MediaAlpha, Inc. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2020

or

For the transition period from __________ to __________

Commission File Number: 001-39671

MediaAlpha, Inc.

(Exact name of registrant as specified in its charter)

700 South Flower Street, Suite 640

Los Angeles, California 90017

(Address of principal executive offices, including zip code)

(213) 316-6256

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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 (§232.405 of this chapter) 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, 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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying 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 ☒

As of October 30, 2020, there were 33,169,141 shares of MediaAlpha, Inc.'s Class A common stock, $0.01 par value per share, and 25,536,043 shares of MediaAlpha, Inc.’s Class B common stock, par value $0.01 per share, outstanding.

MediaAlpha, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2020

TABLE OF CONTENTS

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Certain Definitions

As used in this Quarterly Report on Form 10-Q:

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Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

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The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Report. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Many of the important factors that will determine these results are beyond our ability to control or predict. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and, except as otherwise required by law, we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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Explanatory Note

MediaAlpha, Inc. was formed on July 9, 2020 to affect a series of reorganization transactions through which it would serve as the ultimate holding company, by and through its wholly owned subsidiary Guilford Holdings, Inc. (“Intermediate Holdco”), of QL Holdings LLC and its subsidiaries, and thereafter to complete a planned initial public offering (“IPO”).  MediaAlpha, Inc. completed the series of reorganization transactions on October 27, 2020, and closed its initial public offering of 7,027,606 shares of Class A common stock at a price of $19.00 per share on October 30, 2020, including 769,104 shares sold in connection with the full exercise of the underwriter’s option to purchase additional shares, receiving $124.2 million in proceeds, net of underwriting discounts and commissions.

As of and for the three and nine months ended September 30, 2020, the periods covered by this report, MediaAlpha, Inc. had engaged solely in activities incidental to its formation.  QL Holdings LLC and its subsidiaries have been determined to represent the predecessor entity to MediaAlpha, Inc. prior to the IPO.  As such, in addition to the interim unaudited condensed financial statements of MediaAlpha, Inc. as of and for the period from inception (July 9, 2020) to September 30, 2020, the interim unaudited condensed consolidated financial statements and related notes of QL Holdings LLC and its subsidiaries as of and for the three and nine months ended September 30, 2020 and 2019 have been included within this Form 10-Q.  The information presented within Management’s Discussion & Analysis presented below is also that of QL Holdings LLC and its subsidiaries.

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Part I. Financial Information

Item 1. Financial Statements

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MediaAlpha, Inc.

CONDENSED BALANCE SHEET

(Unaudited)

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MediaAlpha, Inc.

CONDENSED STATEMENT OF OPERATIONS

(Unaudited)

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MediaAlpha, Inc.

CONDENSED STATEMENT OF CASH FLOWS

(Unaudited)

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Notes to Financial Statements (unaudited)

1. Organization

MediaAlpha, Inc. (the “Company”) was formed as a Delaware corporation on July 9, 2020.

As described in more detail in Note 6, on October 30, 2020, the Company closed an initial public offering (the “IPO”) of 7,027,606 shares of Class A common stock at a public offering price of $19.00 per share, including 769,104 shares sold in connection with the full exercise of the underwriter’s option to purchase additional shares, receiving $124.2 million in proceeds, net of underwriting discounts and commissions.

Subsequent to the IPO and related organizational transactions, the Company is a holding company and the principal asset is a controlling equity interest in QL Holdings LLC (“QLH”) by and through the Company’s wholly owned subsidiary, Intermediate Holdco. As the sole managing member of QLH, the Company operates and controls all of the business and affairs of QLH, and through QLH and subsidiaries, conducts the Company’s business. As a result, beginning in the fourth quarter of 2020, the Company will consolidate QLH’s financial results and report a non-controlling interest related to the portion of QLH not owned by the Company.

2. Summary of Significant Accounting Policies

Basis of presentation

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting.

Income taxes

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.

The Company accounts for uncertainty in income taxes recognized in the financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties. The Company’s policy is to record interest and penalties related to income taxes as part of the tax provision.

