UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

 

(Mark One)

For the quarterly period ended September 30, 2017

or

For the transition period from                     to                    

Commission file number 001-37893

 

COGINT, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

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)

(Former name, former address and former fiscal year, if changed since last report)

 

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.

 

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 November 3, 2017, the registrant had 59,677,382 shares of common stock outstanding.

 

 

 

 

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COGINT, INC.

TABLE OF CONTENTS FOR FORM 10-Q

 

 

 

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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,” “cogint,” or the “Company,” refer to Cogint, Inc. and its consolidated subsidiaries.

ITEM 1. FINANCIAL STATEMENTS.

 

COGINT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

 

See notes to condensed consolidated financial statements

 

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COGINT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Amounts in thousands, except share data)

(unaudited)

 

 

See notes to condensed consolidated financial statements

 

 

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COGINT, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Amounts in thousands, except share data)

(unaudited)

 

 

See notes to condensed consolidated financial statements

 

 

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COGINT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, except share data)

(unaudited)

 

 

See notes to condensed consolidated financial statements

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COGINT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share data)

(unaudited)

 

1. Summary of significant accounting policies

(a) Basis of preparation and liquidity

The accompanying unaudited condensed consolidated financial statements have been prepared for Cogint, Inc., a Delaware corporation, 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.

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, 2017.

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 our Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”).

The condensed consolidated balance sheet as of December 31, 2016 included herein was derived from the audited financial statements as of that date included in the 2016 Form 10-K, but does not include all disclosures including notes required by US GAAP.

Reclassifications

Certain prior period items, including write-off of long-lived assets, have been reclassified to conform to the current period presentation.

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.

(b) Recently issued accounting standards

In May 2014, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers (Topic 606).” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which delays the effective date of ASU 2014-09 by one year. FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in evaluating whether it controls the good or the service before it is transferred to the customer. The new revenue recognition standard will be effective for public entities for annual reporting periods beginning after December 15, 2017, and interim periods therein, that is, the first quarter of 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We currently do not plan to early adopt ASU 2014-09, and we anticipate adopting the standard using the modified retrospective method. We plan to have our preliminary assessment on the impact this guidance will have on our condensed consolidated financial statements and related disclosures in the fourth quarter of 2017.

 

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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 in the first quarter of 2019 on a modified retrospective basis and early adoption is permitted. We are still evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.

In March 2016, FASB issued ASU No. 2016-09 (“ASU 2016-09”), “Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting,” which simplifies the accounting for share-based payment transactions, including the income tax consequences, an option to recognize gross share-based compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. We adopted ASU 2016-09 in the first quarter of 2017 on a retrospective basis. As a result of the adoption, the Company recorded an increase to the deferred tax asset balance and an increase to the corresponding valuation allowance of $301 related to the cumulative-effect adjustment as of January 1, 2017. For the three and nine months ended September 30, 2017, the Company recorded tax expense of $482 and $2,451, respectively, which was offset by a corresponding reduction in the valuation allowance.

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 will be effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and early adoption is permitted. We are still evaluating the impact of ASU 2016-15 on our condensed consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18 (“ASU 2016-18”), “Restricted Cash,” which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company plans to adopt this standard on January 1, 2018, and the standard will result in changes to its consolidated statements of cash flows such that restricted cash amounts will be included in the beginning-of-period and end-of-period cash and cash equivalents totals.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”), “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. This guidance will be effective for us in the first quarter of 2020 on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact on our condensed consolidated financial statements.

2. Loss per share

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

The information related to basic and diluted loss per share for the three and nine months ended September 30, 2017 and 2016 is as follows:

 

 

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3. Intangible assets, net

Intangible assets other than goodwill consist of the following:

 

 

The gross amount associated with software developed for internal use mainly represents capitalized costs of internally developed software. The amounts relating to acquired proprietary technology, customer relationships, trade names, domain names, databases, and non-competition agreements mainly represent the fair values of intangible assets acquired as a result of the acquisition of Fluent, LLC (“Fluent”) effective on December 8, 2015 (the “Fluent Acquisition”) and the acquisition of Q Interactive, LLC (“Q Interactive”) effective on June 8, 2016 (the “Q Interactive Acquisition”).

 

On January 18, 2017, the Company’s management and Board of Directors approved a plan to merge and fully integrate Q Interactive’s business into Fluent (the “Q Interactive Integration”). As a result, the remaining balance of long-lived assets of $3,626, relating primarily to the acquired proprietary technology and trade names acquired in the Q Interactive Acquisition, was written off to operating expenses as a write-off of long-lived assets.

 

Amortization expenses of $3,362 and $3,333 for the three months ended September 30, 2017 and 2016, respectively, and $9,931 and $8,726 for the nine months ended September 30, 2017 and 2016, respectively, were included in depreciation and amortization expenses. As of September 30, 2017, intangible assets of $3,444, included in the gross amounts of software developed for internal use, have not been amortized. These intangible assets will start to amortize when they are put into use.

 

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As of September 30, 2017, estimated amortization expenses related to the Company’s intangible assets for the remainder of 2017 through 2022 and thereafter are as follows:

 

 

4. Goodwill

Goodwill represents the cost in excess of the fair value of the net assets acquired in a business combination. As of September 30, 2017 and December 31, 2016, the balance of goodwill includes $5,227 as a result of the acquisition of Interactive Data, LLC (“Interactive Data”) effective on October 2, 2014, $155,645 as a result of the Fluent Acquisition effective on December 8, 2015, and $5,384 as a result of the Q Interactive Acquisition effective on June 8, 2016.

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

As of September 30, 2017, there are no events or changes in circumstances to indicate that goodwill is impaired.

5. Long-term debt, net

Long-term debt, net, including promissory notes payable to certain shareholders, net, as of September 30, 2017, consist of the following:

 

Long-term debt, net, including promissory notes payable to certain shareholders, net, as of December 31, 2016, consist of the following:

 

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Term Loan

On December 8, 2015, Fluent entered into an agreement (“Credit Agreement”) with certain financial institutions, for a term loan in the amount of $45,000 (“Term Loan”), with Whitehorse Finance, Inc. acting as the agent (the “Term Loan Agent”). Fluent’s obligations in respect of the Term Loan are guaranteed by the Company and substantially all of the other direct and indirect subsidiaries of the Company and secured by substantially all of such entities’ assets. The Credit Agreement has a five year term.

Prior to the Amendment No. 3 to Credit Agreement entered into on January 19, 2017 (the “Amendment No. 3”), payments of principal in the amount of $563 each were due on the last day of each quarter, commencing March 31, 2016. Additionally, 50% of excess cash flow of Fluent and its subsidiaries for the immediately preceding fiscal year is required, in the Term Loan Agent’s sole discretion, to be paid towards the Term Loan obligations, commencing with the fiscal year ending December 31, 2016. As a result of the excess cash flow for the year ended December 31, 2016, we reclassified a total amount of $1,885 into current portion of long-term debt in the condensed consolidated balance sheet as of December 31, 2016. Because the Term Loan Agent refused the prepayment, we reclassified the $1,885 back to non-current portion of long-term debt in the first quarter of 2017. The Credit Agreement provides for certain other customary mandatory prepayments upon certain events, and also provides for certain prepayment premiums during the first four years of the Term Loan, provided that the prepayment premiums are not applicable to scheduled payments of principal, the required excess cash flow payments and certain other required prepayments.

Debt issuance costs, including the fair value of warrants issued to the Term Loan Agent and its affiliates in prior periods (“Whitehorse Warrants”), are amortized into interest expense over the term of the Term Loan using the interest method. The Whitehorse Warrants include warrants to purchase, in aggregate, 300,000 shares of common stock, with an exercise price of $5.08 per share. We estimate the fair value of such warrants on the date of grant using a Black-Scholes pricing model and recognized them as debt issuance costs and additional paid-in capital.

