SoundHound AI(US:SOUN)2024-08-09 20:13PART I. FINANCIAL INFORMATION This section presents the company's condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls Condensed Consolidated Financial Statements The company's financial position significantly strengthened by June 30, 2024, driven by equity financing and debt repayment, though Q2 2024 saw a wider net loss due to a one-time debt extinguishment charge Financial Statements Overview This section provides a concise overview of the company's key financial performance and position through summarized balance sheet, income statement, and cash flow data Key Balance Sheet Data (as of June 30, 2024 vs. Dec 31, 2023) | Metric | June 30, 2024 (Unaudited) | December 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $200.2 million | $95.3 million | | Total Assets | $266.7 million | $151.1 million | | Long-term debt | $0 | $84.3 million | | Total Liabilities | $42.7 million | $123.0 million | | Total Stockholders' Equity | $223.9 million | $28.2 million | Key Income Statement Data (Q2 & YTD 2024 vs 2023) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $13.5 million | $8.8 million | $25.1 million | $15.5 million | | Gross Profit | $8.5 million | $6.9 million | $15.4 million | $11.7 million | | Gross Margin | 63% | 79% | 61% | 75% | | Loss from Operations | $(22.0) million | $(16.5) million | $(50.5) million | $(41.7) million | | Net Loss | $(37.3) million | $(23.3) million | $(70.3) million | $(50.7) million | | Net Loss per Share | $(0.11) | $(0.11) | $(0.23) | $(0.25) | Key Cash Flow Data (Six Months Ended June 30) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(40.4) million | $(34.2) million | | Net cash used in investing activities | $(4.8) million | $(0.3) million | | Net cash provided by financing activities | $137.0 million | $154.6 million | Business Combinations This section details the company's recent business combinations, including the acquisition of SYNQ3 and an immaterial acquisition, outlining their financial impact - On January 3, 2024, the company acquired SYNQ3, a voice AI provider for the restaurant industry, for a preliminary purchase price of $15.7 million, consisting of cash and stock, expected to expand customer service solutions and market reach4344 - The SYNQ3 acquisition contributed $6.1 million in revenue and a net loss of $3.1 million for the period from January 3, 2024, to June 30, 202454 - The company completed an immaterial acquisition on June 14, 2024, which resulted in a preliminary gain on bargain purchase of $1.2 million due to the seller's financial distress57 - The SYNQ3 acquisition added $6.0 million in goodwill and $12.7 million in identifiable intangible assets, including developed technology, customer relationships, and tradename5053 Revenue Analysis This section analyzes the company's revenue performance, detailing breakdowns by service type and geographic region, and highlighting customer concentration Revenue by Service Type (Three Months Ended June 30) | Service Type | Q2 2024 | Q2 2023 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Product royalties | $9.7 million | $8.2 million | +$1.5 million | +19% | | Service subscriptions | $3.6 million | $0.4 million | +$3.2 million | +789% | | Monetization | $0.1 million | $0.2 million | -$0.1 million | -38% | | Total | $13.5 million | $8.8 million | +$4.7 million | +54% | - The significant 789% increase in Service subscriptions revenue was primarily driven by the contribution from the newly acquired SYNQ3207 Revenue by Geographic Region (Three Months Ended June 30) | Region | Q2 2024 | Q2 2023 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Americas | $3.8 million | $0.7 million | +$3.1 million | +446% | | Asia | $4.7 million | $3.4 million | +$1.3 million | +40% | | EMEA | $4.9 million | $4.7 million | +$0.2 million | +5% | | Total | $13.5 million | $8.8 million | +$4.7 million | +54% | - For the three months ended June 30, 2024, two customers (Customer A and C) accounted for 27% and 35% of total revenue, respectively, indicating significant customer concentration34 Debt and Financing This section outlines the company's debt management and financing activities, including the full repayment of its term loan and proceeds from equity offerings - On June 7, 2024, the company prepaid its entire outstanding Term Loan of $100.0 million, paying a total of $105.6 million, which resulted in a loss on debt extinguishment of $15.6 million102221 - As of June 30, 2024, the company has no long-term debt outstanding, compared to $84.3 million at the end of 202310102 - The company fully utilized its $150 million Sales Agreement (ATM offering) by March 31, 2024, raising net proceeds of $133.8 million120252 - A new $150 million Equity Distribution Agreement (ATM offering) was initiated on April 9, 2024, under which the company had raised $100.4 million in gross proceeds by June 30, 2024121122 Subsequent Events This section discloses significant events occurring after the reporting period, including further equity sales and a major acquisition - In July 2024, the company sold the remaining $49.6 million of shares available under its Equity Distribution Agreement, fully utilizing the program156 - On August 6, 2024, the company acquired Amelia Holdings, Inc., a conversational AI platform, for approximately $80.0 million in cash and stock, plus potential performance-based earnouts, also