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Item 2. Management’s Discussion and Analysis

2021-11-09 compared with 2021-08-11 · 123 added, 112 removed, 159 unchanged (60% of the section changed)

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.

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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 Quarterly Report on 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, 2020 filed on March 10, 2021 (“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.

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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.

References in this discussion and analysis to “we,”

“us,”

“our,”

“red violet,”

or the “Company,”

refer to Red Violet, Inc.

and its consolidated subsidiaries.

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,”

“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.

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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 intelligence relating to all things identity – entities, relationships, affiliations, interactions, and events.

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.

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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 June 30, 2021 and 2020, idiCORE had 6,141 and 5,375 billable customers and FOREWARN had 67,578 and 40,857 users, respectively.

As of September 30, 2021 and 2020, idiCORE had 6,314 and 5,758 billable customers and FOREWARN had 74,377 and 44,927 users, respectively.

The Company defines a billable customer of idiCORE as a single entity that generated revenue during the last three months of the period.

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Customers access our solutions through a hosted environment using an online interface, batch processing, API and custom integrations.

We recognize revenue from licensing fees (a) on a transactional basis determined by the customer’s usage, (b) via a monthly fee or (c) from a combination of both.

Revenue pursuant to pricing contracts containing a monthly fee is recognized ratably over the contract period.

Pricing contracts are generally annual contracts or longer, with auto renewal.

Revenue from pricing contracts represented 81 % and 80 % of total revenue for the three and six months ended June 30, 202 1 , respectively, as compared to 79 % and 73 % for the three and six months ended June 30, 20 20 , respectively .

We endeavor to understand our customers’ needs at the moment of first engagement.

Revenue from pricing contracts represented 80% of total revenue for the three and nine months ended September 30, 2021, as compared to 68% and 71% for the three and nine months ended September 30, 2020, 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.

We employ a “land and expand”

Our sales model generally begins with a free trial followed by an initial purchase on a transactional basis or minimum-committed monthly spend.

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Starting in the second quarter of 2020, we implemented cost containment strategies across all areas of the organization, including continued curtailment of Company travel and partnering with suppliers, landlords and vendors for price concessions and payment deferrals during this interim period.

As a result of preventative and protective actions taken by federal, state and local governments, including the implementation of stay-at-home orders and social distancing policies that resulted in significantly reduced commercial activity, and certain temporary government-imposed moratoria on collection customers’ activities, we experienced reduced transaction volume in the second and third quarters of 2020.

activities, we experienced reduced transaction volume in the second and third quarters of 2020.

Transaction volume returned to pre-Covid levels by the end of the third quarter of 2020, except for collection customer volume.

Collection customer transaction volume returned to pre-Covid levels during the second quarter of 2021, with the exception of our idiVERIFIED service, which is an ancillary collections market offering that is purely transactional and of a lower margin profile.

idiVERIFIED service revenue was down $0.9 million for the three months ended June 30, 2021, compared to the three months ended March 31, 2020.

idiVERIFIED service revenue was down $0.8 million for the three months ended September 30, 2021, compared to the three months ended March 31, 2020.

We expect idiVERIFIED service volume to return to pre-Covid levels in the first half of 2022.

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Customers who had minimum contractual commitments and requested concessions because they were temporarily unable to meet their minimum contractual commitments as a result of Covid-19 were granted reductions, or eliminations where applicable, of minimums on a month-to-month basis.

The end date of the customer’s agreement was extended by one month for each month of the temporary concession.

During the second quarter of 2020, we provided concessions to a total of 152 customers, representing a $342 thousand reduction in minimum committed spend.

During the second quarter of 2021, we provided concessions to a total of 5 customers, representing a $14 thousand reduction in minimum committed spend.

The end date of the customer’s agreement was extended by one month for each month of the temporary concession.

During the three months ended September 30, 2021 and 2020, we provided concessions to a total of 7 and 22 customers, representing a $24 thousand and $94 thousand reduction in minimum committed spend, respectively.

