VERITONE, INC. Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed under "Risk Factors," set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . See "Special Note Regarding Forward-Looking Statements" above at page 1.
Overview
Veritone, Inc. (collectively with our subsidiaries, referred to as "Veritone ," "Company," "we," "our," and "us") is a provider of artificial intelligence ("AI") solutions, including our proprietary AI platform, aiWARE™, digital content management solutions and content licensing services. We also operate a full-service media advertising agency. The following is a discussion and analysis of certain factors that have affected our results of operations and financial condition during the periods included in the accompanying condensed consolidated financial statements. In this discussion, we refer to our media advertising agency as our advertising business, our content licensing and live events services as our aiWARE content licensing and media services, and our aiWARE platform and digital content management offerings as our aiWARE SaaS solutions.
Impact of the Coronavirus ("COVID-19") Pandemic
The COVID-19 outbreak emerged in late 2019 and was declared a global pandemic by theWorld Health Organization onMarch 11, 2020 . The COVID-19 pandemic, and the actions being taken by governments worldwide to mitigate the public health consequences of the pandemic, have significantly impacted the global economy. For most of the first quarter of 2020, our results reflect historical trends and seasonality. However, inMarch 2020 , we began to experience a reduction in the demand for certain of our products and services as some customers began to reduce or delay their spending due to the negative impact of the pandemic on their businesses. In particular, net revenues from our aiWARE content licensing and media services business, which typically has significant revenues driven by major live sporting events, were negatively impacted in the first quarter of 2020 compared with the same period in 2019, due to the cancellation or postponement of substantially all major live sporting events inthe United States . As such suspension is expected to continue for the foreseeable future, the associated reduction in demand for our services is expected to have a material adverse impact on our net revenues from our aiWARE content licensing and media services business in the second quarter of 2020, and such impact could continue in future quarters. We expect the pandemic to affect substantially all of our customers, which may reduce the demand and/or delay purchase decisions for our products and services, and may impact the creditworthiness of customers. However, we have assessed the potential credit deterioration of our customers due to changes in the macroeconomic environment and has determined that no additional allowance for doubtful accounts was necessary as ofMarch 31, 2020 . The extent to which the COVID-19 pandemic and the related macroeconomic conditions may affect our financial condition or results of operations is uncertain. While our advertising and aiWARE SaaS solutions businesses did not experience decreases in net revenues in the first quarter of 2020 compared with the same period in 2019, the severity and duration of the pandemic and the resulting macroeconomic conditions are difficult to predict, and our revenues and operating results may be negatively impacted in future periods. The extent of the impact on our operational and financial performance will depend on various factors, including the duration and spread of the outbreak; advances in testing, treatment and prevention; the impact of government measures to contain the virus; and related government stimulus actions. Due to the nature of our business, the effect of the COVID-19 pandemic may not be fully reflected in its results of operations until future periods. The most significant risks to our business and results of operations arising from the COVID-19 pandemic are discussed in Part II, Item 1A (Risk Factors) below. Sales of Common Stock During the first quarter of 2020 and 2019, we sold an aggregate of 1,292,208 and 662,000 shares, respectively, of our common stock pursuant to the Equity Distribution Agreement that we entered into withJMP Securities LLC inJune 2018 (the "Equity Distribution Agreement"). We received net proceeds from such sales of approximately$3.0 million and$4.2 million , respectively, during the first quarter of 2020 and 2019, after deducting commissions of$0.1 million and$0.2 million , respectively, paid toJPM Securities LLC . The terms of the Equity Distribution Agreement are discussed under the heading "Capital Resources" below. Key Performance Indicators We track key performance indicators ("KPIs") for our advertising business and our aiWARE SaaS solutions business. We do not currently track KPIs for our aiWARE content licensing and media services business beyond our reported net revenues for that business. We evaluate the KPIs that are most relevant to our businesses periodically, and beginning in the first quarter of 2020, we made changes to the KPIs that we track for each business. 18 -------------------------------------------------------------------------------- The key performance indicators for our advertising business include: (i) average gross billings per active client, and (ii) net revenue. The key performance indicators for our aiWARE SaaS solutions business include: (i) total accounts on the platform, (ii) new bookings, (iii) total contract value of new bookings, and (iv) net revenue. In the tables below, the 'net revenues during quarter' amounts for the periods in 2019 reflect amounts reported using the revenue recognition guidance of Topic 605, Revenue Recognition, and the 'net revenues during the quarter" amounts for the first quarter of 2020 reflect amounts reported using the revenue guidance in Topic 606, Revenue from Contracts with Customers, following our adoption of Topic 606. For additional information about our revenue recognition accounting policies, see Recently Adopted Accounting Pronouncements in Note 2 to the Notes to the Condensed Consolidated Financial Statements including in this Quarterly Report on Form 10-Q. Advertising KPI Results The following table sets forth the results for each of the KPIs for our advertising business. Quarter Ended Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, 2019 2019 2019 2019 2020 Average gross billings per active client (in 000's)(1)$ 469 $ 488 $ 490 $ 511 $ 533 Net revenues during quarter (in 000's)$ 5,714 $ 5,842 $ 6,291 $ 6,517 $ 6,001
(1) For each quarter, reflects the average gross quarterly billings per client
over the twelve month period through the end of such quarter for clients
that are active during such quarter.
