Notes
to Condensed Consolidated Financial Statements
September
30, 2017
Note
1: Nature of Business
Longfin
Corp. (“Longfin” or the “Company”) specialized in structured trade finance solutions and physical commodities
finance solutions for finance houses and trading platforms for North America, South America and Africa regions. Longfin was incorporated
in Delaware on February 1, 2017 and Mr. Venkata Meenavalli (“Mr. Meenavalli”) had a 100% ownership interest in Longfin
upon formation of the Company. The Company is headquartered in New York, New York.
On
June 15, 2017, the Company amended its Certificate of Incorporation such that the Company was authorized to issue 100,000,000
shares of Class A Common Stock, par value $0.00001 per share; 75,000,000 shares of Class B Common Stock, par value $0.00001 per
share and 25,000,000 shares of Class C Common Stock, par value $0.00001 per share. The Company’s By-Laws were amended such
that (i) the holders of Class A Common Stock and Class B Common Stock will at all times vote together as one class on all matters
(including the election of directors) submitted to a vote for the consent of the stockholders of the Company, (ii) Each holder
of Class A Common Stock is entitled to one (1) vote for each share of Class A Common Stock held, (iii) Each holder of Class B
Common Stock is entitled to ten (10) votes for each share of Class B Common Stock held, and (iv) Each holder of Class C Common
Stock is entitled to zero votes for each share of Class C Common Stock held. The Company has been advised that such provisions
of its By-Laws are ineffective under Delaware law and accordingly the disparate voting rights have been disregarded for all periods.
On
June 19, 2017, Longfin acquired all of the common shares of Longfin Tradex Pte. Ltd. (“Longfin Tradex”), formerly
Stampede Tradex Pte. Ltd., a global trade finance technology solution provider. Longfin Tradex was incorporated in Singapore in
2010 and operates an electronic trading and market making business in Asia, Europe and the Middle East. Prior to the acquisition,
Longfin Tradex was 55% owned by Stampede Capital Limited (“SCL”), a public company in India, and 45% owned by Mr.
Meenavalli. Prior to the acquisition, Mr. Meenavalli and his wife owned a combined 17.11% of SCL’s outstanding shares. As
consideration for Longfin Tradex, Longfin issued 27,500,000 shares of Class A Common Stock to SCL and 22,500,000 shares of Class
B Common Stock to Mr. Meenavalli (the “Longfin Tradex Acquisition”). The Longfin Tradex Acquisition has been accounted
for as a business combination, (see Note 4). Subsequent to the Acquisition, Longfin Tradex is a 100% subsidiary of Longfin. The
Company’s plan is to utilize Longfin Tradex’s technology, strategy, infrastructure and its business model for the
regions of United States of America, North America, South America and Africa, and to carry the same business as being carried
by Longfin Tradex for the Asia Pacific, Middle East and Europe region. Longfin Tradex being a subsidiary of Longfin will continue
to grow in Asia Pacific, Middle East and Europe region.
At
September 30, 2017, Mr. Meenavalli controls the voting interests in Longfin through his ownership of 10,000,000 of Class A common
shares and 30,000,000 of Class B common shares.
The
Company operates and is managed as one business. The Company’s operating results are regularly reviewed on a consolidated
basis by its Chief Executive Officer, who is also the chief operating decision maker.
Note
2: Going Concern
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The Company has limited operating history and experienced a
net loss of $26 million since its inception. The Company has $0.3 million of cash at September 30, 2017. The Company operates
primarily in structured trade finance and providing technology services and our operating costs are primarily related to the cost
of providing those services, employee compensation and administrative expenses. At September 30, 2017, Longfin sought to pursue
an IPO and fund raising after SEC qualification under Regulation A + Tier II for $ 50 million and listing on NASDAQ (the “Financing”).
On
January 22, 2018, pursuant to a Securities Purchase Agreement (“SPA”) entered into by an institutional investor (the
“Investor”), the Company agreed to sell and issue (1) (i) Senior Convertible Notes to the Investor in the aggregate
principal amount of $52,700,000 (each, a “Note” and collectively, the ‘‘Notes”), consisting of a
Series A Note in the principal amount of $10,095,941 and (ii) a Series B Note in the principal amount of $42,604,059, and (2)
a warrant to purchase 751,894 shares of Longfin Class A Common Stock, exercisable for a period of five years at an exercise price
of $38.55 per share (the “Warrant”), for consideration consisting of (i) a cash payment of $5,000,000, and (ii) a
secured promissory note payable by the Investor to Longfin (the “Investor Note”) in the principal amount of $42,604,059
(collectively, the “Note Financing”). On February 13, 2018, the Company completed the Note Financing and related sale
and issuance of the Notes, the Warrant and a placement agent warrant. The maturity date of the Notes is August 13, 2019 and the
Investor Note is February 13, 2048. As of May 3, 2018 the Company has received $3.7 million in net proceeds ($5.0 million net
of costs of $1.3 million) related to the Note Financing and will not be able to obtain additional monies through the Note Financing
until the Company files a Registration Statement to register the common shares underlying the Notes and Warrant and such Registration
Statement is declared effective by the Securities and Exchange Commission or such shares are eligible for resale pursuant to Rule
144 under the Securities Act, or the investor elects to convert or exercise such securities notwithstanding the underlying shares
have not been so registered or are then so eligible.
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
The
continuation of the Company as a going concern is dependent upon the ability of the Company to obtain the monies from the Note
Financing and the attainment of profitable operations. These factors, which are not within the Company’s control, raise
substantial doubt regarding the Company’s ability to continue as a going concern. Although it is no longer feasible to view
that additional funding will be forthcoming pursuant to the Note Financing in light of the Default Notice, the Company intends
to enter into discussions with the investor regarding the renegotiation of the terms of the Note Financing in light of the Trading
Halt and SEC Litigation mentioned elsewhere herein. If the Company is unable to obtain the monies from the Note Financing, it
would negatively impact its business and operations and could also lead to the reduction or suspension of the Company’s
operations and ultimately force the Company to cease operations. These financial statements do not include any adjustments to
the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
Note
3: Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Basis
of Preparation
The
accompanying unaudited interim condensed financial statements have been prepared in accordance with generally accepted accounting
principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited
interim condensed financial statements reflect all adjustments, which include only normal recurring adjustments necessary for
the fair statement of the balances and results for the periods presented. They may not include all of the information and footnotes
required by GAAP for complete financial statements. The results of operations for any interim periods are not necessarily indicative
of the results that may be expected for the entire fiscal year or any other interim period.
No
comparative figures have been presented as this is the first set of quarterly financial statements prepared for the Company since
its incorporation.
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of Longfin and its wholly owned subsidiary, Longfin Tradex. All
intercompany balances and transactions have been eliminated in consolidation. The Company has no unconsolidated subsidiaries or
investments accounted for under the equity method.
Use
of Estimates and Assumptions
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of expenses during the reporting period. Actual results may differ materially from those estimates.
