Red Violet, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Red Violet provides identity-intelligence solutions through its CORE platform, primarily marketed as idiCORE and FOREWARN. Its solutions support risk mitigation, due diligence, fraud prevention, regulatory compliance, customer acquisition and related use cases. The filing covers the quarter and six months ended June 30, 2021; financial statements are unaudited and reported in thousands, except per-share data.
At June 30, 2021, idiCORE had 6,141 billable customers versus 5,375 a year earlier, and FOREWARN had 67,578 users versus 40,857. Contractual pricing revenue represented 81% of second-quarter revenue and 80% of year-to-date revenue.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $10.879 million | $7.056 million | $21.096 million | $16.356 million |
| Gross profit | $6.887 million | $3.535 million | $13.140 million | $8.693 million |
| Gross margin | 63% | 50% | 62% | 53% |
| Operating loss | $(0.410) million | $(2.532) million | $(0.983) million | $(4.044) million |
| Net income (loss) | $1.761 million | $(2.532) million | $1.183 million | $(4.013) million |
| Adjusted EBITDA | $3.132 million | $0.908 million | $6.003 million | $2.638 million |
| Adjusted EBITDA margin | 29% | 13% | 28% | 16% |
| Operating cash flow | $2.3 million | Not separately stated | $3.533 million | $3.003 million |
Q2 revenue increased 54%, driven by higher usage from existing customers and customer growth. Platform revenue increased 54% to $10.6 million, while services revenue increased 46% to $0.3 million. Cost of revenue increased only 5% in the quarter, causing cost of revenue as a percentage of revenue to decline to 25% from 37%.
Sales and marketing expense increased 35% to $2.349 million, general and administrative expense increased 15% to $4.890 million, and depreciation and amortization increased 34% to $1.330 million. Share-based compensation expense was $2.165 million in Q2 and $4.211 million year to date.
Cash and cash equivalents were $13.915 million at June 30, 2021, compared with $12.957 million at December 31, 2020. Total assets were $54.232 million and shareholders’ equity was $49.434 million. The company had no outstanding long-term loan after forgiveness of its CARES Act loan, but had $2.192 million of operating lease liabilities.
Material changes versus the prior comparable period
- Q2 net income improved from a $2.532 million loss to $1.761 million of income; the 2021 result included a one-time $2.175 million gain from forgiveness of the CARES Act loan and accrued interest.
- Six-month net income improved from a $4.013 million loss to $1.183 million of income, also including the debt-forgiveness gain.
- Gross margin improved 13 percentage points in Q2 and 9 percentage points year to date, primarily because revenue grew faster than largely fixed data-acquisition costs.
- Adjusted EBITDA increased 245% in Q2 and 128% year to date. These non-GAAP measures exclude, among other items, depreciation and amortization, share-based compensation and the debt-forgiveness gain.
- Revenue from contractual pricing arrangements increased as a proportion of total revenue, while transactional idiVERIFIED revenue remained below pre-Covid levels.
- The company capitalized $2.420 million of software and equipment costs during the first six months, including $2.420 million of capitalized intangible-asset costs and $155 thousand of property and equipment purchases.
Outlook, commentary, risks and unusual items
Management expects idiVERIFIED transaction volume to return to pre-Covid levels in the first half of 2022. No formal revenue or earnings guidance was provided. Management expects to fund operations and expected capital expenditures with available cash and operating cash flow for at least the next twelve months, but noted that additional equity or debt financing could become necessary depending on revenue growth, cash generation and Covid-19 effects.
- Covid-19 continues to limit forecasting visibility. Collection-related transaction volume generally recovered in Q2 2021, but idiVERIFIED remained depressed.
- Customer concessions declined to five customers and $14 thousand of reduced minimum committed spend in Q2 2021, compared with 152 customers and $342 thousand in Q2 2020.
- Material commitments under data licensing agreements totaled $12.491 million at June 30, 2021, including $3.847 million due during the remainder of 2021.
- The largest data supplier represented approximately 50% of Q2 data-acquisition costs and 49% for the first six months, creating supplier-concentration exposure.
- Deferred tax assets remain subject to a full valuation allowance; income tax expense was zero for both comparative periods.
- The company reported no material changes to previously disclosed risk factors and no legal proceedings expected by management to have a material adverse effect, while noting that litigation outcomes cannot be assured.
- Management stated that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Separate sustainable operating performance from the $2.175 million one-time debt-forgiveness gain.
- Reconcile GAAP operating losses with adjusted EBITDA, particularly the effects of substantial share-based compensation and amortization.
- Monitor recovery of idiVERIFIED volume and whether the stated first-half 2022 recovery expectation is achieved.
- Assess the $12.491 million data-licensing commitment against projected operating cash flow and the $13.915 million cash balance.
- Evaluate concentration in the largest data supplier and the company’s ability to maintain favorable data-acquisition economics.
- Track future software capitalization, amortization expense and the remaining $27.810 million net intangible-asset balance.
- Review potential dilution from 1.677 million unvested restricted stock units and ongoing equity compensation.