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Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-11-07 · 96 added, 137 removed, 121 unchanged (66% 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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Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements.

These factors include those contained in this Form 10-Q, as well as the disclosures made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed on March 8, 2023 (“Form 10-K”), and other filings we make with the Securities and Exchange Commission (the "SEC").

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, 2023 filed on March 7, 2024 (“Form 10-K”), and other filings we make with the Securities and Exchange Commission (the "SEC").

We do not undertake any obligation to update forward-looking statements, except as required by law.

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These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.

References in this discussion and analysis to “we,”

“us,”

“our,”

“red violet,”

or the “Company,”

refer to Red Violet, Inc.

References in this discussion and analysis to “we,” “us,” “our,” “red violet,” or the “Company,” refer to Red Violet, Inc.

and its consolidated subsidiaries.

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These solutions are used for purposes including risk mitigation, due diligence, fraud detection and prevention, regulatory compliance, and customer acquisition.

Our intelligent platform, CORE TM , is purpose-built for the enterprise, yet flexible enough for organizations of all sizes, bringing clarity to massive datasets by transforming data into intelligence.

Our AI/ML-driven identity intelligence platform, CORE TM , 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.

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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 identity intelligence –

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.

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.

While our platform powers a vast array of 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 an expansive and diverse set of industries 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.

idiCORE is a next-generation, investigative solution used to address a variety of organizational challenges, including, but not limited to, due diligence, risk mitigation, identity authentication, and regulatory compliance, by financial services companies, insurance companies, healthcare companies, law enforcement and government, identity verification platforms, 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, 2023 and 2022, IDI had 7,769 and 6,873 billable customers and FOREWARN had 168,356 and 110,051 users, respectively.

As of March 31, 2024 and 2023, IDI had 8,241 and 7,256 billable customers and FOREWARN had 236,639 and 131,348 users, respectively.

We define a billable customer of IDI 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.

For the three months ended September 30, 2023 and 2022, 79% and 68% of total revenue was attributable to customers with pricing contracts, respectively, versus 21% and 32% attributable to transactional customers, respectively.

For the nine months ended September 30, 2023 and 2022, 78% and 74% of total revenue was attributable to customers with pricing contracts, respectively, versus 22% and 26% attributable to transactional customers, respectively.

We endeavor to understand our customers’

needs at the moment of first engagement.

For the three months ended March 31, 2024 and 2023, 78% and 75% of total revenue was attributable to customers with pricing contracts, respectively, versus 22% and 25% 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”

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.

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Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our 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.

On an ongoing basis, we evaluate our estimates, including those related to the revenue recognition, 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.

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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, 2023, as compared to the three months ended September 30, 2022:

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

First Quarter Financial Results

For the three months ended March 31, 2024 as compared to the three months ended March 31, 2023:

• Total revenue increased 20% to $17.5 million.

• Gross profit increased 20% to $11.5 million.

Gross margin decreased to 66% from 69%.

Gross margin remained consistent at 66%.

• Adjusted gross profit increased 20% to $13.8 million.

Adjusted gross margin decreased to 79% from 80%.

Net income increased 453% to $12.5 million, which resulted in earnings of $0.90 and $0.87 per basic and diluted share, respectively.

Adjusted gross margin increased to 79% from 78%.

• Net income increased 149% to $1.8 million, which resulted in earnings of $0.13 per basic and diluted share.

Net income margin increased to 10% from 5%.

• Adjusted EBITDA increased 54% to $5.7 million.

Adjusted EBITDA margin decreased to 34% from 35%.

Adjusted EBITDA margin increased to 32% from 25%.

• Adjusted net income increased 36% to $3.2 million, which resulted in adjusted earnings of $0.23 and $0.22 per basic and diluted share, respectively.

• Net cash provided by operating activities increased 181% to $4.3 million.

Cash and cash equivalents were $34.2 million as of September 30, 2023.

Third Quarter and Recent Business Highlights

Added 272 customers to IDI during the third quarter, ending the quarter with 7,769 customers.

