10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 10, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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(Address of principal executive offices, including zip code)
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(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report))
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of the Exchange Act. Yes
As of May 1, 2023,
VERITONE, INC.
QUARTERLY REPORT ON FORM 10-Q
March 31, 2023
TABLE OF CONTENTS
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PART I. |
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Item 1. |
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Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 |
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Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. |
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35 |
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Item 1. |
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Item 1A. |
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35 |
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Item 2. |
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35 |
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Item 3. |
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35 |
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Item 4. |
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Item 5. |
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Item 6. |
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36 |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of 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”), and we intend that such forward-looking statements be subject to the safe harbors created thereby. All statements made in this Quarterly Report on Form 10-Q that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as “anticipates,” “believes,” “seeks,” “estimates,” “expects,” “intends,” “continue,” “can,” “may,” “plans,” “potential,” “projects,” “should,” “could,” “will,” “would” or similar expressions and the negatives of those expressions may identify forward-looking statements, although not all forward-looking statements contain these identifying words. Such forward-looking statements include, but are not limited to, any statements that refer to projections of our future financial condition and results of operations, capital needs and financing plans, competitive position, industry environment, potential growth and market opportunities, acquisition plans and strategies, compensation plans, governance structure and policies and/or the price of our common stock.
The forward-looking statements included herein represent our management’s current expectations and assumptions based on information available as of the date of this report. These statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to:
All forward-looking statements are necessarily only estimates of future results, and there can be no assurance that actual results will not differ materially from expectations. You should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the SEC. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information, which speak only as of the date of this report.
Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time to time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual future results to be materially different from those expressed or implied by any forward-looking statements.
Except as required by law, we assume no obligation to update any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. We qualify all of our forward-looking statements by these cautionary statements.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VERITONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share data)
(Unaudited)
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As of |
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March 31, |
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December 31, |
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ASSETS |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Expenditures billable to clients |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, equipment and improvements, net |
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Intangible assets, net |
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Goodwill |
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Long-term restricted cash |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Accounts payable |
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$ |
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$ |
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Accrued media payments |
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Client advances |
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Contingent consideration, current |
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Other accrued liabilities |
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Total current liabilities |
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Convertible senior notes, non-current |
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Other non-current liabilities |
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Total liabilities |
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Stockholders' equity |
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Common stock, par value $ |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated other comprehensive loss |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
VERITONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(in thousands, except per share and share data)
(Unaudited)
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Three Months Ended |
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2023 |
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2022 |
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Revenue |
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$ |
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$ |
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Operating expenses: |
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Cost of revenue |
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Sales and marketing |
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Research and development |
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General and administrative |
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Amortization |
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Total operating expenses |
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Loss from operations |
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Other income (expense), net |
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Loss before provision for income taxes |
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(Benefit from) provision for income taxes |
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( | ) |
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Net loss |
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$ |
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$ |
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Net loss per share: |
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Basic and diluted |
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$ |
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$ |
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Weighted average shares outstanding: |
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Basic and diluted |
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Comprehensive loss: |
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Net loss |
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$ |
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$ |
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Foreign currency translation (loss) gain, net of income taxes |
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( |
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Total comprehensive loss |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
VERITONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
(Unaudited)
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Three Months Ended March 31, 2023 |
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Accumulated |
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Additional |
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Other |
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Common Stock |
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Paid-in |
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Accumulated |
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Comprehensive |
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Shares |
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Amount |
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Capital |
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Deficit |
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Loss |
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Total |
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Balance as of December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Common stock issued under employee stock plans, net |
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— |
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— |
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Common stock withheld for employee taxes |
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( |
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— |
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( |
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— |
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— |
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( |
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Common stock issued as part of contingent consideration |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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( |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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( |
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( |
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Balance as of March 31, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Three Months Ended March 31, 2022 |
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Accumulated |
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Additional |
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Other |
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Common Stock |
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Paid-in |
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Accumulated |
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Comprehensive |
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Shares |
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Amount |
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Capital |
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Deficit |
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Loss |
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Total |
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Balance as of December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Cumulative-effect of accounting change adopted as of January 1, 2022 |
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— |
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— |
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— |
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( |
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— |
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Common stock issued under employee stock plans, net |
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— |
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— |
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Common stock withheld for employee taxes |
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( |
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— |
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( |
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— |
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— |
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( |
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Common stock issued for acquisition |
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— |
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— |
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— |
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Common stock issued as part of contingent consideration |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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( |
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Other comprehensive gain |
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— |
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— |
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— |
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— |
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Balance as of March 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
VERITONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Three Months Ended |
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2023 |
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2022 |
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Cash flows from operating activities: |
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Net loss |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
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Provision for credit losses |
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Stock-based compensation expense |
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Change in fair value of contingent consideration |
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Change in deferred taxes |
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Amortization of debt issuance costs |
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Amortization of right-of-use assets |
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Imputed non-cash interest (income) expense |
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Changes in assets and liabilities: |
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Accounts receivable |
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Expenditures billable to clients |
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Prepaid expenses and other assets |
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( |
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Other assets |
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( |
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Accounts payable |
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( |
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Accrued media payments |
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( |
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Client advances |
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( |
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( |
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Other accrued liabilities |
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( |
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Other liabilities |
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( |
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( |
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Net cash (used in) provided by operating activities |
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( |
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Cash flows from investing activities: |
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Minority investment |
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— |
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( |
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Capital expenditures |
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( |
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( |
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Acquisitions, net of cash acquired |
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( |
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( |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities: |
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Payment of contingent considerations |
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( |
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( |
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Taxes paid related to net share settlement of equity awards |
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( |
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( |
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Proceeds from issuances of stock under employee stock plans, net |
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Net cash used in financing activities |
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( |
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( |
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Net decrease in cash and cash equivalents and restricted cash |
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( |
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( |
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Cash and cash equivalents and restricted cash, beginning of period |
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Cash and cash equivalents and restricted cash, end of period |
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$ |
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$ |
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Supplemental Disclosure of Cash Flow Information |
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Non-cash investing and financing activities: |
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Shares issued for acquisition of businesses and earn-out consideration |
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Stock-based compensation capitalized for software development |
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Lease liabilities arising from right-of-use assets |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
VERITONE, INC.
Notes to the Condensed Consolidated Financial Statements
(in thousands, except share and per share data and percentages)
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS
Veritone, Inc., a Delaware corporation (“Veritone” and together with its subsidiaries, collectively, the “Company”), is a provider of artificial intelligence (“AI”) computing solutions. The Company’s proprietary AI operating system, aiWARETM, uses machine learning algorithms, or AI models, together with a suite of powerful applications, to reveal valuable insights from vast amounts of structured and unstructured data. The aiWARE platform offers capabilities that mimic human cognitive functions such as perception, prediction and problem solving, enabling users to quickly, efficiently and cost effectively transform unstructured data into structured data, and analyze and optimize data to drive business processes and insights. aiWARE is based on an open architecture that enables new AI models, applications and workflows to be added quickly and efficiently, resulting in a scalable and evolving solution that can be leveraged by organizations across a broad range of business sectors, serving commercial enterprises as well as government and regulated industries.
In addition, the Company operates a full-service advertising agency that leverages the Company’s aiWARE technologies to provide differentiated Managed Services to its clients. The Company’s advertising services include media planning and strategy, advertisement buying and placement, campaign messaging, clearance verification and attribution, and custom analytics, specializing in host-endorsed and influencer advertising across primarily radio, podcasting, streaming audio, social media and other digital media channels. The Company’s advertising services also include its VeriAds Network, which is comprised of programs that enable broadcasters, podcasters and social media influencers to generate incremental advertising revenue. The Company also offers cloud-native digital content management solutions and licensing services, primarily to customers in the media and entertainment market. These offerings leverage the Company’s aiWARE technologies, providing customers with unique capabilities to enrich and drive expanded revenue opportunities from their content.
On August 11, 2022, the Company acquired certain assets of Vision Semantics Limited (“VSL”), a U.K.-based company focused on AI-powered video analytics and surveillance software solutions. On June 10, 2022, the Company acquired VocaliD, Inc. (“VocaliD”), a U.S.-based company that pioneered the creation of personalized synthetic voices. On March 1, 2022, the Company acquired an influencer-based management company. For further details on these acquisitions, refer to Note 3.
NOTE 2. PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial statements and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. Such unaudited condensed consolidated financial statements and accompanying notes are based on the representations of the Company’s management, who is responsible for their integrity and objectivity. The information included in this Form 10-Q should be read in conjunction with the information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 16, 2023. Interim results for the three months ended March 31, 2023 are not necessarily indicative of the results the Company will have for the full year ending December 31, 2023.
The accompanying condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which are normal, recurring and necessary to fairly state the Company’s financial position, results of operations and cash flows. All significant intercompany transactions have been eliminated in consolidation. The financial data and the other information disclosed in these notes to the condensed consolidated financial statements reflected in the three and nine month periods presented are unaudited. The December 31, 2022 balance sheet included herein was derived from the audited financial statements but does not include all disclosures or notes required by GAAP for complete financial statements.
Liquidity and Capital Resources
During the years ended December 31, 2022 and 2021, the Company generated cash flows from operations of $
6
common stock under the Company’s employee stock plans, and used $
Management believes that the Company’s existing balances of cash and cash equivalents, which totaled $
Use of Accounting Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the accompanying condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The principal estimates relate to the accounting recognition and presentation of revenue, allowance for credit losses, purchase accounting, impairment of long-lived assets, the valuation of contingent consideration, the valuation of non-cash consideration received in barter transactions and evaluation of realizability, and the valuation of stock awards and stock warrants and income taxes, where applicable.
There has been uncertainty and disruption in the global economy and financial markets due to the COVID-19 pandemic, the war in Ukraine, the recent inflationary environment and rising interest rates. The Company is not aware of any specific event or circumstance that would require an update to its estimates or assumptions or a revision of the carrying value of its assets or liabilities as of the date of filing of this Quarterly Report on Form 10-Q.
These estimates and assumptions may change as new events occur and additional information is obtained. As a result, actual results could differ materially from these estimates and assumptions.
Significant Customers
Remaining Performance Obligations
Assets and Liabilities Held for Sale
The Company determined that its energy group met the held for sale criteria under GAAP as of March 31, 2023. The potential sale of the energy group would not qualify as discontinued operations as of that date because the disposal would not have a major effect on the Company’s operations and financial results. As of March 31, 2023, the Company classified $
Segment Information
The Company operates as
As of January 1, 2023, Chad Steelberg, who had served as the Company’s chief operating decision maker during the year ended December 31, 2022, resigned as the Company’s Chief Executive Officer effective as of December 31, 2022. Ryan Steelberg was appointed by the Company’s Board of Directors as President and Chief Executive Officer, effective as of January 1, 2023, and serves as the chief operating decision maker of the Company. Despite the change in the chief operating decision maker, the Company determined no change to segment reporting was necessary as there was no change in the components of the Company for which separate financial information is regularly evaluated.
