Red Violet, Inc. — 2020 Q1 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 and related use cases through its idiCORE and FOREWARN brands. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Financial Performance and Liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $9.3 million | $5.7 million | Up 62% |
| Gross profit | $5.2 million | $2.5 million | Up 105% |
| Gross margin | 55% | 44% | Up 11 percentage points |
| Adjusted gross profit | $6.0 million | $3.1 million | Up 96% |
| Adjusted gross margin | 65% | 53% | Up 12 percentage points |
| Loss from operations | $(1.5) million | $(1.4) million | Higher loss |
| Net loss | $(1.5) million | $(1.4) million | Higher loss |
| Adjusted EBITDA | $1.7 million | $(0.4) million | Improved |
| Operating cash flow | $1.2 million | $(1.2) million | Improved by $2.4 million |
Share-based compensation expense increased to $2.2 million from $0.3 million and was a major contributor to the GAAP operating and net losses. Basic and diluted loss per share was $0.13 in both periods.
Cash and cash equivalents were $11.5 million at March 31, 2020, down from $11.8 million at December 31, 2019. Investing cash outflows were $1.6 million, primarily for $1.5 million of capitalized internal software costs. Total assets were $49.5 million and shareholders’ equity was $43.4 million.
The company had no reported funded debt at March 31, 2020; liabilities primarily consisted of operating lease liabilities totaling $2.8 million. The company also had $12.8 million of material commitments under data licensing agreements, payable through 2022.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by stronger usage from existing customers, including an 84% increase in base revenue from existing customers and a 46% increase in growth revenue from existing customers.
- idiCORE billable customers increased to 5,326 from 4,020, while FOREWARN users increased to 36,506 from 15,444.
- Pricing-contract revenue represented 69% of total revenue, compared with 67% in Q1 2019, increasing the recurring component of revenue.
- Cost of revenue increased 23%, substantially below revenue growth, causing cost of revenue as a percentage of revenue to decline to 35% from 47%.
- Sales and marketing expense increased 45% to $2.2 million as the company expanded its sales organization and incurred higher commissions.
- General and administrative expense increased 87% to $4.4 million, primarily because of higher share-based compensation.
- Depreciation and amortization increased 47% to $0.9 million as internally developed software entered service.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal revenue or earnings guidance. It expects to fund operations and anticipated capital expenditures with available cash and operating cash flow, subject to revenue growth, cash generation and the effects of COVID-19. Management stated that available resources, including the CARES Act loan, were expected to support operations for the next twelve months, but noted that additional equity or debt financing could become necessary and could dilute stockholders.
COVID-19 caused reduced transactional volume in the second half of March as customers adjusted to stay-at-home orders. The company moved office employees to remote work, curtailed travel and pursued cost containment, vendor concessions and payment deferrals. Management stated that the pandemic’s full impact could not yet be reasonably estimated.
On May 5, 2020, after quarter-end, the company received a $2.152 million unsecured, non-recourse CARES Act loan bearing 1.00% interest, maturing May 5, 2022, with payments deferred for six months. The loan may be partially or fully forgiven if proceeds satisfy specified payroll, rent and utility requirements, but forgiveness is not assured. The company disclosed risks of regulatory review, repayment, penalties and reputational harm if eligibility or forgiveness certifications are challenged.
Other items to monitor include $12.7 million of unrecognized share-based compensation expected to be recognized over a weighted-average period of two years, $3.9 million of remaining revenue performance obligations, and the company’s dependence on data suppliers, including one supplier representing approximately 39% of Q1 data acquisition costs.
Important Facts for Investors to Verify
- Whether revenue growth and improved adjusted EBITDA continue after the COVID-19-related decline in transactional volume.
- The reconciliation and sustainability of non-GAAP adjusted EBITDA and adjusted gross margin, particularly excluding substantial share-based compensation and amortization.
- The company’s ability to convert operating performance into recurring positive cash flow while continuing internal software investment.
- Eligibility for, use of and potential forgiveness of the $2.152 million CARES Act loan.
- Future cash obligations under data licensing agreements and operating leases.
- Customer retention, usage trends and concentration among data suppliers and major customers.
- Potential dilution from approximately 2.2 million unvested restricted stock units and any future equity financing.