Quarterly report pursuant to Section 13 or 15(d)

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

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NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
9 Months Ended
Sep. 30, 2018
Accounting Policies [Abstract]  
BASIS OF PRESENTATION
BASIS OF PRESENTATION

These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission (“SEC”), for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) can be condensed or omitted. The condensed consolidated balance sheet for the year ended December 31, 2017 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.  The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto of the Company for the year ended December 31, 2017 which were included in the annual report on Form 10-K filed by the Company on March 14, 2018.
 
In the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and notes thereto of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Company’s financial position and operating results. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of the operating results for the year ending December 31, 2018, or any other interim or future periods.
USE OF ESTIMATES
USE OF ESTIMATES
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to stock-based compensation, investments, the determination of the economic useful life of property and equipment, income taxes and valuation allowances against net deferred tax assets. Management bases its estimates on historical experience or on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION
PRINCIPLES OF CONSOLIDATION

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

RECLASSIFICATIONS
RECLASSIFICATIONS

Certain amounts within the balance sheet and cash flows for the prior periods presented have been reclassified to conform to the current period presentation reflected in these condensed consolidated financial statements. There was no impact to the previously reported net income (loss).
REVENUE RECOGNITION
REVENUE RECOGNITION

Under Accounting Standards Codification ("ASC") 605, revenue was recognized when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, all obligations have been performed pursuant to the terms of the agreement, the sales price is fixed or determinable, and collectability is reasonably assured.

Revenue from the Company’s cybersecurity business results from grants of licenses to its patented cybersecurity technology and settlements reached from legal enforcement of the Company’s patent rights. Revenue is recognized when the arrangement with the licensee has been signed and the license has been delivered and made effective, provided the license fees are fixed or determinable and collectability is reasonably assured.

The total amount of the consideration received upon any settlement or judgment is allocated to each element based on the fair value of each element. Elements provided in either settlement agreements or judgments include, the value of a license, legal release and interest. Fair value of licensing agreements and royalty revenues, are recognized as revenues in the condensed consolidated statement of operations. Elements not related to license agreements and royalty revenue in nature will be reflected in other income (expense), net in the condensed consolidated statements of operations. Legal release as part of a settlement agreement is recognized as a separate line item in the condensed consolidated statements of operations when value can be allocated to the legal release. When the Company reaches a settlement with a defendant, no value is allocated to the legal release since the existence of a settlement removes legal standing to bring a claim of infringement, and without a legal claim, the legal release has no economic value. The element that is applicable to interest income will be recorded in other income (expense), net.

When settlements or judgments are achieved at discounts to the fair value of a license, the Company allocates the full settlement or judgment, excluding specifically named elements as mentioned above, to the value of the license agreement or royalty revenue under the residual method relative to full license fair value prior to the discount.

The Company adopted guidance ASC-606 effective January 1, 2018. For further details, see "Recently adopted accounting pronouncements" below.
CONCENTRATIONS OF CREDIT RISK
CONCENTRATIONS OF CREDIT RISK
 
The Company maintains substantially all of its cash and cash equivalents in financial institutions located in the United States. At times, the Company’s cash and cash equivalent balances may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses in such accounts.
ACCOUNTING FOR WARRANTS
ACCOUNTING FOR WARRANTS

The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
DERIVATIVE LIABILITIES
DERIVATIVE LIABILITIES
 
In connection with the issuance of Series A-1 Preferred Stock, the Company issued a warrant with variable consideration from June 2017 through September 2018. The Company determined that this instrument is an embedded derivative pursuant to ASC 815, “Derivatives and Hedging” and recorded a warrant liability that was reclassified to equity during this period (see Note 6).

The accounting treatment of derivative financial instruments requires that the Company record the warrant, at its fair value as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as a change in the fair value of derivative liabilities for each reporting period at each balance sheet date. The Company reassesses the classification at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

The Monte Carlo Valuation model is used to estimate the fair value of the warrant. The model was developed for use in estimating the fair value of traded options or warrants. The expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the instrument granted.

The risk-free interest rate used is the United States Treasury rate for the day of the grant having a term equal to the life of the equity instrument. The volatility is a measure of the amount by which the Company’s share price has fluctuated or is expected to fluctuate. The dividend yield is zero percent as the Company has not made any dividend payment. The Company determines the expected term of its warrant awards by using the contractual term.
 
The principal assumptions used in applying the model were as follows:
Assumptions:
For Three and Nine Months Ended September 30, 2018
Risk-free interest rate
2.3% - 2.5%
Expected life
1.8 - 2.2 Years
Expected volatility
65% - 70%
Dividends
0.0%
NET INCOME (LOSS) PER COMMON SHARE
NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share is based upon the weighted-average number of common shares outstanding.
INCOME TAXES
INCOME TAXES

The Company accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be computed annually for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax expense or benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
RECENT ACCOUNTING PRONOUNCEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to reporting periods beginning after December 15, 2017, with early adoption permitted for reporting periods beginning after December 15, 2016. Subsequently, FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which is intended to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance; and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which contains certain practical expedients in response to identified implementation issues. The Company elected to adopt ASC-606 under Modified Retrospective approach.  Under the Modified Retrospective approach, only contracts with customers for which there were remaining unsatisfied performance obligations (open contracts) at the beginning of initial year of adoption must be restated to apply retrospectively the guidance under ASC-606.  Any resulting impact for such contracts prior to the beginning of the initial year of adoption are made as an adjustment to opening retained earnings for such year.

On January 1, 2018, the Company adopted ASC-606 using the modified retrospective method. This method required retrospective application of the new accounting standard to those contracts which were not completed as of January 1, 2018. Results for the reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. 

The change to the current revenue policy is the timing of revenue recognition. Under the guidance ASC 605, the Company recognized revenue upon receipt of funds related to an executed agreement or funds which were received within 90 days of receipt. Under the guidance ASC 606, all revenue is recognized upon execution of the agreement, including any future dated payments, which often spread over several quarters or years.
 
The Company recorded $2.6 million to opening retained earnings of $5.6 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to existing contracts that had 2019 payment dates.

The cumulative effect of the changes made to the condensed consolidated balance sheet as of January 1, 2018 under current assets for the adoption ASU 2014-09, Revenue - Revenue from Contracts with Customers were as follows (in thousands):
Balance Sheet
Balance at December 31, 2017
 
Adjustments due to ASU 2014-09
 
Balance at January 1, 2018
Current Assets
 
 
 
 
 
Accounts receivable
$
2,606

 
$
2,550

 
$
5,156

 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
Retained earnings
$
5,555

 
$
2,550

 
$
8,105



In accordance with the new revenue recognition standards, the impact of adoption of ASC-606 to the condensed consolidated statement of operations and balance sheet for the period ended September 30, 2018 was as follows (in thousands):
Income Statement
Three Months ended September 30, 2018
 
Nine Months ended September 30, 2018
 
As reported
 
Balance without adoption - ASC-606
 
Effect of change
 
As reported
 
Balance without adoption - ASC-606
 
Effect of change
 
 
Revenue
$

 
$
1,300

 
$
(1,300
)
 
$
82,300

 
$
81,000

 
$
1,300

 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
$
(2,252
)
 
$
(1,888
)
 
$
(364
)
 
$
11,135

 
$
10,771

 
$
364

 
 
 
 
 
 
 
 
 

 
 
Net income (loss)
$
2,252

 
$
3,188

 
$
(936
)
 
$
71,165

 
$
70,229

 
$
936

 
September 30, 2018
Balance Sheet
As reported
 
Balance without ASC-606
 
Effect of change
Current Assets
 
 
 
 
 
Accounts receivable
$
3,850

 
$

 
$
(3,850
)
Other long-term assets (1)
$
678

 
$

 
$
(678
)
Prepaid income tax
$
2,331

 
$
2,695

 
$
364

 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 

Retained earnings
$
34,042

 
$
29,878

 
$
4,164

(1) Deferred tax assets related to the adoption of ASC-606

 
 
 
 


The Company also adopted the following standards during the nine months ended September 30, 2018, none of which had a material impact on the Company's condensed consolidated financial statements:
Standard
Description
Effective date
2016-09
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
January 1, 2018
2016-15
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
January 1, 2018
2018-07
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share Based Payment Accounting
June 1, 2018


Recently issued accounting pronouncements not yet adopted

In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842) (“ASU 2016-02”). This statement requires entities to recognize on its balance sheet assets and liabilities associated with the rights and obligations created by leases with terms greater than twelve months. In July 2018, the FASB issued ASU 2018-10, to provide certain areas for improvement in ASU 2016-02. The New Leasing Standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those annual periods, early adoption is permitted. Management is evaluating the impact of adopting ASU 2016-02 and ASU 2018-10 on our condensed consolidated financial statements.
 
In July 2017, the FASB issued ASU 2017-11, "Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception". Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the effect of the standard on its condensed consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements (“ASU 2018-13”), which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework project. Adoption of this guidance is required for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating this guidance and the impact of this update on its condensed consolidated financial statements.

Other recent accounting standards that have been issued or proposed by FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company's condensed consolidated financial statements upon adoption.