7
Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022, other than those associated with the recently adopted guidance on accounting for expected credit losses as further described in Note 8.
Recently Adopted Accounting Pronouncements
In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) which requires measurement and recognition of expected credit losses for financial assets held. This standard will be effective for the Company beginning in the first quarter of fiscal year 2023, and early adoption is permitted. The Company adopted this guidance on January 1, 2023 and the impact of the adoption was not material to our consolidated financial statements as credit losses are not expected to be significant based on historical collection trends, the financial condition of payment partners, and external market factors.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers, in order to align the recognition of a contract liability with the definition of a performance obligation. The Company adopted this guidance on January 1, 2023. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
NOTE 3. BUSINESS COMBINATIONS
VSL Acquisition
On
The total purchase consideration was $
The following table summarizes the fair value of the VSL Acquisition Consideration (in thousands):
VSL Acquisition Consideration |
|
Amount |
|
|
Cash consideration at closing |
|
$ |
|
|
Deferred consideration |
|
|
|
|
Total |
|
$ |
|
|
The allocation of the VSL Acquisition Consideration to tangible and intangible assets acquired and liabilities assumed is based on estimated fair values and is as follows (in thousands):
Allocation of VSL Acquisition Consideration** |
|
Amount |
|
|
Accounts receivable, net |
|
$ |
|
|
Property, equipment and improvements, net |
|
|
|
|
Intangible assets |
|
|
|
|
Total assets acquired |
|
|
|
|
Accrued expenses and other current liabilities |
|
|
|
|
Total liabilities assumed |
|
|
|
|
Identifiable net assets acquired |
|
|
|
|
Goodwill |
|
|
|
|
Total purchase consideration |
|
$ |
|
|
**The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities is recorded as goodwill. Goodwill is primarily attributable to the assembled workforce. All goodwill generated from the acquisition is tax deductible.
Identifiable Intangible Assets
The identifiable intangible assets acquired consisted of developed technology valued at $
8
The fair value of the intangible assets has been estimated using a cost approach. Under the cost approach, the replacement cost is used to estimate the value of the asset. The key assumptions include the Company’s estimates of the direct and indirect costs required to replace the asset.
VocaliD Acquisition
On
The total purchase consideration was $
The following table summarizes the fair value of the VocaliD Acquisition Consideration (in thousands):
VocaliD Acquisition Consideration |
|
Amount |
|
|
Cash consideration at closing |
|
$ |
|
|
Deferred consideration |
|
|
|
|
Net working capital adjustment |
|
|
( |
) |
Total |
|
$ |
|
|
The allocation of the VocaliD Acquisition Consideration to tangible and intangible assets acquired and liabilities assumed is based on estimated fair values and is as follows (in thousands):
Allocation of VocaliD Acquisition Consideration** |
|
Amount |
|
|
Cash |
|
$ |
|
|
Intangible assets |
|
|
|
|
Total assets acquired |
|
|
|
|
Accounts payable |
|
|
|
|
Accrued expenses and other current liabilities |
|
|
|
|
Deferred tax liability |
|
|
|
|
Total liabilities assumed |
|
|
|
|
Identifiable net assets acquired |
|
|
|
|
Goodwill |
|
|
|
|
Total purchase consideration |
|
$ |
|
|
**The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities is recorded as goodwill. Goodwill is primarily attributable to the assembled workforce. The transaction is treated as a non-taxable stock acquisition for income tax purposes and
Identifiable Intangible Assets
The identifiable intangible assets acquired consisted of developed technology valued at $
The fair value of the intangible assets has been estimated using a cost approach. Under the cost approach, the replacement cost is used to estimate the value of the asset. The key assumptions include the Company’s estimates of the direct and indirect costs required to replace the asset.
March 2022 Acquisition
On
9
The total purchase consideration was $
The Company paid the first of two deferred cash payments of $
The following table summarizes the fair value of the March 2022 Acquisition Consideration (in thousands):
March 2022 Acquisition Consideration |
|
Amount |
|
|
Cash consideration at closing |
|
$ |
|
|
Equity consideration at closing |
|
|
|
|
Deferred consideration |
|
|
|
|
Acquired cash |
|
|
|
|
Settlement of pre-existing receivable |
|
|
( |
) |
Net working capital adjustment |
|
|
|
|
Total |
|
$ |
|
|
Allocation of March 2022 Acquisition Consideration** |
|
Amount |
|
|
Cash |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Prepaid and other current assets |
|
|
|
|
Property and equipment |
|
|
|
|
Intangible assets |
|
|
|
|
Other assets |
|
|
|
|
Total assets acquired |
|
|
|
|
Accounts payable |
|
|
|
|
Accrued expenses and other current liabilities |
|
|
|
|
Operating lease liabilities, non-current |
|
|
|
|
Total liabilities assumed |
|
|
|
|
Identifiable net assets acquired |
|
|
|
|
Goodwill |
|
|
|
|
Total purchase consideration |
|
$ |
|
|
**The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities is recorded as goodwill. Goodwill is primarily attributable to opportunities to cross-sell into our Commercial Enterprise customer base. For income tax purposes, the Company elected to treat the transaction as an asset acquisition. As such, the goodwill generated from the acquisition is tax deductible.
Identifiable Intangible Assets
The identifiable intangible assets acquired consisted of the influencer network, trade name and brand relationships with estimated useful lives of
The fair value of the intangible assets has been estimated using an income approach. Under the income approach, the after-tax cash flows associated with the asset are discounted to present value. The key assumptions include the Company’s estimates of the projected cash flows and discount rates.
10
The valuation of the intangible assets acquired along with their estimated useful lives, is as follows (in thousands):
|
|
Estimated |
|
|
Estimated Useful Lives (in years) |
|
Influencer network |
|
$ |
|
|
||
Trade name |
|
|
|
|
||
Brand relationships |
|
|
|
|
||
Total intangible assets |
|
$ |
|
|
|
|
NOTE 4. DEBT
Convertible Senior Notes
In November 2021, the Company issued, at par value, $
The Convertible Notes are senior, unsecured obligations of the Company and bear interest at a rate of
Holders of the Convertible Notes may convert all or any portion of their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding May 15, 2026, only under the following conditions: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2022 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least
The conversion rate for the Convertible Notes will initially be
The Company may not redeem the Convertible Notes prior to
11
If the Company undergoes a fundamental change prior to the maturity date, subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their Convertible Notes. The fundamental change repurchase price will be equal to
The Convertible Notes are the Company’s senior unsecured obligations and rank senior in right of payment to all of the Company’s indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment with all existing and future liabilities of the Company that are not so subordinated; effectively junior to any of secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) and any preferred equity of the Company’s current or future subsidiaries.
The net proceeds from the issuance of the Convertible Notes were approximately $
For the three months ended March 31, 2023 and 2022, interest expense related to the Convertible Notes and amortization of the issuance costs was $
Capped Calls
In connection with the pricing of the Convertible Notes, with the full exercise by the initial purchasers of their option to purchase additional Convertible Notes in November 2021, the Company used approximately $
The capped call transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes, the number of shares of the Company’s common stock underlying the Convertible Notes. The capped call transactions are expected generally to reduce the potential dilution to the Company’s common stock upon conversion of the Convertible Notes and/or offset some or all of any cash payments the Company is required to make in excess of the principal amount of converted Convertible Notes, as the case may be, in the event that the market price per share of the Company’s common stock, as measured under the terms of the capped call transactions, is greater than the strike price of the capped call transactions, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. If, however, the market price per share of the Company’s common stock, as measured under the terms of the capped call transactions, exceeds the cap price of the capped call transactions, there would nevertheless be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that such market price exceeds the cap price of the capped call transactions. The initial cap price of the capped calls is $
The capped call transactions are separate transactions and are not part of the terms of the Convertible Notes. The capped calls meet the criteria for classification as equity and, as such, are not remeasured each reporting period and are included as a reduction to additional paid-in-capital within stockholders’ equity.
In connection with the Repurchase Transaction, the Company entered into transactions in December 2022 to unwind a portion of the capped calls. As a result, the Company received $
12
NOTE 5. NET LOSS PER SHARE
The following table presents the computation of basic and diluted net loss per share:
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Numerator |
|
|
|
|
|
|
||
Net loss |
|
$ |
( | ) |
|
$ |
( | ) |
Denominator |
|
|
|
|
|
|
||
Weighted-average common shares outstanding |
|
|
|
|
|
|
||
Less: Weighted-average shares subject to repurchase |
|
|
— |
|
|
|
( |
) |
Denominator for basic and diluted net loss per share attributable to common stockholders |
|
|
|
|
|
|
||
Basic and diluted net loss per share |
|
$ |
( |
) |
|
$ |
( |
) |
The Company reported net losses for all periods presented and, as such, all potentially dilutive shares of common stock would have been antidilutive for such periods.
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Common stock options, restricted stock units and performance stock units |
|
|
|
|
|
|
||
Warrants to purchase common stock |
|
|
|
|
|
|
||
Common stock issuable in connection with convertible senior notes |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
NOTE 6. FINANCIAL INSTRUMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs that may be used to measure fair value. Level 1 and Level 2 are considered observable and Level 3 is considered unobservable, as follows:
Cash and Cash Equivalents
The Company’s money market funds are categorized as Level 1 within the fair value hierarchy. As of March 31, 2023, the Company’s cash and cash equivalents were as follows:
|
|
|
|
|
Gross |
|
|
|
|
|
Cash and |
|
||||
|
|
|
|
|
Unrealized |
|
|
Fair |
|
|
Cash |
|
||||
|
|
Cost |
|
|
Losses |
|
|
Value |
|
|
Equivalents |
|
||||
Cash |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|||
Level 1: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|||
13
As of December 31, 2022, the Company’s cash and cash equivalents balances were as follows:
|
|
|
|
|
Gross |
|
|
|
|
|
Cash and |
|
||||
|
|
|
|
|
Unrealized |
|
|
Fair |
|
|
Cash |
|
||||
|
|
Cost |
|
|
Losses |
|
|
Value |
|
|
Equivalents |
|
||||
Cash |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|||
Level 1: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|||
Contingent Consideration
On
All of the Company’s contingent consideration liabilities are categorized as Level 3 within the fair value hierarchy. Contingent consideration for the PandoLogic acquisition was valued at the time of acquisition using Monte Carlo simulation models. These models incorporate contractual terms and assumptions regarding financial forecasts for PandoLogic, discount rates, and volatility of forecasted revenue. The value of the Company’s contingent consideration would increase if a lower discount rate was used and would decrease if a higher discount rate was used. Similarly, a higher revenue volatility assumption would increase the value of the contingent consideration, and a lower revenue volatility assumption would decrease the value of the contingent consideration. Contingent consideration for the March 2022 Acquisition was valued using a simple probability of achievement model, with the probability of achievement based on management’s forecasted outcomes for 2022 and 2023 fiscal year results for the acquired entity. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management with the assistance of a third-party valuation specialist when deemed necessary.
