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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 June 30, 2019

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

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 every Interactive Data File required to be submitted 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 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 August 2, 2019, the registrant had 10,832,537 shares of common stock outstanding.

 

 


 

RED VIOLET, INC.

TABLE OF CONTENTS FOR FORM 10-Q

 

 

 

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

 

 

 

Condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018

 

2

 

 

Condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018

 

3

 

 

Condensed consolidated statements of changes in shareholders' equity and member’s capital for the three and six months ended June 30, 2019 and 2018

 

4

 

 

Condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018

 

5

 

 

Notes to condensed consolidated financial statements

 

6

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

14

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

20

Item 4.

 

Controls and Procedures

 

20

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

21

Item 1A.

 

Risk Factors

 

21

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

21

Item 3.

 

Defaults Upon Senior Securities

 

21

Item 4.

 

Mine Safety Disclosures

 

21

Item 5.

 

Other Information

 

21

Item 6.

 

Exhibits

 

22

 

 

 

 

 

SIGNATURES

 

23

 

1


PART I - FINANCIAL 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 subsidiaries.

Item 1. Financial Statements.

 

RED VIOLET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

(unaudited)

 

 

 

June 30, 2019

 

 

December 31, 2018

 

ASSETS:

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,915

 

 

$

9,950

 

Accounts receivable, net of allowance for doubtful accounts of $98 and $77

  as of June 30, 2019 and December 31, 2018, respectively

 

 

3,626

 

 

 

2,265

 

Prepaid expenses and other current assets

 

 

885

 

 

 

934

 

Total current assets

 

 

10,426

 

 

 

13,149

 

Property and equipment, net

 

 

726

 

 

 

852

 

Intangible assets, net

 

 

22,031

 

 

 

19,971

 

Goodwill

 

 

5,227

 

 

 

5,227

 

Right-of-use assets

 

 

2,835

 

 

 

-

 

Other noncurrent assets

 

 

459

 

 

 

628

 

Total assets

 

$

41,704

 

 

$

39,827

 

LIABILITIES AND SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,290

 

 

$

2,246

 

Accrued expenses and other current liabilities

 

 

932

 

 

 

1,277

 

Current portion of operating lease liabilities

 

 

463

 

 

 

-

 

Deferred revenue

 

 

56

 

 

 

26

 

Total current liabilities

 

 

3,741

 

 

 

3,549

 

Noncurrent operating lease liabilities

 

 

2,712

 

 

 

-

 

Total liabilities

 

 

6,453

 

 

 

3,549

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred stock—$0.001 par value, 10,000,000 shares authorized, and 0 shares

  issued and outstanding, as of June 30, 2019 and December 31, 2018

 

 

-

 

 

 

-

 

Common stock—$0.001 par value, 200,000,000 shares authorized, 10,286,613 and

  10,266,613 shares issued and outstanding, as of June 30, 2019 and

  December 31, 2018

 

 

10

 

 

 

10

 

Additional paid-in capital

 

 

45,253

 

 

 

41,052

 

Accumulated deficit

 

 

(10,012

)

 

 

(4,784

)

Total shareholders' equity

 

 

35,251

 

 

 

36,278

 

Total liabilities and shareholders' equity

 

$

41,704

 

 

$

39,827

 

 

See notes to condensed consolidated financial statements

2


RED VIOLET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share data)

(unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

$

7,245

 

 

$

3,909

 

 

$

12,979

 

 

$

7,234

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue (exclusive of depreciation and amortization)

 

 

3,052

 

 

 

2,084

 

 

 

5,721

 

 

 

4,101

 

Sales and marketing expenses

 

 

2,003

 

 

 

1,228

 

 

 

3,503

 

 

 

2,317

 

General and administrative expenses

 

 

5,396

 

 

 

1,742

 

 

 

7,761

 

 

 

3,594

 

Depreciation and amortization

 

 

681

 

 

 

478

 

 

 

1,299

 

 

 

929

 

Total costs and expenses

 

 

11,132

 

 

 

