Red Violet, a Rebutal

Red Violet, a Rebutal

First, for those who lectured me so earnestly, and felt so sorry for me for being taken in, I made it clear in my statement that this was a 1.5% position for me, a frivolity. For example my portfolio rose yesterday from up 22.9% to up 26.4%, rising 2.8%, the rise in one day being almost double the size of my entire position in Red Violet. If my 1.5% position went to zero I’d hardly notice it in the big scheme of things. On the other hand, while it may go up and down like any other position, my guess is that the chance of it going to zero, is zero.

Second, I’m not trying to influence or convince anyone who doesn’t want to buy this stock to buy it. I’m just telling you what I did, and why.

Third, for a long time we’ve been bemoaning how there aren’t any SaaS companies coming to market at an EV/S of under 20, and with a market cap under $15 billion. We’ve also been talking about how much easier it is for a company with a market cap of $3 billion to triple than a company with a market cap of $20 billion or $30 billion.

Here, by an unusual set of circumstances we have a company which is a SaaS company, which has rapidly rising revenue, which has rapidly rising gross margins, which has rapidly rising numbers of customers, which has reached cash flow positive, which is approaching adjusted profitablility, and has a market cap of $0.3 billion ($300 million), which is only six times forward revenue. How easy will that be to triple. We’ll have to see, but certainly easier than a company with a maket cap of $3.0 billion or $30 billion.

Fourth. And this isn’t a private company that we are frozen out of. It isn’t penny stock: it sells at about $25 per share. It isn’t a pink sheet stock: it’s on the Nasdaq, for God’s sake! We can buy and sell it easily.

Fifth It’s also a company with experienced management, who probably know more about the field than anyone else having worked with the founder of the field on two previous companies. They have spent the last five years laying the foundation and putting in the fixed costs of acquiring the data and building their products and now new revenue goes almost 100% into gross margin.

Sixth I was astounded by the viciousness of the attack on this little company, by people who prided themselves on not having read what I spent considerable time compiling, and who weren’t attacking the company’s numbers or its field, but the fact that their headquarters was in a particular city. Now that’s a rational reason to stop reading about a company and attack it!!! Oh and also because someone they didn’t like had chosen to take a stockholder position in this, a public company.

Seventh How about looking at their revenue growth that TommyTripod collected for us?
Q1 2018 - 111.5%
Q2 2018 - 96.1%
Q3 2018 - 89.1%
Q4 2018 - 73.9%
Q1 2019 - 72.5%
Q2 2019 - 85.3%
Q3 2019 - 89.4%
Q4 2019 - reports March 5, 2020

You really don’t think that that is worth a look at, at 6x forward revenue.

EighthAnd their expanding Gross Margins
Q1 2018 - 39.3%
Q2 2018 - 46.7%
Q3 2018 - 48.8%
Q4 2018 - 51.1%
Q1 2019 - 53.5%
Q2 2019 - 57.9%
Q3 2019 - 62.2%
Q4 2019 - reports March 5, 2020

Management believes that gross margins will peak and stabilize in the 80-90% range once they achieve a $50 million run rate. That will probably be achieved within the next twelve months, as last quarter their revenue was $8.3 million up 89.4% from $4.4 million. $8.3 million is already a $33.2 million run rate and they grew last quarter by 89%.

Ninth And their Free Cash Flow figures (in millions)
Q1 2018: -2.8
Q2 2018: -2.4
Q3 2018: -1.6
Q4 2018: -1.2
Q1 2019: -1.2
Q2 2019: +0.1
Q3 2019: +1.5 (18% of revenue)
Q4 2019: - reports March 5, 2020

Putting all that together it sure looks to me that it’s worth a small position.

Tenth: How about the management team? I’ll quote from Tommy’s post:

“There are more reasons to like RDVT, beyond just their financial statements. The data fusion industry was essentially founded by a man named Hank Asher in 1992. Asher’s first data fusion business “DBT online” was bought out for $150M in 1999.

Immediately after being bought out, Asher teamed up with current CEO of RDVT Derek Dubner and current CIO of RDVT Jeff Dell to build a competing data fusion business called “Seisint”.

Seisint was acquired just 5 years later in 2004 for $775M.
After a 4 year hiatus, Asher began building another data fusion business called TLO “The Last One” with the current CEO of RDVT Derek Dubner, RDVT’s current President James Reilly, and RDVT’s current CFO Dan MacLachlan.

Unfortunately, Asher died suddenly in 2013, and because much of the TLO’s funding came from loans from Asher’s estate, it became a big complicated mess when his daughters got involved. The business ultimately was sold in bankruptcy court to TransUnion for $154M.

In 2014, the same team minus Asher regrouped and started a new business TBO “The Best One”, which was renamed to “Cogint”, then merged with “Fluent”, which was then was spun back out as Red Violet.

The point is this: The current RDVT management team is highly experience in this industry. I would go as far to say as their experience is unparalleled. They also clearly believe in the business, as insiders own 23% of the business. They also have plenty of experience in negotiating buy-outs, which I hypothesize will most likely be RDVT’s ultimate fate.”

Eleven As far as pumping the stock, they hardly even communicated with the public until their May stockholder letter, which I pleaded with you to read. They waited until they had reached the inflection point for the company. It’s still the only stockholder letter they’ve written. That doesn’t sound like pumping to me.

Twelve Does it have a moat? I’ll quote from that article I linked to.

“A question you might have now is: “if the market is so large and the economics are so attractive in this market, why don’t more tech companies copy them?” My discussions with management on this point suggest the core barriers to entry here are (1) there are only a handful of people on the planet that know how to build a robust and market-leading data fusion business and one of them – Ole Paulsen – is leading RDVT’s technical product development, and (2) nothing that RDVT has built thus far is off the shelf – they have literally built their own programming language for the product themselves. This creates an immense moat around their business. The only way a large competitor could reasonably enter this business without drawing a a ton of attention would be to buy RDVT outright.”

Instead of the “only way”, I would put it that buying RDVT would be the “easiest” way for a large company to enter the field.

Thirteen Okay, that’s my thinking. In my five part write-up, I summarized the last four earnings reports, linked to the stockholder letter, summarized and linked to the SA article, and summarized Tommy’s post. If you are interested, do your own evaluation. Don’t just follow what I did, because I don’t want to be responsidble for you.

Best,

Saul

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Oh, and look at the shareholder presentation on the website.

https://redvioletinc.gcs-web.com/static-files/5a0eecb8-c36c-…

It has a lot of information and graphs in a few pages.

Saul

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I will add to Saul’s writeup above, that RDVT’s auditor, since 2017, has been Grant Thornton, one of the most reputable midsize audit/accounting firms on the globe. They aren’t using some rinky dink local audit firm that would bend over backwards and sign off on anything for their business. Grant Thornton has a reputation that outweighs the wants of any small client like Red Violet.

I also did some basic searches of companies headquartered in Boca Raton and there are quite a few well known, major businesses based there:

ADT
Office Depot
Jarden
OfficeMax

just to name a few

I haven’t done much digging besides a high level review of the numbers and, as Saul has pointed out, if they are legit, it looks very promising.

I too took a small 0.5% position yesterday, enough to make me follow it for a bit and see how things play out, but not any great risk

-mekong

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Fourteenth How about the fact that I (me) just wanted an opportunity to add a “potential” moonshot stock (small starter position to a micro-cap) to my portfolio for nothing more than entertainment.

I have a portfolio made up of numerous companies that are recommended by at least one of the many TMF services; companies that are additionally supported and discussed by members of this message board on a daily basis. These companies are discussed at length on virtually every forum I monitor and at times I can become just a little bored and distracted.

Full disclosure, I most definitely suffer from adult ADHD and every now and then I like to, I need to, color outside the lines…at the beginning of the year, dare I even say it, I purchased SPCE!! I spent the last 20+ years of my career walking the high-wire of commercial real estate development, where every day you live in a world of black-n-white, win-or-lose, pass-or-fail. There is an adrenaline high that comes with that lifestyle. An adrenaline high that is hard to replace in retirement (I retired at age 55).

