UNITED STATES
SECURITIES AND EXCHANG E COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended February 28, 2017
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______to ______
Commission File Number: 1-11869
FACTSET RESEARCH SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware | 13-3362547 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
601 Merritt 7, Norwalk, Connecticut | 06851 |
(Address of principal executive office) | (Zip Code) |
Registrant's telephone number, including area code: (203) 810-1000
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares outstanding of the registrant's common stock, $.01 par value, as of March 31, 2017 was 39,458,289.
FactSet Research Systems Inc.
Form 10-Q
For the Quarter Ended February 28, 2017
Index
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| Page | |
Part I | FINANCIAL INFORMATION |
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Item 1. | Financial Statements | ||
| Consolidated Statements of Income for the three and six months ended February 28, 2017 and February 29, 2016 | 3 | |
Consolidated Statements of Comprehensive Income for the three and six months ended February 28, 2017 and February 29, 2016 | 4 | ||
| Consolidated Balance Sheets at February 28, 2017 and August 31, 2016 | 5 | |
| Consolidated Statements of Cash Flows for the six months ended February 28, 2017 and February 29, 2016 | 6 | |
| Notes to the Consolidated Financial Statements | 7 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 31 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 44 | |
Item 4. | Controls and Procedures | 46 | |
Part II | OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 47 | |
Item 1A. | Risk Factors | 47 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 47 | |
Item 3. | Defaults Upon Senior Securities | 47 | |
Item 4. | Mine Safety Disclosures | 47 | |
Item 5. | Other Information | 47 | |
Item 6. | Exhibits | 48 | |
Signatures | 48 | ||
| For additional information about FactSet Research Systems Inc. and access to its Annual Reports to Stockholders and Securities and Exchange Commission filings, free of charge, please visit the website at http://investor.factset.com . Any information on or linked from the website is not incorporated by reference into this Form 10-Q. | |||
2
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF INCOME – Unaudited
| Three Months Ended | Six Months Ended | |||||||||||||||
| ( In thousands, except per share data) | February 28, 2017 | February 29, 2016 | February 28, 2017 | February 29, 2016 | ||||||||||||
Revenues | $ | 294,354 | $ | 281,796 | $ | 582,417 | $ | 552,300 | ||||||||
Operating expenses | ||||||||||||||||
Cost of services | 131,635 | 123,911 | 258,885 | 238,647 | ||||||||||||
Selling, general and administrative | 70,973 | 72,541 | 141,467 | 141,001 | ||||||||||||
Total operating expenses | 202,608 | 196,452 | 400,352 | 379,648 | ||||||||||||
Operating income | 91,746 | 85,344 | 182,065 | 172,652 | ||||||||||||
Other expense | ||||||||||||||||
Loss on sale of business | (1,208 | ) | - | (1,223 | ) | - | ||||||||||
Interest expense, net of interest income | (1,048 | ) | (424 | ) | (1,532 | ) | (331 | ) | ||||||||
Total other expense | (2,256 | ) | (424 | ) | (2,755 | ) | (331 | ) | ||||||||
Income before income taxes | 89,490 | 84,920 | 179,310 | 172,321 | ||||||||||||
Provision for income taxes | 22,780 | 17,157 | 46,017 | 44,594 | ||||||||||||
Net income | $ | 66,710 | $ | 67,763 | $ | 133,293 | $ | 127,727 | ||||||||
Basic earnings per common share | $ | 1.69 | $ | 1.65 | $ | 3.36 | $ | 3.10 | ||||||||
Diluted earnings per common share | $ | 1.68 | $ | 1.63 | $ | 3.34 | $ | 3.06 | ||||||||
Basic weighted average common shares | 39,489 | 41,117 | 39,659 | 41,252 | ||||||||||||
Diluted weighted average common shares | 39,700 | 41,536 | 39,900 | 41,799 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – Unaudited
| Three Months Ended | Six Months Ended | |||||||||||||||
| (In thousands ) | February 28, 2017 | February 29, 2016 | February 28, 2017 | February 29, 2016 | ||||||||||||
Net income | $ | 66,710 | $ | 67,763 | $ | 133,293 | $ | 127,727 | ||||||||
Other comprehensive income (loss), net of tax | ||||||||||||||||
Net unrealized gain (loss) on cash flow hedges* | 1,401 | (1,819 | ) | 1,848 | (2,236 | ) | ||||||||||
Foreign currency translation adjustments | 861 | (10,364 | ) | (10,636 | ) | (16,750 | ) | |||||||||
Other comprehensive income (loss) | 2,262 | (12,183 | ) | (8,788 | ) | (18,986 | ) | |||||||||
Comprehensive income | $ | 68,972 | $ | 55,580 | $ | 124,505 | $ | 108,741 | ||||||||
* For the three and six months ended February 28, 2017, the unrealized gain on cash flow hedges was net of tax expense of $817 and $1,078, respectively. For the three and six months ended February 29, 2016, the unrealized loss on cash flow hedges was net of tax benefits of $1,068 and $1,311 respectively.
