RED VIOLET, INC.
You should read the following discussion in conjunction with our consolidated
financial statements and related notes included in this Annual Report on Form
10-K ("2019 Form 10-K"). This 2019 Form 10-K contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 ("PSLRA"), Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), about our expectations, beliefs, or intentions
regarding our business, financial condition, results of operations, strategies,
or prospects. You can identify forward-looking statements by the fact that these
statements do not relate strictly to historical or current matters. Rather,
forward-looking statements relate to anticipated or expected events, activities,
trends, or results as of the date they are made. Because forward-looking
statements relate to matters that have not yet occurred, these statements are
inherently subject to risks and uncertainties that could cause our actual
results to differ materially from any future results expressed or implied by the
forward-looking statements. Many factors could cause our actual activities or
results to differ materially from the activities and results anticipated in
forward-looking statements. These factors include those contained in Part I,
"Item 1A. Risk Factors" of this 2019 Form 10-K. We do not undertake any
obligation to update forward-looking statements, except as required by law. We
intend that all forward-looking statements be subject to the safe harbor
provisions of PSLRA. These forward-looking statements are only predictions and
reflect our views as of the date they are made with respect to future events and
financial performance.
Overview
Red Violet, Inc. ("we," "us," "our," "red violet," or the "Company"), a Delaware
corporation, is dedicated to making the world a safer place and reducing the
cost of doing business. We specialize in data fusion and analytics, providing
cloud-based, mission-critical solutions to enterprises with use cases including
fraud detection, risk mitigation, due diligence and marketing. Through our
intelligent platform, CORETM, we uncover the relevance of disparate data points
utilizing our analytical capabilities to provide real-time and insightful views
of people, businesses, assets and their interrelationships.
Leveraging proprietary technology and applying machine learning and advanced
analytical and decision-making capabilities, CORE provides compelling solutions
to public and private sector organizations through intuitive, easy-to-use
analytical applications. We empower clients across markets and industries to
better execute all aspects of their business, from managing risk, recovering
debt, identifying fraud and abuse, and ensuring legislative compliance, to
identifying and acquiring customers. With a massive data repository of
approximately nine petabytes of public-record, proprietary and
publicly-available data, as well as self-reported consumer information and
behavioral signals, we transform data into intelligence for our customers to
enable better data-driven decisioning.
We presently market our solutions primarily through two brands, idiCORE™, our
flagship product, and FOREWARN®. idiCORE is a next-generation, investigative
solution used to address a variety of organizational challenges including due
diligence, risk mitigation, identity authentication and legislative compliance,
by financial services companies, insurance companies, healthcare companies, law
enforcement and government, collections, law firms, retail, telecommunication
companies, corporate security and investigative firms. FOREWARN is an app-based
solution currently tailored for the real estate industry, providing instant
knowledge prior to face-to-face engagement with a consumer, helping
professionals identify and mitigate risk. As of December 31, 2019 and 2018,
idiCORE had 5,064 and 3,627 billable customers and FOREWARN had 30,577 and
11,397 users, respectively.
We generate substantially all of our revenue from licensing our solutions.
Customers access our solutions through a hosted environment using an online
interface, batch processing, API and custom integrations. We recognize revenue
from licensing fees (a) on a transactional basis determined by the customer's
usage, (b) via a monthly fee or (c) from a combination of both. Revenue pursuant
to pricing contracts containing a monthly fee is recognized ratably over the
contract period. Pricing contracts are generally annual contracts or longer,
with auto renewal. Revenue from pricing contracts represented 65% and 58% of
total revenue for the years ended December 31, 2019 and 2018, respectively.
Our go-to-market strategy leverages (a) an inside sales team that cultivates
relationships, and ultimately closes business, with their end-user markets, (b)
a strategic sales team that provides a more personal, face-to-face approach for
major accounts within certain industries, and (c) distributors, resellers, and
strategic partners that have a significant foothold in many of the industries
that we have not historically served, as well as to further penetrate those
industries that we do serve. Our sales model generally begins with a free trial
followed by an initial purchase on a transactional basis or minimum-committed
monthly spend. As organizations derive benefits from our solutions, we are able
to "land and expand" within larger organizations as additional use cases expand
across departments, divisions and geographic locations and customers become
increasingly reliant on our solutions in their daily workflow.
