Red Violet, Inc. — 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 marketed as idiCORE and FOREWARN. The company serves public- and private-sector customers using proprietary data, machine learning, and analytical applications. The filing covers the unaudited quarter and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods.
- As of September 30, 2019, idiCORE had approximately 4,780 customers and FOREWARN had approximately 23,850 users.
- The company had 11,530,515 common shares outstanding at September 30, 2019 and 11,536,140 shares outstanding as of November 4, 2019.
- The company operates as a single reportable segment and remains an emerging growth company and smaller reporting company.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $8.3 million in 2019 versus $4.4 million in 2018 | $21.2 million in 2019 versus $11.6 million in 2018 |
| Net loss | $1.0 million versus $1.3 million | $6.2 million versus $4.8 million |
| Loss per share | $0.09 versus $0.12 | $0.59 versus $0.47 |
| Adjusted EBITDA | $1.1 million versus $(0.8) million | $1.1 million versus $(3.3) million |
| Adjusted gross profit | $5.1 million versus $2.1 million | $12.4 million versus $5.3 million |
| Adjusted gross margin | 62% versus 49% | 58% versus 45% |
- GAAP operating loss was $1.0 million for the quarter and $6.3 million for the nine months, compared with $1.7 million and $5.4 million, respectively, in 2018.
- Quarterly revenue increased 89%; nine-month revenue increased 83%. Growth was attributed to new customer onboarding and increased usage by existing customers.
- Pricing contracts represented 66% of quarterly revenue and 65% of nine-month revenue, compared with 64% and 54%, respectively, in the prior-year periods.
- Cost of revenue increased 40% in both the quarter and nine-month period, but declined as a percentage of revenue to 38% from 51% for the quarter and to 42% from 55% for the nine months.
- Sales and marketing expense increased to $1.9 million for the quarter and $5.4 million for the nine months, primarily due to expanded sales headcount.
- General and administrative expense increased to $3.5 million for the quarter and $11.3 million for the nine months. The nine-month increase included $5.0 million of share-based compensation, including a one-time $1.3 million catch-up component related to performance-based awards.
- Cash and cash equivalents were $13.3 million at September 30, 2019, compared with $10.0 million at December 31, 2018.
- Operating activities provided $0.4 million of cash during the first nine months of 2019, versus $6.8 million used in 2018. Investing activities used $4.5 million, primarily for capitalized internally developed software.
- Financing activities provided $7.4 million from an August 2019 registered direct offering of 681,000 shares at $11.00 per share, net of issuance costs.
- The company had no debt reported, but recorded operating lease liabilities of $3.1 million under the new lease standard, including $0.5 million current and $2.6 million noncurrent.
Material changes versus the prior comparable period
- Revenue growth and operating leverage materially improved adjusted gross profit, adjusted gross margin, and adjusted EBITDA.
- The quarterly net loss narrowed, but the nine-month net loss increased because of substantially higher share-based compensation and continued investment in sales and administrative capabilities.
- Share-based compensation expense increased to $5.3 million for the nine months from $0.4 million in 2018. Unrecognized compensation expense was $15.1 million at September 30, 2019, expected to be recognized over approximately 2.3 years.
- The company adopted ASC 842 on January 1, 2019, recognizing approximately $3.0 million of right-of-use assets and $3.4 million of operating lease obligations upon adoption.
- Intangible assets increased to $23.1 million from $20.0 million at year-end 2018, reflecting continued capitalization of internally developed software. Goodwill remained $5.2 million with no impairment charge.
- The company raised equity capital and issued additional performance-based restricted stock units, resulting in increased share count and potential future dilution.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects continued investment in sales, marketing, support, administrative, infrastructure, and engineering personnel over the next 12 months.
- Management expects cost of revenue as a percentage of revenue to decline as revenue scales, with an indicated long-term industry range of approximately 15% to 30%; this is management commentary rather than formal guidance.
- Management believes available cash and expected operating cash flow will fund operations and expected capital expenditures for the next 12 months. However, additional equity or debt financing may be required if growth or cash generation does not meet expectations.
- Material commitments under data licensing agreements totaled $16.7 million at September 30, 2019, including $7.5 million due in 2020 and $5.6 million in 2021.
- The company was undergoing a state sales and use tax examination and estimated a possible adverse loss of up to $0.4 million; no liability was accrued at September 30, 2019.
- Management reported no material changes to the risk factors in the 2018 Form 10-K and no material pending legal proceeding. Actual outcomes of tax, legal, and administrative matters remain uncertain.
- All deferred tax assets remained subject to a full valuation allowance, resulting in a 0% effective tax rate for the reported periods.
- On October 28, 2019, the compensation committee approved 340,500 additional restricted stock units, including 307,500 subject to the 2019 performance criteria.
- On November 4, 2019, the principal accounting officer resigned from that role and remained as a principal accounting advisor; the CFO was appointed principal accounting officer. The filing states that the change was not due to any disagreement.
Key facts investors should verify
- Whether revenue growth and improved adjusted EBITDA convert into sustained positive GAAP operating income and operating cash flow.
- The effect of substantial share-based compensation, outstanding restricted stock units, and future equity issuance on dilution and reported profitability.
- Whether the $13.3 million cash balance is sufficient relative to the $16.7 million data-licensing commitments, lease obligations, software investment, and ongoing operating losses.
- Customer concentration and dependence on major data suppliers, including the largest supplier’s approximately 40% to 41% share of data acquisition costs.
- The outcome and potential financial impact of the state sales and use tax examination.
- Whether the performance conditions attached to 2019 restricted stock units are achieved and how related compensation expense affects future periods.