VERITONE, INC. Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read together with the condensed 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, 2021 . 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, 2021 . See "Special Note Regarding Forward-Looking Statements" above at page 1. Overview
We are a provider of AI solutions, powered by our proprietary AI operating
system, aiWARE™, to deliver differentiated products and solutions to our
Commercial Enterprise and
During the three and six months endedJune 30, 2022 , we generated revenue of$34.2 million and$68.6 million , respectively, as compared to$19.2 million and$37.5 million during the three and six months endedJune 30, 2021 , respectively. Our Software Products & Services grew 256% during the six months endedJune 30, 2022 compared with the same period in 2021, while our Managed Services grew 17% during the six months endedJune 30, 2022 compared with the same periods in 2021. During the three and six months endedJune 30, 2022 our largest customer represented 14% and 22%, respectively, of our consolidated revenue and during the three and six months endedJune 30, 2021 a different customer was our largest customer, with revenues representing 11% and 7%, respectively, of our consolidated revenue. Significant Transactions InJune 2022 , we completed an acquisition of VocaliD for total consideration of$3.4 million . The total consideration consists of a cash payment of$1.6 million made at closing and deferred cash purchase price payment of$2.0 million payable in fiscal 2023, which deferred payments were estimated to have a fair value of$1.4 million on the acquisition date. InMarch 2022 , we completed an acquisition of an influencer-based management services company for total consideration of$5.8 million . The total consideration consists of a cash payment of$2.0 million made at closing,$1.9 million in common stock (0.1 million shares) and deferred compensation of$3.0 million payable in fiscal 2023 and 2024, which deferred payments were estimated to have a fair value of$2.7 million on the acquisition date. The total purchase price was decreased by$1.0 million for the settlement of a preexisting receivable and increased by$0.7 million to adjust for the cash on hand at the time of the transaction closing. In addition, the sellers may receive up to$4.5 million 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. .
Opportunities, Challenges and Risks
During the six months ended
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. In addition to the year-over-year growth of 256% in our Software Products & Services during the six months endedJune 30, 2022 as compared to the prior year, we have also demonstrated our ability to grow our AI-based Managed Services, with our revenue from these Managed Services increasing 17% during the six months endedJune 30, 2022 as compared to the prior year. 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. Beginning in the second half of 2021, we realigned our organization to also focus on enterprise sales and opportunities across existing and newer markets. InSeptember 2021 , we acquired PandoLogic, an intelligent hiring platform. Based inIsrael , PandoLogic serves high-volume hiring and enterprise level customers today, including the second largest employer in theU.S. , Amazon. While management believes there is a substantial opportunity to increase revenue longer term, 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. We also continue to see significant opportunities for growth in cross-selling PandoLogic and aiWARE to existing and newly acquired customers, and where our AI solutions could add tremendous value in content creation and distribution, including in the news, television and film industries. We believe there will be significant near and long-term opportunities for revenue growth fromGovernment & Regulated Industries markets due to customer adoption of our products and services related to AI technologies and more recently with our official Authorization to Operate, or ATO, of our aiWARE platform across the entireU.S. Department of Justice and progress with theJoint Artificial Intelligence Commission ("JAIC") andDepartment of Defense ("DOD"). However, many enterprise-level opportunities with GRI 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 27
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businesses with deep relationships and greater scale within the
During the second half of 2020, we launched ourVeritone energy solutions as part of our GRI solutions to help utilities increase profitability and improve grid reliability as they make the transition to renewables. Today, our energy solutions are in production at a major utility and being deployed across global manufactures. We believe that our patented technology is uniquely suited to solving some of the most difficult challenges facing utilities today, and we see significant near and long-term opportunities to grow our revenue within this market. Our aiWARE platform is in the early stages of deployment in the energy market, and we expect to continue making significant investments in product, sales and engineering over the next 12 to 24 months to further develop our current and future solutions to address the opportunities in this market. Growing our existing and new Software Products & Services customer base is critical for our success. During the six months endedJune 30, 2022 , ending Software Products and Services customers grew to 594, a 42% increase year over on a pro forma basis (pro forma basis meaning the inclusion of PandoLogic as if owned by us sinceJanuary 1, 2021 ). While our overall customer growth has been significant, we did experience a slowdown in our Average Annual Revenue (AAR) per customer (as defined and discussed below under "-Non-GAAP Financial Measures"), which was almost entirely driven by a reduction in hiring consumption from our largest customer, Amazon. As a result, Amazon represented 14% of our consolidated revenue in second quarter of 2022 (comprised of 11% from recurring fulfillment business and 3% from delivery service providers), as compared to 31% in Q1 2022 and 36% in the comparable period of 2021 on a pro forma basis. This was mainly a result of Amazon efforts to reduce its hiring consumption across its fulfillment centers, which Amazon has publicly stated was a 50% reduction when compared to the second quarter of 2021. Given Amazon's high concentration of revenue on our consolidated results, our revenue