NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
(unaudited)
1. Organization
On March 26, 2018, Fluent, Inc. (“Fluent”), formerly known as Cogint, Inc., a Delaware corporation, completed the previously announced spin-off (the “Spin-off”) of its risk management business from its digital marketing business by way of a distribution of all the shares of common stock of Fluent’s wholly-owned subsidiary, Red Violet, Inc. (“red violet” or the “Company”), a Delaware corporation, to Fluent’s stockholders of record as of March 19, 2018 (the “Record Date”) and certain warrant holders. The distribution occurred by way of a pro rata stock distribution to such common stock and warrant holders, each of whom received one share of red violet’s common stock for every 7.5 shares of Fluent’s common stock held on the Record Date or to which they were entitled to under their warrant, which resulted in a distribution of a total of 10,266,613 shares of red violet common stock.
Upon the Spin-off, red violet owns Fluent
subsidiaries
which
previously
operated
Fluent’s
risk
manag
e
ment
business.
As a result of the Spin-off, red violet is an independent public company and red violet’s common stock began regular-way trading on The NASDAQ Capital Market under the symbol “RDVT” on March 27, 2018.
red violet has only one operating segment, as defined by ASC 280, “
Segment Reporting
.”
2. Summary of significant accounting policies
(a) Basis of preparation and liquidity
The accompanying unaudited condensed consolidated and combined financial statements have been prepared for red violet in accordance with accounting principles generally accepted in the United States (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to those rules and regulations.
red violet accounted for the Spin-off in accordance with ASC 805-50-30-5
Initial Measurement- Transactions Between Entities Under Common Control
–
Transfer Date Measurement
and therefore the net assets transferred from Fluent to red violet upon the Spin-off were reflected in our consolidated financial statements at Fluent carrying values at the time of the Spin-off.
The accompanying unaudited condensed consolidated and combined financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for any future interim periods or for the full year ending December 31, 2018.
The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated and combined financial statements and accompanying notes of red violet for the year ended December 31, 2017 (“2017 Financials”) included in Exhibit 99.1, Information Statement, to the current report on Form 8-K filed with the SEC on March 27, 2018.
The condensed consolidated and combined balance sheet as of December 31, 2017 included herein was derived from the audited financial statements as of that date included in the 2017 Financials, but does not include all disclosures including notes required by US GAAP.
Principles of consolidation and combination
Although the Spin-off was completed on March 26, 2018, the Company has reflected the Spin-off in these financial statements as if it occurred on March 31, 2018 as the Company determined that the impact is not material to the consolidated and combined financial statements.
The financial statements present the consolidated and combined results of operations, financial condition, and cash flows of red violet and its subsidiaries. These financial statements were prepared on a consolidated and combined basis because certain of the entities were under common control for periods prior to the Spin-off. All intercompany accounts and transactions have been eliminated between the consolidated and combined entities.
The historical condensed consolidated and combined financial results presented prior to the Spin-off may not be indicative of the results that would have been achieved by the Company had it operated as a separate, standalone entity prior to the Spin-off. The
6
condensed consolidated and combined financial statement
s
presented prior
to the Spin-off do not reflect any changes that may occur in the Company’s operations in connection with or as a result of the Spin-off.
(b) Recently issued accounting standards
As an emerging growth company, we have left open the opportunity to take advantage of the extended transition
period provided to emerging growth companies in Section 13(a) of the Exchange Act, however, it is the Company’s present intention to adopt any applicable new accounting standards timely.
In May 2014, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “
Revenue from Contracts with Customers (Topic 606)
.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, FASB issued ASU No. 2015-14, “
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
,” which delays the effective date of ASU 2014-09 by one year. FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, FASB issued ASU No. 2016-08, “
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in evaluating whether it controls the good or the service before it is transferred to the customer. The new revenue recognition standard is effective for public entities for annual reporting periods beginning after December 15, 2017, and interim periods therein, that is, the first quarter of 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We adopted Topic 606 as of January 1, 2018 using the modified retrospective method, and the adoption did not have any material impact on our consolidated and combined balance sheets, statements of operations, or cash flows. Refer to Note 1(c) below for further details.
In February 2016, FASB issued ASU No. 2016-02 (“ASU 2016-02”), “
Leases (Topic 842)
,” which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This guidance will be effective for public entities and private entities in the first quarter of 2019 and the first quarter of 2020, respectively, on a modified re
trospective basis and early adoption is permitted. It will be effective for us in the first quarter of 2020. We are still evaluating the effect that this guidance will have on our consolidated and combined financial statements and related disclosures.
In August 2016, FASB issued ASU No. 2016-15 (“ASU 2016-15”), “
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
,” which provides guidance for certain cash flow issues, including contingent consideration payments made after a business combination and debt prepayment or debt extinguishment costs etc. The guidance is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and early adoption is perm
itted. We adopted ASU 2016-15 for the first quarter of 2018 and ASU 2016-15 did not have any material impact on our condensed consolidated and combined financial statements.
(c) Revenue recognition
On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to all contracts that are not completed contracts at the date of initial application. There was no impact on the opening accumulated deficit as of January 1, 2018 due to the adoption of Topic 606.
Revenue is recognized when control of goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. In other words, our performance obligation is to provide on demand solutions to our customers by leveraging our proprietary technology and applying machine learning and advanced analytic techniques to our massive data repository. The pricing for the customer contracts is based on usage, a monthly fee, or a combination of both.
Available within Topic 606, we have applied the portfolio approach practical expedient in accounting for customer revenue as one collective group, rather than individual contracts. Based on our historical knowledge of the contracts contained in this portfolio and the similar nature and characteristics of the customers, we have concluded the financial statement effects are not materially different than if accounting for revenue on a contract by contract basis.
Revenue is recognized over a period of time since the performance obligation is delivered in a series. Our customers simultaneously receive and consume the benefits provided by the performance as the Company performs. Furthermore, we have elected the “right to invoice” practical expedient, available within ASC 606-10-55-18, as our measure of progress, since we have a right to payment from a customer in an amount that corresponds directly with the value of our performance completed-to-date. The Company's revenue arrangements do not contain significant financing components.
7
If a customer pays consideration before we transfer services to the customer, those amounts are classified as deferred revenue. As of March 31, 2018 and December 31, 2017, the balance of deferred revenue was $21 and $33, respectively
, all of
which
are
expected to be realized in the next 12 months.
$
17
of t
he deferred revenue balance as of December 31, 2017 had been recognized into revenue during the three months ended March 31, 2018
.
As of March 31, 2018, approximately $363 of revenue is expected to be recognized in the future related to outstanding performance obligations. The balance relates primarily to revenues for subscription contracts that has a term of more than 12 months. Approximately $180 will be recognized during the remaining nine months of 2018, $174
in 2019 and the remainder in 2020. The actual timing of recognition may vary due to factors outside of the Company’s control. The Company has elected to exclude variable consideration related entirely to wholly unsatisfied
performance
obligations and contracts where revenue is recognized based upon the right to invoice the customer.
Sales commissions are recorded at the time revenue is recognized. These costs are recorded in sales and marketing expenses.
In addition, we elected the practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
3. Loss per share
Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and is calculated using the treasury stock method for stock options and unvested shares. Common equivalent shares are excluded from the calculation in the loss periods as their effects would be anti-dilutive.
Prior to the Spin-off, the financial information of red violet represented the consolidated and combined figures of red violet and its subsidiaries. red violet only had 1,000 shares of common stock outstanding, all of which Fluent owned. On March 26, 2018, upon the Spin-off of red violet, an aggregate of 10,266,613 shares of red violet common stock were distributed to Fluent stockholders and certain warrant holders. This number of shares remained outstanding at March 31, 2018, and is utilized to calculate loss per share for the three months ended March 31, 2018 and 2017, as shown in the table below.
|
|
Three Months Ended March 31,
|
|
(In thousands, except share data)
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,084
|
)
|
|
$
|
(2,893
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic and diluted
|
|
|
10,266,613
|
|
|
|
10,266,613
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
$
|
(0.20
|
)
|
|
$
|
(0.28
|
)
|
A total of 56,000 shares of unvested restricted stock units (“RSUs”) have been excluded from the diluted loss per share calculation as the impact is anti-dilutive.
4. Intangible assets, net
Intangible assets other than goodwill consist of the following:
(In thousands)
|
|
Amortization period
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Gross amount:
|
|
|
|
|
|
|
|
|
|
|
Software developed for internal use
|
|
10 years
|
|
$
|
18,193
|
|
|
$
|
16,642
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
Software developed for internal use
|
|
|
|
|
(1,662
|
)
|
|
|
(1,289
|
)
|
Net intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Software developed for internal use
|
|
|
|
$
|
16,531
|
|
|
$
|
15,353
|
|
The gross amount associated with software developed for internal use mainly represents capitalized costs of internally developed software, including eligible salaries and staff benefits, share-based compensation expense, traveling expenses incurred by relevant employees, and other relevant costs.
8
Amortization expenses of $
3
73
and $
156
were included in depreciation and amortization expenses for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, intangible assets of $
1
,
920
, included in the gross amounts of software developed for internal use, h
ave not started amortization, as they have not yet been ready for their intended use.
red violet capitalized $1,551 and $1,893 related to internally developed software during the three months ended March 31, 2018 and 2017, respectively.
