Red Violet, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Red Violet provides cloud-based data fusion and analytics solutions for fraud detection, risk mitigation, due diligence, marketing, collections and related use cases through its idiCORE and FOREWARN products. The filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The company reports one operating segment.
- idiCORE billable customers increased to 5,758 from 4,781 at September 30, 2019.
- FOREWARN users increased to 44,927 from 23,853.
- As of November 6, 2020, 12,150,035 common shares were outstanding.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $9.3 million | $8.3 million | $25.6 million | $21.2 million |
| Gross profit | $5.5 million | $4.4 million | $14.2 million | $10.5 million |
| Gross margin | 59% | 54% | 55% | 50% |
| Loss from operations | $(0.9) million | $(1.0) million | $(5.0) million | $(6.3) million |
| Net loss | $(0.9) million | $(1.0) million | $(4.9) million | $(6.2) million |
| Basic and diluted loss per share | $(0.08) | $(0.09) | $(0.42) | $(0.59) |
| Adjusted EBITDA | $2.1 million | $1.1 million | $4.7 million | $1.1 million |
| Cash flow from operations | $1.7 million | Not separately provided | $4.7 million | $0.4 million |
- Platform revenue increased 27% to approximately $9.0 million in Q3, while services revenue decreased 75% to approximately $0.3 million.
- Adjusted gross profit was $6.6 million and adjusted gross margin was 71% in Q3, compared with $5.1 million and 62%, respectively, in Q3 2019. These are non-GAAP measures.
- Cash and cash equivalents were $12.4 million at September 30, 2020, compared with $11.8 million at December 31, 2019.
- Capitalized software and other intangible assets totaled $27.0 million, up from $24.0 million at year-end 2019. Nine-month capitalized software costs were $5.8 million.
- Total debt was $2.2 million under a CARES Act loan, consisting of $1.1 million current and $1.1 million noncurrent portions. The loan bears interest at 1.0% and matures May 5, 2022.
- Material data-licensing commitments totaled $9.0 million as of September 30, 2020, including $5.6 million scheduled for 2021.
- Management stated that available cash and expected operating cash flow should fund operations and expected capital expenditures for the next twelve months, but future financing could be required if revenue growth or cash generation is insufficient.
Material changes versus the prior comparable periods
- Q3 revenue increased 12%, and nine-month revenue increased 21%, primarily from higher usage and expansion by existing customers.
- Q3 cost of revenue decreased 13%, producing a decrease in cost of revenue as a percentage of revenue from 38% to 29%. For the nine-month period, the ratio declined from 42% to 33%.
- Sales and marketing expense increased 15% in Q3 and 13% year to date as the company expanded its sales organization and incurred higher commissions.
- General and administrative expense increased 19% in Q3 and 14% year to date, primarily due to higher share-based compensation.
- Depreciation and amortization increased 49% in Q3 and 47% year to date as internally developed software placed into service after September 30, 2019 began amortizing.
- Share-based compensation expense increased to $6.4 million for the first nine months from $5.3 million in the prior-year period. An additional $1.5 million was capitalized into intangible assets.
- Operating cash flow improved substantially to $4.7 million for the first nine months, compared with $0.4 million in 2019, primarily because of noncash share-based compensation and depreciation and amortization.
- The company paid $1.8 million in taxes related to the net share settlement of vested restricted stock units and increased treasury stock to $3.1 million from $1.3 million at year-end 2019.
Outlook, commentary, risks and unusual items
- COVID-19 reduced transaction volume during the second and third quarters, particularly in collections. Management said overall transaction volume returned to pre-COVID levels by the end of Q3, except for collection-related volume.
- Management expects collection customer transaction volume, including idiVERIFIED, to return to pre-COVID levels in the first half of 2021. The filing contains differing descriptions of the Q3 collection-volume shortfall: approximately $1.0 million in one disclosure and $0.8 million in the MD&A.
- The company granted minimum-spend concessions to 22 customers in Q3, reducing committed spend by $94,000; in Q2, concessions affected 152 customers and reduced minimum committed spend by $342,000.
- The company intends to seek forgiveness of the $2.2 million CARES Act loan by the end of December 2020. Forgiveness is subject to lender and SBA approval, and the company expects a Treasury audit because the loan exceeded $2 million. Full or partial forgiveness is not assured; the loan may need to be repaid and the company could face penalties if eligibility or forgiveness certifications are challenged.
- The company deferred the employer portion of Social Security payroll taxes under the CARES Act. Half of the deferred amount is due by December 31, 2021, and the remainder by December 31, 2022.
- Management identified ongoing COVID-19 uncertainty, customer demand and collections activity, employee productivity, vendor and data-supplier dependence, capital availability, continued operating losses, and the need to sustain positive cash flow as principal risks.
- No material legal proceedings or off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective as of September 30, 2020.
- On November 9, 2020, executive employment agreements were amended to extend their expiration dates from March 26, 2021 to March 26, 2024.
Important facts for investors to verify
- Whether the CARES Act loan receives full or partial forgiveness and the timing and outcome of any SBA or Treasury review.
- Whether collection-related transaction volumes recover as projected in the first half of 2021 and whether COVID-19 concessions continue or expand.
- The sustainability of positive operating cash flow given continuing GAAP losses, substantial share-based compensation and ongoing software investment.
- The company’s ability to fund approximately $9.0 million of data-licensing commitments and other obligations from cash and operations.
- The effect of increasing amortization, capitalized software balances and future development spending on GAAP profitability.
- The concentration of data-acquisition costs, including the largest supplier’s approximately 48% share of Q3 data-acquisition costs.
- The filing’s inconsistent reported amount for the Q3 collection-volume decline, stated as approximately $1.0 million in one section and $0.8 million in another.