock (at the Company's election) in December 2022, 2023 and 2024, respectively.
The estimated fair value of the contingent consideration liability as of June 30, 2022 was $8.0 million. The loss due to change in fair value of $2.4 million for the six months ended June 30, 2022 was classified within general and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss. The loss due to change in fair value for the three months ended June 30, 2022 was negligible.
Refer to Footnote 6, Fair Value Measurements, for additional information on the fair value of the contingent consideration. Preferred Stock
In January 2021, the Company entered into separate Securities Purchase Agreements with each of Charter Communications Holding Company, LLC ("Charter"), Qurate Retail, Inc. ("Qurate") and Pine Investor, LLC ("Pine") (the "Securities Purchase Agreements") for the issuance and sale of shares of Series B Convertible Preferred Stock, par value $0.001 ("Preferred Stock") described in Footnote 4, Convertible Redeemable Preferred Stock and Stockholders' Equity. The issuance of the Preferred Stock pursuant to the Securities Purchase Agreements (the "Transactions") and related matters were approved by the Company's stockholders on March 9, 2021 and completed on March 10, 2021. The Preferred Stock is contingently redeemable upon certain deemed liquidation events, such as a change in control. Because a deemed liquidation event could constitute a redemption event outside of the Company's control, all shares of Preferred Stock have been presented outside of permanent equity in mezzanine equity on the Condensed Consolidated Balance Sheets. The instrument was initially recognized at fair value net of issuance costs. The Company reassesses whether the Preferred Stock is currently redeemable, or probable to become redeemable in the future, as of each reporting date. If the instrument meets either of these criteria, the Company will accrete the carrying value to the redemption value. The Preferred Stock has not been adjusted to its redemption amount as of June 30, 2022 because a deemed liquidation event is not considered probable.
The Preferred Stock includes a change of control put option which allows the holders of the Preferred Stock to require the Company to repurchase such holders' shares in cash in an amount equal to the initial purchase price plus accrued dividends. The change of control put option was determined to be a derivative liability. As of June 30, 2022, the probability of a change of control was determined to be remote and the fair value of the change of control derivative was determined to be negligible.
Warrants Liability
In June 2019, the Company issued warrants to CVI Investments, Inc. ("CVI") in connection with the private placement described in Footnote 4, Convertible Redeemable Preferred Stock and Stockholders' Equity. The warrants were determined to be freestanding financial instruments that qualify for liability treatment as a result of net cash settlement features associated with a cap on the issuance of shares, under certain circumstances, or upon a change of control. Changes in the fair value of these instruments are recorded in other income (expense), net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
The fair value of each warrant is estimated utilizing an option pricing model. Significant valuation inputs include the price and expected volatility of the Company's Common Stock, risk-free rate, and the remaining term of the warrants. As of June 30, 2022, the probability of a change of control was determined to be remote and did not require an enhancement to the valuation technique.
Loss on Extinguishment of Debt
In March 2021, the Company recorded a $9.6 million loss on debt extinguishment related to the payoff of its senior secured convertible notes (the "Notes") and a foreign secured promissory note (the "Secured Term Note"). Loss on extinguishment of debt represents the difference between the carrying value of the Company's debt instruments and any consideration paid to its creditors in the form of cash or shares of the Company's Common Stock on the extinguishment date. These transactions are described in Footnote 5, Debt. Other Income (Expense), Net
Other income (expense), net represents income and expenses incurred that are generally not recurring in nature or are not part of the Company's normal operations. The following is a summary of the significant components of other income (expense), net:
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| | | Three Months Ended June 30, | | Six Months Ended June 30, | | |
(In thousands) | | | | | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Change in fair value of warrants liability | | | | | $ | 4,560 | | | $ | (6,519) | | | $ | 6,995 | | | $ | (16,520) | | | | | |
Change in fair value of financing derivatives | | | | | — | | | — | | | — | | | 1,800 | | | | | |
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Other | | | | | (3) | | | 11 | | | (5) | | | (62) | | | | | |
Total other income (expense), net | | | | | $ | 4,557 | | | $ | (6,508) | | | $ | 6,990 | | | $ | (14,782) | | | | | |
Loss Per Share
The Company uses the two-class method to calculate net loss per share. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. Under the two-class method, earnings for the period are allocated between common stockholders and participating security holders based on their respective rights to receive dividends as if all undistributed book earnings for the period were distributed.