3. Stockholders’ Equity

The Company is authorized to issue 1,000 shares of Common Stock, par value $0.01 per share, none of which have been issued or are outstanding as of September 30, 2020. The only stockholders’ equity activity for the period from inception through September 30, 2020 is the increase in accumulated deficit due to the Company’s net loss for the period.

4. Commitments and contingencies

As of September 30, 2020, the Company has no commitments and contingencies.

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5. Income taxes

The Company has no income tax expense for the period ended September 30, 2020. The Company has no foreign operations and therefore, has not provided for any foreign taxes.

As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets, which are comprised of net operating loss carryforwards related to the Company’s loss for the period. At September 30, 2020, management recorded a full valuation allowance against its U.S. deferred tax asset, based on its history of cumulative losses and the conclusion that further taxable profit may not be available for the utilization of deferred tax asset for federal and state income tax purposes.

As of September 30, 2020, the Company did not have a liability for unrecognized tax benefits and has no accrued interest or penalties related to uncertain tax positions.

The Company is subject to examination by taxing authorities in the U.S. federal and state jurisdictions. For federal and state income tax, the Company remains subject to examination for 2020.

6. Subsequent events

Reorganization Transactions

On October 27, 2020, in connection with the completion of our IPO, the Company completed a series of reorganization transactions (“Reorganization Transactions”) pursuant to a reorganization agreement by and among MediaAlpha, Inc., Intermediate Holdco, and QLH and certain other parties. The Reorganization Transactions included the following:

QL Holdings Recapitalization

As noted above, the Fourth Amended and Restated Limited Liability Agreement of QLH, among other things, recapitalized the Class A units held by Intermediate Holdco, to voting, managing member Class A-1 units of QLH and recapitalized all other legacy Class A units and Class B units into non-voting, non-managing member, Class B-1 units of QLH. After the contribution of Intermediate Holdco to MediaAlpha, Inc., the Company became the sole voting member of QLH, by and through Intermediate Holdco, and control the management of QLH.  As a result, beginning in the fourth quarter of 2020, we will consolidate both Intermediate Holdco and QLH’s financial results and report a non-controlling interest related to the portion of QLH not owned by us.

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Exchange Agreement

On October 27, 2020, the Company entered into an exchange agreement with Insignia and the Senior Executives, which will each hold Class B-1 units. Pursuant to and subject to the terms of the exchange agreement and the fourth amended and restated limited liability company agreement of QLH, holders of Class B-1 units, from time to time, may exchange one Class B-1 unit, together with the corresponding share of our Class B common stock, for one share of the Company’s Class A common stock (or, at the Company’s election, cash of an equivalent value).

We have reserved for issuance 25,536,043 shares of our Class A common stock for potential exchange in the future for Class B-1 units, which is the aggregate number of Class B common stock outstanding after completion of the Reorganization Transactions and the IPO.

Tax Receivables Agreement

Concurrent with the completion of the IPO, we became a party to a tax receivables agreement with Insignia, the Senior Executives, and White Mountains related to the tax basis step-up of the assets of QLH and certain net operating losses of Intermediate Holdco. The agreement requires us to pay Insignia and the Senior Executives 85% of the cash savings, if any, in U.S. federal, state and local income tax we realize (or are deemed to realize) as a result of (i) any increases in tax basis following our purchase (through Intermediate Holdco) of Class B-1 units of QLH from certain unitholders (including the Selling Class B-1 Unit Holders) in connection with the IPO, as well as any future exchanges described above; (ii) the pre-offering leveraged distribution and actual or deemed other distributions by QLH to its members that result in tax basis adjustments to the assets of QLH, and (iii) certain other tax benefits attributable to payments under the tax receivables agreement itself.

The tax receivables agreement also requires us to pay White Mountains 85% of the amount of the cash savings, if any, in U.S. federal, state and local income tax that we realize (or are deemed to realize) as a result of the utilization of the net operating losses of Intermediate Holdco attributable to periods prior to the IPO and the deduction of any imputed interest attributable to our payment obligations under the tax receivables agreement.