During the nine months ended September 30, 2021 and 2020, we provided concessions to a total of 15 and 164 customers, representing a $50 thousand and $436 thousand reduction in minimum committed spend, respectively.

We continue to work with customers who have been impacted by Covid-19 and consider potential concessions on a case-by-case basis.

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We will continue to evaluate the nature and extent of the impact of the Covid-19 pandemic to our business.

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 can 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.

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.

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 (the “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 three months ended June 30, 2021.

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.

We will continue to assess the CARES Act and other applicable government legislation aimed at assisting businesses during the Covid-19 pandemic.

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Critical Accounting Policies and Estimates

Management’s d i scussion and ana l ysis of financial condition and results of oper a tions are based upon our condensed consolidated financial statement s , which have been prepared in accordance with acc o un t ing principles generally a c c e pted in the Unit e d St a tes (“G A AP”).

The preparati o n of these financial statements requires us to make estimates and judgments that affect the reported amounts of ass e ts, li a bi l it i es, revenues and expenses, and r e lated disclosure of contingent a ssets and liabilities.

On an ongo i ng basis, we evaluate our estimates, including those related to the allowance for doubtful accounts, useful lives of intangible ass e ts, recoverability of the carrying amounts of goodwill and intangible assets, share-based compensation and income tax provision.

We base our e s timates on historical ex p e rience a n d on various other assumptions that are believed to be reason a ble under the circumstances, the results of which form the basis f or making judgments ab o ut the ca rrying valu e s of a s s e ts and l i abi l it i es t hat a r e not readily apparent from other sources.

Actual results may differ from these est i ma t es under di f ferent assumptions or conditions.

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 (“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.

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Recently issued accounting standards

See Note 1(b), “ Recently issued accounting standards,” in “Notes to Condensed Consolidated Financial Statements.”

Second Quarter Financial Results

For the three months ended June 30, 2021 as compared to the three months ended June 30, 2020:

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, 2021 as compared to the three months ended September 30, 2020:

Total revenue increased 26% to $11.7 million.

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Services revenue increased 24% to $0.4 million.

Net income was $1.8 million, inclusive of a one-time gain of $2.2 million on the extinguishment of debt from the forgiveness of our Cares Act Loan, compared to a loss of $2.5 million.

Net income was $1.3 million compared to a loss of $0.9 million.

Adjusted EBITDA increased 73% to $3.6 million.

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Adjusted gross margin increased to 76% from 71%.

Generated $2.3 million in cash from operating activities in the second quarter.

Cash and cash equivalents were $13.9 million as of June 30, 2021.

Second Quarter and Recent Business Highlights

Revenue attributable to customer contracts reached a record 81%.

Customer contracts are generally annual contracts or longer with auto renewal.

Added over 230 new customers to idiCORE™ during the second quarter, ending the quarter with 6,141 customers.

Added over 8,700 users to FOREWARN ® during the second quarter, ending the quarter with 67,578 users.

Generated $3.5 million in cash from operating activities in the third quarter.

Cash and cash equivalents were $13.4 million as of September 30, 2021.

Third Quarter and Recent Business Highlights

Achieved first quarter ever of GAAP profitability without a one-time gain, generating $1.3 million of net income, or $0.09 diluted earnings per share.

Launched our “Innovations in Identity”

Advisory Board, comprised of industry luminaries and accomplished executives to provide strategic guidance in support of our expansion in current and new markets.

Added over 170 new customers to idiCORE during the third quarter, ending the quarter with 6,314 customers.

Added over 6,700 users to FOREWARN ® during the third quarter, ending the quarter with 74,377 users.

Over 165 REALTOR ® Associations throughout the U.S.

are now contracted to use FOREWARN.

Continue to expand leadership talent and depth, with the addition of Jim Greenwell, GM – Identity, and James Frasche, EVP – Property Solutions.

Appointed Lisa Stanton as an independent director of the Board of Directors, strengthening our corporate governance and providing deep expertise in FinTech, identity and security.

Continued addition of thought leadership, including key strategic hires to lead expansion within the public sector and financial services.