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On March 26, 2018 , Fluent, Inc. ("Fluent") spun off its risk management business
by way of a distribution of all of the shares of common stock of its then
wholly-owned subsidiary, red violet, to its stockholders as of the record date
and certain warrant holders (the "Spin-off"). Upon the Spin-off, red violet
owned Fluent subsidiaries that previously operated Fluent's risk management
business, and red violet became an independent public company. For periods prior
to the Spin-off, these financial statements were prepared on a consolidated and
combined basis because certain of the entities were under common control.
In order for us to continue to develop new products, grow our existing business
and expand into additional markets, we must generate and sustain sufficient
operating profits and cash flow in future periods. This will require us to
generate additional sales from current products and new products currently under
development. We are building out our sales organization to drive current
products and to introduce new products into the market place. We will incur
increased compensation expenses relating to our sales and marketing, executive
and administrative, product development and infrastructure-related personnel as
we increase headcount in the next 12 months.
Industry Trends and Uncertainties
Operating results are affected by the following factors that impact the big data
and analytics sector in
• The macroeconomic conditions, including the availability of affordable credit
and capital, interest rates, inflation, employment levels and consumer
confidence, influence our revenue. Macroeconomic conditions also have a
direct impact on overall technology, marketing and advertising expenditures
in the
are easier to reduce in the short term as compared to other corporate
expenses. Future widespread economic slowdowns in any of the industries or
markets our clients serve could reduce the technology and marketing
expenditures of our clients and prospective customers.
• Our revenue is also significantly influenced by industry trends, including
the demand for business analytics services in the industries we serve.
Companies are increasingly relying on business analytics and big-data
technologies to help process data in a cost-efficient manner. As customers
have gained the ability to rapidly aggregate data generated by their own
activities, they are increasingly expecting access to real-time data and
analytics from their service providers as well as solutions that fully
integrate into their workflows. The increasing number and complexity ofregulations centered around data and provision of information services makes
operations for businesses in the big data and analytic sector more
challenging.
• The enactment of new or amended legislation or industry regulationspertaining to consumer or private sector privacy issues could have a material
adverse impact on information and marketing services. Legislation or industry
regulations regarding consumer or private sector privacy issues could place
restrictions upon the collection, sharing and use of information that is
currently legally available, which could materially increase our cost ofcollecting and maintaining some data. These types of legislation or industry
regulations could also prohibit us from collecting or disseminating certain
types of data, which could adversely affect our ability to meet our clients'
requirements and our profitability and cash flow targets.
Company Specific Trends and Uncertainties
Our operating results are also directly affected by company-specific factors, including the following:
• Some of our competitors have substantially greater financial, technical, sales
and marketing resources, better name recognition and a larger customer base.
Even if we introduce advanced products that meet evolving customer requirements in a timely manner, there can be no assurance that our new products will gain market acceptance.
• Certain companies in the big data and analytics sector have expanded their
product lines or technologies in recent years as a result of acquisitions.
Further, more companies have developed products which conform to existing and
emerging industry standards and have sought to compete on the basis of price.
We anticipate increased competition from large data and analytics vendors.
Increased competition in the big data and analytics sector could result in
significant price competition, reduced profit margins or loss of market share,
any of which could have a material adverse effect on our business, operating
results and financial condition. There can be no assurance that we will be
able to compete successfully in the future with current or new competitors.
