Red Violet, Inc. 2020 Q2 Form 10-Q Summary
Business context and reporting period
Red Violet provides cloud-based data fusion, analytics, fraud detection, risk mitigation, due diligence and marketing solutions through its CORE platform and the idiCORE and FOREWARN brands. The company also offers the transactional idiVERIFIED service. The filing covers the three and six months ended June 30, 2020; financial statements are unaudited.
- As of June 30, 2020, idiCORE had 5,375 billable customers versus 4,370 a year earlier, and FOREWARN had 40,857 users versus 19,721.
- Pricing-contract revenue represented 79% of second-quarter revenue and 73% of year-to-date revenue, compared with 62% and 64%, respectively, in the comparable 2019 periods.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $7.1 million | $7.2 million | $16.4 million | $13.0 million |
| Gross profit | $3.5 million | $3.6 million | $8.7 million | $6.1 million |
| Gross margin | 50% | 49% | 53% | 47% |
| Adjusted gross profit | $4.5 million | $4.2 million | $10.5 million | $7.3 million |
| Adjusted gross margin | 63% | 58% | 64% | 56% |
| Net loss | $2.5 million | $3.9 million | $4.0 million | $5.2 million |
| Adjusted EBITDA | $0.9 million | $0.4 million | $2.6 million | $(0.05) million |
| Cash flow from operating activities | $1.8 million | $0.1 million | $3.0 million | $(1.1) million |
Second-quarter revenue declined 3%, while platform revenue increased 11% to $6.9 million and services revenue decreased 82% to $0.2 million. Cost of revenue declined 15% to $2.6 million in the quarter, primarily because of lower transactional data-acquisition costs. Sales and marketing expense declined 13% to $1.7 million, and general and administrative expense declined 21% to $4.3 million, largely because of lower share-based compensation. Depreciation and amortization increased 46% to $1.0 million.
For the six-month period, revenue increased 26%, driven principally by higher usage from existing customers. Sales and marketing expense increased 12% to $3.9 million and general and administrative expense increased 12% to $8.7 million as the company continued investing in its sales organization and recorded higher share-based compensation.
- Cash and cash equivalents were $13.8 million at June 30, 2020, up from $11.8 million at December 31, 2019.
- Total assets were $52.1 million and shareholders’ equity was $43.7 million.
- The company had $2.2 million of CARES Act loan principal outstanding, consisting of $0.7 million current and $1.45 million noncurrent debt.
- The loan bears interest at 1.0%, matures May 5, 2022, and may be partially or fully forgiven subject to eligible use, application and government or lender approval.
- Investing cash outflows were $3.1 million for the first six months, including $3.1 million of capitalized software and $0.1 million of property and equipment purchases.
- Material data-licensing commitments totaled $10.8 million as of June 30, 2020, including $3.5 million due in the remainder of 2020 and $5.6 million in 2021.
Material changes versus the prior comparable period
- Quarterly net loss narrowed 34% and adjusted EBITDA increased 155%, despite a 3% revenue decline.
- Year-to-date revenue rose 26%, and year-to-date operating cash flow improved from a $1.1 million outflow to a $3.0 million inflow.
- Revenue mix shifted toward pricing contracts, while lower-margin transactional services revenue was significantly affected by COVID-19-related collections moratoria and reduced activity.
- Gross margin and adjusted gross margin improved in both the quarter and year-to-date period, reflecting lower relative cost of revenue and increased platform contribution.
- Cash increased by $2.0 million during the first six months, supported by operating cash flow and $2.2 million of CARES Act borrowing, partially offset by $3.1 million of investing outflows.
- Intangible assets increased to $26.4 million from $24.0 million at year-end 2019. The company capitalized $3.1 million of software-development costs during the first six months.
Guidance, outlook, risks and unusual items
The filing does not provide formal numerical revenue or earnings guidance. Management stated that June monthly revenue increased 12% from the April low, new-customer applications increased 33% over April, and July monthly revenue and applications increased 9% and 8%, respectively, over June. Management also reported that transactional volumes returned to pre-COVID levels in July and expects potential pent-up demand in the second half of 2020 and continued tailwinds into 2021.
COVID-19 reduced transactional volume and led the company to grant temporary reductions or eliminations of minimum commitments. Concessions reduced minimum committed spend by $130 thousand in April, $129 thousand in May and $83 thousand in June; agreements were extended by one month for each concession month. The company implemented work-from-home measures, curtailed travel, pursued vendor and landlord concessions, and deferred employer Social Security payroll taxes.
- The ultimate effect of COVID-19 remains uncertain and depends on the pandemic’s duration, government actions, customer demand and ability to pay, employee and vendor disruptions, and access to capital.
- The CARES Act loan may be subject to regulatory review because eligibility and the necessity certification involve subjective criteria. The company may be required to repay the loan and could face penalties if it is found ineligible or if forgiveness certifications are inaccurate.
- The company’s largest data supplier represented approximately 51% of second-quarter data-acquisition costs and 44% of year-to-date data-acquisition costs.
- Share-based compensation was $2.3 million in the quarter and $4.6 million year to date; $10.1 million of related expense remained unrecognized at June 30, 2020.
- Income tax expense was zero because a full valuation allowance was maintained against deferred tax assets.
- Management believes available cash, operating cash flow and CARES Act proceeds are sufficient for the next twelve months, but notes that additional equity or debt financing may be required depending on revenue growth, cash generation and COVID-19 effects.
- Management reported no material legal proceedings, no off-balance-sheet arrangements and effective disclosure controls as of June 30, 2020.
Important facts for investors to verify
- Whether the July recovery trends and expected second-half pent-up demand continued beyond the filing date.
- The extent to which COVID-19 concessions, reduced transactional volume and services revenue weakness affect recurring revenue and customer retention.
- Whether the $2.2 million CARES Act loan is forgiven, partially forgiven or required to be repaid, including any related regulatory review.
- Cash generation relative to $10.8 million of data-licensing commitments, lease obligations and continuing software-development investment.
- The sustainability of positive adjusted EBITDA and operating cash flow after excluding share-based compensation and other noncash adjustments.
- Dependence on major data suppliers and the continued growth of idiCORE and FOREWARN customers and users.