Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 14, 2023

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38093

 

Veritone, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

47-1161641

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1615 Platte Street, 2nd Floor, Denver, CO 80202

(Address of principal executive offices, including zip code)

(888) 507-1737

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

VERI

 

The NASDAQ Stock Market LLC

 

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. Yes No

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). Yes No

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

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

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 No

As of November 10, 2023, 37,052,309 shares of the registrant’s common stock were outstanding.

 

 


 

VERITONE, INC.

QUARTERLY REPORT ON FORM 10-Q

September 30, 2023

TABLE OF CONTENTS

 

Special Note Regarding Forward-Looking Statements

1

PART I.

FINANCIAL INFORMATION

 

2

Item 1.

Financial Statements (Unaudited)

 

2

 

Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022

2

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2023 and 2022

3

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022

4

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022

6

 

Notes to the Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

Controls and Procedures

44

PART II.

OTHER INFORMATION

 

46

Item 1.

Legal Proceedings

46

Item 1A.

Risk Factors

46

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 3.

Defaults Upon Senior Securities

48

Item 4.

Mine Safety Disclosures

48

Item 5.

Other Information

48

Item 6.

Exhibits

49

Signatures

50

 

 

 

 


 

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:

our ability to expand our aiWARE SaaS business;
declines or limited growth in the market for AI-based software applications and concerns over the use of AI that may hinder the adoption of AI technologies;
our ability to close on our Term Loan (as defined in Note 13) and our ability to obtain any additional capital to support our business growth, and the availability of such capital on acceptable terms, if at all;
our reliance upon a limited number of key customers for a significant portion of our revenue, including declines in key customers’ usage of our products and other offerings;
our ability to realize the intended benefits of our acquisitions and divestitures, including our ability to successfully integrate our recent acquisition of Broadbean (as defined in Note 3);
our identification of existing material weaknesses in our internal control over financial reporting;
fluctuations in our results over time;
the impact of seasonality on our business;
our ability to manage our growth, including through acquisitions and our further expansion into international markets;
our ability to enhance our existing products and introduce new products that achieve market acceptance and keep pace with technological developments;
actions by our competitors, partners and others that may block us from using the technology in our aiWARE platform, offering it for free to the public or making it cost prohibitive to continue to incorporate their technologies into our platform;
interruptions, performance problems or security issues with our technology and infrastructure, or that of our third party service providers;
the impact of the continuing economic disruption caused by macroeconomic and geopolitical factors, including the COVID-19 pandemic, the Russia-Ukraine conflict and related sanctions, the war in Israel, financial instability, inflation rates and the responses by central banking authorities to control inflation, monetary supply shifts and the threat of recession in the United States and around the world on our business operations and those of our existing and potential customers; and
any additional factors discussed in Item 1A (Risk Factors) of Part I 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 this Quarterly Report on Form 10-Q and our future SEC filings.

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)

 

 

As of

 

 

September 30,
2023

 

 

December 31,
2022

 

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

72,070

 

 

$

184,423

 

Accounts receivable, net

 

 

49,691

 

 

 

56,001

 

Expenditures billable to clients

 

 

24,447

 

 

 

22,339

 

Prepaid expenses and other current assets

 

 

15,179

 

 

 

15,242

 

Total current assets

 

 

161,387

 

 

 

278,005

 

Property, equipment and improvements, net

 

 

11,595

 

 

 

5,291

 

Intangible assets, net

 

 

89,397

 

 

 

79,664

 

Goodwill

 

 

78,388

 

 

 

46,498

 

Long-term restricted cash

 

 

869

 

 

 

859

 

Other assets

 

 

17,787

 

 

 

14,435

 

Total assets

 

$

359,423

 

 

$

424,752

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Accounts payable

 

$

40,512

 

 

$

36,738

 

Accrued media payments

 

 

84,346

 

 

 

102,064

 

Client advances

 

 

14,867

 

 

 

16,442

 

Deferred revenue

 

 

11,821

 

 

 

2,600

 

Contingent consideration, current

 

 

500

 

 

 

8,067

 

Other accrued liabilities

 

 

34,197

 

 

 

27,412

 

Total current liabilities

 

 

186,243

 

 

 

193,323

 

Convertible senior notes, non-current

 

 

138,416

 

 

 

137,767

 

Contingent consideration, non-current

 

 

317

 

 

 

 

Other non-current liabilities

 

 

15,744

 

 

 

13,811

 

Total liabilities

 

 

340,720

 

 

 

344,901

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

Common stock, par value $0.001 per share; 75,000,000 shares authorized; 37,082,144 and 36,321,222 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively

 

 

37

 

 

 

36

 

Additional paid-in capital

 

 

460,827

 

 

 

451,162

 

Accumulated deficit

 

 

(442,071

)

 

 

(371,271

)

Accumulated other comprehensive loss

 

 

(90

)

 

 

(76

)

Total stockholders' equity

 

 

18,703

 

 

 

79,851

 

Total liabilities and stockholders' equity

 

$

359,423

 

 

$

424,752

 

 

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)

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenue

 

$

35,133

 

 

$

37,196

 

 

$

93,363

 

 

$

105,838

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

7,187

 

 

 

7,097

 

 

 

21,761

 

 

 

20,725

 

Sales and marketing

 

 

12,892

 

 

 

13,920

 

 

 

38,706

 

 

 

37,565

 

Research and development

 

 

10,410

 

 

 

11,784

 

 

 

32,456

 

 

 

32,735

 

General and administrative

 

 

21,082

 

 

 

2,502

 

 

 

57,504

 

 

 

27,127

 

Amortization

 

 

6,624

 

 

 

5,504

 

 

 

17,767

 

 

 

15,730

 

Total operating expenses

 

 

58,195

 

 

 

40,807

 

 

 

168,194

 

 

 

133,882

 

Loss from operations

 

 

(23,062

)

 

 

(3,611

)

 

 

(74,831

)

 

 

(28,044

)

Other income (expense), net

 

 

(2,456

)

 

 

(1,249

)

 

 

1,409

 

 

 

(3,666

)

Loss before provision for income taxes

 

 

(25,518

)

 

 

(4,860

)

 

 

(73,422

)

 

 

(31,710

)

(Benefit from) provision for income taxes

 

 

(977

)

 

 

26

 

 

 

(2,622

)

 

 

(1,442

)

Net loss

 

$

(24,541

)

 

$

(4,886

)

 

$

(70,800

)

 

$

(30,268

)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.66

)

 

$

(0.13

)

 

$

(1.92

)

 

$

(0.84

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

36,991,650

 

 

 

36,202,496

 

 

 

36,810,878

 

 

 

35,924,413

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(24,541

)

 

$

(4,886

)

 

$

(70,800

)

 

$

(30,268

)

Foreign currency translation (loss) gain, net of income taxes

 

 

1,749

 

 

 

66

 

 

 

(14

)

 

 

642

 

Total comprehensive loss

 

$

(22,792

)

 

$

(4,820

)

 

$

(70,814

)

 

$

(29,626

)

 

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)

 

 

Three Months Ended September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Total

 

Balance as of June 30, 2023

 

 

36,889,862

 

 

$

37

 

 

$

458,385

 

 

$

(417,530

)

 

$

(1,839

)

 

$

39,053

 

Common stock issued under employee stock plans

 

 

222,927

 

 

 

 

 

 

420

 

 

 

 

 

 

 

 

 

420

 

Common stock withheld for employee taxes

 

 

(30,645

)

 

 

 

 

 

(85

)

 

 

 

 

 

 

 

 

(85

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,107

 

 

 

 

 

 

 

 

 

2,107

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(24,541

)

 

 

 

 

 

(24,541

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,749

 

 

 

1,749

 

Balance as of September 30, 2023

 

 

37,082,144

 

 

$

37

 

 

$

460,827

 

 

$

(442,071

)

 

$

(90

)

 

$

18,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Total

 

Balance as of December 31, 2022

 

 

36,321,222

 

 

$

36

 

 

$

451,162

 

 

$

(371,271

)

 

$

(76

)

 

$

79,851

 

Common stock issued under employee stock plans

 

 

816,690

 

 

 

1

 

 

 

1,062

 

 

 

 

 

 

 

 

 

1,063

 

Common stock withheld for employee taxes

 

 

(191,568

)

 

 

 

 

 

(1,088

)

 

 

 

 

 

 

 

 

(1,088

)

Common stock issued as part of contingent consideration

 

 

135,800

 

 

 

 

 

 

756

 

 

 

 

 

 

 

 

 

756

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

8,935

 

 

 

 

 

 

 

 

 

8,935

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(70,800

)

 

 

 

 

 

(70,800

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14

)

 

 

(14

)

Balance as of September 30, 2023

 

 

37,082,144

 

 

$

37

 

 

$

460,827

 

 

$

(442,071

)

 

$

(90

)

 

$

18,703

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4


 

 

Three Months Ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income

 

 

Total

 

Balance as of June 30, 2022

 

 

36,128,363

 

 

$

36

 

 

$

440,809

 

 

$

(371,096

)

 

$

472

 

 

$

70,221

 

Common stock issued under employee stock plans

 

 

226,577

 

 

 

 

 

 

417

 

 

 

 

 

 

 

 

 

417

 

Common stock withheld for employee taxes

 

 

(32,475

)

 

 

 

 

 

(217

)

 

 

 

 

 

 

 

 

(217

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

5,172

 

 

 

 

 

 

 

 

 

5,172

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(4,886

)

 

 

 

 

 

(4,886

)

Other comprehensive gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66

 

 

 

66

 

Balance as of September 30, 2022

 

 

36,322,465

 

 

$

36

 

 

$

446,181

 

 

$

(375,982

)

 

$

538

 

 

$

70,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

(Loss) Income

 

 

Total

 

Balance as of December 31, 2021

 

 

34,972,256

 

 

$

35

 

 

$

431,606

 

 

$

(345,037

)

 

$

(104

)

 

$

86,500

 

Cumulative-effect of accounting change adopted as of January 1, 2022

 

 

 

 

 

 

 

 

 

 

 

(677

)

 

 

 

 

 

(677

)

Common stock issued under employee stock plans, net

 

 

1,378,922

 

 

 

1

 

 

 

1,198

 

 

 

 

 

 

 

 

 

1,199

 

Common stock withheld for employee taxes

 

 

(497,593

)

 

 

 

 

 

(9,726

)

 

 

 

 

 

 

 

 

(9,726

)

Common stock issued for acquisition

 

 

116,550

 

 

 

 

 

 

1,929

 

 

 

 

 

 

 

 

 

1,929

 

Common stock issued as part of contingent consideration

 

 

352,330

 

 

 

 

 

 

6,440

 

 

 

 

 

 

 

 

 

6,440

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

14,734

 

 

 

 

 

 

 

 

 

14,734

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(30,268

)

 

 

 

 

 

(30,268

)

Other comprehensive gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

642

 

 

 

642

 

Balance as of September 30, 2022

 

 

36,322,465

 

 

$

36

 

 

$

446,181

 

 

$

(375,982

)

 

$

538

 

 

$

70,773

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

VERITONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

Nine Months Ended
September 30,

 

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(70,800

)

 

$

(30,268

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

20,154

 

 

 

16,494

 

Provision for credit losses

 

 

168

 

 

 

(113

)

Stock-based compensation expense

 

 

8,646

 

 

 

14,734

 

Gain on sale of energy group

 

 

(2,572

)

 

 

 

Change in fair value of contingent consideration

 

 

1,468

 

 

 

(23,076

)

Change in deferred taxes

 

 

(2,858

)

 

 

(2,078

)

Amortization of debt issuance costs

 

 

649

 

 

 

902

 

Amortization of right-of-use assets

 

 

1,127

 

 

 

632

 

Imputed non-cash interest (income) expense

 

 

(108

)

 

 

176

 

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

14,052

 

 

 

370

 

Expenditures billable to clients

 

 

(2,108

)

 

 

3,395

 

Prepaid expenses and other assets

 

 

1,224

 

 

 

(4,290

)

Other assets

 

 

(1,300

)

 

 

(4,568

)

Accounts payable

 

 

2,405

 

 

 

(15,298

)

Deferred revenue

 

 

(913

)

 

 

895

 

Accrued media payments

 

 

(17,718

)

 

 

20,136

 

Client advances

 

 

(1,567

)

 

 

2,240

 

Other accrued liabilities

 

 

4,714

 

 

 

(3,177

)

Other liabilities

 

 

(2,774

)

 

 

(1,736

)

Net cash used in operating activities

 

 

(48,111

)

 

 

(24,630

)

Cash flows from investing activities:

 

 

 

 

 

 

Minority investment

 

 

 

 

 

(2,750

)

Proceeds from divestiture

 

 

504

 

 

 

 

Capital expenditures

 

 

(4,054

)

 

 

(3,777

)

Acquisitions, net of cash acquired

 

 

(50,195

)

 

 

(4,589

)

Net cash used in investing activities

 

 

(53,745

)

 

 

(11,116

)

Cash flows from financing activities:

 

 

 

 

 

 

Payment of contingent consideration

 

 

(7,772

)

 

 

(14,376

)

Taxes paid related to net share settlement of equity awards

 

 

(1,088

)

 

 

(9,726

)

Proceeds from issuances of stock under employee stock plans, net

 

 

1,063

 

 

 

1,199

 

Settlement of deferred consideration for acquisitions

 

 

(2,690

)

 

 

 

Net cash used in financing activities

 

 

(10,487

)

 

 

(22,903

)

Net decrease in cash and cash equivalents and restricted cash

 

 

(112,343

)

 

 

(58,649

)

Cash and cash equivalents and restricted cash, beginning of period

 

 

185,282

 

 

 

255,577

 

Cash and cash equivalents and restricted cash, end of period

 

$

72,939

 

 

$

196,928

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

Fair value of shares issued for acquisition of businesses and earn-out consideration

 

 

756

 

 

 

8,369

 

Stock-based compensation capitalized for software development

 

 

289

 

 

 

155

 

Lease liabilities arising from right-of-use assets

 

 

1,436

 

 

 

4,501

 

Fair value of shares received for consideration of energy group sale

 

 

2,021

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


 

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 June 13, 2023, the Company acquired Broadbean (as defined in Note 3), a global leader of talent acquisition software-as-a-service technology. 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 and nine months ended September 30, 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 six- 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.

Correction of Immaterial Error

During the third quarter of 2023, the Company recorded out of period adjustments related to prior periods associated with consolidation of foreign currency balances in its historical financial statements. The cumulative effect of the error generated during 2022 and during the six months ended June 30, 2023 was corrected during the three months ended September 30, 2023, resulting in a decrease in other income, net of $2,443, an increase in benefit from provision for income taxes of $257, and an increase in foreign currency translation loss, net of income taxes of $2,187. The Company evaluated the aggregate effects of the errors to its previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to the previously issued financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2022 or for any

7


 

quarterly periods included therein. Additionally, the Company determined that the errors were not material for the previously issued financial statements for the interim periods for which financial statements were filed during 2023.

 

Liquidity and Capital Resources

These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles assuming the Company will continue as a going concern. During the years ended December 31, 2022 and 2021, the Company generated cash flows from operations of $3,737 and $7,234, respectively, and incurred net losses of $25,557 and $64,672, respectively. As of September 30, 2023, the Company had an accumulated deficit of $442,071. Historically, the Company has satisfied its capital needs with the net proceeds from sales of equity securities, issuances of convertible debt, and the exercise of common stock options and warrants. In August 2023, the Company entered into the Credit Facility (see Note 4), pursuant to which the Company may borrow up to $30,000. As of September 30, 2023, the Company had not drawn any amounts under the Credit Facility. If the Company needs to raise additional capital in order to continue to execute its business plan, there is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company.

During the nine months ended September 30, 2023, the Company used cash in operations of $48,111, driven principally by the timing of payments for advertising customers and by the Company’s net loss of $70,800, and the Company used cash in investing activities of $53,745, driven principally by its acquisition of Broadbean (see Note 3), and used cash in financing activities of $10,487, driven principally by the settlement of contingent and deferred consideration for its 2022 and 2021 acquisitions. As of September 30, 2023, the Company had cash and cash equivalents of $72,070, including $58,002 of cash received from advertising customers for future payments to vendors. Absent any other action, management determined that the Company would require additional liquidity to continue its operations over the next twelve months. The Company’s management projects that the Company’s ability to borrow up to $30,000 on its Credit Facility, subject to the lender’s approval of qualifying domestic receivables, or the availability of proceeds from the Company’s Term Loan (see Note 13), if consummated, when combined with the Company’s cash and cash equivalents, will allow the Company to meet its anticipated cash requirements for the next twelve months.