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Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States ("US GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to the allowance for doubtful accounts, useful lives of property and equipment and intangible assets, recoverability of the carrying amounts of goodwill and intangible assets, share-based compensation and income tax provision. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies govern our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition OnJanuary 1, 2018 , the Company adopted ASC 606, "Revenue from Contracts with Customers," ("Topic 606") using the modi?ed retrospective method applied to all contracts that were not completed contracts at the date of initial application. There was no impact on the opening accumulated de?cit as ofJanuary 1, 2018 due to the adoption of Topic 606. Revenue is recognized when control of goods or services is transferred to the Company's customers, in an amount that re?ects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company's performance obligation is to provide on demand solutions to its customers by leveraging its proprietary technology and applying machine learning and advanced analytics to its massive data repository. The pricing for the customer contracts is based on usage, a monthly fee, or a combination of both. Revenue is generally recognized on (a) a transactional basis determined by the customers' usage, (b) a monthly fee or (c) a combination of both. Revenue pursuant to transactions determined by the customers' usage is recognized when the transaction is complete, and either party may terminate the transactional agreement at any time. Revenue pursuant to contracts containing a monthly fee is recognized ratably over the contract period, which is generally 12 months, and the contract shall automatically renew for additional, successive 12-month terms unless written notice of intent not to renew is provided by one party to the other at least 30 days or 60 days prior to the expiration of the then current term. The Company's revenue is recorded net of applicable sales taxes billed to customers. Available within Topic 606, the Company has applied the portfolio approach practical expedient in accounting for customer revenue as one collective group, rather than individual contracts. Based on the Company's historical knowledge of the contracts contained in this portfolio and the similar nature and characteristics of the customers, the Company has concluded the financial statement effects are not materially different than if accounting for revenue on a contract by contract basis. Revenue is recognized over a period of time since the performance obligation is delivered in a series. The Company's customers simultaneously receive and consume the benefits provided by the Company's performance as and when provided. Furthermore, the Company has elected the "right to invoice" practical expedient, available within Topic 606, as its measure of progress, since it has a right to payment from a customer in an amount that corresponds directly with the value of its performance completed-to-date. The Company's revenue arrangements do not contain significant financing components. For the years endedDecember 31, 2019 and 2018, 65% and 58% of total revenue was attributable to customers with pricing contracts, respectively, versus 35% and 42% attributable to transactional customers, respectively. Pricing contracts are generally annual contracts or longer, with auto renewal. If a customer pays consideration before the Company transfers services to the customer, those amounts are classi?ed as deferred revenue. As ofDecember 31, 2019 and 2018, the balance of deferred revenue was$128 and$26 , respectively, all of which is expected to be realized in the next 12 months. In relation to the deferred revenue balance as ofDecember 31, 2018 ,$26 was recognized into revenue during the year endedDecember 31, 2019 . 23 -------------------------------------------------------------------------------- As ofDecember 31, 2019 ,$2,929 of revenue is expected to be recognized in the future for performance obligations that are unsatisfied or partially unsatisfied, related to pricing contracts that have a term of more than 12 months.$1,820 of revenue will be recognized in 2020,$1,106 in 2021, and$3 in 2022. The actual timing of recognition may vary due to factors outside of the Company's control. The Company excludes variable consideration related entirely to wholly unsatisfied performance obligations and contracts and recognizes such variable consideration based upon the right to invoice the customer.
Sales commissions are incurred and recorded on an ongoing basis over the term of the customer relationship. These costs are recorded in sales and marketing expenses.
In addition, the Company elected the practical expedient to not disclose the value of unsatis?ed performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed.
Allowances for doubtful accounts
We maintain allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management determines whether an allowance needs to be provided for an amount due from a customer depending on the aging of the individual receivable balance, recent payment history, contractual terms and other qualitative factors such as status of business relationship with the customer. Historically, our estimates for doubtful accounts have not differed materially from actual results. The amount of the allowance for doubtful accounts was$0.04 million and$0.1 million as ofDecember 31, 2019 and 2018, respectively.
Income taxes
We account for income taxes in accordance with ASC 740, "Income Taxes," which requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. As ofDecember 31, 2019 and 2018, we had a valuation allowance of$5.1 million and$2.3 million , respectively. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. ASC 740 clarifies the accounting for uncertain tax positions. This interpretation requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company's accounting policy is to accrue interest and penalties related to uncertain tax positions, if and when required, as interest expense and a component of other expenses, respectively, in the consolidated statements of operations. 24
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Intangible assets other than goodwill
Our intangible assets are initially recorded at the capitalized actual costs incurred, their acquisition cost, or fair value if acquired as part of a business combination, and amortized on a straight-line basis over their respective estimated useful lives, which are the periods over which the assets are expected to contribute directly or indirectly to the future cash flows of the Company. The Company's intangible assets represent software developed for internal use. Intangible assets have estimated useful lives of 5-10 years. In accordance with ASC 350-40, "Software - internal use software," we capitalize eligible costs, including salaries and staff benefits, share-based compensation, travel expenses incurred by relevant employees, and other relevant costs of developing internal-use software that are incurred in the application development stage when developing or obtaining software for internal use. Once the software developed for internal use is ready for its intended use, it is amortized on a straight-line basis over its useful life.