So, every now and then, I allow myself the guilty pleasure of investing in a company like Red Violet. At the end of the day, it will not even move the needle on my networth, but that’s not even the point. Every now and then, I just like throwing all the rules out the window and doing something I want to do.

Thanks Saul for the numerous hours you put into the analysis. I surmise that many of the detractors most likely did not even take the time to read the entirety of your post. I also surmise that many of those newly invested in Red Violet most likely didn’t read the post either…and that is okay with me!

Harley

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Red Violet has provided a very clear narrative detailing its fast-growing and broad-based customer base, increasing revenue from existing customers, strong sequential growth from new customers, increased adoption from large customers, and the optionality of its business model. Further, management repeatedly lives up to any optimistic commentary it provides. This is a very experienced team with deep industry knowledge – and they keep surprising to the upside for me.

I also love the fact that there hasn’t been any recent insider selling despite the stock’s huge run-up.

Investors who want everything to sound perfect should go shopping in the $2 billion+ market cap range.

Great analysis, Saul.

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Morning Saul,

I agree that it was a little much for anyone to give you stock picking advice on that thread.

You were very clear in your original post with your feelings on RDVT. Yes this is a publicly traded company and not a penny stock. I posted my concerns for people to do their own due diligence and that I saw red flags in the two largest shareholders, not RDVTs financials or performance.

So I have this question for you. Knowing everything you know about RDVT as a publicly traded company, not some fly by night penny stock, why in your original write up did you include the line “this could be a scam” when referring to RDVT? I’ve never heard you say that about another company before. That’s an unusual statement.

It was that statement that actually caused me to dig into who owned stock in RDVT, and from the information I posted I came to the conclusion to stay clear of owning shares in RDVT.

What did you see in researching RDVT that would give you concern that the company could possibly be a scam.

TMB

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The way this is going, I wouldn’t blame Saul to keep schtum going forward, just don’t give any more dogs a bone, its likely to get chewed up, scam or no scam. DYOD!

So I have this question for you. Knowing everything you know about RDVT as a publicly traded company, not some fly by night penny stock, why in your original write up did you include the line “this could be a scam” when referring to RDVT? I’ve never heard you say that about another company before. That’s an unusual statement.

Hi TMB,
I, personally, didn’t have any concern that it was a scam, but this is a tiny company, a tenth the size of any of our others, and it didn’t have any analyst following yet (it’s too small for them to recommend it without hugely moving the price), and I didn’t want people to jump into it without knowing anything about it, just because I did. I think that now, after this discussion there is more information to base your decision on. I’m keeping my position.
Saul

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Thanks for the research Tommy and Saul. Interesting company/situation, going to look a little deeper, might also dip a toe in.

Just a small note…RDVT reports Q4 on March 12th (not March 5th).

http://investors.redviolet.com/investor-overview

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To piggyback off what Saul mentioned in point eleven - take a look at the evolution of RDVT’s 8-Ks over the last year. They have made a clear effort to increase transparency. For example, in their latest 8-K RDVT included supplemental metrics that break down their revenues between idiCore and ForeWarn, base/growth revenue from existing customers, revenue from new customers, number of users, and so on…
Also, last quarter RDVT hosted its first conference call to accompany their earnings releases. Listen to their call, plenty transparency there too.
For good measure, they recently secured their first statewide contract for ForeWarn in Maine.
Do these sound like characteristics of a pump and dump stock? It sure doesn’t to me. But, as always, do you own due diligence.

Tommy

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I’m trying to just clarify the “uniqueness” or “competitive advantage” of Red Violet.

Can someone more familiar than me clarify how they are different than the following:

shareable.com

The way I look at RDVT, is their “data fusion” of “big data” is compiling data from multiple sources, and “fusing” them into one report.

How is it different than what shareable is doing here?

https://hires.shareable.com/employment-background-check-cost…

You can see how they shaeable “fuses” data together at different amounts depending on how much you are willing to pay.

The reason I ask this is because I am constantly seeing ads online about how I can instantly check the background of someone. So I am not sure just what moat RDVT has or what makes them unique compared to all the others out there. I could bring more examples but there are plenty of companies when I type “background check” in google. I just picked the first one.

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I went into linked-in and looked at Dubner’s profile. It tells a story of a lawyer who worked for a start up, as legal council, and then began branching out on his own startups. The company descriptions for current and previous company are identical. Description of company prior to that was similar. So the guy is a serial entrepreneur.

A red flag is that about 5 percent of its private investment was from a company called Grander Holdings, Inc. according to this site, Grander was guilty of a pump and dump scheme: https://www.johnschapman.com/investment-fraud/honig-stetson-…

You can see the top holdings here: https://simplywall.st/stocks/us/commercial-services/nasdaq-r…

Another private equity firm, Frost Gamma Investments owns about 22 percent of the stock.

Phillip Frost, a trustee of the Frost Gamma Investments was charged in a pump and dump scheme by the SEC: https://www.marketwatch.com/story/prominent-health-care-inve…. Philip Frost agreed to a $5 million judgement.

A story last year by CNBC about Michael Brauser who owns 10% of the shares contains the following:

“ In September, the SEC charged Honig, Brauser, Stetson and others it called “microcap fraudsters” in connection with a $27 million “lucrative market manipulation,” according to a press release. The charges were unrelated to Polarity. Honig, Brauser and Stetson have not yet responded to the complaint.”

I don’t see a fire, but I smell some smoke.

Gordon

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I read the full post and all the referenced reports and the slide show, as well as the prior posts. On the basis of this impressive set of data I decided to nibble (2%) .This is small enough not to seriously dent my TMF portfolio, nor my overall net worth.

However, the naysayers here all argue with some passion that the numbers and much of the other info is suspect. Having Grant Thornton as an auditor engenders some confidence but it is not an ironclad guarantee.(Maybe nothing is)

I think I’ll flip a coin.

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Reminds me of two things

  1. My dive and experience with MITK. Great numbers on paper… but so small… that even “large growth” didn’t matter. At microcaps… traction in the market isn’t as obvious and therefore I think the discount.

  2. Saul underwent an exercise maybe 10-12 months ago where he reviewed his portfolio, and as I recall, trying to find “try out positions” as he was self analyzing why he wouldn’t be extremely concentrated in AYX, ZS, TWLO, and others at the time. The result… he couldn’t find companies where he would allocate material percentages of his portfolio that bested the stories above.

I took these two lessons and looked at my own portfolio, and now, I think it is important we all take Red Violet as learning #3.

Concentrated Portfolios Require Active Management
You must always be looking for the next opportunity because you know that eventually high growth stocks will decelerate and that’s your jumping off point (debated on when, where, how and when).

It is very, very hard to look for anything that is more appealing than AYX right now, truly. But 30% is about 10% beyond where I’d prefer to be here… but why take that 10% and allocate it somewhere else until I’m sure?

The issue I have with Red Violet is #1. And that’s based on past experience with MITK. I hope I’m wrong here and can learn another lesson.

Stocks I’ve watched for high growth, high margin, include EHTH (basically a search-all for healthcare that I won’t get into because I feel like politics are too tied to its performance), AVLR (PAYC pitch applies but I don’t love the margins or growth rate), EVBG (I feel like its “stuck”), PD (I feel like its superior margins but TEAM may be encroaching), INSP (I own a slice… but generally don’t love the medical device industry), LVGO (need to learn more)

It is a small world we live in, this community and those contributing make it better.

Just a Fool

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Also, this is a start up, and I understand the need to attract talent. However, in 2018, the top three officers collected $8.2 million in compensation. Just seems like a lot of reward for a company making so little. Perhaps I am just too naive.

Color me skeptical. I hope that next year at this time I feel bad for missing a rocket stock.

Gordon

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I have no opinion on Red Violet as an investment. I have too many choices in more mature companies. And my gut feeling is that once promoters are crooked, more often than not they stay that way since penalties tend to be light and rewards high.

But I am happy to see all the controversy because at times I think this board has become a Saul fan club. Not that he isn’t a super investor, it is just that nobody bats 1000 in this game. Even if Saul is a Babe Ruth or a Ty Cobb, he can and does strike out sometimes…Just less often than most of us.
So if some disagree with him ,please do it politely and respectively.

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I’m trying to just clarify the “uniqueness” or “competitive advantage” of Red Violet.

Can someone more familiar than me clarify how they are different than the following:

With something that has a measurable outcome like my Covered Call Selector it is quite easy to rate the outcomes but how do you rate something as fuzzy hiring staff? You only find out after hiring them and you cannot measure them against the people you did not hire.

Darn good question!!!

Denny Schlesinger

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However, in 2018, the top three officers collected $8.2 million in compensation.

You mean the top three officers in this company (all with histories of abuse as noted by the SEC), in what we all know are cash strapped start ups, took this desperately needed and rare cash horde, and instead of investing it into their “legitimate” business, paid “other people’s money” (ie, those who bought the stock) to themselves? No wonder they decided that they did not need venture capital. Or is it that venture capital money (flush and always looking for opportunities - the smart money) just did not want to have anything to do with this company.

Your out of your mind Gordon! How could this be anything but legit! As to my opinion give that a :wink: and concur with you.

The insider promoters have already made millions and will continue to do so as long as the getting is good. Private investors can make tons of money along with insiders for as long as the getting is good. There is a rational reason to invest in such a company, but it is not because the business is legit.

Hey, shoot me (figuratively). I have always been nothing but honest in my opinion, here, and everywhere, my entire life. Caused me endless trouble (being correct is no way to go through life if you want friends, influence, and success. Rather, it makes things more difficult. But we are who we are).

Tinker

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I am impressed by the numbers, as presented by Saul in his initial posts. Both in terms of the numbers and the way Saul analyzes the data. So far, I can understand being tempted, based on the growth.

After reading the shareholder letter, I visited one of their products IDI and was searching for how they get the massive amount of data they would need to be really that good as they say they are. From their web page, they state:

“We collect certain personal information from third-party data sources. Such information includes public record (available from government sources) and publicly-available data. Sources of personal information include major credit bureaus, government and public-record repositories, data aggregators, brokers, and compilers, marketing companies, and public and publicly-available sources.”

They talk about having geolocation data from devices, “An individual’s preferences and characteristics determined by websites visited”. And much more.

If this would be FB or GOOGLE or any other big social media company that has its tracking beaconsd and cookies everywhere, I would think they could manage to really get that amount of data. But looking at the cost of revenue, and given they must buy most of the non-public data, I don’t get a good feeling about the realism of them having that data for real.

The kind of data they brag about having for their analysis is the most precious data available and it will neither be easy nor cheap to buy that kind of data from anyone who has collected it. So I really, really have a hard time imagining that with their small war chest, they can buy that amount of diversified data. And they will have to buy that data over and over, since outdated data wouldn’t be much worth in a short period.

The trustworthyness of their data might not be easy to quantify for single customers. But I fear their story will blow up in their face. Methinks, there are signs that this company produces and sells personal profiles that are in no way based on that amount of data as they brag. Still, might grow for a while and bring in $$$ if you invest now and ride up. But from what I see, there is a good chance their customers will start to notice that the IDI and FOREWARN systems are just coarse guesswork and in no way based on all the data the company so colorfully brags about.

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A story last year by CNBC about Michael Brauser who owns 10% of the shares contains the following:

He does not own 10%, he is a “10% owner” which means he owns at least 10%, a limit above which there are additional SEC reporting requirements.

“ In September, the SEC charged Honig, Brauser, Stetson and others it called “microcap fraudsters” in connection with a $27 million “lucrative market manipulation,” according to a press release. The charges were unrelated to Polarity. Honig, Brauser and Stetson have not yet responded to the complaint.”

The case is being settled. Google “Michael Brauser vs. SEC” and you’ll find it. I did:

https://discussion.fool.com/i39ve-did-quite-a-bit-of-research-on…

Denny Schlesinger

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