Added 21,819 users to FOREWARN during the third quarter, ending the quarter with 168,356 users.

• Cash and cash equivalents were $32.1 million as of March 31, 2024.

First Quarter and Recent Business Highlights

• Added 366 customers to IDI during the first quarter, ending the quarter with 8,241 customers.

• Added a record 51,259 users to FOREWARN during the first quarter, ending the quarter with 236,639 users.

Over 425 REALTOR ® Associations throughout the U.S.

are now contracted to use FOREWARN.

Announced agreement with Florida Realtors ® , the largest state REALTOR Association in the United States, to purchase FOREWARN services for its 238,000 members beginning January 2024.

As a result of our cumulative taxable income for the recent years, projections of future taxable income, and the reversal of taxable temporary differences, the Company released its valuation allowance recorded against its deferred tax assets under ASC 740, resulting in a one-time $10.4 million tax benefit realized in the third quarter.

Purchased 97,181 shares of the Company’s common stock year to date through November 3, 2023, at an average price of $18.29 per share pursuant to the Company’s $5.0 million Stock Repurchase Program that was authorized on May 2, 2022.

The Company has $2.3 million remaining under the Stock Repurchase Program.

• Purchased 291,879 shares of the Company’s common stock year to date through April 30, 2024, at an average price of $19.81 per share pursuant to the Company’s $15.0 million Stock Repurchase Program (as defined below), as amended, that was authorized on May 2, 2022.

As of April 30, 2024, the Company has $4.6 million remaining under the Stock Repurchase Program.

Use and Reconciliation of Non-GAAP Financial Measures

Management evaluates the financial performance of our business on a variety of key indicators, including non-GAAP metrics of adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross margin and free cash flow ("FCF").

Adjusted EBITDA is a financial measure equal to net income, the most directly comparable financial measure based on US GAAP, excluding interest income, net, income tax (benefit) expense, depreciation and amortization, share-based compensation expense, litigation costs, and write-off of long-lived assets and others, as noted in the tables below.

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 net income, adjusted earnings per share, adjusted gross profit, adjusted gross margin, and free cash flow ("FCF").

Adjusted EBITDA is a non-GAAP financial measure equal to net income, the most directly comparable financial measure based on US GAAP, excluding interest income, net, income tax expense (benefit), depreciation and amortization, share-based compensation expense, litigation costs, and write-off of long-lived assets and others.

We define adjusted EBITDA margin as adjusted EBITDA as a percentage of revenue.

Adjusted net income is a non-GAAP financial measure equal to net income, the most directly comparable financial measure based on US GAAP, excluding share-based compensation expense, and amortization of share-based compensation capitalized in intangible assets, and including the tax effect of adjustments.

We define adjusted earnings per share as adjusted net income divided by the weighted average shares outstanding.

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.

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The following is a reconciliation of net income, the most directly comparable US GAAP financial measure, to adjusted EBITDA:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

Interest income, net

Income tax (benefit) expense

Income tax expense (benefit)

Depreciation and amortization

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Adjusted EBITDA margin

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

Three Months Ended March 31,

(Dollars in thousands, except share data)

Share-based compensation expense

Amortization of share-based compensation

capitalized in intangible assets

Tax effect of adjustments (1)

Adjusted net income

Earnings per share:

Adjusted earnings per share:

Weighted average shares outstanding:

(1) The tax effect of adjustments is calculated using the expected federal and state statutory tax rate.

The expected federal and state income tax rate was approximately 25.75% for the three months ended March 31, 2024.

There was no tax effect of such adjustments for the three months ended March 31, 2023, as a full valuation allowance was provided for the net deferred tax assets.

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,

Three Months Ended March 31,

(Dollars 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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The following is a reconciliation of net cash provided by operating activities, the most directly comparable US GAAP financial measure, to FCF:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

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Free cash flow

In order to assist readers of our condensed consolidated financial statements in understanding the operating results that management uses to evaluate the business and for financial planning purposes, we present non-GAAP measures of adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross margin and FCF as supplemental measures of our operating performance.

