UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 20182020

or

For the transition period from to

Commission file number 001-38407

RED VIOLET, 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)

None

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

Securities registered pursuant to Section 12(b) of the Act:

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 May 10, 2018,8, 2020, the registrant had 10,266,61311,598,015 shares of common stock outstanding.

RED VIOLET, INC.

TABLE OF CONTENTS FOR FORM 10-Q

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PART I - FINANCIALFINANCIAL INFORMATION

Unless otherwise indicated or required by the context, all references in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” “red violet,” or the “Company,” refer to Red Violet, Inc. and its consolidated and combined subsidiaries.

Item 1. Financial Statements.

RED VIOLET, INC.

CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS

(Amounts in thousands, except share data)

(unaudited)

See notes to condensed consolidated and combined financial statements

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RED VIOLET, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share data)

(unaudited)

See notes to condensed consolidated and combined financial statements

3

RED VIOLET, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Amounts in thousands, except share data)

(unaudited)

See notes to condensed consolidated and combined financial statements

4

RED VIOLET, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

See notes to condensed consolidated and combined financial statements

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RED VIOLET, INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in thousands, except share data)

(unaudited)

1. OrganizationSummary of significant accounting policies

(a) Basis of preparation

On March 26, 2018, Fluent, Inc. (“Fluent”), formerly known as Cogint, Inc., a Delaware corporation, completed the previously announced spin-off (the “Spin-off”)The accompanying unaudited condensed consolidated financial statements of its risk management business from its digital marketing business by way of a distribution of all the shares of common stock of Fluent’s wholly-owned subsidiary, Red Violet, Inc. (“red violet” or the “Company”), a Delaware corporation, to Fluent’s stockholders of record as of March 19, 2018 (the “Record Date”) and certain warrant holders. The distribution occurred by way of a pro rata stock distribution to such common stock and warrant holders, each of whom received one share of red violet’s common stock for every 7.5 shares of Fluent’s common stock held on the Record Date or to which they were entitled to under their warrant, which resulted in a distribution of a total of 10,266,613 shares of red violet common stock. Upon the Spin-off, red violet owns FluentsubsidiarieswhichpreviouslyoperatedFluent’sriskmanagementbusiness.

As a result of the Spin-off, red violet is an independent public company and red violet’s common stock began regular-way trading on The NASDAQ Capital Market under the symbol “RDVT” on March 27, 2018.

red violet has only one operating segment, as defined by ASC 280, “Segment Reporting.”

2. Summary of significant accounting policies

(a) Basis of preparation and liquidity

The accompanying unaudited condensed consolidated and combined financial statements have been prepared for red violet 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.

red violet accounted for the Spin-off in accordance with ASC 805-50-30-5 Initial Measurement- Transactions Between Entities Under Common Control – Transfer Date Measurement and therefore the net assets transferred from Fluent to red violet upon the Spin-off were reflected in our consolidated financial statements at Fluent carrying values at the time of the Spin-off.

The accompanying unaudited condensed consolidated and combined 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, 2018.2020.

The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated and combined financial statements and accompanying notes of red violetincluded in the Company’s Annual Report on Form 10-K for the year ended December 31, 20172019 (“2017 Financials”) included in Exhibit 99.1, Information Statement, to the current report on2019 Form 8-K filed with the SEC on March 27, 2018.10-K”).

The condensed consolidated and combined balance sheet as of December 31, 20172019 included herein was derived from the audited financial statements as of that date included in the 2017 Financials,2019 Form 10-K, but does not include all disclosures including notes required by US GAAP.

The Company has only 1 operating segment, as defined by Accounting Standards Codification (“ASC”) 280, “Segment Reporting.”

Principles of consolidation and combination

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

The financial statements present the consolidated and combined results of operations, financial condition, and cash flows of red violet and its subsidiaries. These financial statements were prepared on a consolidatedAll significant transactions among the Company and combined basis because certain of the entities were under common control for periods prior to the Spin-off. All intercompany accounts and transactionsits subsidiaries have been eliminated between the consolidated and combined entities.

The historical condensed consolidated and combined financial results presented prior to the Spin-off may not be indicative of the results that would have been achieved by the Company had it operated as a separate, standalone entity prior to the Spin-off. The

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condensed consolidated and combined financial statements presented prior to the Spin-off do not reflect any changes that may occur in the Company’s operations in connection with or as a result of the Spin-off.   upon consolidation.

(b) Recently issued accounting standards

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

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 MarchJune 2016, FASB issued ASU No. 2016-08, 2016-13 (“ASU 2016-13”), “Revenue from Contracts with CustomersFinancial Instruments - Credit Losses (Topic 606)326): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)Measurement of Credit Losses on Financial Instruments.” In November 2018, FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” (“which amends the scope and transition requirements of ASU 2016-08”), which clarifies2016-13. Topic 326 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the implementation guidancenet amount expected to be collected. The measurement of expected credit losses is based on principal versus agent considerations. The guidance includes indicators to assist an entity in evaluating whether it controlsrelevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the good orcollectability of the service before it is transferred to the customer. The new revenue recognition standard isreported amount. Topic 326 became effective for public entitiescompanies beginning January 1, 2020, and the Company adopted it on a modified retrospective approach. The guidance had no material impact on the Company’s condensed consolidated financial statements and related disclosures.

In August 2018, FASB issued ASU No. 2018-15 (“ASU 2018-15”), “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. It also requires the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. This guidance will be effective for the Company for annual reporting periods beginning after December 15, 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 adopted Topic 606 as of January 1, 2018 using the modified retrospective method, and the adoption did not have any material impact on our consolidated and combined balance sheets, statements of operations, or cash flows. Refer to Note 1(c) below for further details.

