Business Context and Reporting Period
Red Violet, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The company operates as a single segment providing identity intelligence, risk mitigation, fraud prevention, compliance, customer acquisition and investigative solutions through its CORE platform, primarily marketed under the idiCORE and FOREWARN brands.
As of September 30, 2021, idiCORE had 6,314 billable customers versus 5,758 a year earlier, while FOREWARN had 74,377 users versus 44,927. Pricing-contract revenue represented 80% of total revenue in both the quarter and nine-month period, up from 68% and 71%, respectively, in the comparable 2020 periods.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $11.7 million, up 26% | $32.8 million, up 28% |
| Gross profit | $7.6 million; 65% margin | $20.7 million; 63% margin |
| Adjusted gross profit | $8.9 million; 76% margin | $24.5 million; 75% margin |
| Income from operations | $1.3 million | $0.3 million |
| Net income | $1.3 million; diluted EPS $0.09 | $2.4 million; diluted EPS $0.19 |
| Adjusted EBITDA | $3.6 million; 31% margin | $9.6 million; 29% margin |
| Operating cash flow | $3.5 million, as reported by management | $7.0 million |
Cash and cash equivalents were $13.4 million at September 30, 2021, compared with $13.0 million at December 31, 2020. Total assets were $53.8 million and shareholders’ equity was $49.2 million. The company had no outstanding long-term loan after forgiveness of its $2.2 million CARES Act loan, including accrued interest, in June 2021. Operating lease liabilities totaled $2.1 million.
For the nine months, investing cash outflows were $3.8 million, principally for capitalized internally developed software and property and equipment. Financing cash outflows were $2.8 million, primarily for taxes paid on the net settlement of restricted stock unit vesting.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased $2.4 million, or 26%, driven by higher base revenue from existing customers, new-customer revenue and customer growth.
- Nine-month revenue increased $7.2 million, or 28%, primarily from stronger usage by existing customers.
- Third-quarter net income improved from a $0.9 million loss to $1.3 million of income. Management described this as the company’s first quarter of GAAP profitability without a one-time gain.
- Nine-month net income improved from a $4.9 million loss to $2.4 million of income; however, 2021 results included a $2.2 million one-time gain from CARES Act loan forgiveness.
- Gross margin expanded from 59% to 65% for the quarter and from 55% to 63% for the nine-month period, primarily because revenue grew faster than largely fixed data-acquisition costs.
- Adjusted EBITDA increased 73% year over year in the quarter, from $2.1 million to $3.6 million, and increased to $9.6 million from $4.7 million for the nine-month period.
- Depreciation and amortization increased to $1.3 million in the quarter and $3.9 million for the nine-month period, reflecting additional amortization of internally developed software.
- Share-based compensation declined to $5.2 million for the nine-month period from $6.4 million, while sales and marketing and general and administrative expenses increased.
Guidance, Outlook, Risks and Unusual Items
- Management expects idiVERIFIED, a lower-margin transactional collections offering affected by COVID-19, to return to pre-pandemic volume in the first half of 2022. Revenue from the service was down $0.8 million in the quarter versus the first quarter of 2020 and down $0.6 million for the nine-month period.
- The company expects to fund operations and expected capital expenditures from available cash and operating cash flow over the next twelve months. Management stated that liquidity is sufficient for that period, but noted that additional equity or debt financing could become necessary depending on revenue growth, cash generation and the pandemic’s effects.
- Material commitments under data licensing agreements totaled $34.1 million as of September 30, 2021, including $2.1 million for the remainder of 2021 and $7.5 million in 2022.
- COVID-19 continued to limit the company’s ability to forecast revenue and expenses. The company provided customer concessions reducing minimum committed spend by $24 thousand in the quarter and $50 thousand for the nine-month period.
- The company had a full valuation allowance against deferred tax assets and recorded no income tax expense for either comparable period.
- Management reported no material changes to previously disclosed risk factors, no material legal proceedings, and no off-balance-sheet arrangements.
- As of September 30, 2021, the company had $27.98 million of net internally developed software, including $3.2 million not yet placed into service, and estimated future amortization of the existing intangible asset balance of $27.98 million.
- Disclosure controls and procedures were assessed as effective, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the sustainability of GAAP profitability excluding the $2.2 million loan-forgiveness gain recognized in the nine-month period.
- Assess whether revenue growth, customer additions and the higher proportion of pricing-contract revenue continue, particularly for idiCORE and FOREWARN.
- Monitor recovery of idiVERIFIED volume and the continuing effect of COVID-19-related customer concessions.
- Evaluate the company’s ability to fund $34.1 million of data licensing commitments while continuing substantial software investment.
- Reconcile adjusted EBITDA and adjusted gross profit to GAAP results, noting the significant exclusions for depreciation and amortization and share-based compensation.
- Review dilution risk from 1.23 million unvested restricted stock units, ongoing share-based compensation and potential future financing.
- Consider concentration risk because the largest data supplier represented approximately 49% of data-acquisition costs in the third quarter and nine-month period.