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 certain transactions including barter transactions and the evaluation of its 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 factors including the COVID-19 pandemic, the wars in Ukraine and Israel, the global inflationary environment and rising interest rates. The war in Israel has also adversely impacted the Company’s business operations because the Company has an office and personnel based in Tel Aviv, Israel. 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

No individual customer accounted for 10% or more of the Company’s revenue for the three months ended September 30, 2023 and one individual customer accounted for 10% or more of the Company’s revenue for the three months ended September 30, 2022. One individual customer accounted for 10% or more of the Company’s revenue for the nine months ended September 30, 2023 and 2022. One individual customer accounted for 10% or more of the Company’s accounts receivable as of September 30, 2023 and one individual customer accounted for 10% or more of the Company’s accounts receivable as of December 31, 2022.

 

Contract Balances

Contract liabilities are recorded as deferred revenue when customer payments are received in advance of the Company meeting all the revenue recognition criteria. Deferred revenue includes prepaid subscription and revenue with performance obligations yet to be satisfied. The Company recognized $2,081 of revenue during the nine months ended September 30, 2023 that was included in the deferred revenue balance as of December 31, 2022.

 

8


 

Remaining Performance Obligations

As of September 30, 2023, the aggregate amount of the transaction prices under the Company’s contracts allocated to the Company’s remaining performance obligations was $27,595, approximately 57% of which the Company expects to recognize as revenue over the next twelve months, and the remainder thereafter. This aggregate amount excludes amounts allocated to remaining performance obligations under contracts that have an original duration of one year or less and variable consideration that is allocated to remaining performance obligations. Excluded based on this policy are balances related to hiring solutions representing gross purchase orders to be satisfied in less than one year. Revenues will be recognized net of costs to fulfill these orders.

 

Segment Information

The Company operates as one reportable segment. The Company reports segment information based on the internal reporting used by the chief operating decision maker for making decisions and assessing performance as the source of the Company’s reportable segments.

 

Seasonality

The Company experiences seasonal fluctuations in its revenue and operating performance as a result of the utilization of its platform and associated revenues from its Software Products & Services. In particular, hiring solutions revenues have historically been higher in the second half of each fiscal year, consistent with the hiring cycles of the Company’s larger customers. The Company also experiences seasonality as a result of factors such as the timing of large projects, the length and complexity of sales cycles, trends impacting the Company’s target vertical markets and the Company’s revenue recognition policies and any changes to those policies. Within a given quarter, a higher proportion of the Company’s agreements are signed toward the end of such quarter. Although these seasonal factors are common in the technology industry, historical patterns should not be considered a reliable indicator of our future sales activity or performance.

 

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 was effective for the Company beginning in the first quarter of fiscal year 2023. The Company adopted this guidance on January 1, 2023 and the impact of the adoption was not material to our condensed 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 condensed consolidated financial statements.

NOTE 3. BUSINESS COMBINATIONS AND DIVESTITURE

 

Broadbean Acquisition

On June 13, 2023, the Company acquired Broadbean, a global leader of talent acquisition software-as-a-service technology, pursuant to a securities and asset purchase agreement whereby the Company acquired (i) 100% of the issued and outstanding share capital of (a) Broadbean Technology Pty Ltd I 116 011 959 / ABN 79 116 011 959, a limited company incorporated under the laws of Australia (“Broadbean Australia”), (b) Broadbean Technology Limited, a limited company incorporated under the laws of England and Wales (“Broadbean UK”), (c) Broadbean, Inc., a Delaware corporation (“Broadbean Inc.”) and (d) CareerBuilder France S.A.R.L., a limited liability company organized (société à responsabilité limitée) under the laws of France, and (ii) certain assets and liabilities related thereto (the foregoing clauses (i) and (ii) together, “Broadbean”). The acquisition is intended to strengthen Veritone’s AI-driven human resources product suite, building on the Company’s previous acquisition of PandoLogic.

The total purchase consideration was $53,224 (the “Broadbean Acquisition Consideration”), which consisted of cash payments of $53,224 at closing. The Company incurred $4,214 in acquisition-related expenses and has recorded them in general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss. The Broadbean Acquisition Consideration is preliminary and subject to net working capital adjustments, deferred tax assets and liabilities adjustments, and income taxes payable

9


 

adjustments that the Company expects to finalize and settle in the measurement period. The final settlement amount may vary materially as amounts are finalized and ultimately agreed to by the parties.

The following table summarizes the fair value of the Broadbean Acquisition Consideration:

 

Preliminary Broadbean Acquisition Consideration

 

Amount

 

Cash consideration at closing

 

$

53,224

 

 

The preliminary allocation of the Broadbean Acquisition Consideration to tangible and intangible assets acquired and liabilities assumed is based on estimated fair values and is as follows:

 

Preliminary Allocation of Broadbean Acquisition Consideration**

 

Amount

 

Cash and cash equivalents

 

$

3,029

 

Accounts receivable, net

 

 

7,910

 

Prepaid expenses and other current assets

 

 

1,008

 

Property, equipment and improvements, net

 

 

4,348

 

Intangible assets

 

 

27,500

 

Other assets

 

 

1,115

 

Total assets acquired

 

 

44,910

 

Accounts payable

 

 

1,369

 

Deferred revenue

 

 

10,134

 

Other accrued liabilities

 

 

4,565

 

Other non-current liabilities

 

 

7,565

 

Total liabilities assumed

 

 

23,633

 

Identifiable net assets acquired

 

 

21,277

 

Goodwill

 

 

31,947

 

Total purchase consideration

 

$

53,224

 

 

**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 and to the assembled workforce.

 

Identifiable Intangible Assets

The identifiable intangible assets acquired consisted of the customer relationships and developed technology with estimated useful lives of four to five years. The Company amortizes the fair value of these intangible assets on a straight-line basis over their respective useful lives.

Developed technology relates to Broadbean’s internally developed software. The Company valued the developed technology using the relief- from- royalty method under the income approach. This method is based on the application of a royalty rate to forecasted revenue that is expected to be generated by the existing developed technology. The economic useful life was determined based on the technology cycle related to the developed technology, as well as the timing of cash flows over the forecast period. Customer relationships relate to the sales of products and services to Broadbean’s existing customer base. The Company valued the customer relationships using the multi-period excess earnings method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the existing customer relationships less charges representing the contribution of other assets to those cash flows. The economic useful life was determined based on historical customer turnover rates, as well as the timing of cash flows over the forecast period.

The valuation of the intangible assets acquired along with their estimated useful lives, is as follows:

 

 

Estimated
Fair Value

 

 

Estimated Useful Lives (in years)

Customer relationships

 

$

17,200

 

 

5

Developed technology

 

 

10,300

 

 

4

Total intangible assets

 

$

27,500

 

 

 

 

10


 

 

Taxes

In connection with the acquisition of Broadbean, a net deferred tax liability of $7,059 was established primarily relating to non-goodwill intangible assets and recorded within other non-current liabilities on the Company’s condensed consolidated balance sheet. The amount of tax-deductible goodwill as of the purchase date is $3,755. The allocation of purchase consideration to deferred tax assets and liabilities and income taxes payable is preliminary as the Company continues to evaluate certain balances, estimates and assumptions during the measurement period (up to one year from the acquisition date).

 

Unaudited Pro Forma Results

The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and Broadbean as if the companies were combined for the three and nine month periods ended September 30, 2023 and September 30, 2022, respectively. The unaudited pro forma financial information for all periods presented included the business combination accounting effects resulting from this acquisition, including adjustments to reflect recognition of intangible asset amortization. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of January 1, 2022 or the results that may occur in the future.

The Company recognized $10,456 in revenue and $1,992 of net income related to Broadbean since the acquisition date of June 13, 2023 through September 30, 2023 in the condensed consolidated statement of operations and comprehensive loss.

The unaudited pro forma financial information was as follows:

 

 

 

 

Nine Months Ended
September 30,

 

 

 

 

2023

 

Net revenue

 

 

 

$

108,426

 

Loss before provision for income taxes

 

 

 

 

(71,886

)

Net loss

 

 

 

 

(68,643

)

 

 

Three months ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

2022

 

 

2022

 

Net revenue

 

$

44,986

 

 

$

130,051

 

Loss before provision for income taxes

 

 

(2,059

)

 

 

(23,338

)

Net loss

 

 

(3,722

)

 

 

(26,739

)

 

VSL Acquisition

On August 11, 2022, the Company acquired certain assets of VSL, a U.K.-based company focused on AI-powered video analytics and surveillance software solutions, pursuant to an asset purchase agreement.

The total purchase consideration was $1,952 (the “VSL Acquisition Consideration”), which consisted of cash payments of $1,700 at closing and deferred cash payments to be made during the three months ended March 31, 2024, totaling $300, which deferred payments were estimated to have a fair value of $252 as of the acquisition date. The Company incurred $272 in acquisition-related expenses and has recorded them in general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss.

The following table summarizes the fair value of the VSL Acquisition Consideration:

 

VSL Acquisition Consideration

 

Amount

 

Cash consideration at closing

 

$

1,700

 

Deferred consideration

 

 

252

 

Total

 

$

1,952

 

 

11


 

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:

 

Allocation of VSL Acquisition Consideration**

 

Amount

 

Accounts receivable, net

 

$

57

 

Property, equipment and improvements, net

 

 

13

 

Intangible assets

 

 

1,500

 

Total assets acquired

 

 

1,570

 

Accrued expenses and other current liabilities

 

 

32

 

Total liabilities assumed

 

 

32

 

Identifiable net assets acquired

 

 

1,538

 

Goodwill

 

 

414

 

Total purchase consideration

 

$

1,952

 

 

**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 $1,500 with estimated useful lives of three years. The Company amortizes the fair value of these intangible assets on a straight-line basis over their respective useful lives.

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 June 10, 2022, the Company acquired 100% of VocaliD, a U.S.-based company that specializes in the creation of personalized synthetic voices, pursuant to a stock purchase agreement.

The total purchase consideration was $3,384 (the “VocaliD Acquisition Consideration”), which consisted of cash payments of $1,609 at closing and deferred cash payments to be made in 2023 totaling $2,000, which deferred payments were estimated to have a fair value of $1,785 as of the acquisition date, and a net working capital adjustment reducing the purchase price by $10. The Company incurred $200 in acquisition-related expenses and has recorded them in general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss during the nine months ended September 30, 2022.

The Company paid the first of two deferred cash payments of $1,000 during the nine months ended September 30, 2023.

The following table summarizes the fair value of the VocaliD Acquisition Consideration:

 

VocaliD Acquisition Consideration

 

Amount

 

Cash consideration at closing

 

$

1,609

 

Deferred consideration

 

 

1,785

 

Net working capital adjustment

 

 

(10

)

Total

 

$

3,384

 

 

12


 

 

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:

 

Allocation of VocaliD Acquisition Consideration**

 

Amount

 

Cash

 

$

216

 

Intangible assets

 

 

2,700

 

Total assets acquired

 

 

2,916

 

Accounts payable

 

 

6

 

Accrued expenses and other current liabilities

 

 

33

 

Deferred tax liability

 

 

663

 

Total liabilities assumed

 

 

702

 

Identifiable net assets acquired

 

 

2,214

 

Goodwill

 

 

1,170

 

Total purchase consideration

 

$

3,384

 

 

**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 none of the goodwill generated from the acquisition was tax deductible.

 

Identifiable Intangible Assets

The identifiable intangible assets acquired consisted of developed technology valued at $2,700 with estimated useful lives of three years. The Company amortizes the fair value of these intangible assets on a straight-line basis over their respective useful lives.

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 March 1, 2022, the Company acquired 100% of an influencer-based management company, which is a California limited liability company, pursuant to a securities purchase agreement dated as of March 1, 2022 (the “March 2022 Acquisition”). The entity is an influencer management company that works with a select group of social media influencers to create content and custom marketing campaigns for brand partners and agencies.

The total purchase consideration was $5,881 (the “March 2022 Acquisition Consideration”), which consisted of a cash payment of $1,500 at closing, $1,929 for the fair value of the Company’s 116,550 shares of common stock, and deferred cash payments to be made in 2023 and 2024 totaling $3,000, which deferred payments were estimated to have a fair value of $2,707 on the acquisition date. The total purchase price was decreased by $976 for the settlement of a preexisting receivable and increased by $684 to adjust for the cash on hand at the time of the transaction closing and a net working capital adjustment of $37. In addition, the seller may receive up to $4,500 in contingent earnout consideration based on achieving certain milestones tied to the entity’s financial performance in fiscal 2022 and 2023, which amount will be paid in cash (the “March 2022 Acquisition Earnout”). The fair value of the March 2022 Acquisition Earnout was estimated to be $3,015 as of March 1, 2022, all of which was deemed to be compensation to the seller which will be recognized as compensation expense over the earnout period in the general and administrative expenses on the condensed consolidated statement of operations and comprehensive loss.

In July 2023, the Company entered into an amendment to the March 2022 Acquisition securities purchase agreement (the “March 2022 Acquisition Amendment”). The March 2022 Acquisition Amendment provides that the March 2022 Acquisition Earnout amount was reduced to $3,500 (the “March 2022 Acquisition Earn-Out Amount”) and the payment is now tied to the employment status of the seller through December 31, 2025, irrespective of the actual financial performance of the acquired company. Expense associated with this expected payment will be accrued ratably over the service period. In exchange for the March 2022 Acquisition Earn-Out Amount, the March 2022 Acquisition Amendment further provides that certain restrictive operational covenants and obligations of the Company terminated immediately as of the date of the March 2022 Acquisition Amendment.

The Company incurred $270 in acquisition-related expenses and has recorded them in general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss during the nine months ended September 30, 2022.

The Company paid the first of two deferred cash payments of $1,500 during the nine months ended September 30, 2023.

13


 

The following table summarizes the fair value of the March 2022 Acquisition Consideration:

 

March 2022 Acquisition Consideration

 

Amount

 

Cash consideration at closing

 

$

1,500

 

Equity consideration at closing

 

 

1,929

 

Deferred consideration

 

 

2,707

 

Acquired cash

 

 

684

 

Settlement of pre-existing receivable

 

 

(976

)

Net working capital adjustment

 

 

37

 

Total

 

$

5,881

 

 

The allocation of the March 2022 Acquisition Consideration to tangible and intangible assets acquired and liabilities assumed is based on estimated fair values and is as follows:

 

Allocation of March 2022 Acquisition Consideration**

 

Amount

 

Cash

 

$

715

 

Accounts receivable

 

 

1,088

 

Prepaid and other current assets

 

 

120

 

Property and equipment

 

 

53

 

Intangible assets

 

 

2,700

 

Other assets

 

 

247

 

Total assets acquired

 

 

4,923

 

Accounts payable

 

 

18

 

Accrued expenses and other current liabilities

 

 

1,788

 

Operating lease liabilities, non-current

 

 

140

 

Total liabilities assumed

 

 

1,946

 

Identifiable net assets acquired

 

 

2,977

 

Goodwill

 

 

2,904

 

Total purchase consideration

 

$

5,881

 

 

**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 three to ten years. The Company amortizes the fair value of these intangible assets on a straight-line basis over their respective useful lives.

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.

The valuation of the intangible assets acquired along with their estimated useful lives, is as follows:

 

 

Estimated
Fair Value

 

 

Estimated Useful Lives (in years)

Influencer network

 

$

1,200

 

 

5

Trade name

 

 

200

 

 

10

Brand relationships

 

 

1,300

 

 

3

Total intangible assets

 

$

2,700

 

 

 

 

Energy Group Divestiture

On June 30, 2023, the Company completed the sale of its energy group (the “Energy Divestiture”) to GridBeyond Limited, an Ireland-based privately held company (“GridBeyond”) that delivers AI-powered energy solutions, pursuant to an asset purchase agreement. The Company received 4,160,644 shares of Series B Preference Shares in GridBeyond valued at approximately $2,021 as well as $549 to be paid in

14


 

cash of which $504 was paid during the three months ended September 30, 2023. The Energy Divestiture resulted in a pre-tax gain of $2,572 for the nine months ended September 30, 2023. The Energy Divestiture does not meet the criteria of discontinued operations because the disposal does not have a major effect on the Company’s operations and financial results.