Platform revenue consists of both contractual and transactional revenue generated from our technology platform, CORE.

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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 (loss), the most directly comparable financial measure based on GAAP, excluding interest expense (income), net, 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.

Adjusted EBITDA is a financial measure equal to net income (loss), the most directly comparable financial measure based on GAAP, excluding interest (income) expense, net, 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 June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Net income (loss)

Interest expense (income), net

Interest (income) expense, net

Depreciation and amortization

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Cost of revenue (exclusive of depreciation and amortization)

Cost of revenue (exclusive of depreciation and

amortization)

Depreciation and amortization of intangible assets

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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 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).

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Results of Operations

Three months ended June 30, 2021 compared to three months ended June 30, 2020

Revenue increased $3.8 million or 54% to $10.9 million for the three months ended June 30, 2021 from $7.1 million for the three months ended June 30, 2020.

This increase was driven by strong growth in usage from existing customers, with base revenue from existing customers increasing $3.3 million or 66%, and growth revenue from existing customers increasing $0.5 million or 46%.

Our idiCORE billable customer base grew from 5,375 customers as of June 30, 2020 to 6,141 customers as of June 30, 2021, and our FOREWARN user base grew from 40,857 users to 67,578 users during that same period.

Three months ended September 30, 2021 compared to three months ended September 30, 2020

Revenue increased $2.4 million or 26% to $11.7 million for the three months ended September 30, 2021 from $9.3 million for the three months ended September 30, 2020.

Base revenue from existing customers increased $3.4 million or 58%, and revenue from new customers increased $0.2 million or 21%, which was partially offset by a decrease in growth revenue from existing customers of $1.1 million or 42%.

Our idiCORE billable customer base grew from 5,758 customers as of September 30, 2020 to 6,314 customers as of September 30, 2021, and our FOREWARN user base grew from 44,927 users to 74,377 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.

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Cost of revenue (exclusive of depreciation and amortization) .

Cost of revenue increased $0.1 million or 5% to $2.7 million for the three months ended June 30, 2021 from $2.6 million for the three months ended June 30, 2020.

Cost of revenue increased $0.1 million or 3% to $2.8 million for the three months ended September 30, 2021 from $2.7 million for the three months ended September 30, 2020.

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 50% of our total data acquisition costs for the three months ended June 30, 2021 compared to approximately 51% for the three months ended June 30, 2020.

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 49% of our total data acquisition costs for the three months ended September 30, 2021 compared to approximately 48% for the three months ended September 30, 2020.

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 25% for the three months ended June 30, 2021 from 37% for the three months ended June 30, 2020.

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 24% for the three months ended September 30, 2021 from 29% for the three months ended September 30, 2020.

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 $0.6 million or 35% to $2.3 million for the three months ended June 30, 2021 from $1.7 million for the three months ended June 30, 2020.

Sales and marketing expenses remained consistent at $2.2 million for the three months ended September 30, 2021 and 2020.

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 June 30, 2021 was primarily attributable to an aggregate of $0.6 million increase in salaries and benefits and sales commissions from increased revenue.

General and administrative expenses .

General and administrative expenses increased $0.6 million or 15% to $4.9 million for the three months ended June 30, 2021 from $4.3 million for the three months ended June 30, 2020.

For the three months ended June 30, 2021 and 2020, our general and administrative expenses consisted primarily of employee salaries and benefits of $1.6 million and $1.0 million, share-based compensation expense of $2.0 million and $2.2 million, and professional fees of $0.7 million and $0.5 million, respectively.

General and administrative expenses remained consistent at $4.1 million for the three months ended September 30, 2021 and 2020.

For the three months ended September 30, 2021 and 2020, our general and administrative expenses consisted primarily of employee salaries and benefits of $2.0 million and $1.2 million, share-based compensation expense of $0.9 million and $1.7 million, and professional fees of $0.7 million and $0.8 million, respectively.

Depreciation and amortization .

Depreciation and amortization expenses increased $0.

3 million or 3 4 % to $ 1 .