The Credit Agreement, as amended, contains customary representations and warranties, covenants (including certain financial covenants), and events of default, upon the occurrence of which the Term Loan Agent may accelerate the obligations under the Credit Agreement. Certain restrictive covenants impose limitations on the way we conduct our business, including limitations on the amount of additional debt we can incur and restricts our ability to make certain investments and other restricted payments, including certain intercompany payments of cash and other property. The financial covenants include the requirement that the Company and its subsidiaries attain, on a quarterly basis, certain minimum EBITDA thresholds for the immediately preceding twelve-month period, Fluent and its subsidiaries attain, on a quarterly basis, certain minimum EBITDA thresholds for the immediately preceding twelve-month period, Fluent and its subsidiaries meet certain leverage ratios on a quarterly basis, Fluent and its subsidiaries meet certain fixed charge coverage ratios on a quarterly basis, and Fluent and its subsidiaries maintain at all times cash and cash equivalent balances of at least $2.0 million (or such lesser amount agreed to by the Term Loan Agent), in the aggregate. On August 7, 2017, the Company and its subsidiaries entered into Amendment No. 4 to the Credit Agreement (“Amendment No. 4”). Amendment No. 4 provides that there shall be no requirement that the Company and its subsidiaries meet any minimum EBITDA threshold for the twelve-month period ended June 30, 2017. The requirement that Fluent and its subsidiaries meet the required minimum EBITDA threshold for the twelve-month period ended June 30, 2017 was not impacted by Amendment No. 4. As of June 30, 2017, the Company was in compliance with the covenants under the Credit Agreement, after giving effect to Amendment No. 4. On November 3, 2017, the Company and its subsidiaries entered into Amendment No. 5 to the Credit Agreement (“Amendment No. 5”). Amendment No. 5 provides for certain amendments to the definition of EBITDA by adding back acquisition and restructuring costs resulting from the Business Combination Transaction (as defined below), and non-recurring costs relating to litigation with TRADS that we settled on July 22, 2017. Amendment No. 5 also amends the minimum EBITDA threshold for the Company and its subsidiaries beginning with the quarter ended September 30, 2017. In addition, Amendment No. 5 allows for additional transfer of cash from Fluent to the Company, provided that Fluent maintains a minimum cash balance. As of September 30, 2017, the Company was in compliance with the covenants under the Credit Agreement, after giving effect to Amendment No. 5.

Incremental Term Loan

On January 19, 2017, Fluent entered into Amendment No. 3, amending Fluent's Term Loan facility dated December 8, 2015. The Amendment No. 3, among other things, provides for a new term loan in the principal amount of $15,000 ("Incremental Term Loan"), subject to the terms and conditions of the Amendment No. 3, and modifies certain other Credit Agreement provisions, including certain financial covenants and related definitions. The entire Incremental Term Loan of $14,039, net of debt issuance costs of $961, was received on February 1, 2017.

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The Incremental Term Loan and Fluent's existing Term Loan (collectively, the "Term Loans") are guaranteed by the Company and the other direct and indirect subsidiaries of the Company, and are secured by substantially all of the assets of the Company and its direct and indirect subsidiaries, including Fluent, in each case, on an equal and ratable basis. The Term Loans accrue interest at the rate of: (a) either, at Fluent's option, LIBOR (subject to a floor of 0.50%) plus 10.5% per annum, or base rate plus 9.5% per annum, payable in cash, plus (b) 1% per annum, payable, at Fluent's option, in either cash or in-kind. Payments of principal of the Term Loans are $688 per quarter, replacing the original $563 for the Term Loan, payable at the end of each calendar quarter, commencing on March 31, 2017. The Term Loans mature on December 8, 2020.

Promissory Notes

On December 8, 2015, the Company entered into and consummated the promissory notes financing (the “Promissory Notes”) with each of Frost Gamma Investment Trust (“Frost Gamma”), an affiliate of Phillip Frost, M.D., the Vice Chairman of the Company’s Board of Directors, Michael Brauser, Chairman of the Board of Directors, and another investor (collectively, the “Promissory Note Investors”), pursuant to which the Company issued Promissory Notes of $5.0 million to Frost Gamma, $4.0 million to Michael Brauser, and $1.0 million to another investor, for an aggregate financing in the amount of $10.0 million. The Promissory Note Investors received (i) a promissory note in the principal amount equal to the amount of their respective promissory notes, with a rate of interest of 10% per annum, which interest shall be capitalized monthly by adding to the outstanding principal amount of such Promissory Notes, and (ii) a grant of 100 shares of convertible Series B preferred stock (“Series B Preferred”) for each $1.0 million increment of their respective Promissory Notes, with a total of 1,000 shares of Series B Preferred granted (“Promissory Note Shares”), pursuant to fee letter agreements. Each share of Series B Preferred automatically converted into 50 shares of common stock in February 2016.

Under the terms of the Promissory Notes, the Company is required to repay the principal and all accrued interest six months after the repayment of all amounts due under the Credit Agreement, except that the Company may repay the Promissory Notes earlier from the proceeds of a round of public equity financing. During the nine months ended September 30, 2017, the Company repaid accrued paid-in-kind (“PIK”) interest of $533, $426, and $107 to Frost Gamma, Michael Brauser and another investor, respectively.

The fair value of Promissory Note Shares of $413 was calculated by multiplying the closing common stock market price of the Company on December 8, 2015 of $8.45, with the total shares granted, as converted, which was recognized as debt issuance costs.

In connection with the Promissory Notes, on December 8, 2015, the Company, each lender under the Promissory Notes, and the Term Loan Agent, etc. entered into a Subordination Agreement (the “Subordination Agreement”), pursuant to which the debt under the Promissory Notes was made expressly subordinate to the debt under the Credit Agreement. In addition, the Subordination Agreement restricts the terms of the Promissory Notes. The terms of the Subordination Agreement shall remain in effect until such time that all obligations under the Credit Agreement are paid in full.

The net balance of Promissory Notes is presented as promissory notes payable to certain shareholders, net, in the condensed consolidated balance sheet.

Fair value

As mentioned above, the Company’s long-term debt outstanding as of September 30, 2017 represented 1) the Term Loans with interest at LIBOR (with a floor of 0.5%) plus 10.5% per annum and 2) the Promissory Notes pursuant to the agreements effective December 8, 2015, with a rate of interest of 10% per annum. Considering the Term Loans have a variable interest rate, and interest rates have been relatively stable, we regard the fair values of the long-term debt to approximate their carrying amount as of September 30, 2017. This fair value assessment represents Level 2 measurements.

6. Income taxes

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

The Company’s effective income tax rate differed from the statutory federal income tax rate of 34% for the three and nine months ended September 30, 2017 and 2016. For the three and nine months ended September 30, 2017, the effective income tax rate was 0%, and the difference is mainly the result of the full valuation allowance applied against the Company’s deferred tax assets and state income taxes. For the three and nine months ended September 30, 2016, the effective income tax rate was 32% and 33%, respectively, and this difference is primarily due to state income taxes and nondeductible expenses.

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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 balance of unrecognized tax benefits as of September 30, 2017 and December 31, 2016 was $1,668. In the Company’s tax return filed for the year ended December 31, 2015, a loss of $4,375, resulting from the disposal of all assets and liabilities related to the Company’s Chinese and British Virgin Islands based subsidiaries (collectively, the “Advertising Business”) in 2015, was included. This uncertain tax position of $1,668 is reflected as a reduction in deferred tax assets. Based on management’s assessment, no tax benefit has been recognized for the loss mentioned above. This unrecognized tax benefit, if recognized, would favorably affect the Company’s annual effective tax rate before application of any valuation allowance. The Company has not accrued any interest or penalties as of September 30, 2017 with respect to its uncertain tax positions.

The Company does not anticipate a significant increase or reduction in unrecognized tax benefits within the next twelve months.

7. Common stock, treasury stock and warrants

Common stock

As of September 30, 2017 and December 31, 2016, the number of issued shares of common stock was 56,418,136 and 53,717,996, respectively, which included shares of treasury stock of 352,523 and 160,235, respectively.

The change in the number of issued shares of common stock during the nine months ended September 30, 2017 was due to the issuance of an aggregate of 2,700,140 shares of common stock from the vesting of restricted stock units (“RSUs”) and the issuance of restricted stock, including 192,288 shares of common stock withheld to pay withholding taxes upon such vesting, which are reflected in treasury stock.

Treasury stock

As of September 30, 2017 and December 31, 2016, the Company held shares of treasury stock of 352,523 and 160,235, with a cost of $1,274 and $531, respectively. This increase in treasury stock during the nine months ended September 30, 2017 was due to shares withheld to pay withholding taxes upon the vesting of RSUs.

Warrants

As of September 30, 2017 and December 31, 2016, warrants to purchase an aggregate of 2,220,102 shares of common stock were outstanding, with exercise prices ranging from $3.75 to $10.00 per share.