Our advertising business has experienced and may continue to experience
volatility in net revenues due to a number of factors, including: (i) the timing
of new large client wins; (ii) loss of clients who choose to replace our
services by bringing their advertising placement in-house; (iii) clients who
experience reductions in their advertising budgets due to issues with their own
businesses; (iv) losses of clients who change providers from time to time based
largely on pricing; and (v) the seasonality of the campaigns for certain large
clients. Our advertising business also relies on certain large key clients and
we have historically generated a significant portion of our net revenues from a
few major clients. As we continue to grow and diversify our client base, we
expect that our dependency on a limited number of large clients will be
minimized.
aiWARE SaaS Solutions KPI Results
The following table sets forth the results for each of the KPIs for our aiWARE
SaaS solutions business.
Quarter Ended
Mar 31, Jun 30, Sept 30, Dec 31, Mar 31,
2019 2019 2019 2019 2020
Total accounts on platform at
quarter end 911 941 980 1,069 1,587
New bookings received during
quarter (in 000's)(1) $ 1,316 $ 1,362 $ 1,384 $ 2,522 $ 1,397
Total contract value of new
bookings received during quarter
(in 000's)(2) $ 2,092 $ 1,351 $ 1,724 $ 12,872 $ 2,312
Net revenues during quarter (in
000's) $ 2,754 $ 2,677 $ 2,350 $ 2,872 $ 3,108 (1) Represents the contractually committed fees payable during the first 12
months of the contract term, or the non-cancellable portion of the
contract term (if shorter), for new contracts received in the quarter,
excluding any variable fees under the contract (i.e., fees for cognitive
processing, storage, professional services and other variable services).
(2) Represents the total fees payable during the full contract term for new
contracts received in the quarter (including fees payable during any
cancellable portion and an estimate of license fees that may fluctuate
over the term), excluding any variable fees under the contract (i.e., fees
for cognitive processing, storage, professional services and other
variable services).
As we grow our aiWARE SaaS solutions business, we expect that our KPI results
will be impacted in different ways based on our customer profiles and the nature
of their use of our aiWARE SaaS solutions in certain target markets. For
example, in the government, legal and compliance markets, use of our aiWARE SaaS
solutions is often project-based and, accordingly, in a given period, we may
experience significant increases or decreases in net revenue without any
significant change in total accounts or new bookings. The timing of large
contract renewals and the variable versus fixed fee nature of certain contracts
will impact the amount of new bookings and the total contract value of new
bookings from quarter to quarter. As such, our results for different KPIs may
fluctuate significantly within the same period, and the result for a particular
KPI in one period may not be indicative of the results that we will achieve for
that KPI in future periods.
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Results of Operations
The following table sets forth items from our condensed consolidated statements of operations and comprehensive loss for the three months endedMarch 31, 2020 and 2019, presented as a percentage of revenue: Three Months Ended March 31, 2020 2019 Net revenues 100.0 % 100.0 % Cost of revenues 32.0 31.9 Gross profit 68.0 68.1 Operating expenses: Sales and marketing 45.9 50.6 Research and development 32.8 57.2 General and administrative 97.0 96.4 Total operating expenses 175.7 204.2 Loss from operations (107.7 ) (136.1 ) Other income, net 1.1 1.7 Loss before provision for income taxes (106.6 ) (134.4 ) Provision for income taxes - - Net loss (106.6 ) (134.4 ) Three Months EndedMarch 31, 2020 Compared with Three Months EndedMarch 31, 2019 Net Revenues Three Months Ended (dollars in thousands) March 31, 2020 2019 $ Change % Change Advertising$ 6,001 $ 5,714 $ 287 5.0 % aiWARE SaaS Solutions 3,108 2,754 354 12.9 % aiWAREContent Licensing and Media Services 2,795 3,657 (862 ) (23.6 )% Net revenues$ 11,904 $ 12,125 $ (221 ) (1.8 )%
The increase in advertising net revenues in the first quarter of 2020 compared with the corresponding prior year period, was due to a combination of the addition of new clients and increased business with existing clients.
aiWARE SaaS solutions net revenues increased in the first quarter of 2020 compared with the corresponding prior year period due primarily to a$0.4 million increase in net revenues in our media and entertainment market as we added new customers and expanded our services to some existing customers, offset in part by a slight decrease year over year in revenues from customers in our government, legal and compliance markets. Net revenues from our aiWARE content licensing and media services business, which typically has significant revenue driven by major sporting events, were negatively impacted in the first quarter of 2020 compared with the prior year period due to the cancellation or postponement of substantially all major sporting events inMarch 2020 as a result of the COVID-19 pandemic. As such suspension is expected to continue for the foreseeable future, the associated reduction in demand for our services is expected to have a material adverse impact on our net revenues from our aiWARE content licensing and media services business in the second quarter of 2020, and such impact could continue in future quarters. 20
-------------------------------------------------------------------------------- Net revenues in our advertising business are impacted by the timing of particular advertising campaigns of our major clients, in many cases due to the seasonal nature of their advertising activities. In our aiWARE SaaS solutions business, revenues from customers in certain markets, particularly in the government, legal and compliance market, are often project-based and are impacted by the timing of projects. Net revenues from our aiWARE content licensing and media services are impacted by the timing of major sporting events throughout the year. As such, in general, we expect that our net revenues from these businesses and markets may fluctuate significantly from period to period.
In addition, as discussed above, we anticipate that our revenues in future periods could be significantly impacted by the macroeconomic conditions resulting from the COVID-19 pandemic.
Cost of Revenues; Gross Profit and Gross Margin
Three Months Ended
(dollars in thousands) March 31,
2020 2019 $ Change % Change
Cost of net revenue $ 3,811 $ 3,872 $ (61 ) -1.6 %
Gross profit 8,093 8,253 (160 ) -1.9 %
Gross margin 68.0 % 68.1 %
Our gross margins in the three months ended March 31, 2020 and 2019 were at
approximately the same level. Our advertising revenues, which have gross margins
exceeding 95%, represented 50% and 47% of our total revenues for the three
months ended March 31, 2020 and 2019, respectively. Our aiWARE SaaS solutions
and aiWARE content licensing and media services, which generally have lower
gross margins than our advertising business, represented 50% and 53% of our
total revenues for the three months ended March 31, 2020 and 2019, respectively.
Operating Expenses
Three Months Ended
(dollars in thousands) March 31,
2020 2019 $ Change % Change
Sales and marketing $ 5,460 $ 6,133 (673 ) -11.0 %
Research and development 3,902 6,938 (3,036 ) -43.8 %
General and administrative 11,543 11,690 (147 ) -1.3 %
Total operating expenses $ 20,905 $ 24,761 (3,856 ) -15.6 %
Sales and Marketing. The decrease in sales and marketing expenses in the three
months ended March 31, 2020 compared with the corresponding prior year period
was due primarily to a decrease in compensation costs resulting from our focused
spending reductions. As a percentage of net revenues, sales and marketing
expenses declined to 46% in the three months ended March 31, 2020 from 51% in
the corresponding prior year period.