NOTE 4. DEBT

 

Convertible Senior Notes

In November 2021, the Company issued, at par value, $201,250 aggregate principal amount of 1.75% convertible senior notes due 2026 (the “Convertible Notes”). The issuance included the full exercise of an option granted by the Company to the initial purchasers of the Convertible Notes to purchase an additional $26,250 aggregate principal amount of Convertible Notes. The Convertible Notes were issued pursuant to and are subject to the terms and conditions of an indenture, which is referred to as the Indenture, between the Company and U.S. Bank National Association, as trustee. The Convertible Notes were offered and sold in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. In December 2022, the Company repurchased $60,000 aggregate principal amount of the Convertible Notes at approximately 65% of par (the “Repurchase Transaction”). The Company has $141,250 in aggregate principal amount of the Convertible Notes outstanding as of September 30, 2023.

The Convertible Notes are senior, unsecured obligations of the Company and bear interest at a rate of 1.75% per year. Interest accrues from November 19, 2021 and is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2022. The Convertible Notes will mature on November 15, 2026, unless earlier converted, redeemed, or repurchased in accordance with the terms of the Convertible Notes.

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 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate for the Convertible Notes on each such trading day; (3) if the Company calls such Convertible Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the applicable redemption date; or (4) upon the occurrence of specified corporate events. On or after May 15, 2026, holders may convert all or any portion of their Convertible Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date regardless of the foregoing conditions. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election.

The conversion rate for the Convertible Notes initially is 27.2068 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $36.76 per share of common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or following the Company’s issuance of a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate event or who elects to convert its Convertible Notes called (or deemed called) for redemption during the related redemption period, as the case may be.

The Company may not redeem the Convertible Notes prior to November 20, 2024. The Company may redeem for cash all or any portion of the Convertible Notes (subject to certain limitations), at its option, on or after November 20, 2024 if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes.

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 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

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

15


 

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 $194,945, after deducting debt issuance costs. The total debt issuance costs incurred and recorded by the Company amounted to $6,304, which were recorded as a reduction to the face amount of the Convertible Notes and are being amortized to interest expense using the effective interest method over the contractual term of the Convertible Notes. The Convertible Notes are recorded as a liability within convertible senior notes, non-current.

For the three and nine months ended September 30, 2023, interest expense related to the Convertible Notes and amortization of the issuance costs was $836 and $2,503, respectively. For the three and nine months ended September 30, 2022, interest expense related to the Convertible Notes and amortization of the issuance costs was $1,183 and $3,544, respectively. The effective annual interest rate for the three and nine months ended September 30, 2023 and the three and nine months ended September 30, 2022 was approximately 2.42%. As of September 30, 2023, the if-converted value of the Convertible Notes did not exceed the outstanding principal amount. As of September 30, 2023, the total estimated fair value of the Convertible Notes was $50,638, which was determined based on a market approach using actual bids and offers of the Convertible Notes in an over-the-counter market during the period. The Company considers these assumptions to be Level 2 inputs in accordance with the fair value hierarchy described in Note 6.

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 $18,616 of the net proceeds from the issuance of the Convertible Notes to enter into privately negotiated capped call transactions, which are referred to as the capped calls, with various financial institutions.

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 $48.55 per share of common stock, which represents a premium of 75% over the last reported sale price of the Company’s common stock of $27.74 per share on November 16, 2021, and is subject to certain customary adjustments under the terms of the capped calls; provided that the cap price will not be reduced to an amount less than the strike price of $35.76 per share.

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 $276 in net proceeds from the unwinding of the capped calls.

Credit Facility

In August 2023, the Company entered into a three year credit agreement with Alterna Capital Solutions, LLC (“ACS”) pursuant to which the Company may borrow up to $30,000 (the “Credit Facility”). Loans under the Credit Facility are secured by certain domestic receivables and other assets as determined by ACS. The Credit Facility bears interest at the greater of Prime rate plus 1% or 9.5%, and minimum annual interest of $250 if no funds are drawn under the Credit Facility in a given year. ACS will be a senior secured creditor. As of September 30, 2023, the Company had not drawn any funds under the Credit Facility.

16


 

NOTE 5. NET LOSS PER SHARE

The following table presents the computation of basic and diluted net loss per share:

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(24,541

)

 

$

(4,886

)

 

$

(70,800

)

 

$

(30,268

)

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

36,991,650

 

 

 

36,202,496

 

 

 

36,810,878

 

 

 

35,924,413

 

Less: Weighted-average shares subject to repurchase

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic and diluted net loss per share attributable to common stockholders

 

 

36,991,650

 

 

 

36,202,496

 

 

 

36,810,878

 

 

 

35,924,413

 

Basic and diluted net loss per share

 

$

(0.66

)

 

$

(0.13

)

 

$

(1.92

)

 

$

(0.84

)

 

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. The table below presents the weighted-average securities (in common equivalent shares) outstanding during the periods presented that have been excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive:

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Common stock options, restricted stock units and performance stock units

 

 

11,058,562

 

 

 

10,635,480

 

 

 

10,909,888

 

 

 

10,484,633

 

Warrants to purchase common stock

 

 

496,612

 

 

 

496,612

 

 

 

496,612

 

 

 

496,612

 

Common stock issuable in connection with convertible senior notes

 

 

3,842,961

 

 

 

5,475,369

 

 

 

3,842,961

 

 

 

5,475,369

 

 

 

15,398,135

 

 

 

16,607,461

 

 

 

15,249,461

 

 

 

16,456,614

 

 

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:

Level 1—quoted prices (unadjusted) in active markets for identical assets or liabilities;

 

Level 2—inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

 

Level 3—unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Cash and Cash Equivalents

The Company’s money market funds are categorized as Level 1 within the fair value hierarchy. As of September 30, 2023, the Company’s cash and cash equivalents were as follows:

 

 

 

 

 

Gross

 

 

 

 

 

Cash and

 

 

 

 

 

Unrealized

 

 

Fair

 

 

Cash

 

 

Cost

 

 

Losses

 

 

Value

 

 

Equivalents

 

Cash

 

$

72,070

 

 

$

 

 

$

72,070

 

 

$

72,070

 

Total

 

$

72,070

 

 

$

 

 

$

72,070

 

 

$

72,070

 

17


 

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

 

$

183,381

 

 

$

 

 

$

183,381

 

 

$

183,381

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

1,042

 

 

 

 

 

 

1,042

 

 

 

1,042

 

Total

 

$

184,423

 

 

$

 

 

$

184,423

 

 

$

184,423

 

 

Contingent Consideration

On September 14, 2021, the Company acquired 100% of PandoLogic, Ltd. (“PandoLogic”), a company incorporated under the laws of the state of Israel, pursuant to an Agreement and Plan of Merger dated as of July 21, 2021 (the “PandoLogic Merger Agreement”). The total purchase consideration for PandoLogic included up to $65,000 in contingent consideration based on achieving certain earnouts tied to financial performance of PandoLogic in fiscal 2021 and 2022, which amount will be paid in a combination of cash and common stock (the “PandoLogic Earnout”).

All of the Company’s contingent consideration liabilities are categorized as Level 3 within the fair value hierarchy, except when the amount of the payout is determined to be fixed. 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 at the time of acquisition 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 $10,825, irrespective of the actual financial performance of PandoLogic for the 2022 PandoLogic Earnout period. All of the 2022 PandoLogic Earnout was paid during the nine months ended September 30, 2023 in a combination of cash consideration and stock consideration, with the number of shares paid equal to that stock consideration portion of the earnout amount divided by a price per share of $20.53 in accordance with the terms of the PandoLogic Merger Agreement.

On March 1, 2022, the Company completed the March 2022 Acquisition, in which it acquired 100% of an influencer-based management company. As part of the consideration, the seller may receive the March 2022 Acquisition Earnout of up to $4,500 in cash. In July 2023, the Company entered into the March 2022 Acquisition Amendment. The March 2022 Acquisition Amendment provides that the March 2022 Acquisition Earnout was reduced to $3,500 and payment of the March 2022 Acquisition Earn-Out Amount is now tied to employment status of the seller through December 31, 2025, irrespective of the actual financial performance of the acquired company. As the amount became fixed under the March 2022 Acquisition Amendment, the Company determined that the March 2022 Acquisition Earn-Out Amount should no longer be categorized as Level 3 within the fair value hierarchy at the time of the amendment.

As of September 30, 2023, the Company’s contingent consideration liabilities current and non-current balances classified as Level 3 were as follows:

 

 

Fair Value as of

 

 

Changes in

 

 

Amount Paid

 

 

Fair Value as of

 

 

January 1, 2023

 

 

Fair Value

 

 

To Date

 

 

September 30, 2023

 

Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration, current

 

$

8,067

 

 

$

651

 

 

$

(8,718

)

 

$

 

Total

 

$

8,067

 

 

$

651

 

 

$

(8,718

)

 

$

 

As of December 31, 2022, the Company’s contingent consideration liabilities current and non-current balances classified as Level 3 were as follows:

 

18


 

 

Fair Value as of

 

 

Changes in

 

 

Amount Paid

 

 

Reclass from
Non-current to

 

 

Fair Value as of

 

 

January 1, 2022

 

 

Fair Value

 

 

To Date

 

 

Current

 

 

December 31, 2022

 

Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration, current

 

$

20,053

 

 

$

(22,703

)

 

$

(20,816

)

 

$

31,533

 

 

$

8,067

 

Contingent consideration, non-current

 

 

31,533

 

 

 

 

 

 

 

 

 

(31,533

)

 

 

 

Total

 

$

51,586

 

 

$

(22,703

)

 

$

(20,816

)

 

$

 

 

$

8,067

 

 

Stock Warrants

All of the Company’s outstanding stock warrants are categorized as Level 3 within the fair value hierarchy. Stock warrants are equity classified and 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 $2,750 on the Company’s condensed consolidated balance sheet within other assets as of September 30, 2023 and December 31, 2022 and is categorized as Level 2 within the fair value hierarchy. As part of the Energy Divestiture, the Company acquired a strategic investment in GridBeyond that was determined not to have a readily determinable fair value. This investment is carried at a cost equal to its initial estimated fair value of $2,021 on the Company’s condensed consolidated balance sheet within other assets as of September 30, 2023, with that initial estimated fair value based on third party valuation at the time of this transaction and is categorized as Level 3 within the fair value hierarchy.

Because these investments do not have readily determinable fair values, the Company has elected to measure these investment under ASC 321, Investments – Equity Securities, at cost minus impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. No impairment was recorded for the three and nine months ended September 30, 2023. The Company re-measures its investments if there is an observable transaction in a class of security similar to the Company’s investments and there were no such re-measurements for the three and nine months ended September 30, 2023.

 

NOTE 7. GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill

The carrying amount of goodwill was $78,388 as of September 30, 2023 and $46,498 as of December 31, 2022.

 

 

Goodwill

 

Balance at December 31, 2022

 

$

46,498

 

Broadbean acquisition

 

$

31,947

 

Foreign currency translation/other

 

 

(57

)

Balance at September 30, 2023

 

$

78,388

 

 

19


 

 

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:

 

 

 

 

 

September 30,
2023

 

 

December 31,
2022

 

 

Weighted
Average
Remaining
Useful
Life (in years)

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net
Carrying
Amount

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net
Carrying
Amount

 

Software and technology

 

 

0.0

 

 

$

3,582

 

 

$

(3,582

)

 

$

 

 

$

3,582

 

 

$

(3,582

)

 

$

 

Licensed technology

 

 

0.0

 

 

 

500

 

 

 

(500

)

 

 

 

 

 

500

 

 

 

(500

)

 

 

 

Developed technology

 

 

1.9

 

 

 

44,100

 

 

 

(22,352

)

 

 

21,748

 

 

 

33,800

 

 

 

(15,512

)

 

 

18,288

 

Customer and supplier relationships

 

 

4.2

 

 

 

99,000

 

 

 

(32,703

)

 

 

66,297

 

 

 

81,800

 

 

 

(22,091

)

 

 

59,709

 

Noncompete agreements

 

 

0.0

 

 

 

800

 

 

 

(800

)

 

 

 

 

 

800

 

 

 

(800

)

 

 

 

Trademarks and trade names

 

 

3.3

 

 

 

2,300

 

 

 

(948

)

 

 

1,352

 

 

 

2,300

 

 

 

(633

)

 

 

1,667

 

Total

 

 

3.4

 

 

$

150,282

 

 

$

(60,885

)

 

$

89,397

 

 

$

122,782

 

 

$

(43,118

)

 

$

79,664

 

 

The following table presents future amortization of the Company’s finite-lived intangible assets as of September 30, 2023:

 

 2023 (three months)

 

$

5,937

 

 2024

 

 

23,972

 

 2025

 

 

21,522

 

 2026

 

 

16,589

 

 2027

 

 

13,527

 

Thereafter

 

 

7,850

 

Total

 

$

89,397

 

 

20


 

Impairment Assessment

During the three months ended September 30, 2023, the Company experienced multiple adverse financial trends. As a result, the Company determined that an indicator of impairment was present and performed a quantitative goodwill impairment assessment as of September 30, 2023 using a market approach, which estimates fair value based on the Company’s market capitalization and an estimate of a reasonable range of values of a control premium. The Company determined that goodwill was not impaired, as the estimated fair value of the Company’s reporting units exceeded their carrying values. Additionally, as of September 30, 2023, the Company performed a quantitative analysis of the recoverability of each of the Company’s asset groups. The result of the analyses was that the assets were not impaired, as the expected cash flows exceeded the carrying value for each asset group.

NOTE 8. CONSOLIDATED FINANCIAL STATEMENTS DETAILS

Consolidated Balance Sheets Details

Cash and cash equivalents

As of September 30, 2023 and December 31, 2022, the Company had cash and cash equivalents of $72,070 and $184,423, respectively, including $58,002 and $93,118, respectively, of cash received from advertising customers for future payments to vendors.

Accounts Receivable, Net and Allowance for Credit Losses

Accounts receivable consisted of the following:

 

 

As of

 

 

September 30,
2023

 

 

December 31,
2022

 

Accounts receivable — Managed Services(1)

 

$

19,769

 

 

$

27,670

 

Accounts receivable — Software Products & Services(2)

 

 

22,586

 

 

 

26,969

 

Accounts receivable — Other

 

 

8,544

 

 

 

2,181

 

 

 

50,899

 

 

 

56,820

 

Less: allowance for expected credit losses

 

 

(1,208

)

 

 

(819

)

Accounts receivable, net

 

$

49,691

 

 

$

56,001

 

 

(1)
Accounts receivable – Managed Services reflects the amounts due from the Company’s advertising customers.
(2)
Accounts receivable – Software Products & Services reflects the amounts due from the Company’s hiring solutions customers.

 

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.

Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of the following:

 

 

As of

 

 

September 30,
2023

 

 

December 31,
2022

 

Prepaid assets

 

$

6,543

 

 

$

5,465

 

Other receivables

 

 

1,348

 

 

 

1,631

 

Other current assets

 

 

7,288

 

 

 

8,146

 

Prepaid expenses and other current assets

 

$

15,179

 

 

$

15,242

 

 

21


 

 

Property, Equipment and Improvements, Net

Property, equipment and improvements, net consisted of the following:

 

 

As of

 

 

September 30,
2023

 

 

December 31,
2022

 

Property and equipment

 

$

27,309

 

 

$

8,532

 

Leasehold improvements

 

 

1,593

 

 

 

250

 

 

 

28,902

 

 

 

8,782

 

Less: accumulated depreciation

 

 

(17,307

)

 

 

(3,491

)

Property, equipment and improvements, net

 

$

11,595

 

 

$

5,291

 

 

Depreciation expense was $1,233 and $2,386 for the three and nine months ended September 30, 2023, respectively. Depreciation expense was $320 and $764 for the three and nine months ended September 30, 2022, respectively. Of the $27,309 in property and equipment as of September 30, 2023, $19,091 consisted of internal use software development costs placed in service and $2,127 consisted of work in progress not yet placed in service for internal use software development costs. Depreciation of internal use software development costs was $520 and $1,144 for the three and nine months ended September 30, 2023, respectively. Depreciation of internal use software development costs was $95 and $175 for the three and nine months ended September 30, 2022, respectively.