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 for public entities and private entities in the first quarter of 2019 and the first quarter of 2020, respectively, on a modified retrospective or prospective basis and early adoption is permitted. It will be effective for us in the first quarter of 2020. We are stillThe Company is currently evaluating the effect thatimpact this guidance will have on ourits consolidated and combined financial statements and related disclosures.

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 is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and early adoption is permitted. We adopted ASU 2016-15 for the first quarter of 2018 and ASU 2016-15 did not have any material impact on our condensed consolidated and combined financial statements.

(c) Revenue recognition

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to all contracts that are not completed contracts at the date of initial application. There was no impact on the opening accumulated deficit as of January 1, 2018 due to the adoption of Topic 606.

Revenue is recognized when control of goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. In other words, our performance obligation is to provide on demand solutions to our customers by leveraging our proprietary technology and applying machine learning and advanced analytic techniques to our massive data repository. The pricing for the customer contracts is based on usage, a monthly fee, or a combination of both.

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

Revenue is recognized over a period of time since the performance obligation is delivered in a series. Our customers simultaneously receive and consume the benefits provided by the performance as the Company performs. Furthermore, we have elected the “right to invoice” practical expedient, available within ASC 606-10-55-18, as our measure of progress, since we have a right to payment from a customer in an amount that corresponds directly with the value of our performance completed-to-date. The Company's revenue arrangements do not contain significant financing components.

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If a customer pays consideration before we transfer services to the customer, those amounts are classified as deferred revenue. As of March 31, 2018 and December 31, 2017, the balance of deferred revenue was $21 and $33, respectively, all of which are expected to be realized in the next 12 months. $17 of the deferred revenue balance as of December 31, 2017 had been recognized into revenue during the three months ended March 31, 2018.

As of March 31, 2018, approximately $363 of revenue is expected to be recognized in the future related to outstanding performance obligations. The balance relates primarily to revenues for subscription contracts that has a term of more than 12 months. Approximately $180 will be recognized during the remaining nine months of 2018, $174 in 2019 and the remainder in 2020. The actual timing of recognition may vary due to factors outside of the Company’s control. The Company has elected to exclude variable consideration related entirely to wholly unsatisfied performance obligations and contracts where revenue is recognized based upon the right to invoice the customer.

Sales commissions are recorded at the time revenue is recognized. These costs are recorded in sales and marketing expenses.

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

3.2. Loss per share

Basic loss per share is computed by dividing net loss by the weighted average number of shares of common sharesstock 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.

Prior to the Spin-off, the financial information of red violet represented the consolidated and combined figures of red violet and its subsidiaries. red violet only had 1,000 shares of common stock outstanding, all of which Fluent owned. On March 26, 2018, upon the Spin-off of red violet, an aggregate of 10,266,613 shares of red violet common stock were distributed to Fluent stockholders and certain warrant holders. This number of shares remained outstanding at March 31, 2018, and is utilized to calculate loss per share for the three months ended March 31, 2018 and 2017, as shown in the table below.

A total of 56,000 shares of unvested restricted stock units (“RSUs”) have been excluded from the diluted loss per share calculation as the impact is anti-dilutive.

4.3. 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 developedinternally-developed software, including eligible salaries and staff benefits, share-based compensation, expense, travelingtravel expenses incurred by relevant employees, and other relevant costs.

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Amortization expenses of $373$850 and $156 were included in depreciation and amortization expenses$554 for the three months ended March 31, 20182020 and 2017, respectively.2019, respectively, were included in depreciation and amortization expense. As of March 31, 2018,2020, intangible assets of $1,920,$4,136, included in the gross amounts of software developed for internal use, have not started amortization, as they haveare not yet been ready for their intended use.

red violetThe Company capitalized $1,551costs of software developed for internal use of $2,126 and $1,893 related to internally developed software$1,580 during the three months ended March 31, 20182020 and 2017,2019, respectively.

As of March 31, 2018,2020, estimated amortization expensesexpense related to the Company’s intangible assets for the remainder of 20182020 through 20232025 and thereafter are as follows:

5.4. Goodwill

Goodwill represents the cost in excess of the fair value of the net assets acquired in a business combination. As of March 31, 20182020 and December 31, 2017,2019, the balance of goodwill of $5,227 was as a result of the acquisition of Interactive Data, LLC, (“Interactive Data”), a wholly-owned subsidiary of red violet, effective on October 2, 2014.

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

As of March 31, 20182020 and December 31, 2017, there2019, 0 goodwill impairment charges were recorded.

5. Revenue recognition

On January 1, 2018, the Company adopted ASC 606, “Revenue from Contracts with Customers,” (“Topic 606”) using the modified retrospective method applied to all contracts that were not completed contracts at the date of initial application. Revenue is recognized when control of goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s performance obligation is to provide on demand solutions to its customers by leveraging its proprietary technology and applying machine learning and advanced analytics to its massive data repository. The pricing for the customer contracts is based on usage, a monthly fee, or a combination of both.

Available within Topic 606, the Company has applied the portfolio approach practical expedient in accounting for customer revenue as one collective group, rather than individual contracts. Based on the Company’s historical knowledge of the contracts contained in this portfolio and the similar nature and characteristics of the customers, the Company has concluded the financial statement effects are no eventsnot materially different than if accounting for revenue on a contract by contract basis.

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

For the three months ended March 31, 2020 and 2019, 69% and 67% of total revenue was attributable to customers with pricing contracts, respectively, versus 31% and 33% attributable to transactional customers, respectively. Pricing contracts are generally annual contracts or changeslonger, with auto renewal.

