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 I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as supplemented by Amendment No. 1 to our Quarterly Report on Form 10-Q/A for the three months endedMarch 31, 2022 and our other filings with theSecurities and Exchange Commission (the "SEC"), including futureSEC filings. 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 nine months endedSeptember 30, 2022 , we generated revenue of$37.2 million and$105.8 million , respectively, as compared to$22.7 million and$60.2 million during the three and nine months endedSeptember 30, 2021 , respectively. Our Software Products & Services grew 197% during the nine months endedSeptember 30, 2022 compared with the same period in 2021, while our Managed Services grew 19% during the nine months endedSeptember 30, 2022 compared with the same period in 2021. During the three and nine months endedSeptember 30, 2022 our largest customer represented 31% and 25%, respectively, of our consolidated revenue. During the three months endedSeptember 30, 2021 , that same customer was our largest customer and represented 17% of our consolidated revenue, while during the nine months endedSeptember 30, 2021 , a different customer was our largest customer and represented 8% of our consolidated revenue.
Significant Transactions
InAugust 2022 , we acquired certain assets of VSL, aU.K. -based company focused on AI-powered video analytics and surveillance software solutions, pursuant to an asset purchase agreement. The total purchase consideration was$2.0 million , which consisted of cash payments of$1.7 million at closing and deferred cash payments to be made in 2023 totaling$0.3 million . InSeptember 2022 , we and PandoLogic entered into an amendment (the "Amendment") to the PandoLogic Merger Agreement. The Amendment provides that the 2022 PandoLogic Earnout will be no less than$10,825,000 (the "Minimum 2022 Earnout Amount"), irrespective of the actual financial performance of PandoLogic for the 2022 PandoLogic Earnout period. In exchange for the Minimum 2022 Earnout Amount, the Amendment further provides that certain restrictive operational covenants and obligations imposed on us during the 2022 PandoLogic Earnout period would terminate as of the date of the Amendment and provides for the early release of certain escrow funds to us and to the paying agent for further distribution to the certain PandoLogic shareholders and employees under the PandoLogic Merger Agreement. The Amendment also provides for releases as to certain matters related to the PandoLogic Merger Agreement and the Amendment.
Opportunities, Challenges and Risks
During the nine months endedSeptember 30, 2022 and 2021, we derived our revenue primarily through our Commercial Enterprise customers, and secondarily through ourGovernment & 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. In addition to the year-over-year growth of 197% in our Software Products & Services during the nine months endedSeptember 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 19% during the nine months endedSeptember 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. 27 -------------------------------------------------------------------------------- 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 . 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 businesses with deep relationships and greater scale within theU.S. government and within regulated industries such as energy to further accelerate our pursuit of the growth opportunities we see in this market. 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. Conversely, our aiWARE platform is in the early stages of deployment in the energy market, and given the current macroeconomic environment, coupled with the fact that we need to continue making significant investments in product, sales and engineering to further develop our current and future solutions, we may opt to slow down our investment inVeritone energy and/or divest our energy platform altogether. Growing our existing and new Software Products & Services customer base is critical for our success. During the nine months endedSeptember 30, 2022 , ending Software Products and Services customers grew to 618, a 43% 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. 