In September 2022, the Company and PandoLogic entered into an amendment to the PandoLogic Merger Agreement. This amendment provides that the 2022 PandoLogic Earnout would be no less than $
As of March 31, 2023, the Company’s contingent consideration liabilities current and non-current balances were as follows:
|
|
|
|
|
Changes in |
|
|
Amount Paid |
|
|
Reclass from |
|
|
Fair |
|
|||||
|
|
Cost |
|
|
Fair Value |
|
|
To Date |
|
|
Current |
|
|
Value |
|
|||||
Level 3: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Contingent consideration, current |
|
$ |
|
|
$ |
( | ) |
|
$ |
( | ) |
|
$ |
|
|
$ |
|
|||
Contingent consideration, non-current |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
|
||
As of December 31, 2022, the Company’s contingent consideration liabilities current and non-current balances were as follows:
|
|
|
|
|
Changes in |
|
|
Amount Paid |
|
|
Reclass from |
|
|
Fair |
|
|||||
|
|
Cost |
|
|
Fair Value |
|
|
To Date |
|
|
Current |
|
|
Value |
|
|||||
Level 3: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Contingent consideration, current |
|
$ |
|
|
$ |
( |
) |
|
$ |
( | ) |
|
$ |
|
|
$ |
|
|||
Contingent consideration, non-current |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
|
||
14
Stock Warrants
All of the Company’s outstanding stock warrants are categorized as Level 3 within the fair value hierarchy. Stock warrants have been recorded at their fair value using either a probability weighted expected return model, the Monte Carlo simulation model or the Black-Scholes option-pricing model. These models incorporate contractual terms, maturity, risk-free interest rates and volatility. The value of the Company’s stock warrants would increase if a higher risk-free interest rate was used and would decrease if a lower risk-free interest rate was used. Similarly, a higher volatility assumption would increase the value of the stock warrants, and a lower volatility assumption would decrease the value of the stock warrants. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management with the assistance of a third-party valuation specialist.
Investments
The Company holds a strategic investment in a technology company that was determined to not have a readily determinable fair value. This investment is carried at cost of $
NOTE 7. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
The carrying amount of goodwill was $
|
|
Goodwill |
|
|
Balance at December 31, 2022 |
|
$ |
|
|
Foreign currency translation/other |
|
|
( |
) |
Balance at March 31, 2023 |
|
$ |
|
|
Intangible Assets
The following table sets forth the Company’s finite-lived intangible assets resulting from business acquisitions and other purchases, which continue to be amortized:
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|||||||||||||||||||
|
|
Weighted |
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|||||||
Software and technology |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
— |
|
|||
Licensed technology |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|||
Developed technology |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Customer and supplier relationships |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Noncompete agreements |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|||
Trademarks and trade names |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Total |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
The following table presents future amortization of the Company’s finite-lived intangible assets as of March 31, 2023:
2023 (nine months) |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
15
NOTE 8. CONSOLIDATED FINANCIAL STATEMENTS DETAILS
Consolidated Balance Sheets Details
Cash and cash equivalents
As of March 31, 2023 and December 31, 2022, the Company had cash and cash equivalents of $
Accounts Receivable, Net and Allowance for Credit Losses
Accounts receivable consisted of the following:
|
|
As of |
|
|||||
|
|
March 31, |
|
|
December 31, |
|
||
Accounts receivable — Managed Services(1) |
|
$ |
|
|
$ |
|
||
Accounts receivable — Software Products & Services(2) |
|
|
|
|
|
|
||
Accounts receivable — Other |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: allowance for expected credit losses |
|
|
( |
) |
|
|
( |
) |
Accounts receivable, net |
|
$ |
|
|
$ |
|
||
Allowance for Credit Losses Accounting
The Company maintains an allowance for expected credit losses in order to record accounts receivable at their net realizable value. Inherent in the assessment of the allowance for credit losses are certain judgments and estimates relating to, among other things, the Company’s customers’ access to capital, customers’ willingness and ability to pay, general economic conditions and the ongoing relationship with customers. The Company calculates the expected credit losses on a pool basis for those receivables that have similar risk characteristics aligned with the types of accounts receivable listed in the accounts receivable table above. Allowances have been recorded for receivables believed to be uncollectible, including amounts for the resolution of potential credit and other collection issues. The allowance for expected credit losses is determined by analyzing the Company’s historical write-offs and the current aging of receivables. Adjustments to the allowance may be required in future periods depending on how issues considered such as the financial condition of customers and the general economic climate may change or if the financial condition of the Company’s customers were to deteriorate resulting in an impairment of their ability to make payments. The Company has not historically had material write-offs due to uncollectible accounts receivable.
Property, Equipment and Improvements, Net
Property, equipment and improvements, net consisted of the following:
|
|
As of |
|
|||||
|
|
March 31, |
|
|
December 31, |
|
||
Property and equipment |
|
$ |
|
|
$ |
|
||
Leasehold improvements |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Property, equipment and improvements, net |
|
$ |
|
|
$ |
|
||
Depreciation expense was $
16
Accounts Payable
Accounts payable consisted of the following:
|
|
As of |
|
|||||
|
|
March 31, |
|
|
December 31, |
|
||
Accounts payable — Managed Services(1) |
|
$ |
|
|
$ |
|
||
Accounts payable — Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Consolidated Statements of Operations and Comprehensive Loss Details
Revenue
Revenue for the periods presented were comprised of the following:
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Commercial Enterprise |
|
$ |
|
|
$ |
|
||
Government & Regulated Industries |
|
|
|
|
|
|
||
Total revenue |
|
$ |
|
|
$ |
|
||
The Company serves two customer groups: (1) Commercial Enterprise, which today consists of customers in the commercial sector, including media and entertainment customers, advertising customers, content licensing customers and PandoLogic customers; and (2) Government & Regulated Industries, which today consists of customers in the government and regulated industries sectors, including state, local and federal government, legal, and compliance customers.
Software Products & Services consists of revenue generated from the Company’s aiWARE platform and PandoLogic’s talent acquisition solutions, any related support and maintenance services, and any related professional services associated with the deployment and or implementation of such solutions.
Managed Services consists of revenues generated from content licensing customers and advertising agency customers and related services.
The table below illustrates the presentation of our revenues based on the above definitions:
|
|
Three Months Ended |
|
|
|||||||||
|
|
|
|
|
Government & |
|
|
|
|
|
|||
|
|
Commercial |
|
|
Regulated |
|
|
|
|
|
|||
|
|
Enterprise |
|
|
Industries |
|
|
Total |
|
|
|||
Total Software Products & Services |
|
$ |
|
|
$ |
|
|
$ |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
Managed Services |
|
|
|
|
|
|
|
|
|
|
|||
Advertising |
|
|
|
|
|
— |
|
|
|
|
|
||
Licensing |
|
|
|
|
|
— |
|
|
|
|
|
||
Total Managed Services |
|
|
|
|
|
— |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|||
Total Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
|||
17
|
|
Three Months Ended |
|
|||||||||
|
|
|
|
|
Government & |
|
|
|
|
|||
|
|
Commercial |
|
|
Regulated |
|
|
|
|
|||
|
|
Enterprise |
|
|
Industries |
|
|
Total |
|
|||
Total Software Products & Services |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Managed Services |
|
|
|
|
|
|
|
|
|
|||
Advertising |
|
|
|
|
|
— |
|
|
|
|
||
Licensing |
|
|
|
|
|
— |
|
|
|
|
||
Total Managed Services |
|
|
|
|
|
— |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|||
Total Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Other Income (Expense), Net
Other income (expense), net for the periods presented was comprised of the following:
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Interest expense, net |
|
$ |
( |
) |
|
$ |
( |
) |
Other |
|
|
|
|
|
( |
) |
|
Other income (expense), net |
|
$ |
|
|
$ |
( |
) |
|
Other in the table above consists primarily of foreign exchange gain of $
Provision for Income Taxes
The provision or benefit from income taxes for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the Company updates the estimate of the annual effective tax rate, and if the estimated tax rate changes, the Company records a cumulative adjustment.
The Company’s effective tax rate for the three months ended March 31, 2023 and 2022 was
As of March 31, 2023, the Company continues to provide a valuation allowance against all federal and state deferred tax assets. The Company continues to evaluate the realizability of deferred tax assets and the related valuation allowance. If the Company’s assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which the determination is made.
The Company is subject to taxation in the United States, Israel, the United Kingdom, and various U.S. states. In general, the U.S. federal statute of limitations is three years. However, the Internal Revenue Service may still adjust a tax loss or credit carryover in the year the tax loss or credit carryover is utilized. As such, the Company’s U.S. federal tax returns and state tax returns are open for examination since inception. The Israeli statute of limitations period is generally three years commencing at the end of the year in which the return was filed. The Company is not currently under examination from income tax authorities in the jurisdictions in which the Company does business.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act (“IRA”) which, among other things, implements a
18
NOTE 9. LEASES, COMMITMENTS AND CONTINGENCIES
Leases
Lease Costs
As of March 31, 2023, on its condensed consolidated balance sheet the Company had right-of-use assets of $
The Company made cash payments for its operating leases of $
The total rent expense for all operating leases was $
Lease Commitments
Years ended December 31, |
|
|
|
|
2023 (nine months) |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Total future minimum lease payments, including short-term leases |
|
|
|
|
Less: future minimum lease payments for short-term leases |
|
|
( |
) |
Less: imputed interest |
|
|
( |
) |
Present value of future minimum lease payments, excluding short-term leases |
|
$ |
|
|
Less: current portion of operating lease liabilities |
|
|
( |
) |
Non-current portion of operating lease liabilities |
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
Sublease Income |
|
|
2023 (nine months) |
|
$ |
|
|
2024 |
|
|
|
|
Total sublease income |
|
$ |
|
|
Purchase Consideration
In connection with the March 2022 Acquisition, the Company committed to make purchase consideration payments of $
Other Contingencies
From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. The Company currently is not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on the Company’s results of operations, financial position or cash flows.
19
NOTE 10. STOCKHOLDERS’ EQUITY
Common Stock Issuances
During the three months ended March 31, 2023 and 2022, the Company issued an aggregate of
During the three months ended March 31, 2023 and 2022, the Company issued a total of
NOTE 11. STOCK PLANS
Stock-Based Compensation
During the three months ended March 31, 2023 and 2022, the Company granted options to purchase an aggregate of
The Company valued these stock options using the Black-Scholes Merton option pricing model.
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Expected term (in years) |
|
|
|
|
||||
Expected volatility |
|
|
|
|
||||
Risk-free interest rate |
|
|
|
|
||||
Expected dividend yield |
|
|
— |
|
|
|
— |
|
The assumptions used in calculating the fair values of purchase rights granted under the ESPP during the three months ended March 31, 2023 and 2022 are set forth in the table below:
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Expected term (in years) |
|
|
|
|
||||
Expected volatility |
|
|
|
|
||||
Risk-free interest rate |
|
|
|
|
||||
Expected dividend yield |
|
|
— |
|
|
|
— |
|
The Company’s stock-based compensation expense by type of award and by operating expense grouping are presented below:
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Stock-based compensation expense by type of award: |
|
|
|
|
|
|
||
Restricted stock units |
|
$ |
|
|
$ |
|
||
Performance-based stock units |
|
|
|
|
|
— |
|
|
Stock options |
|
|
|
|
|
|
||
Employee stock purchase plan |
|
|
|
|
|
|
||
Common stock issued for services |
|
|
— |
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Stock-based compensation expense by operating expense grouping: |
|
|
|
|
|
|
||
Cost of revenue |
|
$ |
|
|
$ |
|
||
Sales and marketing |
|
|
|
|
|
|
||
Research and development |
|
|
|
|
|
|
||
General and administrative |
|
|
|
|
|
|
||
Total stock-based compensation expense |
|
$ |
|
|
$ |
|
||
20
Stock-based compensation capitalized for internal-use software was $
Equity Award Activity Under Stock Plans
Performance Stock Units
On January 4, 2023, the Company entered into a consulting agreement (the “Steel Holdings Consulting Agreement”) with Steel Holdings, LLC, an affiliate of Chad Steelberg, our former Chief Executive Officer and current Chairman of the Company’s Board of Directors (the “Board”), as further described in Note 12. In connection with the Steel Holdings Consulting Agreement, on January 11, 2023 the Compensation Committee of the Board (the “Compensation Committee”) approved a grant of
On March 16, 2023, the Compensation Committee approved a grant of
The Company’s performance stock unit activity for the three months ended March 31, 2023 was as follows:
|
|
|
|
|
Weighted |
|
||
|
|
|
|
|
Average Grant |
|
||
|
|
Shares |
|
|
Date Fair Value |
|
||
Unvested at December 31, 2022 |
|
|
|
|
N/A |
|
||
Granted |
|
|
|
|
$ |
|
||
Unvested at March 31, 2023 |
|
|
|
|
$ |
|
||
Restricted Stock Units
The Company’s restricted stock unit activity for the three months ended March 31, 2023 was as follows:
|
|
|
|
|
Weighted |
|
||
|
|
|
|
|
Average Grant |
|
||
|
|
Shares |
|
|
Date Fair Value |
|
||
Unvested at December 31, 2022 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Forfeited |
|
|
( |
) |
|
$ |
|
|
Vested |
|
|
( |
) |
|
$ |
|
|
Unvested at March 31, 2023 |
|
|
|
|
$ |
|
||
As of March 31, 2023, total unrecognized compensation cost related to restricted stock units was $
21
Performance-Based Stock Options
The activity during the three months ended March 31, 2023 related to stock options that are subject to performance-based vesting conditions tied to the achievement of stock price goals by the Company was as follows:
|
|
|
|
Weighted-Average |
|
|||||||||
|
|
|
|
|
|
|
|
Remaining |
|
Aggregate |
|
|||
|
|
|
|
|
Exercise |
|
|
Contractual |
|
Intrinsic |
|
|||
|
|
Options |
|
|
Price |
|
|
Term |
|
Value |
|
|||
Outstanding at December 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
|
|||
Exercised |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
||
Expired |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
||
Outstanding at March 31, 2023 |
|
|
|
|
$ |
|
|
|
$ |
|
||||
Exercisable at March 31, 2023 |
|
|
|
|
$ |
|
|
|
$ |
|
||||
The aggregate intrinsic value of the options exercised during the three months ended March 31, 2023 and 2022 was $
Stock Options
The activity during the three months ended March 31, 2023 related to all other stock options was as follows:
|
|
|
|
Weighted-Average |
|
|||||||||
|
|
|
|
|
|
|
|
Remaining |
|
Aggregate |
|
|||
|
|
|
|
|
Exercise |
|
|
Contractual |
|
Intrinsic |
|
|||
|
|
Options |
|
|
Price |
|
|
Term |
|
Value |
|
|||
Outstanding at December 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
|
|||
Granted |
|
|
|
|
$ |
|
|
|
|
|
|
|||
Exercised |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
||
Forfeited |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
||
Expired |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
||
Outstanding at March 31, 2023 |
|
|
|
|
$ |
|
|
|
$ |
|
||||
Exercisable at March 31, 2023 |
|
|
|
|
$ |
|
|
|
$ |
|
||||
The weighted average grant date fair value of stock options granted during the three months ended March 31, 2023 and 2022 was $
The aggregate intrinsic values in the tables above represent the difference between the fair market value of the Company’s common stock and the average option exercise price of in-the-money options, multiplied by the number of such stock options.
Employee Stock Purchase Plan
During the three months ended March 31, 2023, a total of
NOTE 12. RELATED PARTY TRANSACTIONS
On January 4, 2023, the Company entered into the Steel Holdings Consulting Agreement with Steel Holdings, LLC, effective as of January 1, 2023. Steel Holdings, LLC is an entity affiliated with Chad Steelberg, our current Chairman of the Board and former Chief Executive Officer effective as of December 31, 2022. Under the Steel Holdings Consulting Agreement, the Company retained Mr. Steelberg as a consultant to provide ongoing Chief Executive Officer transition services and to manage and oversee the further development of the Company’s aiWARE platform. During the three months ended March 31, 2023 the Company recorded a research and development expense of $
There were
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read together with and is qualified in its entirety by reference to the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed under “Risk Factors,” set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 and our other filings with the Securities and Exchange Commission (“SEC”), including future SEC filings. . See “Special Note Regarding Forward-Looking Statements.”
Overview
Veritone, Inc., collectively with our subsidiaries, referred to as “Veritone,” “Company,” “we,” “our,” and “us,” is a provider of Artificial Intelligence, or AI, solutions, powered by our proprietary AI operating system, aiWARE, to deliver differentiated products and solutions to our Commercial Enterprise and Government & Regulated Industries customers. Our Software Products & Services consist of revenues generated from Commercial Enterprise and Government & Regulated Industries customers using our aiWARE platform and hiring solutions, any related support and maintenance services, and any related professional services associated with the deployment and/or implementation of such solutions. Our Managed Services consist of revenues generated from Commercial Enterprise customers using our content licensing services, advertising agency, influencer management and related services.
During the three months ended March 31, 2023, we generated revenue of $30.3 million as compared to $34.4 million during the three months ended March 31, 2022. Our Software Products & Services revenue was $14.1 million during the three months ended March 31, 2023 as compared with $18.2 million for the same period in 2022, while our Managed Services of $16.1 million was relatively flat during the three months ended March 31, 2023 compared with the same period in 2022. During the three months ended March 31, 2023 our largest customer represented 18% of our consolidated revenue and during the three months ended March 31, 2022, that same customer was our largest customer and represented 31% of our consolidated revenue.
Recent Developments
Effective December 31, 2022, Chad Steelberg resigned as our Chief Executive Officer and, effective January 1, 2023, our Board of Directors, or our Board, appointed Ryan Steelberg as President and Chief Executive Officer of the Company, or CEO. Chad Steelberg will continue to provide services to us in his role as Chairman of the Board and as a consultant to the Company. In January 2023, we entered into new employment agreements with Ryan Steelberg and Michael L. Zemetra, our Chief Financial Officer.
On January 4, 2023, we entered into the Steel Holdings Consulting Agreement with Steel Holdings, LLC, an entity affiliated with Chad Steelberg. Pursuant to the Consulting Agreement, we retained Chad Steelberg as a consultant to provide ongoing transition services related to Ryan Steelberg’s appointment as CEO and to manage and oversee the further development of our aiWARE platform.
On January 31, 2023, we announced strategic cost reduction initiatives with the aim of achieving net annualized savings of $12 to $15 million over the course of fiscal 2023. As part of this initiative, we engaged in a headcount reduction during the first quarter of 2023. In addition, we are in the process of divesting our energy group in the first half of 2023, and we intend to reduce and consolidate expenses tied to software, outside services, and cloud-based processing throughout 2023. As of May 1, 2023, we were no longer incurring expenses from the energy group and we anticipate the divestiture transaction will close in the second quarter of 2023.
Opportunities, Challenges and Risks
During the three months ended March 31, 2023 and 2022, we derived our revenue primarily through our Commercial Enterprise customers, and secondarily through our Government & Regulated Industries customers.
We are a leader in AI-based Software Products & Services. Our proprietary AI operating system, aiWARE, uses machine learning algorithms, or AI models, together with a suite of powerful applications, to reveal valuable insights from vast amounts of structured and unstructured data. Historically, we have derived a large portion of our Software Product & Services revenue from applications we internally developed from our aiWARE platform and actively sold across various customers. While management believes there is a substantial opportunity to increase revenue longer term, current economic conditions have negatively impacted our business operations and financial results, and there is no certainty that any future investments, which could be significant and include future potential acquisitions, will result in significant enterprise revenue realization or revenue growth when compared with historical revenue. Nevertheless, we continue to see significant opportunities for growth in Software Products & Services and our aiWARE platform sales to existing and newly acquired
23
customers, and where our AI solutions could add tremendous value in content creation and distribution, including in the news, television and film industries.
We believe there will be significant near and long-term opportunities for revenue growth from Government & Regulated Industries markets due to customer adoption of our products and services related to AI technologies and more recently with our official Authorization to Operate, or ATO, of our aiWARE platform across the entire U.S. Department of Justice and progress with the Chief Digital and Artificial Intelligence Officer (“CDAO”) and Department of Defense (“DOD”). However, many enterprise-level opportunities with Government & Regulated Industries customers can involve long sales cycles, during which we must invest significant time and resources without a guarantee of success. We may seek to acquire businesses with deep relationships and greater scale within the U.S. government and within regulated industries to further accelerate our pursuit of the growth opportunities we see in this market.
During the second half of 2020, we launched our Veritone energy group as part of our Government & Regulated Industries solutions to help utilities increase profitability and improve grid reliability as they make the transition to renewables. Today, our energy solutions are in production at a major utility and being deployed across global manufactures. While we believe our energy solutions have long term value, our aiWARE platform is in the early stages of deployment in this market, and given the current macroeconomic environment, coupled with the fact that we will need to continue making significant investments in product, sales and engineering to further develop current and future solutions, we have elected to divest our energy group in the first half of 2023. As of May 1, 2023, we were no longer incurring expenses from the energy group and we anticipate the divestiture transaction will close in the second quarter of 2023.
Growing our existing and new Software Products & Services customer base is critical for our success. During the three months ended March 31, 2023, ending Software Products & Services customers grew to 667, a 19% increase year over year. While our overall customer growth has been significant, we did experience a slowdown in our Average Annual Revenue (AAR) per customer (as defined and discussed below under “—Non-GAAP Financial Measures”), beginning in our second quarter of 2022, which was principally driven by the reduction in hiring consumption from our largest customer, Amazon. For most of 2021 through the first quarter of 2022, Amazon utilized our hiring platform to support its growth during the COVID-19 pandemic. Beginning in the second quarter of 2022, the COVID-19 pandemic eased and many consumers returned to in-person experiences, including brick and mortar retail shopping. As a result, Amazon substantially slowed its hiring activities in connection with its warehouse and distribution services throughout the remainder of 2022, which created significant fluctuations in our quarterly results in 2022. While we do not expect the same level of fluctuation from Amazon in 2023 as compared to 2022, given Amazon’s high concentration of revenue on our consolidated results, our revenue results may continue to fluctuate significantly year over year based upon their hiring patterns. Overall, our revenues from Amazon during the three months ended March 31, 2023 declined 49% as compared to the prior year, and represented approximately 18% of our consolidated revenue in the first quarter of 2023 compared to 31% of our consolidated revenue in the first quarter of 2022. Offsetting this decline was non-Amazon Software Products & Services revenue, which grew in the aggregate by 16% as compared to the prior year, driven in part by Government & Regulated Industries revenue growth of 79% during the three months ended March 31, 2023 as compared to the prior year. To reduce this risk, we continue to aggressively invest in existing and growing new customers. We also grew our hiring solutions customer base as of March 31, 2023 over 21% year over year.
Additionally, and as a result of the recent pullback in the macroeconomic environment caused by high inflation, rising interest rates and recent and potential future disruptions in access to bank deposits or lending commitments due to bank failures, we expect that some of our customers may reduce advertising spending across our managed services in 2023 when compared to same periods in the prior year. In addition, in the event of a recession in 2023, we may see additional declines in existing and new customers consumption of our Software Products & Services. To mitigate against these risks, we have been investing aggressively in existing customers and acquiring new customers, and in January 2023, we announced certain cost reduction initiatives. As a result of our efforts to diversify our customer base and increase sales within our existing customer base, we intend to continue to increase our sales and marketing spending in the near term as compared to the trailing twelve months; however, these increased investments will be somewhat offset by our 2023 cost reduction initiatives.
We believe our Software Products & Services will extend the capabilities of many third-party software platforms and products that are widely used today. For example, we believe that, when integrated with aiWARE, our hiring solutions customers will be given greater visibility and transparency in their hiring processes. In addition, we have historically integrated aiWARE across many platforms, including Alteryx, Snowflake and the NVIDIA® CUDA® GPU-based platform, enabling dramatic increases in aiWARE’s processing speed and providing a wide range of new use cases for our technology. We are in the process of developing and marketing more specific use cases for these and future integrations, which we believe will open up new markets for our products and accelerate our long term revenue growth opportunities.
For the three months ended March 31, 2023, our total revenues decreased to $30.3 million compared to $34.4 million for the three months ended March 31, 2022, a decrease of 12%. For the three months ended March 31, 2023, our total loss from operations increased to $23.6 million compared to $20.8 million for the three months ended March 31, 2022, an increase of 13%. For the three months ended March 31, 2023, our non-GAAP gross margin (calculated as described in “Non-GAAP Financial Measures” below) decreased slightly to approximately 78% compared with approximately 80% for the three months ended March 31, 2022, primarily due to reduced hiring solutions revenue from Amazon as compared to the prior year period. Our non-GAAP gross margin is impacted significantly by the mix of our Software Products & Services and our Managed Services revenue in any given period because our Managed Services revenue typically has a lower
24
overall non-GAAP gross margin than our Software Products & Services revenue. Our non-GAAP gross profit (see “Non-GAAP Financial Measures” below) is also dependent upon our ability to grow our revenue by expanding our customer base and increasing business with existing customers, and to manage our costs by negotiating favorable economic terms with cloud computing providers such as AWS and Microsoft Azure. While we are focused on continuing to improve our non-GAAP gross profit, our ability to attract and retain customers to grow our revenue will be highly dependent on our ability to implement and continually improve upon our technology and services and improve our technology infrastructure and operations as we experience increased network capacity constraints due to our growth.
We believe our operating results and performance are, and will continue to be, driven by various factors that affect our industry. Our ability to attract, grow and retain customers for our aiWARE platform is highly sensitive to rapidly changing technology and is dependent on our ability to maintain the attractiveness of our platform, content and services to our customers. Our future revenue and operating growth will rely heavily on our ability to grow and retain our Software Products & Services customer base, continue to develop and deploy quality and innovative AI-driven applications and enterprise-level offerings, provide unique and attractive content and advertising services to our customers, continue to grow in newer markets such as Government & Regulated Industries, expand aiWARE into larger and more expansive enterprise engagements and manage our corporate overhead costs. While we believe we will be successful in these endeavors, we cannot guarantee that we will succeed in generating substantial long term operating growth and profitability.
We expect to continue pursuing a strategy of acquiring companies to help accelerate our organic growth. We believe there are strategic acquisition targets that can accelerate our entry into and expand our existing market share in key strategic markets, as well as our ability to grow our business. As a result, we are continuing to prioritize corporate development efforts throughout 2023. Our acquisition strategy is threefold: (i) to increase the scale of our business in markets we are in today, (ii) to accelerate growth in new markets and product categories, including expanding our existing engineering and sales resources, and (iii) to accelerate the adoption of aiWARE as the universal AI operating system through venture or market-driven opportunities.
During the three months ended March 31, 2023, we reported a net loss of $23.0 million compared to a net loss of $22.1 million during the three months ended March 31, 2022. During the three months ended March 31, 2023, we reported a non-GAAP net loss of $9.6 million as compared to a non-GAAP net loss of $5.2 million during the three months ended March 31, 2022. To continue to grow our revenue, we plan to continue to make targeted investments in people, namely software engineers and sales personnel. In 2022, we made substantial investments in our existing employee base, including higher annual raises and increased benefits, to compete in a challenging and constrained labor environment. In addition, we made investments in our corporate infrastructure, including new ERP and workforce systems to help us better manage the scale and growth of our business. However, considering the current challenging macro-economic environment in the first half of 2023, we have made and are continuing to make significant cost reductions to our operating structure to better streamline our business and prioritization around our growth and corresponding investments. In January 2023 we announced strategic cost reduction initiatives with the aim of achieving net annualized savings of $12 to $15 million over the course of fiscal year 2023, of which we have attained $10.8 million in cost reduction, or close to 80% of our target. These cost reduction initiatives began in the latter half of 2022 and will continue through the first half of 2023, and include reductions in workforce and certain legacy operating costs, as well as the divestiture of our energy group. We project that we remain on track to meet our annual goal. As a result of these initiatives, we believe we will be able to accelerate our pathway to long term profitability.
In the three months ended March 31, 2023 and 2022, substantially all of our revenue was derived from customers located in the United States. We believe that there is a substantial opportunity over time for us to expand our service offerings and customer base in countries outside of the United States. In the long term, we plan to expand our business further internationally in places such as Europe, Asia Pacific and Latin America, and as a result, we expect to continue to incur significant incremental upfront expenses associated with these expansion opportunities.
Impact of the Current Global Economic Conditions
Global economic and business activities continue to face widespread macroeconomic uncertainties, including the ongoing impact of COVID-19, labor shortages, inflation and monetary supply shifts, recession risks and disruptions from the Russia-Ukraine conflict. The extent of the impact of these factors on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, and the impact on our customers, partners and employees, all of which are uncertain and cannot be predicted. These global economic conditions and any continued or new disruptions caused by these conditions may negatively impact our business in a number of ways. For example, our hiring solutions are sold to businesses whose financial conditions fluctuate based on general economic and business conditions, particularly the overall demand for labor and the economic health of current and prospective employers. In fiscal 2021, the COVID-19 pandemic forced certain technology and ecommerce companies, like Amazon, to increase hiring to meet increased demand. This, in turn, increased the overall consumption and use of our hiring solutions, and corresponding revenue. In fiscal 2022 and continuing in the first quarter of fiscal 2023, with the easing of COVID-19 restrictions and higher inflation worldwide, demand for certain ecommerce services declined. As a result, companies adversely impacted by this shift in consumer behavior, including Amazon, experienced a decline in the demand for hiring and the consumption of our hiring solutions and corresponding revenue declined.
25
To the extent that economic uncertainty or attenuated economic conditions cause our customers and potential customers to freeze or reduce their headcount, and reduce their advertising spending, demand for our products and services may be negatively affected in 2023 and beyond. These adverse economic conditions could also result in reductions in sales of our applications, longer sales cycles, reductions in contract duration and value, slower adoption of new technologies and increased price competition. In addition, economic recessions have historically resulted in overall reductions in spending on software and technology solutions as well as pressure from customers and potential customers for extended billing terms. If economic, political, or market conditions deteriorate, or if there is uncertainty around these conditions, our customers and potential customers may elect to decrease their software and technology solutions budgets by deferring or reconsidering product purchases, which would limit our ability to grow our business and negatively affect our operating results. Any of these events would likely have an adverse effect on our business, operating results and financial position.
Due to the nature of our business, the effect of these macroeconomic conditions may not be fully reflected in our results of operations until future periods. We have assessed the potential credit deterioration of our customers due to changes in the macroeconomic environment and have determined that no additional allowance for credit losses was necessary due to credit deterioration as of March 31, 2023. The most significant risks to our business and results of operations are discussed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31, 2022.
Non-GAAP Financial Measures
In evaluating our cash flows and financial performance, we use certain non-GAAP financial measures, including “Pro Forma Revenue,” “Average Annual Revenue (AAR),” “non-GAAP gross profit,” “non-GAAP gross margin,” “Non-GAAP net loss (pro forma),” “non-GAAP net income (loss),” and “non-GAAP net income (loss) per share.” Pro Forma Revenue includes historical Software Products & Services revenue of each of Veritone, Inc. and PandoLogic Ltd. (unaudited) and presents such revenue on a combined pro forma basis treating PandoLogic Ltd. as owned by Veritone, Inc. since January 1, 2021. Average Annual Revenue (AAR) is calculated as the aggregate of trailing twelve-month Software Products & Services Pro Forma Revenue divided by the average number of customers over the same period for both Veritone, Inc. and PandoLogic Ltd. Non-GAAP gross profit is the Company’s revenue less its cost of revenue. Non-GAAP gross margin is defined as Non-GAAP gross profit divided by revenue. Non-GAAP net loss (pro forma) is the Company’s net loss excluding the items set forth below. Non-GAAP net income (loss) and non-GAAP net income (loss) per share is the Company’s net income (loss) and net income (loss) per share, adjusted to exclude interest expense, provision for income taxes, depreciation expense, amortization expense, stock-based compensation expense, changes in fair value of warrant liability, changes in fair value of contingent consideration, a reserve for state sales taxes, charges related to a facility sublease, gain on sale of asset, warrant expense, acquisition and due diligence costs, and severance and executive search costs. The results for non-GAAP net income (loss), are presented below for the three months ended March 31, 2023 and 2022. The items excluded from these non-GAAP financial measures, as well as a breakdown of GAAP net loss, non-GAAP net income (loss) and these excluded items between our Core Operations and Corporate, are detailed in the reconciliation below.
In addition, we have provided supplemental non-GAAP measures of gross profit, operating expenses, loss from operations, other (expense) income, net, and loss before income taxes, excluding the items excluded from non-GAAP net loss as noted above, and reconciling such non-GAAP measures to the most directly comparable GAAP measures.
We present these non-GAAP financial measures because management believes such information to be important supplemental measures of performance that are commonly used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Management also uses this information internally for forecasting and budgeting. These non-GAAP financial measures are not calculated and presented in accordance with GAAP and should not be considered as an alternative to net income (loss), operating income (loss) or any other financial measures so calculated and presented, nor as an alternative to cash flow from operating activities as a measure of liquidity. Other companies (including our competitors) may define these non-GAAP financial measures differently. These non-GAAP measures may not be indicative of our historical operating results or predictive of potential future results. Investors should not consider this supplemental non-GAAP financial information in isolation or as a substitute for analysis of our results as reported in accordance with GAAP.
26
Reconciliation of GAAP net loss to Non-GAAP net loss
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
Three Months Ended March 31, |
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||
|
|
Core Operations(1) |
|
|
Corporate(2) |
|
|
Total |
|
|
Core Operations(1) |
|
|
Corporate(2) |
|
|
Total |
|
||||||
Net loss |
|
$ |
(12,570 |
) |
|
$ |
(10,393 |
) |
|
$ |
(22,963 |
) |
|
$ |
(6,100 |
) |
|
$ |
(16,029 |
) |
|
$ |
(22,129 |
) |
(Benefit from) provision for income taxes |
|
|
(504 |
) |
|
|
233 |
|
|
|
(271 |
) |
|
|
134 |
|
|
|
4 |
|
|
|
138 |
|
Depreciation and amortization |
|
|
5,754 |
|
|
|
153 |
|
|
|
5,907 |
|
|
|
5,098 |
|
|
|
116 |
|
|
|
5,214 |
|
Stock-based compensation expense |
|
|
2,335 |
|
|
|
1,582 |
|
|
|
3,917 |
|
|
|
1,983 |
|
|
|
2,833 |
|
|
|
4,816 |
|
Change in fair value of contingent consideration |
|
|
— |
|
|
|
651 |
|
|
|
651 |
|
|
|
— |
|
|
|
5,045 |
|
|
|
5,045 |
|
Interest expense, net |
|
|
9 |
|
|
|
796 |
|
|
|
805 |
|
|
|
— |
|
|
|
1,182 |
|
|
|
1,182 |
|
Foreign currency impact |
|
|
(1,146 |
) |
|
|
(15 |
) |
|
|
(1,161 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Acquisition and due diligence costs |
|
|
— |
|
|
|
805 |
|
|
|
805 |
|
|
|
— |
|
|
|
561 |
|
|
|
561 |
|
Contribution of business held for sale (3) |
|
|
917 |
|
|
|
— |
|
|
|
917 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Variable consultant performance bonus expense |
|
|
394 |
|
|
|
— |
|
|
|
394 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Severance and executive transition costs |
|
|
1,027 |
|
|
|
417 |
|
|
|
1,444 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Non-GAAP Net Income (Loss) |
|
$ |
(3,784 |
) |
|
$ |
(5,771 |
) |
|
$ |
(9,555 |
) |
|
$ |
1,115 |
|
|
$ |
(6,288 |
) |
|
$ |
(5,173 |
) |
(1) Core operations consists of our consolidated Software Products & Services and Managed Services that include our content licensing and advertising services, and their supporting operations, including direct costs of sales as well as operating expenses for sales, marketing and product development and certain general and administrative costs dedicated to these operations.
(2) Corporate consists of general and administrative functions such as executive, finance, legal, people operations, fixed overhead expenses (including facilities and information technology expenses), other income (expenses) and taxes, and other expenses that support the entire company, including public company driven costs.
(3) Contribution of business held for sale relates to the net loss for the periods presented for our energy group that we intend to divest before the end of Q2 2023. The energy group met the held for sale criteria as of March 31, 2023. However, we have not recast Non-GAAP Net Income (Loss) for periods ended prior to March 31, 2023 because the change in business strategy to divest the business occurred in Q1 2023 and the prior period contributions were costs to operate the continuing business when incurred in the prior periods. The historical amounts would not have a major effect on prior period results.
For the three months ended March 31, 2023, our total loss from operations increased to $23.6 million compared to $20.8 million for the three months ended March 31, 2022. The following tables set forth the calculation of our non-GAAP gross profit and non-GAAP gross margin, followed by a reconciliation of non-GAAP to GAAP financial information presented in our condensed consolidated financial statements for three months ended March 31, 2023 and 2022.
(dollars in thousands) |
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Revenue |
|
$ |
30,263 |
|
|
$ |
34,407 |
|
Cost of revenue |
|
|
6,809 |
|
|
|
6,923 |
|
Non-GAAP gross profit |
|
|
23,454 |
|
|
|
27,484 |
|
Non-GAAP gross margin |
|
|
77.5 |
% |
|
|
79.9 |
% |
27
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Revenue |
|
$ |
30,263 |
|
|
$ |
34,407 |
|
Cost of revenue |
|
|
6,809 |
|
|
|
6,923 |
|
Non-GAAP gross profit |
|
|
23,454 |
|
|
|
27,484 |
|
|
|
|
|
|
|
|
||
GAAP cost of revenue |
|
|
6,809 |
|
|
|
6,923 |
|
Stock-based compensation expense |
|
|
(20 |
) |
|
|
(20 |
) |
Non-GAAP cost of revenue |
|
|
6,789 |
|
|
|
6,903 |
|
|
|
|
|
|
|
|
||
GAAP sales and marketing expenses |
|
|
12,690 |
|
|
|
11,069 |
|
Stock-based compensation expense |
|
|
(176 |
) |
|
|
(463 |
) |
Contribution of business held for sale (2) |
|
|
(263 |
) |
|
|
— |
|
Severance and executive transition costs |
|
|
(313 |
) |
|
|
— |
|
Non-GAAP sales and marketing expenses |
|
|
11,938 |
|
|
|
10,606 |
|
|
|
|
|
|
|
|
||
GAAP research and development expenses |
|
|
11,527 |
|
|
|
9,883 |
|
Stock-based compensation expense |
|
|
(1,542 |
) |
|
|
(1,004 |
) |
Contribution of business held for sale (2) |
|
|
(558 |
) |
|
|
— |
|
Severance and executive transition costs |
|
|
(529 |
) |
|
|
— |
|
Non-GAAP research and development expenses |
|
|
8,898 |
|
|
|
8,879 |
|
|
|
|
|
|
|
|
||
GAAP general and administrative expenses |
|
|
17,397 |
|
|
|
22,321 |
|
Depreciation |
|
|
(478 |
) |
|
|
(198 |
) |
Stock-based compensation expense |
|
|
(2,179 |
) |
|
|
(3,329 |
) |
Change in fair value of contingent consideration |
|
|
(651 |
) |
|
|
(5,045 |
) |
Variable consultant performance bonus expense |
|
|
(394 |
) |
|
|
— |
|
Contribution of business held for sale (2) |
|
|
(96 |
) |
|
|
— |
|
Acquisition and due diligence costs |
|
|
(805 |
) |
|
|
(561 |
) |
Severance and executive transition costs |
|
|
(602 |
) |
|
|
— |
|
Non-GAAP general and administrative expenses |
|
|
12,192 |
|
|
|
13,188 |
|
|
|
|
|
|
|
|
||
GAAP amortization |
|
|
(5,429 |
) |
|
|
(5,016 |
) |
|
|
|
|
|
|
|
||
GAAP loss from operations |
|
|
(23,589 |
) |
|
|
(20,805 |
) |
Total non-GAAP adjustments (1) |
|
|
14,035 |
|
|
|
15,636 |
|
Non-GAAP income (loss) from operations |
|
|
(9,554 |
) |
|
|
(5,169 |
) |
|
|
|
|
|
|
|
||
GAAP other income (expense), net |
|
|
355 |
|
|
|
(1,186 |
) |
Foreign currency impact |
|
|
(1,161 |
) |
|
|
— |
|
Interest expense, net |
|
|
805 |
|
|
|
1,182 |
|
Non-GAAP other expense, net |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
||
GAAP loss before income taxes |
|
|
(23,234 |
) |
|
|
(21,991 |
) |
Total non-GAAP adjustments (1) |
|
|
13,679 |
|
|
|
16,818 |
|
Non-GAAP loss before income taxes |
|
|
(9,555 |
) |
|
|
(5,173 |
) |
|
|
|
|
|
|
|
||
(Benefit from) provision for income taxes |
|
|
(271 |
) |
|
|
138 |
|
|
|
|
|
|
|
|
||
GAAP net loss |
|
|
(22,963 |
) |
|
|
(22,129 |
) |
Total non-GAAP adjustments (1) |
|
|
13,408 |
|
|
|
16,956 |
|
Non-GAAP net loss |
|
$ |
(9,555 |
) |
|
$ |
(5,173 |
) |
|
|
|
|
|
|
|
||
Shares used in computing non-GAAP basic and diluted net loss per share |
|
|
36,588 |
|
|
|
35,477 |
|
Non-GAAP basic and diluted net loss per share |
|
$ |
(0.26 |
) |
|
$ |
(0.15 |
) |
(1) Adjustments are comprised of the adjustments to GAAP cost of revenue, sales and marketing expenses, research and development expenses and general and administrative expenses and other (expense) income, net (where applicable) listed above.
(2) Contribution of business held for sale relates to the net loss for the periods presented for our energy group that we intend to divest before the end of Q2 2023. The energy group met the held for sale criteria as of March 31, 2023. However, we have not recast Non-GAAP Net Income (Loss) for periods ended prior to March 31, 2023 because the change in business strategy to divest the business occurred in Q1 2023 and the prior period contributions were costs to operate the continuing business when incurred in the prior periods. The historical amounts would not have a major effect on prior period results.
28
Supplemental Financial Information
We are providing the following unaudited supplemental financial information regarding our Software Products & Services and Managed Services as a lookback of the prior year to explain our recent historical and year-over-year performance.
The supplemental financial information for our Software Products & Services includes: (i) Software Products & Services Revenue, (ii) Ending Software Customers, (iii) Average Annual Revenue (AAR), (iv) Total New Bookings, and (iv) Gross Revenue Retention, in each case as defined in the footnotes to the table below. The supplemental financial information for our Managed Services includes: (i) average gross billings per active agency client, and (ii) revenue.
Software Products & Services Supplemental Financial Information
The following table sets forth the results for each of our Software Products & Services supplemental financial information.
|
|
Quarter Ended |
|
|||||||||||||||||
|
|
Mar 31, |
|
|
Jun 30, |
|
|
Sept 30, |
|
|
Dec 31, |
|
|
Mar 31, |
|
|||||
|
|
2022 |
|
|
2022 |
|
|
2022 |
|
|
2022 |
|
|
2023 |
|
|||||
Software Products & Services Revenue |
|
$ |
18,167 |
|
|
$ |
18,379 |
|
|
$ |
20,812 |
|
|
$ |
27,220 |
|
|
$ |
14,127 |
|
Ending Software Customers (1) |
|
|
559 |
|
|
|
594 |
|
|
|
618 |
|
|
|
642 |
|
|
|
667 |
|
Average Annual Revenue (AAR) (in 000's) (2) |
|
$ |
207 |
|
|
$ |
187 |
|
|
$ |
170 |
|
|
$ |
140 |
|
|
$ |
128 |
|
Total New Bookings (in 000's) (3) |
|
$ |
9,574 |
|
|
$ |
14,658 |
|
|
$ |
16,548 |
|
|
$ |
20,047 |
|
|
$ |
15,010 |
|
Gross Revenue Retention (4) |
|
>90% |
|
|
>90% |
|
|
>90% |
|
|
>90% |
|
|
>90% |
|
|||||
(1) “Ending Software Customers” includes Software Products & Services customers as of the end of each respective quarter set forth above with trailing twelve-month revenues in excess of $2,400 for both Veritone, Inc. and PandoLogic and/or deemed by us to be under an active contract for the applicable periods.
(2) “Average Annual Revenue (AAR)” is calculated as the aggregate of trailing twelve-month Software Products & Services revenue divided by the average number of customers over the same period for both Veritone, Inc. and PandoLogic. Our AAR for the twelve months ended March 31, 2022 and June 30, 2022 is calculated using Pro Forma Revenue for such periods. Pro Forma Revenue is a non-GAAP number. Please see “—Reconciliation of Pro Forma Revenue and Calculation of AAR” below for a reconciliation of Pro forma Revenue to GAAP revenue.
(3) “Total New Bookings” represents the total fees payable during the full contract term for new contracts received in the quarter (including fees payable during any cancellable portion and an estimate of license fees that may fluctuate over the term), excluding any variable fees under the contract (e.g., fees for cognitive processing, storage, professional services and other variable services).
(4) “Gross Revenue Retention”: We calculate our dollar-based gross retention rate as of the period end by starting with the revenue from Ending Software Customers for Software Products & Services as of the 3 months in the prior year quarter to such period, or Prior Year Quarter Revenue. We then deduct from the Prior Year Quarter Revenue any revenue from Ending Software Customers who are no longer customers as of the current period end, or Current Period Ending Customer Revenue. We then divide the total Current Period Ending Customer Revenue by the total Prior Year Quarter Revenue to arrive at our dollar-based gross retention rate, which is the percentage of revenue from all Ending Software Customers from our Software Products & Services as of the year prior that is not lost to customer churn.
Managed Services Supplemental Financial Information
The following table sets forth the results for each of the key performance indicators for Managed Services.
|
|
Quarter Ended |
|
|||||||||||||||||
|
|
Mar 31, |
|
|
Jun 30, |
|
|
Sept 30, |
|
|
Dec 31, |
|
|
Mar 31, |
|
|||||
|
|
2022 |
|
|
2022 |
|
|
2022 |
|
|
2022 |
|
|
2023 |
|
|||||
Avg billings per active Managed Services client (in 000's) (5) |
|
$ |
684 |
|
|
$ |
736 |
|
|
$ |
747 |
|
|
$ |
823 |
|
|
$ |
771 |
|
Revenue during quarter (in 000's) (6) |
|
$ |
10,735 |
|
|
$ |
9,625 |
|
|
$ |
10,035 |
|
|
$ |
11,074 |
|
|
$ |
9,337 |
|
(5) Avg billings per active Managed Services customer for each quarter reflects the average quarterly billings per active Managed Services customer over the twelve-month period through the end of such quarter for Managed Services customers that are active during such quarter.
(6) Managed Services revenue and metrics exclude content licensing and media services.
We have experienced and may continue to experience volatility in revenue from our Managed Services due to a number of factors, including: (i) the timing of new large customer agreements; (ii) loss of customers who choose to replace our services with new providers or by bringing their advertising placement in-house; (iii) customers who experience reductions in their advertising budgets due to issues with their own businesses; and (iv) the seasonality of the campaigns for certain large customers. We have historically generated a significant portion of our revenue from a few major customers. As we continue to grow and diversify our customer base, we expect that our dependency on a limited number of large customers will be minimized.
29
Reconciliation of Pro Forma Revenue and Calculation of AAR
The following table sets forth the reconciliation of pro forma revenue to revenue and the calculation of AAR.
|
|
Trailing Twelve Months Ended |
|
|||||||||||||||||
|
|
Mar 31, |
|
|
Jun 30, |
|
|
Sept 30, |
|
|
Dec 31, |
|
|
Mar 31, |
|
|||||
|
|
2022 |
|
|
2022 |
|
|
2022 |
|
|
2022 |
|
|
2023 |
|
|||||
Software Products & Services Revenue |
|
$ |
72,997 |
|
|
$ |
85,796 |
|
|
$ |
97,581 |
|
|
$ |
84,578 |
|
|
$ |
80,538 |
|
PandoLogic Revenue |
|
|
27,325 |
|
|
|
12,833 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Software Revenue - Pro Forma (1) |
|
$ |
100,322 |
|
|
$ |
98,629 |
|
|
$ |
97,581 |
|
|
$ |
84,578 |
|
|
$ |
80,538 |
|
Managed Services Revenue |
|
|
58,419 |
|
|
|
60,546 |
|
|
|
63,406 |
|
|
|
65,150 |
|
|
|
65,046 |
|
Total Pro Forma Revenue |
|
$ |
158,741 |
|
|
$ |
159,175 |
|
|
$ |
160,987 |
|
|
$ |
149,728 |
|
|
$ |
145,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Average Number of Customers - Pro Forma |
|
|
485 |
|
|
|
529 |
|
|
|
575 |
|
|
|
603 |
|
|
|
630 |
|
Average Annual Revenue (AAR) |
|
$ |
207 |
|
|
$ |
187 |
|
|
$ |
170 |
|
|
$ |
140 |
|
|
$ |
128 |
|
(1) “Software Revenue - Pro Forma” includes historical Software Products & Services revenue from Veritone, Inc. and PandoLogic (unaudited) and presents such revenue on a combined pro forma basis treating PandoLogic as owned by Veritone, Inc. since January 1, 2021.
Results of Operations
The following tables set forth our results of operations for the three months ended March 31, 2023 and 2022, in dollars and as a percentage of our revenue for those periods. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future.
(dollars in thousands) |
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Revenue |
|
$ |
30,263 |
|
|
$ |
34,407 |
|
Operating expenses: |
|
|
|
|
|
|
||
Cost of revenue |
|
|
6,809 |
|
|
|
6,923 |
|
Sales and marketing |
|
|
12,690 |
|
|
|
11,069 |
|
Research and development |
|
|
11,527 |
|
|
|
9,883 |
|
General and administrative |
|
|
17,397 |
|
|
|
22,321 |
|
Amortization |
|
|
5,429 |
|
|
|
5,016 |
|
Total operating expenses |
|
|
53,852 |
|
|
|
55,212 |
|
Loss from operations |
|
|
(23,589 |
) |
|
|
(20,805 |
) |
Other income (expense), net |
|
|
355 |
|
|
|
(1,186 |
) |
Loss before provision for income taxes |
|
|
(23,234 |
) |
|
|
(21,991 |
) |
(Benefit from) provision for income taxes |
|
|
(271 |
) |
|
|
138 |
|
Net loss |
|
$ |
(22,963 |
) |
|
$ |
(22,129 |
) |
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating expenses: |
|
|
|
|
|
|
||
Cost of revenue |
|
|
22.5 |
|
|
|
20.1 |
|
Sales and marketing |
|
|
41.9 |
|
|
|
32.2 |
|
Research and development |
|
|
38.1 |
|
|
|
28.7 |
|
General and administrative |
|
|
57.5 |
|
|
|
64.9 |
|
Amortization |
|
|
17.9 |
|
|
|
14.6 |
|
Total operating expenses |
|
|
177.9 |
|
|
|
160.4 |
|
Loss from operations |
|
|
(77.9 |
) |
|
|
(60.4 |
) |
Other income (expense), net |
|
|
1.2 |
|
|
|
(3.4 |
) |
Loss before provision for income taxes |
|
|
(76.8 |
) |
|
|
(63.8 |
) |
(Benefit from) provision for income taxes |
|
|
(0.9 |
) |
|
|
0.4 |
|
Net loss |
|
|
(75.9 |
) |
|
|
(64.2 |
) |
30
Three Months Ended March 31, 2023 Compared with Three Months Ended March 31, 2022
Revenue
|
|
Three Months Ended |
|
|
Three Months Ended |
|
||||||||||||||||||
|
|
Commercial |
|
|
Government & |
|
|
|
|
|
Commercial |
|
|
Government & |
|
|
|
|
||||||
|
|
Enterprise |
|
|
Regulated |
|
|
Total |
|
|
Enterprise |
|
|
Regulated |
|
|
Total |
|
||||||
Software Products & Services |
|
$ |
12,732 |
|
|
$ |
1,395 |
|
|
$ |
14,127 |
|
|
$ |
17,386 |
|
|
$ |
781 |
|
|
$ |
18,167 |
|
Managed Services |
|
|
16,136 |
|
|
|
— |
|
|
|
16,136 |
|
|
|
16,240 |
|
|
|
— |
|
|
|
16,240 |
|
Revenue |
|
$ |
28,868 |
|
|
$ |
1,395 |
|
|
$ |
30,263 |
|
|
$ |
33,626 |
|
|
$ |
781 |
|
|
$ |
34,407 |
|
Commercial Enterprise
Commercial Enterprise Software Products & Services revenue decreased $4.8 million or 14% in the three months ended March 31, 2023 compared to the corresponding prior year period due primarily due to decreased hiring solutions revenue. Commercial Enterprise Managed Services was relatively flat in the three months ended March 31, 2023 compared to the corresponding prior year, with growth in content licensing offset by slight decreases in advertising revenue driven by the current economic environment.
Government & Regulated Industries
Government & Regulated Industries Software Products & Services revenue increased $0.6 million or 79% in the three months ended March 31, 2023 compared to the corresponding prior year period driven by new and existing customer growth. Government & Regulated Industries Software Products & Services revenue from customers in certain markets, particularly government, is often project-based and is impacted by the timing of projects. As such, we expect that our revenue from these markets could fluctuate significantly from period to period.
Operating Expenses
(dollars in thousands) |
|
Three Months Ended |
|
|
|
|
|
|
|
|
|||||||
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
|
||||
Cost of revenue |
|
$ |
6,809 |
|
|
$ |
6,923 |
|
|
$ |
(114 |
) |
|
|
(1.6 |
)% |
|
Sales and marketing |
|
|
12,690 |
|
|
|
11,069 |
|
|
|
1,621 |
|
|
|
14.6 |
% |
|
Research and development |
|
|
11,527 |
|
|
|
9,883 |
|
|
|
1,644 |
|
|
|
16.6 |
% |
|
General and administrative |
|
|
17,397 |
|
|
|
22,321 |
|
|
|
(4,924 |
) |
|
|
(22.1 |
)% |
|
Amortization |
|
|
5,429 |
|
|
|
5,016 |
|
|
|
413 |
|
|
|
8.2 |
% |
|
Total operating expenses |
|
$ |
53,852 |
|
|
$ |
55,212 |
|
|
$ |
(1,360 |
) |
|
|
(2.5 |
)% |
|
Cost of Revenue. The decrease in cost of revenue in the three months ended March 31, 2023 compared with the corresponding prior year periods was due primarily to our lower revenue level, as discussed above.
Sales and Marketing. The increase in sales and marketing expenses in the three months ended March 31, 2023 compared with the corresponding prior year periods was primarily due increases in personnel-related costs from the addition of new sales and marketing resources. As a percentage of revenue, sales and marketing expenses increased to 42% in the three months ended March 31, 2023, respectively, from 32% in the corresponding prior year period.
Research and Development. The increase in research and development expenses in the three months ended March 31, 2023 compared with the corresponding prior year periods was primarily due to an increase in personnel-related costs from the addition of new engineering resources and costs for the Steel Holdings Consulting Agreement. As a percentage of revenue, research and development expenses increased to 37% in the three months ended March 31, 2023 from 29% in the corresponding prior year period.
General and Administrative. General and administrative expenses decreased by $5.9 million or 22% in the three months ended March 31, 2023 compared with the corresponding prior year period principally due to a $4.4 million decrease in the estimated fair value of contingent consideration and a $1.2 million decrease in stock compensation expense. As a percentage of revenue, general and administrative expenses decreased to 57% in the three months ended March 31, 2023 from 65% in the corresponding prior year period.
31
Amortization Expense. Amortization expense increased in the three months ended March 31, 2023 compared with the corresponding prior year period due to the addition of amortization expense related to our 2022 acquisitions.
Other (Expense) Income, Net
Other expense, net for the three months ended March 31, 2023 was comprised primarily of foreign exchange gain of $1.2 million, offset by interest expense, net of $0.8 million.
Non-GAAP Gross Profit
For the three months ended March 31, 2023, our total loss from operations decreased to $23.6 million compared to $20.8 million for the three months ended March 31, 2022. As noted above, our non-GAAP gross profit is calculated as our revenue less our cost of revenue, as follows:
(dollars in thousands) |
|
Three Months Ended |
|
|
|
|
|
|
|
|
|||||||
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
|
||||
Revenue |
|
$ |
30,263 |
|
|
$ |
34,407 |
|
|
$ |
(4,144 |
) |
|
|
(12.0 |
)% |
|
Cost of revenue |
|
|
6,809 |
|
|
|
6,923 |
|
|
|
(114 |
) |
|
|
(1.6 |
)% |
|
Non-GAAP gross profit |
|
|
23,454 |
|
|
|
27,484 |
|
|
|
(4,030 |
) |
|
|
(14.7 |
)% |
|
Non-GAAP gross margin |
|
|
77.5 |
% |
|
|
79.9 |
% |
|
|
|
|
|
|
|
||
The decrease in non-GAAP gross profit and non-GAAP gross margin in the three months ended March 31, 2023 compared with the corresponding prior year periods was due primarily to decreases in Software Products & Services revenue, which generally generate higher margins than Managed Services revenue.
Liquidity and Capital Resources
We have historically financed our business through the sale of equity and debt securities. Our principal sources of liquidity are our cash and cash equivalents, which totaled $139.7 million as of March 31, 2023, compared with total cash and cash equivalents of $184.4 million as of December 31, 2022. The decrease in our cash and cash equivalents as of March 31, 2023 as compared with December 31, 2022 was primarily due to cash used by operation activities of $33.8 million, investments paid during the three months ended March 31, 2023, and the payment of the PandoLogic 2022 earnout.
Cash Flows
A summary of cash flows from our operating, investing and financing activities is shown in the table below.
(in thousands) |
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cash (used in) provided by operating activities |
|
$ |
(33,785 |
) |
|
$ |
10,134 |
|
Cash used in investing activities |
|
|
(2,947 |
) |
|
|
(4,054 |
) |
Cash used in financing activities |
|
|
(7,981 |
) |
|
|
(23,248 |
) |
Net decrease in cash, cash equivalents and restricted cash |
|
$ |
(44,713 |
) |
|
$ |
(17,168 |
) |
Operating Activities
Our operating activities used cash of $33.8 million in the three months ended March 31, 2023, due primarily to our net loss of $23.0 million, adjusted by $10.6 million in non-cash expenses, including $5.9 million in depreciation and amortization and $3.9 million in stock-based compensation expense, as well as the net working decrease of $21.4 million, primarily due to decreases in accrued media payments of $19.7 million and client advances of $15.6 million from our Managed Services, partially offset by decreases in expenditures billable to clients of $9.3 million.
Our operating activities provided cash of $10.1 million in the three months ended March 31, 2022, due primarily to our net loss of $22.1 million, adjusted by $15.4 million in non-cash expenses, including $5.0 million from a change in the fair value of contingent consideration and $4.8 million in stock-based compensation expense, offset in part by the net working capital increase of $16.9 million, primarily due to decreases in our accounts receivable of $19.0 million.
32
Investing Activities
Our investing activities for the three months ended March 31, 2023 used cash of $2.9 million primarily for $1.5 million in deferred consideration paid for our acquisition in March 2022 of an influencer-based management company, pursuant to a securities purchase agreement, or the March 2022 Acquisition, and $1.4 million in capital expenditures.
Our investing activities for the three months ended March 31, 2022 used cash of $4.1 million primarily for an equity investment of $2.0 million in a strategic partner, $1.3 million to fund a portion of the consideration for the March 2022 Acquisition, and $0.7 million in capital expenditures.
Financing Activities
Our financing activities for the three months ended March 31, 2023 used cash of $8.0 million, consisting of $7.8 million to pay the 2022 earnout for PandoLogic and $0.9 million to pay taxes paid related to the net share settlement of equity awards, partially offset by $0.6 million in proceeds received from the exercise of stock options and purchases of shares under our ESPP.
Our financing activities used cash of $23.2 million in the three months ended March 31, 2022, consisting of $14.4 million to pay the 2021 earnout for PandoLogic and $9.4 million to pay taxes paid related to the net share settlement of equity awards, partially offset by $0.6 million in proceeds received from the exercise of stock options and purchases of shares under our ESPP.
Contractual Obligations and Known Future Cash Requirements
As of March 31, 2023, our only debt obligations were the Convertible Notes issued in the fourth quarter of fiscal year 2021, net of amounts repurchased in 2022. The remaining principal on the Convertible Notes of $141.25 million will mature on November 15, 2026, unless earlier converted, redeemed or repurchased in accordance with the terms of the Convertible Notes.
As of March 31, 2023, we have future cash requirements to pay $3.8 million in purchase consideration commitments related to the VSL acquisition, the VocaliD acquisition and the March 2022 Acquisition that will be paid in 2023 and in 2024. We have no other present agreements or commitments with respect to any material acquisitions of businesses or technologies or any other material capital expenditures.
We have generated significant losses since inception; however, we do expect to begin generating profits on a non-GAAP basis in the foreseeable future. We believe that our current cash and cash equivalents balance will be sufficient to fund our operations in the ordinary course of business for at least the next twelve months from the date of this filing. We have not entered into any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.
Our critical accounting estimates reflecting management’s estimates and judgments are described in our Annual Report on Form 10-K for the year ended December 31, 2022. We have reviewed recently adopted accounting pronouncements and determined that the adoption of such pronouncements is not expected to have a material impact, if any, on our Consolidated Financial Statements. Accordingly, there have been no material changes to critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by Item 305 of Regulation S-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of March 31, 2023. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives of ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief
33
Executive Officer and Chief Financial Officer, as appropriate, to enable timely decisions regarding required disclosures, and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms promulgated by the SEC. Our management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and there is no assurance that our disclosure controls and procedures will operate effectively under all circumstances. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2023, our disclosure controls and procedures were not effective at the reasonable assurance level due to the following material weakness in internal control over financial reporting.
Material Weakness in Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
During the preparation of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, management identified a material weakness in internal control over financial reporting relating to information technology general controls (“ITGCs”) in the areas of user access and change-management over certain information technology (“IT”) systems that support the Company’s financial reporting processes. In addition, the Company’s business process automated and manual controls that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted. Although this material weakness did not result in any identified misstatements to the financial statements and there were no changes to previously released financial results, this material weakness could have resulted in a material misstatement to the Company's annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.
Remediation of Material Weakness in Internal Control Over Financial Reporting
In order to remediate the material weakness relating to ITGCs, management is taking remediation actions including: (i) developing and enhancing IT compliance oversight capabilities with specific focus over identification and execution of appropriate ITGCs; (ii) developing a training program addressing ITGCs and policies, including educating control owners concerning the principles and requirements of each control, with a focus on those related to user access and change management over IT systems impacting financial reporting; (iii) developing and maintaining documentation of underlying ITGCs to promote knowledge transfer upon personnel and function changes; and (iv) implementing an IT management review and testing plan to monitor ITGCs with a specific focus on systems supporting our financial reporting processes. To further remediate the existing material weakness identified herein, the management team, including the Chief Executive Officer and Chief Financial Officer, have reaffirmed and re-emphasized the importance of internal controls, control consciousness and a strong control environment. We are committed to maintaining a strong control environment and believe that these remediation efforts represent continued improvement in our control environment. We also expect to continue to review, optimize and enhance our financial reporting controls and procedures. A material weakness will not be considered remediated until the applicable remediated control operates for a sufficient period of time and management has concluded, through testing, that this enhanced control is operating effectively.
Changes in Internal Control over Financial Reporting
Other than the remediation efforts described above, there have been no changes in our internal control over financial reporting during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Management recognizes that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows. Regardless of the outcome, any litigation could have an adverse impact on us due to defense and settlement costs, diversion of management resources and other factors.
Item 1A. Risk Factors
Our Annual Report on Form 10-K for the year ended December 31, 2022 contains a discussion of the material risks associated with our business. There have been no material changes to the risks described in such Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
35
Item 6. Exhibits
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
2.1 |
|
|
|
|
|
3.1 |
|
|
|
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3.2 |
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10.1* |
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10.2* |
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10.3* |
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10.4 |
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31.1 |
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Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. |
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31.2 |
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Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. |
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32.1+ |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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104 |
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The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, has been formatted in Inline XBRL. |
* Indicates a management contract or compensatory plan or arrangement.
The Company has omitted portions of the referenced exhibit pursuant to Item 601(b) of Regulation S-K because it (a) is not material and (b) is the type of information that the Company both customarily and actually treats as private and confidential.
+ The certifications furnished as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Subsection 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any of the Registrant's filings under the Securities Act, irrespective of any general incorporation language contained in any such filing.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Veritone, Inc. |
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May 9, 2022 |
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By: |
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/s/ Michael L. Zemetra |
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Michael L. Zemetra |
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Executive Vice President, Chief Financial Officer and Treasurer |
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(Principal Financial and Accounting Officer) |
37