If a customer pays consideration before the Company transfers services to the customer, those amounts are classified as deferred revenue. As of March 31, 2020 and December 31, 2019, the balance of deferred revenue was $207 and $128, respectively, all of which is expected to be realized in circumstancesthe next 12 months. In relation to indicatethe deferred revenue balance as of December 31, 2019, $91 was recognized into revenue during the three months ended March 31, 2020.

As of March 31, 2020, $3,868 of revenue is expected to be recognized in the future for outstanding performance obligations, primarily related to pricing contracts that goodwill is impaired.have a term of more than 12 months. $1,967 of revenue will be recognized in the remainder of 2020, $1,820 in 2021, $65 in 2022, and $16 in 2023 and thereafter. The actual timing of recognition may vary due to factors outside of the Company’s control. The Company excludes variable consideration related entirely to wholly unsatisfied performance obligations and contracts and recognizes such variable consideration based upon the right to invoice the customer.

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

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

6. Income taxes

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

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

On December 22, 2017, the tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Act”) was enacted, with the statutory federal income tax rate lowered to 21% among other changes, effective on January 1, 2018. As a full valuation allowance was provided as of March 31, 2018, the Act does not have any material net impact on our consolidated and combined financial statements, however, certain income tax disclosures are affected.

The Company’s effective income tax rate differed from the statutory federal income tax rate of 21%21% for the three months ended March 31, 20182020 and 34% for the three months ended March 31, 2017. 2019. For the three months ended March 31, 20182020 and 2017,2019, the effective income tax rate was 0%, and the difference is primarily the result of the full valuation allowance applied against the Company’s deferred tax assets.

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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

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positions where it is not more-likely-than-not that a tax benefit will be sustained, no0 tax benefit has been recognized in the Company’s financial statements.

red violetThe Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. red violet has no federalAll of the Company’s income tax filings that remain open for tax examinations as 2018 will be the first filing year for the Company for U.S. federal income tax purposes; however, one of red violet’s subsidiaries, Interactive Data’s stand-alone state income tax returns since 20142016 remain open for tax examinations.

red violetThe Company does not0t have any unrecognized tax benefits as of March 31, 20182020 and December 31, 2017.2019.

7. Common stock and preferredtreasury stock

Common stock

As of March 31, 20182020 and December 31, 2017,2019, the number of authorizedissued shares of common stock was 200,000,00011,693,162 and 5,000, with par value11,657,912, respectively, which included shares of $0.001 per share, respectively,treasury stock of which, 10,266,613103,147 and 1,000103,147, respectively. The change in the number of issued shares of common stock were issued and outstanding, respectively.

On March 26, 2018, Fluent completed the Spin-offwas due to an aggregate of its risk management business from its digital marketing business by way of a distribution of all the35,250 shares of common stock issued as a result of red violet to Fluent’s stockholdersthe vesting of record as of March 19, 2018, the Record Date, and certain warrant holders, which resulted in a distribution of a total of 10,266,613 shares of red violet common stock.RSUs.

PreferredTreasury stock

As of March 31, 2018, we had��10,000,0002020 and December 31, 2019, the Company held 103,147 shares of preferredtreasury stock, with par valuea cost of $0.001 per share authorized, and there were no$1,255, as a result of the shares withheld to pay withholding taxes upon the vesting of preferred stock issued or outstanding. There was no preferred stock authorized as of December 31, 2017.RSUs.

8. Share-based compensation

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

As of March 31, 2020, there were 44,624 shares of common stock available for future issuance under the 2018 Plan.

On April 17, 2020, the board of directors of the Company approved, subject to stockholder approval, an amendment to the 2018 Plan to increase the number of shares of common stock authorized for issuance under the 2018 Plan from 3,000,000 shares to 4,500,000 shares.

Details of unvested RSU activity during the three months ended March 29,31, 2020 were as follows:

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On September 5, 2018 and January 16, 2019, the Company granted an aggregate of 56,000 shares1,487,500 RSUs and 90,000 RSUs, respectively, subject to both time- and performance-based requirements, to certain of RSUs were granted to certainits employees and directors, at a grant date fair value of $6.10$7.69 per share underand $7.25 per share, respectively, with a three-year vesting period. Such RSU grants shall not vest unless and until the Company has, for any fiscal quarter in which the RSUs are outstanding, (i) gross revenue determined in accordance with the Company’s reviewed or audited financial statements in excess of $7.0 million for such fiscal quarter, (ii) positive adjusted EBITDA, as determined based on amounts derived from the Company’s reviewed or audited financial statements for such fiscal quarter, and (iii) the participant continues to provide services to the Company either as an employee, director or consultant on the last day of the quarter that the performance criteria are met (collectively, the “2018 Performance Criteria”). Provided the 2018 Plan,Performance Criteria are met, the RSUs will vest in accordance with vesting periods ranging from one tothe time-based requirements contained in the award agreement over three years. The fair valueIn the event of thea change of control, all RSUs was estimated using the market value of the Company’s common stockwhich have not vested on the date of such change of control shall immediately vest even if the 2018 Performance Criteria have not been met. As of June 30, 2019, the Company determined that the 2018 Performance Criteria were met and one-third of the applicable awards vested and shares underlying such awards were issued in August 2019. The remaining shares underlying such awards are expected to vest and be issued in accordance with their time-based vesting requirement.

As a result of meeting the 2018 Performance Criteria as of June 30, 2019, the Company recognized a total of $971 of share-based compensation expense relating to RSUs with the 2018 Performance Criteria for the three months ended March 31, 2020. No share-based compensation expense of such RSUs was recognized during the three months ended March 31, 2019 because the Company determined at that period end that it was not probable that the 2018 Performance Criteria would be met.

On August 28, 2019 and October 28, 2019, the Company granted an aggregate of 681,000 RSUs, subject to both time- and performance-based requirements, to certain employees, at a grant date fair value of $11.42 per share and $16.42 per share, respectively, with time vesting periods of either three or four years. Such RSU grants shall not vest unless and until the Company has, for any fiscal quarter in which was equivalentthe RSUs are outstanding, (i) gross revenue determined in accordance with the Company’s reviewed or audited financial statements in excess of (a) $10.0 million for such fiscal quarter and positive adjusted EBITDA of at least $1.5 million, as determined based on amounts derived from the Company’s reviewed or audited financial statements for such fiscal quarter for 256,000 RSUs, and (b) $12.5 million for such fiscal quarter and positive adjusted EBITDA of at least $2.0 million, as determined based on amounts derived from the Company’s reviewed or audited financial statements for such fiscal quarter for 425,000 RSUs, and (ii) the recipient continues to provide services to the closing priceCompany either as an employee, director or consultant on the last day of the common stockquarter that the performance criteria is met (collectively, the “2019 Performance Criteria”). Provided the respective 2019 Performance Criteria are met, the RSUs will vest in accordance with the time-based requirements contained in the award agreement over three or four years. In the event of a change of control, all RSUs which have not vested on the date of such change of control shall immediately vest even if the 2019 Performance Criteria have not been met. As of the respective grant dates, the Company determined that it is probable that the 2019 Performance Criteria will be met and therefore, began to record the related amortization expense on the grant date.dates. The Company recognized a total of $1,389 of share-based compensation expense relating to RSUs with the 2019 Performance Criteria for the three months ended March 31, 2020.

As of March 31, 2018,2020, unrecognized share-based compensation expense associated with the granted RSUs amounted to $340,$12,654, which is expected to be recognized over a remaining weighted average period of 2.32.0 years.

Share-based compensation of $346 and $649 was recorded during the three months ended March 31, 2018 and 2017, respectively. Included in the total share-based compensation recorded was $344 and $649 related to the share-based awards granted by Fluent to company employees or non-employees during the three months ended March 31, 2018 and 2017, respectively.

Share-based compensation was allocated to the following accounts in the condensed consolidated and combined financial statements for the three months ended March 31, 20182020 and 2017:2019:

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9. Related party transactions

Contribution by Fluent, Inc., recorded in the condensed consolidated and combined statement of changes in shareholders’ equity, represents cash funding provided or the portion of certain expenses allocated by Fluent to red violet, on or prior to the Spin-off.

These allocated expenses are primarily corporate employee salaries and benefits of the functional groups (inclusive of executive management, accounting, administrative and information technology) and corporate administrative expenses (inclusive of legal services, accounting and finance services and other corporate and infrastructure services). Corporate employee salaries and benefits were allocated on the basis of time spent, and corporate administrative expenses were allocated on the basis of relative percentage of services utilized or benefit received. red violet recorded expenses of $325 and $840 as a result of the allocation of expenses from Fluent during the three months ended March 31, 2018 and 2017, respectively. Upon the Spin-off, Fluent no longer allocates any expenses to red violet.

As discussed in Note 8, “Share-based compensation,” share-based compensation of $344 and $649 in relation with the share-based awards granted by Fluent were recorded during the three months ended March 31, 2018 and 2017, respectively.

Management believes the assumptions and allocations underlying the condensed consolidated and combined financial statements are reasonable and appropriate under the circumstances. The expense allocations have been determined on a basis considered to be a reasonable reflection of the utilization of services provided to or the benefit received by red violet during the periods presented relative to the total costs and expenses incurred by Fluent. However, these expenses may not be reflective of the expenses that would have been recorded had red violet been an entity that operated independently of Fluent, and not been a subsidiary of Fluent. Consequently, future results of operations of red violet after the Spin-off will include costs and expenses that may be materially different than red violet’s historical results of operations, financial position, and cash flows. Accordingly, the financial statements for these periods are not indicative of red violet’s future results of operations, financial position, and cash flow.

10. Commitments

(a) Capital commitment

The Company incurred data costs of $1,241 and $980 for the three months ended March 31, 2018 and 2017, respectively, under certain data licensing agreements. As of March 31, 2018, material capital commitments under certain data licensing agreements were $22,011, shown as follows:

(b) Guarantees

As of December 31, 2017, the Company was a guarantor on certain Fluent debt, with an outstanding principal amount, plus paid-in-kind interest, of $55.6 million as of December 31, 2017, and a maturity date in December 2020.

Upon the Spin-off on March 26, 2018, Fluent, LLC, a subsidiary of Fluent, refinanced such Fluent debt, and red violet’s obligations as a guarantor ceased.

(c) Employment agreements

We have employment agreements with certain executives, including our Chief Executive Officer, President, Chief Financial Officer and Chief Accounting Officer, which provide for compensation and certain other benefits and for severance payments under certain circumstances.

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 11. Subsequent eventsServices Agreement

On April 26,August 7, 2018, the Company entered into a consultingan executive chairman services agreement with MDB Management, Inc. (“MDB”), a company owned byMr. Michael Brauser, chairmanthe then Executive Chairman of the Company’s board of directors,Company, pursuant to which Mr. Brauser will be providing recommendations on organizational and one of his sons, for MDB to provide consulting services related to business development,capital structure, future financing needs and future acquisitions andor strategic transactions to the Company (“MDBServices Agreement”), forfor a term of six months, and shallone year, automatically renewrenewing for additional six-monthone-year periods unless either party provides written notice to the other of its intent not to renew not fewer than 30 days prior to the expiration of the then current term.then-current term. Mr. Brauser continues to provide services as a consultant under the Services Agreement after his resignation as Executive Chairman and as a member of the board of directors effective on September 9, 2018. Under the MDBServices Agreement, Mr. Brauser receives cash compensation of $30 per month and is entitled to participate in the Company’s incentive compensation plan. The Company recognized consulting service feefees relating to the Services Agreement of a total of $90 and $90 during the three months ended March 31, 2020 and 2019, respectively. In addition, amortization of share-based compensation expense of $339 in relation to the RSUs with the 2018 Performance Criteria previously granted to Mr. Brauser was recognized during the three months ended March 31, 2020. NaN amortization of share-based compensation expense was recognized during the three months ended March 31, 2019.

10. Leases

On January 1, 2019, the Company adopted Leases (Topic 842) using the modified retrospective method applied to all leases existing at the date of initial application. The Company elected the practical expedients to not reassess whether any existing contracts are or contain leases, not reassess the lease classification for any existing leases, and not reassess initial direct costs for any existing leases, upon the adoption of Leases (Topic 842).

The Company leases its corporate headquarters of 21,020 rentable square feet in accordance with a non-cancelable 89-month operating lease agreement as amended and effective in January 2017. The Company also leases an additional office space of 6,003 rentable square feet in accordance with a non-cancellable 90-month operating lease agreement entered into in April 2017, with an option to extend for additional 60 months. The extension option is $30 per month.not included in the determination of the lease term as it is not reasonably certain to be exercised.

For the three months ended March 31, 2020 and 2019, a summary of the Company’s lease information is shown below:

As of March 31, 2020, the weighted average remaining operating lease term was 4.6 years.

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As of March 31, 2020, scheduled future maturities and present value of the operating lease liabilities are as follows:

11. Commitments and contingencies

(a) Capital commitment

The Company incurred data costs of $2,132 and $1,688 for the three months ended March 31, 2020 and 2019, respectively, under certain data licensing agreements. As of March 31, 2020, material capital commitments under certain data licensing agreements were $12,766, shown as follows:

(b) Contingencies

The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and it discloses 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, the Company evaluates, 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. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated.

The Company may be involved in litigation from time to time in the ordinary course of business. The Company does not believe that the ultimate resolution of any such matters will have a material adverse effect on its business, financial condition, results of operations or cash flows. However, the results of such matters cannot be predicted with certainty and the Company cannot assure you that the ultimate resolution of any legal or administrative proceeding or dispute will not have a material adverse effect on its business, financial condition, results of operations and cash flows.

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(c) Covid-19 update

In December 2019, a novel strain of coronavirus, now known as Covid-19 (“Covid-19”), was reported in Wuhan, China and has since extensively impacted the global health and economic environment. In March 2020, the World Health Organization characterized Covid-19 as a pandemic. The Company has taken numerous steps, and will continue to take further actions, in its approach to minimizing the impact of the Covid-19 pandemic. As a result of the Covid-19 pandemic, to ensure the health and well-being of our employees, the Company instructed employees at its offices to work from home on a temporary basis. The Company has implemented cost containment strategies across all areas of the organization, including continued curtailment of Company travel and partnering with suppliers, landlords and vendors for price concessions and payment deferrals during this interim period. In the second half of March, as preventative and protective actions were taken by governments, including the implementation of stay-at-home orders, we experienced reduced transactional volume that we believe was a result of customers adjusting to the effects of these stay-at-home orders. Beginning April 1, 2020, the Company elected, under Section 2302 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), to defer payment of the employer portion of Social Security payroll tax. Under the CARES Act, employers can forgo timely payment of the employer portion of Social Security taxes that would otherwise be due from March 27, 2020 through December 31, 2020, without penalty or interest charges. Employers must pay 50% of the deferred amount by December 31, 2021, and the remainder by December 31, 2022. The Company will continue to assess the CARES Act and other applicable government-related legislation aimed at assisting businesses during the Covid-19 pandemic. Given the dynamic nature of this health emergency, the full impact of the Covid-19 pandemic on the Company’s ongoing business, results of operations and overall financial performance cannot be reasonably estimated at this time.

12. Subsequent events

On May 5, 2020, the Company received funding under a promissory note dated May 5, 2020 (the “Promissory Note”) evidencing an unsecured non-recourse loan in the principal amount of $2,152 under the CARES Act (the “Loan”). The Loan to the Company is being made through Legacy Bank of Florida (the “Lender”).

The Loan has a two-year term and matures on May 5, 2022. The interest rate on the Loan is 1.00% per annum. Payments shall be deferred for the first six months of the term of the Loan. The U.S. Small Business Administration has the right to extend the deferment period. The Promissory Note contains customary events of default relating to, among other things, payment defaults, and breach of representations and warranties, or other provisions of the Promissory Note.

The Loan may be forgiven partially or fully if the Loan proceeds are used for covered payroll costs, rent and utility costs incurred during the eight-week period that commenced on the date of funding, and at least 75% of the Loan proceeds are used for covered payroll costs. Any forgiveness of the Loan will be subject to approval by the U.S. Small Business Administration and the Lender. The Company will be required to apply for such forgiveness. Although the Company intends to use the proceeds of the Loan for such covered purposes, it can provide no assurance that the Company will obtain forgiveness of the Loan in whole or in part.

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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 and analysis in conjunction with our condensed consolidated and combined financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (“Form 10-Q”). This 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.statements,including the impact of the coronavirus (“Covid-19”) pandemic on our operating results. These factors include those contained in this Quarterly Report on Form 10-Q, as well as the disclosures made in the Company’s Information Statement included in the current reportAnnual Report on Form 8-K10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 27, 201812, 2020 (“2017 Financials”2019 Form 10-K”), and other filings we make with the SEC.Securities and Exchange Commission. 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. To the extent that our business is negatively impacted due to a variety of factors, including the impact of Covid-19 on our operating results, we may implement longer-term cost reduction efforts in order to mitigate such impacts.

The historical financial statements we have includedReferences in this Form 10-Q may not reflect what our business, financial positiondiscussion and analysis to “we,” “us,” “our,” “red violet,” or results of operations would have been had we been a publicly traded company during the periods presented or what our results of operations, financial position“Company,” refer to Red Violet, Inc. and cash flows will be in the future when we are a stand-alone company.

its consolidated subsidiaries.

Overview

On March 26, 2018, Fluent, Inc. (“Fluent”), formerly known as Cogint, Inc., a Delaware corporation, completed the previously announced spin-off (the “Spin-off”) of its risk management business from its digital marketing business by way of a distribution of all the shares of common stock of Fluent’s wholly-owned subsidiary, Red Violet, Inc., a Delawarecorporation(“red violet,”“ (“we,” “us,”“our,” “red violet,”or the “Company”), a Delawarecorporation, is dedicated to making the world a safer place and similarterms), to Fluent’s stockholdersreducing the cost of record as of March 19, 2018 (the “Record Date”)doing business. We specialize in data fusion and certain warrant holders. The distribution occurred by way of a pro rata stock distribution to such common stock and warrant holders, each of whom received one share of red violet’s common stock for every 7.5 shares of Fluent’s common stock held on the Record Date or to which they were entitled to under their warrant, which resulted in a distribution of a total of 10,266,613 shares of red violet common stock. Upon the Spin-off, red violet owns FluentsubsidiarieswhichpreviouslyoperatedFluent’sriskmanagementbusiness.

As a result of the Spin-off, red violet is an independent public company and red violet’s common stock began regular-way trading on The NASDAQ Capital Market under the symbol “RDVT” on March 27, 2018.

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

The financial statements present the consolidated and combined results of operations, financial condition, and cash flows of red violet and its subsidiaries. These financial statements were prepared on a consolidated and combined basis because the operations were under common control. All intercompany accounts and transactions have been eliminated between the consolidated and combined entities.

red violet is a software and services company specializing in big data analysis,analytics, providing cloud-based, mission-critical solutions to enterprises in a variety of industries. red violet’s mission is to transform data into intelligence utilizing our proprietary technology platform to solve complex problems for our clients. Harnessing the power of data fusionwith use cases including fraud detection, risk mitigation, due diligence and powerful analytics, we transform data into intelligence, in a fast and efficient manner, so our clients can spend their time on what matters most, running their organizations with confidence.marketing. Through our intelligent platform, CORE^TM, we uncover the relevance of disparate data points utilizing our analytical capabilities to provide real-time and insightful views of people, businesses, assets and their interrelationships.

Leveraging proprietary technology and applying machine learning and advanced analytical and decision-making capabilities, CORE provides compelling solutions to public and private sector organizations through intuitive, easy-to-use analytical applications. We empower clients across markets and industries to better execute all aspects of their business, from managing risk, recovering debt, identifying fraud and abuse, and ensuring legislative compliance, to debt recovery.

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We provide uniqueidentifying and compelling solutions essential to the daily workflowacquiring customers. With a massive data repository of organizations within both the public and private sectors. Our cloud-based data fusion platform, combined with our massive database consistingapproximately nine petabytes of public-record, proprietary and publicly-available data, as well as self-reported consumer information and behavioral signals, we transform data into intelligence for our customers to enable better data-driven decisioning.

We presently market our solutions primarily through two brands, idiCORE™, our flagship product, and FOREWARN^®. idiCORE is a unique repository of self-reported information on millions of consumers, enables the delivery of differentiated products and solutionsnext-generation, investigative solution used forto address a variety of essential functions. These essential functions include identification andorganizational challenges including due diligence, risk mitigation, identity authentication and investigation and validation.

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 industry. 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, we use 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 andlegislative compliance, by financial services companies, insurance companies, healthcare companies, law enforcement and government, the collection industry,collections, law firms, retail, telecommunicationstelecommunication companies, corporate security and investigative firms. FOREWARN is an app-based solution currently tailored for the real estate industry, providing instant knowledge prior to face-to-face engagement with a consumer, helping professionals identify and mitigate risk. As of March 31, 2020 and 2019, idiCORE had 5,326 and 4,020 billable customers and FOREWARN had 36,506 and 15,444 users, respectively. The Company defines a billable customer of idiCORE as a single entity that generated revenue in the last month of the period. Billable customers are typically corporate organizations. In most cases, corporate organizations will have multiple users and/or departments purchasing our solutions, however, the Company counts the entire organization as a discrete customer. The Company defines a user of FOREWARN as a unique person that has a subscription to use the FOREWARN service as of the last day of the period. A unique person can only have one user account.

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We generate substantially all of our revenue from licensing our solutions. Customers access our solutions through a hosted environment using an online interface, batch processing, API and custom integrations. We recognize revenue from licensing fees (a) on a transactional basis determined by the customer’s usage, (b) via a monthly fee or (c) from a combination of both. Revenue pursuant to pricing contracts containing a monthly fee is recognized ratably over the contract period. Pricing contracts are generally annual contracts or longer, with auto renewal. Revenue from pricing contracts represented 69% and 67% of total revenue for the three months ended March 31, 2020 and 2019, respectively.

Our go-to-market strategy leverages (a) an inside sales team that cultivates relationships, and ultimately closes business, with their end-user markets, (b) a strategic sales team that provides a more personal, face-to-face approach for major accounts within certain industries, and (c) distributors, resellers, and strategic partners that have a significant foothold in many of the industries that we have not historically served, as well as to further penetrate those industries that we do serve. Our sales model generally begins with a secure payment card industry (PCI) compliant environment,free trial followed by an initial purchase on a transactional basis or minimum-committed monthly spend. As organizations derive benefits from our cloud-based next generation technology delivers greater than four 9s of service uptime. By leveraging our proprietary infrastructure design within the cloud,solutions, we currently operate in six datacenters spread geographically across the U.S. and are able to dynamically“land and seamlessly scaleexpand” within larger organizations as needed. Usingadditional use cases expand across departments, divisions and geographic locations and customers become increasingly reliant on our intelligent framework, and leveraging a microservices 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 platformsolutions in May 2016, we have added billions of data records and continue to add 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.

From Fluent’s acquisition of the risk management business in September 2014 through December 2016, the majority of our operations were dedicated to the early stage development of our business model, including the development of our proprietary, cloud-based technology platform, CORE, and the buildout of our initial-phase suite of products, powered by CORE, to serve a variety of industries within risk management. Beginning January 2017, with our technology platform production ready and hardened, our initial suite of products released into the marketplace, and a multi-year product roadmap defined, we transformed from a development organization to a sales-driven organization with sales increasing from a $5.8 million annual run-rate for the month ended January 31, 2017, to a $15.1 million annual run-rate for the month ended March 31, 2018.their daily workflow.

In order for red violetus to continue to develop new products, grow itsour 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 are buildingcontinue to build out our sales organization to drive current products and to introduce new products into the market place. Wemarketplace.

In December 2019, a novel strain of coronavirus, now known as Covid-19, was reported in Wuhan, China and has since extensively impacted the global health and economic environment. In March 2020, the World Health Organization characterized Covid-19 as a pandemic. The Company has taken numerous steps, and will incur increased compensation expensescontinue to take further actions, in its approach to minimizing the impact of the Covid-19 pandemic. As a result of the Covid-19 pandemic, to ensure the health and well-being of our employees, the Company instructed employees at its offices to work from home on a temporary basis. The Company has implemented cost containment strategies across all areas of the organization, including continued curtailment of Company travel and partnering with suppliers, landlords and vendors for our salesprice concessions and marketing, executivepayment deferrals during this interim period. In the second half of March, as preventative and administrative,protective actions were taken by governments, including the implementation of stay-at-home orders, we experienced reduced transactional volume that we believe was a result of customers adjusting to the effects of these stay-at-home orders. Beginning April 1, 2020, the Company elected, under Section 2302 of the Coronavirus Aid, Relief, and infrastructure related persons as we increase headcount inEconomic Security Act (“CARES Act”), to defer payment of the next 12 months.employer portion of Social Security payroll tax. Under the CARES Act, employers can forgo timely payment of the employer portion of Social Security taxes that would otherwise be due from March 27, 2020 through December 31, 2020, without penalty or interest charges. Employers must pay 50% of the deferred amount by December 31, 2021, and the remainder by December 31, 2022. The Company will continue to assess the CARES Act and other applicable government-related legislation aimed at assisting businesses during the Covid-19 pandemic. Given the dynamic nature of this health emergency, the full impact of the Covid-19 pandemic on the Company’s ongoing business, results of operations and overall financial performance cannot be reasonably estimated at this time.

Critical Accounting Policies and Estimates

Management’s discussion andanalysisoffinancial conditionandresultsofoperationsarebasedupon red violet’sour condensed consolidated and combined financialstatements,whichhavebeenpreparedinaccordancewithaccountingprinciples generallyaccepted in the UnitedStates (“US (“GAAP”). The preparationofthesefinancial statementsrequires red violet ustomakeestimates and judgmentsthataffectthereportedamountsof assets, liabilities, revenuesandexpenses,andrelated disclosureofcontingent assetsandliabilities.Onanongoingbasis, red violet evaluates its weevaluateourestimates, including thoserelated totheallowancefordoubtful receivables,accounts, usefullivesofproperty andequipment andintangibleassets, income tax provision, and recoverability of the carrying amounts of goodwill and intangible assets.intangible assets, share-based compensation and income tax provision. Webaseour estimatesonhistoricalexperienceandonvariousother assumptionsthatarebelieved tobereasonable under the circumstances,theresultsofwhichformthebasisformaking judgments about the carrying values ofassetsand liabilitiesthat are not readilyapparentfrom othersources.Actualresultsmaydifferfrom these estimatesunderdifferent assumptionsorconditions.

For additional information, please refer to our 2017 Financials.2019 Form 10-K. There have been no material changes to Critical Accounting Policies and Estimates disclosed in our 2017 Financials.2019 Form 10-K.

Recently issued accounting standards

See Note 2(b)1(b), “Recently issued accounting standards,” in “Notes to Condensed Consolidated and Combined Financial Statements.”

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First Quarter Financial Results

For the three months ended March 31, 2018,2020 as compared to the three months ended March 31, 2017:2019:

First Quarter and Recent Business Highlights

Use and Reconciliation of Non-GAAP Financial Measures

Management evaluates the financial performance of our business on a variety of key indicators, including non-GAAP metrics of adjusted EBITDA, adjusted gross profit and adjusted gross margin. Adjusted EBITDA is a financial measure equal to net loss, the most directly comparable financial measure based on US GAAP, adding backexcluding interest income, tax,net, depreciation and amortization, share-based compensation expense, litigation costs, net, and write-off of long-lived assets and others, as noted in the tables below. We define adjusted gross profit as revenue less cost of revenue (exclusive of depreciation and amortization), and adjusted gross margin as adjusted gross profit as a percentage of revenue.

The following is a reconciliation of gross profit, the most directly comparable GAAP financial measure, to adjusted gross profit:

WeIn order to assist readers of our condensed consolidated financial statements in understanding the operating results that management uses to evaluate the business and for financial planning purposes, we present non-GAAP measures of adjusted EBITDA, adjusted gross profit and adjusted gross margin as supplemental measures of our operating performance because weperformance. We believe they provide useful information to our investors as they eliminate the impact of certain items that we do not consider indicative of our cash operations and ongoing operating performance. In addition, we use them as an integral part of

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our internal reporting to measure the performance of our business, evaluate the performance of our senior management and measure the operating strength of our business.

Adjusted16

We believe adjusted EBITDA, adjusted gross profit and adjusted gross margin are measuresrelevant and provide useful information frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies similar to ours and are indicators of the operational strength of our business. AdjustedWe believe adjusted EBITDA eliminates the uneven effect of considerable amounts of non-cash depreciation and amortization, share-based compensation expense and write-off of long-lived assets, and the impact of other items. Adjustednon-recurring items, providing useful comparisons versus prior periods or forecasts. Our adjusted gross profit is a measure used by management in evaluating the business’s current operating performance by excluding the impact of prior historical costs of assets that are expensed systematically and allocated over the estimated useful lives of the assets, which may not be indicative of the current operating activity. Our adjusted gross margin areprofit is calculated by using revenue, less cost of revenue (exclusive of depreciation and amortization). We believe adjusted gross profit provides useful information to our investors by eliminating the impact of non-cash depreciation and amortization, and specifically the amortization of software developed for internal use, providing a baseline of our core operating results that allow for analyzing trends in our underlying business consistently over multiple periods. Adjusted gross margin is calculated as adjusted gross profit as a percentage of revenue.

Adjusted EBITDA, adjusted gross profit and adjusted gross margin are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, either loss before income taxes or net loss as indicators of operating performance or to cash flows from operating activities as a measure of liquidity.financial measures presented in accordance with GAAP. The way we measure adjusted EBITDA, adjusted gross profit and adjusted gross margin 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.

Results of Operations

Three months ended March 31, 20182020 compared to three months ended March 31, 20172019

Revenue. Revenue increased $1.7$3.6 million or 112%62% to $9.3 million for the three months ended March 31, 2020 from $5.7 million for the three months ended March 31, 2019. This increase was driven by strong growth in usage from existing customers. Revenue from new customers increased $0.2 million or 10%, base revenue from existing customers increased $3.0 million or 84%, and growth revenue from existing customers increased $0.4 million or 46% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, respectively. Our idiCORE billable customer base grew from 4,020 customers as of March 31, 2019 to 5,326 customers as of March 31, 2020. Revenue from new customers represents the total monthly revenue generated from new customers in a given period. A customer is defined as a new customer during the first six months of revenue generation. Base revenue from existing customers represents the total monthly revenue generated from existing customers in a given period that does not exceed the customers' trailing six-month average revenue. A customer is defined as an existing customer six months after their initial month of revenue. Growth revenue from existing customers represents the total monthly revenue generated from existing customers in a given period in excess of the customers' trailing six-month average revenue.

Cost of revenue (exclusive of depreciation and amortization). Cost of revenue increased $0.6 million or 23% to $3.3 million for the three months ended March 31, 2018,2020 from $1.6$2.7 million for the three months ended March 31, 2017. This increase was driven by strong growth in volume resulting from the continued staged release of our product suite, following our transformation from a development organization to a sales-driven organization beginning January 2017. During this time frame, our monthly sales increased from a $5.8 million annual run-rate for the month ended January 31, 2017, to a $15.1 million annual run-rate for the month ended March 31, 2018.

Cost of revenue (exclusive of depreciation and amortization). Cost of revenue increased $0.6 million or 43% to $2.0 million for the three months ended March 31, 2018, from $1.4 million for the three months ended March 31, 2017.2019. Our cost of revenue primarily includes data acquisition costs. Data acquisition costs consist primarily of the costs to acquire data either on a transactional basis or through flat-fee data licensing agreements, including unlimited usage agreements. We continue to expandenhance the breadth and depth of our data through the addition and expansion of relationships with our key data suppliers, including our largest data supplier, which accounted for approximately 49%39% of our total data acquisition costs for the three months ended March 31, 2018,2020 compared to approximately 33%41% for the three months ended March 31, 2017.2019. Other cost of revenue includesitems include expenses related to third-party infrastructure fees.

We continued to develop our baseline data repository in anticipation of completing the development of our full suite of risk management products during the development periods. As the construct of our data costs is primarily a flat-fee, unlimited usage model, the cost of revenue as a percentage of revenue decreased to 61%35% for the three months ended March 31, 20182020 from 89%47% for the three months ended March 31, 2017, as a result of the scaling.2019. We expect that cost of revenue as a percentage of revenue will continue to decrease over the coming years as our revenue increases. Historically, at scale, the industry business model’s cost of revenue will trend between 15% and 30% as a percentage of revenue.