Basic loss per share is computed by dividing total net loss available to common stockholders by the weighted-average number of common shares outstanding for the period. This includes the effect of vested and deferred restricted stock units granted to members of the Company's Board of Directors ("Board") and certain employees. These awards are expected to be settled in shares of Common Stock and generally distributed upon the earlier of the individual's separation from service or a change of control. Diluted loss per share includes the effect of potential common shares, such as the Company's Preferred Stock, Notes, warrants, stock options and restricted stock units, and contingent consideration liability to the extent the effect is dilutive. In periods with a net loss available to common stockholders, the anti-dilutive effect of these potential common shares is excluded and diluted net loss per share is equal to basic net loss per share.
The following is a summary of the Common Stock equivalents for the securities outstanding during the respective periods that have been excluded from the computation of diluted net loss per common share, as their effect would be anti-dilutive:
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| | Three Months Ended June 30, | | Six Months Ended June 30, | | | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | | | | | |
Preferred stock (1) | | 87,255,753 | | | 82,527,609 | | | 85,708,361 | | | 51,350,512 | | | | | | | | | |
Warrants | | 5,457,026 | | | 5,457,026 | | | 5,457,026 | | | 5,457,026 | | | | | | | | | |
Stock options and restricted stock units | | 4,461,988 | | | 5,247,075 | | | 4,566,611 | | | 4,435,010 | | | | | | | | | |
Contingent consideration (2) | | 4,174,757 | | | — | | | 4,174,757 | | | — | | | | | | | | | |
Senior secured convertible notes | | — | | | — | | | — | | | 2,462,981 | | | | | | | | | |
Total | | 101,349,524 | | | 93,231,710 | | | 99,906,755 | | | 63,705,529 | | | | | | | | | |
(1) Includes the effect of potential Common Stock that would be issued to settle unpaid dividends accrued to holders of the Preferred Stock if they elected to convert their shares at the beginning of the period (or at the time of issuance, if later).
(2) A contingent consideration liability was recognized as part of the Shareablee acquisition described in Footnote 2, Summary of Significant Accounting Policies. The liability payments may be settled in any combination of cash or shares of Common Stock (at the Company's election) based on the volume-weighted average trading price of the Common Stock for the ten trading days prior to the date of each payment. Settlement of this liability in Common Stock could potentially dilute basic earnings per share in future periods. The Company calculated a potential anti-dilutive share count based on the expected payments totaling $8.6 million and the $2.06 per share closing price of the Company's Common Stock on the Nasdaq Global Select Market on June 30, 2022. Income Taxes
A significant portion of the Company's net operating loss carryforwards are subject to an annual limitation under Section 382 of the Internal Revenue Code. The Company anticipates the Transactions may have triggered further limitations but has not yet reached a final conclusion as to whether an ownership change occurred and to what extent its net operating loss carryforwards are further limited. If an ownership change occurred as a result of the Transactions, the annual limitation under Section 382 may cause a significant portion of the Company's net operating loss carryforwards to expire prior to use. Due to the Company's valuation allowance position in the United States, the required revaluation of its
deferred tax assets related to these limited U.S. federal and state net operating loss carryforwards is not expected to have a material impact on the Condensed Consolidated Financial Statements or related disclosures.
3.Revenue Recognition
The following table presents the Company's revenue disaggregated by solution group, geographical market and timing of transfer of products and services. The Company has one reportable segment in accordance with ASC 280, Segment Reporting; as such, the disaggregation of revenue below reconciles directly to its unique reportable segment.