The accompanying notes are an integral part of these consolidated financial statements.
4
FactSet Research Systems Inc.
CONSOLIDATED BALANCE SHEETS
February 28, 2017 | August 31, 2016 | |||||||
(In thousands, except share data) | (Unaudited) | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 155,351 | $ | 228,407 | ||||
Investments | 30,003 | 24,217 | ||||||
Accounts receivable, net of reserves of $1,692 at February 28, 2017 and $1,521 at August 31, 2016 | 130,825 | 97,797 | ||||||
Prepaid taxes | 4,760 | - | ||||||
Deferred taxes | 2,693 | 3,158 | ||||||
Prepaid expenses and other current assets | 20,408 | 15,697 | ||||||
Total current assets | 344,040 | 369,276 | ||||||
Property, equipment and leasehold improvements, at cost | 268,795 | 253,274 | ||||||
Less accumulated depreciation and amortization | (179,345 | ) | (168,652 | ) | ||||
Property, equipment and leasehold improvements, net | 89,450 | 84,622 | ||||||
Goodwill | 506,832 | 452,915 | ||||||
Intangible assets, net | 104,695 | 93,161 | ||||||
Deferred taxes | 8,862 | 13,406 | ||||||
Other assets | 7,950 | 5,781 | ||||||
TOTAL ASSETS | $ | 1,061,829 | $ | 1,019,161 | ||||
LIABILITIES | ||||||||
Accounts payable and accrued expenses | $ | 51,121 | $ | 45,836 | ||||
Accrued compensation | 33,183 | 51,036 | ||||||
Deferred fees | 37,252 | 33,247 | ||||||
Deferred taxes | 767 | 291 | ||||||
Taxes payable | 13,056 | 7,781 | ||||||
Dividends payable | 19,709 | 20,019 | ||||||
Total current liabilities | 155,088 | 158,210 | ||||||
Long-term debt | 365,000 | 300,000 | ||||||
Deferred taxes | 2,947 | 1,708 | ||||||
Taxes payable | 10,029 | 8,782 | ||||||
Deferred rent and other non-current liabilities | 35,535 | 33,080 | ||||||
TOTAL LIABILITIES | $ | 568,599 | $ | 501,780 | ||||
Commitments and contingencies (See Note 18) | ||||||||
STOCKHOLDERS' EQUITY | ||||||||
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued | $ | - | $ | - | ||||
Common stock, $.01 par value, 150,000,000 shares authorized, 51,658,197 and 51,150,978 shares issued; 39,418,826 and 40,038,225 shares outstanding at February 28, 2017 and August 31, 2016, respectively | 517 | 512 | ||||||
Additional paid-in capital | 704,522 | 623,195 | ||||||
Treasury stock, at cost: 12,239,371 and 11,112,753 shares at February 28, 2017 and August 31, 2016, respectively | (1,512,127 | ) | (1,321,700 | ) | ||||
Retained earnings | 1,377,659 | 1,283,927 | ||||||
Accumulated other comprehensive loss | (77,341 | ) | (68,553 | ) | ||||
TOTAL STOCKHOLDERS' EQUITY | $ | 493,230 | $ | 517,381 | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,061,829 | $ | 1,019,161 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS – Unaudited
Six Months Ended | ||||||||
(in thousands) | February 28, 2017 | February 29, 2016 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 133,293 | $ | 127,727 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Depreciation and amortization | 20,649 | 18,260 | ||||||
Stock-based compensation expense | 13,611 | 15,027 | ||||||
Loss on sale of business | 1,223 | - | ||||||
Deferred income taxes | 3,032 | 732 | ||||||
Loss on disposition of assets | 142 | - | ||||||
Tax benefits from share-based payment arrangements | (8,995 | ) | (10,804 | ) | ||||
Changes in assets and liabilities, net of effects of acquisitions | ||||||||
Accounts receivable, net of reserves | (30,998 | ) | (5,683 | ) | ||||
Accounts payable and accrued expenses | 3,352 | 1,930 | ||||||
Accrued compensation | (17,699 | ) | (10,180 | ) | ||||
Deferred fees | 1,152 | 913 | ||||||
Taxes payable, net of prepaid taxes | 10,561 | 15,138 | ||||||
Prepaid expenses and other assets | (3,982 | ) | 1,816 | |||||
Deferred rent and other non-current liabilities | 2,774 | 9,372 | ||||||
Other working capital accounts, net | (57 | ) | (22 | ) | ||||
Net cash provided by operating activities | 128,058 | 164,226 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Acquisition of businesses, net of cash acquired | (71,689 | ) | (264,087 | ) | ||||
Purchases of investments | (25,149 | ) | (12,530 | ) | ||||
Proceeds from sales of investments | 19,501 | 12,423 | ||||||
Purchases of property, equipment and leasehold improvements | (18,046 | ) | (26,438 | ) | ||||
Net cash used in investing activities | (95,383 | ) | (290,632 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Dividend payments | (39,568 | ) | (36,132 | ) | ||||