In order to assist readers of our consolidated financial statements in understanding the operating results that management uses to evaluate the business and for financial planning purposes, we present non-GAAP measures of adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted earnings per share, adjusted gross profit, adjusted gross margin, and FCF as supplemental measures of our operating performance.

We believe they provide useful information to our investors as they eliminate the impact of certain items that we do not consider indicative of our cash operations and ongoing operating performance.

In addition, we use them as an integral part of our internal reporting to measure the performance and operating strength of our business.

We believe adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross margin and FCF are relevant and provide useful information frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies similar to ours and are indicators of the operational strength of our business.

We believe adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted earnings per share, adjusted gross profit, adjusted gross margin, and FCF are relevant and provide useful information frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies similar to ours and are indicators of the operational strength of our business.

We believe adjusted EBITDA eliminates the uneven effect of considerable amounts of non-cash depreciation and amortization, share-based compensation expense and the impact of other non-recurring items, providing useful comparisons versus prior periods or forecasts.

Adjusted EBITDA margin is calculated as adjusted EBITDA as a percentage of revenue.

Our adjusted gross profit is a measure used by management in evaluating the business’s current operating performance by excluding the impact of prior historical costs of assets that are expensed systematically and allocated over the estimated useful lives of the assets, which may not be indicative of the current operating activity.

We believe adjusted net income provides additional means of evaluating period-over-period operating performance by eliminating certain non-cash expenses and other items that might otherwise make comparisons of our ongoing business with prior periods more difficult and obscure trends in ongoing operations.

Adjusted net income is a non-GAAP financial measure equal to net income, excluding share-based compensation expense, and amortization of share-based compensation capitalized in intangible assets, and including the tax effect of adjustments.

We define adjusted earnings per share as adjusted net income divided by the weighted average shares outstanding.

Our adjusted gross profit is calculated by using revenue, less cost of revenue (exclusive of depreciation and amortization).

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We believe FCF is an important liquidity measure of the cash that is available, after capital expenditures, for operational expenses and investment in our business.

FCF is a measure used by management to understand and evaluate the business’s operating performance and trends over time.

FCF is calculated by using net cash provided by operating activities, less purchase of property and equipment, and capitalized costs included in intangible assets.

Adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross margin and FCF are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, financial measures presented in accordance with US GAAP.

Adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted earnings per share, adjusted gross profit, adjusted gross margin, and FCF are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, financial measures presented in accordance with US GAAP.

In addition, FCF is not intended to represent our residual cash flow available for discretionary expenses and is not necessarily a measure of our ability to fund our cash needs.

The way we measure adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross margin and FCF may not be comparable to similarly titled measures presented by other companies, and may not be identical to corresponding measures used in our various agreements.

The way we measure adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted earnings per share, adjusted gross profit, adjusted gross margin, and FCF may not be comparable to similarly titled measures presented by other companies, and may not be identical to corresponding measures used in our various agreements.

Results of Operations

Three months ended September 30, 2023 compared to three months ended September 30, 2022

Revenue increased $0.8 million or 5% to $15.8 million for the three months ended September 30, 2023 from $15.0 million for the three months ended September 30, 2022.

Base revenue from existing customers increased $1.6 million or 15%.

Revenue from new customers decreased $0.7 million or 81%, primarily the result of a large new customer win that contributed $1.0 million in one-time transactional revenue during the three months ended September 30, 2022, partially offset by additional revenue from new customers during the three months ended September 30, 2023.

Growth revenue from existing customers decreased $0.1 million or 6%, primarily the result of $0.8 million in one-time transactional revenue recognized during the three months ended September 30, 2022, partially offset by additional growth revenue from existing customers during the three months ended September 30, 2023.

Our IDI billable customer base grew from 6,873 customers as of September 30, 2022 to 7,769 customers as of September 30, 2023, and our FOREWARN user base grew from 110,051 users to 168,356 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 $0.2 million or 8% to $3.3 million for the three months ended September 30, 2023 from $3.1 million for the three months ended September 30, 2022.

Our cost of revenue primarily includes data acquisition costs.

Data acquisition costs consist primarily of the costs to acquire data either on a transactional basis or through flat-fee data licensing agreements, including unlimited usage agreements.

We continue to enhance the breadth and depth of our data through the addition and expansion of relationships with key data suppliers, including our largest data supplier, which accounted for 47% and 48% of our total data acquisition costs for the three months ended September 30, 2023 and 2022, respectively.

Other cost of revenue items include expenses related to third-party infrastructure fees and pertinent personnel costs.

As the construct of our data costs is primarily a flat-fee, unlimited usage model, the cost of revenue as a percentage of revenue increased to 21% for the three months ended September 30, 2023 from 20% for the three months ended September 30, 2022.

We expect that cost of revenue as a percentage of revenue will continue to decrease over the coming years as our revenue increases.

Historically, at scale, the industry business model’s cost of revenue will trend between 15% and 30% as a percentage of revenue.

Sales and marketing expenses .

Sales and marketing expenses increased $0.8 million or 28% to $3.4 million for the three months ended September 30, 2023 from $2.6 million for the three months ended September 30, 2022.

Sales and marketing expenses consist of salaries and benefits, advertising and marketing, travel expenses, and share-based compensation expense, incurred by our sales team, and provision for bad debts.

The increase during the three months ended September 30, 2023 was primarily attributable to the increase of $0.6 million in salaries and benefits, and sales commission.

General and administrative expenses .

General and administrative expenses decreased $0.3 million or 4% to $5.2 million for the three months ended September 30, 2023 from $5.5 million for the three months ended September 30, 2022.

For the three months ended September 30, 2023 and 2022, our general and administrative expenses consisted primarily of employee salaries and benefits of $2.4 million and $2.7 million, respectively, share-based compensation expense of $1.3 million and $1.2 million, respectively, and professional fees of $0.9 million and $1.0 million, respectively.

Depreciation and amortization .

Depreciation and amortization expenses increased $0.5 million or 27% to $2.2 million for the three months ended September 30, 2023 from $1.7 million for the three months ended September 30, 2022.

The increase in depreciation and amortization for the three months ended September 30, 2023 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after September 30, 2022.

Interest income, net .

Interest income increased $0.2 million or 177% to $0.3 million for the three months ended September 30, 2023 from $0.1 million for the three months ended September 30, 2022.

This was primarily due to interest income earned on investments in certain money market funds.

Income before income taxes .

Income before income taxes decreased $0.2 million or 8% to $2.1 million for the three months ended September 30, 2023 from $2.3 million for the three months ended September 30, 2022.

The change was primarily attributable to the increase in cost of revenue (exclusive of depreciation and amortization) of $0.2 million, sales commission of $0.3 million, share-based compensation expense of $0.1 million, and depreciation and amortization of $0.5 million, which was partially offset by the increase in revenue and interest income.

Income taxes .

Income tax benefit of $10.4 million was recognized for the three months ended September 30, 2023 compared to income tax expense of $0.03 million for the three months ended September 30, 2022.

A valuation allowance on the deferred tax assets was recognized as of September 30, 2022 to reduce the deferred tax assets to the amount that is more likely than not to be realized.

During the three months ended September 30, 2023, the Company released the valuation allowance as the Company concluded that the realization of the deferred tax assets as of September 30, 2023 is more likely than not.

See Note 6, “Income taxes,”

included in “Notes to Condensed Consolidated Financial Statements.”

Net income was $12.5 million for the three months ended September 30, 2023 compared to $2.3 million for the three months ended September 30, 2022, as a result of the foregoing.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

Revenue increased $4.9 million or 12% to $45.1 million for the nine months ended September 30, 2023 from $40.2 million for the nine months ended September 30, 2022.

Revenue from new customers increased $0.5 million or 14%, and base revenue from existing customers increased $4.5 million or 15%, while growth revenue from existing customers decreased $0.1 million or 3%.