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| | Three Months Ended June 30, | | Six Months Ended June 30, | | |
(In thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | | | |
By solution group: | | | | | | | | | | | | |
Digital Ad Solutions | | $ | 51,630 | | | $ | 52,497 | | | $ | 104,767 | | | $ | 105,542 | | | | | |
Cross Platform Solutions | | 39,804 | | | 35,162 | | | 80,633 | | | 72,447 | | | | | |
Total | | $ | 91,434 | | | $ | 87,659 | | | $ | 185,400 | | | $ | 177,989 | | | | | |
By geographical market: | | | | | | | | | | | | |
United States | | $ | 81,631 | | | $ | 77,632 | | | $ | 165,713 | | | $ | 155,406 | | | | | |
Europe | | 4,475 | | | 5,442 | | | 9,682 | | | 13,713 | | | | | |
Canada | | 2,174 | | | 1,817 | | | 3,993 | | | 3,561 | | | | | |
Latin America | | 2,136 | | | 1,704 | | | 3,926 | | | 3,280 | | | | | |
Other | | 1,018 | | | 1,064 | | | 2,086 | | | 2,029 | | | | | |
Total | | $ | 91,434 | | | $ | 87,659 | | | $ | 185,400 | | | $ | 177,989 | | | | | |
By timing of revenue recognition: | | | | | | | | | | | | |
Products and services transferred over time | | $ | 76,738 | | | $ | 69,656 | | | $ | 154,682 | | | $ | 137,772 | | | | | |
Products and services transferred at a point in time | | 14,696 | | | 18,003 | | | 30,718 | | | 40,217 | | | | | |
Total | | $ | 91,434 | | | $ | 87,659 | | | $ | 185,400 | | | $ | 177,989 | | | | | |
Contract Balances
The following table provides information about receivables, contract assets, contract liabilities and customer advances from contracts with customers:
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| | As of | | As of |
(In thousands) | | June 30, 2022 | | December 31, 2021 |
Accounts receivable, net | | $ | 56,566 | | | $ | 72,059 | |
Current and non-current contract assets | | 5,751 | | | 4,875 | |
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Current contract liabilities | | 53,936 | | | 54,011 | |
Current customer advances | | 10,909 | | | 11,613 | |
Non-current contract liabilities | | 574 | | | 1,262 | |
Significant changes in the current contract liabilities balance are as follows:
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| Six Months Ended June 30, |
(In thousands) | 2022 | | 2021 |
Revenue recognized that was included in the opening contract liabilities balance | $ | (43,405) | | | $ | (41,506) | |
Cash received or amounts billed in advance and not recognized as revenue | 44,740 | | | 36,262 | |
Remaining Performance Obligations
As of June 30, 2022, approximately $215.0 million of revenue is expected to be recognized from remaining performance obligations that are unsatisfied (or partially unsatisfied) for non-cancelable contracts with an original expected duration of longer than one year. The Company expects to recognize revenue on approximately 29% of these remaining performance obligations during the remainder of 2022, approximately 38% in 2023, and approximately 16% in 2024, with the remainder recognized thereafter.
4.Convertible Redeemable Preferred Stock and Stockholders' Equity
2021 Issuance of Preferred Stock
On March 10, 2021, the Company issued and sold 82,527,609 shares of Preferred Stock in exchange for aggregate gross proceeds of $204.0 million. Net proceeds from the Transactions totaled $187.9 million after deducting issuance costs.
The Preferred Stock is convertible at the option of the holders at any time into shares of Common Stock based on a conversion rate set in accordance with the Certificate of Designations of the Preferred Stock. The conversion right is subject to certain anti-dilution adjustments and customary provisions related to partial dividend periods. As of June 30, 2022, each share of Preferred Stock would have been convertible into 1.000208 shares of Common Stock, with such assumed conversion rate scheduled to return to 1.00 upon payment of accrued dividends on June 30, 2023.
As of June 30, 2022, no shares of Preferred Stock have been converted into Common Stock.
The holders of Preferred Stock are entitled to participate in all dividends declared on the Common Stock on an as-converted basis and are also entitled to a cumulative dividend at the rate of 7.5% per annum, payable annually in arrears and subject to increase under certain circumstances. In addition, such holders are entitled to request, and the Company will take all actions reasonably necessary to pay, a one-time dividend ("Special Dividend") equal to the highest dividend that the Company's Board determines can be paid at the applicable time (or a lesser amount agreed upon by the holders), subject to additional conditions and limitations set forth in a Stockholders Agreement entered into by the Company and the holders on March 10, 2021 (the "Stockholders Agreement"). As set forth in the Stockholders Agreement, the Company may be obligated to obtain debt financing in order to effectuate the Special Dividend.
2019 Issuance and Sale of Common Stock and Warrants
On June 23, 2019, the Company entered into a Securities Purchase Agreement with CVI, pursuant to which CVI agreed to purchase (i) 2,728,513 shares of Common Stock (the "Initial Shares"), at a price of $7.33 per share and (ii) Series A Warrants, Series B-1 Warrants, Series B-2 Warrants and Series C Warrants, for aggregate gross proceeds of $20.0 million (the "Private Placement"). The Private Placement closed on June 26, 2019 (the "CVI Closing Date"). The Series B-1 Warrants and Series B-2 Warrants expired in 2020.
The Series C Warrants were exercised on October 10, 2019. As a result of this exercise, the Company issued 2,728,513 shares of Common Stock to CVI on October 14, 2019. In addition, the number of shares issuable under the Company's Series A Warrants was increased by 2,728,513.
The Series A Warrants are exercisable by the holders for a period of five years from the CVI Closing Date and are currently exercisable into 5,457,026 shares of Common Stock. The Series A Warrants may be exercised for cash or through a net settlement feature under certain circumstances.
The exercise price for the Series A Warrants is subject to anti-dilution adjustment in certain circumstances, including upon certain issuances of capital stock. Upon the issuance of the Preferred Stock, the Company adjusted the exercise price of the Series A Warrants from $12.00 to $2.4719 per share, the closing price of the Transactions.
CVI will not have the right to exercise any warrant that would result in CVI beneficially owning more than 4.99% of the outstanding Common Stock after giving effect to such exercise. CVI has the right, in its discretion, to raise this threshold up to 9.99% with 60 days' notice to the Company. In addition, if and to the extent the exercise of any warrants would, together with the issuances of the Initial Shares and the shares issued pursuant to the exercise of any other warrants, result in the issuance of 20.0% or more of the outstanding Common Stock of the Company on the CVI Closing Date, the Company intends to, in lieu of issuing such shares, settle the obligation to issue such shares in cash.
The estimated fair value of the Series A Warrants as of June 30, 2022 was $3.5 million. Refer to Footnote 6, Fair Value Measurements, for information on the Level 3 inputs utilized for the determination of the fair value of the warrants. 5.Debt
Revolving Credit Agreement
On May 5, 2021, the Company entered into a senior secured revolving credit agreement (the "Revolving Credit Agreement") among the Company, as borrower, certain subsidiaries of the Company, as guarantors, Bank of America N.A., as administrative agent (in such capacity, the "Agent"), and the lenders from time to time party thereto.
The Revolving Credit Agreement had an original borrowing capacity equal to $25.0 million and bore interest on borrowings at a Eurodollar Rate (as defined in the Revolving Credit Agreement) that was based on LIBOR. The Company may also request the issuance of letters of credit under the Revolving Credit Agreement in an aggregate amount up to $5.0 million, which reduces the amount of available borrowings by the amount of such issued and outstanding letters of credit. The facility has a maturity of three years from the closing date of the agreement.
On February 25, 2022, the Company entered into an amendment (the "Amendment") to the Revolving Credit Agreement to expand its aggregate borrowing capacity from $25.0 million to $40.0 million. The Amendment also replaced the Eurodollar Rate with a SOFR-based interest rate and modified the Applicable Rate definition in the Revolving Credit Agreement to increase the Applicable Rate payable on SOFR-based loans to 2.50% until the date a compliance certificate is received for the quarter ending March 31, 2023, with such Applicable Rate thereafter reducing to 2.25%.
The Amendment also modified certain financial covenants under the Revolving Credit Agreement. As amended, the Revolving Credit Agreement requires the Company to maintain:
•minimum Consolidated EBITDA (as defined in the Revolving Credit Agreement) of not less than $20.0 million for the most recently ended four fiscal quarter period, tested as of the last day of each fiscal quarter ending on or before December 31, 2022;
•a minimum Consolidated Asset Coverage Ratio (as defined in the Revolving Credit Agreement) of not less than 1.5 to 1.0, tested as of the last day of each fiscal quarter ending on or before December 31, 2022; and
•a minimum Consolidated Fixed Charge Coverage Ratio (as defined in the Revolving Credit Agreement) of not less than 1.25 to 1.0 for the most recently ended four fiscal quarter period, tested as of the last day of each fiscal quarter ending on or after March 31, 2023.
Additionally, the Revolving Credit Agreement contains restrictive covenants that limit the Company's ability to, among other things, incur additional indebtedness or liens, make investments and loans, enter into mergers and acquisitions, make or declare dividends and other payments, enter into certain contracts, sell assets and engage in transactions with affiliates. The Revolving Credit Agreement is also subject to customary events of default, including a change in control. If an event of default occurs and is continuing, the Agent or the Required Lenders may accelerate any amounts outstanding and terminate lender commitments. The Company is in compliance with the covenants under the amended Revolving Credit Agreement as of June 30, 2022.
The Revolving Credit Agreement is guaranteed by the Company and its domestic subsidiaries (other than Excluded Subsidiaries (as defined in the Revolving Credit Agreement)) and is secured by a first lien security interest in substantially all assets of the Company and its domestic subsidiaries (other than Excluded Subsidiaries), subject to certain customary exclusions.
As of June 30, 2022, the Company had outstanding borrowings of $16.0 million, and issued and outstanding letters of credit of $3.3 million, under the amended Revolving Credit Agreement, with remaining borrowing capacity of $20.7 million.
Senior Secured Convertible Notes and Financing Derivatives
During 2018, the Company entered into certain agreements with funds affiliated with or managed by Starboard Value LP (collectively, "Starboard"), pursuant to which the Company issued and sold to Starboard a total of $204.0 million in Notes, as well as warrants to purchase shares of the Company's Common Stock. The warrants were exercised in full by Starboard in 2019.
The Notes contained, among other features, an interest rate reset feature which the Company determined represented an embedded derivative that must be bifurcated and accounted for separately from the Notes. This feature reset the interest rate on the Notes based on the trading price of the Company's Common Stock.
Interest on the Notes was payable on a quarterly basis in arrears, at the option of the Company, in cash, or, subject to certain conditions, through the issuance by the Company of additional shares of Common Stock ("PIK Interest Shares"). On January 25, 2021, the Company paid quarterly accrued interest of $6.1 million through the issuance of 2,802,454 PIK Interest Shares.
In connection with the Transactions described in Footnote 4, Convertible Redeemable Preferred Stock and Stockholders' Equity, the Company used cash proceeds of $204.0 million from the issuance of shares of its Preferred Stock to extinguish the Notes and related financing derivatives on March 10, 2021. The Company also issued 3,150,000 additional shares to Starboard (the "Conversion Shares"), as additional creditor consideration, which were valued at $9.6 million. Lastly, the Company paid interest accrued of $4.7 million for the period from January 1, 2021 to March 10, 2021 through the issuance of 1,363,327 PIK Interest Shares. The Company recorded a loss on extinguishment of the Notes of $9.3 million during the three months ended March 31, 2021.
Secured Term Note
During 2019, the Company's wholly owned subsidiary, Rentrak B.V., entered into an agreement with several third parties for the Secured Term Note in exchange for gross proceeds of $13.0 million.
The Secured Term Note included a redemption feature which, upon the occurrence of certain fundamental transactions, would require the Company to redeem the Secured Term Note in full, plus accrued interest, and remit a prepayment premium equal to the remaining contractual interest cash flows (the "interest make-whole redemption"). The Company determined this feature represented an embedded derivative that must be bifurcated and accounted for separately from the Secured Term Note.
In connection with the Transactions described in Footnote 4, Convertible Redeemable Preferred Stock and Stockholders' Equity, the Company used restricted cash from its balance sheet to extinguish the Secured Term Note and interest make-whole redemption on March 10, 2021, of which $13.0 million and $1.0 million were for principal repayments and settlement of the interest make-whole redemption, respectively. The Company recorded a loss on extinguishment of the Secured Term Note of $0.3 million during the three months ended March 31, 2021.
