Item 1. Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
(unaudited)
1. Summary of significant accounting policies
(a) Basis of preparation
The accompanying unaudited condensed consolidated financial statements of Red Violet, Inc. (“red violet” or the “Company”), a Delaware corporation, have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commission 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.
On March 26, 2018, Fluent, Inc. (“Fluent”) completed a 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 then wholly-owned subsidiary, red violet, to Fluent’s stockholders of record as of March 19, 2018, the record date, and certain warrant holders (the “Spin-off”). 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 warrants, which resulted in a distribution of a total of 10,266,613 shares of red violet common stock. Upon the Spin-off, the Company owns Fluent subsidiaries that previously operated Fluent’s risk management business. The Company 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 red violet’s condensed consolidated financial statements at Fluent’s carrying values at the time of the Spin-off.
The accompanying unaudited condensed consolidated 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, 2019.
The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”).
The condensed consolidated balance sheet as of December 31, 2018 included herein was derived from the audited financial statements as of that date included in the 2018 Form 10-K, but does not include all disclosures required by US GAAP.
The Company has only one operating segment, as defined by Accounting Standards Codification (“ASC”) 280, “Segment Reporting.”
Principles of consolidation
The condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant transactions among the Company and its subsidiaries have been eliminated upon consolidation. For periods prior to the Spin-off, these financial statements were prepared on a consolidated and combined basis because certain of the entities were under common control.
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 condensed consolidated financial statements.
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 condensed consolidated and combined financial statements 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, the Company has left open the opportunity to take advantage of the extended transition period provided to emerging growth companies in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), however, it is the Company’s present intention to adopt any applicable new accounting standards timely.
6
In February 2016, Financial Accounting Standard Board (“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. In July 2018, FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements.” Topic 842 is effective for public entities and private entities in the first quarter of 2019 and the first quarter of 2020, respectively, on a modified retrospective basis. The Company adopted Topic 842 in the first quarter of 2019. The Company recorded a right-of-use asset and a total operating lease obligation on its condensed consolidated balance sheet of approximately $3.0 million and $3.4 million, respectively, upon the adoption. Refer to Note 10, Leases, for further details.
In June 2016, FASB issued ASU No. 2016-13 (“ASU 2016-13”), “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” In November 2018, FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” which amends the scope and transition requirements of ASU 2016-13. Topic 326 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. Topic 326 will become effective for public companies beginning January 1, 2020, with early adoption permitted, on a modified retrospective approach. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.
In August 2018, FASB issued ASU No. 2018-15 (“ASU 2018-15”), “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. It also requires the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. This guidance will be effective for the Company for annual reporting periods beginning after December 15, 2020, on a retrospective or prospective basis and early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.
2. Loss per share
Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock 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 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 as of September 30, 2018 and is utilized to calculate loss per share for the nine months ended September 30, 2018, as shown in the table below.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(In thousands, except share data)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(992
|
)
|
|
$
|
(1,252
|
)
|
|
$
|
(6,220
|
)
|
|
$
|
(4,830
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic and diluted
|
|
|
10,917,673
|
|
|
|
10,266,613
|
|
|
|
10,497,036
|
|
|
|
10,266,613
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
$
|
(0.09
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.47
|
)
|
A total of 1,954,910 unvested restricted stock units (“RSUs”) have been excluded from the diluted loss per share for the three and nine months ended September 30, 2019, and 2,145,500 RSUs have been excluded for the three and nine months ended September 30, 2018, as the impact is anti-dilutive.
7
3. Intangible assets, net
Intangible assets other than goodwill consist of the following:
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
(In thousands)
|
|
Amortization
Period
|
|
Gross Amount
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Gross Amount
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
Software developed for internal use
|
|
5-10 years
|
|
$
|
27,929
|
|
|
$
|
(4,879
|
)
|
|
$
|
23,050
|
|
|
$
|
22,990
|
|
|
$
|
(3,019
|
)
|
|
$
|
19,971
|
|
The gross amount associated with software developed for internal use represents capitalized costs of internally-developed software, including eligible salaries and staff benefits and share-based compensation incurred by relevant employees, and other relevant costs.
Amortization expenses of $689 and $445 for the three months ended September 30, 2019 and 2018, respectively, and $1,860 and $1,235 for the nine months ended September 30, 2019 and 2018, respectively, were included in depreciation and amortization expense. As of September 30, 2019, intangible assets of $4,018, included in the gross amounts of software developed for internal use, have not started amortization, as they are not ready for their intended use.
The Company capitalized costs of internally-developed software of $1,708 and $1,744 during the three months ended September 30, 2019 and 2018, respectively, and $4,939 and $4,813 for the nine months ended September 30, 2019 and 2018, respectively.
As of September 30, 2019, estimated amortization expense related to the Company’s intangible assets for the remainder of 2019 through 2024 and thereafter are as follows:
(In thousands)
|
|
|
|
|
Year
|
|
September 30, 2019
|
|
Remainder of 2019
|
|
$
|
714
|
|
2020
|
|
|
3,446
|
|
2021
|
|
|
3,642
|
|
2022
|
|
|
3,640
|
|
2023
|
|
|
3,565
|
|
2024 and thereafter
|
|
|
8,043
|
|
Total
|
|
$
|
23,050
|
|
4. Goodwill
Goodwill represents the cost in excess of the fair value of the net assets acquired in a business combination. As of September 30, 2019 and December 31, 2018, the balance of goodwill of $5,227 was as a result of the acquisition of Interactive Data, LLC, 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 the Company’s annual goodwill impairment test is October 1.
As of September 30, 2019 and December 31, 2018, no goodwill impairment charges were recorded.
5. Revenue recognition
On January 1, 2018, the Company adopted ASC 606, “Revenue from Contracts with Customers,” (“Topic 606”) using the modified retrospective method applied to all contracts that were 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 the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s performance obligation is to provide on demand solutions to its customers by leveraging its proprietary technology and applying machine learning and advanced analytics to its massive data repository. The pricing for the customer contracts is based on usage, a monthly fee, or a combination of both.
8
Available within Topic 606, the Company has applied the portfolio approach practical expedient in accounting for customer revenue as one collective group, rather than individual contracts. Based on the Company’s historical knowledge of the contracts contained in this portfolio and the similar nature and characteristics of the customers, the Company has 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. The Company’s customers simultaneously receive and consume the benefits provided by the Company’s performance as and when provided. Furthermore, the Company has elected the “right to invoice” practical expedient, available within Topic 606, as its measure of progress, since it has a right to payment from a customer in an amount that corresponds directly with the value of its performance completed-to-date. The Company's revenue arrangements do not contain significant financing components.
For the three months ended September 30, 2019 and 2018, 66% and 64% of total revenue was attributable to customers with pricing contracts, respectively, versus 34% and 36% attributable to transactional customers, respectively. For the nine months ended September 30, 2019 and 2018, 65% and 54% of total revenue was attributable to customers with pricing contracts, respectively, versus 35% and 46% attributable to transactional customers, respectively. Pricing contracts are generally annual contracts or longer, with auto renewal.
If a customer pays consideration before the Company transfers services to the customer, those amounts are classified as deferred revenue. As of September 30, 2019 and December 31, 2018, the balance of deferred revenue was $35 and $26, respectively, all of which is expected to be realized in the next 12 months. In relation to the deferred revenue balance as of December 31, 2018, $0 and $26 was recognized into revenue during the three and nine months ended September 30, 2019, respectively.
As of September 30, 2019, $3,405 of revenue is expected to be recognized in the future for outstanding performance obligations, primarily related to pricing contracts that have a term of more than 12 months. $522 of revenue will be recognized in the remainder of 2019, $1,795 in 2020, $1,085 in 2021, and $3 in 2022. The actual timing of recognition may vary due to factors outside of the Company’s control. The Company excludes variable consideration related entirely to wholly unsatisfied performance obligations and contracts and recognizes such variable consideration based upon the right to invoice the customer.
Sales commissions are incurred and recorded on an ongoing basis over the term of the customer relationship. These costs are recorded in sales and marketing expenses.
In addition, the Company 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 the Company recognizes revenue at the amount to which it has the right to invoice for services performed.
6. Income taxes
The Company is subject to federal and state income taxes in the United States. The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimate of the annual effective tax rate, and if its estimated annual tax rate changes, the Company makes a cumulative adjustment in that quarter.
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 prior to the Spin-off were prepared assuming the entities filed separate tax returns.
The Company’s effective income tax rate differed from the statutory federal income tax rate of 21% for the three and nine months ended September 30, 2019 and 2018. For the three and nine months ended September 30, 2019 and 2018, 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 positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the Company’s financial statements.
The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. All of the Company’s income tax filings since 2015 remain open for tax examinations.
9
The Company does not have any unrecognized tax benefits as of September 30, 2019 and December 31, 2018.
7. Common stock and treasury stock
Common stock
As of September 30, 2019 and December 31, 2018, the number of issued shares of common stock was 11,633,662 and 10,266,613, respectively, which included shares of treasury stock of 103,417 and 0, respectively. The change in the number of issued shares of common stock was due to the following issuance:
•
|
An aggregate of 686,049 shares of common stock were issued as a result of the vesting of RSUs, of which, 103,147 shares of common stock were withheld to pay withholding taxes upon such vesting, which are reflected in treasury stock.
|
•
|
An aggregate of 681,000 shares of common stock, with an issuance price of $11.00 per share, were issued in a registered direct offering to certain investors, pursuant to a securities purchase agreement entered into on August 28, 2019. Net proceeds of $7,436 were received in August 2019.
|
Treasury stock
As of September 30, 2019, the Company held 103,147 shares of treasury stock, with a cost of $1,255. There was no treasury stock as of December 31, 2018. This increase in treasury stock was due to shares withheld to pay withholding taxes upon the vesting of RSUs.
8. Share-based compensation
On March 22, 2018, the board of directors of the Company 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.
As of September 30, 2019, there were 346,791 shares of common stock reserved for issuance under the 2018 Plan.
Details of unvested RSU activity during the nine months ended September 30, 2019 were as follows:
|
|
Number of units
|
|
|
Weighted average
grant-date fair value
|
|
Unvested as of December 31, 2018 (1)
|
|
|
2,121,000
|
|
|
$
|
7.65
|
|
Granted (1)(2)
|
|
|
577,000
|
|
|
$
|
10.12
|
|
Vested and delivered
|
|
|
(582,902
|
)
|
|
$
|
7.63
|
|
Withheld as treasury stock (3)
|
|
|
(103,147
|
)
|
|
$
|
7.75
|
|
Vested not delivered
|
|
|
(12,250
|
)
|
|
$
|
6.13
|
|
Forfeited
|
|
|
(44,791
|
)
|
|
$
|
7.50
|
|
Unvested as of September 30, 2019
|
|
|
1,954,910
|
|
|
$
|
8.39
|
|
(1)
|
On September 5, 2018 and January 16, 2019, the Company granted an aggregate of 1,487,500 RSUs (included in “Unvested as of December 31, 2018” above) and 90,000 RSUs (included in “Granted” above), respectively, subject to both time- and performance-based requirements, to certain of its employees and directors, at a grant date fair value of $7.69 per share and $7.25 per share, respectively, with a three-year vesting period. Such RSU grants shall not vest unless and until the Company has, for any fiscal quarter in which the RSUs are outstanding, (i) gross revenue determined in accordance with the Company’s reviewed or audited financial statements in excess of $7.0 million for such fiscal quarter, (ii) positive adjusted EBITDA, as determined based on amounts derived from the Company’s reviewed or audited financial statements for such fiscal quarter, and (iii) the participant continues to provide services to the Company either as an employee, director or consultant on the last day of the quarter that the performance criteria are met (collectively, the “2018 Performance Criteria”). Provided the 2018 Performance Criteria are met, the RSUs will vest in accordance with the time-based requirements contained in the award agreement over three years. In the event of a change of control, all RSUs which have not vested on the date of such change of control shall immediately vest even if the 2018 Performance Criteria have not been met. As of June 30, 2019, the Company determined that the 2018 Performance Criteria were met and expects to issue shares underlying the RSUs in accordance with the continuing time-based vesting requirement.
|
10
As a result of meeting the 2018 Performance Criteria as of June 30, 2019, the Company recognized a total of $1,075 and $4,489 of share-based compensation expense relating to RSUs with 2018 Performance Criteria during the three and nine months ended September 30, 2019, respectively. Of the $4,489 recognized, $1,309 represented a catch-up of unamortized expense from September 5, 2018 through December 31, 2018, which was not recognized in prior periods because the Company determined at each period end that it was not probable that the 2018 Performance Criteria would be met.