results may fluctuate significantly year over year based upon their hiring patterns. To reduce this risk, we have been aggressively investing in existing and growing new customers since we acquired PandoLogic inSeptember 2021 . On a pro forma basis, we also grew PandoLogic's customer base as ofJune 30, 2022 over 60% year over year and PandoLogic's non-volume hiring revenue for the six months endedJune 30, 2022 , which excludes Amazon, grew over 80% year over year. To continue to grow our Software Product & Services, diversify our customer base, and drive increased sales within our existing customer base, we plan to continue increasing our sales and marketing spending throughout the second half of 2022 as compared with prior periods. Our business has seasonality, driven mostly by hiring patterns across PandoLogic. Typically, hiring patterns are lowest during the first and second quarters, then increase sequentially each quarter in the second half of the year. During the quarter endedMarch 31, 2022 , Amazon accelerated hiring in part to manage theJanuary 2022 Omicron virus outbreak. As a result of this, our intelligent hiring platform revenues did not sequentially improve from the first quarter of 2022 to the second quarter of 2022, as part of the first half of 2022 planned revenues from this customer accelerated into early 2022. However, we do expect the revenues to normalize starting in the third quarter of 2022, and to grow comparably with prior years' seasonality trends and in accordance with our prior expectations. 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, PandoLogic customers will be given greater visibility and transparency in their hiring processes. In addition, we have historically integrated aiWARE across many platforms, including Alteryx 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 near and long term revenue growth opportunities. We plan to hire additional engineers and business development resources in the near term to further accelerate our pursuit of these potential opportunities, as well as other third-party technology integrations. For the three and six months endedJune 30, 2022 , our non-GAAP gross margin (calculated as described in "Non-GAAP Financial Measures" below) improved to 80% compared with 73% for the three and six months endedJune 30, 2021 , driven by growth of new customers across our Software Products & Services and the addition of PandoLogic in late 2021, which generated incremental non-GAAP gross margins in excess of 80% during the three and six months endedJune 30, 2022 . 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. With the acquisition of PandoLogic inSeptember 2021 , we expect our consolidated non-GAAP gross margin and related non-GAAP gross profit to improve in each subsequent quarter in 2022 as the mix of PandoLogic revenue becomes seasonally larger throughout 2022. 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. Moreover, we have historically reported GAAP operating losses, driven by certain non-cash and non-recurring items such as stock-based compensation and purchase accounting; however, we expect to report substantial improvements in our consolidated operating results for the year endingDecember 31, 2022 as compared to the year endedDecember 31, 2021 , driven by the growth in our software offerings and customers and the growth of PandoLogic. Our future revenue 28 -------------------------------------------------------------------------------- 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 asGovernment & Regulated Industries , expand aiWARE into larger and more expansive enterprise engagements and manage our corporate overhead costs. While we believe we will be successful in these endeavors, we cannot guarantee that we will succeed in generating substantial long term operating growth and profitability. We expect to pursue a strategy of acquiring companies to help accelerate our organic growth. We believe there are strategic acquisition targets that can accelerate our entry into key strategic markets, as well as our ability to grow our business. As a result, we are continuing to prioritize corporate development efforts throughout 2022. Our acquisition strategy is threefold: (i) to increase the scale of our business in markets we are in today, (ii) to accelerate growth in new markets and product categories, including expanding our existing engineering and sales resources, and (iii) to accelerate the adoption of aiWARE as the universal AI operating system through venture or market-driven opportunities. During the three and six months endedJune 30, 2022 , we reported a non-GAAP net loss of$7.2 million and$12.4 million , respectively, as compared to$3.9 million and$7.8 million , respectively, during the three and six months endedJune 30, 2021 . We do expect seasonality in our revenue and operating performance, with increased profitability during the quarters endedSeptember 30 andDecember 31 , driven partly from PandoLogic services and Managed Services. Moreover, and to continue to grow our revenue in 2022, we will continue to make targeted investments in people, namely software engineers and sales personnel. ThroughJune 2022 , our headcount grew approximately 26% since the beginning of 2022. In addition, we have made substantial investments in our existing employee base, including higher annual raises and increased benefits, in order to compete in a challenging and constrained labor environment. Lastly, we are making investments in our corporate infrastructure, including new ERP and workforce systems to help us better manage the scale and growth of our business. These investments in people and infrastructure will weigh heavier on our financial results in the second half of 2022. If we cannot hire or retain people in a timely manner, and or are incapable of managing the scale of our operations, our growth and ultimate profitability could be accelerated or delayed. In the six months endedJune 30, 2022 and 2021, substantially all of our revenue was derived from customers located inthe United States . We believe that there is a substantial opportunity over time for us to significantly expand our service offerings and customer base in countries outside ofthe United States . In the long term, we plan to expand our business further internationally in places such asEurope ,Asia Pacific andLatin America , and as a result, we expect to continue to incur significant incremental upfront expenses associated with these expansion opportunities.