Accounts Payable

 

Accounts payable consisted of the following:

 

 

As of

 

 

September 30,
2023

 

 

December 31,
2022

 

Accounts payable — Managed Services(1)

 

$

22,413

 

 

$

17,972

 

Accounts payable — Other

 

 

18,099

 

 

 

18,766

 

Accounts payable

 

$

40,512

 

 

$

36,738

 

 

(1)
Accounts payable – Managed Services reflects the amounts due to media vendors for advertisements placed on behalf of the Company’s advertising clients.

 

Other Accrued Liabilities

 

Other accrued liabilities consisted of the following:

 

 

As of

 

 

September 30,
2023

 

 

December 31,
2022

 

Accrued compensation

 

$

4,409

 

 

$

4,882

 

Taxes payable

 

 

7,353

 

 

$

4,774

 

Current portion of operating lease liabilities

 

 

2,494

 

 

 

2,112

 

Accrued trade payables

 

 

18,471

 

 

 

14,724

 

Other

 

 

1,470

 

 

 

920

 

Other accrued liabilities

 

$

34,197

 

 

$

27,412

 

 

22


 

Consolidated Statements of Operations and Comprehensive Loss Details

Revenue

Revenue for the periods presented were comprised of the following:

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Commercial Enterprise

 

$

33,657

 

 

$

36,184

 

 

$

88,891

 

 

$

103,174

 

Government & Regulated Industries

 

 

1,476

 

 

 

1,012

 

 

 

4,472

 

 

 

2,664

 

Total revenue

 

$

35,133

 

 

$

37,196

 

 

$

93,363

 

 

$

105,838

 

 

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 hiring solutions customers (inclusive of Broadbean 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 hiring solutions’ talent acquisition solutions (inclusive of Broadbean), 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
September 30, 2023

 

 

Nine Months Ended
September 30, 2023

 

 

 

 

 

 

Government &

 

 

 

 

 

 

 

 

Government &

 

 

 

 

 

 

Commercial

 

 

Regulated

 

 

 

 

 

Commercial

 

 

Regulated

 

 

 

 

 

 

Enterprise

 

 

Industries

 

 

Total

 

 

Enterprise

 

 

Industries

 

 

Total

 

 

Total Software Products & Services

 

$

18,885

 

 

$

1,476

 

 

$

20,361

 

 

$

44,109

 

 

$

4,472

 

 

$

48,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

 

9,993

 

 

 

 

 

 

9,993

 

 

 

28,945

 

 

 

 

 

 

28,945

 

 

Licensing

 

 

4,779

 

 

 

 

 

 

4,779

 

 

 

15,837

 

 

 

 

 

 

15,837

 

 

Total Managed Services

 

 

14,772

 

 

 

 

 

 

14,772

 

 

 

44,782

 

 

 

 

 

 

44,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

$

33,657

 

 

$

1,476

 

 

$

35,133

 

 

$

88,891

 

 

$

4,472

 

 

$

93,363

 

 

 

23


 

 

 

 

Three Months Ended
September 30, 2022

 

 

Nine Months Ended
September 30, 2022

 

 

 

 

 

Government &

 

 

 

 

 

 

 

 

Government &

 

 

 

 

 

Commercial

 

 

Regulated

 

 

 

 

 

Commercial

 

 

Regulated

 

 

 

 

 

Enterprise

 

 

Industries

 

 

Total

 

 

Enterprise

 

 

Industries

 

 

Total

 

Total Software Products & Services

 

$

19,800

 

 

$

1,012

 

 

$

20,812

 

 

$

54,694

 

 

$

2,664

 

 

$

57,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

 

11,017

 

 

 

 

 

 

11,017

 

 

 

32,620

 

 

 

 

 

 

32,620

 

Licensing

 

 

5,367

 

 

 

 

 

 

5,367

 

 

 

15,860

 

 

 

 

 

 

15,860

 

Total Managed Services

 

 

16,384

 

 

 

 

 

 

16,384

 

 

 

48,480

 

 

 

 

 

 

48,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

$

36,184

 

 

$

1,012

 

 

$

37,196

 

 

$

103,174

 

 

$

2,664

 

 

$

105,838

 

 

Broadbean Revenue Recognition Policy

Revenue for Broadbean is generated through various types of talent acquisition software solutions that principally consist of subscription-based talent acquisition products, subscription revenue for recruitment software-as-a-service (“SaaS”) solutions and access to the Broadbean’s online talent networks, transactional talent acquisition products, and other recruitment services. Subscription contracts do not provide customers with the right to take possession of the software supporting the applications and, as a result, are accounted for as service contracts. Subscription fee revenue from SaaS applications and access to Broadbean’s online talent networks, which makes up the majority of Broadbean’s revenues, are generally recognized ratably over the contractual term of the arrangement beginning on the date that service is made available to the customer. Broadbean does not offer financing alternatives to customers and there are no rights of return, warranties, or other variable consideration in contracts with customers. Payment terms are generally net 30 days. In most cases, Broadbean acts as a principal with respect to the goods and services it sells providing for gross revenue. In the certain cases where Broadbean is acting as an agent, net revenue is recognized. Broadbean reports revenue net of sales and other taxes collected from customers to be remitted to government authorities.

 

Other Income (Expense), Net

Other income (expense), net for the periods presented was comprised of the following:

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Interest expense, net

 

$

(218

)

 

$

(1,305

)

 

$

(1,743

)

 

$

(3,670

)

Gain on sale of energy group

 

 

 

 

 

 

 

 

2,572

 

 

 

 

Other

 

 

(2,238

)

 

 

56

 

 

 

580

 

 

 

4

 

Other income (expense), net

 

$

(2,456

)

 

$

(1,249

)

 

$

1,409

 

 

$

(3,666

)

Other in the table above consists primarily of foreign exchange loss of $2,294 for the three months ended September 30, 2023 and foreign exchange gain of $526 for the nine months ended September 30, 2023.

Provision for Income Taxes

In accordance with ASC 740-270, 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. A separate estimated annual effective tax rate is applied for jurisdictions where an entity anticipates an ordinary loss or has an ordinary loss for the year to date for which no tax benefit can be recognized.

The Company’s effective tax rate for the three and nine months ended September 30, 2023 was 3.8% and 3.6%, respectively. The difference between the effective tax rate and the U.S. federal statutory rate of 21% is primarily due to a valuation allowance established on the Company’s domestic federal and state net deferred tax assets, as well as the impact of foreign operations subject to tax in foreign jurisdictions. The Company’s effective tax rate for the three and nine months ended September 30, 2022 was (0.5%) and 4.5%, respectively. The change in

24


 

the effective tax rates for the three and nine months ended September 30, 2023 as compared to the comparable prior year periods is primarily due to the impact of taxes on foreign operations and valuation allowances against domestic net deferred tax assets.

As of September 30, 2023, the Company continues to provide a valuation allowance against federal and state deferred tax assets that are not expected to be realizable. 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 tax benefit for the three months ended September 30, 2023 includes a $347 tax benefit relating to a change to beginning of the year valuation allowance. With the acquisition of Broadbean, the Company acquired deferred tax liabilities that provide a source of taxable income that allows for the release of valuation allowance related to the Company’s deferred tax assets.

As a result of the Broadbean acquisition, the Company expects to be subject to taxation in France and Australia, in addition to already being subject to taxation in the United States, Israel, and the United Kingdom. The United States, Israel, and the United Kingdom comprise the majority of the Company’s operations. 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 four years commencing at the end of the year in which the return was filed. The UK statute of limitations period is typically twelve months following the date on which the return is 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 15% corporate alternative minimum tax based on the adjusted financial statement income for certain large corporations and a 1% excise tax on net share repurchases. The minimum tax and excise tax, if applicable, are effective for fiscal years beginning after December 31, 2022. The Company does not expect the IRA to have a material impact on its financial position, results of operations or cash flows. The Company will continue to monitor additional future guidance from the IRS.

The main corporation tax rate for UK corporations increases from 19% to 25% for the financial year beginning April 1, 2023. The tax provision for the year ended September 30, 2023 is reflective of the change in tax rate.

NOTE 9. LEASES, COMMITMENTS AND CONTINGENCIES

 

Leases

Lease Costs

As of September 30, 2023, on its condensed consolidated balance sheet the Company had right-of-use assets of $2,039 recorded within other assets, the current portion of operating lease liabilities of $2,493 recorded within other accrued liabilities, and the non-current portion of operating lease liabilities of $770 recorded within other non-current liabilities. As of December 31, 2022, on its condensed consolidated balance sheet the Company had right-of-use assets of $1,755 recorded within other assets, the current portion of operating lease liabilities of $2,112 recorded within other accrued liabilities, and the non-current portion of operating lease liabilities of $1,510 recorded within other non-current liabilities.

The Company made cash payments for its operating leases of $820 and $2,070 for the three and nine months ended September 30, 2023, respectively, and $688 and $2,009 for the three and nine months ended September 30, 2022, all of which were included in cash flows from operating activities within the condensed consolidated statements of cash flows. The Company’s operating leases have a weighted average remaining lease term of 1.5 years and weighted average discount rate of 6.8%.

The total rent expense for all operating leases was $612 and $1,704 for the three and nine months ended September 30, 2023, respectively, and $620 and $1,882 for the three and nine months ended September 30, 2022, respectively, with short-term leases making up an immaterial portion of such expenses. For its sublease, the Company recorded sublease income of $277 and $831 for the three and nine months ended September 30, 2023, respectively, and $277 and $831 for the three and nine months ended September 30, 2022, respectively.

25


 

Lease Commitments

Future undiscounted lease payments for the Company’s operating lease liabilities, a reconciliation of these payments to its operating lease liabilities, and related sublease income at September 30, 2023 are as follows:

 

Years ended December 31,

 

 

 

2023 (three months)

 

$

715

 

2024

 

 

2,501

 

2025

 

 

326

 

Total future minimum lease payments, including short-term leases

 

 

3,542

 

Less: future minimum lease payments for short-term leases

 

 

(63

)

Less: imputed interest

 

 

(214

)

Present value of future minimum lease payments, excluding short-term leases

 

$

3,265

 

Less: current portion of operating lease liabilities

 

 

(2,494

)

Non-current portion of operating lease liabilities

 

 

771

 

 

 

 

 

Years ended December 31,

 

Sublease Income

 

2023 (three months)

 

$

301

 

2024

 

 

1,034

 

Total sublease income

 

$

1,335

 

 

Purchase Consideration

In connection with the March 2022 Acquisition, the Company committed to make purchase consideration payments of $1,500 within ten days of the first anniversary of the closing date of the acquisition and an additional $1,500 within ten days of the second anniversary of the closing date of the acquisition. The first payment of $1,500 was made during the nine months ended September 30, 2023. In connection with the VocaliD acquisition, the Company committed to make purchase consideration payments of $1,000 on the first anniversary of the closing date of the acquisition and an additional $1,000 on the 18-month anniversary of the closing date of the acquisition. The first payment of $1,000 was made during the nine months ended September 30, 2023. In connection with the VSL acquisition, the Company committed to make a purchase consideration payment of $300 on the 18-month anniversary of the closing date of the acquisition. Refer to Note 3 for further details.

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.

NOTE 10. STOCKHOLDERS’ EQUITY

Common Stock Issuances

During the nine months ended September 30, 2023 and 2022, the Company issued an aggregate of 816,690 and 1,378,922 shares of its common stock, respectively, in connection with the exercise of stock options, issuance of stock awards and vesting of restricted stock units under its stock incentive plans and stock purchases under its Employee Stock Purchase Plan (the “ESPP”).

During the nine months ended September 30, 2023 and 2022, the Company issued a total of 135,800 and 352,330 shares of its common stock, respectively, in connection with the contingent consideration arrangement related to the acquisition of PandoLogic. During the nine months ended September 30, 2022, the Company issued a total of 116,550 shares of its common stock in connection with the March 2022 Acquisition.

NOTE 11. STOCK PLANS

Stock-Based Compensation

During the nine months ended September 30, 2023 and 2022, the Company granted options to purchase an aggregate of 288,893 and 291,850 shares of its common stock that are subject to time-based vesting conditions, respectively.

26


 

The Company valued these stock options using the Black-Scholes Merton option pricing model. The assumptions used to compute the grant date fair values of the stock options granted during the nine months ended September 30, 2023 and 2022 are set forth in the table below:

 

 

 

 

 

 

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

2023

 

 

2022

 

Expected term (in years)

 

 

 

 

 

6.0 - 6.8

 

 

5.5 - 6.1

 

Expected volatility

 

 

 

 

 

91% - 100%

 

 

82% - 92%

 

Risk-free interest rate

 

 

 

 

 

3.6% - 4.1%

 

 

1.7% - 3.5%

 

Expected dividend yield

 

 

 

 

 

 

 

 

 

 

 

The assumptions used in calculating the fair values of purchase rights granted under the ESPP during the nine months ended September 30, 2023 and 2022 are set forth in the table below:

 

 

 

 

 

 

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

2023

 

 

2022

 

Expected term (in years)

 

 

 

 

 

0.5 - 2.0

 

 

0.5 - 2.0

 

Expected volatility

 

 

 

 

 

71% - 101%

 

 

67% - 119%

 

Risk-free interest rate

 

 

 

 

 

0.1% - 5.5%

 

 

0.1% - 3.0%

 

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
September 30,

 

 

Nine Months Ended
September 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Stock-based compensation expense by type of award:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock units

 

$

1,084

 

 

$

3,509

 

 

$

4,476

 

 

$

9,999

 

Performance-based stock units

 

 

112

 

 

 

 

 

 

582

 

 

 

 

Stock options

 

 

759

 

 

 

1,226

 

 

 

2,811

 

 

 

4,001

 

Employee stock purchase plan

 

 

77

 

 

 

367

 

 

 

777

 

 

 

540

 

Common stock issued for services

 

 

 

 

 

 

 

 

 

 

 

39

 

Total stock-based compensation expense

 

$

2,032

 

 

$

5,102

 

 

$

8,646

 

 

$

14,579

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense by operating expense grouping:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

(5

)

 

$

46

 

 

$

32

 

 

$

90

 

Sales and marketing

 

 

208

 

 

 

538

 

 

 

913

 

 

 

1,728

 

Research and development

 

 

953

 

 

 

1,532

 

 

 

3,622

 

 

 

3,783

 

General and administrative

 

 

876

 

 

 

2,986

 

 

 

4,079

 

 

 

8,978

 

Total stock-based compensation expense

 

$

2,032

 

 

$

5,102

 

 

$

8,646

 

 

$

14,579

 

 

Stock-based compensation capitalized for internal-use software was $75 and $70 for the three months ended September 30, 2023 and 2022, respectively. Stock-based compensation capitalized for internal-use software was $289 and $155 for the nine months ended September 30, 2023 and 2022, respectively.

 

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 118,460 performance stock units (the “Steel Holdings Consulting PSUs”) that vest upon the achievement of certain performance milestones. The Steel Holdings Consulting PSUs will expire 6 months after the Steel Holdings Consulting Agreement terminates.

On March 16, 2023, the Compensation Committee approved a grant of 170,402 target performance stock units to be granted to the Company’s named executive officers (the “Senior Executive PSUs”). The awards have a grant date of March 31, 2023 and will vest based on the achievement of revenue and non-GAAP net income targets (each equally weighted) for 2023, which achievement shall then be modified

27


 

(up to a 20% increase or decrease) based on the Company’s relative total shareholder return over a three-year performance period (the “TSR Modifier”), as compared with the S&P Software and Services Select Industry Index. Based on the Company’s performance, the Company’s named executive officers may earn from 0% to 200% of the target number of shares of the Senior Executive PSUs. The Senior Executive PSUs, to the extent earned, will vest on the date the Board certifies the TSR Modifier for the three-year performance period ending December 31, 2025 and the number of Senior Executive PSUs that will vest as of such certification, all of which will occur within 90 days of the end of the performance period ending December 31, 2025. Compensation costs recognized on the Senior Executive PSUs are adjusted, as applicable, for performance above or below the target specified in the award.

