Leases

9 Months Ended

Sep. 30, 2020

We have adopted Topic 842 effective January 1, 2019 on a modified retrospective basis and elected not to restate comparative periods. We chose to use certain practical expedients offered by the standard including:

•We did not reassess whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases, or the initial direct costs for any existing leases,

•We do not recognize a lease liability or right of use asset for leases with a term of 12 months or less, and

•We used hindsight in determining the lease term.

We lease space under non-cancellable operating leases for our offices as well as our data centers. Our office leases typically include free rent periods or rent escalation periods, and may also include leasehold improvement incentives. Leases for data centers may also include free rent periods or rent escalation periods. These leases typically do not include residual value guarantees. Both office and data center leases may contain both lease components (rent) and non-lease components (maintenance, electrical costs, and other service charges). Non-lease components are accounted for separately.

Both office and data center leases typically contain options to renew, and/or early terminate. Options have been included in the lease term if management has determined it is reasonably certain it will be exercised.

Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate at lease commencement to determine the present value of future payments. We have a centralized treasury function, and the majority of our leases are negotiated and signed by representatives of Criteo SA. As such, the incremental borrowing rate of Criteo SA is used for all of our contracts. It is then adjusted in consideration of the currency of the lease and the lease term as of the lease commencement date.

Lease expense is recognized for minimum lease payments on a straight-line basis over the lease term. Variable costs are expensed in the period incurred. Variable expenses include changes in indexation. Leases for data centers may have variable costs based on electrical usage.

The components of lease expense are as follows:


	Three Months Ended
	September 30, 2019						September 30, 2020
	Offices		Data Centers		Total		Offices		Data Centers		Total
	(in thousands)
Lease expense	$	8,515	$	6,086	$	14,601	$	6,969	$	7,199	$	14,168
Short term lease expense	496		518		1,014		115		—		115
Variable lease expense	406		605		1,011		307		22		329
Sublease income	(769)		—		(769)		(338)		—		(338)
Total operating lease expense	$	8,648	$	7,209	$	15,857	$	7,053	$	7,221	$	14,274


	Nine Months Ended
	September 30, 2019						September 30, 2020
	Offices		Data Centers		Total		Offices		Data Centers		Total
	(in thousands)
Lease expense	$	27,077	$	17,427	$	44,504	$	20,770	$	20,519	$	41,289
Short term lease expense	1,944		1,573		3,517		332		—		332
Variable lease expense	458		958		1,416		320		110		430
Sublease income	(2,538)		—		(2,538)		(514)		—		(514)
Total operating lease expense	$	26,941	$	19,958	$	46,899	$	20,908	$	20,629	$	41,537

As of September 30, 2020, we had future minimum lease payments as follows:


	September 30, 2020
	Offices		Data Centers		Total
	(in thousands)
Remainder of 2020	$	7,281	$	6,369	$	13,650
2021	28,738		20,914		49,652
2022	27,271		10,809		38,080
2023	17,463		4,411		21,874
2024	8,220		2,258		10,478
Thereafter	9,556		378		9,934
Total minimum lease payments	98,529		45,139		143,668
Impact of Discount Rate	(2,876)		(1,542)		(4,418)
Total Lease Liability	$	95,653	$	43,597	$	139,250

The weighted average remaining lease term and discount rates as of September 30, 2020 are as follows:



	September 30, 2019		September 30, 2020
Weighted average remaining lease term (years)
Offices	4.98		3.78
Data Centers	2.64		2.46
Weighted average discount rate
Offices	2.65	%	1.99	%
Data Centers	1.82	%	1.62	%

Supplemental cash flow information related to our operating leases is as follows for the three and nine months ended September 30, 2020:


	Three Months Ended
	September 30, 2019		September 30, 2020
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Cash flow for operating activities	$	(12,885)	$	(20,070)
Right of use assets obtained in exchange for new operating lease liabilities	$	4,194	$	9,792


	Nine Months Ended
	September 30, 2019		September 30, 2020
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Cash flow for operating activities	$	(40,816)	$	(46,851)
Right of use assets obtained in exchange for new operating lease liabilities	$	15,714	$	9,792

As of September 30, 2020, we have additional operating leases, that have not yet commenced which will result in additional operating lease liabilities and right of use assets:


	Offices		Data Centers
	(in thousands)
Additional operating lease liabilities	$	—	$	8,015
Additional right of use assets	$	—	$	8,015

These operating leases will commence during the fiscal year ending December 31, 2021.

During the three and nine months ended September 30, 2020, we incurred an impairment loss of $1.6 million on certain right of use assets due to the implementation of management's facilities right sizing program. We used market quotes in determining the fair value of the right of use assets. The impairment loss was classified between Research and Development expenses $0.2 million, Sales and Operations expenses $1.1 million, and General and Administrative expenses $0.3 million.