Repurchases of common stock | (166,427 | ) | (115,695 | ) | ||||
Proceeds from debt | 65,000 | 265,000 | ||||||
Sale of business | (1,223 | ) | - | |||||
Debt issuance costs | - | (12 | ) | |||||
Proceeds from employee stock plans | 34,725 | 26,848 | ||||||
Tax benefits from share-based payment arrangements | 8,995 | 10,804 | ||||||
Net cash ( used in ) provided by financing activities | (98,498 | ) | 150,813 | |||||
Effect of exchange rate changes on cash and cash equivalents | (7,233 | ) | (8,151 | ) | ||||
Net (decrease) increase in cash and cash equivalents | (73,056 | ) | 16,256 | |||||
Cash and cash equivalents at beginning of period | 228,407 | 158,914 | ||||||
Cash and cash equivalents at end of period | $ | 155,351 | $ | 175,170 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FactSet Research Systems Inc.
February 28, 2017
(Unaudited)
1. ORGANIZATION AND NATURE OF BUSINESS
FactSet Research Systems Inc. (the "Company" or "FactSet") is a global provider of integrated financial information, analytical applications and industry-leading service for the global investment community. The Company delivers insight and information to investment professionals through its analytics, service, content, and technology. By integrating comprehensive datasets and analytics across asset classes with client data, FactSet supports the workflow of both the buy-side and sell-side. These professionals include portfolio managers, wealth managers, research and performance analysts, risk managers, sell-side equity research professionals, investment bankers, and fixed income professionals. From streaming real-time data to historical information, including quotes, estimates, news and commentary, FactSet offers unique and third-party content through desktop, wireless and off-platform solutions. The Company's wide application suite offers tools and resources including company and industry analyses, full screening tools, portfolio analysis, risk profiles, alpha-testing, portfolio optimization and research management solutions. The Company's revenues are derived from subscriptions to products and services such as workstations, analytics, enterprise data, research management, and trade execution.
2. BASIS OF PRESENTATION
FactSet conducts business globally and is managed on a geographic basis. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany activity and balances have been eliminated from the consolidated financial statements.
The accompanying financial data as of February 28, 2017 and for the three and six months ended February 28, 2017 and February 29, 2016 has been prepared by the Company, without audit, pursuant to the rules and regulations of the 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. The August 31, 2016 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The information in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2016.
In the opinion of management, the accompanying balance sheets and related interim statements of income, comprehensive income and cash flows include all normal adjustments in order to present fairly the results of the Company's operations for the periods presented in conformity with GAAP.
The Company has evaluated subsequent events through the date that the financial statements were issued.
3 . RECENT ACCOUNTING PRONOUNCEMENTS
As of the beginning of fiscal 2017, FactSet implemented all applicable new accounting standards and updates issued by the Financial Accounting Standards Board ("FASB") that were in effect. There were no new standards or updates adopted during the first six months of fiscal 2017 that had a material impact on the consolidated financial statements.
Revenue Recognition
In May 2014 and July 2015, the FASB issued accounting standard updates which provide clarified principles for recognizing revenue arising from contracts with clients and supersede most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to clients in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. These accounting standard updates will be effective for FactSet beginning in the first quarter of fiscal 2019, with early adoption in fiscal 2018 permitted and allow for either full retrospective or modified retrospective adoption. The Company is currently evaluating the impact of these accounting standard updates on its consolidated financial statements and the method of adoption.
