Red Violet, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Red Violet provides identity intelligence, data analytics, fraud prevention, risk mitigation, compliance, and related solutions through its CORE platform, primarily marketed under the IDI and FOREWARN brands. The filing covers the three and six months ended June 30, 2022; financial statements are unaudited and presented under U.S. GAAP.
- IDI billable customers increased to 6,817 from 6,141 at June 30, 2021.
- FOREWARN users increased to 101,261 from 67,578.
- The company added 225 IDI customers during the quarter, surpassed 100,000 FOREWARN users, and released idiTRACE.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $12.5 million | $10.9 million | $25.2 million | $21.1 million |
| Gross profit | $8.0 million | $6.9 million | $16.1 million | $13.1 million |
| Gross margin | 64% | 63% | 64% | 62% |
| Adjusted EBITDA | $2.9 million | $3.1 million | $6.2 million | $6.0 million |
| Adjusted EBITDA margin | 23% | 29% | 24% | 28% |
| Net income (loss) | $(0.2) million | $1.8 million | $(0.1) million | $1.2 million |
| Cash flow from operating activities | Not separately stated in the financial statements | Not separately stated in the financial statements | $5.0 million | $3.5 million |
Adjusted gross profit was $9.6 million in Q2, with a 77% adjusted gross margin, compared with $8.2 million and 75% in the prior-year quarter. Platform revenue increased 15% to $12.2 million, while services revenue increased 6% to $0.3 million. Pricing-contract revenue represented 80% of quarterly revenue and 78% of six-month revenue.
- Cash and cash equivalents were $32.3 million at June 30, 2022, compared with $34.3 million at December 31, 2021.
- Total assets were $74.6 million and shareholders’ equity was $69.9 million.
- Total liabilities were $4.7 million, consisting primarily of operating lease liabilities, deferred tax liabilities, and current operating obligations. The filing does not show outstanding debt; the prior CARES Act loan was fully forgiven in June 2021.
- Six-month investing cash use was $4.1 million, including $3.9 million of capitalized intangible-asset costs. Financing cash use was $2.8 million, primarily taxes paid on net settlement of restricted stock units.
- The company had $30.6 million of material commitments under data licensing agreements, extending through 2026, and $1.6 million of recognized operating lease liabilities.
Material changes versus the prior comparable period
- Q2 revenue increased 15%, and six-month revenue increased 20%, primarily from higher base revenue from existing customers and continued customer and user growth.
- Cost of revenue increased 7% in Q2, slower than revenue growth, reducing cost of revenue as a percentage of revenue from 25% to 23%.
- Sales and marketing expense increased 20% in Q2 and 14% year to date, primarily from higher salaries, benefits, and sales commissions.
- General and administrative expense increased 8% in Q2 and 13% year to date. Depreciation and amortization increased 21% in Q2 due primarily to software placed into service after June 30, 2021.
- Net income declined to a loss because the prior-year period included a nonrecurring $2.2 million gain from forgiveness of the CARES Act loan.
- Adjusted EBITDA declined 6% in Q2, despite revenue growth, reflecting higher operating expenses and increased depreciation-related adjustments.
- The company authorized a $5.0 million stock repurchase program in May 2022 and repurchased 7,031 shares for approximately $0.1 million during the six months ended June 30, 2022.
- Stockholders approved an increase in the 2018 Stock Incentive Plan from 4.5 million to 6.5 million authorized shares. Unrecognized share-based compensation was $15.9 million at June 30, 2022.
Guidance, outlook, risks, and unusual items
Management expects idiVERIFIED transaction volume, which was affected by COVID-19 and carries a lower margin profile, to return to pre-pandemic levels in the first half of 2023. The company expects data costs as a percentage of revenue to decline as revenue scales and anticipates funding operations and expected capital expenditures with available cash and operating cash flow over the next 12 months.
- Management believes available cash and projected operating results provide sufficient resources for the next 12 months, but notes that additional equity or debt financing could be required if growth, cash generation, or COVID-19 effects are unfavorable.
- COVID-19 effects remain uncertain, including potential impacts from variants, government actions, customer activity, and idiVERIFIED demand.
- A single largest data supplier represented approximately 48% of Q2 data acquisition costs, creating supplier concentration exposure.
- Deferred tax assets remain subject to a valuation allowance because of the company’s recent history of operating losses. Q2 income tax expense was $44 thousand and six-month expense was $219 thousand.
- The company reported no material legal proceedings, no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors.
- Goodwill was $5.2 million and no goodwill impairment was recorded. Net software-related intangible assets were $29.8 million, with $4.2 million not yet placed into service.
Important facts for investors to verify
- Reconcile GAAP results with adjusted EBITDA and adjusted gross profit, particularly the effects of share-based compensation and amortization.
- Assess whether customer and FOREWARN user growth converts into sustained revenue growth and improved adjusted EBITDA margins.
- Monitor the $30.6 million data licensing commitment relative to operating cash flow and the $32.3 million cash balance.
- Evaluate reliance on the largest data supplier and the company’s ability to maintain favorable data acquisition economics.
- Track the timing and commercial performance of new products, including idiTRACE, and the expected recovery of idiVERIFIED.
- Review future dilution from the expanded incentive plan, 1.1 million unvested RSUs, and any future capital raising.