In accordance with ASC 350, "Intangibles -Goodwill and Other," goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value. A quantitative assessment involves determining the fair value of each reporting unit using market participant assumptions. An entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. OnOctober 1, 2019 and 2018, we performed qualitative assessments on the reporting unit and, based on this assessment, no events have occurred to indicate that it is more likely than not that the fair value of the reporting unit is less than its carry amount. We concluded that goodwill was not impaired as ofDecember 31, 2019 and 2018. For purposes of reviewing impairment and the recoverability of goodwill, we must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the reporting unit, including market multiples, discount rates, etc.
Impairment of long-lived assets
Finite-lived intangible assets are amortized over their respective useful lives and, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable in accordance with ASC 360-10-15, "Impairment or Disposal of Long-Lived Assets." In evaluating long-lived assets for recoverability, including finite-lived intangibles and property and equipment, the Company uses its best estimate of future cash flows expected to result from the use of the asset and eventual disposition in accordance with ASC 360-10-15. To the extent that estimated future undiscounted cash inflows attributable to the asset, less estimated future undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan of disposal, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell. Asset recoverability is an area involving management judgment, requiring assessment as to whether the carrying value of assets can be supported by the undiscounted future cash flows. In calculating the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters such as revenue growth rates, gross margin percentages and terminal growth rates.
We concluded there was no impairment as of
Share-based compensation
We account for share-based compensation to employees in accordance with ASC 718,
"Compensation-Stock Compensation." Under ASC 718, we measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award and, for those awards subject only to
service condition, recognizes the costs on a straight-line basis over the period
the employee is required to provide service in exchange for the award, which
generally is the vesting period. For awards with performance and service
conditions, we begin recording share-based compensation when achieving the
performance criteria is probable and we recognize the costs using the
accelerated attribution method.
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The fair value of restricted stock units ("RSUs") is determined based on the
number of shares granted and the quoted price of our common stock. The estimated
number of stock awards that will ultimately vest requires judgment, and to the
extent actual results or updated estimates differ from our current estimates,
such amount will be recorded as a cumulative adjustment in the period estimates
are revised. Changes in our estimates and assumptions may cause us to realize
material changes in share-based compensation expense in the future.
We have issued share-based awards with performance-based vesting criteria.
Achievement of the milestones must be probable before we begin recording
share-based compensation expense. When the performance-based vesting criteria is
considered probable, we begin to recognize compensation expense at that time. In
the period that achievement of the performance-based criteria is deemed
probable, US GAAP requires the immediate recognition of all previously
unrecognized compensation since the original grant date. As a result,
compensation expense recorded in the period that achievement is deemed probable
could include a substantial amount of previously unrecorded compensation expense
related to the prior periods. For any share-based awards where performance-based
vesting criteria is no longer considered probable, previously recognized
compensation cost would be reversed. As of December 31, 2019 , we have deemed the
achievement of the performance-based criteria to be probable for all share-based
awards with performance-based vesting criteria.
We apply ASU 2018-07, "Improvements to Nonemployee Share-Based Payment
Accounting," which generally expands the scope of ASC 718, Compensation - Stock
Compensation, to include share-based payment transactions for acquiring goods
and services from nonemployees and supersedes the guidance in ASC 505-50,
Equity-Based Payments to Non-employees, which previously included the accounting
for nonemployee awards.
Recently Issued Accounting Standards
See Item 8 of Part II, "Financial Statements and Supplementary Data - Note 2. Summary of significant accounting policies - (s) Recently issued accounting standards."
Fourth Quarter Financial Results
For the three months ended
• Total revenue increased 92% to
• Net loss was
million, which includes a one-time
(including share-based compensation expense of
• Adjusted EBITDA was
• Gross profit increased 155% to
from 41%.
• Adjusted gross profit increased 134% to
increased to 62% from 51%. Full Year Financial Results
For the year ended
• Total revenue increased 86% to
• Net loss was
million) as compared to
expense of
• Adjusted EBITDA was
• Gross profit increased 159% to
from 36%.