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 ofSeptember 30, 2022 over 65% year over year and PandoLogic's non-volume hiring revenue for the nine months endedSeptember 30, 2022 , which excludes Amazon, grew over 100% year over year. Beginning inMarch 2022 , and as a result of the recent pullback in the macroeconomic environment caused by rising interest rates, we have experienced and are continuing to experience a reduction in hiring consumption from our largest customer, Amazon, and to a lesser extent from advertisers reducing spending across our managed services when compared to same periods in the prior year. To reduce this risk, we have been aggressively investing in existing customers and acquiring new customers. In order to continue to grow our Software Product & Services, diversify our customer base and drive increased sales within our existing customer base, we intend to continue to increase our sales and marketing spending in the near term as compared to the trailing twelve to eighteen months. 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. For the three and nine months endedSeptember 30, 2022 , our non-GAAP gross margin (calculated as described in "Non-GAAP Financial Measures" below) improved to approximately 80% compared with approximately 74% for the three and nine months endedSeptember 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 nine months endedSeptember 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 28 -------------------------------------------------------------------------------- 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 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 nine months endedSeptember 30, 2022 , we reported a non-GAAP net loss of$5.7 million and$18.1 million , respectively, as compared to$2.3 million and$10.1 million , respectively, during the three and nine months endedSeptember 30, 2021 . We do expect seasonality in our revenue and operating performance, with increased profitability during the quarter endedDecember 31 , driven partly from PandoLogic services and Managed Services. Moreover, and to continue to grow our revenue, we will continue to make targeted investments in people, namely software engineers and sales personnel. ThroughSeptember 30, 2022 , our headcount grew approximately 24% since the beginning of 2022. In addition, during the first nine months of 2022 we 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 made investments in our corporate infrastructure, including new ERP and workforce systems to help us better manage the scale and growth of our business. In the nine months endedSeptember 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 continued market disruptions caused by the 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 and fourth quarters 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 ofSeptember 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 29 -------------------------------------------------------------------------------- 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. sinceJanuary 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 nine months endedSeptember 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 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.
Reconciliation of GAAP net loss to Non-GAAP net loss
(in thousands)
Three Months Ended September 30,
2022 2021
Core Operations(1) Corporate(2) Total Core Operations(1) Corporate(2) Total
Net loss $ (7,921 ) $ 3,035 $ (4,886 ) $ (427 ) $ (11,064 ) $ (11,491 )
(Benefit from) provision for income
taxes 20 6 26 390 6 396
Depreciation and amortization 5,650 174 5,824 1,698 81 1,779
Stock-based compensation expense 2,944 2,158 5,102 878 4,393 5,271
Change in fair value of contingent consideration - (14,291 ) (14,291 ) - 303 303 Interest expense, net - 1,305 1,305 - - - Acquisition and due diligence costs - 839 839 - 1,426 1,426 State sales tax reserve - - - - 22 22 Severance and executive search 337 28 365 - - - Non-GAAP Net Income (Loss) $ 1,030$ (6,746 ) $ (5,716 ) $ 2,539$ (4,833 ) $ (2,294 ) (in thousands) Nine Months Ended September 30, 2022 2021 Core Operations(1) Corporate(2) Total Core Operations(1) Corporate(2) Total Net loss(3) $ (22,172 )$ (8,096 ) $ (30,268 ) $ (3,933 )$ (50,840 ) $ (54,773 ) (Benefit from) provision for income taxes(3) (826 ) (616 ) (1,442 ) 390 82