7
Balance Sheet Classification of Deferred Taxes
In November 2015, the FASB issued an accounting standard update to simplify the presentation of deferred taxes on the balance sheet. The accounting standard update will require an entity to present all deferred tax assets and deferred tax liabilities as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as current or non-current. Netting deferred tax assets and deferred tax liabilities by tax jurisdiction will still be required under the new guidance. This guidance will be effective for FactSet beginning in the first quarter of fiscal 2018, with early adoption in fiscal 2017 permitted. The accounting standard update is a change in balance sheet presentation only and, as such, the Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued an accounting standard update to amend its current guidance on the classification and measurement of certain financial instruments. The accounting standard update significantly revises an entity's accounting related to the presentation of certain fair value changes for financial liabilities measured at fair value. This guidance also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance will be effective for FactSet beginning in the first quarter of fiscal 2019. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
Leases
In February 2016, the FASB issued an accounting standard update related to accounting for leases. The guidance introduces a lessee model that requires most leases to be reported on the balance sheet. The accounting standard update aligns many of the underlying principles of the new lessor model with those in the FASB's new revenue recognition standard. The guidance also eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining lease classification. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2020, with early adoption in fiscal 2019 permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
Share-Based Payments
In March 2016, the FASB issued an accounting standard update which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flow. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2018. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
Cash Flow Simplification
In August 2016, the FASB issued an accounting standard update which simplifies how certain transactions are classified in the statement of cash flows. This includes revised guidance on the cash flow classification of debt prepayments and debt extinguishment costs, contingent consideration payments made after a business combination and distributions received from equity method investments. The guidance is intended to reduce diversity in practice across all industries. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2019. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
Income Taxes on Intra-Entity Transfer s of Asset s
In October 2016, the FASB issued an accounting standard update which removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The guidance is intended to reduce diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2019. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
Goodwill Impairment Test
In January 2017, the FASB issued an accounting standard update which removes the requirement for companies to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2021, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
No other new accounting pronouncements issued or effective as of February 28, 2017 have had or are expected to have an impact on the Company's consolidated financial statements.
8
4 . FAIR VALUE MEASURES
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date. In determining fair value, the use of various valuation methodologies, including market, income and cost approaches is permissible. The Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
The accounting guidance for fair value measurements establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value based on the reliability of inputs. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect their placement within the fair value hierarchy levels. FactSet has categorized its cash equivalents, investments and derivatives within the fair value hierarchy as follows:
Level 1 – applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. These Level 1 assets and liabilities include the Company's corporate money market funds that are classified as cash equivalents.
Level 2 – applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. The Company's certificates of deposit, mutual funds and derivative instruments are classified as Level 2.
Level 3 – applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. There were no Level 3 assets or liabilities held by the Company as of February 28, 2017 or August 31, 2016.
( a ) Asse ts and Liabilities Measured at Fair Value on a Recurring Basis
The following tables shows by level within the fair value hierarchy the Company's assets and liabilities that are measured at fair value on a recurring basis at February 28, 2017 and August 31, 2016:
Fair Value Measurements at February 28, 2017 | ||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Corporate money market funds (1) | $ | 15,355 | $ | - | $ | - | $ | 15,355 | ||||||||
Mutual funds (2) | - | 11,240 | - | 11,240 | ||||||||||||
Certificates of deposit ( 3 ) | - | 18,763 | - | 18,763 | ||||||||||||
Derivative instruments (4 ) | - | 2,817 | - | 2,817 | ||||||||||||
Total assets measured at fair value | $ | 15,355 | $ | 32,820 | $ | - | $ | 48,175 | ||||||||
Liabilities | ||||||||||||||||
Derivative instruments ( 4 ) | $ | - | $ | 1,813 | $ | - | $ | 1,813 | ||||||||
Total liabilities measured at fair value | $ | - | $ | 1,813 | $ | - | $ | 1,813 | ||||||||
9
Fair Value Measurements at August 31, 2016 | ||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Corporate money market funds (1) | $ | 92,765 | $ | - | $ | - | $ | 92,765 | ||||||||
Certificates of deposit ( 3 ) | - | 24,217 | - | 24,217 | ||||||||||||
Derivative instruments ( 4 ) | - | 869 | - | 869 | ||||||||||||
Total assets measured at fair value | $ | 92,765 | $ | 25,086 | $ | - | $ | 117,851 | ||||||||
Liabilities | ||||||||||||||||
Derivative instruments ( 4 ) | $ | - | $ | 2,791 | $ | - | $ | 2,791 | ||||||||
Total liabilities measured at fair value | $ | - | $ | 2,791 | $ | - | $ | 2,791 | ||||||||
| (1) |