• Adjusted gross profit increased 135% to$18.0 million . Adjusted gross margin increased to 60% from 47%. 26
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Use and Reconciliation of Non-GAAP Financial Measures
Management evaluates the financial performance of our business on a variety of
key indicators, including non-GAAP metrics of adjusted EBITDA, adjusted gross
profit and adjusted gross margin. Adjusted EBITDA is a financial measure equal
to net loss, the most directly comparable financial measure based on US GAAP,
excluding interest income, net, depreciation and amortization, share-based
compensation expense, litigation costs, net, sales and use tax expense,
insurance proceeds in relation to settled litigation, transition service income,
and write-off of long-lived assets and others, as noted in the tables below. We
define adjusted gross profit as revenue less cost of revenue (exclusive of
depreciation and amortization), and adjusted gross margin as adjusted gross
profit as a percentage of revenue.
Three Months Ended December 31, Year Ended December 31,
(In thousands) 2019 2018 2019 2018
Net loss $ (4,856 ) $ (2,038 ) $ (11,076 ) $ (6,868 )
Interest income, net (13 ) (53 ) (136 ) (84 )
Depreciation and amortization 840 559 2,889 1,996
Share-based compensation expense 4,623 277 9,913 709
Litigation costs, net - 248 54 382
Sales and use tax expense 205 - 205 -
Insurance proceeds in relation to
settled litigation - - - (350 )
Transition service income - (4 ) - (218 )
Write-off of long-lived assets and
others 3 - 44 92
Adjusted EBITDA $ 802 $ (1,011 ) $ 1,893 $ (4,341 ) The following is a reconciliation of gross profit, the most directly comparable GAAP financial measure, to adjusted gross profit:
Three Months Ended December 31, Year Ended December 31,
(In thousands) 2019 2018 2019 2018
Revenue $ 9,050 $ 4,708 $ 30,286 $ 16,302
Cost of revenue (exclusive of
depreciation and amortization) 3,414 2,304 12,257 8,638
Depreciation and amortization of
intangible assets 777 495 2,637 1,730
Gross profit 4,859 1,909 15,392 5,934
Depreciation and amortization of
intangible assets 777 495 2,637 1,730
Adjusted gross profit $ 5,636 $ 2,404 $ 18,029 $ 7,664
Gross margin 54 % 41 % 51 % 36 %
Adjusted gross margin 62 % 51 % 60 % 47 %
In order to assist readers of our consolidated financial statements in
understanding the operating results that management uses to evaluate the
business and for financial planning purposes, we present non-GAAP measures of
adjusted EBITDA, adjusted gross profit and adjusted gross margin as supplemental
measures of our operating performance. We believe they provide useful
information to our investors as they eliminate the impact of certain items that
we do not consider indicative of our cash operations and ongoing operating
performance. In addition, we use them as an integral part of our internal
reporting to measure the performance and operating strength of our business.
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-------------------------------------------------------------------------------- We believe adjusted EBITDA, adjusted gross profit and adjusted gross margin are relevant and provide useful information frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies similar to ours and are indicators of the operational strength of our business. We believe adjusted EBITDA eliminates the uneven effect of considerable amounts of non-cash depreciation and amortization, share-based compensation expense and the impact of other non-recurring items, providing useful comparisons versus prior periods or forecasts. Our adjusted gross profit is a measure used by management in evaluating the business's current operating performance by excluding the impact of prior historical costs of assets that are expensed systematically and allocated over the estimated useful lives of the assets, which may not be indicative of the current operating activity. Our adjusted gross profit is calculated by using revenue, less cost of revenue (exclusive of depreciation and amortization). We believe adjusted gross profit provides useful information to our investors by eliminating the impact of non-cash depreciation and amortization, and specifically the amortization of software developed for internal use, providing a baseline of our core operating results that allow for analyzing trends in our underlying business consistently over multiple periods. Adjusted gross margin is calculated as adjusted gross profit as a percentage of revenue. Adjusted EBITDA, adjusted gross profit and adjusted gross margin are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, financial measures presented in accordance with GAAP. The way we measure adjusted EBITDA, adjusted gross profit and adjusted gross margin may not be comparable to similarly titled measures presented by other companies, and may not be identical to corresponding measures used in our various agreements. Results of Operations
Year ended