5,532

 

 

 

18,284

 

 

 

10,941

 

Loss from operations

 

 

(3,887

)

 

 

(1,623

)

 

 

(5,305

)

 

 

(3,707

)

Interest income, net

 

 

37

 

 

 

-

 

 

 

77

 

 

 

-

 

Other income, net

 

 

-

 

 

 

129

 

 

 

-

 

 

 

129

 

Loss before income taxes

 

 

(3,850

)

 

 

(1,494

)

 

 

(5,228

)

 

 

(3,578

)

Income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net loss

 

$

(3,850

)

 

$

(1,494

)

 

$

(5,228

)

 

$

(3,578

)

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.37

)

 

$

(0.15

)

 

$

(0.51

)

 

$

(0.35

)

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

10,298,613

 

 

 

10,266,613

 

 

 

10,283,232

 

 

 

10,266,613

 

 

See notes to condensed consolidated financial statements

3


RED VIOLET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

AND MEMBER’S CAPITAL

(Amounts in thousands, except share data)

(unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Common stock (shares):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

10,286,613

 

 

 

10,266,613

 

 

 

10,266,613

 

 

 

1,000

 

Vesting of restricted stock units

 

 

-

 

 

 

-

 

 

 

20,000

 

 

 

-

 

Spin-off from Fluent, Inc.

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,265,613

 

Ending balance

 

 

10,286,613

 

 

 

10,266,613

 

 

 

10,286,613

 

 

 

10,266,613

 

Common stock (amount):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

10

 

 

$

10

 

 

$

10

 

 

$

-

 

Vesting of restricted stock units

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Spin-off from Fluent, Inc.

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10

 

Ending balance

 

 

10

 

 

 

10

 

 

 

10

 

 

 

10

 

Additional paid-in capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

41,476

 

 

 

40,252

 

 

 

41,052

 

 

 

-

 

Share-based compensation

 

 

3,777

 

 

 

49

 

 

 

4,201

 

 

 

49

 

Spin-off from Fluent, Inc.

 

 

-

 

 

 

-

 

 

 

-

 

 

 

40,252

 

Ending balance

 

 

45,253

 

 

 

40,301

 

 

 

45,253

 

 

 

40,301

 

Accumulated deficit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

(6,162

)

 

 

-

 

 

 

(4,784

)

 

 

-

 

Net loss

 

 

(3,850

)

 

 

(1,494

)

 

 

(5,228

)

 

 

(1,494

)

Ending balance

 

 

(10,012

)

 

 

(1,494

)

 

 

(10,012

)

 

 

(1,494

)

Member's capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,736

 

Contribution by Fluent, Inc., including allocation of expenses

 

 

-

 

 

 

-

 

 

 

-

 

 

 

24,264

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

346

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,084

)

Spin-off from Fluent, Inc.

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(40,262

)

Ending balance

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total shareholders' equity and member's capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

35,324

 

 

$

40,262

 

 

$

36,278

 

 

$

17,736

 

Ending balance

 

$

35,251

 

 

$

38,817

 

 

$

35,251

 

 

$

38,817

 

 

See notes to condensed consolidated financial statements

4


RED VIOLET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,228

)

 

$

(3,578

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,299

 

 

 

929

 

Share-based compensation expense

 

 

3,883

 

 

 

214

 

Write-off of long-lived assets

 

 

30

 

 

 

61

 

Provision for bad debts

 

 

326

 

 

 

155

 

Allocation of expenses from Fluent, Inc.

 

 

-

 

 

 

325

 

Noncash lease expenses

 

 

207

 

 

 

-

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,687

)

 

 

(536

)

Prepaid expenses and other current assets

 

 

49

 

 

 

(284

)

Other noncurrent assets

 

 

169

 

 

 

82

 

Accounts payable

 

 

44

 

 

 

122

 

Accrued expenses and other current liabilities

 

 

-

 

 

 

(2,944

)

Deferred revenue

 

 

30

 

 

 

23

 

Operating lease liabilities

 

 

(212

)

 

 

-

 

Other non-current liabilities

 

 

-

 

 

 

189

 

Net cash used in operating activities

 

 

(1,090

)

 

 

(5,242

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(32

)

 

 

(37

)

Capitalized costs included in intangible assets

 

 

(2,913

)

 

 

(2,888

)

Net cash used in investing activities

 

 

(2,945

)

 

 

(2,925

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Capital contributed by Fluent, Inc.