2020 Omnibus Incentive Plan

On October 27, 2020, the Company’s board of directors (the “Board”) and its stockholder approved the Company’s adoption of the MediaAlpha, Inc. 2020 Omnibus Incentive Plan (the “Omnibus Incentive Plan”). The Omnibus Incentive Plan provides for an initial reserve of an aggregate of 12,506,550 shares of Class A common stock, subject to annual increases for each year during the plan term, as described in the Omnibus Incentive Plan. The Omnibus Incentive Plan authorizes the grants of various types of equity awards, such as nonqualified stock options, incentive (qualified) stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards, cash incentive awards and other equity-based awards (including deferred share units and fully vested shares) to current or prospective directors, officers, employees and consultants of the Company and its affiliates.

Initial Public Offering

As noted above, we completed an IPO of 7,027,606 shares of Class A common stock at a public offering price of $19.00 per share, which includes 769,104 shares issued pursuant to the underwriters’ over-allotment option.  We received $124.2 million, net of underwriting discounts and commissions, which we used in part to repurchase 4,772,449 Class B-1 units from the Selling Class B-1 Unit Holders.  Immediately following the completion of the IPO, there were 33,169,141 shares of Class A common stock outstanding, representing an approximately 56.5% ownership interest in QLH.  Additionally, immediately following the completion of the IPO, there were 25,536,043 shares of Class B common stock outstanding, equivalent to all but 41,620 Class B-1 units of QLH not held by us, representing an approximately 43.5% ownership interest in QLH.  

MediaAlpha, Inc. contributed (i) $84.3 million of the net proceeds to Intermediate Holdco for Intermediate Holdco to repurchase 4,772,449 Class B-1 units of QLH (which Class B-1 units will be converted into Class A-1 units of QLH) and (ii) $23.6 million of the net proceeds to Intermediate Holdco for further contribution to QLH, and in turn to QuoteLab LLC (“QL”), to repay outstanding borrowings under the 2020 Term Loan Facility. The remaining net proceeds of $16.3 million were contributed to Intermediate Holdco for further contribution to QLH and QL to pay for costs associated with the offering and to use for working capital, capital expenditures and general corporate purposes.

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Equity Awards

Effective as of the closing of the IPO on October 30, 2020, the Company granted 4,856,189 restricted stock unit (“RSU”) awards of our Class A common stock at a grant-date fair value of $19.00 per share, the public offering price at the IPO, under the Omnibus Incentive Plan to certain officers of the Company and to the non-employee directors who joined the Board in connection with the IPO. Such RSU awards will vest quarterly over the first three years following the date of grant, subject to continued employment or service through each applicable vesting date (with limited exceptions in the case of a change of control (or certain qualifying terminations in connection with a change of control) or, for certain officers, death, disability, termination without cause or resignation for good reason).

On November 16, 2020, the Company granted a further 966,601 RSU awards of our Class A common stock under the Omnibus Incentive Plan to certain non-executive employees of the Company.  Such RSU awards vest quarterly over terms that range from less than one year to four years, dependent on length of service rendered by each employee at the grant date, subject to continued employment or service through the applicable vesting date.

Partial prepayment of 2020 Term Loan Facility

On December 1, 2020, QL repaid $23.6 million of the 2020 Term Loan Facility.  

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QL Holdings LLC and subsidiaries

Unaudited condensed consolidated balance sheets

(In thousands, except unit and per unit data)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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QL Holdings LLC and subsidiaries

Unaudited condensed consolidated statements of operations

(In thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

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QL Holdings LLC and subsidiaries

Unaudited condensed consolidated statements of changes in redeemable Class A units and members’ deficit

(In thousands, except unit data)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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QL Holdings LLC and subsidiaries

Unaudited condensed consolidated statements of changes in redeemable Class A units and members’ deficit

(In thousands, except unit data)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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QL Holdings LLC and subsidiaries

Unaudited condensed consolidated statements of cash flows

(In thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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QL Holdings LLC and subsidiaries

Unaudited notes to condensed consolidated financial statements

1. Organization

Formation and acquisition

QL Holdings LLC (“QLH” or the “Company”), a Delaware limited liability company, was formed on March 7, 2014, for the sole purpose of reorganizing the ownership structure of Quote Lab, Inc. (“QL”) and MediaAlpha Ventures, LLC (“MAV”) in order to effectuate the purchase of 60% of the membership interests of QLH by White Mountains Capital, Inc. (“WMC”), pursuant to the membership interest purchase agreement effective March 14, 2014 (the “Acquisition” or “Closing”). Concurrent to the Closing, QL Inc. was restructured into QuoteLab, LLC (“QL”), a Delaware limited liability company, and the historical owners (collectively, the “Sellers”) transferred all ownership of QL and MAV to QLH.

