Red Violet, Inc. — Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
Red Violet is a software and services company providing cloud-based big-data analytics and risk-management solutions through its CORE platform. The report covers the three months ended March 31, 2018, and compares results with the three months ended March 31, 2017.
Fluent, Inc. completed the spin-off of its risk-management business on March 26, 2018. Red Violet began regular-way trading on Nasdaq under the symbol RDVT on March 27, 2018. Historical financial statements are presented on a consolidated and combined basis and may not reflect the costs of operating as an independent public company.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $3.325 million | $1.572 million | Up 112% |
| Cost of revenue | $2.017 million | $1.401 million | Up 43% |
| Adjusted gross profit | $1.308 million | $0.171 million | Up 665% |
| Adjusted gross margin | 39% | 11% | Up 28 percentage points |
| Net loss | $2.084 million | $2.893 million | Improved $0.809 million |
| Adjusted EBITDA | $(1.413) million | $(1.715) million | Improved $0.302 million |
| Basic and diluted loss per share | $(0.20) | $(0.28) | Improved $0.08 |
| Cash used in operating activities | $2.825 million | $1.562 million | Use increased $1.263 million |
| Cash used in investing activities | $1.386 million | $1.927 million | Use decreased $0.541 million |
| Cash provided by financing activities | $23.939 million | $3.263 million | Primarily Fluent funding |
Cost of revenue represented 61% of revenue in Q1 2018 versus 89% in the prior-year quarter. Sales and marketing expense increased 33% to $1.089 million, while general and administrative expense decreased 9% to $1.852 million. Depreciation and amortization increased 109% to $0.451 million.
Cash and cash equivalents were $19.793 million at March 31, 2018, compared with $65,000 at December 31, 2017. Total assets were $46.535 million and shareholders’ equity was $40.262 million. The company reported no debt at March 31, 2018. Total liabilities were $6.273 million.
Material Changes Versus the Prior Comparable Period
- Revenue more than doubled, driven by increased product adoption and the transition from development-focused operations to a sales-driven organization.
- Gross economics improved materially because data costs are primarily fixed-fee or unlimited-usage arrangements, allowing revenue growth to outpace cost-of-revenue growth.
- Net loss narrowed despite higher sales and marketing costs and higher depreciation and amortization.
- General and administrative expense benefited from the absence of the $0.5 million of litigation costs recorded in Q1 2017 and lower share-based compensation.
- Operating cash use increased because of the larger net working-capital investment, including higher accounts receivable and lower accrued liabilities.
- Financing cash flow included approximately $20.0 million contributed by Fluent in connection with the spin-off.
- Capitalized internal software costs were $1.370 million in investing cash outflows, and net intangible assets increased to $16.531 million from $15.353 million at year-end 2017.
- Fluent no longer allocates expenses to Red Violet after the spin-off, and future standalone corporate costs may differ materially from historical allocations.
Outlook, Commentary, Risks, and Unusual Items
Management reported a sales annual run-rate of $15.1 million for March 2018, compared with $5.8 million for January 2017, and stated that FOREWARN revenue reached an annual run-rate of approximately $0.3 million for March 2018. Management expects to continue investing in sales, marketing, executive, administrative, and infrastructure personnel.
Management believes available cash and expected operating cash flow will fund operations and expected capital expenditures for the next twelve months. However, the company remains loss-making and cash-flow negative and stated that it may need additional equity or debt financing if revenue growth or operating performance is insufficient. Any financing could dilute existing stockholders or be available only on unfavorable terms.
Material commitments under data-licensing agreements totaled $22.011 million as of March 31, 2018, including $3.784 million for the remainder of 2018 and $5.900 million in 2019. The company’s guarantee of Fluent debt ceased upon the spin-off refinancing. The filing reports no material legal proceedings, no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors.
The company adopted ASC Topic 606 using the modified retrospective method on January 1, 2018, with no material financial-statement impact. It also adopted ASU 2016-15 with no material impact. A full valuation allowance against deferred tax assets resulted in a 0% effective tax rate for both periods.
On April 26, 2018, the company entered into a consulting agreement with MDB Management, Inc., a company owned by the chairman of the board and one of his sons. The agreement provides for a $30,000 monthly fee and an initial six-month term, subject to automatic renewal unless terminated with notice.
Important Facts for Investors to Verify
- Whether revenue growth and the reported $15.1 million annual sales run-rate continue after the spin-off.
- The pace at which Red Violet reduces its operating cash burn and reaches positive operating cash flow.
- Whether the $22.011 million data-licensing commitments can be supported by internally generated cash.
- The extent to which standalone public-company costs differ from historical Fluent expense allocations.
- Customer and data-supplier concentration, including the largest data supplier’s approximately 49% share of Q1 2018 data-acquisition costs.
- Future software capitalization, amortization, and potential impairment of the $16.531 million intangible-asset balance and $5.227 million goodwill balance.
- Potential dilution from the 2018 equity incentive plan, which authorizes 3.0 million shares, and from any future financing.
- The terms and related-party implications of the MDB consulting agreement.