3 million for the three months ended June 30 , 20 2 1 from $ 1 .

0 million for the three months ended June 30 , 20 20 .

The increase in depreciation and amortization for the three months ended June 30 , 20 2 1 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after June 30 , 20 20 .

Gain on extinguishment of debt .

On May 5, 2020, we received the Loan in the principal amount of $2.2 million under the CARES Act.

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

Depreciation and amortization expenses increased $0.2 million or 20% to $1.3 million for the three months ended September 30, 2021 from $1.1 million for the three months ended September 30, 2020.

The increase in depreciation and amortization for the three months ended September 30, 2021 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after September 30, 2020.

Income (loss) before income taxes .

Income before income taxes was $1.8 million, inclusive of a one-time gain of $2.2 million on the extinguishment of debt from the forgiveness of the Loan, for the three months ended June 30, 2021 compared to a loss of $2.5 million for the three months ended June 30, 2020.

The significant decrease in loss before income taxes (exclusive of the one-time gain on extinguishment of debt) 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 commission of $1.2 million, and depreciation and amortization of $0.3 million.

Income before income taxes was $1.3 million for the three months ended September 30, 2021 compared to a loss of $0.9 million for the three months ended September 30, 2020.

The significant improvement in income before income taxes from a loss 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 depreciation and amortization of $0.2 million.

Income taxes .

Income tax expense of $0 was recognized for the three months ended June 30, 2021 and 2020.

A full valuation allowance on the deferred tax assets was recognized as of June 30, 2021 and 2020.

See Note 6, “Income Taxes,” included in “Notes to Condensed Consolidated Financial Statements,” for details.

Income tax expense of $0 was recognized for the three months ended September 30, 2021 and 2020.

A full valuation allowance on the deferred tax assets was recognized as of September 30, 2021 and 2020.

See Note 6, “Income Taxes,”

included in “Notes to Condensed Consolidated Financial Statements,”

Net income (loss) .

Net income was $1.8 million, inclusive of a one-time gain of $2.2 million on the extinguishment of debt from the forgiveness of the Loan, for the three months ended June 30, 2021 compared to a loss of $2.5 million for the three months ended June 30, 2020, as a result of the foregoing .

Six months ended June 30, 2021 compared to six months ended June 30, 2020

Revenue increased $4.7 million or 29% to $21.1 million for the six months ended June 30, 2021 from $16.4 million for the six months ended June 30, 2020.

This increase was driven by strong growth in usage from existing customers, with base revenue from existing customers increasing $4.0 million or 35%, and growth revenue from existing customers increasing $1.1 million or 49%.

Net income was $1.3 million for the three months ended September 30, 2021 compared to a loss of $0.9 million for the three months ended September 30, 2020, as a result of the foregoing.

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020

Revenue increased $7.2 million or 28% to $32.8 million for the nine months ended September 30, 2021 from $25.6 million for the nine months ended September 30, 2020.

This increase was driven by strong growth in usage from existing customers, with base revenue from existing customers increasing $7.4 million or 42%.

This growth was partially offset by a decrease in revenue from new customers of $0.3 million or 9%.

As a result of certain Covid-19 related government mandated collections moratoria remaining in place during the period, our idiVERIFIED service, which is an ancillary collections market offering that is purely transactional and of a lower margin profile, was down $0.7 million for the six months ended June 30, 2021.

We expect our idiVERIFIED service volume to return to pre-Covid levels in the first half of 2022.

Revenue from new customers represents the total monthly revenue generated from new customers in a given period.

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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 decreased $0.4 million or 7% to $5.5 million for the six months ended June 30, 2021 from $5.9 million for the six months ended June 30, 2020.

Cost of revenue decreased $0.3 million or 4% to $8.3 million for the nine months ended September 30, 2021 from $8.6 million for the nine months ended September 30, 2020.

Our cost of revenue primarily includes data acquisition costs.

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The decrease in cost of revenue was primarily attributable to the decrease in transactional based data acquisition costs associated with the reduction in our idiVERIFIED services revenue.

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 49% of our total data acquisition costs for the six months ended June 30, 2021 compared to approximately 44% for the six months ended June 30, 2020.

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 49% of our total data acquisition costs for the nine months ended September 30, 2021 compared to approximately 45% for the nine months ended September 30, 2020.

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 26% for the six months ended June 30, 2021 from 36% for the six months ended June 30, 2020.

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 25% for the nine months ended September 30, 2021 from 33% for the nine months ended September 30, 2020.

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.

7 million or 17 % to $ 4 .

6 million for the six months ended June 30, 2021 from $ 3 .

9 million for the six months ended June 30, 2020 .

Sales and marketing expenses increased $0.6 million or 10% to $6.7 million for the nine months ended September 30, 2021 from $6.1 million for the nine months ended September 30, 2020.

The increase during the six months ended June 30, 202 1 was primarily attributable to an aggregate of $0.

8 million increase in salaries and benefits and sales commissions from increased revenue , which was partially offset by the decrease in provision for bad debts of $0.2 million .

The increase during the nine months ended September 30, 2021 was primarily attributable to an aggregate of $0.8 million increase in salaries and benefits and sales commissions from increased revenue, which was partially offset by the decrease in provision for bad debts of $0.3 million.

General and administrative expenses .

General and administrative expenses increased $0.7 million or 9% to $9.4 million for the six months ended June 30, 2021 from $8.7 million for the six months ended June 30, 2020.

For the six months ended June 30, 2021 and 2020, our general and administrative expenses consisted primarily of employee salaries and benefits of $3.0 million and $2.2 million, share-based compensation expense of $3.9 million and $4.3 million, and professional fees of $1.5 million and $1.2 million, respectively.

General and administrative expenses increased $0.8 million or 6% to $13.6 million for the nine months ended September 30, 2021 from $12.8 million for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021 and 2020, our general and administrative expenses consisted primarily of employee salaries and benefits of $5.0 million and $3.4 million, share-based compensation expense of $4.8 million and $6.0 million, and professional fees of $2.2 million and $1.9 million, respectively.

Depreciation and amortization .

Depreciation and amortization expenses increased $0.7 million or 36% to $2.6 million for the six months ended June 30, 2021 from $1.9 million for the six months ended June 30, 2020.

The increase in depreciation and amortization for the six months ended June 30, 2021 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after June 30, 2020.

Depreciation and amortization expenses increased $0.9 million or 30% to $3.9 million for the nine months ended September 30, 2021 from $3.0 million for the nine months ended September 30, 2020.

The increase in depreciation and amortization for the nine months ended September 30, 2021 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after September 30, 2020.

Gain on extinguishment of debt .

On May 5, 2020, we received the Loan in the principal amount of $2.2 million under the CARES Act.

Income (loss) before income taxes .

Income before income taxes was $1.2 million , inclusive of a one-time gain of $2.2 million on the extinguishment of debt from the forgiveness of the Loan, for the six months ended June 30, 2021 compared to a loss of $4.0 million for the six months ended June 30, 2020.

The significant decrease in loss before income taxes (exclusive of the one-time gain on extinguishment of debt) 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 commission of $1.6 million, and depreciation and amortization of $0.7 million.

Income before income taxes was $2.4 million, inclusive of a one-time gain of $2.2 million on the extinguishment of debt from the forgiveness of the Loan, for the nine months ended September 30, 2021 compared to a loss of $4.9 million for the nine months ended September 30, 2020.

The significant improvement in income before income taxes (exclusive of the one-time gain on extinguishment of debt) from a loss 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 $2.4 million, and depreciation and amortization of $0.9 million.

Income taxes .

Income tax expense of $0 was recognized for the six months ended June 30, 2021 and 2020.

A full valuation allowance on the deferred tax assets was recognized as of June 30, 2021 and 2020.

See Note 6, “Income Taxes,” included in “Notes to Condensed Consolidated Financial Statements,” for details.

Income tax expense of $0 was recognized for the nine months ended September 30, 2021 and 2020.