Impact of the COVID-19 Pandemic and Other Macroeconomic Conditions
Beginning inMarch 2020 , we began to experience fluctuations in demand for certain services, particularly our Managed Services. Our Managed Services drive a significant amount of revenue from major live sporting events that were cancelled or postponed inthe United States due to COVID-19. While many major sporting events have resumed, future cancellations of live sporting events could have a material adverse impact on our revenue generated from our Managed Services in future quarters. The COVID-19 pandemic has also affected and may continue 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 our customers. In addition to the ongoing COVID-19 pandemic, global economic and business activities continue to face widespread macroeconomic uncertainties, including labor shortages, inflation and monetary supply shifts, recession risks and potential disruptions from theRussia -Ukraine conflict. We continue to actively monitor the impact of these macroeconomic factors on our financial condition, liquidity, operations, suppliers, industry and workforce, and have instituted certain cost saving measures for the third quarter 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; however, any continued or renewed disruption resulting from these factors could negatively impact our business. 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 doubtful accounts was necessary due to credit deterioration as ofJune 30, 2022 . The most significant risks to our business and results of operations arising from the COVID-19 pandemic are discussed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Non-GAAP Financial Measures
In evaluating our cash flows and financial performance, we use certain non-GAAP financial measures, including "Pro Forma Revenue," "Average Annual Revenue (AAR)," "non-GAAP gross profit," "non-GAAP gross margin," "Non-GAAP net loss (pro forma)," "non-GAAP net income (loss)," and "non-GAAP net income (loss) per share." Pro Forma Revenue includes historical Software Products & Services revenue from the past six fiscal quarters of each ofVeritone, Inc. andPandoLogic Ltd. (unaudited) and presents such revenue on a combined pro forma basis treatingPandoLogic Ltd. as owned byVeritone, Inc. sinceJanuary 1, 2021 . Average Annual Revenue (AAR) is calculated as the aggregate of trailing twelve-month Software Products & Services Pro Forma Revenue divided by the average number of customers over the same period for bothVeritone, Inc. andPandoLogic Ltd. Non-GAAP gross profit is the Company's revenue less its cost of revenue. Non-GAAP gross margin is defined as Non-GAAP gross profit divided by revenue. Non-GAAP net loss (pro forma) is the Company's net loss excluding the items set forth below presented on a combined pro forma basis treatingPandoLogic Ltd. as owned byVeritone, Inc. since 29 --------------------------------------------------------------------------------January 1, 2021 . Non-GAAP net income (loss) and non-GAAP net income (loss) per share is the Company's net income (loss) and net income (loss) per share, adjusted to exclude interest expense, provision for income taxes, depreciation expense, amortization expense, stock-based compensation expense, changes in fair value of warrant liability, changes in fair value of contingent consideration, a reserve for state sales taxes, charges related to a facility sublease, gain on sale of asset, warrant expense, acquisition and due diligence costs, and severance and executive search costs. The results for non-GAAP net income (loss), are presented below for the three and six months endedJune 30, 2022 and 2021. 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 additional 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. 30
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Reconciliation of GAAP net loss to Non-GAAP net loss (in thousands)
Three Months Ended June 30,
2022 2021
Core Core
Operations(1) Corporate(2) Total Operations(1) Corporate(2) Total
Net loss $ (8,230 ) $ 4,977 $ (3,253 ) $ (676 ) $ (12,039 ) $ (12,715 )
(Benefit from) provision for
income taxes (964 ) (643 ) (1,607 ) - 55 55
Depreciation and amortization 5,306 150 5,456 1,084 73 1,157
Stock-based compensation expense 2,685 1,976 4,661 1,016 5,593 6,609
Change in fair value of contingent
consideration - (13,830 ) (13,830 ) - - -
Interest expense - 1,183 1,183 - - -
Acquisition and due diligence
costs - 207 207 - 735 735
State sales tax reserve - - - - 146 146
Severance and executive search - - - - 92 92
Non-GAAP Net Income (Loss) $ (1,203 ) $ (5,980 ) $ (7,183 ) $ 1,424 $ (5,345 ) $ (3,921 )
(in thousands)
Six Months Ended June 30,
2022 2021
Core Core
Operations(1) Corporate(2) Total Operations(1) Corporate(2) Total
Net loss(3) $ (14,251 ) $ (11,131 ) $ (25,382 ) $ (3,501 ) $ (39,781 ) $ (43,282 )
(Benefit from) provision for
income taxes(3) (846 ) (622 ) (1,468 ) - 77 77
Depreciation and amortization(3) 10,404 266 10,670 2,167 243 2,410
Stock-based compensation expense 4,668 4,809 9,477 3,711 24,508 28,219
Change in fair value of contingent
consideration(3) - (8,785 ) (8,785 ) - - -
State sales tax reserve - - - - 284 284
Interest expense - 2,365 2,365 - - -
Acquisition and due diligence
costs - 769 769 - 735 735
Charges related to sublease - - - - 3,367 3,367
Severance and executive search - - - 250 99 349
Non-GAAP Net Income (Loss) $ (25 ) $
(12,329 )
(1) Core operations consists of our aiWARE operating platform of software, SaaS and related services; content, licensing and advertising agency 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.
The following tables set forth the calculation of our non-GAAP gross profit and
non-GAAP gross margin, followed by a reconciliation of non-GAAP to GAAP
financial information presented in our condensed consolidated financial
statements for three and six months ended
Three Months Ended Six Months Ended
(dollars in thousands) June 30, June 30,
2022 2021 2022 2021
Revenue $ 34,235 $ 19,206 $ 68,642 $ 37,501
Cost of revenue 6,705 5,231 13,628 10,054
Non-GAAP gross profit 27,530 13,975 55,014 27,447
Non-GAAP gross margin 80.4 % 72.8 % 80.1 % 73.2 %
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Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Revenue $ 34,235 $ 19,206 $ 68,642 $ 37,501
Cost of revenue 6,705 5,231 13,628 10,054
Non-GAAP gross profit 27,530 13,975 55,014 27,447
GAAP cost of revenue 6,705 5,231 13,628 10,054
Stock-based compensation expense (24 ) - (44 ) -
Non-GAAP cost of revenue 6,681 5,231 13,584 10,054
GAAP sales and marketing expenses 12,576 5,253 23,645 11,680
Stock-based compensation expense (727 ) (234 ) (1,190 ) (1,132 )
Severance and executive search - - - (236 )
Non-GAAP sales and marketing
expenses 11,849 5,019 22,455 10,312
GAAP research and development expenses 11,068 4,646 20,951 9,606
Stock-based compensation expense (1,247 ) (566 ) (2,251 ) (1,585 )
Severance and executive search - - - (14 )
Non-GAAP research and development
expenses 9,821 4,080 18,700 8,007
GAAP general and administrative
expenses 2,304 15,644 24,625 47,187
Depreciation (245 ) (78 ) (444 ) (253 )
Stock-based compensation expense (2,663 ) (5,809 ) (5,992 ) (25,502 )
Change in fair value of contingent
consideration 13,830 - 8,785 -
Charges related to sublease - - - (3,367 )
State sales tax reserve - (146 ) - (284 )
Acquisition and due diligence costs (207 ) (735 ) (769 ) (735 )
Severance and executive search - (92 ) - (99 )
Non-GAAP general and administrative
expenses 13,019 8,784 26,205 16,947
GAAP amortization (5,211 ) (1,079 ) (10,226 ) (2,157 )
GAAP loss from operations (3,629 ) (12,647 ) (24,433 ) (43,183 )
Total non-GAAP adjustments (1) (3,506 ) 8,739 12,131 35,364
Non-GAAP loss from operations (7,135 ) (3,908 ) (12,302 ) (7,819 )
GAAP other expense, net (1,231 ) (13 ) (2,417 ) (22 )
Interest expense 1,183 - 2,365 -
Non-GAAP other expense, net (48 ) (13 ) (52 ) (22 )
GAAP loss before income taxes (4,860 ) (12,660 ) (26,850 ) (43,205 )
Total non-GAAP adjustments (1) (2,323 ) 8,739 14,496 35,364
Non-GAAP loss before income taxes (7,183 ) (3,921 ) (12,354 ) (7,841 )
Income tax (benefit) provision (1,607 ) 55 (1,468 ) 77
GAAP net loss (3,253 ) (12,715 ) (25,382 ) (43,282 )
Total non-GAAP adjustments (1) (3,930 ) 8,794 13,028 35,441
Non-GAAP net loss $ (7,183 ) $ (3,921
)
Shares used in computing non-GAAP basic and diluted net loss per share 36,084 32,741 35,783 32,458 Non-GAAP basic and diluted net loss per share$ (0.20 ) $ (0.12
)
(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.
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--------------------------------------------------------------------------------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 Software Products & Services supplemental financial information is presented on a pro forma basis, as further described below. The supplemental financial information for our Software Products & Services includes: (i) Software Revenue - Pro Forma, (ii) Ending Customers, (iii) Average Annual Revenue (AAR), (iv) Total New Bookings, and (iv) Gross Revenue Retention, in each case as defined in the footnotes to the table below. The supplemental financial information for our Managed Services includes: (i) average gross billings per active agency client, and (ii) revenue.
Software Products & Services Supplemental Financial Information
The following table sets forth the results for each of our Software Products & Services supplemental financial information.
Quarter Ended
Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30,
2021 2021 2021 2021 2022 2022
Software Revenue - Pro Forma (in
000's) (1) $ 10,183 $ 20,072 $ 21,860 $ 40,223 $ 18,167 $ 18,379
Ending Customers (2) 385 419 433 529 559 594
Average Annual Revenue (AAR) (in
000's) (3) $ 199 $ 203 $ 208 $ 209 $ 207 $ 187
Total New Bookings (in 000's)
(4) $ 2,442 $ 4,896 $ 3,356 $ 8,317 $ 9,574 $ 14,658
Gross Revenue Retention (5) >90% >90% >90% >90% >90% >90%
(1) "Software Revenue - Pro Forma" includes historical Software Products & Services revenue from the past six (6) fiscal quarters of each ofVeritone, Inc. and PandoLogic (unaudited) and presents such revenue on a combined pro forma basis treating PandoLogic as owned byVeritone, Inc. sinceJanuary 1, 2020 . (2) "Ending Customers" includes Software Products & Services customers as of the end of each respective quarter set forth above with trailing twelve-month revenues in excess of$2,400 for bothVeritone, Inc. and PandoLogic and/or deemed by us to be under an active contract for the applicable periods. (3) "Average Annual Revenue (AAR)" is calculated as the aggregate of trailing twelve-month Software Products & Services revenue divided by the average number of customers over the same period for bothVeritone, Inc. and PandoLogic. (4) "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). (5) "Gross Revenue Retention": We calculate our dollar-based gross retention rate as of the period end by starting with the revenue from Ending Customers for Software Products & Services as of the 3 months in the prior year quarter to such period, or Prior Year Quarter Revenue. We then deduct from the Prior Year Quarter Revenue any revenue from Ending Customers who are no longer customers as of the current period end, or Current Period Ending Customer Revenue. We then divide the total Current Period Ending Customer Revenue by the total Prior Year Quarter Revenue to arrive at our dollar-based gross retention rate, which is the percentage of revenue from all Ending Customers from our Software Products & Services as of the year prior that is not lost to customer churn. As we grow our business for our Software Products & Services, we expect that our supplemental financial information will be impacted in different ways based on our customer profiles and the nature of target markets. For example, our PandoLogic business has significant revenue concentration in a single customer which has a material impact on the average contract value and gross retention. As a result, we have shown the supplemental financial information on a pro forma basis for comparability. 33
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The following table sets forth the reconciliation of pro forma revenue to
revenue.
Quarter Ended
Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30,
2021 2021 2021 2021 2022 2022
Software Products & Services
Revenue $ 4,685 $ 5,580 $ 9,027 $ 40,223 $ 18,167 $ 18,379
PandoLogic Revenue (1) 5,498 14,492 12,833 - - -
Software Revenue - Pro Forma $ 10,183 $ 20,072 $ 21,860 $ 40,223 $ 18,167 $ 18,379
Managed Services Revenue 13,610 13,626 13,628 14,926 16,240 15,856
Total Pro Forma Revenue $ 23,793 $ 33,698 $ 35,488 $ 55,149 $ 34,407 $ 34,235
Trailing Twelve Months Ended
Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30,
2021 2021 2021 2021 2022 2022
Software Products & Services
Revenue $ 15,439 $ 18,017 $ 23,693 $ 59,515 $ 72,997 $ 85,796
PandoLogic Revenue (1) 50,283 57,262 59,292 32,824 27,325 12,833
Software Revenue - Pro Forma $ 65,723 $ 75,278 $ 82,985 $ 92,339 $ 100,322 $ 98,629
Managed Services Revenue 43,845 52,019 53,279 55,789 58,419 60,546
Total Pro Forma Revenue $ 109,568 $ 127,297 $ 136,264 $ 148,128 $ 158,741 $ 159,176
Average Number of Customers -
Pro Forma 330 372 399 442 485 529
Average Annual Revenue (AAR)
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,
2021 2021 2021 2021 2022 2022
Avg billings per active Managed
Services client (in 000's) (6) $ 582 $ 622 $ 615 $ 625 $ 684 $ 736
Revenue during quarter (in
000's) (7) $ 10,327 $ 9,968 $ 9,647 $
10,857
(6) Avg billings per active Managed Services customer for each quarter reflects
the average quarterly billings per active Managed Services customer over the
twelve-month period through the end of such quarter for Managed Services
customers that are active during such quarter.
(7) Managed Services revenue and metrics exclude content licensing and media
services.
Overall, second quarter of 2022 advertising revenue was relatively flat year
over year, largely driven by the timing of new and larger, event-driven
campaigns by key customers in the first half of 2021 compared to the first half
of 2022. 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.
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Results of Operations
The following tables set forth our results of operations for the three and six months endedJune 30, 2022 and 2021, 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. Three Months Ended Six Months Ended (dollars in thousands) June 30, June 30, 2022 2021 2022 2021 Revenue$ 34,235 $ 19,206 $ 68,642 $ 37,501 Operating expenses: Cost of revenue 6,705 5,231 13,628 10,054 Sales and marketing 12,576 5,253 23,645 11,680 Research and development 11,068 4,646 20,951 9,606 General and administrative 2,304 15,644 24,625 47,187 Amortization 5,211 1,079 10,226 2,157 Total operating expenses 37,864 31,853 93,075 80,684 Loss from operations (3,629 ) (12,647 ) (24,433 ) (43,183 ) Other expense, net (1,231 ) (13 ) (2,417 ) (22 ) Loss before provision for income taxes (4,860 ) (12,660 ) (26,850 ) (43,205 ) (Benefit) provision for income taxes (1,607 ) 55 (1,468 ) 77 Net loss$ (3,253 ) $ (12,715 ) $ (25,382 ) $ (43,282 ) Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Operating expenses: Cost of revenue 19.6 27.2 19.9 26.8 Sales and marketing 36.7 27.4 34.4 31.1 Research and development 32.3 24.2 30.5 25.6 General and administrative 6.7 81.5 35.9 125.8 Amortization 15.2 5.5 14.9 5.8 Total operating expenses 110.5 165.8 135.6 215.1 Loss from operations (10.5 ) (65.8 ) (35.6 ) (115.1 ) Other expense, net (3.6 ) (0.1 ) (3.5 ) (0.1 ) Loss before provision for income taxes (14.1 ) (65.9 ) (39.1 ) (115.2 ) (Benefit) provision for income taxes (4.7 ) 0.3 (2.1 ) 0.2 Net loss (9.4 ) (66.2 ) (37.0 ) (115.4 ) Three and Six Months EndedJune 30, 2022 Compared with Three and Six Months EndedJune 30, 2021 Revenue Three Months Ended Six Months Ended June 30, 2022 June 30, 2022 Commercial Government &
Commercial Government &
Enterprise Regulated Total Enterprise Regulated Total
Software Products &
Services (1) $ 17,508 $ 871 $ 18,379 $ 34,894 $ 1,652 $ 36,546
Managed Services 15,856 - 15,856 32,096 - 32,096
Revenue $ 33,364 $ 871 $ 34,235 $ 66,990 $ 1,652 $ 68,642
(1) Software Products & Services consists of aiWARE SaaS Solutions revenues of
$9.5 million and $12.8 million for the three and six months ended June 30, 2022 ,
respectively, as well PandoLogic revenues of $8.9 million and $23.7 million for
the three and six months ended June 30, 2022 .
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Three Months Ended Six Months Ended
June 30, 2021 June 30, 2021
Commercial Government & Commercial Government &
Enterprise Regulated Total Enterprise Regulated Total
Software Products &
Services $ 5,132 $ 448 $ 5,580 $ 8,527 $ 1,738 $ 10,265
Managed Services 13,626 - 13,626 27,236 - 27,236
Revenue $ 18,758 $ 448 $ 19,206 $ 35,763 $ 1,738 $ 37,501
Commercial Enterprise ("CE")
CE Software Products & Services revenue increased in the three and six months
ended June 30, 2022 compared to the corresponding prior year periods due
primarily due to our acquisition of PandoLogic in September 2021 , coupled with
expanded services we provided to existing media and entertainment customers. The
increase in CE Software Products & Services was offset in part as a result of
our largest customer, Amazon, reducing its hiring consumption across its
fulfillment centers, which Amazon has publicly stated was a 50% reduction when
compared to the second quarter of 2021. CE Managed Services increased in the
three and six months ended June 30, 2022 compared to the corresponding prior
year period due to growth of our licensing platform, in new advertising
customers and in expanded services for existing advertising customers and in
live events coverage as conditions return to pre-COVID levels.
GRI Software Products & Services revenue increased$0.4 million or 94% in the three months endedJune 30, 2022 compared to the corresponding prior year period while decreasing$0.1 million or 5% in the six months endedJune 30, 2022 compared to the corresponding prior year period. GRI Software Products & Services revenue from customers in certain markets, particularly government and energy customers, 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. With respect to our energy solutions, demand has accelerated since we officially launched our iDERMs product suite and presented our performance metrics against TheCalifornia Independent System Operator and the results of our deployment atTampa Electric Company . We are now actively engaged and generating revenues from multiple operators, each with significant potential for expansion.
Operating Expenses
Three Months Ended Six Months Ended
(dollars in
thousands) June 30 ,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Cost of revenue $ 6,705 $ 5,231 $ 1,474 28.2 % $ 13,628 $ 10,054 $ 3,574 35.5 %
Sales and
marketing 12,576 5,253 7,323 139.4 % 23,645 11,680 11,965 102.4 % Research and development
11,068 4,646 6,422 138.2 % 20,951 9,606 11,345 118.1 % General and administrative 2,304 15,644 (13,340 ) -85.3 %
24,625 47,187 (22,562 ) -47.8 % Amortization
5,211 1,079 4,132 382.9 % 10,226 2,157 8,069 374.1 %
Total operating
expenses $ 37,864 $ 31,853 $ 6,011 18.9 % $ 93,075 $ 80,684 $ 12,391 15.4 %
Cost of Revenue. The increase in cost of revenue in the three and six months
ended June 30, 2022 compared with the corresponding prior year periods was due
primarily to our higher revenue level, as discussed above. Cost of revenue
increased at a lower rate than the increase in revenues due to the introduction
of new products with higher non-GAAP gross margin contribution in the second
half of 2021, including the addition of PandoLogic.
Sales and Marketing. The increase in sales and marketing expenses in the three
and six months ended June 30, 2022 compared with the corresponding prior year
periods was primarily due to our acquisition of PandoLogic in September 2021 ,
coupled with a 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 34% in the three and six months ended June 30,
2022 , respectively, from 27% and 31% in the corresponding prior year periods.
Research and Development. The increase in research and development expenses in
the three and six months ended June 30, 2022 compared with the corresponding
prior year periods was primarily due to an increase of $6.8 million and $12.1
million , respectively, in personnel-related costs from the addition of new
engineering resources and our September 2021 acquisition of PandoLogic in
September 2021 . As a percentage of revenue, research and development expenses
increased to 32% and 31% in the three months and six months ended June 30, 2022 ,
respectively, from 24% and 26% in the corresponding prior year periods.
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General and Administrative. General and administrative expenses decreased by
$13.3 million or 85% in the three months ended June 30, 2022 compared with the
corresponding prior year periods principally due to a $13.8 million decrease in
the estimated fair value of contingent consideration due to PandoLogic for 2022
earnout consideration, coupled with a $3.6 million decrease in stock
compensation primarily for senior executive stock grants in 2021, partially
offset by increases in costs from our acquisition of PandoLogic in September
2021 . General and administrative expenses decreased $22.6 million or 48% in the
six months ended June 30, 2022 compared with the corresponding prior year period
principally due to a $20.2 million decrease in stock compensation expense
attributable primarily to additional expense related to the vesting of
performance-based stock options in 2021, coupled with a $3.4 million one-time
charge related to the sublease of our former Costa Mesa corporate office space
in the first quarter of 2021, partially offset by increases in costs from our
acquisition of PandoLogic in September 2021 . As a percentage of revenue, general
and administrative expenses decreased to 7% and 36% in the three and six months
ended June 30, 2022 , respectively, from 81% and 126% in the corresponding prior
year periods.
Amortization Expense. Amortization expense increased in the three and six months
ended June 30, 2022 compared with the corresponding prior year periods due to
the addition of amortization expense related to our PandoLogic acquisition and
our 2022 acquisitions.
Other (Expense) Income, Net
Other expense, net for the three and six months ended
Non-GAAP Gross Profit
As noted above, our non-GAAP gross profit is calculated as our revenue less our cost of revenue, as follows:
Three Months Ended Six Months Ended
(dollars in
thousands) June 30 ,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Revenue $ 34,235 $ 19,206 $ 15,029 78.3 % $ 68,642 $ 37,501 $ 31,141 83.0 %
Cost of revenue 6,705 5,231 1,474 28.2 % 13,628 10,054 3,574 35.5 %
Non-GAAP gross
profit 27,530 13,975 13,555 97.0 % 55,014 27,447 27,567 100.4 %
Non-GAAP gross
margin 80.4 % 72.8 % 80.1 % 73.2 %
The increase in non-GAAP gross profit and non-GAAP gross margin in the three and
six months ended June 30, 2022 compared with the corresponding prior year
periods was due primarily to growth in Software Products & Services revenue,
including our acquisition of PandoLogic in September 2021 , which collectively
generated incremental non-GAAP gross margins in excess of 80% during the three
and six months ended June 30, 2022 .
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$220.5 million as ofJune 30, 2022 , compared with total cash and cash equivalents of$254.7 million as ofDecember 31, 2021 . The decrease in our cash and cash equivalents in the six months endedJune 30, 2022 as compared withDecember 31, 2021 was primarily due to investments made during the period, taxes paid related to net share settlement of equity awards, and the payment of the PandoLogic 2021 earnout. We used$4.3 million in the six months endedJune 30, 2022 in operating activities.
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,
2022 2021
Cash used in operating activities $ (4,285 ) $ (991 )
Cash used in investing activities (6,870 ) (272 )
Cash (used in) provided by financing activities (23,103 ) 7,073
Net (decrease) increase in cash, cash equivalents and restricted cash$ (34,258 ) $ 5,810 Operating Activities Our operating activities used cash of$4.3 million in the six months endedJune 30, 2022 , due primarily to our net loss of$25.4 million , adjusted by$11.1 million in non-cash expenses, including$10.7 million in depreciation and amortization and$9.6 million in stock-based compensation expense, offset in part by$8.8 million from a change in the fair value of contingent consideration,$1.9 million from a changes in deferred taxes and the net working capital increase of$10.0 million , primarily due to decreases in our accounts receivable of$35.6 million . Our 37 -------------------------------------------------------------------------------- business strategy includes streamlining operational costs while investing in the development of our AI capabilities and enhancement of our Software Products & Services to grow our business and future revenue. Our operating activities used cash of$1.0 million in the six months endedJune 30, 2021 , due primarily to our net loss of$43.3 million , adjusted by$33.7 million in non-cash expenses, including$28.2 million in stock-based compensation expense, offset in part by the net increase of$8.2 million of cash received from advertising clients for future payments to vendors. Our business strategy includes streamlining 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 revenue.
Investing Activities
Our investing activities for the six months endedJune 30, 2022 used cash of$6.9 million primarily for$2.6 million to fund a portion of the consideration for theMarch 2022 acquisition and the VocaliD acquisition,$2.3 million in capital expenditures and for an equity investment of$2.0 million in a strategic partner.
Our investing activities consisted of minimal amounts used for capital
expenditures and proceeds from the sale of equipment in the six months ended
Financing Activities Our financing activities for the six months endedJune 30, 2022 used cash of$23.1 million , consisting of$14.4 million to pay the 2021 earnout for PandoLogic and$9.5 million to pay taxes paid related to the net share settlement of equity awards, partially offset by$0.8 million in proceeds received from the exercise of stock options and purchases of shares under our ESPP. Our financing activities provided cash of$7.1 million in the six months endedJune 30, 2021 . Net cash provided by financing activities consisted of$4.8 million received from the exercise of stock options and purchases of shares under our ESPP and$2.3 million in proceeds received from the exercise of stock warrants. Capital Resources As ofJune 30, 2022 , our only debt obligations were the Convertible Notes issued in the fourth quarter of fiscal year 2021. We have$5.0 million in purchase consideration commitments related to theMarch 2022 acquisition and the VocaliD 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 in the foreseeable future. With the acquisition of PandoLogic, we believe we have an opportunity to significantly improve our operating income/(loss) in 2022 as compared to 2021. We believe that our current cash and cash equivalents balance will be sufficient to fund our operations in the ordinary course of business for at least the next twelve months from the date of this filing. We have not entered into any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted inthe United States requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. Our critical accounting estimates reflecting management's estimates and judgments are described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . We have reviewed recently adopted accounting pronouncements and determined that the adoption of such pronouncements is not expected to have a material impact, if any, on our Consolidated Financial Statements. Accordingly, there have been no material changes to critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
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