Revenue. Revenue increased$14.0 million or 86% to$30.3 million for the year endedDecember 31, 2019 from$16.3 million for the year endedDecember 31, 2018 . This increase was driven by strong growth in volume from onboarding of new customers and usage from existing customers. Revenue from new customers increased$1.8 million or 52%, base revenue from existing customers increased$9.9 million or 94%, and growth revenue from existing customers increased$2.3 million or 100% for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , respectively. Our idiCORE billable customer base grew from 3,627 customers as ofDecember 31, 2018 to 5,064 customers as ofDecember 31, 2019 . Revenue from new customers represents the total monthly revenue generated from new customers in a given period. A customer is defined as a new customer during the first six months of revenue generation. Base revenue from existing customers represents the total monthly revenue generated from existing customers in a given period that does not exceed the customers' trailing six-month average revenue. A customer is defined as an existing customer six months after their initial month of revenue. Growth revenue from existing customers represents the total monthly revenue generated from existing customers in a given period in excess of the customers' trailing six-month average revenue. Cost of revenue (exclusive of depreciation and amortization). Cost of revenue increased$3.7 million or 42% to$12.3 million for the year endedDecember 31, 2019 from$8.6 million for the year endedDecember 31, 2018 . Our cost of revenue primarily includes data acquisition costs. Data acquisition costs consist primarily of the costs to acquire data either on a transactional basis or through flat-fee data licensing agreements, including unlimited usage agreements. We continue to enhance the breadth and depth of our data through the addition and expansion of relationships with key data suppliers, including our largest data supplier, which accounted for approximately 40% of our total data acquisition costs for the year endedDecember 31, 2019 compared to approximately 46% for the year endedDecember 31, 2018 . Other cost of revenue items include expenses related to third-party infrastructure fees. As the construct of our data costs is primarily a flat-fee, unlimited usage model, the cost of revenue as a percentage of revenue decreased to 40% for the year endedDecember 31, 2019 from 53% for the year endedDecember 31, 2018 . We expect that cost of revenue as a percentage of revenue will continue to decrease over the coming years as our revenue increases. Historically, at scale, the industry business model's cost of revenue will trend between 15% and 30% as a percentage of revenue. Sales and marketing expenses. Sales and marketing expenses increased$2.7 million or 58% to$7.5 million for the year endedDecember 31, 2019 from$4.8 million for the year endedDecember 31, 2018 . Sales and marketing expenses consist of salaries and benefits, advertising and marketing, travel expenses, and share-based compensation expense, incurred by our sales team, and provision for bad debts. The increase during the year endedDecember 31, 2019 was primarily attributable to the$1.9 million increase in salaries and benefits, as we continue to invest in the expansion of our sales organization, and sales commissions from increased revenue. In addition,$0.6 million of the total increase was attributable to an increase in share-based compensation expense and provision for bad debts. 28
-------------------------------------------------------------------------------- General and administrative expenses. General and administrative expenses increased$10.4 million or 124% to$18.8 million for the year endedDecember 31, 2019 from$8.4 million for the year endedDecember 31, 2018 . The increase during the year endedDecember 31, 2019 was primarily attributable to the$8.9 million increase in share-based compensation expense. The increase in share-based compensation expense was as a result of achieving certain performance-based milestones in the second quarter of 2019 and certain new grants issued after the second quarter of 2019, as outlined in Note 11, "Share-based compensation," included in "Notes to Consolidated Financial Statements." For the years endedDecember 31, 2019 and 2018, our general and administrative expenses consisted primarily of employee salaries and benefits of$4.7 million and$3.3 million , share-based compensation expense of$9.5 million (including a one-time$2.2 million as a result of achieving certain performance-based milestones) and$0.6 million , and professional fees of$2.6 million and$2.7 million , respectively. Depreciation and amortization. Depreciation and amortization expenses increased$0.9 million or 45% to$2.9 million for the year endedDecember 31, 2019 from$2.0 million for the year endedDecember 31, 2018 . The increase in depreciation and amortization for the year endedDecember 31, 2019 resulted primarily from the amortization of software developed for internal use that became ready for its intended use afterDecember 31, 2018 . Other income, net. There was no other income, net, for the year endedDecember 31, 2019 . For the year endedDecember 31, 2018 , other income, net, consisted primarily of transition service income of$0.2 million and the insurance proceeds of$0.4 million in relation to previously settled litigation. Loss before income taxes. We had a loss before income taxes of$11.1 million for the year endedDecember 31, 2019 as compared to$6.9 million for the year endedDecember 31, 2018 . The increase in loss before income taxes was primarily attributable to the increase in noncash share-based compensation expense of$9.2 million ($2.2 million of which is one-time), salaries and benefits and sales commission of$3.3 million , and depreciation and amortization of$0.9 million , which was partially offset by the increase in revenue and the decrease in our cost of revenue as a percentage of revenue.
