UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2018September 30, 2020
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-38407
RED VIOLET, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
| 82-2408531 |
(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification No.) |
2650 North Military Trail, Suite 300,
Boca Raton, Florida 33431
(Address of Principal Executive Offices) (Zip Code)
(561) 757-4000
(Registrant’s Telephone Number, Including Area Code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol (s) | Name of each exchange on which registered |
Common Stock, $0.001 par value per share | RDVT | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ YES ☐ NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ YES ☐ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| ☐ | Accelerated filer |
| ☐ | |||
Non-accelerated filer |
|
| Smaller reporting company |
| ☒ | |||
Emerging growth company |
| ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): YES ☐ NO ☒
As of May 10, 2018,November 6, 2020, the registrant had 10,266,61312,150,035 shares of common stock outstanding.
RED VIOLET, INC.
TABLE OF CONTENTS FOR FORM 10-Q
|
|
|
| Page |
|
| |||
|
|
|
|
|
Item 1. |
|
|
| |
|
|
| 2 | |
|
|
| 3 | |
|
|
| 4 | |
|
|
| 5 | |
|
|
| 6 | |
Item 2. |
| Management's Discussion and Analysis of Financial Condition and Results of Operations |
| 13 |
Item 3. |
|
|
| |
Item 4. |
|
|
| |
|
|
|
|
|
|
| |||
|
|
|
|
|
Item 1. |
|
|
| |
Item 1A. |
|
|
| |
Item 2. |
|
|
| |
Item 3. |
|
|
| |
Item 4. |
|
|
| |
Item 5. |
|
|
| |
Item 6. |
|
|
| |
|
|
|
|
|
|
|
1
PART I - FINANCIALFINANCIAL INFORMATION
Unless otherwise indicated or required by the context, all references in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” “red violet,” or the “Company,” refer to Red Violet, Inc. and its consolidated and combined subsidiaries.
RED VIOLET, INC.
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
(Amounts in thousands, except share data)
(unaudited)
|
| (unaudited) |
|
|
|
|
| |||||||||
|
| March 31, 2018 |
|
| December 31, 2017 |
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 19,793 |
|
| $ | 65 |
|
| $ | 12,441 |
|
| $ | 11,776 |
|
Accounts receivable, net of allowance for doubtful accounts of $153 and $228 at March 31, 2018 and December 31, 2017, respectively |
|
| 2,032 |
|
|
| 1,650 |
| ||||||||
Accounts receivable, net of allowance for doubtful accounts of $20 and $40 as of September 30, 2020 and December 31, 2019, respectively |
|
| 2,920 |
|
|
| 3,543 |
| ||||||||
Prepaid expenses and other current assets |
|
| 796 |
|
|
| 559 |
|
|
| 616 |
|
|
| 722 |
|
Total current assets |
|
| 22,621 |
|
|
| 2,274 |
|
|
| 15,977 |
|
|
| 16,041 |
|
Property and equipment, net |
|
| 974 |
|
|
| 1,091 |
|
|
| 555 |
|
|
| 660 |
|
Intangible assets, net |
|
| 16,531 |
|
|
| 15,353 |
|
|
| 26,977 |
|
|
| 24,034 |
|
Goodwill |
|
| 5,227 |
|
|
| 5,227 |
|
|
| 5,227 |
|
|
| 5,227 |
|
Other non-current assets |
|
| 1,182 |
|
|
| 1,180 |
| ||||||||
Right-of-use assets |
|
| 2,279 |
|
|
| 2,620 |
| ||||||||
Other noncurrent assets |
|
| 93 |
|
|
| 289 |
| ||||||||
Total assets |
| $ | 46,535 |
|
| $ | 25,125 |
|
| $ | 51,108 |
|
| $ | 48,871 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable |
| $ | 1,063 |
|
| $ | 919 |
| ||||||||
Accounts payable |
| $ | 2,199 |
|
| $ | 2,138 |
| ||||||||
Accrued expenses and other current liabilities |
|
| 5,189 |
|
|
| 6,437 |
|
|
| 775 |
|
|
| 1,571 |
|
Current portion of operating lease liabilities |
|
| 536 |
|
|
| 491 |
| ||||||||
Current portion of long-term loan |
|
| 1,059 |
|
|
| - |
| ||||||||
Deferred revenue |
|
| 21 |
|
|
| 33 |
|
|
| 180 |
|
|
| 128 |
|
Total current liabilities |
|
| 4,749 |
|
|
| 4,328 |
| ||||||||
Noncurrent operating lease liabilities |
|
| 2,052 |
|
|
| 2,459 |
| ||||||||
Long-term loan |
|
| 1,093 |
|
|
| - |
| ||||||||
Total liabilities |
|
| 6,273 |
|
|
| 7,389 |
|
|
| 7,894 |
|
|
| 6,787 |
|
Shareholders' equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock—$0.001 par value, 10,000,000 and 0 authorized, and 0 shares issued and outstanding, at March 31, 2018 and December 31, 2017, respectively |
|
| - |
|
|
| - |
| ||||||||
Common stock—$0.001 par value, 200,000,000 and 5,000 shares authorized, and 10,266,613 and 1,000 shares issued and outstanding, at March 31, 2018 and December 31, 2017, respectively |
|
| 10 |
|
|
| - |
| ||||||||
Preferred stock—$0.001 par value, 10,000,000 shares authorized, and 0 shares issued and outstanding, as of September 30, 2020 and December 31, 2019 |
|
| - |
|
|
| - |
| ||||||||
Common stock—$0.001 par value, 200,000,000 shares authorized, 12,371,665 and 11,657,912 shares issued, 12,146,910 and 11,554,765 shares outstanding, as of September 30, 2020 and December 31, 2019 |
|
| 13 |
|
|
| 12 |
| ||||||||
Treasury stock, at cost, 224,755 and 103,147 shares as of September 30, 2020 and December 31, 2019 |
|
| (3,083 | ) |
|
| (1,255 | ) | ||||||||
Additional paid-in capital |
|
| 40,252 |
|
|
| - |
|
|
| 67,082 |
|
|
| 59,187 |
|
Member's capital |
|
| - |
|
|
| 17,736 |
| ||||||||
Accumulated deficit |
|
| (20,798 | ) |
|
| (15,860 | ) | ||||||||
Total shareholders' equity |
|
| 40,262 |
|
|
| 17,736 |
|
|
| 43,214 |
|
|
| 42,084 |
|
Total liabilities and shareholders' equity |
| $ | 46,535 |
|
| $ | 25,125 |
|
| $ | 51,108 |
|
| $ | 48,871 |
|
See notes to condensed consolidated and combined financial statements
2
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share data)
(unaudited)
|
| Three Months Ended March 31, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||
Revenue |
| $ | 3,325 |
|
| $ | 1,572 |
|
| $ | 9,267 |
|
| $ | 8,257 |
|
| $ | 25,623 |
|
| $ | 21,236 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of depreciation and amortization) |
|
| 2,017 |
|
|
| 1,401 |
|
|
| 2,703 |
|
|
| 3,122 |
|
|
| 8,582 |
|
|
| 8,843 |
|
Sales and marketing expenses |
|
| 1,089 |
|
|
| 818 |
|
|
| 2,217 |
|
|
| 1,925 |
|
|
| 6,139 |
|
|
| 5,428 |
|
General and administrative expenses |
|
| 1,852 |
|
|
| 2,030 |
|
|
| 4,147 |
|
|
| 3,498 |
|
|
| 12,844 |
|
|
| 11,259 |
|
Depreciation and amortization |
|
| 451 |
|
|
| 216 |
|
|
| 1,118 |
|
|
| 750 |
|
|
| 3,020 |
|
|
| 2,049 |
|
Total costs and expenses |
|
| 5,409 |
|
|
| 4,465 |
|
|
| 10,185 |
|
|
| 9,295 |
|
|
| 30,585 |
|
|
| 27,579 |
|
Loss from operations |
|
| (918 | ) |
|
| (1,038 | ) |
|
| (4,962 | ) |
|
| (6,343 | ) | ||||||||
Interest (expense) income, net |
|
| (7 | ) |
|
| 46 |
|
|
| 24 |
|
|
| 123 |
| ||||||||
Loss before income taxes |
|
| (2,084 | ) |
|
| (2,893 | ) |
|
| (925 | ) |
|
| (992 | ) |
|
| (4,938 | ) |
|
| (6,220 | ) |
Income taxes |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Net loss |
| $ | (2,084 | ) |
| $ | (2,893 | ) |
| $ | (925 | ) |
| $ | (992 | ) |
| $ | (4,938 | ) |
| $ | (6,220 | ) |
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
| $ | (0.20 | ) |
| $ | (0.28 | ) |
| $ | (0.08 | ) |
| $ | (0.09 | ) |
| $ | (0.42 | ) |
| $ | (0.59 | ) |
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
| 10,266,613 |
|
|
| 10,266,613 |
|
|
| 12,072,716 |
|
|
| 10,917,673 |
|
|
| 11,758,907 |
|
|
| 10,497,036 |
|
See notes to condensed consolidated and combined financial statements
3
CONDENSED CONSOLIDATED AND COMBINED STATEMENTSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands, except share data)
(unaudited)
|
| Common stock |
|
| Additional paid-in |
|
| Member's |
|
|
|
|
| |||||||
|
| Shares |
|
| Amount |
|
| capital |
|
| capital |
|
| Total |
| |||||
Balance at December 31, 2017 |
|
| 1,000 |
|
| $ | - |
|
| $ | - |
|
| $ | 17,736 |
|
| $ | 17,736 |
|
Contribution by Fluent, Inc., including allocation of expenses |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 24,264 |
|
|
| 24,264 |
|
Share-based compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 346 |
|
|
| 346 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,084 | ) |
|
| (2,084 | ) |
Spin-off from Fluent, Inc. |
|
| 10,265,613 |
|
|
| 10 |
|
|
| 40,252 |
|
|
| (40,262 | ) |
|
| - |
|
Balance at March 31, 2018 |
|
| 10,266,613 |
|
| $ | 10 |
|
| $ | 40,252 |
|
| $ | - |
|
| $ | 40,262 |
|
|
| Common stock |
|
| Treasury stock |
|
| Additional paid-in |
|
| Accumulated |
|
|
|
|
| ||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| capital |
|
| deficit |
|
| Total |
| |||||||
Balance at June 30, 2019 |
|
| 10,286,613 |
|
| $ | 10 |
|
|
| - |
|
| $ | - |
|
| $ | 45,253 |
|
| $ | (10,012 | ) |
| $ | 35,251 |
|
Vesting of restricted stock units |
|
| 666,049 |
|
|
| 1 |
|
|
| - |
|
|
| - |
|
|
| (1 | ) |
|
| - |
|
|
| - |
|
Increase in treasury stock resulting from shares withheld to cover statutory taxes |
|
| - |
|
|
| - |
|
|
| (103,147 | ) |
|
| (1,255 | ) |
|
| - |
|
|
| - |
|
|
| (1,255 | ) |
Issuance of common stock upon direct offering to certain investors, net of issuance costs of $55 |
|
| 681,000 |
|
|
| 1 |
|
|
| - |
|
|
| - |
|
|
| 7,435 |
|
|
| - |
|
|
| 7,436 |
|
Share-based compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,615 |
|
|
| - |
|
|
| 1,615 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (992 | ) |
|
| (992 | ) |
Balance at September 30, 2019 |
|
| 11,633,662 |
|
| $ | 12 |
|
|
| (103,147 | ) |
| $ | (1,255 | ) |
| $ | 54,302 |
|
| $ | (11,004 | ) |
| $ | 42,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2020 |
|
| 11,707,829 |
|
| $ | 12 |
|
|
| (103,147 | ) |
| $ | (1,255 | ) |
| $ | 64,806 |
|
| $ | (19,873 | ) |
| $ | 43,690 |
|
Vesting of restricted stock units |
|
| 663,836 |
|
|
| 1 |
|
|
| - |
|
|
| - |
|
|
| (1 | ) |
|
| - |
|
|
| - |
|
Increase in treasury stock resulting from shares withheld to cover statutory taxes |
|
| - |
|
|
| - |
|
|
| (121,608 | ) |
|
| (1,828 | ) |
|
| - |
|
|
| - |
|
|
| (1,828 | ) |
Share-based compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,277 |
|
|
| - |
|
|
| 2,277 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (925 | ) |
|
| (925 | ) |
Balance at September 30, 2020 |
|
| 12,371,665 |
|
| $ | 13 |
|
|
| (224,755 | ) |
| $ | (3,083 | ) |
| $ | 67,082 |
|
| $ | (20,798 | ) |
| $ | 43,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock |
|
| Treasury stock |
|
| Additional paid-in |
|
| Accumulated |
|
|
|
|
| ||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| capital |
|
| deficit |
|
| Total |
| |||||||
Balance at December 31, 2018 |
|
| 10,266,613 |
|
| $ | 10 |
|
|
| - |
|
| $ | - |
|
| $ | 41,052 |
|
| $ | (4,784 | ) |
| $ | 36,278 |
|
Vesting of restricted stock units |
|
| 686,049 |
|
|
| 1 |
|
|
| - |
|
|
| - |
|
|
| (1 | ) |
|
| - |
|
|
| - |
|
Increase in treasury stock resulting from shares withheld to cover statutory taxes |
|
| - |
|
|
| - |
|
|
| (103,147 | ) |
|
| (1,255 | ) |
|
| - |
|
|
| - |
|
|
| (1,255 | ) |
Issuance of common stock upon direct offering to certain investors, net of issuance costs of $55 |
|
| 681,000 |
|
|
| 1 |
|
|
| - |
|
|
| - |
|
|
| 7,435 |
|
|
| - |
|
|
| 7,436 |
|
Share-based compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 5,816 |
|
|
| - |
|
|
| 5,816 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (6,220 | ) |
|
| (6,220 | ) |
Balance at September 30, 2019 |
|
| 11,633,662 |
|
| $ | 12 |
|
|
| (103,147 | ) |
| $ | (1,255 | ) |
| $ | 54,302 |
|
| $ | (11,004 | ) |
| $ | 42,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019 |
|
| 11,657,912 |
|
| $ | 12 |
|
|
| (103,147 | ) |
| $ | (1,255 | ) |
| $ | 59,187 |
|
| $ | (15,860 | ) |
| $ | 42,084 |
|
Vesting of restricted stock units |
|
| 713,753 |
|
|
| 1 |
|
|
| - |
|
|
| - |
|
|
| (1 | ) |
|
| - |
|
|
| - |
|
Increase in treasury stock resulting from shares withheld to cover statutory taxes |
|
| - |
|
|
| - |
|
|
| (121,608 | ) |
|
| (1,828 | ) |
|
| - |
|
|
| - |
|
|
| (1,828 | ) |
Share-based compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 7,896 |
|
|
| - |
|
|
| 7,896 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (4,938 | ) |
|
| (4,938 | ) |
Balance at September 30, 2020 |
|
| 12,371,665 |
|
| $ | 13 |
|
|
| (224,755 | ) |
| $ | (3,083 | ) |
| $ | 67,082 |
|
| $ | (20,798 | ) |
| $ | 43,214 |
|
See notes to condensed consolidated and combined financial statements
4
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)
|
| Three Months Ended March 31, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2020 |
|
| 2019 |
| ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (2,084 | ) |
| $ | (2,893 | ) |
| $ | (4,938 | ) |
| $ | (6,220 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
| ||||||||
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization |
|
| 451 |
|
|
| 216 |
|
|
| 3,020 |
|
|
| 2,049 |
|
Share-based compensation expense |
|
| 165 |
|
|
| 458 |
|
|
| 6,416 |
|
|
| 5,290 |
|
Write-off of long-lived assets |
|
| 55 |
|
|
| - |
|
|
| 117 |
|
|
| 30 |
|
Provision for (recovery of) bad debts |
|
| (56 | ) |
|
| 6 |
| ||||||||
Allocation of expenses from Fluent, Inc. |
|
| 325 |
|
|
| 840 |
| ||||||||
Provision for bad debts |
|
| 360 |
|
|
| 398 |
| ||||||||
Noncash lease expenses |
|
| 341 |
|
|
| 313 |
| ||||||||
Interest expense |
|
| 7 |
|
|
| - |
| ||||||||
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (326 | ) |
|
| (202 | ) |
|
| 263 |
|
|
| (1,458 | ) |
Prepaid expenses and other current assets |
|
| (237 | ) |
|
| (12 | ) |
|
| 106 |
|
|
| 40 |
|
Other non-current assets |
|
| (2 | ) |
|
| 85 |
| ||||||||
Trade accounts payable |
|
| 144 |
|
|
| (29 | ) | ||||||||
Other noncurrent assets |
|
| 109 |
|
|
| 254 |
| ||||||||
Accounts payable |
|
| 61 |
|
|
| 235 |
| ||||||||
Accrued expenses and other current liabilities |
|
| (1,248 | ) |
|
| (14 | ) |
|
| (803 | ) |
|
| (183 | ) |
Deferred revenue |
|
| (12 | ) |
|
| (17 | ) |
|
| 52 |
|
|
| 9 |
|
Net cash used in operating activities |
|
| (2,825 | ) |
|
| (1,562 | ) | ||||||||
Operating lease liabilities |
|
| (362 | ) |
|
| (322 | ) | ||||||||
Net cash provided by operating activities |
|
| 4,749 |
|
|
| 435 |
| ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| (16 | ) |
|
| (225 | ) |
|
| (98 | ) |
|
| (71 | ) |
Capitalized costs included in intangible assets |
|
| (1,370 | ) |
|
| (1,702 | ) |
|
| (4,310 | ) |
|
| (4,413 | ) |
Net cash used in investing activities |
|
| (1,386 | ) |
|
| (1,927 | ) |
|
| (4,408 | ) |
|
| (4,484 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributed by Fluent, Inc. |
|
| 23,939 |
|
|
| 3,263 |
| ||||||||
Proceeds from issuance of shares, net of issuance costs |
|
| - |
|
|
| 7,436 |
| ||||||||
Proceeds from long-term loan |
|
| 2,152 |
|
|
| - |
| ||||||||
Taxes paid related to net share settlement of vesting of restricted stock units |
|
| (1,828 | ) |
|
| - |
| ||||||||
Net cash provided by financing activities |
|
| 23,939 |
|
|
| 3,263 |
|
|
| 324 |
|
|
| 7,436 |
|
Net increase (decrease) in cash and cash equivalents |
| $ | 19,728 |
|
| $ | (226 | ) | ||||||||
Net increase in cash and cash equivalents |
| $ | 665 |
|
| $ | 3,387 |
| ||||||||
Cash and cash equivalents at beginning of period |
|
| 65 |
|
|
| 226 |
|
|
| 11,776 |
|
|
| 9,950 |
|
Cash and cash equivalents at end of period |
| $ | 19,793 |
|
| $ | - |
|
| $ | 12,441 |
|
| $ | 13,337 |
|
SUPPLEMENTAL DISCLOSURE INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Cash paid for income taxes |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Share-based compensation capitalized in intangible assets |
| $ | 181 |
|
| $ | 191 |
|
| $ | 1,480 |
|
| $ | 526 |
|
Right-of-use assets obtained in exchange of operating lease liabilities |
| $ | - |
|
| $ | 3,042 |
| ||||||||
Operating lease liabilities arising from obtaining right-of-use assets |
| $ | - |
|
| $ | 3,387 |
|
See notes to condensed consolidated and combined financial statements
5
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
(unaudited)
1. OrganizationSummary of significant accounting policies
(a) Basis of preparation
On March 26, 2018, Fluent, Inc. (“Fluent”), formerly known as Cogint, Inc., a Delaware corporation, completed the previously announced spin-off (the “Spin-off”)The accompanying unaudited condensed consolidated financial statements of its risk management business from its digital marketing business by way of a distribution of all the shares of common stock of Fluent’s wholly-owned subsidiary, Red Violet, Inc. (“red violet” or the “Company”), a Delaware corporation, to Fluent’s stockholders of record as of March 19, 2018 (the “Record Date”) and certain warrant holders. The distribution occurred by way of a pro rata stock distribution to such common stock and warrant holders, each of whom received one share of red violet’s common stock for every 7.5 shares of Fluent’s common stock held on the Record Date or to which they were entitled to under their warrant, which resulted in a distribution of a total of 10,266,613 shares of red violet common stock. Upon the Spin-off, red violet owns FluentsubsidiarieswhichpreviouslyoperatedFluent’sriskmanagementbusiness.
As a result of the Spin-off, red violet is an independent public company and red violet’s common stock began regular-way trading on The NASDAQ Capital Market under the symbol “RDVT” on March 27, 2018.
red violet has only one operating segment, as defined by ASC 280, “Segment Reporting.”
2. Summary of significant accounting policies
(a) Basis of preparation and liquidity
The accompanying unaudited condensed consolidated and combined financial statements have been prepared for red violet in accordance with accounting principles generally accepted in the United States (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to those rules and regulations.
red violet accounted for the Spin-off in accordance with ASC 805-50-30-5 Initial Measurement- Transactions Between Entities Under Common Control – Transfer Date Measurement and therefore the net assets transferred from Fluent to red violet upon the Spin-off were reflected in our consolidated financial statements at Fluent carrying values at the time of the Spin-off.
The accompanying unaudited condensed consolidated and combined financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for any future interim periods or for the full year ending December 31, 2018.2020.
The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated and combined financial statements and accompanying notes of red violetincluded in the Company’s Annual Report on Form 10-K for the year ended December 31, 20172019 (“2017 Financials”) included in Exhibit 99.1, Information Statement, to the current report on2019 Form 8-K filed with the SEC on March 27, 2018.10-K”).
The condensed consolidated and combined balance sheet as of December 31, 20172019 included herein was derived from the audited financial statements as of that date included in the 2017 Financials,2019 Form 10-K, but does not include all disclosures including notes required by US GAAP.
The Company has only 1 operating segment, as defined by Accounting Standards Codification (“ASC”) 280, “Segment Reporting.”
Principles of consolidation and combination
AlthoughThe condensed consolidated financial statements include the Spin-off was completed on March 26, 2018,financial statements of the Company has reflected the Spin-off in these financial statements as if it occurred on March 31, 2018 as the Company determined that the impact is not material to the consolidated and combined financial statements.
The financial statements present the consolidated and combined results of operations, financial condition, and cash flows of red violet and its subsidiaries. These financial statements were prepared on a consolidatedAll significant transactions among the Company and combined basis because certain of the entities were under common control for periods prior to the Spin-off. All intercompany accounts and transactionsits subsidiaries have been eliminated between the consolidated and combined entities.
The historical condensed consolidated and combined financial results presented prior to the Spin-off may not be indicative of the results that would have been achieved by the Company had it operated as a separate, standalone entity prior to the Spin-off. The
6
condensed consolidated and combined financial 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. upon consolidation.
(b) Recently issued accounting standards
As an emerging growth company, we havethe Company has left open the opportunity to take advantage of the extended transitionperiod 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.
In May 2014,August 2018, Financial Accounting StandardsStandard Board (“FASB”) issued Accounting Standards Update (“ASU”)ASU No. 2014-092018-15 (“ASU 2014-09”2018-15”), “Revenue from Contracts with Customers (Topic 606).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,” The standard’s core principle 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 company will recognize revenue when it transfers promised goods or services to customers in an amount that reflectsservice contract over the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferralterm of the Effective Date,”hosting arrangement, which delays the effective date of ASU 2014-09 by one year. FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”), which clarifies the implementationincludes reasonably certain renewals. This guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in evaluating whether it controls the good or the service before it is transferred to the customer. The new revenue recognition standard iswill be effective for public entitiesthe Company for annual reporting periods beginning after December 15, 2017, and interim periods therein, that is, the first quarter of 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We adopted Topic 606 as of January 1, 2018 using the modified retrospective method, and the adoption did not have any material impact on our consolidated and combined balance sheets, statements of operations, or cash flows. Refer to Note 1(c) below for further details.
In February 2016, FASB issued ASU No. 2016-02 (“ASU 2016-02”), “Leases (Topic 842),” which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This guidance will be effective for public entities and private entities in the first quarter of 2019 and the first quarter of 2020, respectively, on a modified retrospective or prospective basis and early adoption is permitted. It will be effective for us in the first quarter of 2020. We are stillThe Company is currently evaluating the effect thatimpact this guidance will have on ourits consolidated and combined financial statements and related disclosures.
In August 2016, FASB issued ASU No. 2016-15 (“ASU 2016-15”), “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance for certain cash flow issues, including contingent consideration payments made after a business combination and debt prepayment or debt extinguishment costs etc. The guidance is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and early adoption is permitted. We adopted ASU 2016-15 for the first quarter of 2018 and ASU 2016-15 did not have any material impact on our condensed consolidated and combined financial statements.
On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to all contracts that are not completed contracts at the date of initial application. There was no impact on the opening accumulated deficit as of January 1, 2018 due to the adoption of Topic 606.
Revenue is recognized when control of goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. In other words, our performance obligation is to provide on demand solutions to our customers by leveraging our proprietary technology and applying machine learning and advanced analytic techniques to our massive data repository. The pricing for the customer contracts is based on usage, a monthly fee, or a combination of both.
Available within Topic 606, we have applied the portfolio approach practical expedient in accounting for customer revenue as one collective group, rather than individual contracts. Based on our historical knowledge of the contracts contained in this portfolio and the similar nature and characteristics of the customers, we have concluded the financial statement effects are not materially different than if accounting for revenue on a contract by contract basis.
Revenue is recognized over a period of time since the performance obligation is delivered in a series. Our customers simultaneously receive and consume the benefits provided by the performance as the Company performs. Furthermore, we have elected the “right to invoice” practical expedient, available within ASC 606-10-55-18, as our measure of progress, since we have a right to payment from a customer in an amount that corresponds directly with the value of our performance completed-to-date. The Company's revenue arrangements do not contain significant financing components.
76
If a customer pays consideration before we transfer services to the customer, those amounts are classified as deferred revenue. As of March 31, 2018 and December 31, 2017, the balance of deferred revenue was $21 and $33, respectively, all of which are expected to be realized in the next 12 months. $17 of the deferred revenue balance as of December 31, 2017 had been recognized into revenue during the three months ended March 31, 2018.
As of March 31, 2018, approximately $363 of revenue is expected to be recognized in the future related to outstanding performance obligations. The balance relates primarily to revenues for subscription contracts that has a term of more than 12 months. Approximately $180 will be recognized during the remaining nine months of 2018, $174 in 2019 and the remainder in 2020. The actual timing of recognition may vary due to factors outside of the Company’s control. The Company has elected to exclude variable consideration related entirely to wholly unsatisfied performance obligations and contracts where revenue is recognized based upon the right to invoice the customer.
Sales commissions are recorded at the time revenue is recognized. These costs are recorded in sales and marketing expenses.
In addition, we elected the practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
3.2. Loss per share
Basic loss per share is computed by dividing net loss by the weighted average number of shares of common sharesstock outstanding during the periods. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and is calculated using the treasury stock method for stock options and unvested shares. Common equivalent shares are excluded from the calculation in the loss periods as their effects would be anti-dilutive.
Prior to the Spin-off, the financial information of red violet represented the consolidated and combined figures of red violet and its subsidiaries. red violet only had 1,000 shares of common stock outstanding, all of which Fluent owned. On March 26, 2018, upon the Spin-off of red violet, an aggregate of 10,266,613 shares of red violet common stock were distributed to Fluent stockholders and certain warrant holders. This number of shares remained outstanding at March 31, 2018, and is utilized to calculate loss per share for the three months ended March 31, 2018 and 2017, as shown in the table below.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(In thousands, except share data) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (925 | ) |
| $ | (992 | ) |
| $ | (4,938 | ) |
| $ | (6,220 | ) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic and diluted (1) |
|
| 12,072,716 |
|
|
| 10,917,673 |
|
|
| 11,758,907 |
|
|
| 10,497,036 |
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted: |
| $ | (0.08 | ) |
| $ | (0.09 | ) |
| $ | (0.42 | ) |
| $ | (0.59 | ) |
|
| Three Months Ended March 31, |
| |||||
(In thousands, except share data) |
| 2018 |
|
| 2017 |
| ||
Numerator: |
|
|
|
|
|
|
|
|
Net loss |
| $ | (2,084 | ) |
| $ | (2,893 | ) |
Denominator: |
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic and diluted |
|
| 10,266,613 |
|
|
| 10,266,613 |
|
Loss per share: |
|
|
|
|
|
|
|
|
Basic and diluted: |
| $ | (0.20 | ) |
| $ | (0.28 | ) |
(1) | A total of 1,529,657 unvested restricted stock units (“RSUs”) have been excluded from the diluted loss per share for the three and nine months ended September 30, 2020, and 1,954,910 RSUs have been excluded for the three and nine months ended September 30, 2019, as the impact is anti-dilutive. |
A total of 56,000 shares of unvested restricted stock units (“RSUs”) have been excluded from the diluted loss per share calculation as the impact is anti-dilutive.
4.3. Intangible assets, net
Intangible assets other than goodwill consist of the following:
|
|
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||||||||||||||||||||||||||
(In thousands) |
| Amortization period |
| March 31, 2018 |
|
| December 31, 2017 |
|
| Amortization Period |
| Gross Amount |
|
| Accumulated Amortization |
|
| Net |
|
| Gross Amount |
|
| Accumulated Amortization |
|
| Net |
| ||||||||
Gross amount: |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Software developed for internal use |
| 10 years |
| $ | 18,193 |
|
| $ | 16,642 |
|
| 5-10 years |
| $ | 35,480 |
|
| $ | (8,503 | ) |
| $ | 26,977 |
|
| $ | 29,690 |
|
| $ | (5,656 | ) |
| $ | 24,034 |
|
Accumulated amortization: |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Software developed for internal use |
|
|
|
| (1,662 | ) |
|
| (1,289 | ) | ||||||||||||||||||||||||||
Net intangible assets: |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Software developed for internal use |
|
|
| $ | 16,531 |
|
| $ | 15,353 |
|
The gross amount associated with software developed for internal use mainly represents capitalized costs of internally developedinternally-developed software, including eligible salaries and staff benefits, share-based compensation, expense, travelingtravel expenses incurred by relevant employees, and other relevant costs.
8
Amortization expenses of $373$1,063 and $156$689 for the three months ended September 30, 2020 and 2019, respectively, and $2,847 and $1,860 for the nine months ended September 30, 2020 and 2019, respectively, were included in depreciation and amortization expenses for the three months ended March 31, 2018 and 2017, respectively.expense. As of March 31, 2018,September 30, 2020, intangible assets of $1,920,$2,635, included in the gross amounts of software developed for internal use, have not started amortization, as they haveare not yet been ready for their intended use.
red violetThe Company capitalized $1,551costs of software developed for internal use of $1,646 and $1,893 related to internally developed software$1,708 during the three months ended March 31, 2018September 30, 2020 and 2017,2019, respectively, and $5,790 and $4,939 during the nine months ended September 30, 2020 and 2019, respectively.
As of March 31, 2018,September 30, 2020, estimated amortization expensesexpense related to the Company’s intangible assets for the remainder of 20182020 through 20232025 and thereafter are as follows:
(In thousands) |
|
|
|
|
|
|
|
|
Year |
| March 31, 2018 |
|
| September 30, 2020 |
| ||
Remainder of 2018 |
| $ | 1,270 |
| ||||
2019 |
|
| 1,822 |
| ||||
2020 |
|
| 1,821 |
| ||||
Remainder of 2020 |
| $ | 1,095 |
| ||||
2021 |
|
| 1,819 |
|
|
| 4,776 |
|
2022 |
|
| 1,818 |
|
|
| 4,898 |
|
2023 and thereafter |
|
| 7,981 |
| ||||
2023 |
|
| 4,821 |
| ||||
2024 |
|
| 4,215 |
| ||||
2025 and thereafter |
|
| 7,172 |
| ||||
Total |
| $ | 16,531 |
|
| $ | 26,977 |
|
5.4. Goodwill
Goodwill represents the cost in excess of the fair value of the net assets acquired in a business combination. As of March 31, 2018September 30, 2020 and December 31, 2017,2019, the balance of goodwill of $5,227 was as a result of the acquisition of Interactive Data, LLC, (“Interactive Data”), a wholly-owned subsidiary of red violet, effective on October 2, 2014.
7
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 ourthe Company’s annual goodwill impairment test is October 1.
For the periods ended September 30, 2020 and 2019, 0 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. 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.
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, 2020 and 2019, 68% and 66% of total revenue was attributable to customers with pricing contracts, respectively, versus 32% and 34% attributable to transactional customers, respectively. For the nine months ended September 30, 2020 and 2019, 71% and 65% of total revenue was attributable to customers with pricing contracts, respectively, versus 29% and 35% 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 March 31, 2018September 30, 2020 and December 31, 2017, there2019, the balance of deferred revenue was $180 and $128, 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, 2019, $0 and $128 was recognized into revenue during the three and nine months ended September 30, 2020, respectively.
As of September 30, 2020, $2,626 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. $602 of revenue will be recognized in the remainder of 2020, $1,860 in 2021, $138 in 2022, and $26 in 2023 and thereafter. 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 no eventsincurred 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 changes in circumstancesless and (ii) contracts for which the Company recognizes revenue at the amount to indicate that goodwill is impaired.which it has the right to invoice for services performed.
6. Income taxes
red violet is a “C” corporation, while its subsidiaries are all limited liability companies. Before the Spin-off, red violet and its subsidiaries, were consolidated with Fluent for U.S. federal income tax purposes. However, for purposes of these financial statements, the income tax provisions were prepared assuming the entities filed separate tax returns.
The Company is subject to federal and state income taxes in the United States. OurThe Company’s tax provision for interim periods is determined using an estimate of ourits annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, we update ourthe Company updates its estimate of the annual effective tax rate, and if ourits estimated annual tax rate changes, we makethe Company makes a cumulative adjustment in that quarter.
On December 22, 2017, For the tax reform legislation commonly known asthree and nine months ended September 30, 2020 and 2019, the Tax Cuts and Jobs Act (the “Act”) was enacted, with the statutory federal income tax rate lowered to 21% among other changes, effective on January 1, 2018. As a full valuation allowance was provided as of March 31, 2018, the Act does not have any material net impact on our consolidated and combined financial statements, however, certain income tax disclosures are affected.
The Company’s effective income tax rate differedwas 0%, differing from the statutory federal income tax rate of 21% for the three months ended March 31, 2018 and 34% for the three months ended March 31, 2017. For the three months ended March 31, 2018 and 2017, the effective income tax rate was 0%21%, and the difference is primarily the result of the full valuation allowance applied against the Company’s deferred tax assets.
The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax
9
positions where it is not more-likely-than-not that a tax benefit will be sustained, no0 tax benefit has been recognized in the Company’s financial statements.
red violetThe Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. red violet has no federalAll of the Company’s income tax filings that remain open for tax examinations as 2018 will be the first filing year for the Company for U.S. federal income tax purposes; however, one of red violet’s subsidiaries, Interactive Data’s stand-alone state income tax returns since 20142017 remain open for tax examinations.
red violetThe Company does not0t have any unrecognized tax benefits as of March 31, 2018September 30, 2020 and December 31, 2017.2019.
7. Common stock and preferredtreasury stock
Common stock
As of March 31, 2018September 30, 2020 and December 31, 2017,2019, the number of authorizedissued shares of common stock was 200,000,00012,371,665 and 5,000, with par value11,657,912, respectively, which included shares of $0.001 per share, respectively,treasury stock of which, 10,266,613224,755 and 1,000103,147, respectively. The change in the number of issued shares of common stock were issued and outstanding, respectively.
On March 26, 2018, Fluent completed the Spin-offwas due to an aggregate of its risk management business from its digital marketing business by way of a distribution of all the713,753 shares of common stock issued as a result of red violet to Fluent’s stockholdersthe vesting of record as of March 19, 2018, the Record Date, and certain warrant holders, which resulted in a distribution of a total of 10,266,613 shares of red violet common stock.RSUs.
PreferredTreasury stock
As of MarchSeptember 30, 2020 and December 31, 2018, we had��10,000,0002019, the Company held 224,755 and 103,147 shares of preferredtreasury stock, with par valuea cost of $0.001 per share authorized,$3,083 and there were no$1,255, respectively, as a result of the shares withheld to pay withholding taxes upon the vesting of preferred stock issued or outstanding. There was no preferred stock authorized as of December 31, 2017.RSUs.
8. Share-based compensation
On March 22, 2018, the board of directors of red violetthe Company and Fluent, Inc., in its capacity as sole stockholder of red violet prior to the Spin-off,Company at that time, approved the Red Violet, Inc. 2018 Stock Incentive Plan (the “2018 Plan”), which became effective immediately prior to the Spin-off.. A total of 3,000,000 shares of common stock were authorized to be issued under the 2018 Plan. The primary purpose of the 2018 Plan is to attract, retain, reward and motivate certain individuals by providing them with an opportunity to acquire or increase a proprietary interest in the Company and to incentivize them to expend maximum effort for the growth and success of the Company, so as to strengthen the mutuality of the interests between such individuals and the stockholders of the Company.
On March 29,June 3, 2020, the Company’s stockholders approved an amendment to the 2018 an aggregatePlan to increase the number of 56,000 shares of RSUs were granted to certain directors, at a grant date fair value of $6.10 per share,common stock authorized for issuance under the 2018 Plan with vesting periods ranging from one3,000,000 shares to three years. The fair value of the RSUs was estimated using the market value of the Company’s common stock on the date of grant, which was equivalent to the closing price of the common stock on the grant date.4,500,000 shares.
As of March 31,September 30, 2020, there were 1,525,624 shares of common stock available for future issuance under the 2018 Plan, as amended.
To date, all stock incentives issued under the 2018 Plan have been in the form of RSUs. RSUs granted under the 2018 Plan vest and settle upon the satisfaction of a time-based condition or with both time- and performance-based conditions. The time-based condition for these awards is generally satisfied over three or four years with annual vesting. Details of unvested RSU activity during the nine months ended September 30, 2020 were as follows:
|
| Number of units |
|
| Weighted average grant-date fair value |
| ||
Unvested as of December 31, 2019 |
|
| 2,237,827 |
|
| $ | 8.88 |
|
Granted |
|
| 21,500 |
|
| $ | 20.67 |
|
Vested and delivered |
|
| (592,145 | ) |
| $ | 7.79 |
|
Withheld as treasury stock |
|
| (121,608 | ) |
| $ | 7.72 |
|
Vested not delivered |
|
| (8,417 | ) |
| $ | 11.25 |
|
Forfeited |
|
| (7,500 | ) |
| $ | 12.11 |
|
Unvested as of September 30, 2020 |
|
| 1,529,657 |
|
| $ | 9.52 |
|
As of September 30, 2020, unrecognized share-based compensation expense associated with the granted RSUs amounted to $340,$7,969, which is expected to be recognized over a remaining weighted average period of 2.31.6 years.
9
Share-based compensation of $346 and $649 was recorded during the three months ended March 31, 2018 and 2017, respectively. Included in the total share-based compensation recorded was $344 and $649 related to the share-based awards granted by Fluent to company employees or non-employees during the three months ended March 31, 2018 and 2017, respectively.
Share-based compensation was allocated to the following accounts in the condensed consolidated and combined financial statements for the three and nine months ended March 31, 2018September 30, 2020 and 2017:2019:
|
| Three Months Ended March 31, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||
(In thousands) |
| 2018 |
|
| 2017 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||
Sales and marketing expenses |
| $ | 41 |
|
| $ | 85 |
|
| $ | 151 |
|
| $ | 114 |
|
| $ | 460 |
|
| $ | 290 |
|
General and administrative expenses |
|
| 124 |
|
|
| 373 |
|
|
| 1,702 |
|
|
| 1,293 |
|
|
| 5,956 |
|
|
| 5,000 |
|
Share-based compensation expense |
|
| 165 |
|
|
| 458 |
|
|
| 1,853 |
|
|
| 1,407 |
|
|
| 6,416 |
|
|
| 5,290 |
|
Capitalized in intangible assets |
|
| 181 |
|
|
| 191 |
|
|
| 424 |
|
|
| 208 |
|
|
| 1,480 |
|
|
| 526 |
|
Total |
| $ | 346 |
|
| $ | 649 |
|
| $ | 2,277 |
|
| $ | 1,615 |
|
| $ | 7,896 |
|
| $ | 5,816 |
|
10
Contribution by Fluent, Inc., recorded in the condensed consolidated and combined statement of changes in shareholders’ equity, represents cash funding provided or the portion of certain expenses allocated by Fluent to red violet, on or prior to the Spin-off.
These allocated expenses are primarily corporate employee salaries and benefits of the functional groups (inclusive of executive management, accounting, administrative and information technology) and corporate administrative expenses (inclusive of legal services, accounting and finance services and other corporate and infrastructure services). Corporate employee salaries and benefits were allocated on the basis of time spent, and corporate administrative expenses were allocated on the basis of relative percentage of services utilized or benefit received. red violet recorded expenses of $325 and $840 as a result of the allocation of expenses from Fluent during the three months ended March 31, 2018 and 2017, respectively. Upon the Spin-off, Fluent no longer allocates any expenses to red violet.
As discussed in Note 8, “Share-based compensation,” share-based compensation of $344 and $649 in relation with the share-based awards granted by Fluent were recorded during the three months ended March 31, 2018 and 2017, respectively.
Management believes the assumptions and allocations underlying the condensed consolidated and combined financial statements are reasonable and appropriate under the circumstances. The expense allocations have been determined on a basis considered to be a reasonable reflection of the utilization of services provided to or the benefit received by red violet during the periods presented relative to the total costs and expenses incurred by Fluent. However, these expenses may not be reflective of the expenses that would have been recorded had red violet been an entity that operated independently of Fluent, and not been a subsidiary of Fluent. Consequently, future results of operations of red violet after the Spin-off will include costs and expenses that may be materially different than red violet’s historical results of operations, financial position, and cash flows. Accordingly, the financial statements for these periods are not indicative of red violet’s future results of operations, financial position, and cash flow.
10. Commitments
(a) Capital commitment
The Company incurred data costs of $1,241 and $980 for the three months ended March 31, 2018 and 2017, respectively, under certain data licensing agreements. As of March 31, 2018, material capital commitments under certain data licensing agreements were $22,011, shown as follows:
(In thousands) |
|
|
|
|
Year |
| March 31, 2018 |
| |
Remainder of 2018 |
| $ | 3,784 |
|
2019 |
|
| 5,900 |
|
2020 |
|
| 6,250 |
|
2021 |
|
| 4,775 |
|
2022 |
|
| 1,302 |
|
Total |
| $ | 22,011 |
|
(b) Guarantees
As of December 31, 2017, the Company was a guarantor on certain Fluent debt, with an outstanding principal amount, plus paid-in-kind interest, of $55.6 million as of December 31, 2017, and a maturity date in December 2020.
Upon the Spin-off on March 26, 2018, Fluent, LLC, a subsidiary of Fluent, refinanced such Fluent debt, and red violet’s obligations as a guarantor ceased.
(c) Employment agreements
We have employment agreements with certain executives, including our Chief Executive Officer, President, Chief Financial Officer and Chief Accounting Officer, which provide for compensation and certain other benefits and for severance payments under certain circumstances.
11
11. Subsequent eventsServices Agreement
On April 26,August 7, 2018, the Company entered into a consultingservices agreement with MDB Management, Inc. (“MDB”Mr. Michael Brauser (the “Consultant”), a company owned by Michael Brauser, chairman ofgreater than 10% stockholder, pursuant to which, the Company’s board of directors,Consultant will be providing recommendations on organizational and one of his sons, for MDB to provide consulting services related to business development,capital structure, future financing needs and future acquisitions andor strategic transactions to the Company (“MDBServices Agreement”), forfor a term of six months, and shallone year, automatically renewrenewing for additional six-monthone-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.then-current term. Under the MDBServices Agreement, the Consultant receives cash compensation of $30 per month and is entitled to participate in the Company’s incentive compensation plan. The Company recognized consulting service feefees relating to the Services Agreement of a total of $90 during the three months ended September 30, 2020 and 2019, and $270 during the nine months ended September 30, 2020 and 2019. In addition, amortization of share-based compensation expense of $343 and $343 for the three months ended September 30, 2020 and 2019, respectively, and $1,022 and $1,458 for the nine months ended September 30, 2020 and 2019, respectively, was recognized in relation to the RSUs previously granted to the Consultant.
10. Long-term loan
On May 5, 2020, the Company received funding under a promissory note dated May 5, 2020 (the “Promissory Note”) evidencing an unsecured non-recourse loan in the principal amount of $2,152 under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) (the “Loan”). The Loan to the Company was made through Legacy Bank of Florida (the “Lender”).
Long-term loan as of September 30, 2020 consists of the following:
(In thousands) |
| September 30, 2020 |
| |
Principal amount |
| $ | 2,152 |
|
Included in condensed consolidated balance sheet: |
|
|
|
|
Current portion of long-term loan |
| $ | 1,059 |
|
Long-term loan (non-current) |
|
| 1,093 |
|
|
| $ | 2,152 |
|
The Loan has a two-year term and matures on May 5, 2022. The interest rate on the Loan is $301.0% per month.annum. Pursuant to the Promissory Note, payments shall be deferred for the first six months of the term of the Loan, followed by 18 approximately equal monthly installments of principal and interest. The Promissory Note contains customary events of default relating to, among other things, payment defaults, and breach of representations and warranties, or other provisions of the Promissory Note. As a result of the passage of the Paycheck Protection Program Flexibility Act of 2020 on June 5, 2020, the U.S. Small Business Administration (“SBA”), provided updated guidance that payments can be deferred until the loan forgiveness is determined, or if the Company does not apply for forgiveness, then 10 months after the Covered Period (as defined below) ends.
The Loan may be forgiven partially or fully if the Loan proceeds are used for covered payroll, rent and utility costs incurred during the 24-week period that commenced on the date of funding (the “Covered Period”), and if at least 60% of the proceeds are used for covered payroll costs. Any forgiveness of the Loan will be subject to approval by the SBA and the Lender. The Company will be required to apply for such forgiveness within 10 months after the Covered Period. Because the Loan exceeds $2,000, the Company anticipates the U.S. Department of Treasury will audit the loan. Although the Company used the proceeds of the Loan for such covered purposes and intends to apply for forgiveness by the end of December 2020, it can provide no assurance that the Company will obtain forgiveness of the Loan in whole or in part.
As the Loan was effective in May 2020, the fair value of the Loan approximates its carrying amount as of September 30, 2020.
10
11. 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, 2020 and 2019, a summary of the Company’s lease information is shown below:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(In thousands) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease costs |
| $ | 168 |
|
| $ | 168 |
|
| $ | 504 |
|
| $ | 504 |
|
Other information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for operating leases |
| $ | 177 |
|
| $ | 172 |
|
| $ | 527 |
|
| $ | 513 |
|
Right-of-use assets obtained in exchange for operating lease liabilities |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 3,042 |
|
Weighted average discount rate for operating leases (1) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 8 | % |
(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, 2020, the weighted average remaining operating lease term was 4.1 years.
As of September 30, 2020, scheduled future maturities and present value of the operating lease liabilities are as follows:
(In thousands) |
|
|
|
|
Year |
| September 30, 2020 |
| |
Remainder of 2020 |
| $ | 178 |
|
2021 |
|
| 724 |
|
2022 |
|
| 743 |
|
2023 |
|
| 765 |
|
2024 |
|
| 542 |
|
2025 and thereafter |
|
| 77 |
|
Total maturities |
| $ | 3,029 |
|
Present value included in condensed consolidated balance sheet: |
|
|
|
|
Current portion of operating lease liabilities |
| $ | 536 |
|
Noncurrent operating lease liabilities |
|
| 2,052 |
|
Total operating lease liabilities |
| $ | 2,588 |
|
Difference between the maturities and the present value of operating lease liabilities |
| $ | 441 |
|
12. Commitments and contingencies
(a) Capital commitment
The Company incurred data costs of $2,093 and $1,946 for the three months ended September 30, 2020 and 2019, respectively, and $6,396 and $5,501 for the nine months ended September 30, 2020 and 2019, respectively, under certain data licensing agreements. As of September 30, 2020, material capital commitments under certain data licensing agreements were $9,012, shown as follows:
(In thousands) |
|
|
|
|
Year |
| September 30, 2020 |
| |
Remainder of 2020 |
| $ | 1,745 |
|
2021 |
|
| 5,615 |
|
2022 |
|
| 1,652 |
|
Total |
| $ | 9,012 |
|
11
(b) Contingencies
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 the Company’s 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.
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.
(c) Covid-19 update
In December 2019, a novel strain of coronavirus, now known as Covid-19, was reported in Wuhan, China and has since extensively impacted the global health and economic environment. In March 2020, the World Health Organization characterized Covid-19 as a pandemic. The Company has taken numerous steps, and will continue to take further actions as appropriate, in its approach to minimizing the impact of the Covid-19 pandemic on the Company’s business, results of operations and financial performance. To ensure the health and well-being of its employees, beginning in March 2020, the Company instructed employees at its offices to work from home on a temporary basis. Starting in the second quarter of 2020, the Company implemented cost containment strategies across all areas of the organization, including continued curtailment of Company travel and partnering with suppliers, landlords and vendors for price concessions and payment deferrals during this interim period. As a result of preventative and protective actions taken by federal, state and local governments, including the implementation of stay-at-home orders and social distancing policies which resulted in significantly reduced commercial activity, and certain temporary government-imposed moratoria on collection customers’ activities, the Company experienced reduced transaction volume in the second and third quarters of 2020. Transaction volume returned to pre-Covid levels by the end of the third quarter 2020, except for collection customer volume, which was down $1.0 million, primarily attributable to the Company’s idiVERIFIED service, which is an ancillary collections market offering that is purely transactional and of a lower margin profile, for the three months ended September 30, 2020, compared to the three months ended March 31, 2020. The Company expects collection customer transaction volume, including that of its idiVERIFIED service, to return to pre-Covid levels in the first half of 2021. During the second and third quarters of 2020, the Company took a proactive customer-centric approach working with customers who were impacted by Covid-19. Customers who had minimum contractual commitments and requested concessions because they were temporarily unable to meet their minimum contractual commitments as a result of Covid-19 were granted reductions, or eliminations where applicable, of minimums on a month-to-month basis. The end date of the customer’s agreement was extended by one month for each month of the temporary concession. During the second quarter of 2020, the Company provided concessions to a total of 152 customers, representing a $342 reduction in minimum committed spend. During the third quarter of 2020, the Company provided concessions to a total of 22 customers, representing a $94 reduction in minimum committed spend.
To further support the Company’s liquidity, beginning April 1, 2020, the Company elected, under Section 2302 of the CARES Act, to defer payment of the employer portion of Social Security payroll tax. Under the CARES Act, employers can forgo timely payment of the employer portion of Social Security taxes that would otherwise be due from March 27, 2020 through December 31, 2020, without penalty or interest charges. Employers must pay 50% of the deferred amount by December 31, 2021, and the remainder by December 31, 2022. On May 5, 2020, the Company received the Loan under the CARES Act as discussed in Note 10 above. The Company will continue to assess the CARES Act and other applicable government legislation aimed at assisting businesses during the Covid-19 pandemic. In accordance with best practices and guidance from the Centers for Disease Control and Prevention, the Company implemented protective safeguards, including daily temperature checks, mandatory wearing of masks, social distancing, plexiglass protective barriers, and an entire office HVAC UV-C system. The Company began its first phase of employees returning to the Boca Raton, Florida office in June 2020. The Company will continue to assess the need and timing of additional employees returning to the office. Given the dynamic nature of this health emergency, the full impact of the Covid-19 pandemic on the Company’s ongoing business, results of operations and overall financial performance cannot be reasonably estimated at this time.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Executive Overview
You should read the following discussion and analysis in conjunction with our condensed consolidated and combined financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (“Form 10-Q”). This Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about our expectations, beliefs, or intentions regarding our business, financial condition, results of operations, strategies, the outcome of litigation, or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends, or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements.statements,including the impact of the coronavirus (“Covid-19”) pandemic on our operating results. These factors include those contained in this Quarterly Report on Form 10-Q, as well as the disclosures made in the Company’s Information Statement included in the current reportAnnual Report on Form 8-K10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 27, 201812, 2020 (“2017 Financials”2019 Form 10-K”), and other filings we make with the SEC.Securities and Exchange Commission. We do not undertake any obligation to update forward-looking statements, except as required by law. We intend that all forward-looking statements be subject to the safe harbor provisions of PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance. To the extent that our business is negatively impacted due to a variety of factors, including the impact of Covid-19 on our operating results, we may implement longer-term cost reduction efforts in order to mitigate such impacts.
The historical financial statements we have includedReferences in this Form 10-Q may not reflect what our business, financial positiondiscussion and analysis to “we,” “us,” “our,” “red violet,” or results of operations would have been had we been a publicly traded company during the periods presented or what our results of operations, financial position“Company,” refer to Red Violet, Inc. and cash flows will be in the future when we are a stand-alone company.
its consolidated subsidiaries.
Overview
On March 26, 2018, Fluent, Inc. (“Fluent”), formerly known as Cogint, Inc., a Delaware corporation, completed the previously announced spin-off (the “Spin-off”) of its risk management business from its digital marketing business by way of a distribution of all the shares of common stock of Fluent’s wholly-owned subsidiary, Red Violet, Inc., a Delawarecorporation(“red violet,”“ (“we,” “us,”“our,” “red violet,”or the “Company”), a Delawarecorporation, is dedicated to making the world a safer place and similarterms), to Fluent’s stockholdersreducing the cost of record as of March 19, 2018 (the “Record Date”)doing business. We specialize in data fusion and certain warrant holders. The distribution occurred by way of a pro rata stock distribution to such common stock and warrant holders, each of whom received one share of red violet’s common stock for every 7.5 shares of Fluent’s common stock held on the Record Date or to which they were entitled to under their warrant, which resulted in a distribution of a total of 10,266,613 shares of red violet common stock. Upon the Spin-off, red violet owns FluentsubsidiarieswhichpreviouslyoperatedFluent’sriskmanagementbusiness.
As a result of the Spin-off, red violet is an independent public company and red violet’s common stock began regular-way trading on The NASDAQ Capital Market under the symbol “RDVT” on March 27, 2018.
Although the Spin-off was completed on March 26, 2018, the Company has reflected the Spin-off in these financial statements as if it occurred on March 31, 2018 as the Company determined that the impact is not material to the consolidated and combined financial statements.
The financial statements present the consolidated and combined results of operations, financial condition, and cash flows of red violet and its subsidiaries. These financial statements were prepared on a consolidated and combined basis because the operations were under common control. All intercompany accounts and transactions have been eliminated between the consolidated and combined entities.
red violet is a software and services company specializing in big data analysis,analytics, providing cloud-based, mission-critical solutions to enterprises in a variety of industries. red violet’s mission is to transform data into intelligence utilizing our proprietary technology platform to solve complex problems for our clients. Harnessing the power of data fusionwith use cases including fraud detection, risk mitigation, due diligence and powerful analytics, we transform data into intelligence, in a fast and efficient manner, so our clients can spend their time on what matters most, running their organizations with confidence.marketing. Through our intelligent platform, CORETM, we uncover the relevance of disparate data points utilizing our analytical capabilities to provide real-time and insightful views of people, businesses, assets and their interrelationships.
Leveraging proprietary technology and applying machine learning and advanced analytical and decision-making capabilities, CORE provides compelling solutions to public and private sector organizations through intuitive, easy-to-use analytical applications. We empower clients across markets and industries to better execute all aspects of their business, from managing risk, recovering debt, identifying fraud and abuse, and ensuring legislative compliance, to debt recovery.
13
We provide uniqueidentifying and compelling solutions essential to the daily workflowacquiring customers. With a massive data repository of organizations within both the public and private sectors. Our cloud-based data fusion platform, combined with our massive database consistingapproximately nine petabytes of public-record, proprietary and publicly-available data, as well as self-reported consumer information and behavioral signals, we transform data into intelligence for our customers to enable better data-driven decisioning.
We presently market our solutions primarily through two brands, idiCORE™, our flagship product, and FOREWARN®. idiCORE is a unique repository of self-reported information on millions of consumers, enables the delivery of differentiated products and solutionsnext-generation, investigative solution used forto address a variety of essential functions. These essential functions include identification andorganizational challenges including due diligence, risk mitigation, identity authentication and investigation and validation.
Leveraging leading-edge technology, proprietary algorithms, and massive datasets, and through intuitive and powerful analytical applications, we provide solutions to organizations within the risk management industry. CORE is our next generation data fusion platform, providing mission-critical information about individuals, businesses and assets to a variety of markets and industries. Through machine learning and advanced analytics, we use the power of data fusion to ingest and analyze data at a massive scale. The derived information from the data fusion process ultimately serves to generate unique solutions for banking andlegislative compliance, by financial services companies, insurance companies, healthcare companies, law enforcement and government, the collection industry,collections, law firms, retail, telecommunicationstelecommunication companies, corporate security and investigative firms. FOREWARN is an app-based solution currently tailored for the real estate industry, providing instant knowledge prior to face-to-face engagement with a consumer, helping professionals identify and mitigate risk. As of September 30, 2020 and 2019, idiCORE had 5,758 and 4,781 billable customers and FOREWARN had 44,927 and 23,853 users, respectively. The Company defines a billable customer of idiCORE as a single entity that generated revenue in the last month of the period. Billable customers are typically corporate organizations. In most cases, corporate organizations will have multiple users and/or departments purchasing our solutions, however, the Company counts the entire organization as a discrete customer. The Company defines a user of FOREWARN as a unique person that has a subscription to use the FOREWARN service as of the last day of the period. A unique person can only have one user account.
Built13
We generate substantially all of our revenue from licensing our solutions. Customers access our solutions through a hosted environment using an online interface, batch processing, API and custom integrations. We recognize revenue from licensing fees (a) on a transactional basis determined by the customer’s usage, (b) via a monthly fee or (c) from a combination of both. Revenue pursuant to pricing contracts containing a monthly fee is recognized ratably over the contract period. Pricing contracts are generally annual contracts or longer, with auto renewal. Revenue from pricing contracts represented 68% and 71% of total revenue for the three and nine months ended September 30, 2020, respectively, as compared to 66% and 65% for the three and nine months ended September 30, 2019, respectively.
Our go-to-market strategy leverages (a) an inside sales team that cultivates relationships, and ultimately closes business, with their end-user markets, (b) a strategic sales team that provides a more personal, face-to-face approach for major accounts within certain industries, and (c) distributors, resellers, and strategic partners that have a significant foothold in many of the industries that we have not historically served, as well as to further penetrate those industries that we do serve. Our sales model generally begins with a secure payment card industry (PCI) compliant environment,free trial followed by an initial purchase on a transactional basis or minimum-committed monthly spend. As organizations derive benefits from our cloud-based next generation technology delivers greater than four 9s of service uptime. By leveraging our proprietary infrastructure design within the cloud,solutions, we currently operate in six datacenters spread geographically across the U.S. and are able to dynamically“land and seamlessly scaleexpand” within larger organizations as needed. Usingadditional use cases expand across departments, divisions and geographic locations and customers become increasingly reliant on our intelligent framework, and leveraging a microservices architecture where appropriate, we reduce operational cost and complexity, thus delivering superior performance at greatly reduced costs compared to traditional datacenter architectures. Since the release of our CORE platformsolutions in May 2016, we have added billions of data records and continue to add over a billion records per month on average. Our average query response time for a comprehensive profile is less than 250 milliseconds versus competitive platforms that measure comprehensive profile response times in seconds.
From Fluent’s acquisition of the risk management business in September 2014 through December 2016, the majority of our operations were dedicated to the early stage development of our business model, including the development of our proprietary, cloud-based technology platform, CORE, and the buildout of our initial-phase suite of products, powered by CORE, to serve a variety of industries within risk management. Beginning January 2017, with our technology platform production ready and hardened, our initial suite of products released into the marketplace, and a multi-year product roadmap defined, we transformed from a development organization to a sales-driven organization with sales increasing from a $5.8 million annual run-rate for the month ended January 31, 2017, to a $15.1 million annual run-rate for the month ended March 31, 2018.their daily workflow.
In order for red violetus to continue to develop new products, grow itsour existing business and expand into additional markets, we must generate and sustain sufficient operating profits and cash flow in future periods. This will require us to generate additional sales from current products and new products currently under development. We are buildingcontinue to build out our sales organization to drive current products and to introduce new products into the marketplace.
In December 2019, a novel strain of coronavirus, now known as Covid-19, was reported in Wuhan, China and has since extensively impacted the global health and economic environment. In March 2020, the World Health Organization characterized Covid-19 as a pandemic. We have taken numerous steps, and will continue to take further actions as appropriate, in our approach to minimizing the impact of the Covid-19 pandemic on our business, results of operations and financial performance. To ensure the health and well-being of our employees, beginning in March 2020, we instructed employees at our offices to work from home on a temporary basis. Starting in the second quarter of 2020, we implemented cost containment strategies across all areas of the organization, including continued curtailment of Company travel and partnering with suppliers, landlords and vendors for price concessions and payment deferrals during this interim period. As a result of preventative and protective actions taken by federal, state and local governments, including the implementation of stay-at-home orders and social distancing policies which resulted in significantly reduced commercial activity, and certain temporary government-imposed moratoria on collection customers’ activities, we experienced reduced transaction volume in the second and third quarters 2020. Transaction volume returned to pre-Covid levels by the end of the third quarter 2020, except for collection customer volume, which was down $1.0 million, primarily attributable to our idiVERIFIED service, which is an ancillary collections market place.offering that is purely transactional and of a lower margin profile, for the three months ended September 30, 2020, compared to the three months ended March 31, 2020. We expect collection customer transaction volume, including that of our idiVERIFIED service, to return to pre-Covid levels in the first half of 2021. During the second and third quarters of 2020, we took a proactive customer-centric approach working with customers who were impacted by Covid-19. Customers who had minimum contractual commitments and requested concessions because they were temporarily unable to meet their minimum contractual commitments as a result of Covid-19 were granted reductions, or eliminations where applicable, of minimums on a month-to-month basis. The end date of the customer’s agreement was extended by one month for each month of the temporary concession. During the second quarter of 2020, we provided concessions to a total of 152 customers, representing a $342 reduction in minimum committed spend. During the third quarter of 2020, we provided concessions to a total of 22 customers, representing a $94 reduction in minimum committed spend.
To further support our liquidity, beginning April 1, 2020, we elected, under Section 2302 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), to defer payment of the employer portion of Social Security payroll tax. Under the CARES Act, employers can forgo timely payment of the employer portion of Social Security taxes that would otherwise be due from March 27, 2020 through December 31, 2020, without penalty or interest charges. Employers must pay 50% of the deferred amount by December 31, 2021, and the remainder by December 31, 2022. On May 5, 2020, we received funding under a promissory note dated May 5, 2020 evidencing an unsecured non-recourse loan in the principal amount of $2.2 million under the CARES Act (the “Loan”). We will incur increased compensation expensescontinue to assess the CARES Act and other applicable government legislation aimed at assisting businesses during the Covid-19 pandemic. In accordance with best practices and guidance from the Centers for Disease Control and Prevention, we implemented protective safeguards, including daily temperature checks, mandatory wearing of masks, social distancing, plexiglass protective barriers, and an entire office HVAC UV-C system. We began our salesfirst phase of employees returning to the Boca Raton, Florida office in June 2020. We will continue to assess the need and marketing, executivetiming of additional employees returning to the office. Given the dynamic nature of this health emergency, the full impact of the Covid-19 pandemic on our ongoing business, results of operations and administrative, and infrastructure related persons as we increase headcount in the next 12 months.overall financial performance cannot be reasonably estimated at this time.
14
Critical Accounting Policies and Estimates
Management’s discussion andanalysisoffinancial conditionandresultsofoperationsarebasedupon red violet’sour condensed consolidated and combined financialstatements,whichhavebeenpreparedinaccordancewithaccountingprinciples generallyaccepted in the UnitedStates (“US (“GAAP”). The preparationofthesefinancial statementsrequires red violet ustomakeestimates and judgmentsthataffectthereportedamountsof assets, liabilities, revenuesandexpenses,andrelated disclosureofcontingent assetsandliabilities.Onanongoingbasis, red violet evaluates its weevaluateourestimates, including thoserelated totheallowancefordoubtful receivables,accounts, usefullivesofproperty andequipment andintangibleassets, income tax provision, and recoverability of the carrying amounts of goodwill and intangible assets.intangible assets, share-based compensation and income tax provision. Webaseour estimatesonhistoricalexperienceandonvariousother assumptionsthatarebelieved tobereasonable under the circumstances,theresultsofwhichformthebasisformaking judgments about the carrying values ofassetsand liabilitiesthat are not readilyapparentfrom othersources.Actualresultsmaydifferfrom these estimatesunderdifferent assumptionsorconditions.
For additional information, please refer to our 2017 Financials.2019 Form 10-K. There have been no material changes to Critical Accounting Policies and Estimates disclosed in our 2017 Financials.2019 Form 10-K.
Recently issued accounting standards
See Note 2(b)1(b), “Recently issued accounting standards,” in “Notes to Condensed Consolidated and Combined Financial Statements.”
14
FirstThird Quarter Financial Results
For the three months ended March 31, 2018,September 30, 2020 as compared to the three months ended March 31, 2017:September 30, 2019:
Total revenue increased 112% to $3.3 million.
• | Total revenue increased 12% to $9.3 million. Platform revenue increased 27% to $9.0 million. Services revenue decreased 75% to $0.3 million. |
• | Adjusted EBITDA increased 84% to $2.1 million. |
Loss per share improved by $0.08 to $0.20.
• | Gross profit increased 24% to $5.5 million. Gross margin increased to 59% from 54%. |
Adjusted gross profit increased 665% to $1.3 million.
• | Adjusted gross profit increased 28% to $6.6 million. Adjusted gross margin increased to 71% from 62%. |
Adjusted gross margin increased to 39% from 11%.
• | Generated $1.7 million in cash from operating activities in the third quarter. |
Adjusted EBITDA improved by $0.3 million to negative $1.4 million.
• | Cash and cash equivalents were $12.4 million as of September 30, 2020. |
FirstThird Quarter and Recent Business Highlights
• | Our high-margin, platform revenue demonstrated accelerated growth throughout the third quarter. As a result, we generated a record 71% adjusted gross margin, producing a record adjusted gross profit of $6.6 million. Adjusted EBITDA increased 84% over prior year and increased 130% on a sequential quarter basis to $2.1 million. |
• | Increased customer adoption of idiCORE™ with over 380 new customers added to the platform in the third quarter. |
• | FOREWARN®, our subscription app-based real estate solution, added over 4,000 users in the third quarter. |
• | Strong revenue growth from existing customer expansion. Growth revenue from existing customers increased 116% over prior year and 151% on a sequential quarter basis. |
Successfully completed the spin-offPlatform revenue consists of both contractual and transactional revenue generated from our business on March 26, 2018, with red violet operating as a NASDAQ-listed emerging growth company.
Well-capitalized balance sheet, with approximately $20 million in cash as of March 31, 2018 and no debt, allowing the Company to intently focus on driving the business to profitability.
With our early-stage development completed, including our proprietary, cloud-baseddata fusion technology platform, CORE™,CORE. It includes all revenue generated through our idiCORE and our initial suite of products released into the marketplace, monthly sales increased at a CAGR of 126% from a $5.8 million annual run-rate for the month ended January 31, 2017, to a $15.1 million annual run-rate for the month ended March 31, 2018.
FOREWARN™, our subscription app-based solution for the real estate industry, powered by CORE, grew revenue at a CAGR of 660% in the first quarter 2018, representing an annual run-rate of $0.3 million for the month ended March 31, 2018, with no incrementalFOREWARN solutions. The cost of revenue.
Fixedplatform revenue, which consists primarily of data acquisition costs, remains relatively fixed irrespective of revenue generation. Services revenue consists of revenue generated from our idiVERIFIED service, which is an ancillary collections market offering that is purely transactional and of a lower margin profile. The cost of services revenue, model allows for continued scalingwhich consists primarily of the business with exponential growth in adjusted gross profit, as reflected in the 28 percentage point increase in adjusted gross margin to 39% over prior year quarter.third-party servicer costs, is variable.
15
Use and Reconciliation of Non-GAAP Financial Measures
Management evaluates the financial performance of our business on a variety of key indicators, including non-GAAP metrics of adjusted EBITDA, adjusted gross profit and adjusted gross margin. Adjusted EBITDA is a financial measure equal to net loss, the most directly comparable financial measure based on US GAAP, adding back income tax,excluding interest expense (income), net, depreciation and amortization, share-based compensation expense, litigation costs, and write-off of long-lived assets and others, as noted in the tables below. We define adjusted gross profit as revenue less cost of revenue (exclusive of depreciation and amortization), and adjusted gross margin as adjusted gross profit as a percentage of revenue.
|
| Three Months Ended March 31, |
|
| Three Months Ended September 30, |
|
| Three Months Ended |
|
| Nine Months Ended September 30, |
| ||||||||||||||||
(In thousands) |
| 2018 |
|
| 2017 |
|
| 2020 |
|
| 2019 |
|
| June 30, 2020 |
|
| 2020 |
|
| 2019 |
| |||||||
Net loss |
| $ | (2,084 | ) |
| $ | (2,893 | ) |
| $ | (925 | ) |
| $ | (992 | ) |
| $ | (2,532 | ) |
| $ | (4,938 | ) |
| $ | (6,220 | ) |
Interest expense (income), net |
|
| 7 |
|
|
| (46 | ) |
|
| - |
|
|
| (24 | ) |
|
| (123 | ) | ||||||||
Depreciation and amortization |
|
| 451 |
|
|
| 216 |
|
|
| 1,118 |
|
|
| 750 |
|
|
| 992 |
|
|
| 3,020 |
|
|
| 2,049 |
|
Share-based compensation expense |
|
| 165 |
|
|
| 458 |
|
|
| 1,853 |
|
|
| 1,407 |
|
|
| 2,342 |
|
|
| 6,416 |
|
|
| 5,290 |
|
Litigation costs |
|
| - |
|
|
| 504 |
| ||||||||||||||||||||
Write-off of long-lived assets |
|
| 55 |
|
|
| - |
| ||||||||||||||||||||
Write-off of long-lived assets and others |
|
| 35 |
|
|
| 18 |
|
|
| 106 |
|
|
| 252 |
|
|
| 95 |
| ||||||||
Adjusted EBITDA |
| $ | (1,413 | ) |
| $ | (1,715 | ) |
| $ | 2,088 |
|
| $ | 1,137 |
|
| $ | 908 |
|
| $ | 4,726 |
|
| $ | 1,091 |
|
The following is a reconciliation of gross profit, the most directly comparable GAAP financial measure, to adjusted gross profit:
|
| Three Months Ended March 31, |
|
| Three Months Ended September 30, |
|
| Three Months Ended |
|
| Nine Months Ended September 30, |
| ||||||||||||||||
(In thousands) |
| 2018 |
|
| 2017 |
|
| 2020 |
|
| 2019 |
|
| June 30, 2020 |
|
| 2020 |
|
| 2019 |
| |||||||
Revenue |
| $ | 3,325 |
|
| $ | 1,572 |
|
| $ | 9,267 |
|
| $ | 8,257 |
|
| $ | 7,056 |
|
| $ | 25,623 |
|
| $ | 21,236 |
|
Cost of revenue (exclusive of depreciation and amortization) |
|
| 2,017 |
|
|
| 1,401 |
|
|
| (2,703 | ) |
|
| (3,122 | ) |
|
| (2,587 | ) |
|
| (8,582 | ) |
|
| (8,843 | ) |
Depreciation and amortization of intangible assets |
|
| (1,063 | ) |
|
| (689 | ) |
|
| (934 | ) |
|
| (2,847 | ) |
|
| (1,860 | ) | ||||||||
Gross profit |
|
| 5,501 |
|
|
| 4,446 |
|
|
| 3,535 |
|
|
| 14,194 |
|
|
| 10,533 |
| ||||||||
Depreciation and amortization of intangible assets |
|
| 1,063 |
|
|
| 689 |
|
|
| 934 |
|
|
| 2,847 |
|
|
| 1,860 |
| ||||||||
Adjusted gross profit |
| $ | 1,308 |
|
| $ | 171 |
|
| $ | 6,564 |
|
| $ | 5,135 |
|
| $ | 4,469 |
|
| $ | 17,041 |
|
| $ | 12,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Gross margin |
|
| 59 | % |
|
| 54 | % |
|
| 50 | % |
|
| 55 | % |
|
| 50 | % | ||||||||
Adjusted gross margin |
|
| 39 | % |
|
| 11 | % |
|
| 71 | % |
|
| 62 | % |
|
| 63 | % |
|
| 67 | % |
|
| 58 | % |
WeIn order to assist readers of our condensed consolidated financial statements in understanding the operating results that management uses to evaluate the business and for financial planning purposes, we present non-GAAP measures of adjusted EBITDA, adjusted gross profit and adjusted gross margin as supplemental measures of our operating performance because weperformance. We believe they provide useful information to our investors as they eliminate the impact of certain items that we do not consider indicative of our cash operations and ongoing operating performance. In addition, we use them as an integral part of
15
our internal reporting to measure the performance of our business, evaluate the performance of our senior management and measure the operating strength of our business.
AdjustedWe believe adjusted EBITDA, adjusted gross profit and adjusted gross margin are measuresrelevant and provide useful information frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies similar to ours and are indicators of the operational strength of our business. AdjustedWe believe adjusted EBITDA eliminates the uneven effect of considerable amounts of non-cash depreciation and amortization, share-based compensation expense and write-off of long-lived assets, and the impact of other items. Adjustednon-recurring items, providing useful comparisons versus prior periods or forecasts. Our adjusted gross profit is a measure used by management in evaluating the business’s current operating performance by excluding the impact of prior historical costs of assets that are expensed systematically and allocated over the estimated useful lives of the assets, which may not be indicative of the current operating activity. Our adjusted gross margin areprofit is calculated by using revenue, less cost of revenue (exclusive of depreciation and amortization). We believe adjusted gross profit provides useful information to our investors by eliminating the impact of non-cash depreciation and amortization, and specifically the amortization of software developed for internal use, providing a baseline of our core operating results that allow for analyzing trends in our underlying business consistently over multiple periods. Adjusted gross margin is calculated as adjusted gross profit as a percentage of revenue.
Adjusted EBITDA, adjusted gross profit and adjusted gross margin are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, either loss before income taxes or net loss as indicators of operating performance or to cash flows from operating activities as a measure of liquidity.financial measures presented in accordance with GAAP. The way we measure adjusted EBITDA, adjusted gross profit and adjusted gross margin may not be comparable to similarly titled measures presented by other companies, and may not be identical to corresponding measures used in our various agreements.
16
Results of Operations
Three months ended March 31, 2018September 30, 2020 compared to three months ended March 31, 2017
September 30, 2019
Revenue. Revenue increased $1.7$1.0 million or 112%12% to $3.3$9.3 million for the three months ended March 31, 2018,September 30, 2020 from $1.6$8.3 million for the three months ended March 31, 2017.September 30, 2019. This increase was driven by strong growth in usage from existing customers, with growth revenue from existing customers increasing $1.5 million or 116%. This growth was partially offset by a decrease in revenue from new customers of $0.7 million or 48%, as a result of Covid-19 related factors. As government mandated stay-at-home orders were lifted and our customers adapted and became more efficient transacting in the Covid-19 environment, our transaction volume resulting fromreturned to pre-Covid levels by the continued staged releaseend of the third quarter, with the exception of collection customer volume. Collection customer volume was down $0.8 million, primarily attributable to our product suite, following our transformation fromidiVERIFIED service, which is an ancillary collections market offering that is purely transactional and of a development organization to a sales-driven organization beginning January 2017. During this time frame, our monthly sales increased from a $5.8 million annual run-ratelower margin profile, for the three months ended September 30, 2020, as a result of certain government mandated collections moratoria remaining in place during the period. We continued to take a proactive customer centric approach working with customers who were impacted by Covid-19. Customers who had minimum contractual commitments and requested concessions because they were temporarily unable to meet their minimum contractual commitments as a result of Covid-19 were granted reductions, or eliminations where applicable, of minimums on a month-to-month basis. The end date of the customer’s agreement was extended by one month ended January 31, 2017,for each month of the temporary concession. Our idiCORE billable customer base grew from 4,781 customers as of September 30, 2019 to 5,758 customers as of September 30, 2020. Our FOREWARN user base grew from 23,853 users to 44,927 users during that same period. Revenue from new customers represents the total monthly revenue generated from new customers in a $15.1 million annual run-rate forgiven period. A customer is defined as a new customer during the first six months of revenue generation. Base revenue from existing customers represents the total monthly revenue generated from existing customers in a given period that does not exceed the customers' trailing six-month average revenue. A customer is defined as an existing customer six months after their initial month ended March 31, 2018.of revenue. Growth revenue from existing customers represents the total monthly revenue generated from existing customers in a given period in excess of the customers' trailing six-month average revenue.
Cost of revenue (exclusive of depreciation and amortization). Cost of revenue increased $0.6decreased $0.4 million or 43%13% to $2.0$2.7 million for the three months ended March 31, 2018,September 30, 2020 from $1.4$3.1 million for the three months ended March 31, 2017.September 30, 2019. Our cost of revenue primarily includes data acquisition costs. Data acquisition costs consist primarily of the costs to acquire data either on a transactional basis or through flat-fee data licensing agreements, including unlimited usage agreements. The decrease in cost of revenue was primarily attributable to the decrease in transactional based data acquisition costs associated with the reduction in our idiVERIFIED services revenue. We continue to expandenhance the breadth and depth of our data through the addition and expansion of relationships with our key data suppliers, including our largest data supplier, which accounted for approximately 49%48% of our total data acquisition costs for the three months ended March 31, 2018,September 30, 2020 compared to approximately 33%40% for the three months ended March 31, 2017.September 30, 2019. Other cost of revenue includesitems include expenses related to third-party infrastructure fees.
We continued to develop our baseline data repository in anticipation of completing the development of our full suite of risk management products during the development periods. As the construct of our data costs is primarily a flat-fee, unlimited usage model, the cost of revenue as a percentage of revenue decreased to 61%29% for the three months ended March 31, 2018September 30, 2020 from 89%38% for the three months ended March 31, 2017, as a result of the scaling.September 30, 2019. We expect that cost of revenue as a percentage of revenue will continue to decrease over the coming years as our revenue increases. Historically, at scale, the industry business model’s cost of revenue will trend between 15% and 30% as a percentage of revenue.
Sales and marketing expenses. Sales and marketing expenses increased $0.3 million or 33%15% to $1.1$2.2 million for the three months ended March 31, 2018,September 30, 2020 from $0.8$1.9 million for the three months ended March 31, 2017. The increase resulted from increased headcount as we continue to invest in the expansion of our sales organization.September 30, 2019. Sales and marketing expenses consist of salaries and benefits, advertising and marketing, travelingtravel expenses, and share-based compensation expense, incurred by our sales team.team, and provision for bad debts. The increase during the three months ended September 30, 2020 was primarily attributable to an aggregate of $0.3 million increase in salaries and benefits, as we continue to invest in the expansion of our sales organization, and sales commissions from increased revenue.
General and administrative expenses. General and administrative expenses decreased $0.1increased $0.6 million or 9%19% to $1.9$4.1 million for the three months ended March 31, 2018,September 30, 2020 from $2.0$3.5 million for the three months ended March 31, 2017.September 30, 2019. The decrease resulted from decreasesincrease during the three months ended September 30, 2020 was primarily attributable to the $0.4 million increase in litigation costs and share-based compensation expense, which were partially offset by increases in employee salaries and benefits and other professional fees. expense.
For the three months ended March 31, 2018September 30, 2020 and 2017,2019, our general and administrative expenses consisted primarily of litigation costsemployee salaries and benefits of $0$1.2 million and $0.5$1.1 million, non-cash share-based compensation expense of $0.1$1.7 million and $0.4$1.3 million, employee salaries and benefitsprofessional fees of $0.8 million and $0.6 million, and other professional fees of $0.3 million and $0.1 million, respectively.
Depreciation and amortization. Depreciation and amortization expenses increased $0.3 million or 109%49% to $0.5$1.1 million for the three months ended March 31, 2018,September 30, 2020 from $0.2$0.8 million for the three months ended March 31, 2017.September 30, 2019. The increase in depreciation and amortization for the three months ended March 31, 2018September 30, 2020 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after the first quarter of 2017.September 30, 2019.
Loss before income taxes. We had a lossLoss before income taxes of $2.1narrowed $0.1 million and $2.9 million, including non-cash share-based compensation expense of $0.2 million and $0.5 million, and depreciation and amortization of $0.5 million and $0.2or 9% to $0.9 million for the three
16
months ended March 31, 2018 and 2017, respectively.September 30, 2020 from $1.0 million for the three months ended September 30, 2019. The decrease in loss before income taxes resulted fromwas primarily attributable to the increase in revenue and decrease in our cost of revenue as a percentage of revenue, decreaseswhich was partially offset by the increase in litigation costs and share-based compensation expense which were partially offset by increases inof $0.5 million, employee salaries and benefits other professional feesand sales commission of $0.4 million, and depreciation and amortization.amortization of $0.3 million.
Income taxes. Income tax benefitexpense of $0 was recognized for the three months ended March 31, 2018September 30, 2020 and 2017, respectively.2019. A full valuation allowance on the deferred tax assets was recognized as of March 31, 2018September 30, 2020 and 2017. On December 22, 2017, the tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Act”) was enacted, with the statutory federal income tax rate lowered to 21% among other changes, effective on January 1, 2018. As a full valuation allowance was provided as of March 31, 2018, the Act does not have any material net impact on our condensed consolidated and combined financial statements.2019. See Note 6, “Income Taxes,” included in “Notes to Condensed Consolidated and Combined Financial Statements,” for details.
Net loss. A netNet loss of $2.1narrowed $0.1 million and $2.9or 7% to $0.9 million was recognized for the three months ended March 31, 2018 and 2017, respectively,September 30, 2020 from $1.0 million for the three months ended September 30, 2019, as a result of the foregoing.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Revenue. Revenue increased $4.4 million or 21% to $25.6 million for the nine months ended September 30, 2020 from $21.2 million for the nine months ended September 30, 2019. This increase was driven by strong growth in usage from existing customers, with base revenue from existing customers increasing $3.8 million or 28% and growth revenue from existing customers increasing $1.8 million or 54%. This growth was partially offset by a decrease in revenue from new customers of $1.2 million or 29%, as a result of Covid-19 related factors. During the second and third quarter of 2020, we experienced reduced transaction volume as a result of government mandated stay-at-home orders and certain moratoria on our customer’s business activities as a result of Covid-19. We continued to take a proactive customer centric approach working with customers who were impacted by Covid-19. Customers who had minimum contractual commitments and requested concessions because they were temporarily unable to meet their minimum contractual commitments as a result of Covid-19 were granted reductions, or eliminations where applicable, of minimums on a month-to-month basis. The end date of the customer’s agreement was extended by one month for each month of the temporary concession. As government mandated stay-at-home orders were lifted and our customers adapted and became more efficient transacting in the Covid-19 environment, our transaction volume returned to pre-Covid levels by the end of the third quarter with the exception of collection customer volume. Collection customer volume was down $0.7 million for the nine months ended September 30, 2020, primarily attributable to our idiVERIFIED service, which is an ancillary collections market offering that is purely transactional and of a lower margin profile, as a result of certain government mandated collections moratoria remaining in place during the period. Our idiCORE billable customer base grew from 4,781 customers as of September 30, 2019 to 5,758 customers as of September 30, 2020. Our FOREWARN user base grew from 23,853 users to 44,927 users during that same period. Revenue from new customers represents the total monthly revenue generated from new customers in a given period. A customer is defined as a new customer during the first six months of revenue generation. Base revenue from existing customers represents the total monthly revenue generated from existing customers in a given period that does not exceed the customers' trailing six-month average revenue. A customer is defined as an existing customer six months after their initial month of revenue. Growth revenue from existing customers represents the total monthly revenue generated from existing customers in a given period in excess of the customers' trailing six-month average revenue.
Cost of revenue (exclusive of depreciation and amortization). Cost of revenue decreased $0.2 million or 3% to $8.6 million for the nine months ended September 30, 2020 from $8.8 million for the nine months ended September 30, 2019. Our cost of revenue primarily includes data acquisition costs. Data acquisition costs consist primarily of the costs to acquire data either on a transactional basis or through flat-fee data licensing agreements, including unlimited usage agreements. The decrease in cost of revenue was primarily attributable to the decrease in transactional based data acquisition costs associated with the reduction in our idiVERIFIED services revenue. We continue to enhance the breadth and depth of our data through the addition and expansion of relationships with key data suppliers, including our largest data supplier, which accounted for approximately 45% of our total data acquisition costs for the nine months ended September 30, 2020 compared to approximately 41% for the nine months ended September 30, 2019. Other cost of revenue items include expenses related to third-party infrastructure fees.
As the construct of our data costs is primarily a flat-fee, unlimited usage model, the cost of revenue as a percentage of revenue decreased to 33% for the nine months ended September 30, 2020 from 42% for the nine months ended September 30, 2019. We expect that cost of revenue as a percentage of revenue will continue to decrease over the coming years as our revenue increases. Historically, at scale, the industry business model’s cost of revenue will trend between 15% and 30% as a percentage of revenue.
Sales and marketing expenses. Sales and marketing expenses increased $0.7 million or 13% to $6.1 million for the nine months ended September 30, 2020 from $5.4 million for the nine months ended September 30, 2019. Sales and marketing expenses consist of salaries and benefits, advertising and marketing, travel expenses, and share-based compensation expense, incurred by our sales team, and provision for bad debts. The increase during the nine months ended September 30, 2020 was primarily attributable to an aggregate of $0.5 million increase in salaries and benefits, as we continue to invest in the expansion of our sales organization, and sales commissions from increased revenue.
18
General and administrative expenses. General and administrative expenses increased $1.5 million or 14% to $12.8 million for the nine months ended September 30, 2020 from $11.3 million for the nine months ended September 30, 2019. The increase during the nine months ended September 30, 2020 was primarily attributable to the $1.0 million increase in share-based compensation expense.
For the nine months ended September 30, 2020 and 2019, our general and administrative expenses consisted primarily of employee salaries and benefits of $3.4 million and $3.1 million, share-based compensation expense of $6.0 million and $5.0 million, and professional fees of $1.9 million and $1.8 million, respectively.
Depreciation and amortization. Depreciation and amortization expenses increased $1.0 million or 47% to $3.0 million for the nine months ended September 30, 2020 from $2.0 million for the nine months ended September 30, 2019. The increase in depreciation and amortization for the nine months ended September 30, 2020 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after September 30, 2019.
Loss before income taxes. Loss before income taxes narrowed $1.3 million or 21% to $4.9 million for the nine months ended September 30, 2020 from $6.2 million for the nine months ended September 30, 2019. The decrease in loss before income taxes was primarily attributable to the increase in revenue and the decrease in our cost of revenue as a percentage of revenue, which was partially offset by the increase in share-based compensation expense of $1.1 million, depreciation and amortization of $1.0 million, and salaries and benefits and sales commission of $0.8 million.
Income taxes. Income tax expense of $0 was recognized for the nine months ended September 30, 2020 and 2019. A full valuation allowance on the deferred tax assets was recognized as of September 30, 2020 and 2019. See Note 6, “Income Taxes,” included in “Notes to Condensed Consolidated Financial Statements,” for details.
Net loss. Net loss narrowed $1.3 million or 21% to $4.9 million for the nine months ended September 30, 2020 from $6.2 million for the nine months ended September 30, 2019, as a result of the foregoing.
Effect of Inflation
The rates of inflation experienced in recent years have had no material impact on our financial statements. We attempt to recover increased costs by increasing prices for our services, to the extent permitted by contracts and competition.
Liquidity and Capital Resources
Cash flows used inprovided by operating activities. For the threenine months ended March 31, 2018,September 30, 2020, net cash used inprovided by operating activities was $2.9$4.7 million, primarily the result of the net loss of $2.1$4.9 million, adjusted for certain non-cash items totaling $0.9 million, including(consisting of share-based compensation expense, depreciation and amortization, write-off of long-lived assets, provision for bad debts, and allocationnoncash lease expenses) totaling $10.3 million, and the cash used as a result of expenses from Fluent, Inc. In addition, the net working capital increased $1.7changes in assets and liabilities of $0.6 million, primarily the result of the decrease in accrued expenses and other current liabilities and the increase in accounts receivable following the increase in revenue.operating lease liabilities. For the threenine months ended March 31, 2017,September 30, 2019, net cash used inprovided by operating activities was $1.6$0.4 million, primarily the result of the net loss of $2.9$6.2 million, adjusted for certain non-cash items, of an aggregate of $1.5as mentioned above, totaling $8.1 million, and the cash used as a result of changes in net working capitalassets and liabilities of $0.2 million. Net cash used$1.4 million, primarily the result of the increase in accounts receivable and decrease in operating activities in 2017 increased by $3.7 million resulting from the factors discussed above.lease liabilities.
Cash flows used in investing activities. NetFor the nine months ended September 30, 2020 and 2019, net cash used in investing activities for the three months ended March 31, 2018 and 2017 was $1.4$4.4 million and $1.9$4.5 million, respectively, primarily as a result of capitalized costs included in intangible assets of $1.4 million and $1.7 million for the corresponding periods.assets.
Cash flows provided by financing activities. NetFor the nine months ended September 30, 2020, net cash provided by financing activities was $0.3 million. On May 5, 2020, we received funding under a promissory note dated May 5, 2020 evidencing the Loan in the principal amount of $2.2 million under the CARES Act. The Loan has a two-year term and matures on May 5, 2022. The interest rate on the Loan is 1.0% per annum. Payments can be deferred until loan forgiveness is determined, or if we do not apply for forgiveness, then 10 months after the threecovered period ends. We intend to apply for forgiveness by the end of December 2020. In addition, we paid taxes of $1.8 million related to the net share settlement of vesting of restricted stock units during the nine months ended March 31, 2018 and 2017September 30, 2020. For the nine months ended September 30, 2019, net cash provided by financing activities of $7.4 million was $23.9 million (inclusive of $20.0 cash contribution by Fluent to red violet upon the Spin-off) and $3.3 million, respectively, as a result of capital contributed by Fluent during the corresponding periods.net proceeds raised through a registered direct offering in August 2019.
As of March 31, 2018, red violetSeptember 30, 2020, we had material commitments under certain data licensing agreements of $22.0$9.0 million. red violet anticipatesWe anticipate funding itsour operations using available cash and cash flow generated from operations within the next twelve months.
red violetWe reported net loss of $2.1$0.9 million and $1.0 million for the three months ended March 31, 2018, as compared to $2.9September 30, 2020 and 2019, respectively, and $4.9 million and $6.2 million for the threenine months ended March 31, 2017.September 30, 2020 and 2019, respectively. As of March 31, 2018, red violetSeptember 30, 2020, we had a total shareholders’ equity balance of $40.3$43.2 million.
19
As of March 31, 2018, red violetSeptember 30, 2020, we had cash and cash equivalents of approximately $19.8$12.4 million. Historically, red violet has funded its operations via intercompany transfers from Fluent on an as needed basis. Based on projections of growth in revenue and operating results in the coming year,next twelve months, and the available cash and cash equivalents held by red violet after the Spin-off, the Company believesus, we believe that itwe will have sufficient cash resources to finance itsour operations and expected capital expenditures for the next twelve months. Subject
We further believe that our financial resources will allow us to manage the impact of Covid-19 on the Company's business operations for the foreseeable future. However, subject to revenue growth, red violetour ability to generate positive cash flow, and the potential impact of Covid-19, we may have to raise capital through the issuance of additional equity and/or debt, which, if red violet iswe are able to obtain, could have the effect of diluting stockholders. Any equity or debt financings, if available at all, may be on terms which are not favorable to red violet. If red violet’s operations do not generate positive cash flow in the upcoming year, or if it is not able to obtain additional equity or debt financing on terms and conditions acceptable to it, if at all, it may be unable to implement its business plan, or even continue its operations.us.
Off-Balance Sheet Arrangements
As of March 31, 2018,September 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
17
Item 3. Quantitative and QualitativeQualitative Disclosures About Market Risk.
As a smaller reporting company as defined in Rule 12b-2 of the Exchange Act, we are not required to include information otherwise required by this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officerthe Company’s Chief Executive Officer and chief financial officer,Chief Financial Officer, evaluated the effectiveness of ourthe Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under15d–15(e) of the Exchange Act) as of March 31, 2018.September 30, 2020. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officerChief Executive Officer and chief financial officer,Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Based on the evaluation of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underof the Securities Exchange Act of 1934)Act), the Company’s chief executive officerChief Executive Officer and chief financial officerChief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2018.September 30, 2020.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting identified in connection with management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the fiscal quarter ended March 31, 2018September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
and Internal Control over Financial Reporting
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
18
20
PART II - OTHEROTHER INFORMATION
The Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition, results of operations or cash flows. Legal fees associated with any legal proceedings, are expensed as incurred. We review legal proceedings and claims on an ongoing basis and follow appropriate accounting guidance, including ASC 450, when making accrual and disclosure decisions. We establish accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and we disclose 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, we evaluate, 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. We do not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated.
In addition, weWe may be involved in litigation from time to time in the ordinary course of business. We do not believe that the ultimate resolution of any such matters will have a material adverse effect on our business, financial condition, results of operations or cash flows. However, the results of such matters cannot be predicted with certainty and we cannot assure you that the ultimate resolution of any legal or administrative proceeding or dispute will not have a material adverse effect on our business, financial condition, results of operations and cash flows.
There have beenwere no material changes during the quarter ended March 31, 2018 to the risk factors previously disclosedidentified in the Company’s Information Statement filed2019 Form 10-K, except as Exhibit 99.1noted below.
The ongoing and developing Covid-19 pandemic and the global attempt to contain it may adversely impact our business, our future results of operations and our overall financial performance.
The global spread of Covid-19 and the various attempts to contain it have created significant volatility, uncertainty and economic disruption. In response to government mandates and health care advisories, we have altered certain aspects of our operations. A certain segment of our employee base continues to work from home, which may impact productivity. We have curtailed company travel to ensure the safety of our employees, customers, vendors, and shareholders. The economic disruption has adversely impacted many of our customers and vendors.
The full extent to which the Covid-19 pandemic and the various responses to it impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the Company’s current reportpandemic; the availability and cost to access the capital markets; the effect on Form 8-K filedour customers and customer demand for and ability to pay for our services; and disruptions or restrictions on our employees’ ability to work and travel. In addition, any preventative or protective actions that governments implement or that we take in respect of Covid-19, such as travel restrictions or stay-at-home orders, may interfere with the Securitiesability of our employees and Exchange Commissionvendors to perform their respective responsibilities and obligations relative to the conduct of our business. Such results could have a material adverse effect on March 27, 2018.our operations, business, financial condition, results of operations, or cash flows.
We are closely monitoring the ongoing and developing impact of the Covid-19 pandemic, continually assessing its potential effects on our business. The extent to which our results are affected by Covid-19 will largely depend on future developments which cannot be accurately predicted and are uncertain, but the Covid-19 pandemic or the perception of its effects could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
21
Our CARES Act Loan may be subject to regulatory review resulting from unclear subjective and objective eligibility requirements for the loan.
On May 5, 2020, we received funding of $2,152,000 under the CARES Act Loan. The Loan application required us to certify, among other things, that the current economic uncertainty made the Loan request necessary to support our ongoing operations. While we made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the Loan, the certification described above does not contain any objective criteria and is subject to interpretation. If, despite our good faith belief that we satisfied all eligibility requirements for the Loan, we are found to have been ineligible to receive the Loan or in violation of any of the laws or governmental regulations that apply to us in connection with the Loan, we may be subject to penalties, including significant civil, criminal and administrative penalties and could be required to repay the Loan. We intend to seek forgiveness of all or a portion of the Loan. As such, we will be required to make certain certifications which will be subject to audit and review by governmental entities and could subject us to significant penalties and liabilities if found to be inaccurate. In addition, our receipt of the Loan may result in adverse publicity and damage to our reputation, and a review or audit by a government entity could consume significant financial and management resources. Any of these events could harm our business, results of operations and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
None.On November 9, 2020, the Company and each of Derek Dubner, Chief Executive Officer, James Reilly, President, Daniel MacLachlan, Chief Financial Officer and Jeffrey Dell, Chief Information Officer entered into an amendment to their respective employment agreements which extended the term expiration date by three years, from March 26, 2021 to March 26, 2024.
1922
Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
|
|
|
| Incorporated by Reference |
| Filed | ||||||
Exhibit No. |
| Exhibit Description |
| Form |
| File No. |
| Exhibit |
| Filing Date |
| Herewith |
2.1 |
|
| Form 10 |
| 001-38407 |
| 2.1 |
| February 28, 2018 |
|
| |
10.1+ |
| Form of Restricted Stock Unit Agreement Pursuant to the Red Violet, Inc. 2018 Stock Incentive Plan. |
| Form 10 |
| 001-38407 |
| 10.2 |
| February 28, 2018 |
|
|
10.3 |
|
| Form 10 |
| 001-38407 |
| 10.3 |
| February 28, 2018 |
|
| |
10.4 |
|
| Form 10 |
| 001-38407 |
| 10.4 |
| February 28, 2018 |
|
| |
10.5 |
|
| Form 10 |
| 001-38407 |
| 10.5 |
| March 5, 2018 |
|
| |
10.6 |
| Assignment and Assumption Agreement, dated March 26, 2018, by and between Red Violet and Cogint. |
| 8-K |
| 001-38407 |
| 10.1 |
| March 27, 2018 |
|
|
10.7+ |
| Employment Agreement, dated March 26, 2018, by and between Red Violet and Derek Dubner. |
| 8-K |
| 001-38407 |
| 10.2 |
| March 27, 2018 |
|
|
10.8+ |
| Employment Agreement, dated March 26, 2018, by and between Red Violet and James Reilly. |
| 8-K |
| 001-38407 |
| 10.3 |
| March 27, 2018 |
|
|
10.9+ |
| Employment Agreement, dated March 26, 2018, by and between Red Violet and Dan MacLachlan. |
| 8-K |
| 001-38407 |
| 10.4 |
| March 27, 2018 |
|
|
10.10+ |
|
| 8-K |
| 001-38407 |
| 10.5 |
| March 27, 2018 |
|
| |
10.11 |
|
| 8-K |
| 001-38407 |
| 10.6 |
| March 27, 2018 |
|
| |
10.12+ |
|
| 10-K |
| 333-158336 |
| 10.26 |
| March 18, 2016 |
|
| |
31.1 |
|
|
|
|
|
|
|
|
|
| X | |
31.2 |
|
|
|
|
|
|
|
|
|
| X | |
32.1* |
|
|
|
|
|
|
|
|
|
| X | |
32.2* |
|
|
|
|
|
|
|
|
|
| X | |
101.INS |
| XBRL Instance Document |
|
|
|
|
|
|
|
|
| X |
101.SCH |
| XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
|
|
|
| X |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
|
|
|
| X |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
|
|
|
| X |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
|
|
|
| X |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
|
|
|
| X |
|
|
|
|
|
|
|
|
|
|
|
|
|
+ |
| Management contract or compensatory plan or arrangement |
|
|
|
|
|
|
|
|
|
|
* |
| This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act. |
Incorporated by Reference | Filed | |||||||||||
Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | Herewith | ||||||
31.1 | X | |||||||||||
31.2 | X | |||||||||||
32.1* | X | |||||||||||
32.2* | X | |||||||||||
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | X | ||||||||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document. | X | ||||||||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | X | ||||||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | X | ||||||||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | X | ||||||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | X | ||||||||||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). | X | ||||||||||
* | This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act. |
2023
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
November 10, 2020 |
|
|
| Red Violet, Inc. |
|
|
|
|
|
|
| By: |
| /s/ Daniel MacLachlan |
|
|
|
| Daniel MacLachlan |
|
|
|
| Chief Financial Officer |
|
|
|
| (Principal Financial |
|
| |||
| ||||
| ||||
|
21
24