As of March 31, 2018, estimated amortization expenses related to the Company’s intangible assets for the remainder of 2018 through 2023 and thereafter are as follows:
(In thousands)
|
|
|
|
|
Year
|
|
March 31, 2018
|
|
Remainder of 2018
|
|
$
|
1,270
|
|
2019
|
|
|
1,822
|
|
2020
|
|
|
1,821
|
|
2021
|
|
|
1,819
|
|
2022
|
|
|
1,818
|
|
2023 and thereafter
|
|
|
7,981
|
|
Total
|
|
$
|
16,531
|
|
5. Goodwill
Goodwill represents the cost in excess of the fair value of the net assets acquired in a business combination. As of March 31, 2018 and December 31, 2017, the balance of goodwill of $5,227 was as a result of the acquisition of Interactive Data, LLC (“Interactive Data”), a wholly-owned subsidiary of red violet, effective on October 2, 2014.
In accordance with ASC 350,
“Intangibles - Goodwill and Other,”
goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value. The measurement date of our annual goodwill impairment test is October 1.
As of March 31, 2018 and December 31, 2017, there are no events or changes in circumstances to indicate that goodwill is impaired.
6. Income taxes
red violet is a “C” corporation, while its subsidiaries are all limited liability companies. Before the Spin-off, red violet and its subsidiaries, were consolidated with Fluent for U.S. federal income tax purposes. However, for purposes of these financial statements, the income tax provisions were prepared assuming the entities filed separate tax returns.
The Company is subject to federal and state income taxes in the United States.
Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, we update our estimate of the annual effective tax rate, and if our estimated annual tax rate changes, we make a cumulative adjustment in that quarter.
On December 22, 2017,
the tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Act”)
was enacted, with the statutory federal income tax rate lowered to 21% among other changes, effective on January 1, 2018. As a full valuation allowance was provided as of March 31, 2018, the Act does not have any material net impact on our consolidated and combined financial statements, however, certain income tax disclosures are affected.
The Company’s effective income tax rate differed from the statutory federal income tax rate of 21% for the three months ended March 31, 2018 and 34%
for the three months ended March 31, 2017.
For the three months ended March 31, 2018 and 2017, the effective income tax rate was 0%, and the difference is primarily the result of the full valuation allowance applied against the Company’s deferred tax assets.
The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax
9
positions where it is not more-likely-than-not that a tax ben
efit will be sustained, no tax benefit has been recognized in the Company’s financial statements.
red violet continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new
authoritative
rulings. red violet
has no federal income tax filings that remain open for tax examinations as 2018 will be the first filing year for the Company for U.S. federal income tax purposes; however, one of red violet’s subsidiaries, Interactive Data’s stand-alone state income tax returns since 2014 remain open for tax examinations.
red violet does not have any unrecognized tax benefits as of March 31, 2018 and December 31, 2017.
7. Common stock and preferred stock
Common stock
As of March 31, 2018 and December 31, 2017, the number of authorized shares of common stock was 200,000,000 and 5,000, with par value of $0.001 per share, respectively, of which, 10,266,613 and 1,000 shares of common stock were issued and outstanding, respectively.
On March 26, 2018, Fluent completed the Spin-off of its risk management business from its digital marketing business by way of a distribution of all the shares of common stock of red violet to Fluent’s stockholders of record as of March 19, 2018, the Record Date, and certain warrant holders, which resulted in a distribution of a total of 10,266,613 shares of red violet common stock.
Preferred stock
As of March 31, 2018, we had 10,000,000 shares of preferred stock with par value of $0.001 per share authorized, and there were no shares of preferred stock issued or outstanding. There was no preferred stock authorized as of December 31, 2017.
8. Share-based compensation
On March 22, 2018, the board of directors of red violet and Fluent, in its capacity as sole stockholder of red violet prior to the Spin-off, approved the Red Violet, Inc. 2018 Stock Incentive Plan, (the “2018 Plan”), which became effective immediately prior to the Spin-off. A total of 3,000,000 shares of common stock were authorized to be issued under the 2018 Plan.
The primary purpose of the 2018 Plan is to attract, retain, reward and motivate certain individuals by providing them with an opportunity to acquire or increase a proprietary interest in the Company and to incentivize them to expend maximum effort for the growth and success of the Company, so as to strengthen the mutuality of the interests between such individuals and the stockholders of the Company.
On March 29, 2018, an aggregate of 56,000 shares of RSUs were granted to certain directors, at a grant date fair value of $6.10 per share, under the 2018 Plan, with vesting periods ranging from one to three years. The fair value of the RSUs was estimated using the market value of the Company’s common stock on the date of grant, which was equivalent to the closing price of the common stock on the grant date.