The Company’s performance stock unit activity for the nine months ended September 30, 2023 was as follows:

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average Grant

 

 

 

 

 

 

Shares

 

 

Date Fair Value

 

Unvested at December 31, 2022

 

 

 

 

 

 

 

 

N/A

 

Granted

 

 

 

 

 

 

288,862

 

 

$

5.88

 

Vested

 

 

 

 

 

 

(19,743

)

 

$

5.94

 

Unvested at September 30, 2023

 

 

 

 

 

 

269,119

 

 

$

5.87

 

Restricted Stock Units

The Company’s restricted stock unit activity for the nine months ended September 30, 2023 was as follows:

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average Grant

 

 

 

 

 

 

Shares

 

 

Date Fair Value

 

Unvested at December 31, 2022

 

 

 

 

 

 

1,048,834

 

 

$

15.28

 

Granted

 

 

 

 

 

 

1,274,512

 

 

$

4.70

 

Forfeited

 

 

 

 

 

 

(182,579

)

 

$

19.09

 

Vested

 

 

 

 

 

 

(619,400

)

 

$

15.86

 

Unvested at September 30, 2023

 

 

 

 

 

 

1,521,367

 

 

$

6.85

 

 

As of September 30, 2023, total unrecognized compensation cost related to restricted stock units was $8,111, which is expected to be recognized over a weighted average period of 2.6 years.

Performance-Based Stock Options

The activity during the nine months ended September 30, 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

 

 

 

 

 

 

3,762,679

 

 

$

11.15

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

(7,000

)

 

$

6.11

 

 

 

 

 

 

Expired

 

 

 

 

 

 

(73,768

)

 

$

5.69

 

 

 

 

 

 

Outstanding at September 30, 2023

 

 

 

 

 

 

3,681,911

 

 

$

11.27

 

 

6.7 years

 

$

0

 

Exercisable at September 30, 2023

 

 

 

 

 

 

3,681,911

 

 

$

11.27

 

 

6.7 years

 

$

0

 

 

The aggregate intrinsic value of the options exercised during the nine months ended September 30, 2023 and 2022 was $5 and $275, respectively. No performance-based stock options were granted during the nine months ended September 30, 2023 and 2022 and no performance-based stock options vested during the nine months ended September 30, 2023.

Stock Options

The activity during the nine months ended September 30, 2023 related to all other stock options was as follows:

 

28


 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

Aggregate

 

 

 

 

 

 

 

 

 

Exercise

 

 

Contractual

 

Intrinsic

 

 

 

 

 

 

Options

 

 

Price

 

 

Term

 

Value

 

Outstanding at December 31, 2022

 

 

 

 

 

 

5,867,785

 

 

$

14.53

 

 

 

 

 

 

Granted

 

 

 

 

 

 

288,893

 

 

$

5.02

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

(19,312

)

 

$

4.99

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

(319,734

)

 

$

17.59

 

 

 

 

 

 

Expired

 

 

 

 

 

 

(226,777

)

 

$

15.15

 

 

 

 

 

 

Outstanding at September 30, 2023

 

 

 

 

 

 

5,590,855

 

 

$

13.84

 

 

4.8 years

 

$

96

 

Exercisable at September 30, 2023

 

 

 

 

 

 

4,761,782

 

 

$

14.09

 

 

4.2 years

 

$

96

 

The weighted average grant date fair value of stock options granted during the nine months ended September 30, 2023 and 2022 was $3.99 and $8.59 per share, respectively. The aggregate intrinsic value of the stock options exercised during the nine months ended September 30, 2023 and 2022 was $12 and $274, respectively. The total grant date fair value of stock options vested during the nine months ended September 30, 2023 and 2022 was $4,524 and $4,204, respectively. At September 30, 2023, total unrecognized compensation expense related to stock options was $6,803 and is expected to be recognized over a weighted average period of 2.5 years.

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 nine months ended September 30, 2023, a total of 169,770 shares of common stock were purchased under the ESPP. As of September 30, 2023 and December 31, 2022, accrued employee contributions for future purchases under the ESPP totaled $167 and $595, respectively.

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 and nine months ended September 30, 2023, the Company recorded a research and development expense of $167 and $495, respectively for consulting fees and reimbursements for reasonable and documented expenses; $397 and $1,028, respectively for variable consultant performance bonus expense; and $235 and $582 in stock-based compensation expense for the Steel Holdings Consulting PSUs.

There were no other related party transactions during the nine months ended September 30, 2023.

NOTE 13. SUBSEQUENT EVENTS

New Board Member

On November 6, 2023, the Board increased the size of the Board from five to six members and appointed Michael Zilis as a member of the Board, effective November 8, 2023, to serve as a Class II director until the Company’s 2025 annual meeting of stockholders and until his successor is duly elected and qualified, or until his earlier death, resignation or removal. Mr. Zilis was also appointed to serve as a member of the Audit Committee and Compensation Committee of the Board. The Board has determined that Mr. Zilis is an independent director under the listing standards of the NASDAQ Stock Market LLC (“Nasdaq”) and meets the additional independence requirements of Nasdaq with respect to members of the Audit Committee and Compensation Committee.

Term Loan

On November 7, 2023, Veritone entered into a commitment letter with certain funds managed by Highbridge Capital Management, LLC and with certain other lenders (collectively, the “Lenders”), pursuant to which the Lenders have committed, subject to the terms and conditions contained therein, to establish a senior secured term loan facility in an aggregate principal amount of $77.5 million (the “Term Loan”) and to provide the entire principal amount of the Term Loan. The full amount of the Term Loan must be drawn on the closing date of the Term Loan (the “Closing Date”) and may not be reborrowed.

The proceeds of the Term Loan would be used (i) to repurchase an aggregate $50.0 million principal amount of Veritone's existing Convertible Notes held by the Lenders for total consideration of $37.5 million, (ii) for general corporate purposes and (iii) to pay fees and

29


 

out-of-pocket expenses in connection with the Term Loan. The Convertible Notes would be repurchased, on the Closing Date, at a price equal to 75% of the principal amount of the Convertible Notes repurchased plus any accrued and unpaid interest on such notes as of the Closing Date.

Veritone will be the borrower under the Term Loan and all amounts under the Term Loan will be guaranteed by each of its direct and indirect material subsidiaries (Veritone and the guarantors, collectively being the “Credit Parties”). The Term Loan will generally be secured by a first-priority perfected security interest in and lien on substantially all tangible and intangible property of the Credit Parties and a pledge of equity interests held by the Credit Parties. The Term Loan will have certain customary default provisions, representations and warranties and affirmative and negative covenants, including a covenant to maintain unrestricted cash and cash equivalents of at least $15.0 million at all times.

The Term Loan will accrue interest at a rate of Term SOFR plus 8.50%, with a 3.00% floor for Term SOFR, payable quarterly. A default interest rate of an additional 3.00% per annum will apply on all outstanding obligations after the occurrence of an event of default.

The Term Loan will have a term of four years and will require quarterly amortization payments of 2.50% of the principal amount, commencing in June 2024, with the balance of the Term Loan payable on the scheduled maturity date. Veritone may, subject to certain conditions, elect to make any amortization payment in shares of its common stock. If Veritone elects to make any amortization payment in shares of its common stock, the principal amount will be proportionately prepaid over a 15 trading day period with the shares of common stock valued at a price per share equal to 95% of the volume weighted average price on each trading day during the 15 trading day period ending on the trading day immediately preceding the applicable date; provided that Veritone will pay any such amortization in cash if the common stock would be valued at less than the “Minimum Price”, as computed pursuant to Nasdaq Rule 5635(d), plus $0.0125.

The Term Loan will require mandatory prepayments from the net cash proceeds received by the Credit Parties for among other things (i) certain asset sales, but only to the extent net cash proceeds therefrom exceed $10.0 million, and (ii) insurance recoveries on loss of property that are not otherwise reinvested in other assets of the Credit Parties. The Term Loan will also require prepayment in full if $30.0 million or more of aggregate principal amount of the Convertible Notes are outstanding on August 14, 2026. Veritone may elect to prepay the Term Loans, in whole or in part, in cash, subject to a make-whole premium during the first year of the Term Loan, 14.0% prepayment premium during the second year of the Term Loan, and 7.0% premium during the third year of the Term Loan. Veritone may also prepay the Term Loan in shares of common stock, subject to a 13.0% prepayment premium, if the closing price of the common stock exceeds certain price thresholds for any 20 trading days during a 30 consecutive trading day period and subject to certain other conditions. If Veritone elects to prepay the Term Loan with shares of common stock, the principal amount will be proportionately prepaid over a 15-trading day period with the shares of common stock valued at price per share equal to 95% of the volume weighted average price of the common stock on the applicable prepayment date.

Veritone has agreed to issue warrants (the “Warrants”) to the Lenders to purchase up to 3,008,540 shares of its common stock. Veritone has agreed to issue a total of 20% of the Warrants to the Lenders in connection with the entry into the commitment letter, with the remaining 80% conditioned on the closing of the Term Loan. The Warrants will be exercisable for a period of five years following the closing of the Term Loan at a price per share of $2.576.

Pursuant to the Commitment Letter, Veritone will agree to enter into a registration rights agreement at or prior to the closing of the Term Loan for the resale of the shares of common stock issued pursuant to the terms of the Term Loan and the Warrants.

As of September 30, 2023, the Company held $72.1 million of unrestricted cash and cash equivalents. The Commitment Letter provides that the closing of the Term Loan is conditioned on, among other things, Veritone having unrestricted cash and cash equivalents of at least $55.0 million immediately prior to the funding of the Term Loan on the closing date and satisfaction of certain other conditions. The Commitment Letter will expire on December 15, 2023 if the Term Loan has not been consummated on or prior to that date. The Lenders will select a third party to serve as the sole administrative agent, collateral agent, and documentation agent in connection with the Term Loan.

30


 

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 any updates thereto set forth in this Quarterly Report on Form 10-Q 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 (“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 and nine months ended September 30, 2023, we generated revenue of $35.1 million and $93.4 million, respectively, as compared to $37.2 million and $105.8 million during the three and nine months ended September 30, 2022, respectively. Our Software Products & Services revenue was $20.4 million during the three months ended September 30, 2023 as compared with $20.8 million for the same period in 2022, while our Managed Services revenue was $14.8 million during the three months ended September 30, 2023 as compared with the $16.4 million for the same period in 2022. Our Software Products & Services revenue was $48.6 million during the nine months ended September 30, 2023 as compared with $57.4 million for the same period in 2022, while our Managed Services revenue was $44.8 million during the nine months ended September 30, 2023 as compared with the $48.5 million for the same period in 2022. During the three and nine months ended September 30, 2023 our largest customer represented less than 10% and 12%, respectively, of our consolidated revenue and during the three and nine months ended September 30, 2022 that same customer represented 31% and 25%, respectively, of our consolidated revenue.

Recent Developments

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 headcount and various cost reduction initiatives during the nine months ended September 30, 2023, completed the sale of our energy group to GridBeyond Limited (the “Energy Divestiture”) and we have begun and further intend to reduce and consolidate expenses tied to software, outside services, and cloud-based processing throughout 2023. As of September 30, 2023, we have executed over $24 million of net annualized strategic cost reduction initiatives announced in the first quarter of 2023, exceeding the net annualized savings target for 2023.

On November 7, 2023, we entered into a commitment letter with certain funds managed by Highbridge Capital Management, LLC and certain other lenders to provide a senior secured term loan facility in an aggregate principal amount of $77.5 million (the “Term Loan”). We expect to use the proceeds of the Term Loan to repurchase an aggregate $50.0 million principal amount of our existing 1.75% convertible senior notes due 2026 held by the lenders at a purchase price of $37.5 million plus accrued and unpaid interest and for general corporate purposes.

The Term Loan will have a term of four years, accrue interest at a rate of Term SOFR plus 8.50%, with a 3.00% floor for Term SOFR, payable quarterly, and will require quarterly amortization payments of 2.5% of the principal amount, commencing in June 2024. We may, subject to certain conditions and limitations, elect to make any amortization payment in shares of our common stock. We may prepay the term loan, subject to payment of a premium, at any time and is required to prepay the term loan on certain customary events. We may also, subject to certain conditions and limitations, elect to prepay portions of the Term Loan in shares of our common stock.

We have agreed to issue warrants to the lenders to purchase up to 3,008,540 shares of Common Stock, with 20% of the warrants to be issued for entry into the commitment letter and the remaining 80% conditioned on the closing of the Term Loan. We expect the Term Loan to close in the fourth quarter and to replace our credit facility with Alterna Capital Solutions, LLC. For more information on the Term Loan and warrants, see Note 13. Subsequent Events to our condensed consolidated financial statements included in this Quarterly Report.

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We have operations and an office in Israel, and as a result of the war with Hamas there, a number of our employees and family members of our employees have been conscripted into military service. In addition, our hiring solutions are sold to businesses that experience performance fluctuations based on factors including the demand for labor and the economic health of current and prospective employers. To the extent that economic uncertainty or attenuated economic conditions cause our current and potential customers to freeze or reduce their headcount, demand for our products and services has been, and may continue to be, negatively affected.

Opportunities, Challenges and Risks

During the nine months ended September 30, 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 parts of our consumption-based 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 customers, and where our AI solutions could add near and long-term value in the government and regulated industries and content creation and distribution across the global media and entertainment industry.

We believe there are significant near and long-term revenue and growth opportunities from our Software Products & Services. In June 2023, we completed the acquisition of Broadbean, a leader in subscription-based talent acquisition software-as-a-service which has approximately 3,000 subscription-based customers based throughout the world, integrated with over 100 applicant tracking systems (“ATS”) and has direct access to over 2,500 job boards globally. The acquisition of Broadbean was strategic to our HR Solutions growth, as we plan in the near term to offer our existing product offerings to Broadbean’s 3,000 customers, including programmatic advertising capabilities. Over the long term, we plan to utilize our AI capabilities to analyze complex data sets through direct access to these ATS. In Government & Regulated Industries markets, we see growth opportunities with customer adoption of our products and services related to AI technologies and with our official Authorization to Operate, of our aiWARE platform across the entire U.S. Department of Justice and progress with the Chief Digital and Artificial Intelligence Officer and Department of Defense. 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.

Growing our existing and new Software Products & Services customer base is critical for our success. Since the second quarter of 2022, we have experienced large variances from the consumption of our HR Solutions when compared to the prior year periods from our largest customer, Amazon. In May 2023, Amazon informed us that they planned to reduce their consumption of our HR Solutions further. Overall, our revenues from Amazon during the nine months ended September 30, 2023 declined as compared to the prior year and represented approximately 12% of our consolidated revenue during the nine months ended September 30, 2023 compared to 25% of our consolidated revenue in the comparable prior year period. Offsetting this decline was non-Amazon Software Products & Services revenue, which grew as compared to the prior year, driven in part by Government & Regulated Industries revenue growth of 67% during the nine months ended September 30, 2023 as compared to the prior year. To reduce this risk, we continue to aggressively invest in existing and growing new customers.

As a result of the recent pullback in the macroeconomic environment caused by high inflation, rising interest rates, and geopolitical factors such as the Russia-Ukraine conflict and the war in Israel, some of our customers reduced consumption-based and advertising spending across our Commercial Enterprise customer base, including our hiring solutions and managed services in the first three quarters of 2023 when compared to the same period in the prior year. As of September 30, 2023, our total Software Products & Services customers declined to 3,536, which was a decrease of 7% compared to the third quarter of 2022 on a pro forma basis giving effect to the acquisition of Broadbean as if it occurred on January 1, 2022. The decrease in customers was largely driven by planned migration of legacy CareerBuilder customers off the Broadbean software platform. While we anticipate these trends to continue in the fourth quarter of 2023, we expect the overall impact will not be as severe as it was in the first three quarters of 2023. However, we still expect to see additional declines in existing and new customers consumption of our Software Products & Services. To mitigate these risks, we have been investing aggressively in existing customers and acquiring new customers. In addition, in January 2023 we announced certain cost reduction initiatives and as of September 30, 2023, we had executed over $24 million of net annualized strategic cost reductions. As a result of our efforts to diversify our customer base and increase sales within our existing customer base, we increased our sales and marketing spending in the near term as compared to the trailing twelve months; however, these increased investments were partially offset by our 2023 cost initiatives.

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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.

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 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.

Historically, we have pursued an opportunistic strategy of acquiring companies to help accelerate our organic growth. Our acquisition strategy has been 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. While 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, there is no certainty our historical or future acquisitions will achieve these objectives. Conversely, we may pursue opportunistic sales of certain business operations that are not strategic to us long-term, such as the Energy Divestiture.