The Acquisition was accounted for under the acquisition method of accounting in accordance with Financial Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”), under which the purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of the Acquisition. In accordance with ASC 805, QLH and its wholly owned subsidiaries QL and MAV (collectively, the “Company”) elected the option to apply pushdown accounting, and accordingly recorded goodwill to the extent the purchase price exceeded the fair value of assets acquired, net of liabilities assumed, on the account records of QLH. The Company prepared the valuations for all identifiable intangible assets acquired internally.

On September 26, 2016, MAV was dissolved to effectuate a merger with QL.

Insignia Capital Group

In connection with a recapitalization transaction (“Insignia Recapitalization”), on February 26, 2019, Insignia Capital Group (“ICG”) acquired 284,211 Class A units from the Company for $62.8 million, and the Company immediately repurchased 25% of the Class A units from WMC and the founders, and 25% of outstanding Class B units from Class B unitholders, for an aggregate of $62.8 million. As part of that transaction, QL entered into a new secured credit facility with Monroe Capital Management Advisors, LLC (“Monroe Capital”) on February 26, 2019. See Note 8 for more information.

WMC remains a significant equity holder in QLH with a 42% ownership interest on a fully-diluted basis as of September 30, 2020. ICG is a significant minority equity holder in QLH with a 22% ownership interest on a fully-diluted basis, as of September 30, 2020. MediaAlpha’s founders continue to lead the business, and each remains a significant equity holder, as of September 30, 2020.

The Company incurred total transaction expenses of $8.8 million related to the sale of Class A units to ICG. The transaction expenses consisted of $7.2 million of legal, investment banking, and other consulting fees and $1.6 million in transaction bonuses which were recorded in general and administrative expenses in the consolidated statements of operations. The Company recorded $2.3 million in fees related to the closing of the new secured credit facility with Monroe Capital as a reduction of long-term debt in the consolidated balance sheets.

MediaAlpha, Inc.

MediaAlpha, Inc. was incorporated as a Delaware corporation on July 9, 2020. MediaAlpha, Inc. was formed to serve as a holding company for QLH and QLH’s principal operating subsidiary, QL, by and through MediaAlpha, Inc.’s wholly owned subsidiary, Guilford Holdings, Inc. (“Intermediate Holdco”), following the occurrence of a series of reorganization transactions in connection with MediaAlpha, Inc.’s initial public offering (“IPO”). On October 30, 2020, MediaAlpha, Inc. closed its IPO, receiving $124.2 million in proceeds, net of underwriting discounts and commissions. Subsequent to the IPO, MediaAlpha, Inc. operates and controls all of QLH’s business and affairs, and through QLH and its subsidiaries, conducts its business.

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Nature of business

The Company does business as MediaAlpha. MediaAlpha specializes in end customer acquisition for insurance carriers, distributors and other clients in various verticals, including property & casualty insurance, health insurance and life insurance. The corporate headquarters is located in Los Angeles, California, with additional offices throughout the United States.

Impact of COVID-19

The COVID-19 pandemic is currently impacting the United States and many countries around the world. The outbreak and government measures taken in response have had a significant impact, both direct and indirect, on businesses and commerce. The future progression of the pandemic and its effects on the Company’s business and operations are uncertain and the Company is unable to estimate the full impact at this time. However, the Company’s travel vertical has experienced a decline in revenue and the Company expects this trend to continue indefinitely. Although the Company does not believe the situation will materially impact the Company’s liquidity or capital position, the Company does not expect revenue from the travel vertical to recover in the foreseeable future.

