Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (“Form 10-Q”). This Form 10-Q 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 this Form 10-Q, as well as the disclosures made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed on March 8, 2023 (“Form 10-K”), and other filings we make with the Securities and Exchange Commission. 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.
References in this discussion and analysis to “we,” “us,” “our,” “red violet,” or the “Company,” refer to Red Violet, Inc. and its consolidated subsidiaries.
Overview
Red Violet, Inc., a Delaware corporation, is dedicated to making the world a safer place and reducing the cost of doing business. We build proprietary technologies and apply analytical capabilities to deliver identity intelligence. Our technology powers critical solutions, which empower organizations to operate with confidence. Our solutions enable the real-time identification and location of people, businesses, assets and their interrelationships. These solutions are used for purposes including risk mitigation, due diligence, fraud detection and prevention, regulatory compliance, and customer acquisition. Our intelligent platform, CORETM, is purpose-built for the enterprise, yet flexible enough for organizations of all sizes, bringing clarity to massive datasets by transforming data into intelligence. We drive workflow efficiency and enable organizations to make better data-driven decisions.
Organizations are challenged by the structure, volume and disparity of data. Our platform and applications transform the way our customers interact with information, presenting connections and relevance of information otherwise unattainable, which drives actionable insights and better outcomes. Leveraging cloud-native proprietary technology and applying machine learning and advanced analytical capabilities, CORE provides essential solutions to public and private sector organizations through intuitive, easy-to-use analytical interfaces. With massive data assets consisting of public record, proprietary and publicly-available data, our differentiated information and innovative platform and solutions deliver identity intelligence – entities, relationships, affiliations, interactions, and events. Our solutions are used today to enable frictionless commerce, to ensure safety, and to reduce fraud and the concomitant expense borne by society.
While our platform powers many diverse solutions for our customers, we presently market our solutions primarily through two brands, IDI and FOREWARN®. IDI is a leading-edge, analytics and information solutions provider delivering actionable intelligence to the risk management industry in support of use cases such as the verification and authentication of consumer identities, due diligence, prevention of fraud and abuse, legislative compliance, and debt recovery. idiCORE is IDI's flagship product. idiCORE is a next-generation, investigative solution used to address a variety of organizational challenges including due diligence, risk mitigation, identity authentication and regulatory 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 March 31, 2023 and 2022, IDI had 7,256 and 6,592 billable customers and FOREWARN had 131,348 and 91,490 users, respectively. We define a billable customer of IDI as a single entity that generated revenue during the last three months of the period. Billable customers are typically corporate organizations. In most cases, corporate organizations will have multiple users and/or departments purchasing our solutions, however, we count the entire organization as a discrete customer. We define a user of FOREWARN as a unique person that has a subscription to use the FOREWARN service as of the last day of the period. A unique person can only have one user account.
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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. For the three months ended March 31, 2023 and 2022, 75% and 77% of total revenue was attributable to customers with pricing contracts, respectively, versus 25% and 23% attributable to transactional customers, respectively.
We endeavor to understand our customers’ needs at the moment of first engagement. We continuously engage with our customers and evaluate their usage of our solutions throughout their life cycle, to maximize utilization of our solutions and, hence, their productivity. 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. We employ a “land and expand” approach. 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 expand within organizations as additional use cases are presented across departments, divisions and geographic locations and customers become increasingly reliant on our solutions in their daily workflow.
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 continue to build out our sales organization to drive current products and to introduce new products into the marketplace.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the 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, revenues 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 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.
For additional information, please refer to our Form 10-K. There have been no material changes to Critical Accounting Policies and Estimates disclosed in our Form 10-K.
Recently issued accounting standards
See Note 1(b), “Recently issued accounting standards,” in “Notes to Condensed Consolidated Financial Statements.”
First Quarter Financial Results
For the three months ended March 31, 2023, as compared to the three months ended March 31, 2022:
•Total revenue increased 15% to $14.6 million.
•Gross profit increased 19% to $9.6 million. Gross margin increased to 66% from 64%.
•Adjusted gross profit increased 20% to $11.4 million. Adjusted gross margin increased to 78% from 75%.
•Net income increased 569% to $0.7 million, which resulted in $0.05 per basic and diluted share.
•Adjusted EBITDA increased 15% to $3.7 million.
•Net cash from operating activities decreased 37% to $1.5 million.
•Cash and cash equivalents were $30.8 million as of March 31, 2023.
First Quarter and Recent Business Highlights
•Added 235 customers to IDI during the first quarter, ending the quarter with 7,256 customers.
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•Added 14,388 users to FOREWARN during the first quarter, ending the quarter with 131,348 users. Over 255 REALTOR® Associations throughout the U.S. are now contracted to use FOREWARN.
•Launched redesigned corporate websites, www.redviolet.com, www.ididata.com, and www.forewarn.com, providing a more valuable user experience with modern design, improved functionality, easier navigation, and greater detail on the breadth and applicability of our identity solutions.