As of March 31, 2018, unrecognized share-based compensation expense associated with the granted RSUs amounted to $340, which is expected to be recognized over a weighted average period of 2.3 years.
Share-based compensation of $346 and $649 was recorded during the three months ended March 31, 2018 and 2017, respectively. Included in the total share-based compensation recorded was $344 and $649 related to the share-based awards granted by Fluent to company employees or non-employees during the three months ended March 31, 2018 and 2017, respectively.
Share-based compensation was allocated to the following accounts in the condensed consolidated and combined financial statements for the three months ended March 31, 2018 and 2017:
|
|
Three Months Ended March 31,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
Sales and marketing expenses
|
|
$
|
41
|
|
|
$
|
85
|
|
General and administrative expenses
|
|
|
124
|
|
|
|
373
|
|
Share-based compensation expense
|
|
|
165
|
|
|
|
458
|
|
Capitalized in intangible assets
|
|
|
181
|
|
|
|
191
|
|
Total
|
|
$
|
346
|
|
|
$
|
649
|
|
10
9. Related party transactions
Contribution by Fluent, Inc., recorded in the condensed consolidated and combined statement of changes in shareholders’ equity, represents cash funding provided or the portion of certain expenses allocated by Fluent to red violet, on or prior to the Spin-off.
These allocated expenses are primarily corporate employee salaries and benefits of the functional groups (inclusive of executive management, accounting, administrative and information technology) and corporate administrative expenses (inclusive of legal services, accounting and finance services and other corporate and infrastructure services). Corporate employee salaries and benefits were allocated on the basis of time spent, and corporate administrative expenses were allocated on the basis of relative percentage of services utilized or benefit received. red violet recorded expenses of $325 and $840 as a result of the allocation of expenses from Fluent during the three months ended March 31, 2018 and 2017, respectively. Upon the Spin-off, Fluent no longer allocates any expenses to red violet.
As discussed in Note 8, “Share-based compensation,” share-based compensation of $344 and $649 in relation with the share-based awards granted by Fluent were recorded during the three months ended March 31, 2018 and 2017, respectively.
Management believes the assumptions and allocations underlying the condensed consolidated and combined financial statements are reasonable and appropriate under the circumstances. The expense allocations have been determined on a basis considered to be a reasonable reflection of the utilization of services provided to or the benefit received by red violet during the periods presented relative to the total costs and expenses incurred by Fluent. However, these expenses may not be reflective of the expenses that would have been recorded had red violet been an entity that operated independently of Fluent, and not been a subsidiary of Fluent. Consequently, future results of operations of red violet after the Spin-off will include costs and expenses that may be materially different than red violet’s historical results of operations, financial position, and cash flows. Accordingly, the financial statements for these periods are not indicative of red violet’s future results of operations, financial position, and cash flow.
10. Commitments
(a) Capital commitment
The Company incurred data costs of $1,241 and $980 for the three months ended March 31, 2018 and 2017, respectively, under certain data licensing agreements. As of March 31, 2018, material capital commitments under certain data licensing agreements were $22,011, shown as follows:
(In thousands)
|
|
|
|
|
Year
|
|
March 31, 2018
|
|
Remainder of 2018
|
|
$
|
3,784
|
|
2019
|
|
|
5,900
|
|
2020
|
|
|
6,250
|
|
2021
|
|
|
4,775
|
|
2022
|
|
|
1,302
|
|
Total
|
|
$
|
22,011
|
|
(b) Guarantees
As of December 31, 2017, the Company was a guarantor on certain Fluent debt, with an outstanding principal amount,
plus paid-in-kind interest, of $55.6 million
as of December 31, 2017, and a maturity date in December 2020.
Upon the Spin-off on March 26, 2018, Fluent, LLC, a subsidiary of Fluent, refinanced such Fluent debt, and red violet’s obligations as a guarantor ceased.
(c) Employment agreements
We have employment agreements with certain executives, including our Chief Executive Officer, President, Chief Financial Officer and Chief Accounting Officer, which provide for compensation and certain other benefits and for severance payments under certain circumstances.
11
1
1
. Subsequent events
On April 26, 2018, the Company entered into a consulting agreement with MDB Management, Inc. (“MDB”), a company owned by Michael Brauser, chairman of the Company’s board of directors, and one of his sons, for MDB to provide consulting services related to business development, future acquisitions, and strategic transactions to the Company (“MDB Agreement”), f
or a term of six months, and shall automatically renew for additional six-month periods unless either party provides written notice to the other of its intent not to renew not fewer than 30 days prior to the expiration of the then current term
. Under the MDB Agreement, the consulting service fee is $30 per month.
12