472
Depreciation and amortization(3) 16,054 440 16,494 3,865 324
4,189
Stock-based compensation expense 7,612 6,967 14,579 4,589 28,902
33,491
Change in fair value of contingent consideration(3) - (23,076 ) (23,076 ) - 303 303 State sales tax reserve - - - - 306 306 Interest expense, net - 3,670 3,670 - - - Acquisition and due diligence costs - 1,608 1,608 - 2,161 2,161 Charges related to sublease - - - - 3,367 3,367 Severance and executive search 337 28 365 - 349 349 Non-GAAP Net Income (Loss) $ 1,005$ (19,075 ) $ (18,070 ) $ 4,911$ (15,046 ) $ (10,135 ) 30
-------------------------------------------------------------------------------- (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 nine months ended
Three Months Ended Nine Months Ended
(dollars in thousands) September 30, September 30,
2022 2021 2022 2021
Revenue $ 37,196 $ 22,655 $ 105,838 $ 60,156
Cost of revenue 7,097 5,808 20,725 15,862
Non-GAAP gross profit 30,099 16,847 85,113 44,294
Non-GAAP gross margin 80.9 % 74.4 % 80.4 % 73.6 %
31--------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Revenue $ 37,196 $ 22,655 $ 105,838 $ 60,156
Cost of revenue 7,097 5,808 20,725 15,862
Non-GAAP gross profit 30,099 16,847 85,113 44,294
GAAP cost of revenue 7,097 5,808 20,725 15,862
Stock-based compensation expense (46 ) - (90 ) -
Non-GAAP cost of revenue 7,051 5,808 20,635 15,862
GAAP sales and marketing expenses 13,920 5,906 37,565 17,586 Stock-based compensation expense (538 ) (226 ) (1,728 ) (1,358 ) Severance and executive search (86 ) -
(86 ) (236 ) Non-GAAP sales and marketing expenses 13,296 5,680 35,751 15,992
GAAP research and development expenses 11,784 5,254 32,735 14,860 Stock-based compensation expense
(1,532 ) (431 ) (3,783 ) (2,016 )
Severance and executive search (198 ) - (198 ) (14 )
Non-GAAP research and development
expenses 10,054 4,823 28,754 12,830
GAAP general and administrative expenses 2,502 15,084 27,127 62,272 Depreciation
(320 ) (95 ) (764 ) (349 )
Stock-based compensation expense (2,986 ) (4,615 ) (8,978 ) (30,117 )
Change in fair value of contingent
consideration 14,291 (303 ) 23,076 (303 )
Charges related to sublease - - - (3,367 )
State sales tax reserve - (22 ) - (306 )
Acquisition and due diligence costs (839 ) (1,426 ) (1,608 ) (2,161 )
Severance and executive search (81 ) - (81 ) (99 )
Non-GAAP general and administrative
expenses 12,567 8,623 38,772 25,570
GAAP amortization (5,504 ) (1,683 ) (15,730 ) (3,840 )
GAAP loss from operations (3,611 ) (11,080 ) (28,044 ) (54,264 )
Total non-GAAP adjustments (1) (2,161 ) 8,801 9,970 44,166
Non-GAAP loss from operations (5,772 ) (2,279 ) (18,074 ) (10,098 )
GAAP other expense, net (1,249 ) (15 ) (3,666 ) (37 )
Interest expense, net 1,305 - 3,670 -
Non-GAAP other expense, net 56 (15 ) 4 (37 )
GAAP loss before income taxes (4,860 ) (11,095 ) (31,710 ) (54,301 )
Total non-GAAP adjustments (1) (856 ) 8,801 13,640 44,166
Non-GAAP loss before income taxes (5,716 ) (2,294 ) (18,070 ) (10,135 )
Income tax (benefit) provision 26 396
(1,442 ) 472
GAAP net loss (4,886 ) (11,491 ) (30,268 ) (54,773 ) Total non-GAAP adjustments (1) (830 ) 9,197 12,198 44,638 Non-GAAP net loss$ (5,716 ) $ (2,294 ) $
(18,070 )
Shares used in computing non-GAAP basic and diluted net loss per share 36,202 33,333 35,924 32,753 Non-GAAP basic and diluted net loss per share$ (0.16 ) $ (0.07 ) $ (0.50 ) $ (0.31 )
(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.
32
--------------------------------------------------------------------------------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 Software Customers, (iii) Average Annual Revenue (AAR), (iv) Total New Bookings, and (iv) Gross Revenue Retention, in each case as defined in the footnotes to the table below. The supplemental financial information for our Managed Services includes: (i) average gross billings per active agency client, and (ii) revenue.
Software Products & Services Supplemental Financial Information
The following table sets forth the results for each of our Software Products & Services supplemental financial information.