 

 

-

 

 

 

23,939

 

Net cash provided by financing activities

 

 

-

 

 

 

23,939

 

Net (decrease) increase in cash and cash equivalents

 

$

(4,035

)

 

$

15,772

 

Cash and cash equivalents at beginning of period

 

 

9,950

 

 

 

65

 

Cash and cash equivalents at end of period

 

$

5,915

 

 

$

15,837

 

SUPPLEMENTAL DISCLOSURE INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

-

 

 

$

-

 

Cash paid for income taxes

 

$

-

 

 

$

-

 

Share-based compensation capitalized in intangible assets

 

$

318

 

 

$

181

 

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 financial statements

5


RED VIOLET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share data)

(unaudited)

1. Summary of significant accounting policies

(a) Basis of preparation

The accompanying unaudited condensed consolidated financial statements of Red Violet, Inc. (“red violet” or the “Company”), a Delaware corporation, have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to those rules and regulations.

On March 26, 2018, Fluent, Inc. (“Fluent”) completed a spin-off of its risk management business from its digital marketing business by way of a distribution of all the shares of common stock of Fluent’s then wholly-owned subsidiary, red violet, to Fluent’s stockholders as of the record date and certain warrant holders (the “Spin-off”). The distribution occurred by way of a pro rata stock distribution to such common stock and warrant holders, each of whom received one share of red violet’s common stock for every 7.5 shares of Fluent’s common stock held on the record date or to which they were entitled to under their warrants, which resulted in a distribution of a total of 10,266,613 shares of red violet common stock. Upon the Spin-off, the Company owns Fluent subsidiaries that previously operated Fluent’s risk management business. The Company accounted for the Spin-off in accordance with ASC 805-50-30-5 Initial Measurement- Transactions Between Entities Under Common ControlTransfer Date Measurement and therefore the net assets transferred from Fluent to red violet upon the Spin-off were reflected in red violet’s condensed consolidated financial statements at Fluent’s carrying values at the time of the Spin-off.

The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for any future interim periods or for the full year ending December 31, 2019.

The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”).

The condensed consolidated balance sheet as of December 31, 2018 included herein was derived from the audited financial statements as of that date included in the 2018 Form 10-K, but does not include all disclosures required by US GAAP.

The Company has only one operating segment, as defined by Accounting Standards Codification (“ASC”) 280, “Segment Reporting.”

Principles of consolidation

The condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant transactions among the Company and its subsidiaries have been eliminated upon consolidation. For periods prior to the Spin-off, these financial statements were prepared on a consolidated and combined basis because certain of the entities were under common control.

Although the Spin-off was completed on March 26, 2018, the Company has reflected the Spin-off in these financial statements as if it occurred on March 31, 2018 as the Company determined that the impact is not material to the condensed consolidated financial statements.

The historical condensed consolidated and combined financial results presented prior to the Spin-off may not be indicative of the results that would have been achieved by the Company had it operated as a separate, standalone entity prior to the Spin-off. The condensed consolidated and combined financial statements presented prior to the Spin-off do not reflect any changes that may occur in the Company’s operations in connection with or as a result of the Spin-off.

(b) Recently issued accounting standards

 

As an emerging growth company, the Company has left open the opportunity to take advantage of the extended transition period provided to emerging growth companies in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), however, it is the Company’s present intention to adopt any applicable new accounting standards timely.

6


In February 2016, Financial Accounting Standard Board (“FASB”) issued ASU No. 2016-02 (“ASU 2016-02”), “Leases (Topic 842),” which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. In July 2018, FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements.” Topic 842 is effective for public entities and private entities in the first quarter of 2019 and the first quarter of 2020, respectively, on a modified retrospective basis. The Company adopted Topic 842 in the first quarter of 2019. The Company recorded a right-of-use asset and a total operating lease obligation on its condensed consolidated balance sheet of approximately $3.0 million and $3.4 million, respectively, upon the adoption. Refer to Note 9, Leases, for further details.

In June 2016, FASB issued ASU No. 2016-13 (“ASU 2016-13”), “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” In November 2018, FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” which amends the scope and transition requirements of ASU 2016-13. Topic 326 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. Topic 326 will become effective for public companies beginning January 1, 2020, with early adoption permitted, on a modified retrospective approach. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

In August 2018, FASB issued ASU No. 2018-15 (“ASU 2018-15”), “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. It also requires the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. This guidance will be effective for the Company for annual reporting periods beginning after December 15, 2020, on a retrospective or prospective basis and early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

 

2. Loss per share

 

Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the periods. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and is calculated using the treasury stock method for unvested shares. Common equivalent shares are excluded from the calculation in the loss periods as their effects would be anti-dilutive.

 

Prior to the Spin-off, the financial information of red violet represented the consolidated and combined figures of red violet and its subsidiaries. red violet only had 1,000 shares of common stock outstanding, all of which Fluent owned. On March 26, 2018, upon the Spin-off of red violet, an aggregate of 10,266,613 shares of red violet common stock were distributed to Fluent stockholders and certain warrant holders. This number of shares remained outstanding as of June 30, 2018 and is utilized to calculate loss per share for the six months ended June 30, 2018, as shown in the table below.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands, except share data)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(3,850

)

 

$

(1,494

)

 

$

(5,228

)

 

$

(3,578

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - Basic and diluted

 

 

10,298,613

 

 

 

10,266,613

 

 

 

10,283,232

 

 

 

10,266,613

 

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted:

 

$

(0.37

)

 

$

(0.15

)

 

$

(0.51

)

 

$

(0.35

)

 

A total of 2,237,000 unvested restricted stock units (“RSUs”) have been excluded from the diluted loss per share for the three and six months ended June 30, 2019, and 56,000 RSUs have been excluded for the three and six months ended June 30, 2018, as the impact is anti-dilutive.

7


3. Intangible assets, net

Intangible assets other than goodwill consist of the following:

 

 

 

 

 

June 30, 2019

 

 

December 31, 2018

 

(In thousands)

 

Amortization

Period

 

Gross Amount

 

 

Accumulated Amortization

 

 

Net

 

 

Gross Amount

 

 

Accumulated Amortization

 

 

Net

 

Software developed for internal use

 

5-10 years

 

$

26,221

 

 

$

(4,190

)

 

$

22,031

 

 

$

22,990

 

 

$

(3,019

)

 

$

19,971

 

 

The gross amount associated with software developed for internal use represents capitalized costs of internally-developed software, including eligible salaries and staff benefits and share-based compensation incurred by relevant employees, and other relevant costs.

Amortization expenses of $617 and $417 for the three months ended June 30, 2019 and 2018, respectively, and $1,171 and $790 for the six months ended June 30, 2019 and 2018, respectively, were included in depreciation and amortization expense. As of June 30, 2019, intangible assets of $3,515, included in the gross amounts of software developed for internal use, have not started amortization, as they are not ready for their intended use.

The Company capitalized costs of internally-developed software of $1,651 and $1,518 during the three months ended June 30, 2019 and 2018, respectively, and $3,231 and $3,069 for the six months ended June 30, 2019 and 2018, respectively.

As of June 30, 2019, estimated amortization expense related to the Company’s intangible assets for the remainder of 2019 through 2023 and thereafter are as follows:

 

(In thousands)

 

 

 

 

Year

 

June 30, 2019

 

Remainder of 2019

 

$

1,307

 

2020

 

 

3,304

 

2021

 

 

3,303

 

2022

 

 

3,301

 

2023

 

 

3,226

 

2024 and thereafter

 

 

7,590

 

Total

 

$

22,031

 

 

4. Goodwill

 

Goodwill represents the cost in excess of the fair value of the net assets acquired in a business combination. As of June 30, 2019 and December 31, 2018, the balance of goodwill of $5,227 was as a result of the acquisition of Interactive Data, LLC (“Interactive Data”), a wholly-owned subsidiary of red violet, effective on October 2, 2014.

In accordance with ASC 350, “Intangibles - Goodwill and Other,” goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value. The measurement date of the Company’s annual goodwill impairment test is October 1.

As of June 30, 2019 and December 31, 2018, no goodwill impairment charges were recorded.

5. Revenue recognition

 

On January 1, 2018, the Company adopted ASC 606, “Revenue from Contracts with Customers,” (“Topic 606”) using the modified retrospective method applied to all contracts that were not completed contracts at the date of initial application. There was no impact on the opening accumulated deficit as of January 1, 2018 due to the adoption of Topic 606. Revenue is recognized when control of goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s performance obligation is to provide on demand solutions to its customers by leveraging its proprietary technology and applying machine learning and advanced analytics to its massive data repository. The pricing for the customer contracts is based on usage, a monthly fee, or a combination of both.

8


Available within Topic 606, the Company has applied the portfolio approach practical expedient in accounting for customer revenue as one collective group, rather than individual contracts. Based on the Company’s historical knowledge of the contracts contained in this portfolio and the similar nature and characteristics of the customers, the Company has concluded the financial statement effects are not materially different than if accounting for revenue on a contract by contract basis.

Revenue is recognized over a period of time since the performance obligation is delivered in a series. The Company’s customers simultaneously receive and consume the benefits provided by the Company’s performance as and when provided. Furthermore, the Company has elected the “right to invoice” practical expedient, available within Topic 606, as its measure of progress, since it has a right to payment from a customer in an amount that corresponds directly with the value of its performance completed-to-date. The Company's revenue arrangements do not contain significant financing components.

For the three months ended June 30, 2019 and 2018, 62% and 52% of total revenue was attributable to customers with pricing contracts, respectively, versus 38% and 48% attributable to transactional customers, respectively. For the six months ended June 30, 2019 and 2018, 64% and 48% of total revenue was attributable to customers with pricing contracts, respectively, versus 36% and 52% 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 June 30, 2019 and December 31, 2018, the balance of deferred revenue was $56 and $26, respectively, all of which is expected to be realized in the next 12 months. In relation to the deferred revenue balance as of December 31, 2018, $10 and $26 was recognized into revenue during the three and six months ended June 30, 2019, respectively.

As of June 30, 2019, $3,626 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. $980 of revenue will be recognized in the remainder of 2019, $1,639 in 2020, $1,004 in 2021, and $3 in 2022. The actual timing of recognition may vary due to factors outside of the Company’s control. The Company excludes variable consideration related entirely to wholly unsatisfied performance obligations and contracts and recognizes such variable consideration based upon the right to invoice the customer.

Sales commissions are incurred and recorded on an ongoing basis over the term of the customer relationship. These costs are recorded in sales and marketing expenses.

In addition, the Company elected the practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed.

6. Income taxes

The Company is subject to federal and state income taxes in the United States. The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimate of the annual effective tax rate, and if its estimated annual tax rate changes, the Company makes a cumulative adjustment in that quarter. 

 

red violet is a “C” corporation, while its subsidiaries are all limited liability companies. Before the Spin-off, red violet and its subsidiaries were consolidated with Fluent for U.S. federal income tax purposes. However, for purposes of these financial statements, the income tax provisions prior to the Spin-off were prepared assuming the entities filed separate tax returns.

The Company’s effective income tax rate differed from the statutory federal income tax rate of 21% for the three and six months ended June 30, 2019 and 2018. For the three and six months ended June 30, 2019 and 2018, the effective income tax rate was 0%, and the difference is primarily the result of the full valuation allowance applied against the Company’s deferred tax assets.

The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the Company’s financial statements.

The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. All of the Company’s income tax filings since 2015 remain open for tax examinations.

The Company does not have any unrecognized tax benefits as of June 30, 2019 and December 31, 2018.

9


7. Share-based compensation

On March 22, 2018, the board of directors of the Company and Fluent, in its capacity as sole stockholder of red violet prior to the Spin-off, approved the Red Violet, Inc. 2018 Stock Incentive Plan (the “2018 Plan”), which became effective immediately prior to the Spin-off. A total of 3,000,000 shares of common stock were authorized to be issued under the 2018 Plan. The primary purpose of the 2018 Plan is to attract, retain, reward and motivate certain individuals by providing them with an opportunity to acquire or increase a proprietary interest in the Company and to incentivize them to expend maximum effort for the growth and success of the Company, so as to strengthen the mutuality of the interests between such individuals and the stockholders of the Company.

As of June 30, 2019, there were 731,000 shares of common stock reserved for issuance under the 2018 Plan.

Details of unvested RSU activity during the six months ended June 30, 2019 were as follows:

 

 

Number of units

 

 

Weighted average

grant-date fair value

 

Unvested as of December 31, 2018 (1)

 

 

2,121,000

 

 

$

7.65

 

Granted (2)

 

 

183,500

 

 

$

7.25

 

Vested and delivered

 

 

(20,000

)

 

$

6.10

 

Vested not delivered

 

 

(12,000

)

 

$

6.10

 

Forfeited

 

 

(35,500

)

 

$

7.49

 

Unvested as of June 30, 2019

 

 

2,237,000

 

 

$

7.64

 

(1)

On September 5, 2018, the Company’s compensation committee approved the grant of an aggregate of 1,487,500 RSUs, subject to both time- and performance-based requirements, to certain of its executive officers and directors, at a grant date fair value of $7.69 per share, under the 2018 Plan, with a three-year vesting period. Such RSU grants shall not vest unless and until the Company has, for any fiscal quarter in which the RSUs are outstanding, (i) gross revenue determined in accordance with the Company’s reviewed or audited financial statements in excess of $7.0 million for such fiscal quarter, (ii) positive adjusted EBITDA, as determined based on amounts derived from the Company’s reviewed or audited financial statements for such fiscal quarter, and (iii) the participant continues to provide services to the Company either as an employee, director or consultant on the last date of the quarter that the performance criteria is met (collectively, the “Performance Criteria”). If the Performance Criteria are met, the RSUs will vest one-third annually on each of July 1, 2019, July 1, 2020 and July 1, 2021. In the event of a change of control, all RSUs which have not vested on the date of such change of control shall immediately vest even if the Performance Criteria has not been met. As of June 30, 2019, the Company determined that the Performance Criteria was met and expects to issue shares underlying the RSUs in accordance with the continuing time-based vesting requirement.

(2)

On January 16, 2019, an aggregate of 183,500 RSUs were granted to certain employees of the Company, at a grant date fair value of $7.25 per share, under the 2018 Plan, with vesting periods ranging from three to four years. Among these grants, 90,000 RSUs were also subject to the Performance Criteria, as defined above. Based on the achievement of the Performance Criteria as of June 30, 2019, the Company expects to issue shares underlying the 90,000 RSUs in accordance with the continuing time-based vesting requirement.

As a result of meeting the Performance Criteria as of June 30, 2019, the Company recognized a total of $3,414 of share-based compensation expense relating to RSUs with Performance Criteria during the three-month period ended June 30, 2019. Of the $3,414 recognized, $2,351 represented a catch-up of unamortized expense from September 5, 2018 through March 31, 2019, which was not recognized in prior periods because the Company determined at each period end that it was not probable that the Performance Criteria would be met.

As of June 30, 2019, unrecognized share-based compensation expense associated with the granted RSUs amounted to $12,334, which is expected to be recognized over a remaining weighted average period of 2.2 years.

10


Share-based compensation was allocated to the following accounts in the condensed consolidated financial statements for the three and six months ended June 30, 2019 and 2018:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Sales and marketing expenses

 

$

89

 

 

$

-

 

 

$

176

 

 

$

41

 

General and administrative expenses

 

 

3,520

 

 

 

49

 

 

 

3,707

 

 

 

173

 

Share-based compensation expense

 

 

3,609

 

 

 

49

 

 

 

3,883

 

 

 

214

 

Capitalized in intangible assets

 

 

168

 

 

 

-

 

 

 

318

 

 

 

181

 

Total

 

$

3,777

 

 

$

49

 

 

$

4,201

 

 

$

395

 

 

The amounts recorded in the six months ended June 30, 2018 included an allocation of share-based compensation related to the share-based awards granted by Fluent to Company employees or non-employees prior to the Spin-off.

8. Related party transactions

Services Agreement

On August 7, 2018, the Company entered into an executive chairman services agreement with Mr. Michael Brauser, the then Executive Chairman of the Company, pursuant to which Mr. Brauser will be providing recommendations on organizational and capital structure, future acquisitions and strategic transactions (“Services Agreement”), for a term of one year, automatically renewing for additional one-year periods unless either party provides written notice to the other of its intent not to renew not fewer than 30 days prior to the expiration of the then current term. Mr. Brauser remains a consultant to the Company and continues to provide services under the existing Services Agreement after his resignation as Executive Chairman and as a member of the board of directors effective on September 9, 2018. Under the Services Agreement, Mr. Brauser receives cash compensation of $30 per month and is entitled to participate in the Company’s incentive compensation plan. The Company recognized consulting service fees relating to the Services Agreement of a total of $90 and $180 during the three and six months ended June 30, 2019, respectively. In addition, amortization of share-based compensation expense of $1,115 in relation to the RSUs with Performance Criteria previously granted to Mr. Brauser was recognized during the three months ended June 30, 2019.

Contribution by Fluent

Contribution by Fluent represents cash funding provided or the portion of certain expenses allocated by Fluent to red violet, on or prior to the Spin-off.

These allocated expenses are primarily corporate employee salaries and benefits of the functional groups (inclusive of executive management, accounting, administrative and information technology) and corporate administrative expenses (inclusive of legal services, accounting and finance services and other corporate and infrastructure services). Corporate employee salaries and benefits were allocated on the basis of time spent, and corporate administrative expenses were allocated on the basis of relative percentage of services utilized or benefit received. red violet recorded expenses of $325 for the three months ended March 31, 2018 as a result of the allocation of expenses from Fluent. Upon the Spin-off, Fluent no longer allocates any expenses to red violet.

In addition, share-based compensation of $344, relating to the share-based awards granted by Fluent prior to the Spin-off, was recorded during the three months ended March 31, 2018.

9. 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.

11


For the three and six months ended June 30, 2019, a summary of the Company’s lease information is shown below:

 

 

Three Months Ended

 

 

Six Months Ended

 

(In thousands)

 

June 30, 2019

 

 

June 30, 2019

 

Lease cost:

 

 

 

 

 

 

 

 

Operating lease costs

 

$

168

 

 

$

336

 

Other information:

 

 

 

 

 

 

 

 

Cash paid for operating leases

 

$

171

 

 

$

341

 

Right-of-use assets obtained in exchange for operating lease liabilities

 

$

-

 

 

$

3,042

 

Weighted average discount rate for operating leases (1)

 

 

-

 

 

 

8.0

%

(1)

The Company used 8.0%, its estimated incremental borrowing rate for similar secured assets, as the discount rate for the leases to determine the present value of the lease payments because the implicit rate in each lease is not readily determinable. The discount rate was calculated on the basis of information available as of January 1, 2019, the application date.

As of June 30, 2019, the weighted average remaining operating lease term was 5.3 years.

As of June 30, 2019, scheduled future maturities and present value of the operating lease liabilities are as follows:

(In thousands)

 

 

 

 

Year

 

June 30, 2019

 

Remainder of 2019

 

$

346

 

2020

 

 

705