During the three and nine months ended September 30, 2023, we reported net loss of $24.5 million and $70.8 million, respectively, compared to a net loss of $4.9 million and $30.3 million during the three and nine months ended September 30, 2022, respectively. During the three and nine months ended September 30, 2023, we reported a non-GAAP net loss of $7.9 million and $30.5 million, respectively as compared to a non-GAAP net loss of $5.7 million and $18.1 million during the three and nine months ended September 30, 2022, respectively. 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 and 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, 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.

During the nine months ended September 30, 2023 and 2022, more than 90% of our revenue was derived from customers located in the United States. Since our acquisition of Broadbean in June 2023, we have seen an increase in revenue from customers outside the United States and we believe that there is a substantial opportunity 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 uncertainty as a result of macroeconomic and geopolitical factors, including the ongoing impact of the global economy following the COVID-19 pandemic, labor shortages, inflation rates and the responses by central banking authorities to control inflation, monetary supply shifts, recession risks, disruptions from the Russia-Ukraine conflict and related sanctions, and the recent war in Israel. In particular, business operations at our Tel Aviv office location where we do development work on our hiring solutions products have been, and may continue to be, impacted by the war in Israel. A small portion of our Israel-based employees, and a number of their family members, have been conscripted into military service. 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

33


 

developments, and the impact on our customers, partners and employees, all of which have uncertainty 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 through the third 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, reduced consumption of our hiring solutions and corresponding revenue declined.

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 the fourth quarter of 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 September 30, 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, and Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q.

Non-GAAP Financial Measures and Key Performance Indicators

In evaluating our cash flows and financial performance, we use certain non-GAAP financial measures, including Pro Forma Software Revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP net income (loss), and non-GAAP net income (loss) per share. We also provide certain key performance indicators (KPIs”), including Total Software Products & Services Customers, Annual Recurring Revenue, Annual Recurring Revenue (SaaS), Annual Recurring Revenue (Consumption), Total New Bookings and Gross Revenue Retention.

“Pro Forma” information provided in this current report on Form 10-Q represents our historical information combined with the historical information of Broadbean (as defined below) for the applicable period on a pro forma basis as if we had acquired Broadbean on January 1, 2022.

Pro Forma Software Revenue represents Software Products & Services revenue on a Pro Forma basis. 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 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, interest income, interest expense, foreign currency gains and losses, acquisition and due diligence costs, gain on sale of energy group, contribution of business held for sale, variable consultant performance bonus expense, and severance and executive transition costs. The results for non-GAAP net income (loss), are presented below for the three and nine months ended September 30, 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.

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Reconciliation of GAAP net loss to Non-GAAP net income (loss)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

2023

 

 

2022

 

 

Core Operations(1)

 

 

Corporate(2)

 

 

Total

 

 

Core Operations(1)

 

 

Corporate(2)

 

 

Total

 

Net income (loss)

 

$

(10,689

)

 

$

(13,852

)

 

$

(24,541

)

 

$

(7,921

)

 

$

3,035

 

 

$

(4,886

)

(Benefit from) provision for income taxes

 

 

(3,163

)

 

 

2,186

 

 

 

(977

)

 

 

20

 

 

 

6

 

 

 

26

 

Depreciation and amortization

 

 

7,857

 

 

 

 

 

 

7,857

 

 

 

5,650

 

 

 

174

 

 

 

5,824

 

Stock-based compensation expense

 

 

1,446

 

 

 

586

 

 

 

2,032

 

 

 

2,944

 

 

 

2,158

 

 

 

5,102

 

Change in fair value of contingent consideration

 

 

 

 

 

816

 

 

 

816

 

 

 

 

 

 

(14,291

)

 

 

(14,291

)

Interest expense, net

 

 

 

 

 

218

 

 

 

218

 

 

 

 

 

 

1,305

 

 

 

1,305

 

Foreign currency impact

 

 

2,318

 

 

 

(24

)

 

 

2,294

 

 

 

 

 

 

 

 

 

 

Acquisition and due diligence costs

 

 

 

 

 

3,177

 

 

 

3,177

 

 

 

 

 

 

839

 

 

 

839

 

Variable consultant performance bonus expense

 

 

397

 

 

 

 

 

 

397

 

 

 

 

 

 

 

 

 

 

Severance and executive transition costs

 

 

770

 

 

 

15

 

 

 

785

 

 

 

337

 

 

 

28

 

 

 

365

 

Non-GAAP Net Income (Loss)

 

$

(1,064

)

 

$

(6,878

)

 

$

(7,942

)

 

$

1,030

 

 

$

(6,746

)

 

$

(5,716

)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2023

 

 

2022

 

 

Core Operations(1)

 

 

Corporate(2)

 

 

Total

 

 

Core Operations(1)

 

 

Corporate(2)

 

 

Total

 

Net loss

 

$

(38,464

)

 

$

(32,336

)

 

 

(70,800

)

 

$

(22,172

)

 

$

(8,096

)

 

$

(30,268

)

(Benefit from) provision for income taxes

 

 

(4,409

)

 

 

1,787

 

 

 

(2,622

)

 

 

(826

)

 

 

(616

)

 

 

(1,442

)

Depreciation and amortization

 

 

19,429

 

 

 

724

 

 

 

20,153

 

 

 

16,054

 

 

 

440

 

 

 

16,494

 

Stock-based compensation expense

 

 

5,710

 

 

 

2,936

 

 

 

8,646

 

 

 

7,612

 

 

 

6,967

 

 

 

14,579

 

Change in fair value of contingent consideration

 

 

 

 

 

1,467

 

 

 

1,467

 

 

 

 

 

 

(23,076

)

 

 

(23,076

)

Interest expense, net

 

 

9

 

 

 

1,734

 

 

 

1,743

 

 

 

 

 

 

3,670

 

 

 

3,670

 

Foreign currency impact

 

 

(459

)

 

 

(67

)

 

 

(526

)

 

 

 

 

 

 

 

 

 

Acquisition and due diligence costs

 

 

 

 

 

8,253

 

 

 

8,253

 

 

 

 

 

 

1,608

 

 

 

1,608

 

Gain on sale of energy group

 

 

 

 

 

(2,572

)

 

 

(2,572

)

 

 

 

 

 

 

 

 

 

Contribution of business held for sale (3)

 

 

1,789

 

 

 

 

 

 

1,789

 

 

 

 

 

 

 

 

 

 

Variable consultant performance bonus expense

 

 

1,028

 

 

 

 

 

 

1,028

 

 

 

 

 

 

 

 

 

 

Severance and executive transition costs

 

 

2,271

 

 

 

647

 

 

 

2,918

 

 

 

337

 

 

 

28

 

 

 

365

 

Non-GAAP Net Income (Loss)

 

$

(13,096

)

 

$

(17,427

)

 

$

(30,523

)

 

$

1,005

 

 

$

(19,075

)

 

$

(18,070

)

 

(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 divested during the second quarter of 2023. We have not recast Non-GAAP Net Loss for periods ended prior to March 31, 2023 because the change in business strategy to divest the business occurred in the first quarter of 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 September 30, 2023, our total loss from operations increased to $22.9 million compared to $3.6 million in the corresponding prior year period. For the nine months ended September 30, 2023, our total loss from operations increased to $74.7 million compared to $28.0 million in the corresponding prior year period. The following tables set forth the calculation of our non-GAAP gross profit

35


 

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 and nine months ended September 30, 2023 and 2022.

 

(dollars in thousands)

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenue

 

$

35,133

 

 

$

37,196

 

 

$

93,363

 

 

$

105,838

 

Cost of revenue

 

 

7,187

 

 

 

7,097

 

 

 

21,761

 

 

 

20,725

 

Non-GAAP gross profit

 

 

27,946

 

 

 

30,099

 

 

 

71,602

 

 

 

85,113

 

Non-GAAP gross margin

 

 

79.5

%

 

 

80.9

%

 

 

76.7

%

 

 

80.4

%

 

36


 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended
September 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenue

 

$

35,133

 

 

$

37,196

 

 

$

93,363

 

 

$

105,838

 

Cost of revenue

 

 

7,187

 

 

 

7,097

 

 

 

21,761

 

 

 

20,725

 

Non-GAAP gross profit

 

 

27,946

 

 

 

30,099

 

 

 

71,602

 

 

 

85,113

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP cost of revenue

 

 

7,187

 

 

 

7,097

 

 

 

21,761

 

 

 

20,725

 

Stock-based compensation expense

 

 

5

 

 

 

(46

)

 

 

(32

)

 

 

(90

)

Non-GAAP cost of revenue

 

 

7,192

 

 

 

7,051

 

 

 

21,729

 

 

 

20,635

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP sales and marketing expenses

 

 

12,892

 

 

 

13,920

 

 

 

38,706

 

 

 

37,565

 

Stock-based compensation expense

 

 

(208

)

 

 

(538

)

 

 

(913

)

 

 

(1,728

)

Contribution of business held for sale (2)

 

 

 

 

 

 

 

 

(484

)

 

 

 

Severance and executive transition costs

 

 

(207

)

 

 

(86

)

 

 

(710

)

 

 

(86

)

Non-GAAP sales and marketing expenses

 

 

12,477

 

 

 

13,296

 

 

 

36,599

 

 

 

35,751

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP research and development expenses

 

 

10,410

 

 

 

11,784

 

 

 

32,456

 

 

 

32,735

 

Stock-based compensation expense

 

 

(953

)

 

 

(1,532

)

 

 

(3,622

)

 

 

(3,783

)

Contribution of business held for sale (2)

 

 

 

 

 

 

 

 

(1,117

)

 

 

 

Severance and executive transition costs

 

 

(188

)

 

 

(198

)

 

 

(868

)

 

 

(198

)

Non-GAAP research and development expenses

 

 

9,269

 

 

 

10,054

 

 

 

26,849

 

 

 

28,754

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP general and administrative expenses

 

 

21,082

 

 

 

2,502

 

 

 

57,504

 

 

 

27,127

 

Depreciation

 

 

(1,233

)

 

 

(320

)

 

 

(2,386

)

 

 

(764

)

Stock-based compensation expense

 

 

(876

)

 

 

(2,986

)

 

 

(4,079

)

 

 

(8,978

)

Change in fair value of contingent consideration

 

 

(816

)

 

 

14,291

 

 

 

(1,467

)

 

 

23,076

 

Variable consultant performance bonus expense

 

 

(397

)

 

 

 

 

 

(1,028

)

 

 

 

Contribution of business held for sale (2)

 

 

 

 

 

 

 

 

(188

)

 

 

 

Acquisition and due diligence costs

 

 

(3,177

)

 

 

(839

)

 

 

(8,253

)

 

 

(1,608

)

Severance and executive transition costs

 

 

(390

)

 

 

(81

)

 

 

(1,340

)

 

 

(81

)

Non-GAAP general and administrative expenses

 

 

14,193

 

 

 

12,567

 

 

 

38,763

 

 

 

38,772

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP amortization

 

 

(6,624

)

 

 

(5,504

)

 

 

(17,767

)

 

 

(15,730

)

 

 

 

 

 

 

 

 

 

 

 

 

GAAP loss from operations

 

 

(23,062

)

 

 

(3,611

)

 

 

(74,831

)

 

 

(28,044

)

Total non-GAAP adjustments (1)

 

 

15,064

 

 

 

(2,161

)

 

 

44,254

 

 

 

9,970

 

Non-GAAP loss from operations

 

 

(7,998

)

 

 

(5,772

)

 

 

(30,577

)

 

 

(18,074

)

 

 

 

 

 

 

 

 

 

 

 

 

GAAP other income (expense), net

 

 

(2,456

)

 

 

(1,249

)

 

 

1,409

 

 

 

(3,666

)

Gain on sale of energy group

 

 

 

 

 

 

 

 

(2,572

)

 

 

 

Foreign currency impact

 

 

2,294

 

 

 

 

 

 

(526

)

 

 

 

Interest expense, net

 

 

218

 

 

 

1,305

 

 

 

1,743

 

 

 

3,670

 

Non-GAAP other expense, net

 

 

56

 

 

 

56

 

 

 

54

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP loss before income taxes

 

 

(25,518

)

 

 

(4,860

)

 

 

(73,422

)

 

 

(31,710

)

Total non-GAAP adjustments (1)

 

 

17,576

 

 

 

(856

)

 

 

42,899

 

 

 

13,640

 

Non-GAAP loss before income taxes

 

 

(7,942

)

 

 

(5,716

)

 

 

(30,523

)

 

 

(18,070

)

 

 

 

 

 

 

 

 

 

 

 

 

(Benefit from) provision for income taxes

 

 

(977

)

 

 

26

 

 

 

(2,622

)

 

 

(1,442

)

 

 

 

 

 

 

 

 

 

 

 

 

GAAP net loss

 

 

(24,541

)

 

 

(4,886

)

 

 

(70,800

)

 

 

(30,268

)

Total non-GAAP adjustments (1)

 

 

16,599

 

 

 

(830

)

 

 

40,277

 

 

 

12,198

 

Non-GAAP net loss

 

$

(7,942

)

 

$

(5,716

)

 

$

(30,523

)

 

$

(18,070

)

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing non-GAAP basic and diluted net loss per share

 

 

36,992

 

 

 

36,202

 

 

 

36,811

 

 

 

35,924

 

Shares used in computing non-GAAP diluted net income (loss) per share

 

 

36,992

 

 

 

36,202

 

 

 

36,811

 

 

 

35,924

 

Non-GAAP basic and diluted net loss per share

 

$

(0.21

)

 

$

(0.16

)

 

$

(0.83

)

 

$

(0.50

)

Non-GAAP diluted net loss per share

 

$

(0.21

)

 

$

(0.16

)

 

$

(0.83

)

 

$

(0.50

)

 

(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 divested during Q2 2023. We have not recast Non-GAAP Net 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.

37


 

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) Pro Forma Software Revenue, (ii) Total Software Products & Services Customers, (iii) Annual Recurring Revenue, (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 billings per active Managed Services 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,

 

 

Jun 30,

 

 

Sept 30,

 

 

2022 (1)

 

 

2022 (1)

 

 

2022 (1)

 

 

2022 (1)

 

 

2023 (1)

 

 

2023 (1)

 

 

2023

 

Pro Forma Software Revenue (in 000's) (2)

 

$

26,319

 

 

$

26,650

 

 

$

28,603

 

 

$

35,612

 

 

$

22,423

 

 

$

20,860

 

 

$

20,361

 

Total Software Products & Services Customers (3)

 

 

3,673

 

 

 

3,718

 

 

 

3,787

 

 

 

3,824

 

 

 

3,773

 

 

 

3,705

 

 

 

3,536

 

Annual Recurring Revenue (SaaS) (in 000's) (4)

 

$

48,392

 

 

$

44,465

 

 

$

43,925

 

 

$

46,248

 

 

$

45,453

 

 

$

47,720

 

 

$

47,756

 

Annual Recurring Revenue (Consumption) (in 000's) (5)

 

$

87,445

 

 

$

85,901

 

 

$

85,091

 

 

$

71,754

 

 

$

67,242

 

 

$

60,229

 

 

$

50,803

 

Total New Bookings (in 000's)  (6)

 

$

16,643

 

 

$

22,009

 

 

$

23,793

 

 

$

26,342

 

 

$

22,794

 

 

$

8,388

 

 

$

15,501

 

Gross Revenue Retention (7)

 

>90%

 

 

>90%

 

 

>90%

 

 

>90%

 

 

>90%

 

 

>90%

 

 

>90%

 

 

(1) All of the supplemental financial information for this period is presented on a Pro Forma basis inclusive of Broadbean.

(2) “Pro Forma Software Revenue” is a non-GAAP measure that represents Software Products & Services revenue on a Pro Forma basis.

(3) “Total Software Products & Services Customers” includes Software Products & Services customers as of the end of each respective quarter set forth above with net revenues in excess of $10 and also excludes any customers categorized by us as trial or pilot status. In prior periods, we provided “Ending Software Customers,” which represented Software Products & Services customers as of the end of each fiscal quarter with trailing twelve-month revenues in excess of $2,400 for both Veritone, Inc. and PandoLogic Ltd. and/or deemed by the Company to be under an active contract for the applicable periods. Total Software Products & Services Customers is not comparable to Ending Software Customers. Total Software Products & Services Customers includes customers based on revenues in the last month of the quarter rather than on a trailing twelve-month basis. Total Software Products & Services Customers includes customers based on revenues in the last month of the quarter rather than on a trailing twelve-month basis and excludes any customers that are on trial or pilot status with us rather than including customers with active contracts. Management uses Total Software Products & Services Customers and we believe Total Software Products & Services Customers are useful to investors because it more accurately reflects our total customers for our Software Products & Services customers inclusive of Broadbean.

(4) “Annual Recurring Revenue (SaaS)” represents an annualized calculation of monthly recurring revenue during the last month of the applicable quarter for all Total Software Products & Services customers, in each case on a Pro Forma basis. In prior periods, we provided “Average Annual Revenue,” which was 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 Ltd. Annual Recurring Revenue is not comparable to Average Annual Revenue (SaaS). Annual Recurring Revenue (SaaS) includes only subscription-based SaaS revenue, is not averaged among active customers and uses a calculation of recurring revenue as described above instead of annual revenue. Management uses “Annual Recurring Revenue (SaaS)” and we believe Annual Recurring Revenue (SaaS) is useful to investors because Broadbean significantly increases our mix of subscription-based SaaS revenues as compared to Consumption revenues and the split between the two allows the reader to delineate between predictable recurring SaaS revenues and more volatile Consumption revenues.

(5) “Annual Recurring Revenue (Consumption)” represents the trailing twelve months of all non-recurring and/or consumption-based revenue for all active Total Software Products & Services customers, in each case, on a Pro Forma basis. In prior periods, we provided “Average Annual Revenue,” which was 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 Ltd. Annual Recurring Revenue (Consumption) is not comparable to Average Annual Revenue. Annual Recurring Revenue (Consumption) includes only non-recurring and/or consumption-based revenue, is not averaged among active customers and uses a calculation of recurring revenue as described above instead of annual revenue. Management uses “Annual Recurring Revenue (Consumption)” and we believe Annual Recurring Revenue (Consumption) is useful to investors because Broadbean significantly increases our mix of subscription-based SaaS revenues as compared to Consumption revenues and the split between the two allows the reader to delineate between predictable recurring SaaS revenues and more volatile Consumption revenues.

(6) “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), in each case on a Pro Forma basis.

(7) “Gross Revenue Retention” represents calculate our dollar-based gross revenue retention rate as of the period end by starting with the revenue from Software Products & Services Customers 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 Software Products & Services Customers who are no longer customers as of the current period end, or Current Period Ending Software Customer Revenue. We then divide the total Current Period Ending Software 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 Software Products & Services Customers from our Software Products & Services as of the year prior that is not lost to customer churn. All numbers used to determine Gross Revenue Retention are calculated on a Pro Forma basis.

38


 

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,

 

 

Jun 30,

 

 

Sept 30,

 

 

2022

 

 

2022

 

 

2022

 

 

2022

 

 

2023

 

 

2023

 

 

2023

 

Avg billings per active Managed Services client (in 000's) (1)

 

$

684

 

 

$

736

 

 

$

747

 

 

$

823

 

 

$

771

 

 

$

576

 

 

$

630

 

Revenue during quarter (in 000's) (2)

 

$

10,735

 

 

$

9,625

 

 

$

10,035

 

 

$

11,074

 

 

$

9,337

 

 

$

6,876

 

 

$

9,117

 

 

(1) 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 clients that are active during such quarter.

(2) 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.

Results of Operations

The following tables set forth our results of operations for the three and nine months ended September 30, 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
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenue

 

 

 

 

 

$

35,133

 

 

$

37,196

 

 

$

93,363

 

 

$

105,838

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

 

7,187

 

 

 

7,097

 

 

 

21,761

 

 

 

20,725

 

Sales and marketing

 

 

 

 

 

 

12,892

 

 

 

13,920

 

 

 

38,706

 

 

 

37,565

 

Research and development

 

 

 

 

 

 

10,410

 

 

 

11,784

 

 

 

32,456

 

 

 

32,735

 

General and administrative

 

 

 

 

 

 

21,082

 

 

 

2,502

 

 

 

57,504

 

 

 

27,127

 

Amortization

 

 

 

 

 

 

6,624

 

 

 

5,504

 

 

 

17,767

 

 

 

15,730

 

Total operating expenses

 

 

 

 

 

 

58,195

 

 

 

40,807

 

 

 

168,194

 

 

 

133,882

 

Loss from operations

 

 

 

 

 

 

(23,062

)

 

 

(3,611

)

 

 

(74,831

)

 

 

(28,044

)

Other income (expense), net

 

 

 

 

 

 

(2,456

)

 

 

(1,249

)

 

 

1,409

 

 

 

(3,666

)

Loss before provision for income taxes

 

 

 

 

 

 

(25,518

)

 

 

(4,860

)

 

 

(73,422

)

 

 

(31,710

)

(Benefit from) provision for income taxes

 

 

 

 

 

 

(977

)

 

 

26

 

 

 

(2,622

)

 

 

(1,442

)

Net loss

 

 

 

 

 

$

(24,541

)

 

$

(4,886

)

 

$

(70,800

)

 

$

(30,268

)

 

39


 

 

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenue

 

 

 

 

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

 

20.5

 

 

 

19.1

 

 

 

23.3

 

 

 

19.6

 

Sales and marketing

 

 

 

 

 

 

36.7

 

 

 

37.4

 

 

 

41.5

 

 

 

35.5

 

Research and development

 

 

 

 

 

 

29.6

 

 

 

31.7

 

 

 

34.8

 

 

 

30.9

 

General and administrative

 

 

 

 

 

 

60.0

 

 

 

6.7

 

 

 

61.6

 

 

 

25.6

 

Amortization

 

 

 

 

 

 

18.9

 

 

 

14.9

 

 

 

19.0

 

 

 

14.9

 

Total operating expenses

 

 

 

 

 

 

165.7

 

 

 

109.7

 

 

 

180.2

 

 

 

126.4

 

Loss from operations

 

 

 

 

 

 

(65.7

)

 

 

(9.7

)

 

 

(80.2

)

 

 

(26.4

)

Other income (expense), net

 

 

 

 

 

 

(7.0

)

 

 

(3.4

)

 

 

1.5

 

 

 

(3.5

)

Loss before provision for income taxes

 

 

 

 

 

 

(72.7

)

 

 

(13.1

)

 

 

(78.7

)

 

 

(29.9

)

(Benefit from) provision for income taxes

 

 

 

 

 

 

(2.8

)

 

 

0.1

 

 

 

(2.8

)

 

 

(1.4

)

Net loss

 

 

 

 

 

 

(69.9

)

 

 

(13.1

)

 

 

(75.9

)

 

 

(28.5

)

 

Three and Nine Months Ended September 30, 2023 Compared with Three and Nine Months Ended September 30, 2022

Revenue

 

 

Three Months Ended
September 30, 2023

 

 

Nine Months Ended
September 30, 2023

 

 

Commercial

 

 

Government &

 

 

 

 

 

Commercial

 

 

Government &

 

 

 

 

 

Enterprise

 

 

Regulated

 

 

Total

 

 

Enterprise

 

 

Regulated

 

 

Total

 

Software Products & Services

 

$

18,885

 

 

$

1,476

 

 

$

20,361

 

 

$

44,109

 

 

$

4,472

 

 

$

48,581

 

Managed Services

 

 

14,772

 

 

 

 

 

 

14,772

 

 

 

44,782

 

 

 

 

 

 

44,782

 

Revenue

 

$

33,657

 

 

$

1,476

 

 

$

35,133

 

 

$

88,891

 

 

$

4,472

 

 

$

93,363

 

 

 

Three Months Ended
September 30, 2022

 

 

Nine Months Ended
September 30, 2022

 

 

Commercial

 

 

Government &

 

 

 

 

 

Commercial

 

 

Government &

 

 

 

 

 

Enterprise

 

 

Regulated

 

 

Total

 

 

Enterprise

 

 

Regulated

 

 

Total

 

Software Products & Services

 

$

19,800

 

 

$

1,012

 

 

$

20,812

 

 

$

54,694

 

 

$

2,664

 

 

$

57,358

 

Managed Services

 

 

16,384

 

 

 

 

 

 

16,384

 

 

 

48,480

 

 

 

 

 

 

48,480

 

Revenue

 

$

36,184

 

 

$

1,012

 

 

$

37,196

 

 

$

103,174

 

 

$

2,664

 

 

$

105,838

 

Commercial Enterprise

Commercial Enterprise Software Products & Services revenue decreased $0.9 million or 5% in the three months ended September 30, 2023 compared to the corresponding prior year period and decreased $10.6 million or 19% in the nine months ended September 30, 2023 compared to the corresponding prior year period, with the decreases largely driven by decreased revenue from Amazon, partially offset by revenue from the acquisition of Broadbean in June 2023. Commercial Enterprise Managed Services decreased $1.6 million or 10% in the three months ended September 30, 2023 compared to the corresponding prior year period and decreased $3.7 million or 8% in the nine months ended September 30, 2023 compared to the corresponding prior year period, with the decreases driven primarily due to decreases in advertising revenue driven by the current economic environment.

Government & Regulated Industries

Government & Regulated Industries Software Products & Services revenue increased $0.5 million or 46% in the three months ended September 30, 2023 compared to the corresponding prior year period and increased $1.8 million or 67% in the nine months ended September 30, 2023 compared to the corresponding prior year period, with the increases 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

40


 

 

(dollars in thousands)

 

Three Months Ended
September 30,

 

 

 

 

 

 

 

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

$ Change

 

 

% Change

 

 

2023

 

 

2022

 

 

$ Change

 

 

% Change

 

 

Cost of revenue

 

$

7,187

 

 

$

7,097

 

 

$

90

 

 

 

1.3

%

 

$

21,761

 

 

$

20,725

 

 

$

1,036

 

 

 

5.0

%

 

Sales and marketing

 

 

12,892

 

 

 

13,920

 

 

 

(1,028

)

 

 

(7.4

)%

 

 

38,706

 

 

 

37,565

 

 

 

1,141

 

 

 

3.0

%

 

Research and development

 

 

10,410

 

 

 

11,784

 

 

 

(1,374

)

 

 

(11.7

)%

 

 

32,456

 

 

 

32,735

 

 

 

(279

)

 

 

(0.9

)%

 

General and administrative

 

 

21,082

 

 

 

2,502

 

 

 

18,580

 

 

 

742.6

%

 

 

57,504

 

 

 

27,127

 

 

 

30,377

 

 

 

112.0

%

 

Amortization

 

 

6,624

 

 

 

5,504

 

 

 

1,120

 

 

 

20.3

%

 

 

17,767

 

 

 

15,730

 

 

 

2,037

 

 

 

12.9

%

 

Total operating expenses

 

$

58,195

 

 

$

40,807

 

 

$

17,388

 

 

 

42.6

%

 

$

168,194

 

 

$

133,882

 

 

$

34,312

 

 

 

25.6

%

 

 

Cost of Revenue. Cost of revenue increased by $0.1 million in the three months ended September 30, 2023 compared to the corresponding prior year period and increased by $1.0 million in the nine months ended September 30, 2023 compared with the corresponding prior year period, primarily due to a shift in the mix of revenues from higher margin Software Products & Services products to lower margin Managed Services products.

Sales and Marketing. Sales and marketing expenses decreased by $1.0 million in the three months ended September 30, 2023 compared to the corresponding prior year period, primarily due to cost reduction initiatives announced in the first quarter of 2023 and reduced advertising spend, partially offset by increased sales and marketing expense as a result of the acquisition of Broadbean. Sales and marketing increased by $1.1 million in the nine months ended September 30, 2023 compared with the corresponding prior year period, primarily due to 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 37% and 42% in the three and nine months ended September 30, 2023, respectively, from 37% and 36% in the corresponding prior year periods.

Research and Development. Research and development expenses decreased by $1.4 million or 12% in the three months ended September 30, 2023 and by $0.3 million or 1% in the nine months ended September 30, 2023 compared with the corresponding prior year periods principally due to an increase in capitalized costs for internal use software and decrease in personnel-related costs of due to cost reduction initiatives announced in the first quarter of 2023, partially offset by increased costs for the Steel Holdings Consulting Agreement. As a percentage of revenue, research and development expenses increased to 30% and 35% in the three and nine months ended September 30, 2023, from 32% and 31% in the corresponding prior year periods.

General and Administrative. General and administrative expenses increased by $18.6 million or 743% in the three months ended September 30, 2023 compared with the corresponding prior year period principally due to a non-cash benefit of $14.3 million recognized during the three months ended September 30, 2022 associated with a change in the estimated fair value of contingent consideration. General and administrative expenses increased by $30.4 million or 112% in the nine months ended September 30, 2023 compared with the corresponding prior year period principally due to a non-cash benefit of $23.1 million recognized in the prior year associated with a change in the estimated fair value of contingent consideration, coupled with the increase in accounting and legal fees. As a percentage of revenue, general and administrative expenses increased to 60% and 62% in the three and nine months ended September 30, 2023, respectively, from 7% and 26% in the corresponding prior year periods.

Amortization Expense. Amortization expense increased in the three and nine months ended September 30, 2023 compared with the corresponding prior year period due to the addition of amortization expense related to our 2022 and 2023 acquisitions.

Other Income (Expense), Net

Other expense, net for the three months ended September 30, 2023 was comprised primarily of foreign exchange loss of $2.3 million and interest expense, net of $0.2 million. Other expense, net for the three months ended September 30, 2022 was $1.2 million due primarily to interest expense. Other income, net for the nine months ended September 30, 2023 was comprised primarily of a gain on the sale of the energy group of $2.6 million and foreign exchange gain of $0.5 million, offset by interest expense, net of $1.7 million. Other expense, net for the nine months ended September 30, 2022 was $3.7 million due primarily to interest expense.

Non-GAAP Gross Profit

For the three months ended September 30, 2023, our total loss from operations increased to $22.9 million compared to $3.6 million in the corresponding prior year period. For the nine months ended September 30, 2023, our total loss from operations increased to $74.7 million

41


 

compared to $28.0 million in the corresponding prior year period. 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
September 30,

 

 

 

 

 

 

 

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

$ Change

 

 

% Change

 

 

2023

 

 

2022

 

 

$ Change

 

 

% Change

 

 

Revenue

 

$

35,133

 

 

$

37,196

 

 

$

(2,063

)

 

 

(5.5

)%

 

$

93,363

 

 

$

105,838

 

 

$

(12,475

)

 

 

(11.8

)%

 

Cost of revenue

 

 

7,187

 

 

 

7,097

 

 

 

90

 

 

 

1.3

%

 

 

21,761

 

 

 

20,725

 

 

 

1,036

 

 

 

5.0

%

 

Non-GAAP gross profit

 

 

27,946

 

 

 

30,099

 

 

 

(2,153

)

 

 

(7.2

)%

 

 

71,602

 

 

 

85,113

 

 

 

(13,511

)

 

 

(15.9

)%

 

Non-GAAP gross margin

 

 

79.5

%

 

 

80.9

%

 

 

 

 

 

 

 

 

76.7

%

 

 

80.4

%

 

 

 

 

 

 

 

 

The decrease in non-GAAP gross profit and non-GAAP gross margin in the three and nine months ended September 30, 2023 compared with the corresponding prior year periods was due primarily to decreases in revenue compared to the corresponding prior year periods.

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 $72.1 million as of September 30, 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 September 30, 2023 as compared with December 31, 2022 was primarily due to cash used by operating activities of $48.1 million, investments paid during the nine months ended September 30, 2023, and the payment of the PandoLogic 2022 earnout.

In August 2023, we entered into a three-year credit agreement with Alterna Capital Solutions, LLC (“ACS”) under which we are initially able to borrow, at our discretion and throughout the term, up to $30,000 against certain domestic receivables (the “Credit Facility”), subject to the lender’s approval of such domestic receivables. The Credit Facility bears interest at the greater of Prime rate plus 1 percent or 9.5%, and minimum annual interest of $250 is due if no funds are drawn in a given year. ACS will be a senior secured creditor. The Credit Facility provides additional financial flexibility and liquidity on our balance sheet. As of September 30, 2023, we had not drawn any amounts under the Credit Facility.

On November 7, 2023, we entered into a commitment letter with certain lenders to provide a senior secured term loan facility in an aggregate principal amount of $77.5 million. We expect to use the proceeds of the Term Loan to repurchase an aggregate $50.0 million principal amount of our existing 1.75% convertible senior notes due 2026 held by the lenders at a purchase price of $37.5 million plus accrued and unpaid interest and for general corporate purposes. We expect the Term Loan to close in the fourth quarter and to replace our Credit Facility with Alterna Capital Solutions, LLC. For more information on the Term Loan, see Note 13. Subsequent Events to our condensed consolidated financial statements included in this Quarterly Report.

We believe that our ability to borrow up to $30,000 under the Credit Facility, subject to the lender’s approval of qualifying domestic receivables, or the availability of proceeds from our Term Loan, if consummated, when combined with our cash and cash equivalents, will allow us to meet our anticipated cash requirements for the next twelve months.

Cash Flows

A summary of cash flows from our operating, investing and financing activities is shown in the table below.

 

(in thousands)

 

Nine Months Ended
September 30,

 

 

2023

 

 

2022

 

Cash used in operating activities

 

$

(48,111

)

 

$

(24,630

)

Cash used in investing activities

 

 

(53,745

)

 

 

(11,116

)

Cash used in financing activities

 

 

(10,487

)

 

 

(22,903

)

Net decrease in cash, cash equivalents and restricted cash

 

$

(112,343

)

 

$

(58,649

)

 

Operating Activities

Our operating activities used cash of $48.1 million in the nine months ended September 30, 2023, due primarily to our net loss of $70.8 million, adjusted by $26.7 million in non-cash expenses, including $20.2 million in depreciation and amortization and $8.6 million in stock-based compensation expense, as well as the net working capital decrease of $4.0 million, primarily due to decreases in accrued media payments of $17.7 million, partially offset by decreases in accounts receivable of $14.1 million.

42


 

Our operating activities used cash of $24.6 million in the nine months ended September 30, 2022, due primarily to our net loss of $30.3 million, adjusted by $7.5 million in non-cash expenses, including $16.5 million in depreciation and amortization and $14.7 million in stock-based compensation expense, offset in part by $23.1 million from a change in the fair value of contingent consideration, $2.1 million from a changes in deferred taxes and the net working capital decrease of $1.9 million.

Investing Activities

Our investing activities for the nine months ended September 30, 2023 used cash of $53.7 million primarily for $50.2 million in cash paid for the Broadbean acquisition net of cash acquired and $4.0 million in capital expenditures, with these uses of cash partially offset by $0.5 million in proceeds from the Energy Divestiture.

Our investing activities for the nine months ended September 30, 2022 used cash of $11.1 million primarily for $4.6 million to fund a portion of the consideration for our acquisitions, $3.8 million in capital expenditures and for an equity investment of $2.8 million in a strategic partner.

Financing Activities

Our financing activities for the nine months ended September 30, 2023 used cash of $10.5 million, consisting of $7.8 million to pay the 2022 earnout for PandoLogic, $2.7 million in deferred consideration primarily related to the March 2022 Acquisition and the VocaliD acquisition, and $1.1 million to pay taxes paid related to the net share settlement of equity awards, offset by $1.1 million in proceeds received from the exercise of stock options and purchases of shares under our ESPP.

Our financing activities for the nine months ended September 30, 2022 used cash of $22.9 million, consisting of $14.4 million to pay the 2021 earnout for PandoLogic and $9.7 million to pay taxes paid related to the net share settlement of equity awards, partially offset by $1.2 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 September 30, 2023, our only debt obligations were the Convertible Notes issued in the fourth quarter of fiscal year 2021, net of amounts repurchased in 2022 and the Credit Facility. 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 September 30, 2023, we have future cash requirements to pay $2.8 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, combined with available borrowing under the Credit Facility, 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 condensed 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 condensed 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.

43


 

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 September 30, 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 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 September 30, 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 Weaknesses 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 this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, management identified a material weakness in internal control over financial reporting relating to the consolidation process and review of financial statements specifically pertaining to the Company’s design of controls to determine the proper accounting for certain foreign exchange transactions and translation between Veritone, Inc. and certain foreign subsidiaries. This material weakness did not result in any identified material misstatements to the financial statements. However, this material weakness could have resulted in a material misstatement to the Company's annual or interim condensed consolidated financial statements that would not be prevented or detected on a timely basis. While the adjustments identified were not material to the financial statements for the three and nine months ended September 30, 2023 and there were no changes to previous periods, based on the volatility of the foreign currency exchange rates and cumulative materiality of the outstanding intercompany balance, the calculated amounts could have resulted in a material misstatement to our annual or interim condensed consolidated financial statements that would 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 condensed consolidated financial statements that would not be prevented or detected on a timely basis.

Remediation of Material Weaknesses 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. In order to remediate the material weakness relating to the consolidation process, including the proper accounting of foreign exchange transactions between the Company and its foreign subsidiaries, management plans to implement financial reporting control changes to address the material weakness, evaluate the adequacy of resources surrounding its consolidation process and train individuals in the proper accounting treatment for foreign currency transactions and consolidation under US GAAP. This training is expected to be completed in the fourth quarter of 2023. Management has also hired additional staff to oversee the implementation and testing of these remediation actions. 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.

44


 

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2023, we completed the acquisition of Broadbean. Prior to the acquisition, Broadbean was a privately-held company and was not subject to the Sarbanes-Oxley Act of 2002, the rules and regulations of the SEC, or other corporate governance requirements applicable to public reporting companies. As part of our ongoing integration activities, we are continuing to incorporate our controls and procedures into Broadbean and to augment our company-wide controls to reflect the risks that may be inherent in acquisitions of privately-held companies.

Other than our integration of the Broadbean business and the remediation efforts described above, there have been no changes in our internal control over financial reporting during the three months ended September 30, 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.

45


 

PART II. OTHER INFORMATION

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. Other than as set forth below, there have been no material changes to the risks described in such Annual Report on Form 10-K.

 

We entered into a Commitment Letter for a $77.5 million aggregate principal amount senior secured term loan facility, which we expect to close in the fourth quarter of 2023. If the Term Loan does not close, we anticipate we will require additional liquidity to continue our operations for the next twelve months.

As of September 30, 2023, we had $72.1 million in cash and cash equivalents, and in August 2023, we entered into a three-year credit agreement with Alterna Capital Solutions, LLC (“ACS”) under which we are initially able to borrow, at our discretion and throughout the term, up to $30.0 million against certain domestic receivables (the “Credit Facility”), subject to the lender’s approval of such domestic receivables. There were no amounts outstanding under the Credit Facility as of September 30, 2023. In November 2023, we entered into a Commitment Letter for a $77.5 million aggregate principal amount Term Loan, of which we will use $37.5 million to repurchase $50.0 million of our existing Convertible Notes and the remainder will be used for general corporate purposes. We intend to replace our Credit Facility with Alterna Capital Solutions, LLC with the Term Loan. We believe that our ability to borrow up to $30,000 under the Credit Facility, subject to the lender’s approval of qualifying domestic receivables, and the net proceeds from the Term Loan, if consummated, when combined with our cash and cash equivalents, will allow us to meet our anticipated cash requirements for the next twelve months. If we are unable to borrow up to the full $30.0 million under the Credit Facility or the Term Loan does not close, however, we anticipate we will require additional liquidity to continue our operations over the next twelve months.

In determining our cash requirements for the next twelve months, our estimates regarding our operating expense and capital expenditure requirements are based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate. Moreover, it is particularly difficult to estimate with certainty our future expenses given the dynamic nature of our business and widespread macroeconomic and geopolitical uncertainties, including labor shortages, inflation rates and the responses by central banking authorities to control inflation such as higher interest rates, monetary supply shifts, disruptions in access to bank deposits or lending commitments due to bank failures and the threat of recession in the United States and around the world, as well as disruptions from the Russia-Ukraine conflict and the war in Israel. As a result, we may have to delay, reduce the scope of, suspend or eliminate one or more of our product offerings or lines of business.

We expect to close the Term Loan in the fourth quarter of 2023. As a result of closing the Term Loan, we will incur increased interest expense. Also, we have agreed to issue warrants to purchase up to 3,008,540 shares at an exercise price of $2.576 per share and, subject to certain conditions and limitations, we may elect to pay portions of our Term Loan and interest payments with shares of our common stock. These issuances of common stock may be dilutive to our stockholders.

If we are unable to borrow up to the full $30.0 million under the Credit Facility or do not close the Term Loan, we believe we will require additional liquidity to continue our operations over the next twelve months. However, there can be no assurance that we will be able to obtain additional financing or on terms acceptable to us or at all. If we do raise additional funds through future issuances of equity or convertible debt securities, our stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve debt service obligations and restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. Also, market volatility, including as a result of the macroeconomic and geopolitical factors discussed above, could adversely increase our need to access capital and likewise, adversely impact our ability to access capital as and when needed. Our failure to raise capital or on acceptable terms would have a negative impact on our ability to continue to support our business growth, scale our infrastructure, develop product enhancements and respond to business challenges, and we may have to delay, reduce the scope of, suspend or eliminate one or more of our product offerings or programs. Any of the above events could significantly harm our business, financial condition, results of operations, prospects and ability to compete, and cause the price of our common stock to decline.

 

 

46


 

We have identified material weaknesses in our internal control over financial reporting. If we are unable to develop and maintain effective internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us, materially and adversely affect our business and operating results and expose us to potential litigation.

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 our annual or interim consolidated financial statements will not be prevented or detected and corrected on a timely basis. We have previously identified multiple material weaknesses in our internal control over financial reporting.

During the preparation of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, management identified a material weakness in internal control over financial reporting relating to the consolidation process and review of financial statements specifically pertaining to the Company’s design of controls to determine proper accounting for certain foreign exchange transactions and translation between Veritone, Inc. and certain foreign subsidiaries. This material weakness did not result in any identified material misstatements to the financial statements. However, this material weakness could have resulted in a material misstatement to the Company's annual or interim condensed consolidated financial statements that would not be prevented or detected on a timely basis. While the adjustments identified were not material to the financial statements for the three and nine months ended September 30, 2023 and there were no changes to previous periods, based on the volatility of the foreign currency exchange rates and cumulative materiality of the outstanding intercompany balance, the calculated amounts could have resulted in a material misstatement to our annual or interim condensed consolidated financial statements that would 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 our financial reporting processes. Our business process automated and manual controls that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted. These control deficiencies were a result of user access and change management processes over certain IT systems. 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 our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis. Management is taking remediation actions with respect to this material weakness 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.

During the preparation of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, management identified that a material weakness in internal control over financial reporting existed relating to the appropriate oversight and sufficient review of the work performed by third-party specialists on our behalf and the coordination of work being performed by more than one specialist. Such third-party specialists were used in the preparation of (i) our valuation of contingent consideration, (ii) our valuation of certain identified intangible assets and (iii) our purchase price allocation pursuant to ASC 805, Business Combinations, in connection with our acquisition of PandoLogic Ltd. The material weakness resulted in the restatement of the unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2022 and immaterial misstatements to the consolidated financial statements for the year ended December 31, 2021. Additionally, this material weakness could have resulted in a misstatement of certain accounting estimates or disclosures that would have resulted in a material misstatement of our annual consolidated financial statements that would not have been prevented or detected on a timely basis. We concluded this material weakness had been remediated as of December 31, 2022.

To further remediate the 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. If we are not able to remediate the existing material weaknesses, or if we identify any new material weaknesses in the future, we may be unable to maintain compliance with the requirements of securities laws, stock exchange listing rules, or debt instrument covenants regarding timely filing of information; we could lose access to sources of capital or liquidity; and investors may lose confidence in our financial reporting and our stock price may decline as a result. Though we are taking steps to remediate the existing material weaknesses, we cannot be assured that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weakness or avoid potential future material weaknesses.

As a result of the material weaknesses described above and other related matters raised or that may in the future be identified, we face potential for adverse regulatory consequences, including investigations, penalties or suspensions by the SEC or NASDAQ, litigation or other disputes which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the restatement and material weakness in our internal control over financial reporting and the preparation of our consolidated financial statements. As of the date of this filing, we have no knowledge of any such regulatory consequences, litigation, claim or dispute. However, we can provide no assurance that such regulatory consequences, litigation, claim or dispute will not arise in the future. Any such regulatory consequences, litigation, claim or dispute, whether successful or not, could subject us to additional costs, divert the attention of our

47


 

management, or impair our reputation. Each of these consequences could have a material adverse effect on our business, results of operations and financial condition.

Our business has been and may continue to be negatively affected by macroeconomic and geopolitical factors, including economic disruption caused by the COVID-19 pandemic, the Russia-Ukraine conflict and related sanctions, the war in Israel, inflation rates and the responses by central banking authorities to control inflation, monetary supply shifts and the threat of recession in the United States and around the world .

Global economic and business activities continue to face widespread macroeconomic and geopolitical uncertainties, including labor shortages, inflation rates and the responses by central banking authorities to control inflation such as higher interest rates, monetary supply shifts, disruptions in access to bank deposits or lending commitments due to bank failures, the ongoing impact of the COVID-19 pandemic, and the threat of recession in the United States and around the world, as well as disruptions from the Russia-Ukraine conflict and the war in Israel. We continue to actively monitor the impact of these macroeconomic factors on our financial condition, liquidity, operations, suppliers, industry and workforce, and instituted certain cost saving measures for the during the second half of 2022 and the first nine months of 2023 as a result of these factors. 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 and other global economic conditions, including any new disruptions, have and may again negatively impact our business. For example, we have operations and an office in Israel, and as a result of the war with Hamas there, a number of our employees and family members of our employees have been conscripted into military service. In addition, our hiring solutions are sold to businesses that experience performance fluctuations based on factors including the demand for labor and the economic health of current and prospective employers. To the extent that economic uncertainty or attenuated economic conditions cause our current and potential customers to freeze or reduce their headcount, demand for our products and services has been, and may continue to be negatively affected. Adverse economic conditions have also caused and could continue to 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. For instance, beginning in March 2022, we experienced a reduction in hiring consumption from our largest customer, Amazon, and found that advertisers reduced spending across our managed services when compared to the same periods in the prior year. 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 current and potential customers may elect to decrease their software and technology solutions budgets by deferring or reconsidering product purchases, which could 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.

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.

48


 

Item 6. Exhibits

 

Exhibit

No.

 

Description of Exhibit

 

 

 

2.1†

 

Securities and Asset Purchase Agreement, dated as of May 27, 2023, by and among Veritone, Inc., Veritone UK Ltd., CareerBuilder, LLC, CareerBuilder International Holding B.V. and CareerBuilder France Holding, LLC (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on May 31, 2023).

 

 

 

3.1

 

Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 23, 2017).

 

 

 

3.2

 

Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on May 23, 2017).

 

 

 

10.1

 

Ledgered ABL Agreement, dated August 8, 2023, by and among Veritone, Inc., Veritone One, Inc., Table Rock Management, LLC, Pandologic, Inc., Veritone Enterprises, LLC, Veritone Digital, Inc. d/b/a T3 Media and Alterna Capital Solutions, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 14, 2023).

 

 

 

10.2

 

Commercial Guarantee, dated August 8, 2023, by Veritone Alpha, Inc., Performance Bridge Media, Inc., Machine Box, Inc., Veritone Politics, LLC, VocaliD, Inc. and Broadbean, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on August 14, 2023).

 

 

 

10.3†

 

Commitment Letter, dated November 7, 2023, by and among Veritone, Inc., certain funds managed by Highbridge Capital Management, LLC and other lenders party thereto.

 

 

 

31.1

 

Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.

 

 

 

31.2

 

Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.

 

 

 

32.1+

 

Certifications pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.

 

 

 

101.INS

 

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.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

104

 

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, has been formatted in Inline XBRL.

 

† The Company has omitted portions of the referenced exhibit pursuant to Item 601(a)(5) of Regulation S-K under the Securities Act. The Company agrees to furnish supplementally a copy of all omitted exhibits, schedules and annexes to the Securities and Exchange Commission upon request.

 

+ 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.

 

49


 

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.

 

 

 

 

 

Veritone, Inc.

 

 

 

 

 

November 14, 2023

 

 

 

By:

 

/s/ Michael L. Zemetra

 

 

 

 

 

 

Michael L. Zemetra

 

 

 

 

 

 

Executive Vice President, Chief Financial Officer and Treasurer

 

 

 

 

 

 

(Principal Financial and Accounting Officer)

 

50