Red Violet, Inc. annual report, FY2018

Red Violet, Inc. 2018 Form 10-K Summary

Business Context and Reporting Period

Red Violet is a cloud-based software and data analytics company focused on risk management, fraud detection, identity verification, investigations, compliance and debt recovery. Its CORE platform combines proprietary analytics with public, proprietary and self-reported data. The filing covers the fiscal year ended December 31, 2018, including fourth-quarter results. Red Violet completed its spin-off from Fluent, Inc. on March 26, 2018, and began regular-way NASDAQ trading under “RDVT” on March 27, 2018. Pre-spin-off results are presented on a consolidated and combined basis and may not reflect the costs of operating as a standalone company.

Financial Results and Key Metrics

Metric	Q4 2018	Q4 2017	FY 2018	FY 2017
Revenue	$4.7 million	$2.7 million	$16.3 million	$8.6 million
Net loss	$2.0 million	$3.1 million	$6.9 million	$21.5 million
Loss per share	$0.20	$0.31	$0.67	$2.09
Adjusted gross profit	$2.4 million	$0.8 million	$7.7 million	$1.5 million
Adjusted gross margin	51%	31%	47%	18%
Adjusted EBITDA	$(1.0) million	$(2.1) million	$(4.3) million	$(8.3) million

FY 2018 revenue increased 90% to $16.3 million, driven by new customer onboarding and greater usage from existing customers. The core billable customer base increased from 2,703 to 3,627 customers at year-end.
Cost of revenue increased 22% to $8.6 million, but declined to 53% of revenue from 82% in 2017 as revenue grew faster than largely fixed or flat-fee data costs.
Sales and marketing expense increased 8% to $4.8 million as the company expanded its sales organization.
General and administrative expense declined 52% to $8.4 million, primarily because 2017 included $9.2 million of litigation costs related to the TransUnion/TRADS settlement.
Depreciation and amortization increased 75% to $2.0 million, primarily from internally developed software placed into service after 2017.
Operating cash flow remained negative at $(8.1) million, compared with $(10.4) million in 2017. Investing cash flow was $(6.0) million, principally for capitalized internally developed software.
Cash provided by financing activities was $23.9 million, including a $20.0 million cash contribution from Fluent in connection with the spin-off.
Cash and cash equivalents were $10.0 million at December 31, 2018, compared with $65,000 at December 31, 2017. Total shareholders’ equity was $36.3 million.
The filing does not report outstanding borrowings or conventional debt. Total liabilities were $3.5 million, including $2.2 million of accounts payable and $1.3 million of accrued expenses and other current liabilities.
Income tax expense was zero because the company maintained a full valuation allowance against its deferred tax assets. Federal and state net operating loss carryforwards totaled approximately $16.4 million and $8.4 million, respectively.

Material Changes Versus the Prior Comparable Period

Revenue growth accelerated, with annual revenue rising 90% and fourth-quarter revenue rising 74% year over year.
Annual net loss improved by $14.6 million, largely reflecting the absence of the $7.0 million TransUnion/TRADS settlement expense recorded in 2017, lower share-based compensation and stronger gross profit.
Adjusted gross margin expanded by 29 percentage points for the full year and 20 percentage points in the fourth quarter.
Adjusted EBITDA improved by $4.0 million for the full year and $1.1 million in the fourth quarter, but remained negative.
Revenue mix shifted toward recurring or pricing-contract revenue: 58% of 2018 revenue came from pricing contracts versus 36% in 2017; transactional revenue represented the balance.
The company became an independent public company following the spin-off. Standalone costs, financing needs and future results may differ materially from the historical combined presentation.
Red Violet adopted ASC Topic 606 using the modified retrospective method with no material impact on opening accumulated deficit or reported financial statements.

Outlook, Risks, Contingencies and Unusual Items

Management expects to fund operations and planned capital expenditures for the next twelve months with available cash and anticipated operating cash flow, based on projected revenue and operating improvement. Management also states that additional equity or debt financing may be required if growth or cash generation falls short. No quantitative revenue or profitability guidance was provided.

Management plans to continue investing in sales and marketing, executive and administrative functions, infrastructure, technology and data assets. Headcount-related compensation expense is expected to increase.
The company has material data licensing commitments of $21.8 million through 2022, including $7.0 million in 2019 and $7.5 million in 2020. Its largest data supplier represented approximately 46% of 2018 data acquisition costs, with a remaining minimum purchase commitment of $14.9 million through the initial contract term.
Operating lease commitments totaled $4.2 million at December 31, 2018. Upon adoption of ASC Topic 842 in the first quarter of 2019, management expected to record approximately a $3.0 million right-of-use asset and a $3.4 million operating lease liability.
One customer represented 11% of 2018 revenue. Customer loss, consolidation or reduced usage could materially affect results.
Key risks include continued operating losses and negative operating cash flow, dependence on external data providers, privacy and data-security regulation, cyberattacks, intense competition, long sales cycles, technology execution, customer concentration and potential future capital needs.
The company owns sensitive consumer and personally identifiable information. A security breach or service interruption could result in litigation, regulatory penalties, reputational damage and loss of customers.
The company was undergoing a state sales and use tax examination related to the Wayfair decision. Management recorded no liability and did not expect a material adverse impact, but the outcome remained uncertain.
No material pending legal proceeding was identified by management. The 2017 TransUnion/TRADS settlement was fully paid during 2018; $7.0 million had been expensed in 2017.
The company granted 2.1 million unvested restricted stock units at year-end 2018, including 1.5 million performance-based units. These performance-based awards require quarterly revenue above $7.0 million and positive adjusted EBITDA, among other conditions; no compensation expense had been recognized for them as of year-end because achievement was not considered probable.
Goodwill and long-lived assets were determined not to be impaired as of December 31, 2018.

Important Facts for Investors to Verify

Whether revenue growth and the shift toward pricing-contract revenue continue after the spin-off.
Whether the company can achieve positive adjusted EBITDA and eventually positive operating cash flow without additional financing.
The adequacy of the $10.0 million cash balance relative to negative operating cash flow, software investment and $21.8 million of data licensing commitments.
The economic terms, renewal provisions and substitutability of the largest data supplier relationship.
The effect of ASC Topic 842 adoption on reported assets, liabilities and operating metrics.
Potential dilution from 2.1 million outstanding RSUs and 879,000 additional shares available under the 2018 Stock Incentive Plan.
Progress of the state sales and use tax examination and any related exposure.
The company’s ability to manage privacy, cybersecurity and regulatory compliance risks while expanding its data repository and customer base.