Research and Development. The decrease in research and development expenses in
the three months ended March 31, 2020 compared with the corresponding prior year
period was due primarily to a decrease in compensation costs resulting from our
focused spending reductions. The decrease is also due to $0.9 million in
contingent payments made to the former stockholders of Machine Box in the first
quarter of 2019, which did not recur in the current year period, and a decrease
in platform costs and cognitive engine expenses. As a percentage of net
revenues, research and development expenses declined to 33% in the first quarter
of 2020 from 57% in prior year period.
General and Administrative. The decrease in general and administrative expenses
in the three months ended March 31, 2020 compared with the corresponding prior
year period was due primarily to a decrease in accounting and legal fees, offset
in part by an increase in compensation costs.
We intend to continue to invest in the development of our AI capabilities and
enhancement of our aiWARE SaaS solutions and services, and in our sales and
marketing efforts in order to drive greater awareness of our offerings, gain new
customers and grow our business. However, we plan to manage our operating
expenses prudently, particularly in light of the current uncertainties arising
from the COVID-19 pandemic. In November 2019 , we realigned our business and
functional teams to achieve operational efficiencies, implemented computing cost
reductions, and completed enhancements to our aiWARE operating system that we
expect will improve computing efficiency. We believe that these initiatives and
our ongoing cost management efforts will support the next phase of our growth
strategy while reducing our expenses and improving our financial performance.
Other Income, Net
Other income, net in each of the first quarters of 2020 and 2019 was comprised primarily of interest income on investments in money market funds, which totaled$0.1 million and$0.2 million , respectively. 21
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Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, which totaled$49.2 million as ofMarch 31, 2020 and$44.1 million as ofDecember 31, 2019 . The increase in our cash and cash equivalents in the three months endedMarch 31, 2020 was due primarily to the net cash provided by our operations, and$3.5 million in proceeds from common stock offerings.
Cash Flows
A summary of cash flows from our operating, investing and financing activities
is shown in the table below.
Three Months Ended
(in thousands) March 31,
2020 2019
Cash provided by (used in) operating activities $ 1,503 Cash (used in) provided by investing activities (9 )
2,375
Cash provided by financing activities 3,606
4,484
Net increase in cash, cash equivalents and restricted cash
$ 2,227 Operating Activities Our operating activities provided cash of$1.5 million in the three months endedMarch 31, 2020 , due primarily to a$9.7 million increase resulting from the timing of prepayments and advances by our advertising clients and related media payments, which more than offset our net loss of$12.7 million , after adjustments of$6.1 million in non-cash expenses, including$4.5 million in stock-based compensation expense. Our business strategy includes decreasing operational costs while investing in the development of our AI capabilities and enhancement of our aiWARE SaaS solutions and services to grow our business and future revenues. We gauge the amount of cash utilized in these efforts using the Non-GAAP metric presented below under the heading "Non-GAAP Financial Measure." Our use of cash as measured by Non-GAAP net loss decreased to$6.7 million for the three months endedMarch 31, 2020 from$9.3 million in the three months endedMarch 31, 2019 , as we leveraged the decrease in net operating expenses to reduce our Non-GAAP net loss. Our operating activities used cash of$4.6 million in the three months endedMarch 31, 2019 , due primarily to our net loss of$16.3 million , adjusted by$6.7 million in non-cash expenses, including$5.5 million in stock-based compensation expense, offset in part by cash received as client advances in our advertising business. Investing Activities
Our investing activities consisted of minimal amounts for capital expenditures
in the three months ended
Our investing activities provided cash of$2.4 million in the three months endedMarch 31, 2019 . Net cash provided by investing activities consisted primarily of proceeds from maturing marketable securities, which were used to fund a portion of the cash used in our operating activities.
Financing Activities
Our financing activities provided cash of$3.6 million in the three months endedMarch 31, 2020 . Net cash provided by financing activities consisted of$3.5 million in net proceeds received from our sales of common stock and$0.1 million received from the exercise of stock options and purchases of shares under our ESPP. Our financing activities provided cash of$4.5 million in the three months endedMarch 31, 2019 . Net cash provided by financing activities consisted primarily of$4.2 million in net proceeds received from our sales of common stock and$0.3 million received from purchases of shares under our ESPP.
Capital Resources
InJune 2018 , we entered into an Equity Distribution Agreement withJMP Securities LLC , as sales agent ("JMP Securities "), pursuant to which we may offer and sell, from time to time, throughJMP Securities , shares of our common stock having an aggregate offering price of up to$50.0 million , of which$21.7 million remains available for sale as of the date of this filing. Subject to the terms and conditions of the Equity Distribution Agreement and satisfaction of certain conditions,JMP Securities will use commercially reasonable efforts, consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations, and the rules of The Nasdaq Global Market, to sell shares of our common stock from time to time based upon our instructions, including any price, time or size limits that we specify, in any method deemed to be an "at the market offering" as defined in Rule 415(a)(4) of the Securities Act. We will payJMP Securities a commission of 3.0% of the aggregate gross proceeds from each sale of shares. 22 -------------------------------------------------------------------------------- We are not obligated to sell any shares under the Equity Distribution Agreement. The Equity Distribution Agreement may be terminated byJMP Securities or us at any time upon notice to the other party, or byJMP Securities at any time in certain circumstances, including the occurrence of a material adverse change in our business or financial condition that makes it impractical or inadvisable to market our shares or to enforce contracts for the sale of the shares. As ofMarch 31, 2020 , we had no outstanding debt obligations. OnApril 3, 2020 , we applied for loans under the Paycheck Protection Program (the "PPP") established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), and onApril 14 andApril 15, 2020 , we entered into loan agreements and promissory notes evidencing unsecured loans in the aggregate amount of$6,491 under the PPP. The proceeds from these loans will be used for payroll costs and any payments of rent and utilities. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. However, no assurance can be given that we will seek or obtain forgiveness of the loans in whole or in part, or that we will not elect to prepay the loans.
We have no present agreements or commitments with respect to any material acquisitions of businesses or technologies or any other material capital expenditures.
We have generated significant losses since inception and expect to continue to generate losses for the foreseeable future. However, we believe that our current cash and cash equivalents balances will be sufficient to fund our operations in the ordinary course of business for at least the next twelve months from the date of this filing. However, we do not expect that our current cash and cash equivalents will be sufficient to support the development of our business to the point at which we have positive cash flows from operations. We plan to meet our future needs for additional capital through equity and/or debt financings. Equity financings may include sales of common stock under the Equity Distribution Agreement. We currently have no available lines of credit for future borrowings. Future equity or debt financing may not be available on favorable terms or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when required, our ability to continue to support our business growth, scale our infrastructure, develop product enhancements and respond to business challenges could be significantly impaired. If we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Non-GAAP Financial Measure
We have presented non-GAAP measures in the discussion of our cash flows above. The items excluded from Non-GAAP net loss are detailed in the reconciliation below. Non-GAAP net loss is not a financial measure calculated and presented in accordance withU.S. generally accepted accounting principles ("GAAP") and should not be considered as an alternative to net income (loss), operating income (loss) or any other financial measures so calculated and presented, nor as an alternative to cash flow from operating activities as a measure of liquidity. Other companies (including our competitors) may define Non-GAAP net loss differently. We have presented Non-GAAP net loss because management believes it to be an important supplemental measure of performance that is commonly used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, and believes that it provides a useful comparison of our current period financial results to our historical and future financial results. Management also uses this information internally for forecasting and budgeting. This non-GAAP measure may not be indicative of our historical operating results or predictive of our potential future results. Investors should not consider Non-GAAP net loss in isolation or as a substitute for analysis of our results as reported in accordance with GAAP. Three Months Ended (in thousands)March 31, 2020 2019
Reconciliation of Net Loss to Non-GAAP Net Loss:
Net loss $ (12,684 ) $ (16,306 )
Provision for income taxes 3 9
Depreciation and amortization 1,604 1,133
Stock-based compensation expense 4,456 4,803
Change in fair value of warrant liability (2 ) 13
Gain on sale of asset (56 ) -
Machine Box contingent payments - 917
Performance Bridge earn-out fair value adjustment -
139
Non-GAAP Net Loss $ (6,679 ) $ (9,292 )
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