Income taxes. Income tax expense of
Net loss. A net loss of$11.1 million was recognized for the year endedDecember 31, 2019 as compared to$6.9 million for the year endedDecember 31, 2018 , as a result of the foregoing. Effect of Inflation The rates of inflation experienced in recent years have had no material impact on our financial statements. We attempt to recover increased costs by increasing prices for our services, to the extent permitted by contracts and competition.
Liquidity and Capital Resources
Cash flows provided by (used in) operating activities. For the year endedDecember 31, 2019 , net cash provided by operating activities was$1.6 million , primarily the result of the net loss of$11.1 million , adjusted for certain non-cash items (consisting of share-based compensation expense, depreciation and amortization, write-off of long-lived assets, provision for bad debts and noncash lease expenses) totaling$13.8 million , and the cash used as a result of changes in assets and liabilities of$1.1 million , primarily the result of the increase in accounts receivable, following the increase in revenue. For the year endedDecember 31, 2018 , net cash used in operating activities was$8.1 million , primarily the result of the net loss of$6.9 million , adjusted for certain non-cash items (consisting of share-based compensation expense, depreciation and amortization, write-off of long-lived assets, provision for bad debts and allocation of expenses from Fluent, Inc.) totaling$3.4 million , and the cash used as a result of changes in assets and liabilities of$4.6 million , primarily the result of the increase in accounts receivable and the decrease in accrued expenses and other current liabilities. Cash flows used in investing activities. Net cash used in investing activities for the years endedDecember 31, 2019 and 2018 was$6.0 million , primarily as a result of capitalized costs included in intangible assets of$5.9 million in each of the corresponding periods. 29 -------------------------------------------------------------------------------- Cash flows provided by financing activities. Net cash provided by financing activities for the year endedDecember 31, 2019 was$6.2 million as a result of$7.4 million raised through a registered direct offering inAugust 2019 , which was partially offset by the taxes paid related to net share settlement of vesting of restricted stock units of$1.3 million . Net cash provided by financing activities for the year endedDecember 31, 2018 was$23.9 million (inclusive of the$20.0 million cash contribution by Fluent to red violet upon the Spin-off) as a result of capital contributed by Fluent.
As of
We reported net loss of
As ofDecember 31, 2019 , we had cash and cash equivalents of approximately$11.8 million . Based on projections of growth in revenue and operating results in the next twelve months, and the available cash and cash equivalents held by us, including the net proceeds of$7.4 million through the registered direct offering inAugust 2019 , we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months. Subject to revenue growth, we may have to raise capital through the issuance of additional equity and/or debt, which, if we are able to obtain, could have the effect of diluting stockholders. Any equity or debt financings, if available at all, may be on terms which are not favorable to us. If our operations do not generate positive cash flow in the upcoming year, or if we are not able to obtain additional equity or debt financing on terms and conditions acceptable to us, if at all, we may be unable to implement our business plan, or even continue our operations.
Off-Balance Sheet Arrangements
We do not have any outstanding off-balance sheet guarantees, interest rate swap
transactions or foreign currency forward contracts. In addition, we do not
engage in trading activities involving non-exchange traded contracts. In our
ongoing business, we do not enter into transactions involving, or otherwise form
relationships with, unconsolidated entities or financial partnerships that are
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
FORWARD-LOOKING STATEMENTS
This 2019 Form 10-K contains certain "forward-looking statements" within the
meaning of the PSLRA, Section 27A of the Securities Act, and Section 21E of the
Exchange Act. Such forward-looking statements contain information about our
expectations, beliefs or intentions regarding our product development and
commercialization efforts, business, financial condition, results of operations,
strategies or prospects. You can identify forward-looking statements by the fact
that these statements do not relate strictly to historical or current matters.
Rather, forward-looking statements relate to anticipated or expected events,
activities, trends or results as of the date they are made. Because
forward-looking statements relate to matters that have not yet occurred, these
statements are inherently subject to risks and uncertainties that could cause
our actual results to differ materially from any future results expressed or
implied by the forward-looking statements.
Many factors could cause our actual activities or results to differ materially
from the activities and results anticipated in forward-looking statements. These
factors include the following:
• We have a history of losses which makes our future results uncertain.
• Our products and services are highly technical and if they containundetected errors, our business could be adversely affected and we may have
to defend lawsuits or pay damages in connection with any alleged or actual
failure of our products and services.
• Because our networks and information technology systems are critical to our
success, if unauthorized persons access our systems or our systems otherwise
cease to function properly, our operations could be adversely affected and
we could lose revenue or proprietary information, all of which could
materially adversely affect our business.
• We must adequately protect our intellectual property in order to prevent
loss of valuable proprietary information.
• We depend, in part, on strategic alliances, joint ventures and acquisitions
to grow our business. If we are unable to make strategic acquisitions and
develop and maintain these strategic alliances and joint ventures, our
growth may be adversely affected.
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• If we consummate any future acquisitions, we will be subject to the risks
inherent in identifying, acquiring and operating a newly acquired business.
• Our business is subject to various governmental regulations, laws and
orders, compliance with which may cause us to incur significant expenses or
reduce the availability or effectiveness of our solutions, and the failure
to comply with which could subject us to civil or criminal penalties or
other liabilities.
• The outcome of litigation, inquiries, investigations, examinations or other
legal proceedings in which we are involved, in which we may become involved,
or in which our customers or competitors are involved could subject us to
significant monetary damages or restrictions on our ability to do business.
• Our relationships with key customers may be materially diminished or
terminated.
• If we lose the services of key personnel, it could adversely affect our
business.
• If we fail to respond to rapid technological changes in the big data and
analytics sector, we may lose customers and/or our products and/or services
may become obsolete.
• Our revenue is concentrated in the U.S. market across a broad range of
industries. When these industries or the broader financial markets
experience a downturn, demand for our services and revenue may be adversely
affected.
• We could lose our access to data sources which could prevent us from
providing our services.
• Data security and integrity are critically important to our business, and
breaches of security, unauthorized access to or disclosure of confidential
information, disruption, including distributed denial of service ("DDoS")
attacks or the perception that confidential information is not secure, could
result in a material loss of business, substantial legal liability or
significant harm to our reputation.
• We face intense competition from both start-up and established companies
that may have significant advantages over us and our products.
• There may be further consolidation in our end-customer markets, which may
adversely affect our revenue.
• To the extent the availability of free or relatively inexpensive consumer
and/or business information increases, the demand for some of our services
may decrease.
• If our newer products do not achieve market acceptance, revenue growth may
suffer.
• Our products and services can have long sales and implementation cycles,
which may result in substantial expenses before realizing any associated
revenue.
• If we fail to maintain and improve our systems, our technology, and our
interfaces with data sources and customers, demand for our services could be
adversely affected.
• If our outside service providers and key vendors are not able to or do not
fulfill their service obligations, our operations could be disrupted and our
operating results could be harmed.
• Consolidation in the big data and analytics sector may limit market
acceptance of our products and services.
• We may incur substantial expenses defending against claims of infringement.
• Our bylaws designate the
sole and exclusive forum for certain actions, including derivative actions,
which could limit a stockholder's ability to bring a claim in a judicial
forum that it finds favorable for disputes with the Company and its
directors, officers, other employees, or the Company's stockholders and may
discourage lawsuits with respect to such claims.
• We could be negatively impacted by the recent outbreak of coronavirus
(COVID-19).
• Our stock price has been and may continue to be volatile, and the value of
an investment in our common stock may decline.
• Future issuances of shares of our common stock in connection withacquisitions or pursuant to our stock incentive plan could have a dilutive
effect on your investment.
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• The concentration of our stock ownership may limit individual stockholder
ability to influence corporate matters.
• We are an "emerging growth company," and we cannot be certain if the reduced
reporting requirements available to emerging growth companies will make our
shares of common stock less attractive to investors.
• We expect that we may need additional capital in the future; however, such
capital may not be available to us on reasonable terms, if at all, when or
as we require additional funding. If we issue additional shares of our
common stock or other securities that may be convertible into, or
exercisable or exchangeable for, our common stock, our existing stockholders
would experience further dilution.
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