Business Context and Reporting Period
Red Violet, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company provides cloud-based big-data analytics and risk-management solutions through its idiCORE and FOREWARN products. As of June 30, 2019, idiCORE had more than 4,370 customers and FOREWARN had more than 19,700 users. Red Violet became an independent public company following its March 2018 spin-off from Fluent, Inc.
Financial Performance and Position
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Revenue | $7.245 million | $3.909 million | $12.979 million | $7.234 million |
| Net loss | $(3.850) million | $(1.494) million | $(5.228) million | $(3.578) million |
| Loss per share | $(0.37) | $(0.15) | $(0.51) | $(0.35) |
| Adjusted gross profit | $4.193 million | $1.825 million | $7.258 million | $3.133 million |
| Adjusted gross margin | 58% | 47% | 56% | 43% |
| Adjusted EBITDA | $0.356 million | $(1.081) million | $(0.046) million | $(2.494) million |
- GAAP operating loss was $3.887 million in Q2 and $5.305 million for the six-month period. GAAP operating margins were approximately negative 54% and negative 41%, respectively.
- Cost of revenue was 42% of revenue in Q2 and 44% for the six months, compared with 53% and 57% in the comparable 2018 periods.
- Pricing-contract revenue represented 62% of Q2 revenue and 64% of six-month revenue, compared with 52% and 48%, respectively, in 2018.
- Net cash used in operating activities was $1.090 million for the six months, compared with $5.242 million in 2018. Investing cash outflow was $2.945 million, primarily for internally developed software.
- Cash and cash equivalents were $5.915 million at June 30, 2019, down from $9.950 million at December 31, 2018. The filing reports no borrowings or debt facilities; reported liabilities primarily comprise accounts payable, accrued liabilities and operating lease obligations.
- Total operating lease liabilities were $3.175 million, including $463,000 current and $2.712 million noncurrent, following adoption of ASC 842.
- Total assets were $41.704 million and shareholders’ equity was $35.251 million at June 30, 2019.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased 85%, and six-month revenue increased 79%, driven by new-customer onboarding and higher usage from existing customers. The idiCORE billable customer base increased from approximately 3,300 to 4,370 year over year.
- Adjusted gross margin expanded by 11 percentage points in Q2 and 13 percentage points for the six months, reflecting revenue growth against largely flat-fee data costs.
- Sales and marketing expense increased 63% in Q2 and 51% for the six months as the company expanded its sales organization.
- General and administrative expense increased 210% in Q2 and 116% for the six months, primarily because of higher share-based compensation and increased personnel and professional costs.
- Share-based compensation expense was $3.609 million in Q2 and $3.883 million for the six months, versus $49,000 and $214,000, respectively, in the comparable periods. The Q2 amount included a one-time catch-up charge of approximately $2.4 million related to performance-based restricted stock units.
- Adjusted EBITDA improved to positive $356,000 in Q2, but remained negative $46,000 for the first six months.
Outlook, Risks, Contingencies and Unusual Items
- The company provided no formal revenue or earnings guidance. Management expects to continue investing in sales, marketing, support, administrative, infrastructure and engineering personnel over the next 12 months.
- Management stated that available cash and expected operating cash flow should fund operations and planned capital expenditures for the next 12 months, based on projected revenue growth and operating results. Management also cautioned that additional equity or debt financing may be required if growth or cash generation falls short; such financing could be dilutive or unavailable on favorable terms.
- Material commitments under data-licensing agreements totaled $18.549 million as of June 30, 2019, including $3.776 million due in the remainder of 2019 and $7.506 million in 2020.
- The company was undergoing a state sales and use tax examination. No accrual was recorded, but management estimated a possible adverse loss of up to $213,000.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
- Approximately 2.237 million unvested restricted stock units were excluded from diluted loss per share because they were anti-dilutive. Unrecognized share-based compensation was $12.334 million, expected to be recognized over a weighted-average period of 2.2 years.
- Approximately $3.515 million of internally developed software had not begun amortization because it was not yet ready for intended use.
Investor Verification Checklist
- Verify whether revenue growth and customer expansion are translating into sustained positive operating cash flow, rather than relying primarily on noncash adjustments.
- Assess the effect of the $18.549 million data-licensing commitment on liquidity and future gross margins.
- Monitor recurring pricing-contract revenue, customer retention, usage trends and the conversion of FOREWARN users into revenue.
- Reconcile adjusted EBITDA and adjusted gross margin to GAAP results and evaluate the impact of excluding substantial share-based compensation.
- Track the cash balance, potential need for external financing and dilution from outstanding restricted stock units.
- Review the outcome of the state sales and use tax examination and any potential liability up to the disclosed $213,000 estimate.