ThZeal - The Zeal

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-38407

RED VIOLET, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		82-2408531
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2650 North Military Trail, Suite 300, Boca Raton, Florida 33431

(Address of Principal Executive Offices) (Zip Code)

(561) 757-4000

(Registrant’s Telephone Number, Including Area Code)

None

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol (s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	RDVT	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

As of November 3, 2022, the registrant had 13,893,803 shares of common stock outstanding.

RED VIOLET, INC.

TABLE OF CONTENTS FOR FORM 10-Q


		Page
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)
	Condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021	1
	Condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021	2
	Condensed consolidated statements of changes in shareholders' equity for the three and nine months ended September 30, 2022 and 2021	3
	Condensed consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021	4
	Notes to condensed consolidated financial statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Mine Safety Disclosures	21
Item 5.	Other Information	21
Item 6.	Exhibits	21

SIGNATURES		22

PART I - FINANCIAL INFORMATION

Unless otherwise indicated or required by the context, all references in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” “red violet,” or the “Company,” refer to Red Violet, Inc. and its consolidated subsidiaries.

Item 1. Financial Statements.

RED VIOLET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

(unaudited)


	September 30, 2022			December 31, 2021
ASSETS:
Current assets:
Cash and cash equivalents	$	31,273		$	34,258
Accounts receivable, net of allowance for doubtful accounts of $39 and $28 as of September 30, 2022 and December 31, 2021, respectively		6,473			3,736
Prepaid expenses and other current assets		849			599
Total current assets		38,595			38,593
Property and equipment, net		664			577
Intangible assets, net		30,831			28,181
Goodwill		5,227			5,227
Right-of-use assets		1,255			1,661
Other noncurrent assets		137			137
Total assets	$	76,709		$	74,376
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable	$	1,596		$	1,605
Accrued expenses and other current liabilities		562			395
Current portion of operating lease liabilities		674			617
Deferred revenue		539			841
Total current liabilities		3,371			3,458
Noncurrent operating lease liabilities		778			1,291
Deferred tax liabilities		405			198
Total liabilities		4,554			4,947
Shareholders' equity:
Preferred stock—$0.001 par value, 10,000,000 shares authorized, and 0 shares issued and outstanding, as of September 30, 2022 and December 31, 2021		-			-
Common stock—$0.001 par value, 200,000,000 shares authorized, 13,874,406 and 13,488,540 shares issued, 13,873,406 and 13,488,540 shares outstanding, as of September 30, 2022 and December 31, 2021		14			13
Treasury stock, at cost, 1,000 and 0 shares as of September 30, 2022 and December 31, 2021		(18	)		-
Additional paid-in capital		92,017			91,434
Accumulated deficit		(19,858	)		(22,018	)
Total shareholders' equity		72,155			69,429
Total liabilities and shareholders' equity	$	76,709		$	74,376

See notes to condensed consolidated financial statements

RED VIOLET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share data)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue	$	15,026	$	11,668	$	40,249	$	32,764
Costs and expenses:
Cost of revenue (exclusive of depreciation and amortization)		3,067		2,787		9,157		8,268
Sales and marketing expenses		2,623		2,154		7,836		6,724
General and administrative expenses		5,465		4,127		16,118		13,567
Depreciation and amortization		1,713		1,345		4,860		3,933
Total costs and expenses		12,868		10,413		37,971		32,492
Income from operations		2,158		1,255		2,278		272
Interest income (expense), net		125		1		126		(8	)
Gain on extinguishment of debt		-		-		-		2,175
Income before income taxes		2,283		1,256		2,404		2,439
Income tax expense		25		-		244		-
Net income	$	2,258	$	1,256	$	2,160	$	2,439
Earnings per share:
Basic	$	0.16	$	0.10	$	0.16	$	0.20
Diluted	$	0.16	$	0.09	$	0.16	$	0.19
Weighted average number of shares outstanding:
Basic		13,748,587		12,741,723		13,690,309		12,408,152
Diluted		13,764,262		13,645,208		13,872,596		13,140,854

See notes to condensed consolidated financial statements

RED VIOLET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Amounts in thousands, except share data)

(unaudited)


	Common stock					Treasury stock						Additional paid-in			Accumulated
	Shares			Amount		Shares			Amount			capital			deficit			Total
Balance at June 30, 2021		12,248,794		$	13		-		$	-		$	70,911		$	(21,490	)	$	49,434
Vesting of restricted stock units		742,101			-		-			-			-			-			-
Increase in treasury stock resulting from shares withheld to cover statutory taxes		-			-		(127,871	)		(2,785	)		-			-			(2,785	)
Retirement of treasury stock		(127,871	)		-		127,871			2,785			(2,785	)		-			-
Share-based compensation		-			-		-			-			1,314			-			1,314
Net income		-			-		-			-			-			1,256			1,256
Balance at September 30, 2021		12,863,024		$	13		-		$	-		$	69,440		$	(20,234	)	$	49,219

Balance at June 30, 2022		13,702,796		$	14		(7,031	)	$	(134	)	$	92,178		$	(22,116	)	$	69,942
Vesting of restricted stock units		285,389			-		-			-			-			-			-
Increase in treasury stock resulting from shares withheld to cover statutory taxes		-			-		(93,779	)		(1,539	)		-			-			(1,539	)
Common stock repurchased		-			-		(13,969	)		(249	)		-			-			(249	)
Retirement of treasury stock		(113,779	)		-		113,779			1,904			(1,904	)		-			-
Share-based compensation		-			-		-			-			1,743			-			1,743
Net income		-			-		-			-			-			2,258			2,258
Balance at September 30, 2022		13,874,406		$	14		(1,000	)	$	(18	)	$	92,017		$	(19,858	)	$	72,155

	Common stock					Treasury stock						Additional paid-in			Accumulated
	Shares			Amount		Shares			Amount			capital			deficit			Total
Balance at December 31, 2020		12,167,327		$	13		-		$	-		$	66,005		$	(22,673	)	$	43,345
Vesting of restricted stock units		823,568			-		-			-			-			-			-
Increase in treasury stock resulting from shares withheld to cover statutory taxes		-			-		(127,871	)		(2,785	)		-			-			(2,785	)
Retirement of treasury stock		(127,871	)		-		127,871			2,785			(2,785	)		-			-
Share-based compensation		-			-		-			-			6,220			-			6,220
Net income		-			-		-			-			-			2,439			2,439
Balance at September 30, 2021		12,863,024		$	13		-		$	-		$	69,440		$	(20,234	)	$	49,219

Balance at December 31, 2021		13,488,540		$	13		-		$	-		$	91,434		$	(22,018	)	$	69,429
Vesting of restricted stock units		605,899			1		-			-			(1	)		-			-
Increase in treasury stock resulting from shares withheld to cover statutory taxes		-			-		(200,033	)		(4,310	)		-			-			(4,310	)
Common stock repurchased		-			-		(21,000	)		(383	)		-			-			(383	)
Retirement of treasury stock		(220,033	)		-		220,033			4,675			(4,675	)		-			-
Share-based compensation		-			-		-			-			5,259			-			5,259
Net income		-			-		-			-			-			2,160			2,160
Balance at September 30, 2022		13,874,406		$	14		(1,000	)	$	(18	)	$	92,017		$	(19,858	)	$	72,155

See notes to condensed consolidated financial statements

RED VIOLET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)


	Nine Months Ended September 30,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,160		$	2,439
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,860			3,933
Share-based compensation expense		4,066			5,197
Write-off of long-lived assets		6			24
Provision for bad debts		96			67
Noncash lease expenses		406			371
Interest expense		-			11
Deferred income tax expense		207			-
Gain on extinguishment of debt		-			(2,175	)
Changes in assets and liabilities:
Accounts receivable		(2,833	)		(906	)
Prepaid expenses and other current assets		(250	)		(69	)
Other noncurrent assets		-			2
Accounts payable		(9	)		(709	)
Accrued expenses and other current liabilities		149			(700	)
Deferred revenue		(302	)		(80	)
Operating lease liabilities		(456	)		(408	)
Net cash provided by operating activities		8,100			6,997
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(271	)		(223	)
Capitalized costs included in intangible assets		(6,139	)		(3,549	)
Net cash used in investing activities		(6,410	)		(3,772	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Taxes paid related to net share settlement of vesting of restricted stock units		(4,310	)		(2,785	)
Repurchases of common stock		(365	)		-
Net cash used in financing activities		(4,675	)		(2,785	)
Net (decrease) increase in cash and cash equivalents	$	(2,985	)	$	440
Cash and cash equivalents at beginning of period		34,258			12,957
Cash and cash equivalents at end of period	$	31,273		$	13,397
SUPPLEMENTAL DISCLOSURE INFORMATION
Cash paid for interest	$	-		$	-
Cash paid for income taxes	$	37		$	-
Share-based compensation capitalized in intangible assets	$	1,193		$	1,023
Retirement of treasury stock	$	4,675		$	2,785

See notes to condensed consolidated financial statements

RED VIOLET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share data)

(unaudited)

1. Summary of significant accounting policies

(a) Basis of preparation

The accompanying unaudited condensed consolidated financial statements of Red Violet, Inc., a Delaware corporation, and its consolidated subsidiaries (collectively, “red violet” or the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to those rules and regulations.

The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for any future interim periods or for the full year ending December 31, 2022.

The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (“Form 10-K”).

The condensed consolidated balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date included in the Form 10-K, but does not include all disclosures required by US GAAP.

The Company has only one operating segment, as defined by Accounting Standards Codification (“ASC”) 280, “Segment Reporting.”

Principles of consolidation

The condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant transactions among the Company and its subsidiaries have been eliminated upon consolidation.

(b) Recently issued accounting standards

As an emerging growth company, the Company has left open the opportunity to take advantage of the extended transition period provided to emerging growth companies in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), however, it is the Company’s present intention to adopt any applicable new accounting standards timely.

2. Earnings per share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and is calculated using the treasury stock method for unvested shares. Common equivalent shares are excluded from the calculation in the loss periods as their effects would be anti-dilutive.


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except share data)	2022		2021		2022		2021
Numerator:
Net income	$	2,258	$	1,256	$	2,160	$	2,439
Denominator:
Weighted average shares outstanding:
Basic		13,748,587		12,741,723		13,690,309		12,408,152
Diluted(1)		13,764,262		13,645,208		13,872,596		13,140,854
Earnings per share:
Basic	$	0.16	$	0.10	$	0.16	$	0.20
Diluted	$	0.16	$	0.09	$	0.16	$	0.19

(1)

For the three and nine months ended September 30, 2022 and 2021, diluted weighted average shares outstanding are calculated by the inclusion of unvested restricted stock units ("RSUs").

3. Intangible assets, net

Intangible assets other than goodwill consist of the following:


		September 30, 2022							December 31, 2021
(In thousands)	Amortization Period	Gross Amount		Accumulated Amortization			Net		Gross Amount		Accumulated Amortization			Net
Software developed for internal use	5-10 years	$	50,314	$	(19,483	)	$	30,831	$	42,982	$	(14,801	)	$	28,181

The gross amount associated with software developed for internal use represents capitalized costs of internally-developed software, including eligible salaries and staff benefits, share-based compensation, travel expenses incurred by relevant employees, and other relevant costs.

Amortization expenses of $1,659 and $1,288 for the three months ended September 30, 2022 and 2021, respectively, and $4,682 and $3,763 for the nine months ended September 30, 2022 and 2021, respectively, were included in depreciation and amortization expense. As of September 30, 2022, intangible assets of $4,629, included in the gross amounts of software developed for internal use, have not started amortization, as they are not ready for their intended use.

The Company capitalized costs of software developed for internal use of $2,716 and $1,457 during the three months ended September 30, 2022 and 2021, respectively, and $7,332 and $4,572 during the nine months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022, estimated amortization expense related to the Company’s intangible assets for the remainder of 2022 through 2027 and thereafter are as follows:


(In thousands)
Year	September 30, 2022
Remainder of 2022		2,018
2023		7,638
2024		7,011
2025		5,805
2026		4,340
2027 and thereafter		4,019
Total	$	30,831

4. Goodwill

Goodwill represents the cost in excess of the fair value of the net assets acquired in a business combination. As of September 30, 2022 and December 31, 2021, the balance of goodwill of $5,227 was as a result of the acquisition of Interactive Data, LLC, a wholly-owned subsidiary of red violet, effective on October 2, 2014.

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. The measurement date of the Company’s annual goodwill impairment test is October 1.

For the periods ended September 30, 2022 and 2021, no goodwill impairment charges were recorded.

5. Revenue recognition

The Company recognized revenue in accordance with ASC 606, “Revenue from Contracts with Customers” (“Topic 606”). Under this standard, revenue is recognized when control of goods or services is transferred to the Company’s customers, in an amount that reﬂects 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 information and identity intelligence 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.

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. 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 three months ended September 30, 2022 and 2021, 68% and 80% of total revenue was attributable to customers with pricing contracts, respectively, versus 32% and 20% attributable to transactional customers, respectively. For the nine months ended September 30, 2022 and 2021, 74% and 80% of total revenue was attributable to customers with pricing contracts, respectively, versus 26% and 20% 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 classiﬁed as deferred revenue. As of September 30, 2022 and December 31, 2021, the balance of deferred revenue was $539 and $841, respectively, all of which is expected to be realized in the next 12 months. In relation to the deferred revenue balance as of December 31, 2021, $115 and $583 was recognized into revenue during the three and nine months ended September 30, 2022, respectively.

As of September 30, 2022, $8,776 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, of which, $1,875 of revenue will be recognized in the remainder of 2022, $5,386 in 2023, $1,393 in 2024, and $122 in 2025. 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 unsatisﬁed 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.

6. Income taxes

The Company is subject to federal and state income taxes in the United States. The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter, unless a reliable estimate of ordinary income or the related tax expense/benefit cannot be made or the Company is in cumulative losses for which the benefit cannot be realized. In each quarter, the Company updates its estimate of the annual effective tax rate, and if its estimated annual tax rate changes, the Company makes a cumulative adjustment in that quarter. For the three and nine months ended September 30, 2022 and 2021, the Company concluded that, due to a recent history of operating losses, a valuation allowance should be applied to reduce its deferred tax assets to the amount that is more likely than not to be realized.

The Company’s effective income tax rate was 1% and 0% for the three months ended September 30, 2022 and 2021, respectively, and 10% and 0% for the nine months ended September 30, 2022 and 2021, respectively, differing from the U.S. corporate statutory federal income tax rate of 21%. The Company’s income tax expense for the three and nine months ended September 30, 2022 was primarily a result of the remeasurement of its valuation allowance, which differed from the income tax that would result from applying the U.S. corporate statutory federal income tax rate of 21% to its income before income taxes.

The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the Company’s financial statements.

The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. All of the Company’s income tax filings since 2018 remain open for tax examinations.

The Company does not have any material unrecognized tax benefits as of September 30, 2022 and December 31, 2021.

7. Common stock

As of September 30, 2022 and December 31, 2021, the number of issued shares of common stock was 13,874,406 and 13,488,540, respectively. The change in the number of issued shares of common stock was due to the following factors:

•

An aggregate of 605,899 shares of common stock issued as a result of the vesting of RSUs, of which, 200,033 shares of common stock were withheld to pay withholding taxes upon such vesting, which were reflected in treasury stock, with a cost of $4,310. The treasury stock of 200,033 shares was then retired during the nine months ended September 30, 2022.

•

In May 2022, the board of directors of the Company authorized the repurchase of up to $5.0 million of the Company's common stock from time to time (the “Stock Repurchase Program”). The Stock Repurchase Program does not obligate the Company to repurchase any shares and may be modified, suspended or terminated at any time and for any reason at the discretion of the board of directors. During the nine months ended September 30, 2022, the Company repurchased 21,000 shares of common stock under the Stock Repurchase Program at a net average price of $18.22 per share, which was reflected in treasury stock, with a cost of $383. The treasury stock of 20,000 shares was then retired during the nine months ended September 30, 2022, with the remaining treasury stock cost balance of $18 as of September 30, 2022.

8. Share-based compensation

On March 22, 2018, the board of directors of the Company and Cogint, Inc. (“cogint”) (now known as Fluent, Inc.), in its capacity as sole stockholder of the Company prior to the Company’s spin-off from cogint on March 26, 2018, approved the Red Violet, Inc. 2018 Stock Incentive Plan (the “2018 Plan”), which became effective immediately prior to the spin-off. A total of 3,000,000 shares of common stock were authorized to be issued under the 2018 Plan. On June 3, 2020, the Company’s stockholders approved an amendment to the 2018 Plan to increase the number of shares of common stock authorized for issuance under the 2018 Plan from 3,000,000 shares to 4,500,000 shares, and on May 25, 2022, the Company's stockholders approved an amendment to the 2018 Plan to increase the number of shares of common stock authorized for issuance under the 2018 Plan from 4,500,000 shares to 6,500,000 shares.

The primary purpose of the 2018 Plan is to attract, retain, reward and motivate certain individuals by providing them with an opportunity to acquire or increase a proprietary interest in the Company and to incentivize them to expend maximum effort for the growth and success of the Company, so as to strengthen the mutuality of the interests between such individuals and the stockholders of the Company.

As of September 30, 2022, there were 2,718,037 shares of common stock available for future issuance under the 2018 Plan, as amended.

To date, all stock incentives issued under the 2018 Plan have been in the form of RSUs. RSUs granted under the 2018 Plan vest and settle upon the satisfaction of a time-based condition or with both time- and performance-based conditions. The time-based condition for these awards is generally satisfied over three or four years with annual vesting. Details of unvested RSU activity during the nine months ended September 30, 2022 were as follows:


	Number of units			Weighted average grant-date fair value
Unvested as of December 31, 2021		1,306,953		$	18.85
Granted(1)		117,750		$	24.98
Vested and delivered(2)		(405,866	)	$	13.51
Withheld as treasury stock(2)		(200,033	)	$	14.58
Vested not delivered		(3,416	)	$	18.37
Forfeited		(30,325	)	$	27.29
Unvested as of September 30, 2022(3)		785,063		$	25.74

(1)

During the nine months ended September 30, 2022, the Company granted an aggregate of 117,750 RSUs to certain employees at grant date fair values ranging from $16.71 to $28.75 per share, with a vesting period ranging from two to four years.

(2)

During the period from August 29, 2019 to November 20, 2020, the Company granted an aggregate of 455,000 RSUs. Such RSU grants shall not vest unless and until the Company has, for any fiscal quarter in which the RSUs are outstanding, (i) gross revenue determined in accordance with the Company’s reviewed or audited financial statements in excess of $12.5 million for such fiscal quarter, and (ii) positive adjusted EBITDA of at least $2.0 million, as determined based on amounts derived from the Company’s reviewed or audited financial statements for such fiscal quarter, subject to the recipient continuing to provide services to the Company either as an employee, director or consultant on the last day of the quarter that the performance criteria are met. Provided the respective performance criteria are met, the RSUs will vest in accordance with the time-based requirements contained in the award agreement over three years. In the event of a change of control, all RSUs which have not vested on the date of such change of control shall immediately vest even if the performance criteria have not been met. As of the respective grant dates, the Company determined that it was probable that such performance criteria would be met and therefore, began to record the related amortization expense on the grant dates. The Company determined that the performance criteria were met as of March 31, 2022. As a result, 259,138 RSUs were included above in "Vested and delivered" and 165,862 RSUs were included above in "Withheld as treasury stock."

(3)

On July 30, 2021, the Company granted 120,000 RSUs, subject to performance-based requirements, to one non-executive employee, which was subsequently modified on February 18, 2022, with a fair value of $27.23 per share as of the modification date. Such RSU grants shall not vest unless and until the Company has achieved certain revenue for a portion of its business prior to the achievement date deadline for each performance milestone. No amortization of share-based compensation expense has been recognized for these RSUs, because, as of September 30, 2022, the Company determined that it is not probable that such performance criteria will be met. The 120,000 RSUs were included in "Unvested as of September 30, 2022" with a fair value of $27.23 per share.

As of September 30, 2022, unrecognized share-based compensation expense associated with the granted RSUs amounted to $14,221, which is expected to be recognized over a remaining weighted average period of 2.5 years.

Share-based compensation was allocated to the following accounts in the condensed consolidated financial statements for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2022		2021		2022		2021
Sales and marketing expenses	$	92	$	103	$	247	$	417
General and administrative expenses		1,181		883		3,819		4,780
Share-based compensation expense		1,273		986		4,066		5,197
Capitalized in intangible assets		470		328		1,193		1,023
Total	$	1,743	$	1,314	$	5,259	$	6,220

9. Related party transactions

Services Agreement

On August 7, 2018, the Company entered into a services agreement (the “Services Agreement”) with Mr. Michael Brauser (the “Consultant”), a greater than 10% stockholder, pursuant to which, the Consultant received cash compensation of $30 per month and was entitled to participate in the Company’s incentive compensation plan. The Services Agreement terminated on August 6, 2021, as further detailed below.

On February 16, 2021, the Company entered into a Separation Agreement (the "Separation Agreement") with the Consultant. Pursuant to the Separation Agreement, the parties agreed that the Services Agreement which expired on August 6, 2021 (“Expiration Date”), would not be renewed, but would continue in force and effect until the Expiration Date. As part of the Separation Agreement, the Consultant agreed (i) to certain non-solicitation obligations contained therein, (ii) that he and his affiliates would not disparage or assist or cooperate with any person or entity seeking to publicly disparage or economically harm the Company, (iii) that the Consultant and his affiliates would not initiate any lawsuit, claim, or proceeding with respect to any claims against the Company, except (with designated exceptions) for any legal proceeding initiated solely to remedy a breach of or to enforce the Separation Agreement, and (iv) with respect to each annual or special meeting of the Company's stockholders until the Expiration Date of the Separation Agreement, the Consultant agreed to vote the shares of the Company's common stock or any other securities entitled to vote then held by him or his affiliates in accordance with the board of directors' recommendations on director proposals (subject to certain board of directors change thresholds), and the ratification of the appointment of the Company’s independent registered public accounting firm.

The Company agreed (i) that the remaining unvested 166,666 RSUs previously granted to Consultant in accordance with the 2018 RSU agreement would continue to vest on July 1, 2021, in accordance with and subject to all other provisions and conditions of such grant, (ii) to amend the 2020 RSU agreement, previously granting Consultant 30,000 RSUs such that the 30,000 RSUs would continue to vest 33-1/3% on November 1, 2021, 66-2/3% on November 1, 2022, and 100% on November 1, 2023, without certain Company performance criteria, subject to all other provisions and conditions of such grant, (iii) to include shares of the Company's common stock held by the Consultant or his affiliates in any registration statement the Company files for the benefit of selling stockholders at any time when the Consultant or his affiliates beneficially own 10% or more of the Company's common stock, and (iv) to not initiate any lawsuit, claim, or proceeding with respect to any claims against the Consultant and his affiliates, except (with designated exceptions) for any legal proceeding initiated solely to remedy a breach of or to enforce the Separation Agreement. As a result of the modification to the 2020 RSU agreement, beginning February 16, 2021, the Company recognized an aggregate of $723 in share-based compensation expense over the remaining service period which ended on the Expiration Date.

The Company recognized consulting service fees relating to the Services Agreement of a total of $36 and $216 during the three and nine months ended September 30, 2021, respectively. In addition, amortization of share-based compensation expense of $160 and $1,432 (inclusive of the amortization of share-based compensation expense in relation with the modification of RSUs mentioned above) for the three and nine months ended September 30, 2021, respectively, was recognized in relation to the RSUs previously granted to the Consultant. There were no such expenses recognized during the three and nine months ended September 30, 2022.

10. Leases

The Company leases its corporate headquarters of 21,020 rentable square feet in accordance with a non-cancelable 89-month operating lease agreement as amended and effective in January 2017, with an option to extend for an additional 60 months. The Company also leases an additional office space of 6,003 rentable square feet in accordance with a non-cancellable 90-month operating lease agreement entered into in April 2017, with an option to extend for an additional 60 months. The extension option is not included in the determination of the lease term as it is not reasonably certain to be exercised.

For the three and nine months ended September 30, 2022 and 2021, a summary of the Company’s lease information is shown below:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2022		2021		2022		2021
Lease cost:
Operating lease costs	$	168	$	168	$	504	$	504
Other information:
Cash paid for operating leases	$	186	$	180	$	555	$	540

As of September 30, 2022, the weighted average remaining operating lease term was 2.1 years.

As of September 30, 2022, scheduled future maturities and present value of the operating lease liabilities are as follows:


(In thousands)
Year	September 30, 2022
Remainder of 2022	$	188
2023		765
2024		542
2025		77
Total maturities	$	1,572
Present value included in condensed consolidated balance sheet:
Current portion of operating lease liabilities	$	674
Noncurrent operating lease liabilities		778
Total operating lease liabilities	$	1,452
Difference between the maturities and the present value of operating lease liabilities	$	120

11. Commitments and contingencies

(a) Capital commitment

The Company incurred data costs of $2,332 and $2,107 for the three months ended September 30, 2022 and 2021, respectively, and $6,832 and $6,337 for the nine months ended September 30, 2022 and 2021, respectively, under certain data licensing agreements. As of September 30, 2022, material capital commitments under certain data licensing agreements were $28,668, shown as follows:


(In thousands)
Year	September 30, 2022
Remainder of 2022		2,092
2023		7,705
2024		7,544
2025		7,507
2026		3,820
Total	$	28,668

(b) Contingencies

The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and it discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for its financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, the Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated.

The Company may be involved in litigation from time to time in the ordinary course of business. The Company does not believe that the ultimate resolution of any such matters will have a material adverse effect on its business, financial condition, results of operations or cash flows. However, the results of such matters cannot be predicted with certainty and the Company cannot assure you that the ultimate resolution of any legal or administrative proceeding or dispute will not have a material adverse effect on its business, financial condition, results of operations and cash flows.

During 2020, the Company experienced significantly reduced commercial activity in numerous aspects of its business as a result of the preventative and protective actions taken by federal, state and local governments to combat Covid-19, including the implementation of stay-at-home orders, social distancing policies and certain temporary government-imposed moratoria on collection customers’ activities. During 2021 and the nine months ended September 30, 2022, the Company saw ongoing improvement in its results of operations, with the exception of the Company's idiVERIFIED service, which is an ancillary collections market offering that is purely transactional and of a lower margin profile. The Company expects its idiVERIFIED service volume to return to pre-Covid levels in the first half of 2023.

To further support the Company’s liquidity, beginning April 1, 2020, the Company elected, under Section 2302 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), to defer payment of the employer portion of Social Security payroll tax. Under the CARES Act, employers could forgo timely payment of the employer portion of Social Security taxes that would otherwise be due from March 27, 2020 through December 31, 2020, without penalty or interest charges. Employers must pay 50% of the deferred amount by December 31, 2021, and the remainder by December 31, 2022. The Company paid 50% of the deferred amount in December 2021. On May 5, 2020, the Company received funding under a promissory note dated May 5, 2020 evidencing an unsecured non-recourse loan under the CARES Act, which was fully forgiven by Legacy Bank of Florida and the U.S. Small Business Administration in June 2021, resulting in a gain on extinguishment of debt of $2,175 during the nine months ended September 30, 2021.

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, including the impact of the coronavirus (“Covid-19”) pandemic on our operating results. 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, 2021 filed on March 9, 2022 (“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. To the extent that our business is negatively impacted due to a variety of factors, including the impact of Covid-19 on our operating results, we may implement longer-term cost reduction efforts in order to mitigate such impacts.

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. (“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 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 September 30, 2022 and 2021, IDI had 6,873 and 6,314 billable customers and FOREWARN had 110,051 and 74,377 users, respectively. The Company defines 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, the Company counts the entire organization as a discrete customer. The Company defines 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.

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 September 30, 2022 and 2021, 68% and 80% of total revenue was attributable to customers with pricing contracts, respectively, versus 32% and 20% attributable to transactional customers, respectively. For the nine months ended September 30, 2022 and 2021, 74% and 80% of total revenue was attributable to customers with pricing contracts, respectively, versus 26% and 20% 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.

During 2020, we experienced significantly reduced commercial activity in numerous aspects of our business as a result of the preventative and protective actions taken by federal, state and local governments to combat Covid-19, including the implementation of stay-at-home orders, social distancing policies and certain temporary government-imposed moratoria on collection customers’ activities. During 2021 and the nine months ended September 30, 2022, we saw ongoing improvement in our results of operations, with the exception of our idiVERIFIED service, which is an ancillary collections market offering that is purely transactional and of a lower margin profile. We expect our idiVERIFIED service volume to return to pre-Covid levels in the first half of 2023.

To further support our liquidity, beginning April 1, 2020, we elected, under Section 2302 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), to defer payment of the employer portion of Social Security payroll tax. Under the CARES Act, employers could forgo timely payment of the employer portion of Social Security taxes that would otherwise be due from March 27, 2020 through December 31, 2020, without penalty or interest charges. Employers must pay 50% of the deferred amount by December 31, 2021, and the remainder by December 31, 2022. We paid 50% of the deferred amount in December 2021. On May 5, 2020, we received funding under a promissory note dated May 5, 2020 evidencing an unsecured non-recourse loan in the principal amount of $2.2 million under the CARES Act ("CARES Act Loan"), which was fully forgiven by Legacy Bank of Florida (the "Lender") and the U.S. Small Business Administration in June 2021, resulting in a gain on extinguishment of debt of $2.2 million during the nine months ended September 30, 2021.

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.”

Third Quarter Financial Results

For the three months ended September 30, 2022 as compared to the three months ended September 30, 2021:

•

Total revenue increased 29% to $15.0 million. Platform revenue increased 31% to $14.8 million. Services revenue decreased 29% to $0.2 million.

•

Gross profit increased 36% to $10.3 million. Gross margin increased to 69% from 65%.

•

Adjusted gross profit increased 35% to $12.0 million. Adjusted gross margin increased to 80% from 76%.

•

Net income increased 80% to $2.3 million, which resulted in $0.16 per basic and diluted share.

•

Adjusted EBITDA increased 43% to $5.2 million.

•

Cash from operating activities decreased 9% to $3.1 million.

•

Cash and cash equivalents were $31.3 million as of September 30, 2022.

Third Quarter and Recent Business Highlights

•

Added 56 customers to IDI during the third quarter, ending the quarter with 6,873 customers.

•

Added 8,790 users to FOREWARN during the third quarter, ending the quarter with 110,051 users. Over 225 REALTOR® Associations are now contracted to use FOREWARN.

•

Continue to enhance our go-to-market capabilities with the expansion of our sales team, including key new hires focused on several strategic areas within fraud and identity where we are seeing strong traction.

•

To date, we have purchased a total of 50,000 shares of the Company’s common stock at an average price of $17.52 per share pursuant to the Company’s Stock Repurchase Program authorized by the board of directors on May 4, 2022.

Platform revenue consists of both contractual and transactional revenue generated from our technology platform, CORE. It includes all revenue generated through our idiCORE and FOREWARN solutions. The cost of platform revenue, which consists primarily of data acquisition costs, remains relatively fixed irrespective of revenue generation. Services revenue consists of revenue generated from our idiVERIFIED service, which is an ancillary collections market offering that is purely transactional and of a lower margin profile. The cost of services revenue, which consists primarily of third-party servicer costs, is variable.

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 and adjusted gross margin. Adjusted EBITDA is a financial measure equal to net income, the most directly comparable financial measure based on US GAAP, excluding interest (income) expense, net, income tax expense, depreciation and amortization, share-based compensation expense, gain on extinguishment of debt, 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.


	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2022			2021			2022			2021
Net income	$	2,258		$	1,256		$	2,160		$	2,439
Interest (income) expense, net		(125	)		(1	)		(126	)		8
Income tax expense		25			-			244			-
Depreciation and amortization		1,713			1,345			4,860			3,933
Share-based compensation expense		1,273			986			4,066			5,197
Gain on extinguishment of debt		-			-			-			(2,175	)
Litigation costs		37			-			128			126
Write-off of long-lived assets and others		4			34			7			95
Adjusted EBITDA	$	5,185		$	3,620		$	11,339		$	9,623
Revenue	$	15,026		$	11,668		$	40,249		$	32,764

Net income margin		15	%		11	%		5	%		7	%
Adjusted EBITDA margin		35	%		31	%		28	%		29	%

The following is a reconciliation of gross profit, the most directly comparable US GAAP financial measure, to adjusted gross profit:


	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2022			2021			2022			2021
Revenue	$	15,026		$	11,668		$	40,249		$	32,764
Cost of revenue (exclusive of depreciation and amortization)		(3,067	)		(2,787	)		(9,157	)		(8,268	)
Depreciation and amortization of intangible assets		(1,659	)		(1,288	)		(4,682	)		(3,763	)
Gross profit		10,300			7,593			26,410			20,733
Depreciation and amortization of intangible assets		1,659			1,288			4,682			3,763
Adjusted gross profit	$	11,959		$	8,881		$	31,092		$	24,496

Gross margin		69	%		65	%		66	%		63	%
Adjusted gross margin		80	%		76	%		77	%		75	%

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 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.

We believe adjusted EBITDA, adjusted EBITDA margin, 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. 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’ 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 EBITDA margin, 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 US GAAP. The way we measure adjusted EBITDA, adjusted EBITDA margin, 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

Three months ended September 30, 2022 compared to three months ended September 30, 2021

Revenue. Revenue increased $3.3 million or 29% to $15.0 million for the three months ended September 30, 2022 from $11.7 million for the three months ended September 30, 2021. Revenue from new customers increased $1.1 million or 130%, base revenue from existing customers increased $1.6 million or 18%, and growth revenue from existing customers increased $0.6 million or 35%. Our IDI billable customer base grew from 6,314 customers as of September 30, 2021 to 6,873 customers as of September 30, 2022, and our FOREWARN user base grew from 74,377 users to 110,051 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.

Cost of revenue (exclusive of depreciation and amortization). Cost of revenue increased $0.3 million or 10% to $3.1 million for the three months ended September 30, 2022 from $2.8 million for the three months ended September 30, 2021. 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 48% of our total data acquisition costs for the three months ended September 30, 2022 compared to approximately 49% for the three months ended September 30, 2021. 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 20% for the three months ended September 30, 2022 from 24% for the three months ended September 30, 2021. 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 $0.4 million or 22% to $2.6 million for the three months ended September 30, 2022 from $2.2 million for the three months ended September 30, 2021. 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 September 30, 2022 was primarily attributable to an increase of $0.3 million in salaries and benefits, and sales commissions resulting from increased revenue.

General and administrative expenses. General and administrative expenses increased $1.4 million or 32% to $5.5 million for the three months ended September 30, 2022 from $4.1 million for the three months ended September 30, 2021. For the three months ended September 30, 2022 and 2021, our general and administrative expenses consisted primarily of employee salaries and benefits of $2.7 million and $2.0 million, share-based compensation expense of $1.2 million and $0.9 million, and professional fees of $1.0 million and $0.7 million, respectively.

Depreciation and amortization. Depreciation and amortization expenses increased $0.4 million or 27% to $1.7 million for the three months ended September 30, 2022 from $1.3 million for the three months ended September 30, 2021. The increase in depreciation and amortization for the three months ended September 30, 2022 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after September 30, 2021.

Income before income taxes. Income before income taxes increased $1.0 million or 82% to $2.3 million for the three months ended September 30, 2022 from $1.3 million for the three months ended September 30, 2021. The increase in income before income taxes was primarily attributable to the increase in revenue, decrease in our cost of revenue as a percentage of revenue, which was partially offset by the increase in employee salaries and benefits and sales commissions of $1.0 million, share-based compensation expense of $0.3 million, professional fees of $0.3 million, and depreciation and amortization of $0.4 million.

Income tax expense. Income tax expense of $25 thousand and $0 was recognized for the three months ended September 30, 2022 and 2021, respectively. A valuation allowance on the deferred tax assets was recognized as of September 30, 2022 and 2021, 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 increased $1.0 million or 80% to $2.3 million for the three months ended September 30, 2022 from $1.3 million for the three months ended September 30, 2021, as a result of the foregoing.

Nine months ended September 30, 2022 compared to nine months ended September 30, 2021

Revenue. Revenue increased $7.4 million or 23% to $40.2 million for the nine months ended September 30, 2022 from $32.8 million for the nine months ended September 30, 2021. Revenue from new customers increased $1.0 million or 38%, base revenue from existing customers increased $5.8 million or 23%, and growth revenue from existing customers increased $0.6 million or 12%. Our IDI billable customer base grew from 6,314 customers as of September 30, 2021 to 6,873 customers as of September 30, 2022, and our FOREWARN user base grew from 74,377 users to 110,051 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.

Cost of revenue (exclusive of depreciation and amortization). Cost of revenue increased $0.9 million or 11% to $9.2 million for the nine months ended September 30, 2022 from $8.3 million for the nine months ended September 30, 2021. 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 48% of our total data acquisition costs for the nine months ended September 30, 2022 compared to approximately 49% for the nine months ended September 30, 2021. 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 23% for the nine months ended September 30, 2022 from 25% for the nine months ended September 30, 2021. 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 $1.1 million or 17% to $7.8 million for the nine months ended September 30, 2022 from $6.7 million for the nine months ended September 30, 2021. 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 nine months ended September 30, 2022 was primarily attributable to an increase of $1.0 million in salaries and benefits, and sales commissions resulting from increased revenue.

General and administrative expenses. General and administrative expenses increased $2.5 million or 19% to $16.1 million for the nine months ended September 30, 2022 from $13.6 million for the nine months ended September 30, 2021. For the nine months ended September 30, 2022 and 2021, our general and administrative expenses consisted primarily of employee salaries and benefits of $7.7 million and $5.0 million, share-based compensation expense of $3.8 million and $4.8 million, and professional fees of $2.8 million and $2.2 million, respectively.

Depreciation and amortization. Depreciation and amortization expenses increased $1.0 million or 24% to $4.9 million for the nine months ended September 30, 2022 from $3.9 million for the nine months ended September 30, 2021. The increase in depreciation and amortization for the nine months ended September 30, 2022 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after September 30, 2021.

Gain on extinguishment of debt. On May 5, 2020, we received the CARES Act Loan in the principal amount of $2.2 million. On June 16, 2021, we received a notice from the Lender that the full principal amount of the CARES Act Loan and its accrued interest had been fully forgiven, resulting in a gain on extinguishment of debt of $2.2 million during the nine months ended September 30, 2021.

Income before income taxes. Income before income taxes was $2.4 million for the nine months ended September 30, 2022 compared to $2.4 million, inclusive of a one-time gain of $2.2 million on the extinguishment of debt from the forgiveness of the CARES Act Loan, for the nine months ended September 30, 2021. The significant $2.2 million increase in income before income taxes to $2.4 million for the nine months ended September 30, 2022 from $0.2 million, exclusive of the one-time gain of $2.2 million on the extinguishment of debt, for the nine months ended September 30, 2021, was primarily attributable to the increase in revenue, decrease in our cost of revenue as a percentage of revenue, and decrease in share-based compensation expense, which was partially offset by the increase in employee salaries and benefits and sales commissions of $3.7 million, professional fees of $0.6 million, and depreciation and amortization of $1.0 million.

Income tax expense. Income tax expense of $0.2 million and $0 was recognized for the nine months ended September 30, 2022 and 2021, respectively. A valuation allowance on the deferred tax assets was recognized as of September 30, 2022 and 2021, 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 $2.2 million for the nine months ended September 30, 2022 compared to $2.4 million, inclusive of a one-time gain of $2.2 million on the extinguishment of debt from the forgiveness of the CARES Act Loan, for the nine months ended September 30, 2021, 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 operating activities. For the nine months ended September 30, 2022, net cash provided by operating activities was $8.1 million, primarily the result of the net income of $2.2 million, adjusted for certain non-cash items (consisting primarily 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 expense) totaling $9.6 million, and the cash used as a result of changes in assets and liabilities of $3.7 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. For the nine months ended September 30, 2021, net cash provided by operating activities was $7.0 million, primarily the result of the net income of $2.4 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, interest expense, and gain on extinguishment of debt) totaling $7.4 million, and the cash used as a result of changes in assets and liabilities of $2.9 million, primarily the result of the increase in accounts receivable, and the decrease in accounts payable, accrued expenses and other current liabilities, and operating lease liabilities.

Cash flows used in investing activities. For the nine months ended September 30, 2022 and 2021, net cash used in investing activities was $6.4 million and $3.8 million, respectively, primarily as a result of capitalized costs included in intangible assets.

Cash flows used in financing activities. For the nine months ended September 30, 2022 and 2021, net cash used in financing activities was $4.7 million and $2.8 million, respectively. For the nine months ended September 30, 2022, we paid taxes of $4.3 million related to the net share settlement of vesting of RSUs. In addition, on May 4, 2022, we announced that the board of directors authorized the repurchase of up to $5.0 million of our common stock from time to time (the “Stock Repurchase Program”), and we paid an aggregate of $0.4 million for the repurchases of common stock. For the nine months ended September 30, 2021, we paid taxes of $2.8 million related to the net share settlement of vesting of RSUs.

As of September 30, 2022, we had material commitments under certain data licensing agreements of $28.7 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 $2.3 million and $1.3 million for the three months ended September 30, 2022 and 2021, respectively, and $2.2 million and $2.4 million (inclusive of a one-time gain of $2.2 million on the extinguishment of debt from the forgiveness of the CARES Act Loan) for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, we had a total shareholders’ equity balance of $72.2 million.

As of September 30, 2022, we had cash and cash equivalents of approximately $31.3 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 September 30, 2022, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company as defined in Rule 12b-2 of the Exchange Act, we are not required to include information required by this item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d–15(e) of the Exchange Act) as of September 30, 2022. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Based on the evaluation of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the fiscal quarter ended September 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures and Internal Control over Financial Reporting

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition, results of operations or cash flows. Legal fees associated with any legal proceedings, are expensed as incurred. We review legal proceedings and claims on an ongoing basis and follow appropriate accounting guidance, including Accounting Standards Codification 450, when making accrual and disclosure decisions. We establish accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. We do not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated.

We may be involved in litigation from time to time in the ordinary course of business. We do not believe that the ultimate resolution of any such matters will have a material adverse effect on our business, financial condition, results of operations or cash flows. However, the results of such matters cannot be predicted with certainty and we cannot assure you that the ultimate resolution of any legal or administrative proceeding or dispute will not have a material adverse effect on our business, financial condition, results of operations and cash flows.

Item 1A. Risk Factors.

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 9, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table provides information relating to the Company's repurchase of common stock during the three months ended September 30, 2022 pursuant to the Stock Repurchase Program:


Period(1)	Total number of shares purchased		Average price paid per share(2)		Total number of shares purchased as part of publicly announced plans or programs		Approximate dollar value of shares that may yet be purchased under the plans or programs
July 1, 2022 - July 31, 2022		2,155	$	18.93		2,155	$	4,825,097
August 1, 2022 - August 31, 2022		417	$	18.82		417	$	4,817,251
September 1, 2022 - September 30, 2022		11,397	$	17.47		11,397	$	4,618,184
Total		13,969	$	17.73		13,969

(1)

From October 1, 2022 to October 31, 2022, the Company purchased an additional 28,527 shares at an average price of $17.04 per share under a 10b5-1 trading plan pursuant to the Stock Repurchase Program.

(2)

Exclusive of commission fees incurred in relation to the repurchase of common stock.

On May 4, 2022, the Company announced that the board of directors authorized the repurchase of up to $5.0 million of the Company's common stock pursuant to the Stock Repurchase Program. The Stock Repurchase Program does not obligate the Company to repurchase any shares and it may be modified, suspended or terminated at any time and for any reason at the discretion of the board of directors.

Shares of common stock withheld as payment of withholding taxes in connection with the vesting of equity awards are also treated as common stock repurchases. Those withheld shares of common stock are not required to be disclosed under Item 703 of Regulation S-K and accordingly are excluded from the amounts in the table above.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

Incorporated by Reference

Filed

Exhibit No.

Exhibit Description

Form

File No.

Exhibit

Filing Date

Herewith

31.1

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Certification of Chief Executive Officer filed pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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31.2

Certification of Chief Financial Officer filed pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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32.1*

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Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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32.2*

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Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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101.SCH

Inline XBRL Taxonomy Extension Schema Document.

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101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

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101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

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101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.

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Inline XBRL Taxonomy Extension Presentation Linkbase Document.

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Cover Page Interactive Data File (embedded within the Inline XBRL document).

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* This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


November 7, 2022		Red Violet, Inc.

	By:	/s/ Daniel MacLachlan
		Daniel MacLachlan
		Chief Financial Officer
		(Principal Financial and Accounting Officer)