Business Context and Reporting Period
Red Violet, Inc. provides cloud-based identity intelligence, data analytics, and risk-management solutions through its CORE platform, idiCORE, and FOREWARN brands. Customers use the solutions for risk mitigation, due diligence, fraud prevention, regulatory compliance, investigations, and customer acquisition. The filing is a Form 10-K for the fiscal year ended December 31, 2020; fourth-quarter results are also discussed.
- idiCORE billable customers increased to 5,726 from 5,064.
- FOREWARN users increased to 48,377 from 30,577.
- Pricing-contract revenue represented 73% of 2020 revenue versus 65% in 2019.
Financial Performance and Metrics
| Metric | Q4 2020 | Q4 2019 | FY 2020 | FY 2019 |
|---|---|---|---|---|
| Revenue | $9.0 million | $9.1 million | $34.6 million | $30.3 million |
| Platform revenue | $8.6 million | $7.7 million | $32.5 million | $25.8 million |
| Services revenue | $0.4 million | $1.5 million | $2.0 million | $4.5 million |
| Net loss | $1.9 million | $4.9 million | $6.8 million | $11.1 million |
| Gross profit | $5.1 million | $4.9 million | $19.3 million | $15.4 million |
| Gross margin | 57% | 54% | 56% | 51% |
| Adjusted EBITDA | $1.2 million | $0.8 million | $5.9 million | $1.9 million |
| Adjusted gross margin | 70% | 62% | 67% | 60% |
Full-year revenue increased 14%, driven by higher usage from existing customers and growth in platform revenue. Net loss narrowed 38%, while adjusted EBITDA increased 213%. Cost of revenue declined 8% to $11.3 million, primarily because of lower transactional data-acquisition costs associated with reduced idiVERIFIED activity. Depreciation and amortization increased 46% to $4.2 million as internally developed software entered service.
Cash provided by operating activities was $6.5 million in 2020 versus $1.6 million in 2019. Investing cash use was $5.7 million, including $5.5 million of capitalized internal-use software costs. Financing cash flow was $0.3 million, primarily reflecting the CARES Act loan proceeds less taxes paid on vested restricted stock units.
Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $13.0 million at December 31, 2020, compared with $11.8 million at December 31, 2019.
- Total shareholders’ equity was $43.3 million; accumulated deficit was $22.7 million.
- The company had $2.2 million of unsecured CARES Act debt outstanding: $0.4 million current and $1.7 million long term. The loan bears interest at 1.0% and matures May 5, 2022.
- The company applied for forgiveness of the CARES Act loan in November 2020, but forgiveness had not been confirmed in the filing.
- Material future data-licensing commitments totaled $10.9 million, including $7.5 million due in 2021 and $2.5 million in 2022.
- Management believes available cash and expected operating cash flow will fund operations and planned capital expenditures for the next twelve months, but states that additional equity or debt financing may be needed depending on growth, cash generation, and COVID-19 effects.
Material Changes Versus the Prior Comparable Period
- Revenue rose $4.3 million, or 14%, to $34.6 million.
- Platform revenue increased 26%, while services revenue decreased 54%.
- Base revenue from existing customers increased 19% and growth revenue from existing customers increased 40%; revenue from new customers declined 26%, primarily because of COVID-19-related conditions.
- Gross margin improved five percentage points to 56%, reflecting revenue growth and a lower proportion of transactional data costs.
- Sales and marketing expense increased 8%, while general and administrative expense decreased 5%, principally because of lower share-based compensation.
- Operating cash flow improved by $4.9 million year over year.
- Fourth-quarter revenue declined 1%, but platform revenue increased 12%; fourth-quarter net loss narrowed 61% and adjusted EBITDA increased 49%.
Outlook, Commentary, Risks, and Unusual Items
COVID-19 reduced transaction volumes during the second and third quarters of 2020 and continued to depress collection-customer activity in the fourth quarter. Collection volume, including idiVERIFIED, was $0.9 million lower in Q4 2020 than in Q1 2020. Management expects collection-customer transaction volume to return to pre-COVID levels in the second half of 2021, but states that the pandemic materially limits forecasting reliability.
- The company granted temporary minimum-spend concessions to 181 customers during 2020, reducing committed revenue by approximately $468,000.
- The largest data supplier represented 46% of 2020 data-acquisition costs, up from 40% in 2019. The agreement’s initial term ends April 30, 2022, with $5.7 million of remaining minimum purchase commitments through that date.
- Privacy, data-protection, cybersecurity, regulatory, and litigation risks are significant because the business collects and processes sensitive personal information.
- The company competes with substantially larger providers, including Palantir, RELX/LexisNexis, TransUnion, and Thomson Reuters.
- The company has a history of losses and no income tax expense because a full valuation allowance was maintained against deferred tax assets. The valuation allowance was $7.6 million at year-end 2020.
- Share-based compensation was $8.1 million in expense and $1.8 million capitalized in 2020. An additional 1.8 million unvested RSUs remained outstanding at year-end, and $11.7 million of related compensation expense was unrecognized.
- No material legal proceeding was identified by management, and the company reported no off-balance-sheet arrangements.
- Management reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2020; the independent auditor did not express an opinion on internal control because the company was not required to obtain an audit under applicable smaller-reporting-company rules.
Important Facts for Investors to Verify
- Whether the CARES Act loan is ultimately forgiven, partially forgiven, or required to be repaid.
- Whether collection and idiVERIFIED transaction volumes recover as projected in the second half of 2021.
- The sustainability of positive adjusted EBITDA and operating cash flow despite GAAP net losses.
- The company’s ability to fund approximately $10.9 million of data-licensing commitments while continuing substantial software investment.
- Renewal terms and operational dependence on the largest data supplier after April 2022.
- The effect of privacy regulation, cybersecurity incidents, and potential data-access restrictions on revenue, margins, and liquidity.
- Potential dilution from the 1.8 million unvested RSUs and other equity awards.
- Adjusted EBITDA, adjusted gross profit, and adjusted gross margin are non-GAAP measures and may not be comparable with similarly titled measures used by other companies.