6.Fair Value Measurements
The Company's financial instruments measured at fair value in the accompanying Condensed Consolidated Balance Sheets on a recurring basis consist of the following:
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| As of | | As of |
| June 30, 2022 | | December 31, 2021 |
(In thousands) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
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Assets | | | | | | | | | | | | | | | |
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Money market funds (1) | $ | 439 | | | $ | — | | | $ | — | | | $ | 439 | | | $ | 2,429 | | | $ | — | | | $ | — | | | $ | 2,429 | |
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Liabilities | | | | | | | | | | | | | | | |
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Contingent consideration liability (2) | $ | — | | | $ | 8,003 | | | $ | — | | | $ | 8,003 | | | $ | — | | | $ | — | | | $ | 5,600 | | | $ | 5,600 | |
Warrants liability (3) | — | | | — | | | 3,525 | | | 3,525 | | | — | | | — | | | 10,520 | | | 10,520 | |
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Total liabilities | $ | — | | | $ | 8,003 | | | $ | 3,525 | | | $ | 11,528 | | | $ | — | | | $ | — | | | $ | 16,120 | | | $ | 16,120 | |
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(1) Level 1 cash equivalents are invested in money market funds that are intended to maintain a stable net asset value of $1.00 per share by investing in liquid, high quality U.S. dollar-denominated money market instruments with maturities less than three months.
(2) The fair value of this liability as of June 30, 2022 is derived from a technique which utilizes market-corroborated inputs that result in classification as a Level 2 fair value measurement as of such date. The fair value of this liability as of December 31, 2021 was derived from techniques which utilize inputs, certain of which are significant and unobservable, that result in classification as a Level 3 fair value measurement as of such date. The current and non-current portions of the contingent consideration liability are classified within other current and non-current liabilities in the Condensed Consolidated Balance Sheets. The current portion of the contingent consideration liability was $3.6 million and $1.0 million as of June 30, 2022 and December 31, 2021, respectively. The non-current portion of the contingent consideration liability was $4.4 million and $4.6 million as of June 30, 2022 and December 31, 2021, respectively.
(3) The fair value of this liability is derived from a technique which utilizes inputs, certain of which are significant and unobservable, that result in classification as a Level 3 fair value measurement. Warrants liability includes only the Series A warrants as of June 30, 2022 and December 31, 2021.
The elimination of the option pricing model used to value the contingent consideration liability reflected a change in the Company's valuation technique during the three months ended June 30, 2022. There were no other changes to the Company's valuation techniques or methodologies during the three and six months ended June 30, 2022 or 2021.
The following tables present the changes in the Company's recurring Level 3 fair valued instruments for the six months ended June 30, 2022 and 2021, respectively:
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(In thousands) | | Contingent Consideration Liability | | | | | | Warrants Liability |
Balance as of December 31, 2021 | | $ | 5,600 | | | | | | | $ | 10,520 | |
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Total loss (gain) recognized due to remeasurement (1) | | 2,348 | | | | | | | (6,995) | |
Transfer to Level 2 (2) | | (7,948) | | | | | | | — | |
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Balance as of June 30, 2022 | | $ | — | | | | | | | $ | 3,525 | |
(1) The loss due to remeasurement of the contingent consideration liability was recorded in general and administrative expense, and the gain on remeasurement of the warrants liability was recorded in other income (expense), net, in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
(2) The transfer was due to the resolution of the contingency regarding the amount of consideration payable. Transfers between levels of the fair value hierarchy are recognized at the beginning of the reporting period.
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(In thousands) | Interest Make-whole Derivative Liability | | Financing Derivative Liabilities | | Warrants Liability |
Balance as of December 31, 2020 | $ | 871 | | | $ | 11,300 | | | $ | 2,831 | |
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Total loss (gain) recognized due to remeasurement (1) | 150 | | | (1,800) | | | 16,520 | |
Settlement or derecognition upon extinguishment of host debt (2) | (1,021) | | | (9,500) | | | — | |
Balance as of June 30, 2021 | $ | — | | | $ | — | | | $ | 19,351 | |
(1) All losses and gains were recorded in other income (expense), net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
(2) Refer to Footnote 5, Debt for additional information on the extinguishment of the Notes and Secured Term Note.
The following table displays the valuation technique and the significant inputs, certain of which are unobservable, for the Company's Level 3 liabilities that existed as of June 30, 2022 and December 31, 2021 that are measured at fair value on a recurring basis:
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| | Fair Value Measurements |
| | Significant Valuation Technique | | Significant Valuation Inputs | | June 30, 2022 | | December 31, 2021 |
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Warrants liability | | Option pricing | | Stock price | | $2.06 | | $3.34 |
| | | | Exercise price | | $2.47 | | $2.47 |
| | | | Volatility | | 65.0% | | 85.0% |
| | | | Term | | 1.99 years | | 2.49 years |
| | | | Risk-free rate | | 2.9% | | 0.9% |
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The primary sensitivities in the valuation of the warrants liability are driven by the Common Stock price at the measurement date and the expected volatility of the Common Stock over the remaining term.
7.Accrued Expenses
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(In thousands) | | June 30, 2022 | | December 31, 2021 |
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Accrued data costs | | $ | 15,837 | | | $ | 18,116 | |
Payroll and payroll-related | | 12,519 | | | 16,272 | |
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Professional fees | | 2,288 | | | 2,978 | |
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Other | | 6,643 | | | 7,898 | |
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Total accrued expenses | | $ | 37,287 | | | $ | 45,264 | |
8.Related Party Transactions
Transactions with WPP plc
As of June 30, 2022 (based on public filings), WPP plc and its affiliates ("WPP") owned 11,319,363 shares of the Company's outstanding Common Stock, representing 12.3% of the outstanding Common Stock. The Company provides WPP, in the normal course of business, services amongst its different product lines and receives various services from WPP supporting the Company's data collection efforts.
The Company's results from transactions with WPP, as reflected in the Condensed Consolidated Statements of Operations and Comprehensive Loss, are as follows:
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| Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Revenues | $ | 3,369 | | | $ | 3,287 | | | $ | 6,710 | | | $ | 6,613 | |
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Cost of revenues | 2,234 | | | 2,416 | | | 4,374 | | | 7,093 | |
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The Company has the following balances related to transactions with WPP, as reflected in the Condensed Consolidated Balance Sheets:
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| As of | | As of |
(In thousands) | June 30, 2022 | | December 31, 2021 |
Assets | | | |
Accounts receivable, net | $ | 1,353 | | | $ | 3,506 | |
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Liabilities | | | |
Accounts payable | $ | 1,931 | | | $ | 1,395 | |
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Contract liabilities | 1,910 | | | 3,403 | |
Other non-current liabilities | 671 | | | 1,582 | |
Transactions with Charter, Qurate and Pine
Charter, Qurate (through an affiliate) and Pine each hold 33.3% of the outstanding shares of Preferred Stock, which are entitled to convert into shares of Common Stock and to vote as a single class with the holders of the Common Stock as set forth in the Certificate of Designations. In addition, Charter, Qurate and Pine each designated two members of the Company's Board in accordance with the Stockholders Agreement.
As of June 30, 2022 and December 31, 2021, Charter, Qurate and Pine each owned 27,509,203 shares of the Company's outstanding Preferred Stock. On June 30, 2022, in accordance with the Certificate of Designations, the Company made cash dividend payments totaling $15.5 million to the holders of the Preferred Stock, representing dividends accrued for the period from June 30, 2021 through June 29, 2022. Accrued
dividends to the holders of Preferred Stock as of June 30, 2022 were negligible. The next scheduled dividend payment date for the Preferred Stock is June 30, 2023.
Concurrent with the closing of the Transactions on March 10, 2021, the Company entered into a ten-year Data License Agreement ("DLA") with Charter Communications Operating, LLC ("Charter Operating"), an affiliate of Charter. Under the DLA, Charter Operating will bill the Company for license fees according to a payment schedule that gradually increases from $10.0 million in the first year of the term to $32.3 million in the tenth year of the term. The Company recognizes expense for the license fees ratably over the term. A portion of the annual license fees is allocated to a base license comparable to the Company's prior license with Charter Operating. The remaining fees are allocated to the additional data sets contemplated by the DLA and the designation and related endorsement of the Company as Charter Operating's preferred data measurement partner for the term.
The Company's results from transactions with Charter and its affiliates, as reflected in the Condensed Consolidated Statements of Operations and Comprehensive Loss, are detailed below:
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| Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Revenues | $ | 546 | | | $ | 540 | | | $ | 1,272 | | | $ | 879 | |
Cost of revenues | 5,539 | | | 5,797 | | | 11,067 | | | 10,942 | |
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The Company has the following liability balances related to transactions with Charter and its affiliates, as reflected in the Condensed Consolidated Balance Sheet:
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| | As of | | As of |
(In thousands) | | June 30, 2022 | | December 31, 2021 |
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Accounts payable | | $ | 10,131 | | | $ | 5,180 | |
Accrued expenses | | 4,083 | | | 3,377 | |
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Non-current portion of accrued data costs | | 12,087 | | | 7,843 | |
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The Company recognized revenues of $0.2 million during the three months ended June 30, 2022 and 2021, and $0.4 million during the six months ended June 30, 2022 and 2021, from transactions with Qurate and its affiliates in the normal course of business as reflected in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
The Company had no transactions, other than the issuance of shares of Preferred Stock and related matters, with Pine for the three and six months ended June 30, 2022 and 2021.
Transactions with Starboard
In 2018, the Company entered into certain agreements with Starboard, then a beneficial owner of more than 5.0% of the Company's outstanding Common Stock. Refer to Footnote 5, Debt, for further information regarding these agreements and the Company's issuance of Notes to Starboard in 2018. As a result of these agreements and the transactions contemplated thereby, Starboard ceased to be a beneficial owner of more than 5.0% of the Company's outstanding Common Stock in January 2018. In addition, pursuant to a prior agreement with Starboard, the Company provided Starboard the right to designate certain members to the Company's Board. As of December 31, 2018, Starboard had no remaining right to designate any directors to the Board. As of June 30, 2022, there were no directors remaining on the Board who were designated by Starboard. In connection with the extinguishment of the Notes on March 10, 2021, the Company issued 3,150,000 Conversion Shares to Starboard valued at $9.6 million as discussed in Footnote 5, Debt, which amount was included as a component of loss on extinguishment of debt in the Condensed Consolidated Statement of Operations and Comprehensive Loss. The Company recorded interest expense, inclusive of non-cash accretion of issuance discount and deferred financing costs, related to the Notes of $6.6 million during the three months ended March 31, 2021.
The Company had no outstanding balances related to Starboard as of June 30, 2022 or December 31, 2021.
9.Commitments and Contingencies
Contingencies
The Company is involved in various legal proceedings from time to time. The Company establishes reserves for specific legal proceedings when management determines that the likelihood of an unfavorable outcome is probable, and the amount of loss can be reasonably estimated. The Company has also identified certain other legal matters where an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. In these cases, the Company does not establish a reserve until it can reasonably estimate the loss. Legal fees related to contingencies are expensed as incurred. The outcomes of legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to the Company's operating results and cash flows for a particular period.
Current Matters
The Company is, and may become, a party to a variety of legal proceedings from time to time that arise in the normal course of the Company's business. While the results of such legal proceedings cannot be predicted with certainty, management believes that, based on current knowledge, the final outcome of any such current pending matters will not have a material effect on the Company's financial position, results of operations or cash flows. Regardless of the outcome, legal proceedings can have an adverse effect on the Company because of defense costs, diversion of management resources and other factors.
Indemnification
The Company has entered into indemnification agreements with each of the Company's directors and certain officers, and the Company's amended and restated certificate of incorporation requires it to indemnify each of its officers and directors, to the fullest extent permitted by Delaware law, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he or she is or was a director or officer of the Company. The Company has paid and may in the future pay legal counsel fees incurred by current and former directors and officers who are involved in legal proceedings that require indemnification.
Similarly, certain of the Company's commercial contracts require it to indemnify contract counterparties under specified circumstances, and the Company may incur legal counsel fees and other costs in connection with these obligations.