8. Share-based payments

As of September 30, 2017, the Company maintains two share-based incentive plans: the 2008 Share Incentive Plan (the “2008 Plan”), which was carried forward as a result of the reverse acquisition between the Company and The Best One, Inc. (“TBO”) consummated on March 21, 2015, whereby TBO became a wholly-owned subsidiary of the Company (the “TBO Merger”), and the Cogint, Inc. 2015 Stock Incentive Plan (the “2015 Plan”), approved during the annual meeting of stockholders on June 2, 2015, which authorized the issuance of 2,500,000 shares of common stock. The total shares of common stock authorized for issuance under the 2015 Plan was increased on June 3, 2016 to 12,500,000 shares, and subsequently increased on September 6, 2017 to 13,500,000 shares, which subsequent increase becomes effective 20 days after the mailing of the stockholder notice on Schedule 14C. The primary purpose of the 2015 Plan is to attract, retain, reward and motivate certain individuals by providing them with an opportunity to acquire or increase a proprietary interest in the Company and to incentivize them to expend maximum effort for the growth and success of the Company, so as to strengthen the mutuality of the interests between such individuals and the stockholders of the Company.

As of September 30, 2017, there were 180,568 and 3,838,658 shares (inclusive of the increase of 1,000,000 shares to the 2015 Plan approved on September 6, 2017) of common stock reserved for issuance under the 2008 Plan and the 2015 Plan, respectively.

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Shares issued outside of the 2008 Plan and 2015 Plan

The following RSUs were issued outside of the 2008 Plan and 2015 Plan:

Marlin Capital Investments, LLC (“Marlin Capital”), a company which our Chairman Michael Brauser owns 50% and is one of two managers, holds RSUs representing the right to receive 2,000,000 shares of the Company’s common stock, which RSUs are outside of the 2008 Plan and 2015 Plan. These RSUs vest annually beginning from October 13, 2015 only if certain performance goals of the Company are met. The shares underlying such RSUs will not be delivered until October 13, 2018, unless there is a change of control of the Company. Share-based compensation expenses of $315 and $315 for the three months ended September 30, 2017 and 2016, respectively, and $937 and $937 for the nine months ended September 30, 2017 and 2016, respectively, associated with shares under the Marlin Capital agreement, were recognized.

Effective November 16, 2015, the Company entered into an employment agreement with Michael Brauser (the “Michael Brauser Employment Agreement”) relating to his service as Executive Chairman of the Board of Directors, pursuant to which, Michael Brauser will receive an annual base salary of $25 payable in accordance with the Company’s general payroll practices and RSUs outside of the 2008 Plan and 2015 Plan representing the right to receive 5,000,000 shares of common stock. The issuance of shares of common stock underlying the RSUs was approved by the stockholders at the annual meeting in 2016. These RSUs vest ratably over a four-year period; provided, however, that no portion of the RSUs shall vest unless and until the Company has gross revenue in excess of $100.0 million and positive EBITDA in any one fiscal year during the vesting period (the “Vesting Conditions”). In addition, such RSUs vest in full upon a Company change in control, termination of Michael Brauser without cause, termination by Michael Brauser for good reason, or Michael Brauser’s death or disability. The Company determined that the Vesting Conditions were met, effective March 14, 2017, and as a result, 1,250,000 shares were vested, but Michael Brauser has elected to defer delivery of any vested RSUs until his separation from service from the Company or death or disability. Effective on June 23, 2017, the Michael Brauser Employment Agreement was terminated. Mr. Brauser continues to serve as Chairman of the Board of Directors of the Company. On September 6, 2017, the Company entered into a consulting services agreement with Mr. Brauser, effective on June 23, 2017, for a term of four years (the “Consulting Agreement”), under which Mr. Brauser will serve as a strategic advisor to cogint but will receive no salary for such services. In consideration for Mr. Brauser’s services, the Consulting Agreement provides for continued vesting on all outstanding RSUs granted to Mr. Brauser before the effective date of the Consulting Agreement.

On December 8, 2015, at the time Dr. Phillip Frost joined the Board of Directors of the Company as Vice Chairman, Frost Gamma was granted 3,000,000 RSUs, outside of the 2008 Plan and 2015 Plan. The issuance of shares of common stock underlying such RSUs was approved by the stockholders at the annual meeting in 2016. These grants were fully vested on December 8, 2015, but Frost Gamma has elected to defer delivery of any vested RSUs until Dr. Phillip Frost’s separation from service from the Company or death or disability.

Share options

Details of share options activity during the nine months ended September 30, 2017 were as follows:

 

 

The aggregate intrinsic value amounts in the table above represent the difference between the closing price of the Company’s common stock on September 30, 2017 of $4.90 and the exercise price, multiplied by the number of in-the-money stock options as of the same date.

The unvested balance of options is shown below for the nine months ended September 30, 2017:

 

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Compensation expenses recognized from employee stock options for the three months ended September 30, 2017 and 2016 of $31 and $35, respectively, and $91 and $82 for the nine months ended September 30, 2017 and 2016, respectively, were recognized in general and administrative expenses in the condensed consolidated statements of operations. As of September 30, 2017, unrecognized share-based compensation cost relating to granted share options amounted to $274, which are expected to be recognized over a weighted average period of 2.2 years.

Restricted stock units and restricted stock

Details of unvested RSUs and restricted stock activity during the nine months ended September 30, 2017 were as follows:

 

 

The Company recognized share-based compensation (included in sales and marketing expenses, and general and administrative expenses in the condensed consolidated statements of operations, and intangible assets in the condensed consolidated balance sheets) for these RSUs and restricted stock of $11,461 and $7,615 for the three months ended September 30, 2017 and 2016, respectively, and $28,613 and $22,561 for the nine months ended September 30, 2017 and 2016, respectively. The fair value of the RSUs and restricted stock was estimated using the market value of the Company’s common stock on the date of grant, which was equivalent to the closing price of the common stock on the grant date.

As of September 30, 2017, unrecognized share-based compensation expenses associated with the granted RSUs and restricted stock amounted to $59,625, which are expected to be recognized over a weighted average period of 1.9 years.

Shares issued to third-party vendors

The Company issues shares to certain third-party vendors from time to time in lieu of cash for services rendered. Stock compensation expenses for shares issued to third-party vendors of $0 and $37 for the three months ended September 30, 2017 and 2016, respectively, and $0 and $166 for the nine months ended September 30, 2017 and 2016, respectively, were recognized in general and administrative expenses.

The share-based compensation expenses for the Company’s share options, RSUs and common stock were allocated to the following accounts in the condensed consolidated financial statements for the three and nine months ended September 30, 2017 and 2016:

 

 

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9. Segment information

The Company currently manages its operations in two reportable segments, Information Services and Performance Marketing. The segments reflect the way the Company evaluates its business performance and manages its operations.

Information regarding our Information Services and Performance Marketing segments is as follows:

 

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A reconciliation of loss from operations from segments to loss before income taxes for the periods presented is as follows:

 

Revenue by geography is based on the location of the customers. The following table sets forth revenue by geographic areas:

 

 

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10. Related party transactions

For the three and nine months ended September 30, 2017 and 2016, material related party transactions were as follows:

Promissory Notes

On December 8, 2015, the Company entered into the Promissory Notes with certain investors, for an aggregate financing of $10.0 million, pursuant to which the Company received $5.0 million from Frost Gamma, $4.0 million from Michael Brauser, and $1.0 million from another investor. As of September 30, 2017, the principal, plus accrued PIK interest, of such Promissory Notes, owing to Frost Gamma, Michael Brauser and such other investor, were $5,437, $4,349, and $1,087, respectively. During the nine months ended September 30, 2017, the Company repaid $533, $426, and $107 to Frost Gamma, Michael Brauser and another investor, respectively. See Note 5, “Long-term debt, net,” for details.

Conversion of Series B Preferred

On February 22, 2016, the Company’s Series B Preferred, 450,962 shares in total, including 141,430 shares previously issued to Frost Gamma in relation to certain financial arrangements, and 156,544 and 105,704 shares previously issued to Ryan Schulke, Chief Executive Officer of Fluent, and Matthew Conlin, President of Fluent, respectively, in connection with the Fluent Acquisition, automatically converted into the Company’s common stock, by multiplying each such share of Series B Preferred by 50.

Earn-out Shares

On March 11, 2016, the Company issued 900,108 common earn-out shares to Frost Gamma, and 1,800,220 Series A earn-out shares to certain investors (which were converted to 1,800,220 shares of common stock in March 2016), including 567,069 shares to Grander Holdings, Inc. 401K, an entity owned by Michael Brauser, upon a Board of Directors determination that certain financial targets had been achieved as set forth in the merger agreement of the TBO Merger effective on March 21, 2015. 