•Purchased 44,766 shares of the Company’s common stock year to date through May 5, 2023, at an average price of $16.88 per share pursuant to the Company’s $5.0 million Stock Repurchase Program that was authorized on May 2, 2022. The Company has $3.4 million remaining under the Stock Repurchase Program.
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 EBITDA margin, adjusted gross profit, adjusted gross margin and free cash flow ("FCF"). Adjusted EBITDA is a financial measure equal to net income, the most directly comparable financial measure based on US GAAP, excluding interest income, net, income tax (benefit) expense, depreciation and amortization, share-based compensation expense, litigation costs, and write-off of long-lived assets and others, as noted in the tables below. We define adjusted EBITDA margin as adjusted EBITDA as a percentage of revenue. 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. We define FCF as net cash provided by operating activities reduced by purchase of property and equipment and capitalized costs included in intangible assets.
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|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(In thousands) |
|
2023 |
|
|
2022 |
|
Net income |
|
$ |
716 |
|
|
$ |
107 |
|
Interest income, net |
|
|
(286 |
) |
|
|
(1 |
) |
Income tax (benefit) expense |
|
|
(29 |
) |
|
|
175 |
|
Depreciation and amortization |
|
|
1,916 |
|
|
|
1,534 |
|
Share-based compensation expense |
|
|
1,384 |
|
|
|
1,387 |
|
Litigation costs |
|
|
3 |
|
|
|
15 |
|
Write-off of long-lived assets and others |
|
|
2 |
|
|
|
3 |
|
Adjusted EBITDA |
|
$ |
3,706 |
|
|
$ |
3,220 |
|
Revenue |
|
$ |
14,626 |
|
|
$ |
12,729 |
|
|
|
|
|
|
|
|
Net income margin |
|
|
5 |
% |
|
|
1 |
% |
Adjusted EBITDA margin |
|
|
25 |
% |
|
|
25 |
% |
The following is a reconciliation of gross profit, the most directly comparable US GAAP financial measure, to adjusted gross profit:
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|
|
|
|
|
|
|
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Three Months Ended March 31, |
|
(In thousands) |
|
2023 |
|
|
2022 |
|
Revenue |
|
$ |
14,626 |
|
|
$ |
12,729 |
|
Cost of revenue (exclusive of depreciation and amortization) |
|
|
(3,179 |
) |
|
|
(3,170 |
) |
Depreciation and amortization of intangible assets |
|
|
(1,858 |
) |
|
|
(1,472 |
) |
Gross profit |
|
|
9,589 |
|
|
|
8,087 |
|
Depreciation and amortization of intangible assets |
|
|
1,858 |
|
|
|
1,472 |
|
Adjusted gross profit |
|
$ |
11,447 |
|
|
$ |
9,559 |
|
|
|
|
|
|
|
|
Gross margin |
|
|
66 |
% |
|
|
64 |
% |
Adjusted gross margin |
|
|
78 |
% |
|
|
75 |
% |
The following is a reconciliation of net cash provided by operating activities, the most directly comparable US GAAP measure, to FCF:
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|
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|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(In thousands) |
|
2023 |
|
|
2022 |
|
Net cash provided by operating activities |
|
$ |
1,531 |
|
|
$ |
2,430 |
|
Less: |
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(44 |
) |
|
|
(113 |
) |
Capitalized costs included in intangible assets |
|
|
(2,273 |
) |
|
|
(1,794 |
) |
Free cash flow |
|
$ |
(786 |
) |
|
$ |
523 |
|
In order to assist readers of our condensed 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 EBITDA margin, adjusted gross profit, adjusted gross margin and FCF 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.
We believe adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross margin and FCF 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. Adjusted EBITDA margin is calculated as adjusted EBITDA as a percentage of revenue. 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. We believe FCF is an important liquidity measure of the cash that is available, after capital expenditures, for operational expenses and investment in our business. FCF is a measure used by management to understand and evaluate the business’s operating performance and trends over time. FCF is calculated by using net cash provided by operating activities, less purchase of property and equipment and capitalized costs included in intangible assets.
Adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross margin and FCF 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 US GAAP. In addition, FCF is not intended to represent our residual cash flow available for discretionary expenses and is not necessarily a measure of our ability to fund our cash needs. The way we measure adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross margin and FCF 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
Three months ended March 31, 2023 compared to three months ended March 31, 2022
Revenue. Revenue increased $1.9 million or 15% to $14.6 million for the three months ended March 31, 2023 from $12.7 million for the three months ended March 31, 2022. Revenue from new customers increased $0.9 million or 84%, and base revenue from existing customers increased $1.4 million or 14%, while growth revenue from existing customers decreased $0.4 million or 18%. Our IDI billable customer base grew from 6,592 customers as of March 31, 2022 to 7,256 customers as of March 31, 2023, and our FOREWARN user base grew from 91,490 users to 131,348 users during that same period. 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.
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Cost of revenue (exclusive of depreciation and amortization). Cost of revenue remained consistent at $3.2 million for the three months ended March 31, 2023 and 2022. 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 48% and 47% of our total data acquisition costs for the three months ended March 31, 2023 and 2022, respectively. 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 22% for the three months ended March 31, 2023 from 25% for the three months ended March 31, 2022. 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 $1.5 million or 63% to $3.9 million for the three months ended March 31, 2023 from $2.4 million for the three months ended March 31, 2022. 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 three months ended March 31, 2023 was primarily attributable to the increase of $0.7 million in salaries and benefits, and sales commissions, resulting from increased revenue, and $0.6 million in provision for bad debts.
General and administrative expenses. General and administrative expenses decreased $0.2 million or 2% to $5.2 million for the three months ended March 31, 2023 from $5.4 million for the three months ended March 31, 2022. For the three months ended March 31, 2023 and 2022, our general and administrative expenses consisted primarily of employee salaries and benefits of $2.8 million and $2.5 million, share-based compensation expense of $1.3 million and $1.3 million, and professional fees of $0.6 million and $1.0 million, respectively.
Depreciation and amortization. Depreciation and amortization expenses increased $0.4 million or 25% to $1.9 million for the three months ended March 31, 2023 from $1.5 million for the three months ended March 31, 2022. The increase in depreciation and amortization for the three months ended March 31, 2023 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after March 31, 2022.
Interest income, net. Interest income of $0.3 million for the three months ended March 31, 2023 was primarily due to interest income earned on investments in certain money market funds. There was no significant interest income, net for the three months ended March 31, 2022.
Income before income taxes. Income before income taxes was $0.7 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively. The increase in income before income taxes for the three months ended March 31, 2023 was primarily attributable to the increase in revenue, decrease in our cost of revenue as a percentage of revenue, and increase in interest income, which was partially offset by the increase in employee salaries and benefits and sales commissions of $1.0 million, provision for bad debts of $0.6 million, and depreciation and amortization of $0.4 million.
Income taxes. Income tax benefit of $0.03 million and income tax expense of $0.2 million was recognized for the three months ended March 31, 2023 and 2022, respectively. A valuation allowance on the deferred tax assets was recognized as of March 31, 2023 and 2022, to reduce the deferred tax assets to the amount that is more likely than not to be realized. See Note 6, “Income Taxes,” included in “Notes to Condensed Consolidated Financial Statements.”
Net income. Net income was $0.7 million for the three months ended March 31, 2023 compared to $0.1 million for the three months ended March 31, 2022, as a result of the foregoing.
Effect of Inflation
We believe that the persistent inflationary pressure throughout 2022 and up to March 31, 2023 has contributed to deteriorating macroeconomic conditions and increased recession fears, causing businesses to slow their spending over the last several months, which have resulted, and may continue to result, in fluctuations in volumes, pricing and operating margins for our services. Also, higher interest rates imposed to combat inflation, may reduce the demand for credit, which may lead to a decline in the volume of services we provide to our customers in the banking or financial industry, or other industries that are affected by these types of disruptions. However, the rates of inflation experienced in recent years have had no material impact on our financial statements as we have attempted to recover increased costs by increasing prices for our services, to the extent permitted by contracts and competition.
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Liquidity and Capital Resources
Cash flows provided by operating activities. For the three months ended March 31, 2022, net cash provided by operating activities was $1.5 million, primarily the result of the net income of $0.7 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, noncash lease expenses, and deferred income tax (benefit) expense) totaling $4.1 million, and the cash used as a result of changes in assets and liabilities of $3.3 million, primarily the result of the increase in accounts receivable, prepaid expenses and other current assets and other noncurrent assets, and the decrease in accrued expenses and other current liabilities, and operating lease liabilities. For the three months ended March 31, 2022, net cash provided by operating activities was $2.4 million, primarily the result of the net income of $0.1 million, adjusted for certain non-cash items, as mentioned above, totaling $3.3 million, and the cash used as a result of changes in assets and liabilities of $0.9 million, primarily the result of the increase in accounts receivable and prepaid expenses and other current assets, and the decrease in deferred revenue and operating lease liabilities, which was offset by the increase in accounts payable.
Cash flows used in investing activities. For the three months ended March 31, 2023 and 2022, net cash used in investing activities was $2.3 million and $1.9 million, respectively, primarily as a result of capitalized costs included in intangible assets.
Cash flows used in financing activities. For the three months ended March 31, 2023, net cash used in financing activities was $0.2 million, mainly the result of $0.2 million paid in aggregate for the repurchase of common stock pursuant to a stock repurchase program that the board of directors authorized on May 2, 2022 (the "Stock Repurchase Program"), authorizing the repurchase of up to $5.0 million of our common stock. There were no significant financing activities for the three months ended March 31, 2022.
As of March 31, 2023, we had material commitments under certain data licensing agreements of $25.0 million. We anticipate funding our operations using available cash and cash flow generated from operations within the next twelve months.
We reported net income of $0.7 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, we had a total shareholders’ equity balance of $73.4 million.
As of March 31, 2023, we had cash and cash equivalents of approximately $30.8 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, 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 and our ability to generate positive cash flow, 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.
Off-Balance Sheet Arrangements
As of March 31, 2023, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.