VERITONE, INC. Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 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 II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . See "Special Note Regarding Forward-Looking Statements" above at page 1.
Overview
Veritone, Inc. (collectively with our subsidiaries, referred to as "Veritone ," "Company," "we," "our," and "us") is a provider of artificial intelligence ("AI") solutions, including our proprietary AI platform, aiWARE™, digital content management solutions and content licensing services. We also operate a full-service media advertising agency and our VeriAds Network™. The following is a discussion and analysis of certain factors that have affected our results of operations and financial condition during the periods included in the accompanying condensed consolidated financial statements. In this discussion, we refer to our media advertising agency and our VeriAds Network as our advertising business, our content licensing and live events services as our aiWARE content licensing and media services, and our aiWARE platform and digital content management offerings as our aiWARE SaaS solutions.
Impact of the Coronavirus ("COVID-19") Pandemic
The COVID-19 outbreak emerged in late 2019 and was declared a global pandemic by theWorld Health Organization onMarch 11, 2020 . The COVID-19 pandemic, and the actions being taken by governments worldwide to mitigate the public health consequences of the pandemic, have significantly impacted the global economy. For most of the first quarter of 2020, our results reflect historical trends and seasonality. However, inMarch 2020 and throughout the second quarter of 2020, we began to experience a reduction in the demand for certain of our products and services. In particular, net revenues from our aiWARE content licensing and media services business, which typically has significant revenues driven by major live sporting events, were negatively impacted in the first six months of 2020 compared with the same period in 2019, due to the cancellation or postponement of substantially all major live sporting events inthe United States . Even though major sporting events are starting to resume, it is still uncertain as to whether sports leagues will be able to navigate through COVID-19 health concerns and complete their respective seasons and whether postponed events will be rescheduled. Future cancellations of live sporting events would further reduce demand for our services, and it could have a material adverse impact on our net revenues generated from our aiWARE content licensing and media services business in the third quarter of 2020, and such impact could continue in future quarters. We expect the pandemic to affect some of our customers, which may further reduce the demand and/or delay purchase decisions for our products and services, and may additionally impact the creditworthiness of customers. We have assessed the potential credit deterioration of our customers due to changes in the macroeconomic environment and has determined that no additional allowance for doubtful accounts was necessary due to credit deterioration as ofJune 30, 2020 . The extent to which the COVID-19 pandemic and the related macroeconomic conditions may continue to affect our financial condition or results of operations is uncertain. While our advertising and aiWARE SaaS solutions businesses did not experience decreases in net revenues in the first six months of 2020 compared with the same period in 2019, the severity and duration of the pandemic and the resulting macroeconomic conditions are difficult to predict, and our revenues and operating results may be negatively impacted in future periods. The extent of the impact on our operational and financial performance will depend on various factors, including the duration and spread of the outbreak; advances in testing, treatment and prevention; the impact of government measures to contain the virus; and related government stimulus actions. Due to the nature of our business, the effect of the COVID-19 pandemic may not be fully reflected in its results of operations until future periods. The most significant risks to our business and results of operations arising from the COVID-19 pandemic are discussed in Part II, Item 1A (Risk Factors) of our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . In response to the COVID-19 pandemic, we have taken actions to reduce expenses, including discontinuing non-essential services and instituting controls on travel, entertainment and other expenses. We will continue to evaluate further cost-cutting measures and whether improved efficiencies can be obtained in our workforce. In addition, in compliance with government mandates, we have temporarily closed our offices and initiated a work from home policy. 19
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Sales of Common Stock
During the three months endedJune 30, 2020 and 2019, we sold an aggregate of 199,109 and 1,006,663 shares, respectively, of our common stock pursuant to the Equity Distribution Agreement that we entered into withJMP Securities LLC inJune 2018 (the "Equity Distribution Agreement"). We received net proceeds from such sales of approximately$3.0 million and$8.1 million during the three months endedJune 30, 2020 and 2019, respectively, after deducting commissions of$0.1 million and$0.2 million , respectively, paid toJMP Securities LLC . The terms of the Equity Distribution Agreement are discussed under the heading "Capital Resources" below. Key Performance Indicators We track key performance indicators ("KPIs") for our advertising agency business and our aiWARE SaaS solutions business. We do not currently track KPIs for our aiWARE content licensing and media services business beyond our reported net revenues for that business. We evaluate the KPIs that are most relevant to our businesses periodically, and beginning in the first quarter of 2020, we made changes to the KPIs that we track for each business. The KPIs for our advertising agency business include: (i) average gross billings per active client, and (ii) net revenue. The key performance indicators for our aiWARE SaaS solutions business include: (i) total accounts on the platform, (ii) new bookings, (iii) total contract value of new bookings, and (iv) net revenue. In the tables below, the 'net revenues during quarter' amounts for the periods in 2019 reflect amounts reported using the revenue recognition guidance of Topic 605, Revenue Recognition, and the 'net revenues during the quarter' amounts for the periods in 2020 reflect amounts reported using the revenue guidance in Topic 606, Revenue from Contracts with Customers, following our adoption of Topic 606. For additional information about our revenue recognition accounting policies, see Recently Adopted Accounting Pronouncements in Note 2 to the Notes to the Condensed Consolidated Financial Statements including in this Quarterly Report on Form 10-Q. Advertising KPI Results
The following table sets forth the results for each of the KPIs for our advertising agency business.
Quarter Ended
Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30,
2019 2019 2019 2019 2020 2020
Average gross billings per
active client (in 000's)(1) $ 469 $ 488 $ 490 $ 511 $ 533 $ 614
Net revenues during quarter (in
000's) $ 5,714 $ 5,842 $ 6,197 $ 6,517 $ 5,881 $ 6,140 (1) For each quarter, reflects the average gross quarterly billings per client
over the twelve month period through the end of such quarter for clients
that are active during such quarter.
Our advertising business has experienced and may continue to experience
volatility in net revenues due to a number of factors, including: (i) the timing
of new large client wins; (ii) loss of clients who choose to replace our
services by bringing their advertising placement in-house; (iii) clients who
experience reductions in their advertising budgets due to issues with their own
businesses; (iv) losses of clients who change providers from time to time based
largely on pricing; and (v) the seasonality of the campaigns for certain large
clients. Our advertising business also relies on certain large key clients and
we have historically generated a significant portion of our net revenues from a
few major clients. As we continue to grow and diversify our client base, we
expect that our dependency on a limited number of large clients will be
minimized.
aiWARE SaaS Solutions KPI Results
The following table sets forth the results for each of the KPIs for our aiWARE
SaaS solutions business.
Quarter Ended
Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30,
2019 2019 2019 2019 2020 2020
Total accounts on platform at
quarter end 911 941 980 1,069 1,587 1,753
New bookings received during
quarter (in 000's)(1) $ 1,316 $ 1,351 $ 1,384 $ 2,522 $ 1,397 $ 2,319
Total contract value of new
bookings received during quarter
(in 000's)(2) $ 2,092 $ 1,351 $ 1,724 $ 12,872 $ 2,312 $ 2,502
Net revenues during quarter (in
000's) $ 2,754 $ 2,677 $ 2,350 $ 2,872 $ 3,108 $ 3,002 (1) Represents the contractually committed fees payable during the first 12
months of the contract term, or the non-cancellable portion of the
contract term (if shorter), for new contracts received in the quarter,
excluding any variable fees under the contract (i.e., fees for cognitive
processing, storage, professional services and other variable services).
(2) 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 (i.e., fees
for cognitive processing, storage, professional services and other
variable services).
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-------------------------------------------------------------------------------- As we grow our aiWARE SaaS solutions business, we expect that our KPI results will be impacted in different ways based on our customer profiles and the nature of their use of our aiWARE SaaS solutions in certain target markets. For example, in the government, legal and compliance markets, use of our aiWARE SaaS solutions is often project-based and, accordingly, in a given period, we may experience significant increases or decreases in net revenue without any significant change in total accounts or new bookings. The timing of large contract renewals and the variable versus fixed fee nature of certain contracts will impact the amount of new bookings and the total contract value of new bookings from quarter to quarter. As such, our results for different KPIs may fluctuate significantly within the same period, and the result for a particular KPI in one period may not be indicative of the results that we will achieve for that KPI in future periods. Results of Operations The following table sets forth items from our condensed consolidated statements of operations and comprehensive loss for the three and six months endedJune 30, 2020 and 2019, presented as a percentage of revenue: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net revenues 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenues 32.6 37.2 32.3 34.6 Gross profit 67.4 62.8 67.7 65.4 Operating expenses: Sales and marketing 41.2 52.5 43.4 51.6 Research and development 27.9 51.8 30.2 54.5 General and administrative 85.5 94.9 90.9 95.7 Total operating expenses 154.6 199.2 164.5 201.8 Loss from operations (87.2 ) (136.4 ) (96.8 ) (136.4 ) Other income (expense), net (1.8 ) 0.4 (0.4 ) 1.1 Loss before provision for income taxes (89.0 ) (136.0 ) (97.2 ) (135.3 ) Provision for income taxes - - - - Net loss (89.0 ) (136.0 ) (97.2 ) (135.3 ) Three and Six Months EndedJune 30, 2020 Compared with Three and Six Months EndedJune 30, 2019 Net Revenues Three Months Ended Six Months Ended (dollars in thousands) June 30, June 30, 2020 2019 $ Change % Change
2020 2019 $ Change %
$ 7,038 $ 5,842 $ 1,196 20.5 %$ 13,039 $ 11,556 $ 1,483 12.8 % aiWARE SaaS Solutions 3,002 2,677 325 12.1 % 6,110 5,431 679 12.5 % aiWARE Content Licensing and Media Services 3,228 3,751 (523 ) (13.9 )% 6,023 7,408 (1,385 ) (18.7 )% Net revenues$ 13,268 $ 12,270 $ 998 8.1 %$ 25,172 $ 24,395 $ 777 3 % The increases in advertising net revenues in the second quarter and first six months of 2020 compared with the corresponding prior year periods were due primarily to revenues generated from our VeriAds Network, which we launched in late 2019. Revenues from our VeriAds Network totaled$898 and$1,018 for the three and six months endedJune 30, 2020 , respectively, for which we had no corresponding revenues in the 2019 periods. aiWARE SaaS solutions net revenues increased in the second quarter of 2020 compared with the corresponding prior year period due primarily to our initial sales to a customer in the energy market of services related to the integration of specialized aiWARE technology with the customer's solar installations. aiWARE SaaS solutions net revenues increased in the first six months of 2020 compared with the corresponding prior year period due primarily to increased revenues in the media and entertainment market as we added new customers and expanded our services to some existing customers, as well as to our initial sales into the energy market in the second quarter of 2020. Net revenues from our aiWARE content licensing and media services business, which typically has significant revenue driven by major sporting events, were negatively impacted in the second quarter and first six months of 2020 compared with the prior year periods due to the cancellation or postponement of substantially all major sporting events fromMarch 2020 throughJune 2020 as a result of the COVID-19 pandemic. 21 -------------------------------------------------------------------------------- Net revenues in our advertising business are impacted by the timing of particular advertising campaigns of our major clients, in many cases due to the seasonal nature of their advertising activities. In our aiWARE SaaS solutions business, revenues from customers in certain markets, particularly in the government, legal and compliance market, are often project-based and are impacted by the timing of projects. Net revenues from our aiWARE content licensing and media services are impacted by the timing of major sporting events throughout the year. As such, in general, we expect that our net revenues from these businesses and markets may fluctuate significantly from period to period. In addition, we anticipate that our revenues in future periods could be significantly impacted by the macroeconomic conditions resulting from the COVID-19 pandemic. In particular, even though major sporting events are starting to resume, it is still uncertain as to whether sports leagues will be able to navigate through COVID-19 health concerns and complete their respective seasons and whether postponed events will be rescheduled. Due to this uncertainty, we may continue to experience a reduction in demand for our services, which may have a material adverse impact on our net revenues from our aiWARE content licensing and media services business in the third quarter of 2020, and such impact could continue in future quarters.
Cost of Revenues; Gross Profit and Gross Margin
Three Months Ended Six Months Ended
(dollars in thousands) June 30, June 30,
2020 2019 $ Change % Change 2020 2019 $ Change % Change
Cost of revenues $ 4,325 $ 4,562 $ (237 ) -5.2 % $ 8,136 $ 8,434 $ (298 ) (3.5 )%
Gross profit 8,943 7,708 1,235 16.0 % 17,036 15,961 1,075 6.7 %
Gross margin 67 % 63 % 68 % 65 %
The increase in gross margins in the three and six months ended June 30, 2020
compared with the corresponding prior year periods is primarily the result of a
decrease in platform costs year over year.
Operating Expenses
Three Months Ended Six Months Ended
(dollars in thousands) June 30, June 30,
2020 2019 $ Change %
Change 2020 2019 $ Change % Change
Sales and marketing
(2.6 )% 22,886 23,335 (449 ) (1.9 )%
Total operating expenses
Sales and Marketing. The decreases in sales and marketing expenses in the three and six months endedJune 30, 2020 compared with the corresponding prior year periods were due primarily to decreases in compensation costs resulting from our focused spending reductions. As a percentage of net revenues, sales and marketing expenses declined to 41% and 43% in the three and six months endedJune 30, 2020 , respectively, from 53% and 52% in the corresponding prior year periods. Research and Development. The decreases in research and development expenses in the three and six months endedJune 30, 2020 compared with the corresponding prior year periods were due primarily to decreases in compensation costs resulting from our focused spending reductions. These decreases were also due to the contingent payments made to the former stockholders of Machine Box during the three and six months endedJune 30, 2019 , of$0.6 million and$1.5 million , respectively, which did not recur in the current year periods, and to a decrease in platform and cognitive processing related costs. As a percentage of net revenues, research and development expenses declined to 28% and 30% in the three and six months endedJune 30, 2020 , respectively, from 52% and 54% in the corresponding prior year periods. General and Administrative. The decreases in general and administrative expenses in the three and six months endedJune 30, 2020 compared with the corresponding prior year periods were due primarily to a decrease in stock-based compensation expense. We intend to continue to invest in the development of our AI capabilities and enhancement of our aiWARE SaaS solutions and services, and in our sales and marketing efforts in order to drive greater awareness of our offerings, gain new customers and grow our business. However, we plan to manage our operating expenses prudently, particularly in light of the current uncertainties arising from the COVID-19 pandemic. InNovember 2019 , we realigned our business and functional teams to achieve operational efficiencies, implemented computing cost reductions, and completed enhancements to our aiWARE operating system that we expect will improve computing efficiency. We believe that these initiatives and our ongoing cost management efforts will support the next phase of our growth strategy while reducing our expenses and improving our financial performance. 22
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Other Income (Expense), Net
For both the three and six months endedJune 30, 2020 , other expense, net was comprised primarily of warrant expense of$0.2 million . For the three and six months endedJune 30, 2019 , other income, net was comprised primarily of interest income on investments in money market funds, which totaled$0.2 million and$0.3 million , respectively.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, which totaled$50.1 million as ofJune 30, 2020 and$44.1 million as ofDecember 31, 2019 . The increase in our cash and cash equivalents in the six months endedJune 30, 2020 was due primarily to the increase in cash collected from advertising clients of$9.2 million ,$6.5 million in proceeds from common stock offerings and$2.1 million in proceeds from the exercise of stock warrants, which offset our Non-GAAP net loss of$12.4 million .
Cash Flows
A summary of cash flows from our operating, investing and financing activities
is shown in the table below.
Six Months Ended
(in thousands) June 30,
2020 2019
Cash used in operating activities $ (2,777 ) $ (16,606 )
Cash provided by investing activities 26 7,048
Cash provided by financing activities 8,767
12,192
Net increase in cash, cash equivalents and restricted cash
2,634 Operating Activities Our operating activities used cash of$2.8 million in the six months endedJune 30, 2020 , due primarily to our net loss of$24.5 million , adjusted by$12.3 million in non-cash expenses, including$8.6 million in stock-based compensation expense, and an increase of$9.2 million of cash received from advertising clients for future payments to vendors. Our business strategy includes decreasing operational costs while investing in the development of our AI capabilities and enhancement of our aiWARE SaaS solutions and services to grow our business and future revenues. We gauge the amount of cash utilized in these efforts using the Non-GAAP net loss metric, as presented below under the heading "Non-GAAP Financial Measure." Our use of cash as measured by Non-GAAP net loss decreased to$12.4 million for the six months endedJune 30, 2020 from$18.5 million for the six months endedJune 30, 2019 , due primarily to the initiatives that we commenced in the fourth quarter of 2019 to decrease our operating costs, including headcount reductions and enhancements to our software architecture, which have resulted in lower cloud computing costs.
Our operating activities used cash of
Investing Activities
Our investing activities consisted of minimal amounts for the sale of equipment
and capital expenditures in the six months ended
Our investing activities provided cash of$7.0 million in the six months endedJune 30, 2019 . Net cash provided by investing activities consisted primarily of proceeds from maturing marketable securities, which were used to fund a portion of the cash used in our operating activities, offset in part by$0.9 million of cash paid to the former stockholder ofPerformance Bridge as additional earnout consideration and$0.5 million of cash paid to acquire software.
Financing Activities
Our financing activities provided cash of$8.8 million in the six months endedJune 30, 2020 . Net cash provided by financing activities consisted of$6.5 million in net proceeds received from our sales of common stock,$2.1 million in proceeds received from the exercise of stock warrants and$0.1 million received from the exercise of stock options and purchases of shares under our ESPP. Proceeds received from loans under the Paycheck Protection Program inApril 2020 were repaid in full inMay 2020 . Our financing activities provided cash of$12.2 million in the six months endedJune 30, 2019 . Net cash provided by financing activities consisted of$11.8 million in net proceeds received from our sales of common stock and$0.4 million received from the exercise of stock options and purchases of shares under our ESPP. 23
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Capital Resources
InJune 2018 , we entered into an Equity Distribution Agreement withJMP Securities LLC , as sales agent ("JMP Securities "), pursuant to which we may offer and sell, from time to time, throughJMP Securities , shares of our common stock having an aggregate offering price of up to$50.0 million , of which$18.5 million remains available for sale as of the date of this filing. Subject to the terms and conditions of the Equity Distribution Agreement and satisfaction of certain conditions,JMP Securities will use commercially reasonable efforts, consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations, and the rules of The Nasdaq Global Market, to sell shares of our common stock from time to time based upon our instructions, including any price, time or size limits that we specify, in any method deemed to be an "at the market offering" as defined in Rule 415(a)(4) of the Securities Act. We will payJMP Securities a commission of 3.0% of the aggregate gross proceeds from each sale of shares. We are not obligated to sell any shares under the Equity Distribution Agreement. The Equity Distribution Agreement may be terminated byJMP Securities or us at any time upon notice to the other party, or byJMP Securities at any time in certain circumstances, including the occurrence of a material adverse change in our business or financial condition that makes it impractical or inadvisable to market our shares or to enforce contracts for the sale of the shares.
As of
We have no 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 and expect to continue to generate losses for the foreseeable future. Also, we will continue to evaluate potential acquisitions of, or investment in, companies or technologies that complement our business, and those acquisitions may require the use of cash. However, we believe that our current cash and cash equivalents balances 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. However, we do not expect that our current cash and cash equivalents will be sufficient to support the development of our business to the point at which we have positive cash flows from operations. We plan to meet our future needs for additional capital through equity and/or debt financings, particularly if we use cash to finance any acquisitions or investments in the future. Equity financings may include sales of common stock under the Equity Distribution Agreement. We currently have no available lines of credit for future borrowings. Future equity or debt financing may not be available on favorable terms or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when required, our ability to continue to support our business growth, scale our infrastructure, develop product enhancements and respond to business challenges could be significantly impaired. If we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
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Non-GAAP Financial Measure
We have presented a measure of Non-GAAP net loss in the discussion of our cash flows above. The items excluded from Non-GAAP net loss are detailed in the reconciliation below. Non-GAAP net loss is not a financial measure calculated and presented in accordance withU.S. generally accepted accounting principles ("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 Non-GAAP net loss differently. We have presented Non-GAAP net loss because management believes it to be an important supplemental measure of performance that is commonly used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, and believes that it provides a useful comparison of our current period financial results to our historical and future financial results. Management also uses this information internally for forecasting and budgeting. This non-GAAP measure may not be indicative of our historical operating results or predictive of our potential future results. Investors should not consider Non-GAAP net loss in isolation or as a substitute for analysis of our results as reported in accordance with GAAP. Three Months Ended Six Months Ended (in thousands) June 30, June 30, 2020 2019 2020 2019 Reconciliation of Net Loss to Non-GAAP Net Loss: Net loss$ (11,793 ) $ (16,691 ) $ (24,477 ) $ (32,997 ) Provision for income taxes 2 6 5 15 Depreciation and amortization 1,602 1,586 3,206 2,719 Stock-based compensation expense 4,131 5,255 8,587 10,058 Change in fair value of warrant liability 202 37 200 50 Issuance of warrants 102 - 102 - Gain on sale of asset - - (56 ) - Interest expense 9 - 9 - Machine Box contingent payments - 530 - 1,447 Machine Box earn-out fair value adjustment - 70 - 70Performance Bridge earn-out fair value adjustment - - - 139 Non-GAAP Net Loss$ (5,745 ) $ (9,207 ) $
(12,424 )
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