The Company is monitoring the potential impact of the COVID-19 pandemic on its business and financial statements. To date, the Company has not experienced material business disruptions or incurred impairment losses in the carrying values of its assets as result of the pandemic and it is not aware of any specific related event or circumstance that would require it to revise its estimates reflected in these condensed consolidated financial statements. The extent to which the COVID-19 pandemic will further impact the Company’s business, results of operations and financial condition, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, the actions taken to contain or treat it, and the duration and intensity of the related effects.

2. Summary of significant accounting policies

Other than the policies disclosed below, there have been no significant changes in accounting policies during the nine months ended September 30, 2020 from those disclosed in the annual consolidated financial statements for the year ended December 31, 2019 and the related notes. Accordingly, these interim financial statements do not include all disclosures normally required in annual consolidated financial statements prepared in accordance with accounting principal generally accepted in the United States of America (“GAAP”).  Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s final prospectus dated October 30, 2020 and filed with the SEC pursuant to Rule 424(b)(4) on October 29, 2020.

Basis of presentation

The condensed consolidated financial statements have been prepared in accordance with GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. The condensed consolidated financial statements include the accounts of QLH and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

QLH was formed for the sole purpose of reorganizing the ownership structure of QL in order to complete the purchase of a majority of QLH membership interests by WMC, with an effective date of March 14, 2014. This acquisition was accounted for by WMC under the acquisition method of accounting in accordance with FASB ASC 805, under which the purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of the acquisition. In accordance with ASC 805, QLH and its wholly owned subsidiary QL elected the option to apply pushdown accounting, and accordingly, recorded goodwill to the extent the purchase price exceeded the fair value of assets acquired, net of liabilities assumed, on the accounting records of QL, with a corresponding entry to Members’ Equity in the Company.

In the opinion of the Company, the accompanying unaudited condensed financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2020, and its results of operations and cash flows for the three and nine months ended

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September 30, 2020 and 2019. The condensed balance sheet at December 31, 2019, was derived from audited annual financial statements but does not contain all the footnote disclosures from the annual financial statements.

Use of estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, certain disclosures at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, valuation of goodwill and long-lived assets for impairment and inputs into the valuation of our equity-based compensation awards. Significant estimates affecting the consolidated financial statements have been prepared on the basis of the most current and best available information, including historical experience, known trends and other market-specific or other relevant factors that the Company believes to be reasonable. On an ongoing basis, management evaluates its estimates, as there are changes in circumstances, facts and experience. Changes in estimates are recorded in periods which they become known. However, actual results from the resolution of such estimates and assumptions may vary from those used in the preparation of the consolidated financial statements. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including revenue, expenses, reserves and allowances, asset recoverability, and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on our customers and markets. We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods. Actual results may differ from these estimates.

Accounts receivable

The Company provides credit to customers in the ordinary course of business and believes its credit policies are prudent and reflect industry practices and business risk. Accounts receivables are stated at amounts due from customers. The Company reviews accounts receivable on a periodic basis and determines an allowance for doubtful accounts by considering a number of factors including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off outstanding accounts receivable against the allowance when the Company has exhausted all collection efforts and the potential recovery is considered remote. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

The Company reported an allowance for doubtful accounts of $0.6  million as of September 30, 2020 and $0.3 million as of December 31, 2019, respectively.

Concentrations of credit risk and of significant customers and suppliers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains cash balances that can, at times, exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in these accounts, and believes it is not exposed to unusual credit risk beyond the normal credit risk in this area based on the financial strength of institutions with which the Company maintains its deposits.

The Company’s accounts receivable, which are unsecured, may expose the Company to credit risk due to collectability. The Company controls credit risk by investigating the creditworthiness of all customers prior to establishing relationships with them, performing periodic reviews of the credit activities of those customers during the course of the business relationship, regularly analyzing the collectability of accounts receivables, and recording allowances for doubtful accounts when these receivables become uncollectible.

Customer concentrations consisted of one customer that accounted for approximately $46.0 million and $102.4 million, or 30% and 26%, of revenue for the three and nine months ended September 30, 2020, respectively,

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and $23.7 million and $61.3 million, or 21% and 22%, of revenue for the three and nine months ended September 30, 2019, respectively; the same customer accounted for approximately $16.0 million, or 25%, of the Company’s accounts receivable as of September 30, 2020 compared to $4.7 million, or 8%, as of December 31, 2019.