Quarter Ended
Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, Sept 30,
2021 2021 2021 2021 2022 2022 2022
Software Revenue - Pro Forma
(in 000's) (1) $ 10,183 $ 20,072 $ 21,860 $ 40,223 $ 18,167 $ 18,379 $ 20,812
Ending Software Customers (2) 385 419 433 529 559 594 618
Average Annual Revenue (AAR)
(in 000's) (3) $ 199 $ 203 $ 208 $ 209 $ 207 $ 187 $ 170
Total New Bookings (in 000's)
(4) $ 2,442 $ 4,896 $ 3,356 $ 8,317 $ 9,574 $ 14,658 $ 16,548
Gross Revenue Retention (5) >90% >90% >90% >90% >90% >90% >90%
(1) "Software Revenue - Pro Forma" includes historical Software Products & Services revenue from the past seven (7) 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 Software Customers" includes Software Products & Services customers as of the end of each respective quarter set forth above with trailing twelve-month revenues in excess of$2,400 for 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 fromEnding Software Customers for Software Products & Services as of the 3 months in the prior year quarter to such period, or Prior Year Quarter Revenue. We then deduct from the Prior Year Quarter Revenue any revenue from Ending Software Customers who are no longer customers as of the current period end, or Current Period Ending Customer Revenue. We then divide the total Current Period Ending Customer Revenue by the total Prior Year Quarter Revenue to arrive at our dollar-based gross retention rate, which is the percentage of revenue from all Ending Software Customers from our Software Products & Services as of the year prior that is not lost to customer churn. 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.
The following table sets forth the reconciliation of pro forma revenue to revenue and the calculation of AAR.
Quarter Ended
Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, Sept 30,
2021 2021 2021 2021 2022 2022 2022
Software Products & Services
Revenue $ 4,685 $ 5,580 $ 9,027 $ 40,223 $ 18,167 $ 18,379 $ 20,812
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 $ 20,812
Managed Services Revenue 13,610 13,626 13,628 14,926 16,240 15,856 16,384
Total Pro Forma Revenue $ 23,793 $ 33,698 $ 35,488 $ 55,149 $ 34,407 $ 34,235 $ 37,196
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Trailing Twelve Months Ended
Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, Sept 30,
2021 2021 2021 2021 2022 2022 2022
Software Products & Services
Revenue $ 15,439 $ 18,017 $ 23,693 $ 59,515 $ 72,997 $ 85,796 $ 97,581
PandoLogic Revenue (1) 50,283 57,262 59,292 32,824 27,325 12,833 -
Software Revenue - Pro Forma
92,339$ 100,322 $ 98,629 $ 97,581 Managed Services Revenue 43,845 52,019 53,279 55,789 58,419 60,546 63,406 Total Pro Forma Revenue$ 109,567 $ 127,298 $ 136,264 $ 148,128 $ 158,741 $ 159,175 $ 160,987 Average Number of Customers - Pro Forma 330 372 399 442 485 529 575
Average Annual Revenue (AAR)
209 $ 207 $ 187 $ 170 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,
2021 2021 2021 2021 2022 2022 2022
Avg billings per active
Managed Services client (in
000's) (6) $ 582 $ 622 $ 615 $ 625 $ 684 $ 736 $ 747
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, third quarter of 2022 advertising revenue increased slightly year over year. 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 endedSeptember 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 Nine Months Ended (dollars in thousands) September 30, September 30, 2022 2021 2022 2021 Revenue$ 37,196 $ 22,655 $ 105,838 $ 60,156 Operating expenses: Cost of revenue 7,097 5,808 20,725 15,862 Sales and marketing 13,920 5,906 37,565 17,586 Research and development 11,784 5,254 32,735 14,860 General and administrative 2,502 15,084 27,127 62,272 Amortization 5,504 1,683 15,730 3,840 Total operating expenses 40,807 33,735 133,882 114,420 Loss from operations (3,611 ) (11,080 ) (28,044 ) (54,264 ) Other expense, net (1,249 ) (15 ) (3,666 ) (37 ) Loss before provision for income taxes (4,860 ) (11,095 ) (31,710 ) (54,301 ) (Benefit) provision for income taxes 26 396 (1,442 ) 472 Net loss$ (4,886 ) $ (11,491 ) $ (30,268 ) $ (54,773 ) 34
--------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses:
Cost of revenue 19.1 25.6 19.6 26.4
Sales and marketing 37.4 26.1 35.5 29.2
Research and development 31.7 23.2 30.9 24.7
General and administrative 6.7 66.6 25.6 103.5
Amortization 14.8 7.5 14.9 6.4
Total operating expenses 109.6 148.9 126.5 190.1
Loss from operations (9.6 ) (48.9 ) (26.5 ) (90.1 )
Other expense, net (3.4 ) (0.1 ) (3.5 ) (0.1 )
Loss before provision for income taxes (13.0 ) (49.0 ) (30.0 ) (90.2 )
(Benefit) provision for income taxes 0.1 1.7 (1.4 ) 0.8
Net loss (13.0 ) (50.7 ) (28.6 ) (91.0 )
Three and Nine Months Ended
Revenue
Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2022
Commercial Government & Commercial Government &
Enterprise Regulated Total Enterprise Regulated Total
Software Products & Services (1) $ 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
(1) Software Products & Services consists of aiWARE revenues of $3.8 million and
$16.7 million for the three and nine months ended September 30, 2022 ,
respectively, as well PandoLogic revenues of $17.0 million and $40.7 million for
the three and nine months ended September 30, 2022 .
Three Months Ended Nine Months Ended
September 30, 2021 September 30, 2021
Commercial Government & Commercial Government &
Enterprise Regulated Total Enterprise Regulated Total
Software Products & Services (1) $ 8,069 $ 958 $ 9,027 $ 16,596 $ 2,696 $ 19,292
Managed Services 13,628 - 13,628 40,864 - 40,864
Revenue $ 21,697 $ 958 $ 22,655 $ 57,460 $ 2,696 $ 60,156
(1) Software Products & Services consists of aiWARE revenues of $4.7 million and
$15.0 million for the three and nine months ended September 30, 2021 ,
respectively, as well PandoLogic revenues of $4.3 million for the three and nine
months ended September 30, 2021 .
Commercial Enterprise ("CE")
CE Software Products & Services revenue increased in the three and nine months endedSeptember 30, 2022 compared to the corresponding prior year periods due primarily due to our acquisition of PandoLogic inSeptember 2021 , coupled with expanded services we provided to existing media and entertainment customers. CE Managed Services increased in the three and nine months endedSeptember 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$0.1 million or 6% in the three months endedSeptember 30, 2022 compared to the corresponding prior year period while remaining relatively flat in the nine months endedSeptember 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. 35 -------------------------------------------------------------------------------- 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 Nine Months Ended
(dollars in thousands) September 30, September 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Cost of revenue $ 7,097 $ 5,808 $ 1,289 22.2 % $ 20,725 $ 15,862 $ 4,863 30.7 %
Sales and marketing 13,920 5,906 8,014 135.7 % 37,565 17,586 19,979 113.6 %
Research and development 11,784 5,254 6,530 124.3 % 32,735 14,860 17,875 120.3 % General and administrative 2,502 15,084 (12,582 )
(83.4 )% 27,127 62,272 (35,145 ) (56.4 )% Amortization 5,504 1,683 3,821 227.0 % 15,730 3,840 11,890 309.6 % Total operating expenses$ 40,807 $ 33,735 $ 7,072 21.0 %$ 133,882 $ 114,420 $ 19,462 17.0 % Cost of Revenue. The increase in cost of revenue in the three and nine months endedSeptember 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 nine months endedSeptember 30, 2022 compared with the corresponding prior year periods was primarily due to our acquisition of PandoLogic inSeptember 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 36% in the three and nine months endedSeptember 30, 2022 , respectively, from 26% and 29% in the corresponding prior year periods. Research and Development. The increase in research and development expenses in the three and nine months endedSeptember 30, 2022 compared with the corresponding prior year periods was primarily due to an increase of$4.5 million and$13.0 million , respectively, in personnel-related costs from the addition of new engineering resources and ourSeptember 2021 acquisition of PandoLogic inSeptember 2021 . As a percentage of revenue, research and development expenses increased to 32% and 31% in the three and nine months endedSeptember 30, 2022 , respectively, from 23% and 25% in the corresponding prior year periods. General and Administrative. General and administrative expenses decreased by$12.6 million or 83% in the three months endedSeptember 30, 2022 compared with the corresponding prior year periods principally due to a$14.6 million decrease in the estimated fair value of contingent consideration, coupled with a$1.6 million decrease in stock compensation, partially offset by increases in costs from our acquisition of PandoLogic inSeptember 2021 . General and administrative expenses decreased$35.2 million or 56% in the nine months endedSeptember 30, 2022 compared with the corresponding prior year period principally due to a$23.4 million decrease in the estimated fair value of contingent consideration, a$21.1 million decrease in stock compensation expense attributable primarily to additional expense related to the vesting of performance-based stock options in 2021, coupled with$3.4 million one-time charge related to the sublease of our formerCosta Mesa corporate office space in the first quarter of 2021, partially offset by increases in personnel-related costs and from our acquisition of PandoLogic inSeptember 2021 . As a percentage of revenue, general and administrative expenses decreased to 7% and 26% in the three and nine months endedSeptember 30, 2022 , respectively, from 67% and 104% in the corresponding prior year periods.
Amortization Expense. Amortization expense increased in the three and nine
months ended
Other (Expense) Income, Net
Other expense, net for the three and nine months endedSeptember 30, 2022 was comprised primarily of interest expense of$1.2 million and$3.7 million , respectively, and increased compared with the corresponding prior year periods due primarily to the Convertible Notes we issued inNovember 2021 . 36 --------------------------------------------------------------------------------
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 Nine Months Ended
(dollars in thousands) September 30, September 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Revenue $ 37,196 $ 22,655 $ 14,541 64.2 % $ 105,838 $ 60,156 $ 45,682 75.9 %
Cost of revenue 7,097 5,808 1,289 22.2 % 20,725 15,862 4,863 30.7 %Non-GAAP gross profit 30,099 16,847 13,252 78.7 % 85,113 44,294 40,819
92.2 %
Non-GAAP gross margin 80.9 % 74.4 % 80.4 % 73.6 %
The increase in non-GAAP gross profit and non-GAAP gross margin in the three and
nine months ended September 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 nine months ended September 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$196.1 million as ofSeptember 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 as ofSeptember 30, 2022 as compared withDecember 31, 2021 was primarily due to investments made during the nine months endedSeptember 30, 2022 , taxes paid related to net share settlement of equity awards, and the payment of the PandoLogic 2021 earnout. We used$24.6 million in the nine months endedSeptember 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.
Nine Months Ended
(in thousands) September 30,
2022 2021
Cash used in operating activities $ (24,630 ) $ (3,528 )
Cash used in investing activities (11,116 ) (48,050 )
Cash (used in) provided by financing activities (22,903 ) 9,406
Net (decrease) increase in cash, cash equivalents and restricted cash$ (58,649 ) $ (42,172 ) Operating Activities Our operating activities used cash of$24.6 million in the nine months endedSeptember 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 . Our 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$3.5 million in the nine months ended nine months endedSeptember 30, 2021 , due primarily to our net loss of$54.8 million , adjusted by$41.1 million in non-cash expenses, including$33.5 million in stock-based compensation expense, offset in part by the net working capital increase of$10.1 million of cash received from Managed Services advertising clients for future payments to vendors.
Investing Activities
Our investing activities for the nine months endedSeptember 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.
Our investing activities for the nine months ended
37
--------------------------------------------------------------------------------Financing Activities
Our financing activities for the nine months endedSeptember 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. Our financing activities provided cash of$9.4 million in the nine months endedSeptember 30, 2021 . Net cash provided by financing activities consisted of$7.1 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 ofSeptember 30, 2022 , our only debt obligations were the Convertible Notes issued in the fourth quarter of fiscal year 2021. We have$5.3 million in purchase consideration commitments related to the VSL acquisition, the VocaliD acquisition, and theMarch 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 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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