Business Consulting Agreement

Marlin Capital holds RSUs representing the right to receive 2,000,000 shares of the Company’s common stock. These RSUs vest annually beginning from October 13, 2015 only if certain performance goals of the Company are met. The shares underlying such RSUs will not be delivered until October 13, 2018, unless there is a change of control of the Company. Share-based compensation expenses of $315 and $315 for the three months ended September 30, 2017 and 2016, respectively, and $937 and $937 for the nine months ended September 30, 2017 and 2016, respectively, associated with shares under the Marlin Capital agreement, were recognized, respectively. See Note 8, “Share-based payments,” for details.

Others

Effective on August 1, 2015, the Company entered into a consulting agreement with DAB Management Group Inc. (“DAB”) for DAB to provide consulting services related to business development, future acquisitions and strategic transactions for a term of six months, and shall automatically renew for additional six-month periods, unless either party provides written notice to the other of its intent not to renew not fewer than 30 days prior to the expiration of the then current term (the “DAB Agreement”). DAB is owned by Daniel Brauser, a director of the Company at the time the DAB Agreement was entered into and the son of Michael Brauser, our Chairman. Under the DAB Agreement, the consulting service fee is $20 per month. The Company recognized consulting service fee of $60 each for the three months ended September 30, 2017 and 2016, and $180 each for the nine months ended September 30, 2017 and 2016.

In October 2015, the Company entered into a Non-Exclusive Aircraft Dry Lease Agreement with Brauser Aviation, LLC, an affiliated entity of our Chairman, to pay a set hourly rate for Company-related usage of the aircraft. The Company recognized aircraft lease fee of $0 and $58 for the three months ended September 30, 2017 and 2016, respectively, and $27 and $168 for the nine months ended September 30, 2017 and 2016, respectively.

On September 6, 2017, the Company entered into the Consulting Agreement with Mike Brauser, effective on June 23, 2017, for a term of four years, under which, Mr. Brauser will serve as a strategic advisor to cogint but will receive no salary for such services. In consideration for Mr. Brauser’s services, the Consulting Agreement provides for continued vesting on all outstanding RSUs granted to Mr. Brauser before the effective date of the Consulting Agreement. See Note 8, “Share-based payments,” for details.

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11. Commitments and contingencies

(a) Capital commitment

The Company incurred data costs of $1,179 and $874 for the three months ended September 30, 2017 and 2016, respectively, and $3,400 and $2,757 for the nine months ended September 30, 2017 and 2016, respectively, under certain non-cancellable data licensing agreements. As of September 30, 2017, material capital commitments under non-cancellable data licensing agreements were $24,321, shown as follows:

 

 

(b) Contingency

On July 22, 2017, the Company entered in a settlement agreement with TransUnion and TransUnion Risk and Alternative Data Solutions, Inc. (“TRADS”), settling all litigation with TransUnion and TRADS. Company subsidiary, IDI Holdings, LLC (“IDI Holdings”), will pay $7,000 to TRADS over the course of one year to settle all matters (the “TRADS Litigation Settlement”). The terms of the settlement agreement are confidential. The Company recorded the expense of $7,000 in general and administrative expenses during the three months ended June 30, 2017. As of September 30, 2017, the remaining unpaid balance of $5,000 was reflected in accrued expenses and other current liabilities in the condensed consolidated balance sheet. For a description of the legal proceedings settled in the TRADS Litigation Settlement, see Part I, Item 3 of the Company’s 2016 Form 10-K and Part II, Item 1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.

Following the TRADS Litigation Settlement, 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 such 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, we 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.

12. Business Combination Agreement

On September 6, 2017, the Company entered into a Business Combination Agreement (the “Business Combination Agreement”) with BlueFocus International Limited (“BlueFocus”), a private company limited by shares registered in Hong Kong. Under the terms of the Business Combination Agreement, the Company will issue to BlueFocus shares of the Company’s common stock, representing 63% of the Company’s common stock on a fully diluted, post-transaction basis (the “Purchased Shares”). In consideration of the Purchased Shares, BlueFocus will contribute to the Company (i) all of the issued and outstanding membership interests, shares of capital stock, and/or other equity interests of certain entities (the “Contributed Entities”), (ii) $100.0 million in cash (the “Cash Consideration”) and if applicable, certain net working capital adjustments, and (iii) repay, assume, or refinance indebtedness for borrowed money of the Company as of the Closing (as defined below). We refer to the issuance of the Purchased Shares in consideration of the contribution of the Contributed Entities and the Cash Consideration, together with the Cash Dividend hereinafter described, as the “Business Combination Transaction.”

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As a condition to closing the Business Combination Transaction (the “Closing”), immediately before Closing, cogint will contribute its data and analytics operations and assets (the “IDI Business”) into its wholly-owned subsidiary, Red Violet, Inc. (“Red Violet”). The shares of Red Violet will be distributed as a stock dividend (the “Spin-Off”) to cogint stockholders of record as of the record date (the “Record Date”) and to holders of derivative securities who are entitled to participate in such a dividend in accordance with the terms of their securities. Before the Company effects the Spin-Off, Red Violet will file with the SEC a Registration Statement on Form 10 (the “Form 10”), registering under the Securities Exchange Act of 1934, the shares of Red Violet to be distributed in the Spin-Off. As a result, upon completion of the Spin-Off, cogint stockholders will hold shares of two public companies, cogint and Red Violet. We expect cogint common stock to continue trading on the NASDAQ Stock Market (the “NASDAQ”) and we intend to apply for listing the Red Violet shares on NASDAQ.

The Cash Consideration, after deductions for certain transaction expenses and an amount up to $20.0 million to capitalize Red Violet at the time of the Spin-Off, will be distributed pro rata as a cash dividend or payment (the “Cash Dividend”) to the holders of cogint common stock and the holders of certain warrants of the Company. The Cash Dividend is contingent on Closing.

Before the Record Date, cogint expects to accelerate the vesting of all outstanding RSUs and deliver all shares of common stock underlying such RSUs so that such shares will participate in the Spin-Off and Cash Dividend pro rata.  Also, before the Record Date, cogint expects to vest all outstanding stock options, and any options not exercised before the Record Date will terminate on the Record Date, except for options issued under the 2015 Plan, which will terminate immediately before the Closing. Options outstanding but unexercised on the Record Date will not be equitably adjusted in respect of the Spin-off, the Cash Dividend, or otherwise. Shares issued pursuant to any option exercised before the Record Date will participate in the Spin-off and Cash Dividend pro rata.  In addition, before the Record Date, cogint expects to vest all outstanding shares of restricted stock, so that such shares will participate in the Spin-off and Cash Dividend pro rata, and holders of warrants to purchase cogint common stock will participate in the Spin-off and Cash Dividend pro rata, in accordance with the terms of their warrants.

There are certain conditions to the Closing and the other transactions contemplated by the Business Combination Agreement, which include the receipt of the required Company stockholders’ approval, the consent under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) and the Committee on Foreign Investment in the United States (“CFIUS”) approval, the effectiveness of the Form 10 and consummation of the Spin-Off, the approval by NASDAQ of the listing of the Purchased Shares, and others.

13. Subsequent events

Intracoastal and Anson Warrant Amendments

On October 17, 2017, the Company entered into certain amendment agreements (collectively, the “Intracoastal and Anson Warrant Amendments”) with warrant holders, representing a total of 861,769 warrants to purchase the Company’s common stock, previously granted to Intracoastal Capital, LLC (“Intracoastal”) and Anson Investments Master Fund LP (“Anson”). Pursuant to the Warrant Amendments, the Company agreed to reduce the exercise price of all common stock warrants described above to $3.00 per share, and Intracoastal and Anson separately agreed to exercise all common stock warrants held by them. The proceeds from the exercise were approximately $2.6 million, which were received in October 2017.

The Intracoastal and Anson Warrant Amendments also provide that the Company deliver to each of Anson and Intracoastal an additional warrant for common stock equal to 25% of the number of shares exercised, at an exercise price of $5.35 per share (collectively, the “Additional Warrants”). The Additional Warrants provided to Intracoastal and Anson are exercisable into 184,193 shares and 31,250 shares of common stock, respectively. The Additional Warrants are exercisable from the date of issuance and expire on the earlier of the close of business on the two-year anniversary of (i) the date the registration statement registering the resale of the underlying shares is declared effective by the SEC, or (ii) the commencement date that such Additional Warrant may be exercised by means of a “cashless exercise.” These Additional Warrants do not participate in the Cash Dividend or Spin-Off of the Business Combination Transaction.

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Whitehorse Warrant Amendments

On November 3, 2017, the Company entered into warrant amendments (the "Whitehorse Warrant Amendments") with H.I.G. Whitehorse SMA ABF, L.P., H.I.G. Whitehorse SMA Holdings I, LLC and Whitehorse Finance, Inc., regarding an aggregate of 300,000 Whitehorse Warrants to purchase the Company’s common stock (the “Whitehorse Shares”), at an original exercise price of $5.0829 per share. Pursuant to the Whitehorse Warrant Amendments, the Company agreed to reduce the exercise price of all common stock warrants described above to $3.00 per share, and each warrant holder set forth above separately agreed to exercise all common stock warrants held by them within 30 days. Pursuant to the terms of the Whitehorse Warrant Amendments, the warrant holders are prohibited from engaging or otherwise agreeing to any sale, pledge, or other transfer of the Whitehorse Shares for a period of 120 days (the “Whitehorse Lock-Up Period”) following the exercise of such warrants in full. Following the Whitehorse Lock-Up Period, (i) the warrant holders may only sell such number of shares underlying the warrants representing up to 5% of the Company’s daily trading volume on the immediately prior trading day prior to a sale and (ii) the warrant holders may not transfer any of the Whitehorse Shares for less than $4.50 per share, provided that the warrant holders may not transfer any Whitehorse Shares unless the Company has an effective registration statement permitting the resale of the Whitehorse Shares. Provided that such warrant holders have exercised the Whitehorse Warrants, upon either the Record Date or the termination of the Business Combination Agreement, such warrant holders can require the Company to purchase from them all the Whitehorse Shares at a price of $4.50 per share.

Acquisition consideration payable in stock

In relation to the Q Interactive Acquisition, Selling Source, LLC (“Selling Source”), the seller, was entitled to receive additional consideration as it was concluded that the earn-out target (the “Q Interactive Earn-out Target”) specified in the purchase agreement had been met. As of September 30, 2017 and December 31, 2016, after certain measurement period adjustments, the net balance of acquisition consideration payable in stock of $10,225 was recognized. We used the probability-weighted method to determine the fair value of the acquisition consideration payable in stock, and this fair value assessment represents Level 3 measurements. It is classified as a non-current liability in the condensed consolidated balance sheets because this liability will be settled with the Company’s common stock. On November 3, 2017, the Company issued a total of 2,750,000 shares of common stock to settle the acquisition consideration payable in stock.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Executive Overview

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. This Quarterly Report on 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. These factors include those contained in this Quarterly Report on Form 10-Q, as well as the disclosures made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed on March 14, 2017 (“2016 Form 10-K”), and other filings we make with the Securities and Exchange Commission (the “SEC”). 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.

Overview

Cogint, Inc. (“we,” “us,” “our,” “cogint,” or the “Company”), a Delaware corporation, is a data and analytics company providing cloud-based mission-critical information and performance marketing solutions to enterprises in a variety of industries. cogint’s mission is to transform data into intelligence utilizing our proprietary technology platforms to solve complex problems for our clients. Harnessing the power of data fusion and powerful analytics, we transform data into intelligence, in a fast and efficient manner, so that our clients can spend their time on what matters most, running their organizations with confidence. Through our intelligent platforms, CORE^TM and Agile Audience Engine^TM, we uncover the relevance of disparate data points to deliver end-to-end, ROI-driven results for our customers. Our analytical capabilities enable us to build comprehensive datasets in real-time and provide insightful views of people, businesses, assets and their interrelationships. We empower clients across markets and industries to better execute all aspects of their business, from managing risk, identifying fraud and abuse, ensuring legislative compliance, and debt recovery, to identifying and acquiring new customers. With the goal of reducing the cost of doing business and enhancing the consumer experience, our solutions enable our clients to optimize overall decision-making and to have a holistic view of their customers.

We provide unique and compelling solutions essential to the daily workflow of organizations within both the public and private sectors. Our cloud-based data fusion and customer acquisition technology platforms, combined with our massive database consisting of public-record, proprietary and publicly-available data, as well as a unique repository of self-reported information on millions of consumers, enables the delivery of differentiated products and solutions used for a variety of essential functions throughout the customer life cycle. These essential functions include customer identification and authentication, investigation and validation, and customer acquisition and retention.

The Company operates through two reportable segments: (i) Information Services and (ii) Performance Marketing.

Information Services—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 and consumer marketing industries. 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, our Information Services segment uses 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 and financial services companies, insurance companies, healthcare companies, law enforcement and government, the collection industry, law firms, retail, telecommunications companies, corporate security and investigative firms. In addition, our data acquisition solutions enable clients to rapidly grow their customer databases by using self-declared consumer insights to identify, connect with, and acquire first-party consumer data and multi-channel marketing consent at massive scale.

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Built in a secure Payment Card Industry (PCI) compliant environment, our cloud-based next generation technology delivers greater than four 9s of service uptime. By leveraging our proprietary infrastructure design within the cloud, we currently operate in six datacenters spread geographically across the U.S. and are able to dynamically and seamlessly scale as needed. Using our intelligent framework and leveraging a micro services 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 platform in May 2016, we have added billions of data records and continue to add approximately 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.

Performance Marketing—Our Agile Audience Engine drives our Performance Marketing segment, which provides solutions to help brands, advertisers and marketers find the right customers in every major business-to-consumer (B2C) vertical, including internet and telecommunications, financial services, health and wellness, consumer packaged goods, career and education, and retail and entertainment. We deterministically target consumers across various marketing channels and devices, through the user- supplied acquisition of personally identifiable information on behalf of our clients, such as email addresses, other identifying information and responses to dynamically-populated survey questions. Additionally, 80% of our consumer interaction comes from mobile, a highly-differentiated characteristic compared to our competitors whose platforms are not mobile-first.

We own hundreds of media properties, through which we engage millions of consumers everyday with interactive content, such as job postings, cost savings, surveys, promotions and sweepstakes that generate on average over 850,000 consumer registrations and over 8.8 million compiled survey responses daily, with a recent record high of over 1.0 million registrations and over 10.3 million compiled survey responses in a single day. Our owned media properties alone have created a database of approximately 130 million U.S. adults with detailed profiles, including 224 million unique email addresses, across over 75 million households. With meaningful, people-based interaction that focuses on consumer behavior and declared first-party data, leveraged on a mobile-centric platform that provides seamless omni-channel capabilities, we have the ability to target and develop comprehensive consumer profiles that redefine the way advertisers view their most valuable customers.

In order for the Company to continue to develop new products, grow its 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 continue to build out our sales organization to drive current products and to introduce new products into the market place. We will incur increased compensation expenses for our sales and marketing, executive and administrative, and infrastructure related persons as we increase headcount in the next 12 months.

Business Combination Agreement

On September 6, 2017, the Company entered into a Business Combination Agreement (the “Business Combination Agreement”) with BlueFocus International Limited (“BlueFocus”), a private company limited by shares registered in Hong Kong. Under the terms of the Business Combination Agreement, the Company will issue to BlueFocus shares of the Company’s common stock, representing 63% of the Company’s common stock on a fully diluted, post-transaction basis (the “Purchased Shares”). In consideration of the Purchased Shares, BlueFocus will contribute to the Company (i) all of the issued and outstanding membership interests, shares of capital stock, and/or other equity interests of certain entities (the “Contributed Entities”), (ii) $100.0 million in cash (the “Cash Consideration”) and if applicable, certain net working capital adjustments, and (iii) repay, assume, or refinance indebtedness for borrowed money of the Company as of the Closing (as defined below). We refer to the issuance of the Purchased Shares in consideration of the contribution of the Contributed Entities and the Cash Consideration, together with the Cash Dividend hereinafter described, as the “Business Combination Transaction.”

As a condition to closing the Business Combination Transaction (the “Closing”), immediately before Closing, cogint will contribute its data and analytics operations and assets (the “IDI Business”) into its wholly-owned subsidiary, Red Violet, Inc. (“Red Violet”). The shares of Red Violet will be distributed as a stock dividend (the “Spin-Off”) to cogint stockholders of record as of the record date (the “Record Date”) and to holders of derivative securities who are entitled to participate in such a dividend in accordance with the terms of their securities. Before the Company effects the Spin-Off, Red Violet will file with the SEC a Registration Statement on Form 10 (the “Form 10”), registering under the Exchange Act, the shares of Red Violet to be distributed in the Spin-Off. As a result, upon completion of the Spin-Off, cogint stockholders will hold shares of two public companies, cogint and Red Violet. We expect cogint common stock to continue trading on the NASDAQ Stock Market (the “NASDAQ”) and we intend to apply for listing the Red Violet shares on NASDAQ.

The Cash Consideration, after deductions for certain transaction expenses and an amount up to $20.0 million to capitalize Red Violet at the time of the Spin-Off, will be distributed pro rata as a cash dividend or payment (the “Cash Dividend”) to the holders of company common stock and the holders of certain warrants of the Company. The Cash Dividend is contingent on Closing.

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Before the Record Date, cogint expects to accelerate the vesting of all outstanding RSUs and deliver all shares of common stock underlying such RSUs so that such shares will participate in the Spin-Off and Cash Dividend pro rata.  Also, before the Record Date, cogint expects to vest all outstanding stock options, and any options not exercised before the Record Date will terminate on the Record Date, except for options issued under the 2015 Plan, which will terminate immediately before the Closing. Options outstanding but unexercised on the Record Date will not be equitably adjusted in respect of the Spin-off, the Cash Dividend, or otherwise. Shares issued pursuant to any option exercised before the Record Date will participate in the Spin-off and Cash Dividend pro rata.  In addition, before the Record Date, cogint expects to vest all outstanding shares of restricted stock, so that such shares will participate in the Spin-off and Cash Dividend pro rata, and holders of warrants to purchase cogint common stock will participate in the Spin-off and Cash Dividend pro rata, in accordance with the terms of their warrants.

There are certain conditions to the Closing and the other transactions contemplated by the Business Combination Agreement, which include the receipt of the required Company stockholders’ approval, the consent under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) and the Committee on Foreign Investment in the United States (“CFIUS”) approval, the effectiveness of the Form 10 and consummation of the Spin-Off, the approval by NASDAQ of the listing of the Purchased Shares, and others.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon cogint’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). The preparation of these financial statements requires cogint to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, cogint evaluates its estimates, including those related to bad debts, income taxes, and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

For additional information, please refer to our 2016 Form 10-K, filed with the SEC on March 14, 2017. There have been no material changes to Critical Accounting Policies and Estimates disclosed in the 2016 Form 10-K.

Recently issued accounting standards

See Note 1(b), “Recently issued accounting standards,” in the Notes to Condensed Consolidated Financial Statements.

Third Quarter Financial Highlights

For the three months ended September 30, 2017, as compared to the three months ended September 30, 2016:

Third Quarter 2017 and Recent Business Highlights

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Use and Reconciliation of Non-GAAP Financial Measures

 

Management evaluates the financial performance of our business on a variety of key indicators, including adjusted EBITDA.  Adjusted EBITDA is a non-GAAP financial measure equal to net loss, the most directly comparable financial measure based on US GAAP, adding back interest expense, income tax benefit, depreciation and amortization, share-based compensation expense, non-recurring legal and litigation costs, acquisition and restructuring costs, write-off of long-lived assets, and other adjustments, as noted in the tables below.

 

 

We present adjusted EBITDA as a supplemental measure of our operating performance because we believe it provides useful information to our investors as it eliminates the impact of certain items that we do not consider indicative of our cash operations and ongoing operating performance. In addition, we use it as an integral part of our internal reporting to measure the performance of our reportable segments, evaluate the performance of our senior management and measure the operating strength of our business.

 

Adjusted EBITDA is a measure frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies similar to ours and is an indicator of the operational strength of our business. Adjusted EBITDA eliminates the uneven effect across all reportable segments of considerable amounts of non-cash depreciation and amortization, share-based payments and write-off of long-lived assets.

Adjusted EBITDA is not intended to be a performance measure that should be regarded as an alternative to, or more meaningful than, either operating income or net income as indicators of operating performance or to cash flows from operating activities as a measure of liquidity. The way we measure adjusted EBITDA 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.

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Results of Operations

Three and nine months ended September 30, 2017 compared to three and nine months ended September 30, 2016

Revenue. Total revenue increased $5.1 million or 10% to $57.2 million, and $28.4 million or 21% to $161.0 million for the three and nine months ended September 30, 2017, respectively, from $52.2 million and $132.6 million for the three and nine months ended September 30, 2016, respectively. This increase was driven by strong growth in our Information Services segment. Revenue generated from our Information Services segment was $22.8 million and $57.8 million for the three and nine months ended September 30, 2017, respectively, versus $14.8 million and $39.3 million for the three and nine months ended September 30, 2016, respectively. Revenue generated from our Performance Marketing segment was $34.4 million and $103.2 million for the three and nine months ended September 30, 2017, versus $37.4 million and $93.4 million for the three and nine months ended September 30, 2016, respectively.

Gross profit. Gross profit margin was 34% and 32% for the three and nine months ended September 30, 2017, respectively, as compared to 24% and 26% for the three and nine months ended September 30, 2016, respectively. The increase in gross profit margin was mainly attributed to scaling of our Information Services segment, producing higher gross margin relative to the consolidated business.

Historically, the relative mix of revenue derived from our Information Services and Performance Marketing segments produces a consolidated average gross margin between 26% and 32%. At scale, the Information Services segment will trend with average gross margins between 70% and 85%. As a result of our continued focus on scaling the Information Services segment, our consolidated average gross margin has increased to between 30% and 34%. We continue to expect our consolidated gross margin to increase over the next twelve months as our Information Services revenue continues to scale.

As a result of the increase in revenue and gross profit margin, gross profit increased $7.1 million or 56% to $19.6 million for the three months ended September 30, 2017, from $12.5 million for the three months ended September 30, 2016; while gross profit increased $16.6 million or 48% to $51.5 million for the nine months ended September 30, 2017, from $34.9 million for the nine months ended September 30, 2016.

Sales and marketing expenses. Sales and marketing expenses increased $2.6 million or 70% to $6.3 million, and $6.6 million or 66% to $16.6 million for the three and nine months ended September 30, 2017, respectively, from $3.7 million and $10.0 million for the three and nine months ended September 30, 2016, respectively. The increase was mainly the result of increased headcount as we continue to invest in the expansion of our sales organization, increased fulfillment costs, and increased bad debt expenses. Sales and marketing expenses consist of advertising and marketing, salaries and benefits, traveling expenses incurred by our sales team, share-based compensation expenses, provision for bad debts, and fulfillment costs. Included in sales and marketing expenses was non-cash share-based compensation expenses of $0.9 million and $2.4 million for the three and nine months ended September 30, 2017, respectively, as compared to $0.6 and $1.8 million for the three and nine months ended September 30, 2016, respectively.

General and administrative expenses. General and administrative expenses increased $7.8 million or 57% to $21.4 million, and $20.8 million or 52% to $60.9 million for the three and nine months ended September 30, 2017, respectively, from $13.6 million and $40.1 million for the three and nine months ended September 30, 2016, respectively. The increase was mainly the result of increased non-cash share-based payments, employee salaries and benefits, non-recurring legal and litigation costs, and acquisition and restructuring costs. For the three months ended September 30, 2017 and 2016, the amounts consisted mainly of non-cash share-based payments of $10.2 million and $6.7 million, non-recurring legal and litigation costs of $0.3 million and $0.6 million, acquisition and restructuring costs of $2.4 million and $0 million, other professional fees of $0.8 million and $1.0 million, and employee salaries and benefits of $4.2 million and $3.2 million, respectively. For the nine months ended September 30, 2017 and 2016, the amounts consisted mainly of non-cash share-based payments of $25.3 million and $20.2 million, non-recurring legal and litigation costs of $9.2 million, including $7.0 million in connection with the TRADS Litigation Settlement, and $1.4 million, acquisition and restructuring costs of $4.8 million and $0.4 million, other professional fees of $2.2 million and $3.8 million, and employee salaries and benefits of $11.7 million and $8.4 million, respectively. The Company expects a significant reduction in litigation costs going forward.

Depreciation and amortization. Depreciation and amortization expenses increased $0.1 million or 2% to $3.6 million, and $1.3 million or 15% to $10.5 million for the three and nine months ended September 30, 2017, respectively, from $3.5 million and $9.1 million for the three and nine months ended September 30, 2016, respectively. For the nine months ended September 30, 2017, the increase in depreciation and amortization was mainly due to the amortization of intangible assets resulting from the Q Interactive Acquisition effective on June 8, 2016 and the launch of software developed for internal use in the second quarter of 2016.

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Write-off of long-lived assets. During the nine months ended September 30, 2017, as a result of the Q Interactive Integration, we wrote off $3.6 million, primarily relating to the remaining balance of the acquired proprietary technology and trade names, acquired in the Q Interactive Acquisition. We included it in the operating expenses as a write-off of long-lived assets. During the nine months ended September 30, 2016, the write-off of intangible assets of $4.1 million represented the write-off of the remaining balance of the intellectual property pursuant to the Intellectual Property Purchase Agreement dated October 14, 2014 (“Purchased IP”) and capitalized litigation costs as a result of an unfavorable ruling in relation to the Purchased IP litigation.

Interest expense, net. Interest expense, net, represented the interest expense and amortization of debt issuance costs associated with (i)  the term loan in the amount of $45.0 million (“Term Loan”) pursuant to a credit agreement entered in December 2015 (“Credit Agreement”), (ii) promissory notes payable to certain stockholders in the amount of $10 million (“Promissory Notes”) pursuant to agreements with certain stockholders in December 2015, and (iii) the incremental term loan in the amount of $15.0 million (“Incremental Term Loan”, together with Term Loan, collectively, “Term Loans”), pursuant to the amendment No. 3 to the Credit Agreement effective in January 2017 (the “Amendment No. 3”). Interest expense, net, increased $0.5 million or 29% to $2.4 million, and $1.5 million or 28% to $7.1 million for the three and nine months ended September 30, 2017, respectively, from $1.9 million and $5.6 million for the three and nine months ended September 30, 2016, respectively. The increase was mainly attributable to the addition of the Incremental Term Loan. The long-term debt balance, including the current portion of long-term debt and net of unamortized debt issuance costs, was $62.8 million as of September 30, 2017.

Loss before income taxes. For the three months ended September 30, 2017 and 2016, we had a loss before income taxes of $14.1 million and $14.2 million, including non-cash share-based payments of $11.1 million and $7.3 million, depreciation and amortization of $3.6 million and $3.5 million, non-recurring legal and litigation costs of $0.3 million and $0.6 million, acquisition and restructuring costs of $2.5 million and $0, and one-time write-off of long-lived assets of $0 and $4.1 million, respectively. For the nine months ended September 30, 2017 and 2016, we had a loss before income taxes of $47.2 million and $35.2 million, including non-cash share-based payments of $27.7 million and $21.9 million, depreciation and amortization of $10.5 million and $9.1 million, non-recurring legal and litigation costs of $9.2 million and $1.5 million, acquisition and restructuring costs of $4.8 million and $0.4 million, one-time write-off of long-lived assets of $3.6 million and $4.1 million, and non-cash loss on exchange of warrants of $0 and $1.3 million, respectively.

Income taxes. Income tax benefit of $0 was recognized for the three and nine months ended September 30, 2017, as compared to $4.5 million and $11.5 million for the three and nine months ended September 30, 2016, respectively. A full valuation allowance on the net deferred tax assets was recognized for the three and nine months ended September 30, 2017. See Note 6, “Income Taxes,” for details.

Net loss. A net loss of $14.1 million and $47.2 million was recognized for the three and nine months ended September 30, 2017, respectively, as compared to $9.7 million and $23.7 million for the three and nine months ended September 30, 2016, respectively, 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 in) provided by operating activities. For the nine months ended September 30, 2017, net cash used in operating activities was $2.9 million, which was mainly the result of the operating loss of $0.8 million, after the adjustments of non-cash items of $46.4 million. For the nine months ended September 30, 2016, net cash provided by operating activities was $4.4 million, which was mainly the result of the operating income $3.6 million, after the adjustments of non-cash items of $27.3 million.

Cash flows used in investing activities. Net cash used in investing activities for the nine months ended September 30, 2017 and 2016 was $6.7 million and $9.5 million, respectively, which was mainly due to capitalized costs included in intangible assets of $5.5 million and $8.0 million, for the corresponding periods, respectively.

Cash flows provided by financing activities. Net cash provided by financing activities for the nine months ended September 30, 2017 was $9.8 million, which was mainly the result of net proceeds from the Incremental Term Loan of $14.0 million in February 2017, partially offset by repayments of long-term debt of $3.5 million. Net cash provided by financing activities for the nine months ended September 30, 2016 was $2.0 million, which was mainly due to the net proceeds from the registered direct offering of $4.7 million in May 2016, partially offset by the repayments of long-term debt of $1.7 million.

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As of September 30, 2017, the Company had material commitments under non-cancellable data licensing agreements of $24.3 million. For the nine months ended September 30, 2017, the Company funded its operations using available cash and proceeds from the Incremental Term Loan.

The Company reported net loss of $14.1 million and $47.2 million for the three and nine months ended September 30, 2017, respectively, as compared to $9.7 million and $23.7 million for the three and nine months ended September 30, 2016, respectively. As of September 30, 2017, the Company had an accumulated deficit of $161.5 million.

As of September 30, 2017, the Company had cash and cash equivalents of approximately $10.3 million, of which, $9.4 million was held by Fluent, an increase of $0.2 million from $10.1 million as of December 31, 2016. A portion of this cash held by Fluent may be used by Fluent only for general operating purposes. Based on projections of growth in revenue and operating results in the coming year, the proceeds of $2.6 million from the exercise of certain warrants in October 2017, and other potential financings, the Company believes that it will have sufficient cash resources to finance its operations and expected capital expenditures for the next twelve months. Subject to revenue growth, the Company may have to continue to raise capital through the issuance of additional equity and/or debt, which, if the Company is 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 the Company. If the Company’s operations do not generate positive cash flow in the upcoming year, or if it is not able to meet the debt covenants specified in the Credit Agreement, as amended, 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.

The Company may explore the possible acquisition of businesses, products and/or technologies that are complementary to its existing business. The Company is continuing to identify and prioritize additional technologies, which it may wish to develop internally or through licensing or acquisition from third parties. While the Company may engage from time to time in discussions with respect to potential acquisitions, there can be no assurances that any such acquisitions will be made or that the Company will be able to successfully integrate any acquired business. In order to finance such acquisitions and working capital, it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to stockholders.

As of September 30, 2017, we had financed approximately $70.0 million, for the cash portion of the purchase price of the Fluent Acquisition and other general operating purposes, with the proceeds from the Term Loans and Promissory Notes described herein. The Term Loans have an outstanding principal balance, plus paid-in-kind (“PIK”) interest, of $56.2 million, and the Promissory Notes have an outstanding principal balance, plus PIK interest, of $10.9 million. All obligations under the Term Loans mature on December 8, 2020 and our Promissory Notes are due six months after payment in full of our Term Loans. The Credit Agreement governing the Term Loans contains restrictive covenants which impose limitations on the way we conduct our business, including limitations on the amount of additional debt we are able to incur and restricts our ability to make certain investments and other restricted payments, including certain intercompany payments of cash and other property. The restrictive covenants in the Credit Agreement, as amended, may limit our strategic and financing options and our ability to return capital to our stockholders through dividends or stock buybacks. Furthermore, we still may need to incur additional debt to meet future financing needs.

The Term Loans are guaranteed by the Company and the other direct and indirect subsidiaries of the Company, and are secured by substantially all of the assets of the Company and its direct and indirect subsidiaries, including Fluent, in each case, on an equal and ratable basis. The Term Loans accrue interest at the rate of: (a) either, at Fluent's option, LIBOR (subject to a floor of 0.50%) plus 10.5% per annum, or base rate plus 9.5% per annum, payable in cash, plus (b) 1% per annum, payable, at Fluent's option, in either cash or in-kind. Principal amortization of the Term Loans is $0.7 million per quarter, payable at the end of each calendar quarter, which commenced on March 31, 2017. The Term Loans mature on December 8, 2020.

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The Credit Agreement, as amended, requires us to maintain and comply with certain financial and other covenants. We cannot assure you that we will be able to maintain compliance with such financial or other covenants. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness, which would materially adversely affect our financial health if we are unable to access sufficient funds to repay all the outstanding amounts. Moreover, if we are unable to meet our debt obligations as they come due, we could be forced to restructure or refinance such obligations, seek additional equity financing or sell assets, which we may not be able to do on satisfactory terms, or at all. In addition, the Credit Agreement includes certain mandatory prepayment provisions, including annual prepayments of the Term Loans with a portion of our excess cash flow. As long as the Term Loans remain outstanding, the restrictive covenants and mandatory prepayment provisions could impair our ability to expand or pursue our business strategies or obtain additional funding. On August 7, 2017, the Company and its subsidiaries entered into Amendment No. 4 to the Credit Agreement (“Amendment No. 4”). Amendment No. 4 provides that there shall be no requirement that the Company and its subsidiaries meet any minimum EBITDA threshold for the twelve-month period ended June 30, 2017. The requirement that Fluent and its subsidiaries meet the required minimum EBITDA threshold for the twelve-month period ended June 30, 2017 was not impacted by Amendment No. 4. As of June 30, 2017, the Company was in compliance with the covenants under the Credit Agreement, after giving effect to Amendment No. 4. On November 3, 2017, the Company and its subsidiaries entered into Amendment No. 5 to the Credit Agreement (“Amendment No. 5”). Amendment No. 5 provides for certain amendments to the definition of EBITDA by adding back acquisition and restructuring costs resulting from the Business Combination Transaction, and non-recurring costs relating to litigation with TRADS that we settled on July 22, 2017. Amendment No. 5 also amends the minimum EBITDA threshold for the Company and its subsidiaries beginning with the quarter ended September 30, 2017. In addition, Amendment No. 5 allows for additional transfer of cash from Fluent to the Company, provided that Fluent maintains a minimum cash balance. As of September 30, 2017, the Company was in compliance with the covenants under the Credit Agreement, after giving effect to Amendment No. 5.

Contractual Obligations

As of September 30, 2017, the Company has the following future contractual obligations:

 

The lease agreements represent future minimum rental payments under non-cancellable operating leases having initial or remaining lease terms of more than one year. The data licensing agreements of $24.3 million represent material data purchase commitments under non-cancellable data licensing agreements. Debt of $92.5 million represents the payment of principal and interest of the Term Loans and Promissory Notes. Acquisition consideration payable in stock mainly represents the fair value of earn-out shares associated with the Q Interactive Acquisition, payable in 2017. Litigation settlement represents payments, over the course of one year, in connection with the TRADS Litigation Settlement. Employment agreements represent related agreements reached with certain executives, including our Chief Executive Officer and Chief Financial Officer, etc., which provide for compensation and certain other benefits and for severance payments under certain circumstances. The total future contractual obligations as of September 30, 2017 increased by $28.1 million from December 31, 2016, which was primarily due to the increase in data licensing agreements of $7.6 million, debt of $12.7 million, and litigation settlement of $5.0 million.

Off-Balance Sheet Arrangements

As of September 30, 2017, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk for the effect of interest rate changes. To date, we have not used derivative instruments to mitigate the impact of our market risk exposures. We have also not used, nor do we intend to use, derivatives for trading or speculative purposes.

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Interest Rate Risk

We are exposed to market risk related to changes in interest rates. Our investments are considered cash equivalents and primarily consist of money market mutual funds. As of September 30, 2017, we had cash and cash equivalents of $10.3 million. The carrying amount of our cash and cash equivalents reasonably approximates fair value, due to the fact that we can redeem such investment freely. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

As of September 30, 2017, we have the principal amount of long-term debt, plus PIK interest, in the aggregate of $67.1 million, including current portion of long-term debt. Our Term Loans accrue interest at LIBOR (with a floor of 0.5%) plus 10.5% per annum, payable in cash, plus an additional 1.0% per annum payable, at Fluent’s election, in-kind or in cash. Interest under the Term Loans is payable monthly, including monthly compounding of PIK interest. Our Promissory Notes have a rate of interest of 10% per annum, which interest is capitalized monthly by adding to the outstanding principal amount of such Promissory Notes. The fair value of our debt will generally fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest.

A hypothetical 10% increase in interest rates relative to our current interest rates would not have a material impact on the fair value of all of our outstanding long-term debt, net. Changes in interest rates would, however, affect operating results and cash flows, because of the variable rate nature of the Term Loans. A hypothetical 10% increase or decrease in overall interest rates as of September 30, 2017 would result in an impact to interest expense for the next twelve months by $0.8 million.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2017. 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 Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

On July 22, 2017, the Company entered in a settlement agreement with TransUnion and TransUnion Risk and Alternative Data Solutions, Inc. (“TRADS”), settling all litigation with TransUnion and TRADS. Company subsidiary, IDI Holdings, LLC (“IDI Holdings”), will pay $7.0 million to TRADS over the course of one year to settle all matters (the “TRADS Litigation Settlement”). The terms of the settlement agreement are confidential. The Company recorded an expense of $7.0 million in general and administrative expenses during the three months ended June 30, 2017. For a description of the legal proceedings settled in the TRADS Litigation Settlement, see Part I, Item 3 of the Company’s 2016 Form 10-K and Part II, Item 1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.

Following the TRADS Litigation Settlement, 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 such 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, we 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.

Item 1A. Risk Factors.

Our business, financial condition, operating results, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our Annual Report on 10-K for the year ended December 31, 2016 (“2016 Form 10-K”), filed on March 14, 2017, the occurrence of any one of which could have a material adverse effect on our actual results.

There have been no material changes to the Risk Factors previously disclosed in our 2016 Form 10-K.

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.

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Item 5. Other Information.

Amendment No. 5

On November 3, 2017, the Company and its subsidiaries entered into Amendment No. 5 to the Credit Agreement (“Amendment No. 5”). Amendment No. 5 provides for certain amendments to the definition of EBITDA by adding back acquisition and restructuring costs resulting from the potential business combination transaction pursuant to the Business Combination Agreement entered into on September 6, 2017, and non-recurring costs relating to litigation with TransUnion Risk and Alternative Data Solutions, Inc. that we settled on July 22, 2017. Amendment No. 5 also amends the minimum EBITDA threshold for the Company and its subsidiaries beginning with the quarter ended September 30, 2017. In addition, Amendment No. 5 allows for additional transfer of cash from Fluent, LLC to the Company, provided that Fluent maintains a minimum cash balance. As of September 30, 2017, the Company was in compliance with the covenants under the Credit Agreement, after giving effect to Amendment No. 5.

Amendment No. 5 is filed as Exhibits 10.9 to this quarterly report on Form 10-Q and incorporated herein by reference.

Whitehorse Warrant Amendments

On November 3, 2017, the Company entered into warrant amendments (the "Whitehorse Warrant Amendments") with (i) H.I.G. Whitehorse SMA ABF, L.P. regarding 46,667 warrants to purchase common stock of the Company, par value $0.0005 per share, at an exercise price of $5.0829 per share; (ii) H.I.G. Whitehorse SMA Holdings I, LLC regarding 66,666 warrants to purchase common stock of the Company at an exercise price of $5.0829 per share; and (iii) Whitehorse Finance, Inc. regarding 186,667 warrants to purchase common stock of the Company at an exercise price of $5.0829 per share; pursuant to which the Company agreed to reduce the exercise price of all common stock warrants described above to $3.00 per share, and each warrant holder set forth above separately agreed to exercise all common stock warrants held by them within 30 days. Pursuant to the terms of the Whitehorse Warrant Amendments, the warrant holders are prohibited from engaging or otherwise agreeing to any sale, pledge, or other transfer of the shares of common stock underlying the warrants for a period of 120 days following the exercise of such warrants in full (the “Whitehorse Lock-Up Period”). Following the Whitehorse Lock-Up Period, (i) the warrant holders may only sell such number of shares underlying the warrants representing up to 5% of the Company’s daily trading volume on the immediately prior trading day prior to a sale and (ii) the warrant holders may not transfer any of the shares underlying the warrants for less than $4.50 per share, provided that the warrant holder may not transfer any shares underlying the warrants unless the Company has an effective registration statement permitting the resale of the shares underlying the warrants.

The Company has also agreed to register the resale of the shares underlying the warrants, if exercised in full as set forth in the Whitehorse Warrant Amendments, during the Whitehorse Lock-Up Period. The issuance of the shares of such common stock upon exercise of the above-described warrants is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”), in accordance with Section 4(a)(2) of the Act, as a transaction by an issuer not involving a public offering.

The description of the Whitehorse Warrant Amendments does not purport to be complete and is qualified in its entirety by reference to each respective Whitehorse Warrant Amendment, which are filed as Exhibits 4.6, 4.7, and 4.8 to this quarterly report on Form 10-Q and incorporated herein by reference.

Acquisition consideration payable in stock

On November 3, 2017, in connection with the terms of that certain Membership Interest Purchase Agreement (the “Purchase Agreement”) entered into on June 8, 2016 between the Company and Selling Source, LLC (“Selling Source”) pursuant which Selling Source sold to the Company all of Selling Source’s right, title, and interest in all of the issued and outstanding membership interests in Q Interactive, LLC, the Company issued 2,750,000 shares (the “Shares”) of the Company’s common stock, representing the earn-out shares and certain other adjustments, including the monetized shares and the net working capital adjustment.

Within 10 business days following the issuance of the Shares, the Company shall file a registration statement registering the resale of the Shares and shall use commercially reasonable best efforts to cause such registration statement to become effective no later than 30 days thereafter.

The Shares issued in connection with the Purchase Agreement are exempt from the registration requirements of the Act, in accordance with Section 4(a)(2) of the Act, as a transaction by an issuer not involving a public offering.

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Item 6. Exhibits.

 

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

 

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SIGNATURES

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.

 

 

 

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