The Company’s accounts payable can expose the Company to business risks such as supplier concentrations. For the three and nine months ended September 30, 2020 and 2019, supplier concentrations consisted of two suppliers that accounted for approximately $33.8 million and $70.5 million, or 25% and 20%, and $20.0 million and $57.7 million, or 22% and 23%, of total purchases, respectively; the same suppliers accounted for approximately $14.2 million, or 23%, of the Company’s total accounts payable as of September 30, 2020 compared to $14.7 million, or 36%, as of December 31, 2019.

Deferred initial public offering costs

Deferred offering costs, which consist of direct incremental legal and accounting fees relating to the Company becoming a publicly traded company, are capitalized and will be offset against the proceeds upon the completion of the IPO in October 2020. As of September 30, 2020 and December 31, 2019, $7.2 million and no offering costs were deferred and included in non-current assets on the consolidated balance sheets, respectively.

Income Taxes

The Company is a pass-through entity for federal and state income tax purposes and is not subject to income tax as the LLC member is responsible for the tax consequences of its proportionate share of the pass-through income or loss. As such, the Company’s tax provision consists solely of the activities of its wholly-owned Taiwanese subsidiary, Skytiger Studio Ltd., which is a taxpaying entity in Taiwan. Accordingly, the Company provides current and deferred income taxes for this entity.

The Company’s taxable subsidiary accounts for income taxes using the asset and liability method, under which deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities and net operating loss (“NOL”) and tax credit carryforwards. Deferred tax assets and liabilities are classified as noncurrent on the consolidated balance sheet. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company uses a recognition threshold and measurement attribute for the consolidated financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A tax position is recognized when it is more likely than not that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than a 50% likelihood of being realized upon ultimate settlement with a taxing authority. Interest and penalties related to unrecognized tax benefits are recognized in benefit from income taxes in the accompanying consolidated statements of operations and comprehensive loss. No such interest and penalties were recognized for any period presented.

Segment information

The Company operates in the United States and in a single operating segment. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its chief executive officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements.

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Recently issued not yet adopted accounting pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. The new guidance requires lessees to recognize lease assets and liabilities on the balance sheet for both operating and financing leases, with the exception of leases with an original term of 12 months or less. Under existing guidance, recognition of lease assets and liabilities is not required for operating leases. The lease assets and liabilities to be recognized are both measured initially based on the present value of the lease payments. Under the new guidance, a sale-leaseback transaction must meet the recognition criteria under ASC 606 in order to be accounted for as sale. ASU 2016-02 initially required adoption using a modified retrospective approach, under which all years presented in the financial statements would be prepared under the revised guidance. In July 2018, the FASB issued ASU No. 2018-11 which added an optional transition method under which financial statements may be prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings in the period of adoption. In June 2020, the FASB issued ASU No. 2020-05 that deferred the effective date for non-public entities and emerging growth companies that choose to take advantage of the extended transition periods to annual reporting periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently in the process of evaluating the potential impact of this new accounting guidance, which is effective for the Company for annual periods beginning after December 15, 2021.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In February 2020, the FASB issued ASU 2020-02, Financial Instruments–Credit Losses (Topic 326) and Leases (Topic 842)–Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update), which amends the language in Subtopic 326-20 and addresses questions primarily regarding documentation and company policies. The guidance in ASU 2016-13 and ASU 2020-02 related to credit losses is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate or by another reference rate expected to be discontinued. This standard may be elected and applied prospectively over time from March 12, 2020 through December 31, 2022 as reference rate reform activities occur. We are evaluating the method of adoption and impact of the standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures.

3. Disaggregation of revenue

The following table shows the Company’s revenue disaggregated by transaction model:

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The following table shows the Company’s revenue disaggregated by product vertical:

4. Property and equipment

Property and equipment consisted of the following as of:

Depreciation expense related to property and equipment amounted to $0.1 million and $0.2 million, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2020 and 2019, respectively.

5. Goodwill and intangible assets

Goodwill and intangible assets consisted of: