Red Violet, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Red Violet provides cloud-based big-data analytics and risk-management solutions through its CORE platform, primarily under the idiCORE and FOREWARN brands. As of March 31, 2019, idiCORE had more than 4,000 customers and FOREWARN had more than 15,400 users. The company reported its unaudited first-quarter results for the three months ended March 31, 2019. The comparable 2018 period includes pre-spin-off consolidated and combined results from Fluent, Inc.; therefore, historical comparability may be limited.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $5.734 million | $3.325 million | Up 72% |
| Cost of revenue | $2.669 million | $2.017 million | Up 32% |
| Adjusted gross profit | $3.065 million | $1.308 million | Up 134% |
| Adjusted gross margin | 53% | 39% | Up 14 percentage points |
| Loss from operations | $(1.418) million | $(2.084) million | Improved $0.666 million |
| Net loss | $(1.378) million | $(2.084) million | Improved $0.706 million |
| Adjusted EBITDA | $(0.402) million | $(1.413) million | Improved $1.011 million |
| Basic and diluted loss per share | $(0.13) | $(0.20) | Improved $0.07 |
| Net cash used in operating activities | $(1.186) million | $(2.825) million | Improved $1.639 million |
Revenue growth was attributed to new customer onboarding and increased usage by existing customers. Pricing-contract revenue represented 67% of total revenue, compared with 44% in the prior-year period. Cost of revenue represented 47% of revenue, versus 61% in Q1 2018. The GAAP operating margin was approximately negative 25% and the GAAP net margin was approximately negative 24%.
Cash and cash equivalents were $7.319 million at March 31, 2019, down from $9.950 million at December 31, 2018. The company had no financing cash flows in Q1 2019 and reported no traditional debt in the filing. Operating lease liabilities totaled $3.282 million, including $0.449 million current and $2.833 million noncurrent. Shareholders’ equity was $35.324 million.
Investing cash outflows were $1.445 million, including $1.430 million of capitalized internally developed software costs. The company had $20.275 million of material future commitments under data-licensing agreements as of March 31, 2019.
Material changes versus the prior comparable period
- Revenue increased 72%, while the idiCORE customer base grew from approximately 2,900 to 4,000 customers year over year.
- Adjusted gross margin expanded from 39% to 53%, primarily because data costs are largely fixed or based on unlimited-use arrangements.
- Sales and marketing expense increased 38% to $1.5 million as the company expanded its sales organization.
- General and administrative expense increased 28% to $2.4 million, driven by higher employee compensation, share-based compensation, and professional fees.
- Depreciation and amortization increased 37% to $0.6 million as additional internally developed software entered service.
- Cash used in operations declined from $2.8 million to $1.2 million, although the company remained cash-flow negative.
- The company adopted ASC 842 lease accounting on January 1, 2019, recording approximately $3.0 million of right-of-use assets and $3.4 million of operating lease obligations.
- Pricing contracts increased to 67% of revenue from 44%, indicating a greater mix of recurring or committed customer arrangements.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide specific quantitative revenue or earnings guidance. Management expects to continue investing in sales, marketing, support, administrative, infrastructure, and engineering personnel over the next 12 months. The company expects to fund operations and anticipated capital expenditures with available cash and operating cash flow, based on its projections.
Management stated that additional equity or debt financing may be required depending on revenue growth and operating results. Any equity financing could dilute existing stockholders, while financing may be unavailable or available only on unfavorable terms. Management also cautioned that failure to generate positive operating cash flow or obtain financing could impair execution of the business plan or continuation of operations.
- The company remains unprofitable and had negative operating cash flow in the quarter.
- Data-licensing commitments of $20.275 million are significant relative to the $7.319 million cash balance.
- The company relies on data suppliers; its largest supplier represented approximately 41% of data-acquisition costs in Q1 2019.
- A state sales and use tax examination was ongoing. No accrual was recorded because management concluded that no liability requiring accrual existed at March 31, 2019.
- The company had a full valuation allowance against deferred tax assets and recorded no income tax expense.
- Share-based compensation expense was $0.274 million, and 2.2675 million unvested restricted stock units were excluded from diluted loss per share because they were anti-dilutive.
- Performance-based restricted stock units require, among other criteria, quarterly revenue above $7.0 million and positive adjusted EBITDA; management determined the criteria were not probable of being met as of March 31, 2019.
- Management reported no material changes to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls as of March 31, 2019.
Important facts for investors to verify
- Whether revenue growth and the shift toward pricing contracts continue in subsequent quarters.
- Whether adjusted gross-margin improvement is sustainable as the company scales and as data costs and supplier arrangements change.
- The path to positive GAAP earnings and positive operating cash flow.
- Liquidity relative to the $20.275 million data-licensing commitments, lease obligations, software investment, and expected personnel expansion.
- Potential need for equity or debt financing and the resulting dilution or financing risk.
- Progress and potential exposure from the state sales and use tax examination.
- Execution against the performance criteria attached to outstanding restricted stock units and the resulting potential future share dilution.