Red Violet, Inc. annual report, FY2019

Red Violet, Inc. 2019 Form 10-K Summary

Business Context and Reporting Period

Red Violet provides cloud-based data fusion, analytics and information solutions through its CORE platform, primarily under the idiCORE and FOREWARN brands. Applications include fraud detection, risk mitigation, due diligence, identity verification, debt recovery, compliance and marketing. The filing covers the fiscal year ended December 31, 2019, including fourth-quarter results compared with the same periods in 2018.

At December 31, 2019, idiCORE had 5,064 billable customers versus 3,627 in 2018, while FOREWARN had 30,577 users versus 11,397. The Company had 107 full-time and one part-time employee and operates as one reporting segment.

Financial Performance and Key Metrics

Metric	Q4 2019	Q4 2018	FY 2019	FY 2018
Revenue	$9.1 million	$4.7 million	$30.3 million	$16.3 million
Gross profit	$4.9 million	$1.9 million	$15.4 million	$5.9 million
Gross margin	54%	41%	51%	36%
Net loss	$4.9 million	$2.0 million	$11.1 million	$6.9 million
Adjusted EBITDA	$0.8 million	$(1.0) million	$1.9 million	$(4.3) million
Adjusted gross margin	62%	51%	60%	47%

FY 2019 revenue increased 86%, driven by new customer onboarding and higher usage from existing customers. Revenue from new customers increased 52%, base revenue from existing customers increased 94%, and growth revenue from existing customers increased 100%.

Cost of revenue increased 42% to $12.3 million, but declined to 40% of revenue from 53% in 2018 because data costs are primarily based on flat-fee or unlimited-use arrangements. Sales and marketing expense increased 58% to $7.5 million. General and administrative expense increased 124% to $18.8 million, primarily due to share-based compensation.

Share-based compensation expense was $9.9 million in FY 2019 versus $0.7 million in FY 2018, including a substantial catch-up charge after performance-based vesting criteria were deemed probable. The Company reported no income tax expense because its deferred tax assets remained subject to a full valuation allowance.

Cash Flow, Liquidity, Debt and Capitalization

Operating cash flow was positive $1.6 million in 2019 versus negative $8.1 million in 2018.
Investing cash flow was negative $6.0 million, primarily reflecting $5.9 million of capitalized internal-use software costs.
Financing cash flow was positive $6.2 million, including $7.4 million of net proceeds from an August 2019 registered direct offering, partially offset by $1.3 million of taxes paid on net share settlement of restricted stock units.
Cash and cash equivalents were $11.8 million at December 31, 2019, compared with $10.0 million at December 31, 2018.
Total shareholders’ equity was $42.1 million; accumulated deficit was $15.9 million.
The filing does not identify conventional interest-bearing debt. Operating lease liabilities totaled $3.0 million, including $0.5 million current and $2.5 million noncurrent.
Material data licensing commitments totaled $14.8 million through 2022, including $7.5 million in 2020, $5.6 million in 2021 and $1.7 million in 2022.
Management believes available cash and expected operating cash flow will fund operations and expected capital expenditures for the next twelve months, but states that additional equity or debt financing may be required depending on revenue growth and cash flow.

Material Changes Versus the Prior Comparable Period

Revenue and customer adoption accelerated substantially, with FY revenue rising from $16.3 million to $30.3 million and FOREWARN users increasing approximately 168%.
Gross margin improved 15 percentage points to 51%, while adjusted gross margin improved 13 percentage points to 60%.
Adjusted EBITDA improved by $6.2 million, moving from a $4.3 million loss to $1.9 million of positive EBITDA.
GAAP net loss increased by $4.2 million, primarily because of $9.2 million of additional share-based compensation expense, including a one-time performance-based catch-up component.
Operating cash flow improved by $9.7 million and became positive.
The Company adopted lease accounting under ASC 842, recording right-of-use assets and operating lease liabilities.
The Company issued 681,000 shares in a registered direct offering and had 2,237,827 unvested restricted stock units outstanding at year-end, creating potential future dilution.
Pricing-contract revenue increased to 65% of total revenue from 58%, increasing the recurring component of the revenue base.

Guidance, Outlook, Risks and Unusual Items

Management did not provide formal revenue or earnings guidance. It expects to continue investing in sales, marketing, product development and infrastructure, which may increase compensation and operating expenses. Management’s liquidity assessment depends on continued revenue growth, improved operating results and the availability of existing cash resources.

Customer concentration is material: one customer represented 15% of FY 2019 revenue.
Supplier concentration is significant: the largest data supplier represented approximately 40% of 2019 data acquisition costs and was subject to $10.4 million of remaining minimum purchase commitments through April 2022.
The business depends on access to licensed consumer and public-record data and is exposed to supplier loss, pricing changes and regulatory restrictions.
Privacy, data security and cybersecurity risks are significant, including potential liability, reputational damage and interruption of service. The California Consumer Privacy Act became effective January 1, 2020 and may increase compliance costs.
The Company faces intense competition from larger and better-funded providers, including Palantir, LexisNexis, TransUnion and Thomson Reuters.
The Company has a history of operating losses and may need additional capital; future financing could dilute existing stockholders or impose restrictive terms.
COVID-19 was identified as a potential risk, but the filing states that its effect was uncertain and could not be predicted.
The Company recorded $245,000 of sales and use tax expense related to a finalized state audit and stated that it did not expect additional adverse decisions from that matter.
No material pending legal proceeding was identified, although ordinary-course litigation and regulatory matters remain possible.
Management reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2019.

Important Facts for Investors to Verify

Whether strong revenue growth and positive adjusted EBITDA convert into sustained GAAP profitability and positive free cash flow.
The quality and recurrence of revenue growth, including customer retention, usage expansion and the increasing share of pricing-contract revenue.
The impact of the $9.9 million annual share-based compensation expense and the $15.5 million of unrecognized compensation expected to be recognized over approximately 2.3 years.
Whether the $11.8 million cash balance is sufficient relative to the $14.8 million data licensing commitments, lease obligations and continuing software investment.
The renewal terms and operational alternatives associated with the largest data supplier, including the $10.4 million minimum purchase commitment.
The potential dilution from 2.2 million unvested restricted stock units, future capital raises and additional equity awards.
Compliance costs and business effects arising from the CCPA and other evolving privacy, data-use and cybersecurity regulations.
Management’s assumptions supporting its statement that liquidity is sufficient for the next twelve months, given the continuing net losses and possible need for additional capital.