The
Company’s most significant estimates and judgments include the estimation of the underlying deemed fair value of Common
Stock, the valuation of acquired intangible assets and goodwill from business combinations, the recoverability and useful lives
(indefinite or finite) of intangible assets, and the assessment of impairment of goodwill.
The
Company’s estimates could be affected by external conditions, including those unique to the Company and general economic
conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates and could
cause actual results to differ from those estimates and assumptions.
Functional
Currency
The
functional currency for Longfin Tradex is the United States Dollar (“USD”). Transaction gains or losses related to
balances denominated in a currency other than the functional currency are recognized in the condensed consolidated statements
of operations. Securities and other assets and liabilities denominated in foreign currencies are translated into USD amounts at
the date of valuation. Purchases and sales of other assets and liabilities and the related income and expenses denominated in
foreign currencies are translated into USD on the respective dates of the transactions.
Foreign
Currency Transactions
Gains
and losses realized from foreign currency transactions (those transactions denominated in currencies other than the foreign subsidiaries’
functional currency) are included in other income (expense), net. Monetary assets and liabilities are re-measured using foreign
currency exchange rates at the end of the period, and non-monetary assets are re-measured based on historical exchange rates.
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
Concentrations
of Credit Risk
Financial
instruments that potentially subject us to credit risk consist of cash and cash equivalents, accounts and notes receivable and
derivative financial instruments. Certain of our cash and cash equivalents are invested in money market accounts with investment
banks that are not FDIC insured. We place our cash and cash equivalents in what we believe to be creditworthy financial institutions.
We actively monitor the credit risk of our counterparties and customers, including our receivables and payables for physical commodities.
Our accounts receivable are concentrated within entities engaged in import/export industry, mainly outside the U.S. We generally
have not collected collateral for accounts receivable.
Our
counterparties and customers primarily consist of financial institutions and trading companies.
We
have concentrations of credit risk with a few of our physical commodity counterparties. We have exposure to trends within the
physical commodities import/export industry, including declines in the creditworthiness of our counterparties and customers for
our physical commodity transactions. We manage counterparty and customer credit risk and monitor our net exposure with each counterparty
or customer on a daily basis. The net exposure is compared against a credit risk threshold which is determined based on each counterparties’
and customer’s credit rating and evaluation of their financial statements. We utilize these thresholds to determine the
need for collateral or restriction of activity with the counterparty or customer. We believe that our credit policies adequately
monitor our credit risk. Currently, our wholesale counterparties and retail customers are performing and financially settling
timely according to their respective agreements.
The
Company’s three largest customers accounted for 68% of the total revenue for the three months ended September 30, 2017 and
65% of the total revenue for the period from February 1, 2017 through September 30, 2017. For the three months ended September
30, 2017, these customers accounted for 28%, 20% and 20% of the revenue and 48% of this revenue was from related parties. For
the period from February 1, 2017 through September 30, 2017, these customers accounted for 27%, 20% and 18% of the revenue and
49% of this revenue was from related parties.
Cash
and Cash Equivalents
All
highly liquid investments with maturities of three months or less at the time of purchase are considered to be cash equivalents.
All of the Company’s cash equivalents have liquid markets and high credit ratings.
Fair
Value Measurements
The
Company follows accounting guidance on fair value measurements for financial instruments measured on a recurring basis, as well
as for certain assets and liabilities that are initially recorded at their estimated fair values. Fair value is defined as the
exit price, or the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The Company uses the following three level hierarchy that maximizes the use
of observable inputs and minimizes the use of unobservable inputs to value its financial instruments:
Level
1: Observable inputs such as unadjusted quoted prices in active markets for identical instruments.
Level
2: Quoted prices for similar instruments that are directly or indirectly observable in the marketplace.
Level
3: Significant unobservable inputs which are supported by little or no market activity and that are financial instruments whose
values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments
for which the determination of fair value requires significant judgment or estimation.
Financial
instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to
the fair value measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety
requires us to make judgments and consider factors specific to the asset or liability. The use of different assumptions and/or
estimation methodologies may have a material effect on estimated fair values. Accordingly, the fair value estimates disclosed,
or initial amounts recorded may not be indicative of the amount that the Company or holders of the instruments could realize in
a current market exchange.
Certain
of the Company’s financial instruments are not measured at fair value on a recurring basis, but are recorded at amounts
that approximate their fair value due to their liquid or short-term nature, such as cash, accounts receivable, accounts payable
and accrued expenses.
Accounts
Receivable and Payable
Accounts
receivable and payable represent amounts due from customers and owed to vendors, respectively. Accounts receivable are recorded
at invoiced amounts, net of reserves and allowances, and do not bear interest. The Company assesses the need for an allowance
for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due,
the customer’s ability to pay its obligation and the condition of the general economy and the industry as a whole. The Company
will write off accounts receivable when the Company determines that they are uncollectible. No allowance for doubtful accounts
was required as of September 30, 2017 since the Company has not yet experienced any collection problems.
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
The
Company’s three largest customers accounted for 21%,18% and 16% of the September 30, 2017 accounts receivable balance, respectively.
The
Company’s three largest vendors accounted for 26%,17% and 15% of the September 30, 2017 accounts payable balance, respectively.
Physical
Commodity Purchases
The
Company purchases certain physical commodities in the normal course of business that result in physical delivery of the goods
and, hence, are excluded from ASC 815, Derivatives and Hedging.
Deferred
Offering Costs
Deferred
offering costs consist of legal fees incurred through the balance sheet date that are directly related to the planned initial
public offering (“IPO”) and that will be charged to stockholders’ equity upon the completion of the IPO. Should
the IPO prove to be unsuccessful, these deferred costs, as well as additional expenses to be incurred, will be charged to the
statement of operations as general and administrative expenses.
Money
Received Pending Allotment
As
on September 30, 2017, money ($ 2.03 million) was received from the subscribers of the Company against which the allotment of
shares was pending.
Property,
Plant and Equipment, Net
Property
plant and equipment are stated at cost and depreciated over the estimated useful life of the assets. Depreciation is recorded
using the straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Leasehold
improvements are amortized over the shorter of the asset’s useful life or the life of the lease term. Expenditures for maintenance
and repairs are charged to expense as incurred.
Software
Development Costs
The
Company generally capitalizes eligible costs to acquire or develop internal-use software that are incurred during the application
development stage once the preliminary project stage is complete, management authorizes and commits to funding the project, and
it is probable that the project will be completed, and that the software will be used to perform the function intended. Capitalization
ceases at the point the software project is substantially complete and ready for its intended use, and after all substantial testing
is completed. Upgrades and enhancements are capitalized if it is probable that those expenditures will result in additional functionality.
Amortization is provided for on a straight-line basis over the expected useful life of three years of the internal-use software
development costs and related upgrades and enhancements. When existing software is replaced with new software, the unamortized
costs of the old software are expensed when the new software is ready for its intended use. Costs related to preliminary project
activities and post implementation activities are expensed as incurred. There were no capitalized internal use software costs
for the period ended September 30, 2017.
Business
Combinations
The
Company uses estimates and assumptions to assign a fair value to the tangible and intangible assets acquired and liabilities assumed
in business combinations as of the acquisition date. These estimates are inherently uncertain and subject to refinement. During
the measurement period, which may be up to one year from the acquisition date, adjustments to the fair value of these tangible
and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill. Upon the conclusion
of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes
first, any subsequent adjustments are recorded to the Company’s condensed consolidated statements of operations.
Goodwill
and Indefinite Lived Intangible Assets
Goodwill
is the excess of purchase price over the fair value of identified net assets of businesses acquired. The Company’s intangible
assets with an indefinite life are related to the acquisition of Longfin Tradex. Intangible assets with indefinite useful lives
are measured at their respective fair values as of the acquisition date. The Company does not amortize goodwill and intangible
assets with indefinite useful lives.
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
The
Company reviews goodwill and indefinite-lived intangible assets at least annually for possible impairment. Goodwill and indefinite-lived
intangible assets are reviewed for possible impairment between annual tests if an event occurs or circumstances change that would
more likely than not reduce the fair value of the reporting unit or the indefinite-lived intangible assets below their carrying
values. The Company tests its goodwill and indefinite-lived intangible assets each year on December 31. The Company has one reporting
unit as of September 30, 2017. The company will review the carrying value of goodwill utilizing market capitalization approach
which would be based upon the closing price of the company’s stock price after the completion of the IPO. As of September
30, 2017 the fair value of the company’s reporting unit was in excess of carrying value and goodwill was not deemed to be
impaired. The Company did not identify any impairment to goodwill during the period ended September 30, 2017.
Finite
Lived Intangible Assets
Finite-lived
intangible assets are amortized on a straight-line basis over the asset’s estimated economic life and are tested for impairment
based on undiscounted cash flows and, if impaired, are written down to fair value based on discounted cash flows. The identified
intangible assets are amortized over 8 years for developed technology and 3 years for customer relationships.
The
Company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If the sum of the estimated future cash flows expected to result from the use and eventual
disposition of an asset is less than its net book value, an impairment loss is recognized. Measurement of an impairment loss is
based on the fair value of an asset. No impairment was recorded during the period ended September 30, 2017.
Impairment
of Non-Financials Assets
The
Company monitors the carrying value of long-lived assets for potential impairment and tests the recoverability of such assets
whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If a change in circumstance
occurs, the Company performs a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted
expected future cash flows. If cash flows cannot be separately and independently identified for a single asset, the Company will
determine whether impairment has occurred for the Company of assets for which the Company can identify the projected cash flows.
If the carrying values are in excess of undiscounted expected future cash flows, the Company measures any impairment by comparing
the fair value of the asset or asset group to its carrying value. There were no indicators of impairment of long-lived assets
during the period ended September 30, 2017.
Revenue
Recognition
Revenue
is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence that an arrangement exists;
(2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably
assured. When the revenue recognition criteria are not met, the Company defers the recognition of revenue by recording deferred
revenue on the balance sheet until such time that all criteria are met.
The
Company’s revenue consists of the following:
Physical
commodity contracts — We recognize revenue from the sale of physical commodities for sale to our customers. Additionally,
we determine whether the financial statement presentation of revenues should be on a gross or net basis. With respect to our physical
commodity contracts, we act as a principal and take title of the physical commodities and assume the risks and rewards of ownership.
We record settlement of our physical commodity contracts on a gross basis.
Technology
services revenue consists of fees paid by third parties for using the Company’s proprietary risk management and trading
infrastructure technology and provision of associated services.
Other
revenue consists of incentive income received pursuant to agreements with exchanges that is recognized when earned.
Income
Taxes
The
Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for
the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets
and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The Company establishes
a valuation allowance if it is more likely than not that the deferred tax assets will not be recovered based on an evaluation
of objective verifiable evidence. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes
the largest amount of the benefit that is greater than 50% likely of being realized. For tax positions that are not more likely
than not of being sustained upon audit, the Company does not recognize any portion of the benefit.
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
The
FASB Accounting Standards Codification (“ASC”), Topic 740, Income Taxes, or ASC 740, also clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold
and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination
by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in
interim period, disclosure and transition. Based on the Company’s evaluation, it has been concluded that there are no significant
uncertain tax positions requiring recognition in the Company’s consolidated financial statements. The Company believes that
its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result
in material changes to its financial position.
The
Company’s policy for recording interest and penalties associated with audits is to record such expense as a component of
income tax expense. There were no amounts accrued for penalties or interest as of September 30, 2017. Management is currently
unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
Stock-Based
Compensation.
The
Company measures all stock-based compensation to using a fair value method.
Prior
to the Company’s initial public offering, in determining the fair value of the Company’s common stock the Company
considered, among other things, contemporaneous valuations of the Company’s common stock, the Company’s business,
financial condition and results of operations, including related industry trends affecting its operations; the likelihood of achieving
a liquidity event, such as an initial public offering, or IPO, or sale, given prevailing market conditions; the lack of marketability
of the Company’s common stock; the market performance of comparable publicly traded companies; and U.S. and global economic
and capital market conditions.
Loss
per Share
Basic
and diluted net loss per share attributable to Common Stockholders are presented in conformity with the “two-class method”
in accordance with ASC 260, Loss Per Share. Under the two-class method, basic net loss per share is computed using the weighted-average
number of shares of Common Stock outstanding during the period. Diluted net loss per share is computed using the weighted-average
number of shares of Common Stock and, if dilutive, potential shares of Common Stock outstanding during the period. The dilutive
effect of potential shares of Common Stock is reflected in diluted loss per share by application of the treasury stock method.
Recently
Adopted Accounting Pronouncements
In
January 2017, the Financial Accounting Standards Board (“FASB) issued Accounting Standards Update (“ASU”) No.
2017-01, Business Combinations – Clarifying the Definition of a Business
,
which clarifies the definition of a business
to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses.
The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include,
at a minimum, an input and a substantive process that contribute to an output to be considered a business.
Recently
Issued Accounting Pronouncements
In
November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash (a consensus of the Emerging
Issues Task Force). This update attempts to reduce diversity in practice and provides guidance on the presentation of restricted
cash or restricted cash equivalents in the statement of cash flows. The guidance will be effective for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. The Company does not expect this new guidance to
have a material impact on its consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash
Payments (a consensus of the Emerging Issues Task Force). This update attempts to reduce diversity in practice by providing guidance
on the classification of certain cash receipts and payments in the statement of cash flows. The new standard is effective for
fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect
this new guidance to have a material impact on its consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), which introduces a new accounting
model, referred to as the current expected credit losses (CECL) model, for estimating credit losses on certain financial instruments
and expands the disclosure requirements for estimating such credit losses. Under the new model, an entity is required to estimate
the credit losses expected over the life of an exposure (or pool of exposures). The guidance also amends the current impairment
model for debt securities classified as available-for-sale securities. The new guidance will be effective for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating
the impact of this standard on its consolidated financial statements.
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new provisions, all lessees will report on the balance
sheet a right-of-use asset and a liability for the obligation to make payments with the exception of those leases with a term
of 12 months or less. The new provisions will be effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early adoption is permitted. The Company will evaluate the expected impact of this standard
on its consolidated financial statements.
In
January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities, which amends the guidance relating to the classification and measurement of financial
instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under
the fair value option, and the presentation and disclosure requirements for financial instruments. The new standard is effective
for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017.The Company does not
expect this new guidance to have a material impact on its consolidated financial statements.
In
November 2016, the FASB issued ASU 2016-18, Restricted Cash. The standard requires restricted cash to be included with cash and
cash equivalents when reconciling the beginning and ending amounts in the statement of cash flows and also requires disclosures
regarding the nature of restrictions on cash, cash equivalents and restricted cash. The standard is effective for fiscal years
beginning after December 15, 2017, including interim periods and requires retrospective adoption with early adoption permitted.
The Company does not expect this new guidance to have a material impact on its consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-04, simplifying the Test for Goodwill Impairment. The standard eliminates the second step
in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill.
Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit
exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting
unit. The standard is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December
15, 2019, with early adoption permitted. The Company will evaluate the expected impact of this standard on its consolidated financial
statements.
In
August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. The standard better aligns
an entity’s hedging activities and financial reporting for hedging relationships through changes to both the designation
and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements.
The standard will prospectively make hedge accounting easier to apply to hedging activities and also enhances disclosure requirements
for how hedge transactions are reflected in the financial statements when hedge accounting is elected. The standard is effective
for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company will evaluate the future effect
this standard may have on our financial condition, results of operations or cash flows.
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09) as modified by ASU
No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08, Revenue from Contracts
with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No. 2016-10, Revenue
from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, and ASU No. 2016-12, Revenue from
Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The revenue recognition principle in
ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, new
and enhanced disclosures will be required. Companies may adopt the new standard either using the full retrospective approach,
a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. The Company will adopt
the new standard effective January 1, 2018, using the modified retrospective approach. The adoption of ASU 2014-09 will not have
a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows.
Note
4: Business Combinations
On
June 19, 2017, Longfin acquired 100% of the outstanding shares of capital stock of Longfin Tradex in exchange for shares of Longfin’s
Common Stock. The acquisition of Longfin Tradex was determined to be an acquisition of a business and the results of Longfin Tradex’s
operations have been included in the consolidated financial statements since that date. Prior to the acquisition, Longfin Tradex
was 55% owned by SCL, a public company in India, and 45% owned by Mr. Meenavalli. Mr. Meenavalli and his wife owned a combined
17.11% of SCL’s outstanding shares and Mr. Meenavalli served as Chairman and Non-Executive, Non-Independent Director of
SCL, a position he resigned from effective June 2, 2017.The shareholders of SCL approved the sale of Longfin Tradex to Longfin.
Longfin Tradex operated an electronic trading and market making business in Asia, Europe and the Middle East and was incorporated
in Singapore in 2010.
The
Company plans to utilize Longfin Tradex’s technology, strategy, infrastructure and its business model for the regions of
United States of America, North America, South America and Africa, and to carry the same business as being carried by Longfin
Tradex for the Asia Pacific, Middle East and Europe regions.
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
The
acquisition-date fair value of the consideration transferred totaled $134.4 million, which consisted of the following:
Fair
value of consideration transferred (in thousands):
Longfin
Class A common stock (27,500,000 shares)
|
|
$
|
73,920
|
|
Longfin
Class B common stock (22,500,000 shares)
|
|
|
60,480
|
|
Total
|
|
$
|
134,400
|
|
The
fair value of the consideration of $134,400 as on June 19, 2017 was based on a third party valuation report from Scalar in accordance
with ASC 805.
The
following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition
date (in thousands):
As
of June 19, 2017:
|
|
(in
thousands)
|
|
Assets:
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
14
|
|
Accounts
receivable
|
|
|
11,934
|
|
Due
from related parties
|
|
|
1,209
|
|
Property,
plant and equipment
|
|
|
3,454
|
|
Intangible
assets
|
|
|
38,600
|
|
Goodwill
|
|
|
90,474
|
|
Other
assets
|
|
|
231
|
|
Total
Assets
|
|
|
145,916
|
|
Liabilities:
|
|
|
|
|
Accounts
payable
|
|
|
675
|
|
Accrued
expenses
|
|
|
37
|
|
Due
to related parties
|
|
|
3,431
|
|
Other
current liabilities
|
|
|
16
|
|
Accrued
income taxes
|
|
|
208
|
|
Deferred
tax liability
|
|
|
7,149
|
|
Total
Liabilities
|
|
|
11,516
|
|
Net
assets acquired
|
|
$
|
134,400
|
|
Acquired
intangible assets of $38.6 million are finite-lived assets, which include $32.0 million of the Company’s developed technology
to be amortized over an 8-year useful life and $6.6 million related to customer relationships to be amortized over a 3-year useful
life. Due to the complexity and proprietary nature of the underlying technology, a useful life of 8 years was ascribed by the
Company.
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
Goodwill
of $90 million is primarily attributable to the valuation of the Longfin Tradex acquisition and includes a deferred tax liability
of $7.1 million related to the acquired intangible assets of $38.6 million. Goodwill is not deductible for income tax purposes.
The
Company recognized nominal costs related to the acquisition that were expensed in the current period.
The
amounts of revenue and earnings of Longfin Tradex included in the Company’s condensed consolidated statement of operations
from the acquisition date to the period ended September 30, 2017 are as follows (in thousands):
|
|
June
20, 2017 – September 30, 2017
|
|
Revenue
|
|
$
|
17,439
|
|
Loss
from operations
|
|
$
|
(34
|
)
|
The
following represents the unaudited pro forma condensed consolidated statement of operations as if Longfin Tradex had been included
in the condensed consolidated results of the Company for the period from February 1, 2017 through September 30, 2017:
Unaudited
pro forma condensed consolidated statement of operations (in thousands, except for share and per share amounts):
|
|
From
January 1, 2017 – September 30, 2017
|
|
Revenue
|
|
|
25,150
|
|
Net
loss
|
|
$
|
(26,038
|
)
|
|
|
|
|
|
Net
loss per common share, basic
|
|
$
|
(0.77
|
)
|
Net
loss per common share, diluted
|
|
$
|
(0.77
|
)
|
|
|
|
|
|
Weighted
average common shares outstanding, basic
|
|
|
33,664,463
|
|
Weighted
average common shares outstanding, diluted
|
|
|
33,664,463
|
|
These
amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Longfin Tradex
to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property,
plant and equipment and intangible assets had been applied on February 1, 2017.
Prior
to the acquisition, the Company had no prior relationship with Longfin Tradex, except for the ownership interest of Mr. Meenavalli.
Note
5: Property, Plant and Equipment, Net
Property,
Plant and Equipment, net consists of the following (in thousands):
|
|
September
30, 2017
|
|
Computer
software
|
|
$
|
6,283
|
|
Computer
equipment
|
|
|
3,454
|
|
|
|
|
9,737
|
|
Accumulated
depreciation
|
|
|
(605
|
)
|
Property
and equipment, net
|
|
$
|
9,132
|
|
For
the three months ended September 30, 2017 and the period from February 1, 2017 through September 30, 2017, the Company recorded
$0.5 million and $0.6 million, respectively, in depreciation expense.
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
Note
6: Intangible Assets
As
of September 30, 2017, the Company has the following amounts related to intangible assets (in thousands):
|
|
Useful
Lives
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book Value
|
|
Developed
technology
|
|
8
years
|
|
$
|
32,000
|
|
|
$
|
(1,118
|
)
|
|
$
|
30,882
|
|
Customer
relationships
|
|
3
years
|
|
|
6,600
|
|
|
|
(615
|
)
|
|
|
5,985
|
|
|
|
|
|
$
|
38,600
|
|
|
$
|
(1,733
|
)
|
|
$
|
36,867
|
|
The
following table represents the total estimated amortization of intangible assets for the five succeeding years (in thousands):
For
the Year-Ended
September
30
|
|
Estimated
Amortization
Expense
|
|
2018
|
|
$
|
6,200
|
|
2019
|
|
$
|
6,200
|
|
2020
|
|
$
|
5,585
|
|
2021
|
|
$
|
4,000
|
|
2022
|
|
$
|
4,000
|
|
Thereafter
|
|
$
|
10,882
|
|
For
the three months ended September 30, 2017 and the period from February 1, 2017 through September 30, 2017, the Company recorded
$1.6 million and $1.7 million, respectively, in amortization expense.
Note
7: Accrued Expenses
Accrued
expenses as of September 30, 2017 consists of the following (in thousands):
|
|
September
30, 2017
|
|
Legal
and professional fee
|
|
|
121
|
|
Director
fees
|
|
|
19
|
|
Payroll
|
|
|
16
|
|
Rent
Deposit
|
|
|
4
|
|
|
|
$
|
160
|
|
Note
8: Stockholders’ Equity
As
of the date of incorporation, the Company has authorized share capital of 200,000,000 shares, par value $0.00001 per share. On
February 1, 2017 the Company issued 7,500,000 founder shares to Mr. Meenavalli, the Company’s Chief Executive Officer (“CEO”),
valued at $75, which was paid for in cash by Mr. Meenavalli.
On
June 15, 2017, the Company amended its Certificate of Incorporation such that the Company is authorized to issue 100,000,000 shares
of Class A Common Stock, par value $0.00001 per share; 75,000,000 of Class B Common Stock, par value $0.00001 per share and 25,000,000
shares of Class C Common Stock, par value $0.00001 per share. The By-Laws were amended such that (i) the holders of Class A Common
Stock and Class B Common Stock will at all times vote together as one class on all matters(including the election of directors)
submitted to a vote for the consent of the stockholders of the Company, (ii) Each holder of Class A Common Stock is entitled to
one (1) vote for each share of Class A Common Stock held, (iii) Each holder of Class B Common Stock is entitled to ten (10) votes
for each share of Class B Common Stock held, and (iv) Each holder of Class C Common Stock is entitled to zero votes for each share
of Class C Common Stock held. The Company has been advised that such provisions of its By-Laws are ineffective under Delaware
law and accordingly the disparate voting rights have been disregarded for all periods.
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
The
holders of ordinary shares are entitled to receive dividends as and when declared and are entitled to one vote per share at meetings
of the Company. All shares rank equally with regards to residual assets of the Company.
On
June 19, 2017, the Company issued shares of its Common Stock related to the acquisition of Longfin Tradex valued at $134.4 million
(see Note 4), which is comprised of 27,500,000 shares of Class A Common Stock issued to SCL and 22,500,000 shares of Class B Common
Stock issued to Mr. Meenavalli, Longfin’s CEO. The Company also issued 10,000,000 shares of class A Common Stock to Mr.
Meenavalli, valued at $19 million for services and recorded compensation expense in the Company’s condensed consolidated
statement of operations in general and administrative expenses. The 10,000,000 shares of class A Common Stock were valued under
409A of the Internal Revenue Code at a price of $1.90 per share based on a third party valuation report from Scalar.
On
September 14, 2017, the Company issued 3,375,000 shares of its Class A Common Stock valued at $7.0 million to Mr. Krishanu Singhal,
the Company’s former Chief Financial Officer. The Company recorded the value of the shares as compensation expense in the
Company’s condensed consolidated statement of operations in general and administrative expenses.
The
Company issued 2,025,000 shares of its Class A Common Stock valued at $4.2 million to a third-party marketing platform owned by
Adamson Brothers Corp., an entity of which Mr. Andy Altahawi has voting and dispositive control, in exchange for services in connection
with the Financing. Such amounts were recorded as deferred offering costs –non cash as of September 30, 2017. Also, in addition
to stock compensation paid to Adamson Brothers Corp., the Company also agreed to pay $65,000 in cash for the services obtained
in connection with the Public Offering.
Note
9: Related Party Transactions
Related
party transactions for the three months ended September 30, 2017 and the period from February 1, 2017 through September 30, 2017
are as follows (in thousands):
|
|
For
the Year-Ended
September
30
|
|
|
For
the period from February 1, 2017 (inception) through September 30, 2017
|
|
|
|
Sale
of physical commodities
|
|
|
Cost
of physical commodities revenues
|
|
|
Cost
of technology revenue
|
|
|
Sale
of physical commodities
|
|
|
Cost
of physical commodities revenues
|
|
|
Cost
of technology revenue
|
|
|
Capital
Expenditures
|
|
Stampede Enterprises
India Private Limited
|
|
$
|
3,180
|
|
|
$
|
1,302
|
|
|
$
|
-
|
|
|
$
|
6,852
|
|
|
$
|
1,302
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Meridian Enterprises Pte. Limited
|
|
|
4,453
|
|
|
|
1,886
|
|
|
|
-
|
|
|
|
4,453
|
|
|
|
6,825
|
|
|
|
-
|
|
|
|
-
|
|
Meridian Tech
HK Limited
|
|
|
-
|
|
|
|
-
|
|
|
|
1,137
|
|
|
|
944
|
|
|
|
907
|
|
|
|
2,789
|
|
|
|
4,515
|
|
|
|
$
|
7,633
|
|
|
$
|
3,188
|
|
|
$
|
1,137
|
|
|
$
|
12,249
|
|
|
$
|
9,034
|
|
|
$
|
2,789
|
|
|
$
|
4,515
|
|
Related
party balances for the period-ended September 30, 2017 are as follows (in thousands):
Due
from Related Parties:
|
|
Relationship
|
|
September30,
2017
|
|
Meridian
Enterprises Pte Ltd
|
|
Common Promoter
|
|
$
|
4,462
|
|
Stampede
Enterprises India Private Limited
|
|
Wholly
owned subsidiary of Stampede Capital Limited
|
|
$
|
2,224
|
|
Meridian
Tech HK Limited
|
|
Wholly
owned subsidiary of Meridian Enterprises Pte Limited
|
|
$
|
54
|
|
|
|
|
|
$
|
6,740
|
|
Due
to Related Parties
|
|
|
|
|
|
|
Meridian
Tech HK Limited
|
|
Wholly
owned subsidiary of Meridian Enterprises Pte Limited
|
|
$
|
3,993
|
|
Stampede
Capital Limited
|
|
See
Note1
|
|
$
|
332
|
|
Stampede
Enterprises India Private Limited
|
|
Wholly
owned subsidiary of Stampede Capital Limited
|
|
$
|
302
|
|
Stampede
Technologies Pte Limited
|
|
Wholly
owned subsidiary of Stampede Capital Limited
|
|
$
|
625
|
|
Globe7
Pte Limited
|
|
Common
Promoter
|
|
$
|
4
|
|
Meridian
Enterprises Pte Limited
|
|
Common Promoter
|
|
$
|
2,208
|
|
|
|
|
|
$
|
7,464
|
|
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
A
description of the amounts included related party transactions are as follows:
Stampede
Enterprises India Private Limited includes revenue related to the sale of physical commodities and costs related to the purchase
of physical commodities.
Meridian
Enterprises Pte. Limited includes revenue related to the sale of physical commodities and costs related to the purchase of physical
commodities.
Meridian
Tech HK Ltd. includes the sale of physical commodities the costs related to the sale of physical commodities, and costs related
to the purchase of physical commodities and the purchase of binary options trading software.
Note
10: Income Taxes
The
components of loss from operations before income tax are the three months ended September 30, 2017 and the period from February
1, 2017 through September 30, 2017 (in thousands) as follows (in thousands):
|
|
For
the three
months ended September
30, 2017
|
|
|
For
the period from February 1, 2017 (inception) through September 30, 2017
|
|
United
States
|
|
|
|
|
|
|
|
|
Non-United
States
|
|
$
|
(6,990
|
)
|
|
$
|
(25,951
|
)
|
|
|
|
(409
|
)
|
|
|
(34
|
)
|
|
|
$
|
(7,399
|
)
|
|
$
|
(25,985
|
)
|
The
components of the income tax expense (benefit) for the three months ended September 30, 2017 and the period from February 1, 2017
through September 30, 2017 (in thousands):
|
|
For
the three
months ended September
30, 2017
|
|
|
For
the period from February 1, 2017 (inception) through September 30, 2017
|
|
Current:
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
81
|
|
|
$
|
32
|
|
Non-United
States
|
|
|
(208
|
)
|
|
|
(208
|
)
|
|
|
|
(127
|
)
|
|
|
(176
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
United
States
|
|
|
-
|
|
|
|
-
|
|
Non-United
States
|
|
|
135
|
|
|
|
229
|
|
|
|
|
135
|
|
|
|
229
|
|
Total
|
|
$
|
8
|
|
|
$
|
53
|
|
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
Reconciliation
of the income tax expense (benefit) if computed at the U.S. Federal income tax rate to the Company’s reported income tax
expense (benefit) for the three months ended September 30, 2017 and the period from February 1, 2017 through September 30, 2017
is as follows (in thousands):
|
|
For
the three
months
ended September 30, 2017
|
|
|
For
the period from February 1, 2017 (inception) through September 30, 2017
|
|
Loss
from operations before income tax
|
|
$
|
(7,399
|
)
|
|
$
|
(25,985
|
)
|
Income
tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Income
tax expense at the U.S. Federal tax rate
|
|
|
(2,516
|
)
|
|
|
(8,835
|
)
|
Adjustments
to derive effective tax rate:
|
|
|
|
|
|
|
|
|
Non-deductible
stock-based compensation
|
|
|
2,375
|
|
|
|
8,835
|
|
Other
non-deductible expenses
|
|
|
20
|
|
|
|
19
|
|
Foreign
rate differential
|
|
|
127
|
|
|
|
33
|
|
State
and local net of federal benefit
|
|
|
1
|
|
|
|
1
|
|
Income
tax (benefit) expense
|
|
$
|
8
|
|
|
$
|
53
|
|
The
primary components of the deferred tax liabilities are as follows (in thousands):
|
|
September
30, 2017
|
|
Deferred
income tax assets
|
|
|
|
|
Net
operating loss - foreign
|
|
$
|
442
|
|
Total
deferred tax asset
|
|
|
442
|
|
Deferred
income tax liabilities
|
|
|
|
|
Intangible
assets
|
|
|
(6,267
|
)
|
Depreciation
|
|
|
(1,553
|
)
|
Total
deferred tax liabilities
|
|
|
(7,820
|
)
|
Net
deferred tax liabilities
|
|
$
|
(7,378
|
)
|
The
ultimate realization of deferred tax assets depends primarily on the Company’s ability to generate sufficient timely future
income of the appropriate character in the appropriate taxing jurisdiction.
At
September 30, 2017 Longfin has no unrecognized tax benefits.
Impact
of The Tax Cuts and Jobs Act
The
Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted on December 22, 2017 and provides for significant changes
to U.S. tax law. Among other provisions, the Tax Reform Act reduces the U.S. corporate income tax rate to 21%, effective in 2018.
As a result, the Company has re-measured its U.S. deferred tax assets and liabilities as of December 31, 2017 to reflect the lower
rate expected to apply when these temporary differences reverse.
The
Company estimates that the re-measurement resulted in a nominal reduction in deferred tax assets, which was fully offset by a
corresponding change to the Company’s valuation allowance. The impact will likely be subject to ongoing technical guidance
and accounting interpretation, which the Company will continue to monitor and assess.
The
Tax Reform Act also provides for a transition to a new territorial system of taxation and generally requires companies to include
certain untaxed foreign earnings of non-U.S. subsidiaries into taxable income in 2017 (“Transition Tax”). The Company
estimates that it will incur a $0.6 million Transition Tax and has recorded a provisional liability in this amount.
Additionally,
the Securities Exchange Commission staff has issued SAB 118, which allows the Company to record provisional amounts during a measurement
period not to extend beyond one year of the enactment date. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB
118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information
available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax
effects of the Act. Because the Company is still in the process of analyzing certain provisions of the Tax Act, the Company has
determined that the adjustment to its deferred taxes and the Transition Tax are provisional amounts as permitted under SAB 118.
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
Note
11: Commitments & Contingencies
Legal
Matters
The
Company is and may become subject to certain legal proceedings and claims arising in connection with the normal course of its
business. In the opinion of management, there were no claims as of September 30, 2017 that would have a material adverse effect
on its condensed consolidated financial position, results of operations or cash flows.
On
March 5, 2018, the Division of Enforcement of the SEC informed the Company that it is conducting an investigation In the Matter
of Trading in the Securities of Longfin Corp. and requested that the Company provide certain documents in connection with its
investigation, including documents related to our IPO and other financings and the acquisition of Ziddu.com. The Company is in
the process of responding to this document request and will cooperate with the SEC in connection with its investigation. While
the SEC is trying to determine whether there have been any violations of the federal securities laws, the investigation does not
mean that the SEC has concluded that anyone has violated the law. Also, the investigation does not mean that the SEC has a negative
opinion of any person, entity or security.
At
the beginning of April 2018, the SEC filed the case Securities and Exchange Commission v. Longfin Corp., et al., 19 Civ. 2977
(DLC) (‘the SEC Litigation”) in federal court in Southern District of New York. The Company and Mr. Meenavalli are
named as defendants, as are three of the Company’s stockholders who made certain sales of Class A Common Stock. The SEC’s
complaint alleges that the defendants violated Section 5 of the Securities Act of 1933 y either distributing or participating
in the distribution of the Company’s securities to the public in unregistered transactions. The SEC Litigation includes
the SEC”s application for a temporary restraining order and asset freeze relating to the assets of the three defendants
who were stockholders who made certain sales of Class A Common Stock. By order dated April 23, 2018, the Court vacated the temporary
restraining order and asset freeze with respect to the Company and Mr. Meenavalli. By order dated May 1, 2018, the Court granted
the SEC’s request for a preliminary injunction regarding the assets of the other three defendants.
Also,
at the beginning of April 2018, five putative securities class action lawsuits were filed in the federal courts for the Southern
and Eastern Districts of New York against Longfin Corp and our CEO, Mr. Meenavalli, and (in the case of the second action) CFO,
Mr. Ratakonda. The actions are:
Reddy v. LongFin Corp. et al
., 18 Civ. 2933 (JGK) (SDNY);
Long Chee Min v. Longfin Corp.
et al
., 18 Civ. 2973 (VSB) (SDNY);
Chauhan v. Longfin et al.
, 18 Civ. 2010 (MKB) (EDNY); and
Miller v. Longfin et
al
., 18 Civ. 3121 (UA) (SDNY). According to the complaints, defendants made false and/or misleading statements and failed
to disclose material adverse facts about Longfin’s business, operations, prospects and performance. Plaintiffs allege,
inter
alia
, that defendants made false and/or misleading statements and/or failed to disclose that: (i) Longfin had material weaknesses
in its operations and internal controls that hindered the Company’s profitability; and (ii) Longfin did not meet the requirements
for inclusion in Russell indices. Based on the foregoing, plaintiffs assert causes of action for violation of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs seek unspecified compensatory damages,
fees and costs. By order dated April 26, 2018, the four actions filed in Southern District of New York (bearing docket numbers
18 Civ. 2933, 18 Civ. 2973, 18 Civ. 3121 and 18 Civ. 3462) were consolidated under the docket number of the lead case, 18 Civ.
2933, pending before the Honorable Denise Cote, United States District Judge. The Company has reviewed the allegations contained
in the various complaints and believe they are without merit. The Company intends to defend the litigation vigorously.
Leases
Leases
where the lessor effectively retains substantially all the risks and benefits of ownership of the leased asset are classified
as operating leases. Operating lease payments are recognized as an expense in the statement of operations on a straight-line basis
over the lease term. The aggregate benefit of incentives provided by the lessor is recognized as a reduction of rental expense
over the lease term on a straight-line basis.
Employee
Benefits
Defined
contribution plan
As
required by law, Longfin Tradex makes contributions to a pension plan, the Central Provident Fund (“CPF”), as applicable
in a different jurisdiction where the companies operate. Such obligations for contributions are recognized as compensation expense
in the statement of operations in the same period as the employment that gives rise to the obligatory contribution.
Note
12. Loss Per Share
Under
the two-class method, basic net loss per share is computed using the weighted-average number of shares of Common Stock outstanding
during the period. Diluted net loss per share is computed using the weighted-average number of shares of Common Stock and, if
dilutive, potential shares of Common Stock outstanding during the period. The dilutive effect of potential shares of Common Stock
is reflected in diluted loss per share by application of the treasury stock method.
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
The
Company has two classes of issued and outstanding Common Stock; Class A Common Stock and Class B Common Stock. Holders of Class
A Common Stock and holders of Class B Common Stock have substantially identical rights, including rights with respect to voting,
any declared dividends or distributions of cash or property, and the right to receive proceeds on liquidation or dissolution of
the Company after payment of the Company’s indebtedness. The undistributed losses are allocated based on the contractual
participation rights of the Class A and Class B Common Stock as if the losses for the year have been distributed. As the liquidation
and dividend rights are identical, the undistributed losses are allocated on a proportionate basis.
The
following table sets forth the calculation of basic and diluted net loss per share attributable to Common Stockholders during
the three months ended September 30, 2017 and the period from February 1, 2017 through September 30, 2017 (in thousands except
share and per share amounts):
Warrants
issued to purchase 39,834 of common shares were not included in the computation of diluted loss per share.
The
Company does not have any dilutive securities as of September 30, 2017.
|
|
For
the three
months
ended September 30, 2017
|
|
|
For
the period February 1, 2017 through
September
30, 2017
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(7,407
|
)
|
|
$
|
(26,038
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
68,497,826
|
|
|
|
33,664,463
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.77
|
)
|
Note
13 Geography Revenue
The
following table sets forth long-lived assets by geographic area for the period from February 1, 2017 through September 30, 2017
(in thousands):
|
|
For
the three months ended
September
30, 2017
|
|
Singapore
|
|
$
|
10,573
|
|
India
|
|
|
6,852
|
|
United
Kingdom
|
|
|
5,004
|
|
Other
|
|
|
2,720
|
|
|
|
$
|
25,150
|
|
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
Note
14 Subsequent Events
Common
Stock Issuances
On
December 11, 2017, the Company issued 2,500,000 shares of its Class A Common Stock in connection with the purchase of the website
www.Ziddu.com
and all of its respective content and intellectual property rights (“Ziddu”), from Meridian Enterprises
Pte. Ltd. (“Meridian”), a company owned by Mr. Meenavalli. The acquisition of Ziddu has been accounted for as an asset
acquisition between entities under common control and was recorded at Meridian’s historical carrying value of $0 (zero).
The website and related content and intellectual property comprised substantially all of the value acquired. Meridian had not
recognized revenue related to Ziddu historically.
On
December 12, 2017, the Company completed its initial public offering of 1,140,989 shares of its Class A Common Stock, par value
$0.00001 at a price of $5.00 per share to investors pursuant to Regulation A promulgated under the Securities Act. This included
issue of shares for money pending allotment of $ 2,024,615 as on September 30, 2017. Net proceeds from the offering totaled $4,948,998,
net of cash offering expenses of $755,947. In connection with the offering, the Company issued five-year Common Stock warrants
to purchase an aggregate of 39,834 shares of Class A Common Stock at an exercise price equal to $7.50 per share in the offering.
On
March 19, 2018, the Company executed an agreement to cancel 2,000,000 of the 3,375,000 shares of Class A Common Stock issued to
Mr. Krishanu Singhal on September 14, 2017 and will pay Mr. Singhal $100,000 in cash compensation.
Securities
Purchase Agreement
On
January 22, 2018, pursuant to a Securities Purchase Agreement (“SPA”) entered into by an institutional investor (the
“Investor”), the Company agreed to sell and issue (1) (i) Senior Convertible Notes to the Investor in the aggregate
principal amount of $52,700,000 (each, a “Note” and collectively, the “Notes”), consisting of a Series
A Note in the principal amount of $ 10,095,941 and (ii) a Series B Note in the principal amount of $42,604,059, and (2) a warrant
to purchase 751,894 shares of Longfin Class A Common Stock, exercisable for a period of five years at an exercise price of $38.55
per share (the “Warrant”), for consideration consisting of (i) a cash payment of $5,000,000, and (ii) a secured promissory
note payable by the Investor to Longfin (the “Investor Note”) in the principal amount of $42,604,059 (collectively,
the “Note Financing”).
As
of May 3, 2018, the Company has received $3.7 million in net proceeds ($5.0 million net of costs of $1.3 million) related to the
Note Financing and will not be able to obtain additional monies through the Note Financing until the Company files a Registration
Statement to register the common shares underlying the Notes and Warrant and such Registration Statement is deemed effective by
the Securities and Exchange Commission.
On
February 13, 2018, the Company completed the Note Financing and related sale and issuance of the Notes, the Warrant and a placement
agent warrant. The maturity date of the Notes is August 13, 2019 and the Investor Note is February 13, 2048.
Pursuant
to a continued trading halt in the Company’s Class A Stock instituted on April 6, 2018, the Notes are in default and the
investor in the Note Financing has begun to exercise its remedies with respect to requiring the Company to redeem the Series A
Note by notice dated February 13, 2018 (the “Default Notice”). Pursuant to the Default Notice, the investor in the
Note Financing has demanded that the Company pay the Event of Default Redemption Price of the Series A Note not later than Friday,
April 20, 2018, which the investor has calculated as $33.6 million if paid by such date, but we did not make such payment as demanded.
The investor has not exercised its remedies with respect to requiring the Company to redeem the Series B Note, but in the Default
Notice has reserved its rights with regard to such remedy.
Amendment
and Restatement of Certificate of Incorporation
On
March 20, 2018, the Company amended and restated its Certificate of Incorporation to increase the authorized shares of the Company’s
capital stock from 200,000,000 shares to 300,000,000 shares, $0.00001 par value per share, comprised of 200,000,000 shares of
Class A Common Stock, 75,000,000 shares of Class B Common Stock and 25,000,000 shares of Class C Common Stock. Shares of Common
Stock shall have the same rights and powers, rank equally (including as to dividends and distributions, and any liquidation, dissolution
or winding up of the corporation), share ratably and be identical in all respects as to all matters, except conversion rights
with each share of Class B Common Stock convertible into one share of Class A Common Stock. Holders of Class A and Class B Common
Stock will be entitled to one vote for each share held. Holders of Class C Common Stock will have no voting rights.
LONGFIN
CORP. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2017
Longfin
2018 Omnibus Equity Incentive Plan
On
February 12, 2018, the Company adopted the Longfin 2018 Omnibus Equity Incentive Plan authorizing the grant of awards up to 2,000,000
shares of Class A Common Stock effective March 20, 2018.
Securities
and Exchange Commission Matters
On
March 5, 2018, the Division of Enforcement of the SEC informed the Company that it is conducting an investigation
In the Matter
of Trading in the Securities of Longfin Corp.
and requested that the Company provide certain documents in connection with
its investigation, including documents related to its IPO and other financings and the acquisition of Ziddu.com. The Company is
in the process of responding to this document request and will cooperate with the SEC in connection with its investigation. While
the SEC is trying to determine whether there have been any violations of the federal securities laws, the investigation does not
mean that the SEC has concluded that anyone has violated the law. Also, the investigation does not mean that the SEC has a negative
opinion of any person, entity or security.
At
the beginning of April 2018, the SEC filed the case
Securities and Exchange Commission v. Longfin Corp., et al.
, 18 Civ.
2977 (DLC) (the “SEC Litigation”) in federal court in the Southern District of New York. The Company and Mr. Meenavalli
are named as defendants, as are three of the Company’s stockholders who made certain sales of Class A Common Stock. The
SEC’s complaint alleges that the defendants violated Section 5 of the Securities Act of 1933 by either distributing or participating
in the distribution of the Company’s securities to the public in unregistered transactions. The SEC Litigation includes
the SEC’s application for a temporary restraining order and asset freeze relating to the assets of the three defendants
who were stockholders who made certain sales of Class A Common Stock. By order dated April 23, 2018, the Court vacated the temporary
restraining order and asset freeze with respect to the Company and Mr. Meenavalli. By order dated May 1, 2018, the Court granted
the SEC’s request for a preliminary injunction regarding the assets of the other three defendants.
NASDAQ
Matters
The
Company’s Class A Common Stock is subject to a trading halt on NASDAQ and there can be no assurance when or if this halt
will be lifted. This market has continued listing standards that we must maintain on an ongoing basis in order to continue the
listing of our Class A Common Stock and NASDAQ has requested certain information from us to ensure that we continue to meet these
requirements. If following these inquiries and responses NASDAQ determines that we fail to meet these continued listing requirements,
our Class A Common Stock may be subject to delisting.
Class
Action Litigation
At
the beginning of April 2018, four putative securities class action lawsuits were filed in the federal courts for the Southern
and Eastern Districts of New York against Longfin Corp. and our CEO, Mr. Meenavalli, and (in the case of the second action) CFO,
Mr. Ratakonda. The actions are:
Reddy v. LongFin Corp. et al
., 18 Civ. 2933 (JGK) (SDNY);
Long Chee Min v. Longfin Corp.
et al
., 18 Civ. 2973 (VSB) (SDNY);
Chauhan v. Longfin et al.
, 18 Civ. 2010 (MKB) (EDNY); and
Miller v. Longfin et
al
., 18 Civ. 3121 (UA) (SDNY). According to the complaints, defendants made false and/or misleading statements and failed
to disclose material adverse facts about Longfin’s business, operations, prospects and performance. Plaintiffs allege,
inter
alia
, that defendants made false and/or misleading statements and/or failed to disclose that: (i) Longfin had material weaknesses
in its operations and internal controls that hindered the Company’s profitability; and (ii) Longfin did not meet the requirements
for inclusion in Russell indices. Based on the foregoing, plaintiffs assert causes of action for violation of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs seek unspecified compensatory damages,
fees and costs. By order dated April 26, 2018, the four actions filed in Southern District of New York (bearing docket numbers
18 Civ. 2933, 18 Civ. 2973, 18 Civ. 3121 and 18 Civ. 3462) were consolidated under the docket number of the lead case, 18 Civ.
2933, pending before the Honorable Denise Cote, United States District Judge. The Company has reviewed the allegations contained
in the various complaints and believe they are without merit. The Company intends to defend the litigation vigorously.
Incorporation
of a subsidiary
On
January 10, 2018, Longhash Commmodities Private Ltd, a private limited company was incorporated as a 100% subsidiary of Longfin
Corp. to carry commodity trading in India.