Red Violet, Inc. 10-Q

Item 1. Financial Statements. RED VIOLET, INC. CONDENSED CONSOLIDA TED BALANCE SHEETS (Amounts in thousands, except share data) (unaudited) March 31, 2023 December 31, 2022 ASSETS: Current assets: Cash and cash equivalents $ 30,818 $ 31,810 Accounts receivable, net of allowance for doubtful accounts of $ 40 and $ 60 as of March 31, 2023 and December 31, 2022, respectively 5,889 5,535 Prepaid expenses and other current assets 1,310 771 Total current assets 38,017 38,116 Property and equipment, net 692 709 Intangible assets, net 32,521 31,647 Goodwill 5,227 5,227 Right-of-use assets 969 1,114 Other noncurrent assets 894 601 Total assets $ 78,320 $ 77,414 LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 2,345 $ 2,229 Accrued expenses and other current liabilities 411 1,845 Current portion of operating lease liabilities 711 692 Deferred revenue 763 670 Total current liabilities 4,230 5,436 Noncurrent operating lease liabilities 413 598 Deferred tax liabilities 257 287 Total liabilities 4,900 6,321 Shareholders' equity: Preferred stock—$ 0.001 par value, 10,000,000 shares authorized, and 0 shares issued and outstanding, as of March 31, 2023 and December 31, 2022 - - Common stock—$ 0.001 par value, 200,000,000 shares authorized, 13,961,643 and 13,956,404 shares issued, and 13,950,706 and 13,956,404 shares outstanding, as of March 31, 2023 and December 31, 2022 14 14 Treasury stock, at cost, 10,937 and 0 shares as of March 31, 2023 and December 31, 2022 ( 201 ) - Additional paid-in capital 94,293 92,481 Accumulated deficit ( 20,686 ) ( 21,402 ) Total shareholders' equity 73,420 71,093 Total liabilities and shareholders' equity $ 78,320 $ 77,414 See notes to condensed consolidated financial statements 1 RED VIOLET, INC. CONDENSED CONSOLIDATED STATEMENTS O F OPERATIONS (Amounts in thousands, except share data) (unaudited) Three Months Ended March 31, 2023 2022 Revenue $ 14,626 $ 12,729 Costs and expenses: Cost of revenue (exclusive of depreciation and amortization) 3,179 3,170 Sales and marketing expenses 3,889 2,391 General and administrative expenses 5,241 5,353 Depreciation and amortization 1,916 1,534 Total costs and expenses 14,225 12,448 Income from operations 401 281 Interest income, net 286 1 Income before income taxes 687 282 Income tax (benefit) expense ( 29 ) 175 Net income $ 716 $ 107 Earnings per share: Basic $ 0.05 $ 0.01 Diluted $ 0.05 $ 0.01 Weighted average number of shares outstanding: Basic 13,997,154 13,543,607 Diluted 14,236,771 14,047,635 See notes to condensed consolidated financial statements 2 RED VIOLET, INC. CONDENSED CONSOLIDATED STATEMENTS O F 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 December 31, 2021 13,488,540 $ 13 - $ - $ 91,434 $ ( 22,018 ) $ 69,429 Vesting of restricted stock units 34,750 1 - - ( 1 ) - - Increase in treasury stock resulting from shares withheld to cover statutory taxes - - ( 223 ) ( 6 ) - - ( 6 ) Retirement of treasury stock ( 223 ) - 223 6 ( 6 ) - Share-based compensation - - - - 1,688 - 1,688 Net income - - - - - 107 107 Balance at March 31, 2022 13,523,067 $ 14 - $ - $ 93,115 $ ( 21,911 ) $ 71,218 Balance at December 31, 2022 13,956,404 $ 14 - $ - $ 92,481 $ ( 21,402 ) $ 71,093 Vesting of restricted stock units 6,800 - - - - - - Increase in treasury stock resulting from shares withheld to cover statutory taxes - - ( 1,561 ) ( 31 ) - - ( 31 ) Common stock repurchased - - ( 10,937 ) ( 201 ) - - ( 201 ) Retirement of treasury stock ( 1,561 ) - 1,561 31 ( 31 ) - - Share-based compensation - - - - 1,843 - 1,843 Net income - - - - - 716 716 Balance at March 31, 2023 13,961,643 $ 14 ( 10,937 ) $ ( 201 ) $ 94,293 $ ( 20,686 ) $ 73,420 See notes to condensed consolidated financial statements 3 RED VIOLET, INC. CONDENSED CONSOLIDATED S TATEMENTS OF CASH FLOWS (Amounts in thousands) (unaudited) Three Months Ended March 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 716 $ 107 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,916 1,534 Share-based compensation expense 1,384 1,387 Write-off of long-lived assets 3 3 Provision for bad debts 668 37 Noncash lease expenses 145 132 Deferred income tax (benefit) expense ( 30 ) 175 Changes in assets and liabilities: Accounts receivable ( 1,022 ) ( 862 ) Prepaid expenses and other current assets ( 539 ) ( 482 ) Other noncurrent assets ( 293 ) - Accounts payable 116 628 Accrued expenses and other current liabilities ( 1,460 ) 47 Deferred revenue 93 ( 128 ) Operating lease liabilities ( 166 ) ( 148 ) Net cash provided by operating activities 1,531 2,430 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 44 ) ( 113 ) Capitalized costs included in intangible assets ( 2,273 ) ( 1,794 ) Net cash used in investing activities ( 2,317 ) ( 1,907 ) CASH FLOWS FROM FINANCING ACTIVITIES: Taxes paid related to net share settlement of vesting of restricted stock units ( 31 ) ( 6 ) Repurchases of common stock ( 175 ) - Net cash used in financing activities ( 206 ) ( 6 ) Net (decrease) increase in cash and cash equivalents $ ( 992 ) $ 517 Cash and cash equivalents at beginning of period 31,810 34,258 Cash and cash equivalents at end of period $ 30,818 $ 34,775 SUPPLEMENTAL DISCLOSURE INFORMATION Cash paid for interest $ - $ - Cash paid for income taxes $ 1 $ - Share-based compensation capitalized in intangible assets $ 459 $ 301 Retirement of treasury stock $ 31 $ 6 See notes to condensed consolidated financial statements 4 RED VIOLET, INC. NOTES TO CONDENSED CONSOLID ATED 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, 2023. 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, 2022 (“Form 10-K”). The condensed consolidated balance sheet as of December 31, 2022 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. Three Months Ended March 31, (In thousands, except share data) 2023 2022 Numerator: Net income $ 716 $ 107 Denominator: Weighted average shares outstanding: Basic 13,997,154 13,543,607 Diluted (1) 14,236,771 14,047,635 Earnings per share: Basic $ 0.05 $ 0.01 Diluted $ 0.05 $ 0.01 (1) For the three months ended March 31, 2023 and 2022, diluted weighted average shares outstanding are calculated by the inclusion of unvested restricted stock units ("RSUs"). 5 3. Intangible assets, net Intangible assets other than goodwill consist of the following: March 31, 2023 December 31, 2022 (In thousands) Amortization period Gross amount Accumulated amortization Net Gross amount Accumulated amortization Net Software developed for internal use 5 - 10 years $ 55,410 $ ( 22,889 ) $ 32,521 $ 52,678 $ ( 21,031 ) $ 31,647 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 $ 1,858 and $ 1,472 for the three months ended March 31, 2023 and 2022, respectively, were included in depreciation and amortization expense. As of March 31, 2023, intangible assets of $ 5,359 , 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 $ 2,732 and $ 2,095 during the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, estimated amortization expense related to the Company’s intangible assets for the remainder of 2023 through 2028 and thereafter are as follows: (In thousands) Year March 31, 2023 Remainder of 2023 6,033 2024 8,029 2025 6,863 2026 5,381 2027 3,755 2028 and thereafter 2,460 Total $ 32,521 4. Goodwill Goodwill represents the cost in excess of the fair value of the net assets acquired in a business combination. As of March 31, 2023 and December 31, 2022, 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 . The Company did no t record a goodwill impairment loss during the three months ended March 31, 2023 and 2022, and as of March 31, 2023, there was no accumulated goodwill impairment loss. 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. 6 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. In some arrangements, a right to consideration for the Company's performance under the customer contract may occur before invoicing to the customer, resulting in an unbilled accounts receivable. As of March 31, 2023, the current and noncurrent portion unbilled accounts receivable of $ 733 and $ 757 , respectively, were included within accounts receivable and other noncurrent assets, respectively, on the condensed consolidated balance sheets . As of December 31, 2022, the current and noncurrent portion unbilled accounts receivable of $ 923 and $ 464 , respectively, were included within accounts receivable and other noncurrent assets, respectively, on the condensed consolidated balance sheets . The Company's revenue arrangements do not contain significant financing components. For the three months ended March 31, 2023 and 2022, 75 % and 77 % of total revenue was attributable to customers with pricing contracts, respectively, versus 25 % and 23 % attributable to transactional customers, respectively. 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 March 31, 2023 and December 31, 2022, the balance of deferred revenue was $ 763 and $ 670 , 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, 2022, $ 283 was recognized into revenue during the three months ended March 31, 2023. As of March 31, 2023, $ 10,614 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, $ 5,904 of revenue will be recognized in the remainder of 2023, $ 3,858 in 2024, $ 708 in 2025, $ 136 in 2026, and $ 8 in 2027. 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 months ended March 31, 2023 and 2022, 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 ( 4 %) and 62 % for the three months ended March 31, 2023 and 2022, respectively, differing from the U.S. corporate statutory federal income tax rate of 21 %, and the difference is primarily the result of the valuation allowance applied to reduce the Company’s deferred tax assets to the amount that is more likely than not to be realized. 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. Due to the existence of net operating loss carryforwards since inception, all of the Company’s income tax filings remain open for tax examinations. The Company does no t have any material unrecognized tax benefits as of March 31, 2023 and December 31, 2022. 7 7. Common stock and treasury stock As of March 31, 2023 and December 31, 2022, the number of issued shares of common stock was 13,961,643 and 13,956,404 , respectively, which included shares of treasury stock of 10,937 and 0 , respectively. The changes in the number of issued shares of common stock and treasury stock were due to the following factors: • An aggregate of 6,800 shares of common stock were issued as a result of the vesting of RSUs, of which, 1,561 shares of common stock were withheld to pay withholding taxes upon such vesting, which were reflected in treasury stock, with a cost of $ 31 . The treasury stock of 1,561 shares was then retired during the three months ended March 31, 2023. • On May 2, 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 three months ended March 31, 2023, the Company repurchased 10,937 shares of common stock under the Stock Repurchase Program, which was reflected in treasury stock, with a cost of $ 201 . 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 (the “Spin-off”), 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, as amended, 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 March 31, 2023, there were 2,299,607 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 three months ended March 31, 2023 were as follows: Number of units Weighted average grant-date fair value Unvested as of December 31, 2022 1,044,132 $ 20.64 Granted (1) 17,500 $ 19.16 Vested and delivered ( 5,239 ) $ 26.18 Withheld as treasury stock (2) ( 1,561 ) $ 25.08 Forfeited ( 27,750 ) $ 20.20 Unvested as of March 31, 2023 1,027,082 $ 20.59 (1) During the three months ended March 31, 2023, the Company granted an aggregate of 17,500 RSUs to certain employees at grant date fair values ranging from $ 18.59 to $ 19.59 per share, with a vesting period of four years . (2) Withheld as treasury stock represents shares withheld to pay statutory taxes upon the vesting of RSUs. Refer to Note 7, "Common stock and treasury stock," for details. As of March 31, 2023, unrecognized share-based compensation expense associated with the granted RSUs amounted to $ 15,809 , which is expected to be recognized over a remaining weighted average period of 2.3 years. 8 Share-based compensation was allocated to the following accounts in the condensed consolidated financial statements for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, (In thousands) 2023 2022 Sales and marketing expenses $ 107 $ 47 General and administrative expenses 1,277 1,340 Share-based compensation expense 1,384 1,387 Capitalized in intangible assets 459 301 Total $ 1,843 $ 1,688 9 . 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 months ended March 31, 2023 and 2022, a summary of the Company’s lease information is shown below: Three Months Ended March 31, (In thousands) 2023 2022 Lease cost: Operating lease costs $ 168 $ 168 Other information: Cash paid for operating leases $ 190 $ 184 As of March 31, 2023, the weighted average remaining operating lease term was 1.6 years. As of March 31, 2023, scheduled future maturities and present value of the operating lease liabilities are as follows: (In thousands) Year March 31, 2023 Remainder of 2023 575 2024 542 2025 77 Total maturities $ 1,194 Present value included in condensed consolidated balance sheet: Current portion of operating lease liabilities $ 711 Noncurrent operating lease liabilities 413 Total operating lease liabilities $ 1,124 Difference between the maturities and the present value of operating lease liabilities $ 70 10. Commitments and contingencies (a) Capital commitment The Company incurred data costs of $ 2,361 and $ 2,248 for the three months ended March 31, 2023 and 2022, respectively , under certain data licensing agreements. As of March 31, 2023, material capital commitments under certain data licensing agreements were $ 24,983 , shown as follows: (In thousands) Year March 31, 2023 Remainder of 2023 6,108 2024 7,548 2025 7,507 2026 3,820 Total $ 24,983 9 (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. 10