COMMITMENTS AND CONTINGENCIES

3 Months Ended

Mar. 31, 2020

Commitments and Contingencies Disclosure [Abstract]

Operating and Finance Leases

The Company’s operating leases are primarily comprised of office facilities, with the most significant leases relating to corporate headquarters in San Francisco, and offices in Oakland and New York. The Company's leases have remaining lease terms of 1 to 12 years, some of which include options to extend for 5 year terms, or include options to terminate the leases within 1 year. None of the options to extend the leases have been included in the measurement of the right-of-use asset or the associated lease liability. The Company elected to apply the short-term lease measurement and recognition exemption to its leases where applicable. Generally, operating lease right-of-use assets and operating lease liabilities are recognized at the present value of the future lease payments, generally for the base non-cancellable lease term on the lease commencement date of each lease. The interest rate used to determine the present value of the future lease payments is the Company's incremental borrowing rate because the interest rate implicit in most of the Company's leases is not readily determinable. The Company's incremental borrowing rate is estimated to approximate the interest rate that the Company would pay to borrow on a collateralized basis with similar terms and payments as the lease, and in economic environments where the leased asset is located. Operating lease right-of-use assets also include any prepaid lease payments and lease incentives. The Company's lease agreements generally contain lease and non-lease components. Non-lease components, which primarily include payments for maintenance and utilities, are combined with lease payments and accounted for as a single lease component. The Company includes the fixed non-lease components in the determination of the right-of-use assets and operating lease liabilities. The Company records the amortization of the right-of-use asset and the accretion of lease liability as a component of rent expense in the consolidated statement of operations.

In December 2018, the Company entered into a lease arrangement for 355,762 square feet of office space in Oakland, California for a term of 12 years with options to extend the lease term for two 5 year terms. The lease commencement date was January 15, 2020. In July 2019, the Company entered into a lease arrangement for 226,158 square feet of office space in St Louis, Missouri, with an affiliate of one of the Company’s co-founders, Mr. Jim McKelvey, who is also a Company stockholder and a member of its board of directors, for a term of 15.5 years with options to extend the lease term for two 5 year terms. The Company also has an option to terminate the lease for up to 50% of the leased space any time between January 1, 2024 and December 31, 2026, as well as an option to terminate the lease for the entire property on January 1, 2034. Termination penalties specified in the lease agreement will apply if the Company exercises any of the options to terminate the lease. The lease commencement date is expected to be in July 2020 with total future minimum lease payments over the term of approximately $42.7 million.

Additionally, the Company has finance leases for data center equipment, with remaining lease terms of approximately 0.8 years.

The components of lease expense for the periods presented are follows (in thousands):


	Three Months Ended March 31,
	2020		2019
Fixed operating lease costs	$	15,125	$	6,690
Variable operating lease costs	5,724		637
Short term lease costs	1,856		441
Sublease income	(1,437)		—
Finance lease costs
Amortization of finance right-of-use assets	1,054		1,293
Interest on finance lease liabilities	—		—
Total lease costs	$	22,322	$	9,061

Other information related to leases was as follows:


	March 31, 2020
Weighted Average Remaining Lease Term:
Operating leases	8.8 years
Finance leases	0.5 years
Weighted Average Discount Rate:
Operating leases	4	%
Finance leases	—	%

Cash flows related to leases were as follows (in thousands):


	Three Months Ended March 31,
	2020		2019
Cash flows from operating activities:
Payments for operating lease liabilities	$	(9,570)	$	(9,293)
Cash flows from financing activities:
Principal payments on finance lease obligation	$	(1,054)	$	(1,284)
Supplemental Cash Flow Data:
Right-of-use assets obtained in exchange for operating lease obligations	$	255,553	$	19,918

Future minimum lease payments under non-cancelable operating leases (with initial lease terms in excess of one year) and future minimum finance lease payments as of March 31, 2020 are as follows (in thousands):


	Finance		Operating
Year:
Remainder of 2020	$	1,391	$	39,616
2021	—		67,683
2022	—		70,409
2023	—		65,056
2024	—		45,520
Thereafter	—		269,229
Total	$	1,391	$	557,513
Less: amount representing interest	—		78,640
Less: leases executed but not yet commenced	—		82,692
Less: lease incentives	—		9,284
Total	$	1,391	$	386,897

The current portion of the finance lease liability is included within other current liabilities while the non-current portion is included within other non-current liabilities on the condensed consolidated balance sheets. The associated finance lease assets are included in property and equipment, net on the condensed consolidated balance sheets.

Litigation

The Company is currently subject to, and may in the future be involved in, various litigation matters, legal claims, and investigations.

The Treasurer & Tax Collector of the City and County of San Francisco (Tax Collector) has issued decisions for fiscal years 2014, 2015, 2016, and 2017 that the Tax Collector believes the Company’s primary business activity is financial services rather than information, and accordingly, the Company would be liable for the Gross Receipts Tax and Payroll Expense Tax under the rules for financial services business activities. The Company is required to pay tax assessments prior to contesting any such assessments. This requirement is commonly referred to as “pay-to-play.” In connection with the tax audits, the Company paid an additional $1.3 million for fiscal years 2014 and 2015 in the first quarter of 2018, and an additional $8.4 million for fiscal years 2016 and 2017 in the fourth quarter of 2019, as assessed by the Tax Collector, even though the Company strongly disagrees with the Tax Collector’s assessment of the Company’s primary business activity. On September 6, 2019, the Company filed a lawsuit against the Tax Collector and the City and County of San Francisco in the San Francisco County Superior Court for a refund of the $1.3 million paid for the fiscal years of 2014 and 2015. On November 14, 2019, the Company also filed a petition for redetermination with the Tax Collector for fiscal years 2016 and 2017. The Company has been in discussions with the City and County of San Francisco to resolve the matter and on May 4, 2020, entered into a settlement agreement that is subject to approval by the Mayor, Controller, and the Board of Supervisors of the City and County of San Francisco. Should the agreement not be approved or should the Company not prevail in its legal challenge against the application of San Francisco’s Gross Receipts Tax to its business, the Company estimates that it could incur additional losses associated with taxes, interest, and penalties in the range of approximately $0 to $66 million in the aggregate for the fiscal years 2016, 2017, 2018, 2019, and for the three months ended on March 31, 2020, over and above the taxes the Company has already paid under the information classification. Additional taxes, interest, and penalties for future periods could be material as well. The Company regularly assesses the likelihood of adverse outcomes resulting from tax disputes such as this and examinations for all open years to determine the necessity and adequacy of any tax reserves. The eventual outcome could differ materially from the estimates we have made in the financial statements.

From time to time, the Company is also subject to various legal matters and disputes arising in the ordinary course of business. The Company cannot at this time fairly estimate a reasonable range of exposure, if any, of the potential liability with respect to these other matters. Although occasional adverse decisions or settlements may occur, the Company does not believe that the final disposition of any of these matters will have a material adverse effect on its results of operations, financial position, or liquidity. The Company cannot give any assurance regarding the ultimate outcome of these other matters, and their resolution could be material to the Company's operating results for any particular period.