Three months ended March 31, 2024 compared to three months ended March 31, 2023

Revenue increased $2.9 million or 20% to $17.5 million for the three months ended March 31, 2024 from $14.6 million for the three months ended March 31, 2023.

Base revenue from existing customers increased $2.1 million or 19%, and growth revenue from existing customers increased $1.0 million or 62%, while revenue from new customers decreased $0.2 million or 13%.

Our IDI billable customer base grew from 7,256 customers as of March 31, 2023 to 8,241 customers as of March 31, 2024, and our FOREWARN user base grew from 131,348 users to 236,639 users during that same period.

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

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Cost of revenue (exclusive of depreciation and amortization) .

Cost of revenue increased $0.5 million or 6% to $9.7 million for the nine months ended September 30, 2023 from $9.2 million for the nine months ended September 30, 2022.

Cost of revenue increased $0.6 million or 18% to $3.8 million for the three months ended March 31, 2024 from $3.2 million for the three months ended March 31, 2023.

Our cost of revenue primarily includes data acquisition costs.

Data acquisition costs consist primarily of the costs to acquire data either on a transactional basis or through flat-fee data licensing agreements, including unlimited usage agreements.

We continue to enhance the breadth and depth of our data through the addition and expansion of relationships with key data suppliers, including our largest data supplier, which accounted for 48% of our total data acquisition costs for the nine months ended September 30, 2023 and 2022.

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 41% and 48% of our total data acquisition costs for the three months ended March 31, 2024 and 2023, respectively.

Other cost of revenue items include expenses related to third-party infrastructure fees and pertinent personnel costs.

As the construct of our data costs is primarily a flat-fee, unlimited usage model, the cost of revenue as a percentage of revenue decreased to 22% for the nine months ended September 30, 2023 from 23% for the nine months ended September 30, 2022.

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 21% for the three months ended March 31, 2024 from 22% for the three months ended March 31, 2023.

We expect that cost of revenue as a percentage of revenue will continue to decrease over the coming years as our revenue increases.

Historically, at scale, the industry business model’s cost of revenue will trend between 15% and 30% as a percentage of revenue.

Sales and marketing expenses .

Sales and marketing expenses increased $2.5 million or 32% to $10.3 million for the nine months ended September 30, 2023 from $7.8 million for the nine months ended September 30, 2022.

Sales and marketing expenses decreased $0.2 million or 5% to $3.7 million for the three months ended March 31, 2024 from $3.9 million for the three months ended March 31, 2023.

The increase during the nine months ended September 30, 2023 was primarily attributable to the increase of $1.3 million in salaries and benefits, and sales commissions, and $0.8 million in provision for bad debts.

The decrease during the three months ended March 31, 2024 was primarily attributable to the decrease of $0.6 million in provision for bad debts, which was offset by the increase of $0.3 million in salaries and benefits, and sales commission.

General and administrative expenses .

General and administrative expenses decreased $0.6 million or 4% to $15.5 million for the nine months ended September 30, 2023 from $16.1 million for the nine months ended September 30, 2022.

For the nine months ended September 30, 2023 and 2022, our general and administrative expenses consisted primarily of employee salaries and benefits of $7.7 million and $7.7 million, respectively, share-based compensation expense of $3.7 million and $3.8 million, respectively, and professional fees of $2.3 million and $2.8 million, respectively.

General and administrative expenses increased $0.6 million or 10% to $5.8 million for the three months ended March 31, 2024 from $5.2 million for the three months ended March 31, 2023.

For the three months ended March 31, 2024 and 2023, our general and administrative expenses consisted primarily of employee salaries and benefits of $2.7 million and $2.8 million, respectively, share-based compensation expense of $1.3 million and $1.3 million, respectively, and professional fees of $1.2 million and $0.6 million, respectively.

Depreciation and amortization .

Depreciation and amortization expenses increased $1.2 million or 26% to $6.1 million for the nine months ended September 30, 2023 from $4.9 million for the nine months ended September 30, 2022.

The increase in depreciation and amortization for the nine months ended September 30, 2023 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after September 30, 2022.

Depreciation and amortization expenses increased $0.4 million or 18% to $2.3 million for the three months ended March 31, 2024 from $1.9 million for the three months ended March 31, 2023.

The increase in depreciation and amortization for the three months ended March 31, 2024 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after March 31, 2023.

Interest income, net .

Interest income increased $0.8 million or 652% to $0.9 million for the nine months ended September 30, 2023 from $0.1 million for the nine months ended September 30, 2023.

Interest income, net increased $0.1 million or 28% to $0.4 million for the three months ended March 31, 2024 from $0.3 million for the three months ended March 31, 2023.

This was primarily due to interest income earned on investments in certain money market funds.

Income before income taxes .

Income before income taxes increased $1.9 million or 81% to $4.3 million for the nine months ended September 30, 2023 from $2.4 million for the nine months ended September 30, 2022.

The increase in income before income taxes for the nine months ended September 30, 2023 was primarily attributable to the increase in revenue, decrease in our cost of revenue as a

percentage of revenue, and increase in interest income, which was partially offset by the increase in employee salaries and benefits and sales commissions of $1.3 million, provision for bad debts of $0.8 million, and depreciation and amortization of $1.2 million.

Income before income taxes increased $1.6 million or 242% to $2.3 million for the three months ended March 31, 2024 from $0.7 million for the three months ended March 31, 2023.

The increase was primarily attributable to the increase in revenue, decrease in our cost of revenue as a percentage of revenue, and decrease in provision for bad debts of $0.6 million, which was partially offset by the increase in employee salaries and benefits and sales commissions of $0.3 million, professional fees of $0.6 million, and depreciation and amortization of $0.4 million.

Income taxes .

Income tax benefit of $10.3 million was recognized for the nine months ended September 30, 2023 compared to income tax expense of $0.3 million for the nine months ended September 30, 2022.

A valuation allowance on the deferred tax assets was recognized as of September 30, 2022 to reduce the deferred tax assets to the amount that is more likely than not to be realized.

During the nine months ended September 30, 2023, the Company released the valuation allowance as the Company concluded that the realization of the deferred tax assets as of September 30, 2023 is more likely than not.

See Note 6, “Income taxes,”

included in “Notes to Condensed Consolidated Financial Statements.”

Net income was $14.6 million for the nine months ended September 30, 2023 compared to $2.2 million for the nine months ended September 30, 2022, as a result of the foregoing.

Income tax expense of $0.6 million was recognized for the three months ended March 31, 2024 compared to income tax benefit of $0.03 million for the three months ended March 31, 2023.

A valuation allowance on the deferred tax assets was recognized as of March 31, 2023 to reduce the deferred tax assets to the amount that is more likely than not to be realized.

Beginning from the three months ended September 30, 2023, the Company released the valuation allowance as the Company concluded that the realization of the deferred tax assets is more likely than not.

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

Net income was $1.8 million for the three months ended March 31, 2024 compared to $0.7 million for the three months ended March 31, 2023, as a result of the foregoing.

Effect of Inflation

We believe that the persistent inflationary pressure throughout 2022 and up to September 30, 2023 has contributed to deteriorating macroeconomic conditions and increased recession fears, causing businesses to slow their spending over the last several months, which have resulted, and may continue to result, in fluctuations in volumes, pricing and operating margins for our services.

We believe that the persistent inflationary pressure throughout 2023 and up to March 31, 2024 has contributed to deteriorating macroeconomic conditions and increased recession fears, causing businesses to slow their spending over the last several months, which have resulted, and may continue to result, in fluctuations in volumes, pricing and operating margins for our services.

Also, higher interest rates imposed to combat inflation, may reduce the demand for credit, which may lead to a decline in the volume of services we provide to our customers in the banking or financial industry, or other industries that are affected by these types of disruptions.

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Cash flows provided by operating activities .

For the nine months ended September 30, 2023, net cash provided by operating activities was $10.9 million, primarily the result of the net income of $14.6 million, adjusted for certain non-cash items (consisting of share-based compensation expense, depreciation and amortization, write-off of long-lived assets, provision for bad debts, noncash lease expenses, and deferred income tax (benefit) expense) totaling $(1.3) million, and the cash used as a result of changes in assets and liabilities of $5.0 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 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, mentioned above, 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 three months ended March 31, 2024, net cash provided by operating activities was $4.3 million, primarily the result of the net income of $1.8 million, adjusted for certain non-cash items (consisting of share-based compensation expense, depreciation and amortization, provision for bad debts, noncash lease expenses, and deferred income tax expense (benefit)) totaling $4.3 million, and the cash used as a result of changes in assets and liabilities of $1.8 million, primarily the result of the increase in accounts receivable, and prepaid expenses and other current assets, and the decrease in accrued expenses and other current liabilities, which was offset by the increase in accounts payable.

For the three months ended March 31, 2023, net cash provided by operating activities was $1.5 million, primarily the result of the net income of $0.7 million, adjusted for certain non-cash items, primarily as mentioned above, totaling $4.1 million, and the cash used as a result of changes in assets and liabilities of $3.3 million, primarily the result of the increase in accounts receivable, prepaid expenses and other current assets and other noncurrent assets, and the decrease in accrued expenses and other current liabilities, and operating lease liabilities.

Cash flows used in investing activities .

For the nine months ended September 30, 2023 and 2022, net cash used in investing activities was $7.0 million and $6.4 million, respectively, primarily as a result of capitalized costs included in intangible assets.

For the three months ended March 31, 2024 and 2023, net cash used in investing activities was $2.4 million and $2.3 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, 2023, net cash used in financing activities was $1.4 million, mainly the result of $1.3 million paid in aggregate for the repurchase of common stock pursuant to a stock repurchase program that the board of directors authorized on May 2, 2022 (the "Stock Repurchase Program"), authorizing the repurchase of up to $5.0 million of our common stock.

For the nine months ended September 30, 2022, net cash used in financing activities was $4.7 million, resulting from the taxes paid related to the net share settlement of vesting of RSUs of $4.3 million, and the repurchase of common stock pursuant to the Stock Repurchase Program of $0.4 million.

As of September 30, 2023, we had material commitments under certain data licensing agreements of $22.1 million.

For the three months ended March 31, 2024, net cash used in financing activities was $1.8 million, resulting from the taxes paid related to the net share settlement of vesting of RSUs of $0.4 million, and the result of $1.4 million paid in aggregate for the repurchase of common stock pursuant to a stock repurchase program that the board of directors authorized on May 2, 2022 (the "Stock Repurchase Program"), authorizing the repurchase of up to $5.0 million of our common stock.

Subsequently on each December 19, 2023 and March 28, 2024, the board of directors approved the repurchases of an additional $5.0 million of our common stock under the Stock Repurchase Program.

For the three months ended March 31, 2023, net cash used in financing activities was $0.2 million, mainly the result of $0.2 million paid in aggregate for the repurchase of common stock pursuant to the Stock Repurchase Program.

As of March 31, 2024, we had material commitments under certain data licensing agreements of $20.1 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 $12.5 million and $2.3 million for the three months ended September 30, 2023 and 2022, respectively, and net income of $14.6 million and $2.2 million for the nine months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023, we had a total shareholders’

equity balance of $89.7 million.

As of September 30, 2023, we had cash and cash equivalents of approximately $34.2 million.

We reported net income of $1.8 million and $0.7 million for the three months ended March 31, 2024 and 2023, respectively.

As of March 31, 2024, we had a total shareholders’ equity balance of $83.8 million.

As of March 31, 2024, we had cash and cash equivalents of approximately $32.1 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 September 30, 2023, we did not have any off-balance sheet arrangements, as defined in Item 303 of Regulation S-K.

As of March 31, 2024, we did not have any off-balance sheet arrangements, as defined in Item 303 of Regulation S-K.

Quantitative and Qualitati ve Disclosures About Market Risk.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis