You should read the following discussion in conjunction with our consolidated financial statements and related notes included in this 2021 Form 10-K. This 2021 Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), about our expectations, beliefs, or intentions regarding our business, financial condition, results of operations, strategies, or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends, or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those contained in Part I, "Item 1A. Risk Factors" of this 2021 Form 10-K. We do not undertake any obligation to update forward-looking statements, except as required by law. We intend that all forward-looking statements be subject to the safe harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
Red Violet, Inc., a Delawarecorporation, is dedicated to making the world a safer place and reducing the cost of doing business. We build proprietary technologies and apply analytical capabilities to deliver identity intelligence. Our technology powers critical solutions, which empower organizations to operate with confidence. Our solutions enable the real-time identification and location of people, businesses, assets and their interrelationships. These solutions are used for purposes including risk mitigation, due diligence, fraud detection and prevention, regulatory compliance, and customer acquisition. Our intelligent platform, CORETM, is purpose-built for the enterprise, yet flexible enough for organizations of all sizes, bringing clarity to massive datasets by transforming data into intelligence. We drive workflow efficiency and enable organizations to make better data-driven decisions. Organizations are challenged by the structure, volume and disparity of data. Our platform and applications transform the way our customers interact with information, presenting connections and relevance of information otherwise unattainable, which drives actionable insights and better outcomes. Leveraging cloud-native proprietary technology and applying machine learning and advanced analytical capabilities, CORE provides essential solutions to public and private sector organizations through intuitive, easy-to-use analytical interfaces. With massive data assets consisting of public record, proprietary and publicly-available data, our differentiated information and innovative platform and solutions deliver identity intelligence - entities, relationships, affiliations, interactions, and events. Our solutions are used today to enable frictionless commerce, to ensure safety, and to reduce fraud and the concomitant expense borne by society. While our platform powers many diverse solutions for our customers, we presently market our solutions primarily through two brands, IDI™ and FOREWARN®. IDI is a leading-edge, analytics and information solutions provider delivering actionable intelligence to the risk management industry in support of use cases such as the verification and authentication of consumer identities, due diligence, prevention of fraud and abuse, legislative compliance, and debt recovery. idiCORE™ is IDI's flagship product. idiCORE is a next-generation, investigative solution used to address a variety of organizational challenges including due diligence, risk mitigation, identity authentication and regulatory compliance, by financial services companies, insurance companies, healthcare companies, law enforcement and government, collections, law firms, retail, telecommunication companies, corporate security and investigative firms. FOREWARN is an app-based solution currently tailored for the real estate industry, providing instant knowledge prior to face-to-face engagement with a consumer, helping professionals identify and mitigate risk. As of December 31, 2021and 2020, IDI had 6,548 and 5,726 billable customers and FOREWARN had 82,419 and 48,377 users, respectively. The Company defines a billable customer of IDI as a single entity that generated revenue during the last three months of the period. Billable customers are typically corporate organizations. In most cases, corporate organizations will have multiple users and/or departments purchasing our solutions, however, the Company counts the entire organization as a discrete customer. The Company defines a user of FOREWARN as a unique person that has a subscription to use the FOREWARN service as of the last day of the period. A unique person can only have one user account. 21 -------------------------------------------------------------------------------- We generate substantially all of our revenue from licensing our solutions. Customers access our solutions through a hosted environment using an online interface, batch processing, API and custom integrations. We recognize revenue from licensing fees (a) on a transactional basis determined by the customer's usage, (b) via a monthly fee or (c) from a combination of both. Revenue pursuant to pricing contracts containing a monthly fee is recognized ratably over the contract period. Pricing contracts are generally annual contracts or longer, with auto renewal. For the years ended December 31, 2021and 2020, 80% and 73% of total revenue was attributable to customers with pricing contracts, respectively, versus 20% and 27% attributable to transactional customers, respectively. We endeavor to understand our customers' needs at the moment of first engagement. We continuously engage with our customers and evaluate their usage of our solutions throughout their life cycle, to maximize utilization of our solutions and, hence, their productivity. Our go-to-market strategy leverages (a) an inside sales team that cultivates relationships, and ultimately closes business, with their end-user markets, (b) a strategic sales team that provides a more personal, face-to-face approach for major accounts within certain industries, and (c) distributors, resellers, and strategic partners that have a significant foothold in many of the industries that we have not historically served, as well as to further penetrate those industries that we do serve. We employ a "land and expand" approach. Our sales model generally begins with a free trial followed by an initial purchase on a transactional basis or minimum-committed monthly spend. As organizations derive benefits from our solutions, we are able to expand within organizations as additional use cases are presented across departments, divisions and geographic locations and customers become increasingly reliant on our solutions in their daily workflow. In order for us to continue to develop new products, grow our existing business and expand into additional markets, we must generate and sustain sufficient operating profits and cash flow in future periods. This will require us to generate additional sales from current products and new products currently under development. We continue to build out our sales organization to drive current products and to introduce new products into the marketplace. During 2020, we experienced significantly reduced commercial activity in numerous aspects of our business as a result of the preventative and protective actions taken by federal, state and local governments to combat Covid-19, including the implementation of stay-at-home orders, social distancing policies and certain temporary government-imposed moratoria on collection customers' activities. During 2021, we saw ongoing improvement in our results of operations, with the exception of our idiVERIFIED service, which is an ancillary collections market offering that is purely transactional and of a lower margin profile. We expect our idiVERIFIED service volume to return to pre-Covid levels in the second half of 2022. We continue to take precautionary measures intended to minimize the risk of the Covid-19 pandemic to our employees, our customers, and the communities in which we operate. These measures may result in inefficiencies, delays and additional costs to our business. The Covid-19 pandemic and its impact on us and the economy has significantly limited our ability to forecast our future operating results, including our ability to predict revenue and expense levels, and plan for and model future operating results. Furthermore, the full impact of the Covid-19 pandemic on our ongoing business, results of operations and overall financial performance cannot be reasonably estimated at this time. We will continue to evaluate the nature and extent of the impact of the Covid-19 pandemic to our business, including the emergence of new variants and the development, availability, distribution and effectiveness of vaccines. 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 Securitypayroll tax. Under the CARES Act, employers could forgo timely payment of the employer portion of Social Securitytaxes that would otherwise be due from March 27, 2020through December 31, 2020, without penalty or interest charges. Employers must pay 50% of the deferred amount by December 31, 2021, and the remainder by December 31, 2022. We paid 50% of the deferred amount in December 2021. On May 5, 2020, we received funding under a promissory note dated May 5, 2020evidencing an unsecured non-recourse loan in the principal amount of $2.2 millionunder the CARES Act (the "Loan"), which was fully forgiven by Legacy Bank of Florida(the "Lender") and the U.S. Small Business Administrationin June 2021, resulting in a gain on extinguishment of debt of $2.2 millionduring the year ended December 31, 2021. We will continue to assess the CARES Act and other applicable government legislation aimed at assisting businesses during the Covid-19 pandemic. 22
Industry trends and uncertainties
Operating results are affected by the following factors that impact the data and analytics industry in
The macroeconomic conditions, including the availability of affordable credit and capital, interest rates, inflation, employment levels and consumer confidence, influence our revenue. Macroeconomic conditions also have a direct impact on overall technology, marketing and advertising expenditures in the
U.S.As marketing budgets are often more discretionary in nature, they are easier to reduce in the short term as compared to other corporate expenses. Future widespread economic slowdowns in any of the industries or markets our customers serve could reduce the technology and marketing expenditures of our customers and prospective customers.
Our revenue is also significantly influenced by industry trends, including the demand for business analytics services in the industries we serve. Companies are increasingly relying on business analytics and related technologies to help process data in a cost-efficient manner. As customers have gained the ability to rapidly aggregate data generated by their own activities, they are increasingly expecting access to real-time data and analytics from their service providers as well as solutions that fully integrate into their workflows. The increasing number and complexity of regulations centered around data and provision of information services makes operations for businesses in the data and analytic sector more challenging.
The enactment of new or amended legislation or industry regulations pertaining to consumer or private sector privacy issues could have a material adverse impact on information and marketing services. Legislation or industry regulations regarding consumer or private sector privacy issues could place restrictions upon the collection, sharing and use of information that is currently legally available, which could materially increase our cost of collecting and maintaining some data. These types of legislation or industry regulations could also prohibit us from collecting or disseminating certain types of data, which could adversely affect our ability to meet our customers' requirements and our profitability and cash flow targets.
Company-specific trends and uncertainties
Our results of operations are also directly impacted by company-specific factors, including:
Some of our competitors have substantially greater financial, technical, sales and marketing resources, better name recognition and a larger customer base. Even if we introduce advanced products that meet evolving customer requirements in a timely manner, there can be no assurance that our new products will gain market acceptance.
Certain companies in the data and analytics sector have expanded their product lines or technologies in recent years as a result of acquisitions. Further, more companies have developed products which conform to existing and emerging industry standards and have sought to compete on the basis of price. We anticipate increased competition from large data and analytics vendors. Increased competition in the data and analytics sector could result in significant price competition, reduced profit margins or loss of market share, any of which could have a material adverse effect on our business, operating results and financial condition. There can be no assurance that we will be able to compete successfully in the future with current or new competitors.
Significant Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue 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.
We believe that the following significant accounting policies govern our most significant judgments and estimates used in the preparation of our consolidated financial statements.
We recognize 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 re?ects the consideration the Company expects to be entitled to in exchange for those goods or services. Our performance obligation is to provide on demand information and identity intelligence solutions to our customers by leveraging our proprietary technology and applying machine learning and advanced analytics to our massive data repository. The pricing for the customer contracts is based on usage, a monthly fee, or a combination of both. Revenue is generally recognized on (a) a transactional basis determined by the customers' usage, (b) a monthly fee or (c) a combination of both. Revenue pursuant to transactions determined by the customers' usage is recognized when the transaction is complete, and either party may terminate the transactional agreement at any time. Revenue pursuant to contracts containing a monthly fee is considered to be a single performance obligation consisting of a series of distinct services, and is recognized ratably over the contract period, which is generally 12 months, and the contract shall automatically renew for additional, successive 12-month terms unless written notice of intent not to renew is provided by one party to the other at least 30 days or 60 days prior to the expiration of the then current term. Variable fees are allocated to each distinct month in the series for which they are earned. Our revenue is recorded net of applicable sales taxes billed to customers. Available within Topic 606, we have applied the portfolio approach practical expedient in accounting for customer revenue as one collective group, rather than individual contracts. Based on our historical knowledge of the contracts contained in this portfolio and the similar nature and characteristics of the customers, we have concluded the financial statement effects are not materially different than if accounting for revenue on a contract by contract basis. Revenue is recognized over a period of time. Our customers simultaneously receive and consume the benefits provided by our performance as and when provided. Furthermore, we have elected the "right to invoice" practical expedient, available within Topic 606, as our measure of progress, since we have a right to payment from a customer in an amount that corresponds directly with the value of our performance completed-to-date. Our revenue arrangements do not contain significant financing components. For the years ended
December 31, 2021and 2020, 80% and 73% of total revenue was attributable to customers with pricing contracts, respectively, versus 20% and 27% attributable to transactional customers, respectively. Pricing contracts are generally annual contracts or longer, with auto renewal. If a customer pays consideration before we transfer services to the customer, those amounts are classi?ed as deferred revenue. As of December 31, 2021and 2020, the balance of deferred revenue was $0.8 millionand $0.5 million, 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, 2020, $0.5 millionwas recognized into revenue during the year ended December 31, 2021. As of December 31, 2021, $7.7 millionof 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 $4.4 millionof revenue will be recognized in 2022, $2.6 millionin 2023, and $0.7 millionin 2024. The actual timing of recognition may vary due to factors outside of our control. We exclude 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 recognized continuously over the term of the customer relationship. These costs are recognized in sales and marketing expenses.
In addition, we elected the practical expedient to not disclose the value of unsatis?ed performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Provisions for bad debts
We maintain allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management determines whether an allowance needs to be provided for an amount due from a customer depending on the aging of the individual receivable balance, recent payment history, contractual terms and other qualitative factors such as status of business relationship with the customer. Historically, our estimates for doubtful accounts have not differed materially from actual results. The amount of the allowance for doubtful accounts was
$0.03 millionand $0.04 millionas of December 31, 2021and 2020, respectively. 24 --------------------------------------------------------------------------------
We account for income taxes in accordance with ASC 740, "Income Taxes," which requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. As of
December 31, 2021and 2020, we had a valuation allowance of $9.5 millionand $7.6 million, respectively. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. ASC 740 clarifies the accounting for uncertain tax positions. This interpretation requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company's accounting policy is to accrue interest and penalties related to uncertain tax positions, if and when required, as interest expense and a component of other expenses, respectively, in the consolidated statements of operations.
Intangible assets other than goodwill
Our intangible assets are initially recorded at the capitalized actual costs incurred, their acquisition cost, or fair value if acquired as part of a business combination, and amortized on a straight-line basis over their respective estimated useful lives, which are the periods over which the assets are expected to contribute directly or indirectly to the future cash flows of the Company. The Company's intangible assets represent software developed for internal use. Intangible assets have estimated useful lives of 5-10 years. In accordance with ASC 350-40, "Software - internal use software," we capitalize eligible costs, including salaries and staff benefits, share-based compensation, travel expenses incurred by relevant employees, and other relevant costs of developing internal-use software that are incurred in the application development stage when developing or obtaining software for internal use. Once the software developed for internal use is ready for its intended use, it is amortized on a straight-line basis over its useful life.
In accordance with ASC 350, "Intangibles -
Goodwilland 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. A quantitative assessment involves determining the fair value of each reporting unit using market participant assumptions. An entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. On October 1, 2021and 2020, we performed qualitative assessments on the reporting unit and, based on this assessment, no events have occurred to indicate that it is more likely than not that the fair value of the reporting unit is less than its carry amount. We concluded that goodwill was not impaired as of December 31, 2021and 2020. For purposes of reviewing impairment and the recoverability of goodwill, we must make various assumptions regarding estimated future cash flows and other factors in determining the fair value of the reporting unit, including market multiples, discount rates, etc.
Impairment of long-lived assets
Finite-lived intangible assets are amortized over their respective useful lives and, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable in accordance with ASC 360-10-15, "Impairment or Disposal of Long-Lived Assets." In evaluating long-lived assets for recoverability, including finite-lived intangibles and property and equipment, the Company uses its best estimate of future cash flows expected to result from the use of the asset and eventual disposition in accordance with ASC 360-10-15. To the extent that estimated future undiscounted cash inflows attributable to the asset, less estimated future undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan of disposal, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell. 25 -------------------------------------------------------------------------------- Asset recoverability is an area involving management judgment, requiring assessment as to whether the carrying value of assets can be supported by the undiscounted future cash flows. In calculating the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters such as revenue growth rates, gross margin percentages and terminal growth rates.
We concluded that there was no impairment in
We account for share-based compensation to employees in accordance with ASC 718, "Compensation-Stock Compensation." Under ASC 718, we measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and, for those awards subject only to service condition, recognizes the costs on a straight-line basis over the period the employee is required to provide service in exchange for the award, which generally is the vesting period. For awards with performance and service conditions, we begin recording share-based compensation when achieving the performance criteria is probable and we recognize the costs using the accelerated attribution method. The fair value of RSUs is determined based on the number of shares granted and the quoted price of our common stock. The estimated number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amount will be recorded as a cumulative adjustment in the period estimates are revised. Changes in our estimates and assumptions may cause us to realize material changes in share-based compensation expense in the future. We have issued share-based awards with performance-based vesting criteria. Achievement of the milestones must be probable before we begin recording share-based compensation expense. When the performance-based vesting criteria is considered probable, we begin to recognize compensation expense at that time. In the period that achievement of the performance-based criteria is deemed probable, US GAAP requires the immediate recognition of all previously unrecognized compensation since the original grant date. As a result, compensation expense recorded in the period that achievement is deemed probable could include a substantial amount of previously unrecorded compensation expense related to the prior periods. For any share-based awards where performance-based vesting criteria is no longer considered probable, previously recognized compensation cost would be reversed. As of
December 31, 2021, we have deemed the achievement of the performance-based criteria to be probable for all share-based awards with performance-based vesting criteria, except for the Criteria Four award, as defined in Note 10, "Share-based compensation," included in "Notes to Consolidated Financial Statements." We apply ASU 2018-07, "Improvements to Nonemployee Share-Based Payment Accounting," which generally expands the scope of ASC 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees and supersedes the guidance in ASC 505-50, Equity-Based Payments to Non-employees, which previously included the accounting for nonemployee awards.
Recently issued accounting standards
See Item 8 of Part II, “Financial Statements and Supplementary Data – Note 2. Summary of Significant Accounting Policies – (s) Recently Issued Accounting Standards”.
Fourth quarter financial results
For the three months ended
Total revenue increased by 26% to reach
Net loss decreased 5% to
Adjusted EBITDA increased by 9% to reach
Gross margin increased by 35% to reach
Adjusted gross profit increased 33% to
Cash flow from operating activities increased by 10% to reach
Cash and cash equivalents were
Annual financial results
For the year ended
Total revenue increased by 27% to reach
The net income was
Adjusted EBITDA increased by 85% for
Gross margin increased by 43% to reach
Adjusted gross profit increased 41% to
Cash flow from operating activities increased by 37% to reach
Platform revenue consists of both contractual and transactional revenue generated from our technology platform, CORE. It includes all revenue generated through our idiCORE and FOREWARN solutions. The cost of platform revenue, which consists primarily of data acquisition costs, remains relatively fixed irrespective of revenue generation. Services revenue consists of revenue generated from our idiVERIFIED service, which is an ancillary collections market offering that is purely transactional and of a lower margin profile. The cost of services revenue, which consists primarily of third-party servicer costs, is variable.
Use and Reconciliation of Non-GAAP Financial Measures
Management evaluates the financial performance of our business on a variety of key indicators, including non-GAAP metrics of adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit and adjusted gross margin. Adjusted EBITDA is a financial measure equal to net (loss) income, the most directly comparable financial measure based on US GAAP, excluding interest (income) expense, net, income tax expense, depreciation and amortization, share-based compensation expense, gain on extinguishment of debt, litigation costs, and write-off of long-lived assets and others, as noted in the tables below. We define adjusted EBITDA margin as adjusted EBITDA as a percentage of revenue. We define adjusted gross profit as revenue less cost of revenue (exclusive of depreciation and amortization), and adjusted gross margin as adjusted gross profit as a percentage of revenue. Three Months Ended December 31, Year Ended December 31, (In thousands) 2021 2020 2021 2020 Net (loss) income
$ (1,784 ) $ (1,875 ) $ 655 $ (6,813 )Interest (income) expense, net (1 ) 6 7 (18 ) Income tax expense 198 - 198 - Depreciation and amortization 1,466 1,196 5,399 4,216 Share-based compensation expense 1,418 1,648 6,615 8,064 Gain on extinguishment of debt - - (2,175 ) - Litigation costs - - 126 - Write-off of long-lived assets and others 9 222 104 474 Adjusted EBITDA $ 1,306 $ 1,197 $ 10,929 $ 5,923Revenue $ 11,258 $ 8,963 $ 44,022 $ 34,586Net (loss) income margin (16 %) (21 %) 1 % (20 %) Adjusted EBITDA margin 12 % 13 % 25 % 17 % 27
The following is a reconciliation of gross margin, the most directly comparable GAAP financial measure, to adjusted gross margin:
Three Months Ended December 31, Year Ended December 31, (In thousands) 2021 2020 2021 2020 Revenue
$ 11,258$ 8,963 $ 44,022 $ 34,586Cost of revenue (exclusive of depreciation and amortization) (2,927 ) (2,694 ) (11,195 ) (11,276 ) Depreciation and amortization of intangible assets (1,407 ) (1,143 ) (5,170 ) (3,990 ) Gross profit 6,924 5,126 27,657 19,320 Depreciation and amortization of intangible assets 1,407 1,143 5,170 3,990 Adjusted gross profit $ 8,331 $ 6,269 $ 32,827 $ 23,310Gross margin 62 % 57 % 63 % 56 % Adjusted gross margin 74 % 70 % 75 % 67 % 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 gross profit and adjusted gross margin as supplemental measures of our operating performance. We believe they provide useful information to our investors as they eliminate the impact of certain items that we do not consider indicative of our cash operations and ongoing operating performance. In addition, we use them as an integral part of our internal reporting to measure the performance and operating strength of our business. We believe adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit and adjusted gross margin are relevant and provide useful information frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies similar to ours and are indicators of the operational strength of our business. We believe adjusted EBITDA eliminates the uneven effect of considerable amounts of non-cash depreciation and amortization, share-based compensation expense and the impact of other non-recurring items, providing useful comparisons versus prior periods or forecasts. Adjusted EBITDA margin is calculated as adjusted EBITDA as a percentage of revenue. Our adjusted gross profit is a measure used by management in evaluating the business's current operating performance by excluding the impact of prior historical costs of assets that are expensed systematically and allocated over the estimated useful lives of the assets, which may not be indicative of the current operating activity. Our adjusted gross profit is calculated by using revenue, less cost of revenue (exclusive of depreciation and amortization). We believe adjusted gross profit provides useful information to our investors by eliminating the impact of non-cash depreciation and amortization, and specifically the amortization of software developed for internal use, providing a baseline of our core operating results that allow for analyzing trends in our underlying business consistently over multiple periods. Adjusted gross margin is calculated as adjusted gross profit as a percentage of revenue. Adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit and adjusted gross margin are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, financial measures presented in accordance with US GAAP. The way we measure adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit and adjusted gross margin may not be comparable to similarly titled measures presented by other companies, and may not be identical to corresponding measures used in our various agreements. 28 --------------------------------------------------------------------------------
Quarterly financial data (unaudited)
The following tables set forth the Company's unaudited quarterly consolidated statements of operations data and reconciliations of certain directly comparable US GAAP financial measures to non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit and adjusted gross margin, for each of the eight quarters in the two-year period ended
December 31, 2021. The Company has prepared the quarterly unaudited consolidated statements of operations data on a basis consistent with the audited consolidated financial statements included elsewhere in this 2021 Form 10-K. In the opinion of management, the financial information in these tables reflects all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this 2021 Form 10-K. The results of historical periods are not necessarily indicative of the results for any future period. Three Months Ended (In thousands, except share data) (Unaudited) 3/31/2020 6/30/2020 9/30/2020 12/31/2020 3/31/2021 6/30/2021 9/30/2021 12/31/2021 Revenue $ 9,300 $ 7,056 $ 9,267 $ 8,963 $ 10,217 $ 10,879 $ 11,668 $ 11,258Costs and expenses: Cost of revenue (exclusive of depreciation and amortization) 3,292 2,587 2,703 2,694 2,761 2,720 2,787 2,927 Sales and marketing expenses 2,176 1,746 2,217 1,959 2,221 2,349 2,154 2,208 General and administrative expenses 4,434 4,263 4,147 4,983 4,550 4,890 4,127 6,244 Depreciation and amortization 910 992 1,118 1,196 1,258 1,330 1,345 1,466 Total costs and expenses 10,812 9,588 10,185 10,832 10,790 11,289 10,413 12,845 (Loss) income from operations (1,512 ) (2,532 ) (918 ) (1,869 ) (573 ) (410 ) 1,255 (1,587 ) Interest income (expense), net 31 - (7 ) (6 ) (5 ) (4 ) 1 1 Gain on extinguishment of debt - - - - - 2,175 - - (Loss) income before income taxes (1,481 ) (2,532 ) (925 ) (1,875 ) (578 ) 1,761 1,256 (1,586 ) Income tax expense - - - - - - - 198 Net (loss) income $ (1,481 ) $ (2,532 ) $ (925 ) $ (1,875 ) $ (578 ) $ 1,761 $ 1,256 $ (1,784 )(Loss) earnings per share: Basic $ (0.13 ) $ (0.22 ) $ (0.08 ) $ (0.14 ) $ (0.05 ) $ 0.14 $ 0.10 $ (0.14 )Diluted $ (0.13 ) $ (0.22 ) $ (0.08 ) $ (0.14 ) $ (0.05 ) $ 0.13 $ 0.09 $ (0.14 )Weighted average number of shares outstanding: Basic 11,583,214 11,617,342 12,072,716
12,173,301 12,207,193 12,269,412 12,741,723 13,158,638 Diluted 11,583,214 11,617,342 12,072,716 12,173,301 12,207,193 13,560,714 13,645,208
13,158,638 Three Months Ended (In thousands) (Unaudited) 3/31/2020 6/30/2020 9/30/2020 12/31/2020 3/31/2021 6/30/2021 9/30/2021
12/31/2021Net (loss) income $ (1,481 ) $ (2,532 ) $ (925 ) $ (1,875 ) $ (578 ) $ 1,761 $ 1,256 $ (1,784 )Interest expense (income), net (31 ) - 7 6 5 4 (1 ) (1 ) Income tax expense - - - - - - - 198 Depreciation and amortization 910 992 1,118 1,196 1,258 1,330 1,345 1,466 Share-based compensation expense 2,221 2,342 1,853 1,648 2,046 2,165 986 1,418 Gain on extinguishment of debt - - - - - (2,175 ) - - Litigation costs - - - - 120 6 - - Write-off of long-lived assets and others 111 106 35 222 20 41 34 9 Adjusted EBITDA $ 1,730 $ 908 $ 2,088 $ 1,197 $ 2,871 $ 3,132 $ 3,620 $ 1,306Revenue $ 9,300 $ 7,056 $ 9,267 $ 8,963 $ 10,217 $ 10,879 $ 11,668 $ 11,258Net (loss) income margin (16 %) (36 %) (10 %) (21 %) (6 %) 16 % 11 % (16 %) Adjusted EBITDA margin 19 % 13 % 23 % 13 % 28 % 29 % 31 % 12 % Three Months Ended (In thousands) (Unaudited) 3/31/2020 6/30/2020 9/30/2020 12/31/2020 3/31/2021 6/30/2021 9/30/2021 12/31/2021 Revenue $ 9,300 $ 7,056 $ 9,267 $ 8,963 $ 10,217 $ 10,879 $ 11,668 $ 11,258Cost of revenue (exclusive of depreciation and amortization) (3,292 ) (2,587 ) (2,703 ) (2,694 ) (2,761 ) (2,720 ) (2,787 ) (2,927 ) Depreciation and amortization of intangible assets (850 ) (934 ) (1,063 ) (1,143 ) (1,203 ) (1,272 ) (1,288 ) (1,407 ) Gross profit 5,158 3,535 5,501 5,126 6,253 6,887 7,593 6,924 Depreciation and amortization of intangible assets 850 934 1,063 1,143 1,203 1,272 1,288 1,407 Adjusted gross profit $ 6,008 $ 4,469 $ 6,564 $ 6,269 $ 7,456 $ 8,159 $ 8,881 $ 8,331Gross margin 55 % 50 % 59 % 57 % 61 % 63 % 65 % 62 % Adjusted gross margin 65 % 63 % 71 % 70 % 73 % 75 % 76 % 74 % 29
Revenue. Revenue increased
$9.4 millionor 27% to $44.0 millionfor the year ended December 31, 2021from $34.6 millionfor the year ended December 31, 2020. This increase was driven by base revenue from existing customers that increased $9.9 millionor 41%, which was partially offset by a decrease in revenue from new customers of $0.2 millionor 6% and growth revenue from existing customers of $0.2 millionor 3%. 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 $0.5 millionfor the year ended December 31, 2021. We expect our idiVERIFIED service volume to return to pre-Covid levels in the second half of 2022. Our IDI billable customer base grew from 5,726 customers as of December 31, 2020to 6,548 customers as of December 31, 2021, and our FOREWARN user base grew from 48,377 users to 82,419 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 decreased $0.1 millionor 1% to $11.2 millionfor the year ended December 31, 2021from $11.3 millionfor the year ended December 31, 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. 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 49% of our total data acquisition costs for the year ended December 31, 2021compared to 46% for the year ended December 31, 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 year ended December 31, 2021from 33% for the year ended December 31, 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 $0.8 millionor 10% to $8.9 millionfor the year ended December 31, 2021from $8.1 millionfor the year ended December 31, 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 year ended December 31, 2021was primarily attributable to an increase of $0.3 millionin salaries and benefits, and $0.6 millionin sales commissions and $0.2 millionin merchant processing fees, resulting 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 $2.0 millionor 11% to $19.8 millionfor the year ended December 31, 2021from $17.8 millionfor the year ended December 31, 2020. For the years ended December 31, 2021and 2020, our general and administrative expenses consisted primarily of employee salaries and benefits of $8.4 millionand $5.3 million, share-based compensation expense of $6.1 millionand $7.5 million, and professional fees of $3.2 millionand $2.8 million, respectively. Depreciation and amortization. Depreciation and amortization expenses increased $1.2 millionor 28% to $5.4 millionfor the year ended December 31, 2021from $4.2 millionfor the year ended December 31, 2020. The increase in depreciation and amortization for the year ended December 31, 2021resulted primarily from the amortization of software developed for internal use that became ready for its intended use after December 31, 2020.
Gain on extinguishment of debt. At
30 -------------------------------------------------------------------------------- Income (loss) before income taxes. Income before income taxes was
$0.9 million, inclusive of a one-time gain of $2.2 millionon the extinguishment of debt from the forgiveness of the Loan, for the year ended December 31, 2021compared to a loss of $6.8 millionfor the year ended December 31, 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 commissions of $4.0 million, and depreciation and amortization of $1.2 million. Income taxes. Income tax expense of $198and $0was recognized for the years ended December 31, 2021and 2020, respectively. A valuation allowance on the deferred tax assets was recognized as of December 31, 2021and 2020, to reduce the deferred tax assets to the amount that is more likely than not to be realized. See Note 8, "Income Taxes," included in "Notes to Consolidated Financial Statements." Net income (loss). Net income was $0.7 million, inclusive of a one-time gain of $2.2 millionon the extinguishment of debt from the forgiveness of the Loan, for the year ended December 31, 2021compared to a net loss of $6.8 millionfor the year ended December 31, 2020, as a result of the foregoing.
Effect of inflation
The rates of inflation experienced in recent years have had no material impact on our financial statements. We attempt to recover increased costs by increasing prices for our services, to the extent permitted by contracts and competition.
Cash and capital resources
Cash flows provided by operating activities. For the year ended
December 31, 2021, net cash provided by operating activities was $8.9 million, primarily the result of the net income of $0.7 million, adjusted for certain non-cash items (consisting of share-based compensation expense, depreciation and amortization, write-off of long-lived assets, provision for bad debts, noncash lease expenses, gain on extinguishment of debt, and deferred income tax expense) totaling $10.7 million, and the cash used as a result of changes in assets and liabilities of $2.4 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 year ended December 31, 2020, net cash provided by operating activities was $6.5 million, primarily the result of the net loss of $6.8 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, and noncash lease expenses) totaling $13.5 million, and the cash used as a result of changes in assets and liabilities of $0.2 million, primarily the result of the decrease in accrued expenses and other current liabilities and operating lease liabilities. Cash flows used in investing activities. Net cash used in investing activities for the years ended December 31, 2021and 2020 was $5.2 millionand $5.7 million, respectively, primarily as a result of capitalized costs included in intangible assets of $5.0 millionand $5.5 millionfor the years ended December 31, 2021and 2020, respectively. Cash flows provided by financing activities. For the year ended December 31, 2021, net cash provided by financing activities was $17.6 million. On November 19, 2021, we entered into definitive securities purchase agreements with certain investors for the sales of our common stock in a registered direct offering for net proceeds of $20.9 million. In addition, we paid taxes of $3.3 millionrelated to the net share settlement of vesting of RSUs during the year ended December 31, 2021. For the year ended December 31, 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 millionunder 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 millionduring the year ended December 31, 2021. In addition, we paid taxes of $1.8 millionrelated to the net share settlement of vesting of RSUs during the year ended December 31, 2020.
We reported net income of
$0.7 millionand a net loss of $6.8 millionfor the years ended December 31, 2021and 2020, respectively. As of December 31, 2021, we had a total shareholders' equity balance of $69.4 million.
31 -------------------------------------------------------------------------------- We further believe that our financial resources will allow us to manage the impact of Covid-19 on the Company's business operations for the foreseeable future. However, subject to revenue growth, our ability to generate positive cash flow, and the potential impact of Covid-19, we may have to raise capital through the issuance of additional equity and/or debt, which, if we are able to obtain, could have the effect of diluting stockholders. Any equity or debt financings, if available at all, may be on terms which are not favorable to us.
Off-balance sheet arrangements
We do not have any outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. In addition, we do not engage in trading activities involving non-exchange traded contracts. In our ongoing business, we do not enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financial partnerships that are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. FORWARD-LOOKING STATEMENTS This 2021 Form 10-K contains certain "forward-looking statements" within the meaning of the PSLRA, Section 27A of the Securities Act, and Section 21E of the Exchange Act. Such forward-looking statements contain information about our expectations, beliefs or intentions regarding our product development and commercialization efforts, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include the following:
The ongoing and developing Covid-19 pandemic and the global response to it may adversely impact our business, our future results of operations and our overall financial performance.
Our products and services are highly technical and if they contain undetected errors, our business could be adversely affected and we may have to defend lawsuits or pay damages in connection with any alleged or actual failure of our products and services.
If we fail to respond to rapid technological changes in the data and analytics sector, we may lose customers and/or our products and/or services may become obsolete.
Because our networks and information technology systems are critical to our success, if unauthorized persons access our systems or our systems otherwise cease to function properly, our operations could be adversely affected and we could lose revenue or proprietary information, all of which could materially adversely affect our business.
Data security and integrity are of critical importance to our business, and breaches of security, unauthorized access or disclosure of confidential information, disruptions, including distributed denial of service attacks ( “DDoS”) or the perception that confidential information is not secure, could result in material loss of business, substantial legal liability or material damage to our reputation.
If we fail to maintain and improve our systems, certifications, technology and interfaces with data sources and customers, demand for our services could be adversely affected.
Our business is subject to various governmental regulations, laws and orders, compliance with which may cause us to incur significant expenses or reduce the availability or effectiveness of our solutions, and the failure to comply with which could subject us to civil or criminal penalties or other liabilities.
The outcome of litigation, investigations, investigations, reviews or other legal proceedings in which we are involved, in which we may be involved or in which our customers or competitors are involved could expose us to damages significant pecuniary charges or restrictions on our ability to do business.
Our bylaws designate the
Court of Chancery of the State of Delawareas the sole and exclusive forum for certain actions, including derivative actions, which could limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company and its directors, officers, other employees, or the Company's stockholders and may discourage lawsuits with respect to such claims.
The market price of our shares has been and may continue to be volatile, and the value of an investment in our common shares may decline.
Future issuances of shares of our common stock in connection with acquisitions or pursuant to our stock incentive plan could have a dilutive effect on your investment.
The concentration of our shareholding may limit the ability of individual shareholders to influence the affairs of the company.
We are an “emerging growth company” and cannot be certain that the reduced reporting requirements available to emerging growth companies will make our common stock less attractive to investors.
We expect that we may need additional capital in the future; however, such capital may not be available to us on reasonable terms, if at all, when or as we require additional funding. If we issue additional shares of our common stock or other securities that may be convertible into, or exercisable or exchangeable for, our common stock, our existing stockholders would experience further dilution.
We have a history of losses which makes our future results uncertain.
We depend, in part, on strategic alliances, joint ventures and acquisitions to grow our business. If we are unable to make strategic acquisitions and develop and maintain these strategic alliances and joint ventures, our growth may be adversely affected.
If we make future acquisitions, we will be subject to the risks inherent in identifying, acquiring and operating a newly acquired business.
Our relationships with key customers may be significantly reduced or interrupted.
If we lose the services of key personnel, it could adversely affect our business.
Our revenues are focused on the US market across a wide range of industries. When these industries or broader financial markets experience a downturn, demand for our services and our revenues may be adversely affected.
We may lose our access to data sources that may prevent us from providing our services.
We must adequately protect our intellectual property to prevent the loss of valuable proprietary information.
We face intense competition from start-ups and established companies that can have significant advantages over us and our products.
There may be further consolidation in our end-customer markets, which could adversely affect our revenues.
To the extent that the availability of free or relatively inexpensive consumer and/or business information increases, demand for some of our services may decrease.
If our new products are not accepted by the market, revenue growth could suffer.
Our products and services may have long sales and implementation cycles, which may result in significant expenditures before realizing the associated revenue.
If our external service providers and key suppliers are unable or fail to meet their service obligations, our operations could be disrupted and our results of operations could be affected.
Consolidation in the data and analytics industry may limit market acceptance of our products and services.
We may incur substantial expenses defending against infringement claims.
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