Red Violet, Inc. — Fiscal 2021 Form 10-K Summary
Business context and reporting period
Red Violet provides cloud-native identity intelligence, data analytics and information solutions through its CORE platform and the IDI and FOREWARN brands. Its solutions support identity verification, fraud prevention, risk mitigation, due diligence, regulatory compliance and customer acquisition. The filing covers the fiscal year ended December 31, 2021, including unaudited fourth-quarter results for the three months ended December 31, 2021.
At December 31, 2021, IDI had 6,548 billable customers versus 5,726 in 2020, and FOREWARN had 82,419 users versus 48,377. Pricing-contract revenue represented 80% of total revenue in 2021, compared with 73% in 2020.
Financial performance and liquidity
| Metric | FY 2021 | FY 2020 | Change |
|---|---|---|---|
| Revenue | $44.0 million | $34.6 million | Up 27% |
| Platform revenue | $42.5 million | Not clearly stated in source | Up 31% |
| Services revenue | $1.5 million | Not clearly stated in source | Down 25% |
| Gross profit | $27.7 million | $19.3 million | Up 43% |
| Gross margin | 63% | 56% | Up 7 percentage points |
| Net income (loss) | $0.7 million | $(6.8) million | Improved |
| Adjusted EBITDA | $10.9 million | $5.9 million | Up 85% |
| Adjusted EBITDA margin | 25% | 17% | Up 8 percentage points |
| Cash from operating activities | $8.9 million | $6.5 million | Up 37% |
| Capitalized software and other investing cash outflows | $5.2 million | $5.7 million | Down 7% |
| Cash and cash equivalents | $34.3 million | $13.0 million | Up $21.3 million |
Fourth-quarter 2021 revenue was $11.3 million, up 26% year over year. Gross profit was $6.9 million, gross margin was 62%, adjusted EBITDA was $1.3 million, adjusted EBITDA margin was 12%, and operating cash flow was $2.0 million. Fourth-quarter net loss was $1.8 million compared with a $1.9 million loss in the prior-year quarter.
At December 31, 2021, total assets were $74.4 million, shareholders’ equity was $69.4 million and total liabilities were $4.9 million. The CARES Act loan, which had a principal amount of approximately $2.2 million, was fully forgiven in June 2021; consequently, the Company had no outstanding loan balance at year-end. Operating lease liabilities totaled $1.9 million.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by a $9.9 million, or 41%, increase in base revenue from existing customers.
- IDI customers and FOREWARN users grew substantially year over year, supporting increased platform revenue.
- Cost of revenue decreased slightly in dollars despite higher revenue, causing cost of revenue as a percentage of revenue to decline to 25% from 33%.
- Sales and marketing expense increased 10% to $8.9 million, while general and administrative expense increased 11% to $19.8 million.
- Depreciation and amortization increased 28% to $5.4 million, primarily due to internally developed software placed into service after 2020.
- Share-based compensation expense declined to $6.6 million from $8.1 million, although $7.8 million was recorded in total share-based compensation including amounts capitalized to software.
- The Company completed a registered direct offering of 552,915 shares at $38.00 per share, generating net proceeds of $20.9 million.
- Common shares outstanding increased to 13.49 million at December 31, 2021 from 12.17 million at December 31, 2020.
- Services revenue declined because idiVERIFIED, a lower-margin transactional collections offering, remained affected by COVID-19-related collections moratoria.
Outlook, commentary, risks and unusual items
Management expects idiVERIFIED volume to return to pre-COVID levels in the second half of 2022, but states that the pandemic continues to limit forecasting visibility. Management believes available cash and expected operating cash flow will fund operations and expected capital expenditures for the next twelve months.
As of December 31, 2021, the Company had $33.1 million of future commitments under data licensing agreements, including $23.8 million of minimum purchases under its largest supplier agreement. The largest data supplier represented 49% of 2021 data acquisition costs, and its agreement runs through June 30, 2026, subject to specified termination rights.
The $2.2 million CARES Act loan forgiveness produced a one-time gain and materially benefited 2021 pretax and net income. Excluding this gain, the Company remained loss-making on a GAAP operating basis, reporting a $1.3 million operating loss for the year.
Key risks include dependence on external data suppliers, cybersecurity and privacy incidents, evolving federal and state privacy regulation, intense competition, customer retention and consolidation, macroeconomic conditions, lengthy sales cycles, dependence on key personnel, potential dilution from equity awards or future financing, and continued COVID-19 uncertainty. The Company reported no legal proceeding that management believes is likely to have a material adverse effect. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021.
Important facts for investors to verify
- Reconcile the improvement to 2021 GAAP profitability with the $2.2 million one-time debt-forgiveness gain and the continuing $1.3 million operating loss.
- Assess the sustainability of platform growth, including IDI customer expansion, FOREWARN user growth and the shift toward recurring pricing-contract revenue.
- Evaluate the $33.1 million data-licensing commitments and the concentration of 49% of data acquisition costs with one supplier.
- Review future software capitalization, amortization and share-based compensation, including $14.1 million of unrecognized RSU compensation expected to be recognized over a weighted-average period of 2.6 years.
- Monitor liquidity after the $20.9 million equity offering, ongoing data commitments, software investment and potential future capital needs.
- Verify the timing and magnitude of any recovery in idiVERIFIED revenue and its effect on margins.
- Consider dilution from 1.31 million unvested RSUs at year-end 2021 and additional shares scheduled to vest through 2025.