(2)
|
On August 28, 2019, the Company granted an aggregate of 373,500 RSUs, subject to both time- and performance-based requirements, to certain employees, at a grant date fair value of $11.42 per share, with vesting periods of either three or four years. Such RSU grants shall not vest unless and until the Company has, for any fiscal quarter in which the RSUs are outstanding, (i) gross revenue determined in accordance with the Company’s reviewed or audited financial statements in excess of (a) $10.0 million for such fiscal quarter and positive adjusted EBITDA of at least $1.5 million , as determined based on amounts derived from the Company’s reviewed or audited financial statements for such fiscal quarter for 248,500 RSUs, and (b) $12.5 million for such fiscal quarter and positive adjusted EBITDA of at least $2.0 million, as determined based on amounts derived from the Company’s reviewed or audited financial statements for such fiscal quarter for 125,000 RSUs, and (ii) the participant continues to provide services to the Company either as an employee, director or consultant on the last day of the quarter that the performance criteria is met (collectively, the “2019 Performance Criteria”). Provided the respective 2019 Performance Criteria are met, the RSUs will vest in accordance with the time-based requirements contained in the award agreement over three or four years. In the event of a change of control, all RSUs which have not vested on the date of such change of control shall immediately vest even if the 2019 Performance Criteria have not been met. As of September 30, 2019, the Company determined that it is probable that the 2019 Performance Criteria will be met and therefore, began to record the related amortization expense on the grant date.
|
(3)
|
The increase in treasury stock was due to shares withheld to pay statutory taxes upon the vesting of RSUs during the nine months ended September 30, 2019. Refer to Note 7 for details.
|
As of September 30, 2019, unrecognized share-based compensation expense associated with the granted RSUs amounted to $15,105, which is expected to be recognized over a remaining weighted average period of 2.3 years.
Share-based compensation was allocated to the following accounts in the condensed consolidated financial statements for the three and nine months ended September 30, 2019 and 2018:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Sales and marketing expenses
|
|
$
|
114
|
|
|
$
|
54
|
|
|
$
|
290
|
|
|
$
|
95
|
|
General and administrative expenses
|
|
|
1,293
|
|
|
|
164
|
|
|
|
5,000
|
|
|
|
337
|
|
Share-based compensation expense
|
|
|
1,407
|
|
|
|
218
|
|
|
|
5,290
|
|
|
|
432
|
|
Capitalized in intangible assets
|
|
|
208
|
|
|
|
135
|
|
|
|
526
|
|
|
|
316
|
|
Total
|
|
$
|
1,615
|
|
|
$
|
353
|
|
|
$
|
5,816
|
|
|
$
|
748
|
|
The amounts recorded in the nine months ended September 30, 2018 included an allocation of share-based compensation related to the share-based awards granted by Fluent to Company employees or non-employees prior to the Spin-off.
9. Related party transactions
Services Agreement
On August 7, 2018, the Company entered into an executive chairman services agreement with Mr. Michael Brauser, the then Executive Chairman of the Company, pursuant to which Mr. Brauser will be providing recommendations on organizational and capital structure, future financing needs and future acquisitions or strategic transactions (“Services Agreement”), for a term of one year, automatically renewing for additional one-year 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. Mr. Brauser continues to provide services as a consultant under the Services Agreement after his resignation as Executive Chairman and as a member of the board of directors effective on September 9, 2018. Under the Services Agreement, Mr. Brauser receives cash compensation of $30 per month and is entitled to participate in the Company’s incentive compensation plan. The Company recognized consulting service fees relating to the Services Agreement of a total of $90 and $270 during the three and nine months ended September 30, 2019, respectively, and $90 during the three and nine months ended September 30, 2018. In addition, amortization of share-based compensation expense of $343 and $1,458 in relation to the RSUs with the 2018 Performance Criteria previously granted to Mr. Brauser was recognized during the three and nine months ended September 30, 2019, respectively.
11
Contribution by Fluent
Contribution by Fluent 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 for the three months ended March 31, 2018 as a result of the allocation of expenses from Fluent. Upon the Spin-off, Fluent no longer allocates any expenses to red violet.
In addition, share-based compensation of $344, relating to the share-based awards granted by Fluent prior to the Spin-off, was recorded during the three months ended March 31, 2018.
10. Leases
On January 1, 2019, the Company adopted Leases (Topic 842) using the modified retrospective method applied to all leases existing at the date of initial application. The Company elected the practical expedients to not reassess whether any existing contracts are or contain leases, not reassess the lease classification for any existing leases, and not reassess initial direct costs for any existing leases, upon the adoption of Leases (Topic 842).
The Company leases its corporate headquarters of 21,020 rentable square feet in accordance with a non-cancelable 89-month operating lease agreement as amended and effective in January 2017. The Company also leases an additional office space of 6,003 rentable square feet in accordance with a non-cancellable 90-month operating lease agreement entered into in April 2017, with an option to extend for additional 60 months. The extension option is not included in the determination of the lease term as it is not reasonably certain to be exercised.
For the three and nine months ended September 30, 2019, a summary of the Company’s lease information is shown below:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(In thousands)
|
|
September 30, 2019
|
|
|
September 30, 2019
|
|
Lease cost:
|
|
|
|
|
|
|
|
|
Operating lease costs
|
|
$
|
168
|
|
|
$
|
504
|
|
Other information:
|
|
|
|
|
|
|
|
|
Cash paid for operating leases
|
|
$
|
172
|
|
|
$
|
513
|
|
Right-of-use assets obtained in exchange for operating lease liabilities
|
|
$
|
-
|
|
|
$
|
3,042
|
|
Weighted average discount rate for operating leases (1)
|
|
|
-
|
|
|
|
8.0
|
%
|
(1)
|
The Company used 8.0%, its estimated incremental borrowing rate for similar secured assets, as the discount rate for the leases to determine the present value of the lease payments because the implicit rate in each lease is not readily determinable. The discount rate was calculated on the basis of information available as of January 1, 2019, the application date.
|
As of September 30, 2019, the weighted average remaining operating lease term was 5.1 years.
12
As of September 30, 2019, scheduled future maturities and present value of the operating lease liabilities are as follows:
(In thousands)
|
|
|
|
|
Year
|
|
September 30, 2019
|
|
Remainder of 2019
|
|
$
|
174
|
|
2020
|
|
|
705
|
|
2021
|
|
|
724
|
|
2022
|
|
|
743
|
|
2023
|
|
|
765
|
|
2024 and thereafter
|
|
|
619
|
|
Total maturities
|
|
$
|
3,730
|
|
Present value included in condensed consolidated balance sheet:
|
|
|
|
|
Current portion of operating lease liabilities
|
|
$
|
477
|
|
Noncurrent operating lease liabilities
|
|
|
2,588
|
|
Total operating lease liabilities
|
|
$
|
3,065
|
|
Difference between the maturities and the present value of operating lease liabilities
|
|
$
|
665
|
|
11. Commitments and contingencies
(a) Capital commitment
The Company incurred data costs of $1,946 and $1,447 for the three months ended September 30, 2019 and 2018, respectively, and $5,501 and $4,080 for the nine months ended September 30, 2019 and 2018, respectively, under certain data licensing agreements. As of September 30, 2019, material capital commitments under certain data licensing agreements were $16,689, shown as follows:
(In thousands)
|
|
|
|
|
Year
|
|
September 30, 2019
|
|
Remainder of 2019
|
|
$
|
1,916
|
|
2020
|
|
|
7,506
|
|
2021
|
|
|
5,615
|
|
2022
|
|
|
1,652
|
|
Total
|
|
$
|
16,689
|
|
(b) Contingencies
On June 21, 2018, the U.S. Supreme Court in South Dakota v. Wayfair, Inc. et al, overturned prior law which required physical presence for nexus and endorsed economic nexus as a basis for South Dakota to require online merchants to collect and remit sales taxes, even if the business does not have an in-state physical presence (the "Wayfair Decision"). As of September 30, 2019, the vast majority of states have enacted or announced their own interpretation of the Wayfair Decision. The Company collects and remits sales tax in certain states as a result of the Wayfair Decision and as a result of its continued overall compliance and review practice related to its sales and use tax obligations. In addition, the Company is currently undergoing a state sales and use tax examination.
The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and it discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, the Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated. Based upon its analysis of potential sales and use tax labilities, the Company determined that there were no matters that required an accrual as of the balance sheet date, September 30, 2019. The Company estimates that adverse decisions, if any, related to state sales and use tax examinations could result in a possible loss up to $413.
13
The Company may be involved in litigation from time to time in the ordinary course of business. The Company does not believe that the ultimate resolution of any such matters will have a material adverse effect on its business, financial condition, results of operations or cash flows. However, the results of such matters cannot be predicted with certainty and the Company cannot assure you that the ultimate resolution of any legal or administrative proceeding or dispute will not have a material adverse effect on its business, financial condition, results of operations and cash flows.
12. Subsequent event
On October 28, 2019, the Company’s compensation committee approved an aggregate of 340,500 RSUs to certain of its employees and directors, with a vesting period of 3 years, among which 307,500 RSUs are also subject to the 2019 Performance Criteria.
14