A full valuation allowance on the deferred tax assets was recognized as of September 30, 2021 and 2020.

See Note 6, “Income Taxes,”

included in “Notes to Condensed Consolidated Financial Statements,”

Net income (loss) .

Net income was $1.2 million, inclusive of a one-time gain of $2.2 million on the extinguishment of debt from the forgiveness of the Loan, for the six months ended June 30, 2021 compared to a loss of $4.0 million for the six months ended June 30, 2020, as a result of the foregoing .

Net income was $2.4 million, inclusive of a one-time gain of $2.2 million on the extinguishment of debt from the forgiveness of the Loan, for the nine months ended September 30, 2021 compared to a loss of $4.9 million for the nine months ended September 30, 2020, as a result of the foregoing.

Effect of Inflation

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Cash flows provided by operating activities .

For the six months ended June 30, 2021, net cash provided by operating activities was $3.5 million, primarily the result of the net income of $1.2 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 gain on extinguishment of debt) totaling $5.0 million, and the cash used as a result of changes in assets and liabilities of $2.6 million, primarily the result of the increase in accounts receivable and prepaid expenses and other current assets, and the decrease in accounts payable, accrued expenses and other current liabilities and operating lease liabilities.

For the six months ended June 30, 2020, net cash provided by operating activities was $3.0 million, primarily the result of the net loss of $4.0 million, adjusted for certain non-cash items, as mentioned above, totaling $7.1 million.

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, 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.

For the nine months ended September 30, 2020, net cash provided by operating activities was $4.7 million, primarily the result of the net loss of $4.9 million, adjusted for certain non-cash items, as mentioned above, totaling $10.3 million, and the cash used as a result of changes in assets and liabilities of $0.6 million, primarily the result of the decrease in accrued expenses and other current liabilities, and operating lease liabilities.

Cash flows used in investing activities .

For the six months ended June 30, 2021 and 2020, net cash used in investing activities was $2.6 million and $3.1 million, respectively, primarily as a result of capitalized costs included in intangible assets.

Cash flows provided by financing activities .

For the six months ended June 30, 2021 and 2020, net cash provided by financing activities was $0 and $2.2 million, respectively.

For the nine months ended September 30, 2021 and 2020, net cash used in investing activities was $3.8 million and $4.4 million, respectively, primarily as a result of capitalized costs included in intangible assets.

Cash flows (used in) provided by financing activities .

For the nine months ended September 30, 2021, net cash used in financing activities was $2.8 million, which was related to the taxes paid for the net share settlement of vesting of restricted stock units (“RSUs”).

For the nine months ended September 30, 2020, net cash provided by financing activities was $0.3 million.

On May 5, 2020, we received the Loan in the principal amount of $2.2 million under the CARES Act.

As of June 30 , 20 2 1 , we had material commitments under certain data licensing agreements of $ 12.5 million.

In addition, we paid taxes of $1.8 million related to the net share settlement of vesting of RSUs during the nine months ended September 30, 2020.

As of September 30, 2021, we had material commitments under certain data licensing agreements of $34.1 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 $1.8 million and net loss of $2.5 million for the three months ended June 30, 2021 and 2020, respectively, and net income of $1.2 million and net loss of $4.0 million for the six months ended June 30, 2021 and 2020, respectively.

As of June 30, 2021, we had a total shareholders’ equity balance of $49.4 million.

As of June 30, 2021, we had cash and cash equivalents of approximately $13.9 million.

We reported net income of $1.3 million and net loss of $0.9 million for the three months ended September 30, 2021 and 2020, respectively, and net income of $2.4 million and net loss of $4.9 million for the nine months ended September 30, 2021 and 2020, respectively.

As of September 30, 2021, we had a total shareholders’

equity balance of $49.2 million.

As of September 30, 2021, we had cash and cash equivalents of approximately $13.4 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.

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Off-Balance Sheet Arrangements

As of June 30, 2021, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Quantitative and Qualitative Disclosures About Market Risk.

As of September 30, 2021, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Quantitative and Qualitati ve 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis