Red Violet, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Red Violet is a cloud-based software and data analytics company providing risk-management solutions for identity verification, fraud prevention, investigations, compliance, debt recovery and related applications. The filing covers the quarter and nine months ended September 30, 2018.
Fluent, Inc. completed the spin-off of Red Violet’s risk-management business on March 26, 2018. Red Violet began trading on Nasdaq under “RDVT” on March 27, 2018. Pre-spin-off results were prepared on a consolidated and combined basis and may not be indicative of results as a standalone public company.
Financial Highlights
| Metric | Q3 2018 | Q3 2017 | Nine Months 2018 | Nine Months 2017 |
|---|---|---|---|---|
| Revenue | $4.4 million | $2.3 million | $11.6 million | $5.9 million |
| Net loss | $1.3 million | $3.3 million | $4.8 million | $18.4 million |
| Loss per share | $0.12 | $0.32 | $0.47 | $1.79 |
| Adjusted gross profit | $2.1 million | $0.4 million | $5.3 million | $0.7 million |
| Adjusted gross margin | 49% | 15% | 45% | 11% |
| Adjusted EBITDA | $(0.8) million | $(2.1) million | $(3.3) million | $(6.2) million |
Q3 revenue increased 89%, while nine-month revenue increased 97%. GAAP operating loss was $1.7 million in Q3 and $5.4 million for the nine months. Based on reported revenue and cost of revenue, gross margins were approximately 49% and 45%, respectively; operating margins were approximately negative 39% and negative 47%.
Cash and cash equivalents were $12.6 million at September 30, 2018, compared with $0.1 million at December 31, 2017. Total assets were $41.6 million and shareholders’ equity was $37.9 million. The filing does not disclose outstanding debt; interest expense and cash interest payments were zero.
Cash Flow, Liquidity and Capital Commitments
- Net cash used in operating activities was $6.8 million for the first nine months of 2018, compared with $7.9 million in the prior-year period.
- Net cash used in investing activities was $4.5 million, primarily reflecting $4.5 million of capitalized software development costs.
- Net cash provided by financing activities was $23.9 million, including a $20.0 million cash contribution from Fluent in connection with the spin-off.
- Red Violet had $20.3 million of material commitments under data licensing agreements, primarily extending through 2022.
- Management believes available cash and expected operating cash flow will fund operations and expected capital expenditures for the next 12 months, but acknowledges that additional equity or debt financing may be required if growth or cash generation falls short.
Material Changes Versus the Prior Comparable Period
- Revenue growth and scaling reduced cost of revenue as a percentage of revenue to 51% in Q3 from 85% and to 55% for the nine months from 89%.
- General and administrative expense declined 62% for the nine months, primarily because prior-year litigation costs and share-based compensation were substantially lower in 2018.
- Depreciation and amortization increased 76% in Q3 and 98% for the nine months as internally developed software entered service.
- The prior-year nine-month results included $9.2 million of litigation costs, compared with $0.1 million in 2018. Q3 2018 also included $0.4 million of insurance proceeds related to previously settled litigation and $0.1 million of transition-service income.
- Recurring customer-contract revenue represented 64% of monthly revenue at September 30, 2018. Management reported an annual revenue run rate of $18.6 million for that month, up from $9.9 million in September 2017.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expects continued investment in sales, marketing, executive, administrative and infrastructure personnel and expects cost of revenue as a percentage of revenue to decline as the business scales. Management stated that the business is moving toward profitability but remains dependent on continued sales growth and development of new products.
- The company remains loss-making and generated negative operating cash flow during the first nine months of 2018.
- Management may need to raise capital if operations do not generate positive cash flow or revenue growth is below expectations; any financing could dilute shareholders or be available only on unfavorable terms.
- Data licensing commitments are significant relative to cash on hand, and one data supplier represented approximately 44% of Q3 data-acquisition costs and 47% of nine-month data-acquisition costs.
- Capitalized internal-use software totaled $18.9 million net, including $3.7 million not yet placed into service, creating future amortization requirements.
- The company had a full valuation allowance against deferred tax assets, resulting in no income tax expense despite pre-tax losses.
- Management reported effective disclosure controls as of September 30, 2018 and no material changes in internal control over financial reporting.
- No material legal proceedings, defaults, or off-balance-sheet arrangements were reported. The filing states that previously disclosed risk factors were not materially changed.
Investor Verification Points
- Verify whether revenue growth and recurring-contract expansion continue after the spin-off and whether the reported run rate converts into GAAP revenue.
- Assess the pace of operating-cash-flow improvement relative to the $20.3 million data licensing commitments.
- Reconcile adjusted EBITDA and adjusted gross profit to GAAP results, including litigation proceeds, transition-service income, share-based compensation and software amortization.
- Monitor customer and data-supplier concentration, contract renewal behavior and the sustainability of the claimed margin expansion.
- Evaluate dilution risk from the 2018 equity incentive plan, including 2.1 million performance-based restricted stock units excluded from diluted loss per share.
- Consider the comparability limitations caused by pre-spin-off allocations and the transition to standalone public-company operations.