assuming and largely retiring Amelia's debt157 Management's Discussion and Analysis (MD&A) Management attributes Q2 revenue growth to the SYNQ3 acquisition and increased royalties, with gross margin declining due to SYNQ3's integration, while liquidity significantly improved via ATM equity offerings, enabling debt repayment and strategic acquisitions Business Overview and Strategy This section provides an overview of SoundHound's core business as a conversational intelligence leader, its revenue model, and strategic growth initiatives - SoundHound is a global leader in conversational intelligence, offering independent Voice AI solutions for automotive, TV, IoT, and customer service industries161 - The company's business model is built on three pillars: Product Royalties, Service Subscriptions, and a Monetization ecosystem, with Product Royalties currently contributing the majority of revenue, but subscription and monetization expected to grow172176 - A key strategy is the 'monetization flywheel': as more products integrate the platform, more services will join, creating a cycle of increased usage and revenue sharing that encourages further adoption176 Results of Operations Analysis This section analyzes the company's operational performance, detailing changes in revenue, gross margin, and key operating expenses for the period - Q2 2024 revenue increased by $4.7 million (54%) YoY, driven by a $3.2 million increase in service subscription revenue from the SYNQ3 acquisition and a $1.5 million increase in product royalties205207 - Gross margin decreased to 63% in Q2 2024 from 79% in Q2 2023, primarily due to the integration of SYNQ3's lower-margin business and amortization of acquired intangibles209 - Research & Development expenses increased by $4.0 million (34%) in Q2 YoY, due to higher personnel costs ($3.0 million) and cloud computing services ($1.4 million)211 - General & Administrative expenses increased by $3.1 million (48%) in Q2 YoY, mainly from a $2.5 million rise in legal and professional fees, including $0.5 million in SYNQ3 acquisition costs213 - A loss on debt extinguishment of $15.6 million was recognized in Q2 2024 from the early repayment of the Term Loan, significantly impacting the net loss for the quarter196221 Liquidity and Capital Resources This section assesses the company's liquidity position, identifying primary cash sources and their utilization for operations, acquisitions, and debt repayment - The company's unrestricted cash and cash equivalents stood at $200.2 million as of June 30, 2024, with management confident in funding operations for at least the next twelve months231 - Principal sources of liquidity are cash reserves and proceeds from the sale of common stock via at-the-market (ATM) offerings232233 - During the six months ended June 30, 2024, net cash provided by financing activities was $137.0 million, primarily from stock sales, which was used for operations, acquisitions, and the repayment of $105.5 million in debt261263 Critical Accounting Policies This section identifies critical accounting policies, particularly those related to business combinations, goodwill, and intangible assets, requiring significant management estimates - The company has identified new critical accounting policies related to Business Combinations, Contingent Consideration, Goodwill, and Intangible Assets due to recent acquisition activity268269272 - Accounting for business combinations requires significant management estimates for the fair value of assets acquired, liabilities assumed, and any contingent consideration, which are subject to refinement during a measurement period of up to one year269270 Market Risk Disclosures The company's market risk exposure remains largely unchanged, with interest rate risk eliminated due to debt repayment and foreign exchange risk deemed immaterial - As of June 30, 2024, the company had no outstanding borrowings, thus eliminating its exposure to interest rate risk from variable-rate debt276 - The company is subject to foreign exchange risk, but does not believe a 10% change in the U.S. dollar's value would have a material effect on operating results277 Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of June 30, 2024, due to previously identified material weaknesses in internal control over financial reporting, for which a remediation plan is actively underway - The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2024280 - The ineffectiveness is due to material weaknesses previously identified in the 2023 Form 10-K, relating to control environment, risk assessment, complex financing transactions, segregation of duties, and IT general controls282 - A remediation plan is in progress, involving third-party risk assessments, implementation of automated tools for segregation of duties, and development of new policies and procedures283284285 PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, and insider trading plans Other Information Overview The company faces a legal proceeding from the SYNQ3 acquisition, has no material changes to previously disclosed risk factors, and saw two directors adopt or modify Rule 10b5-1 trading plans during the quarter - The company is involved in a legal proceeding inherited from the SYNQ3 acquisition concerning a landlord dispute, leading to a recorded liability of $1.9 million as of June 30, 2024, after an appellate court reversed a prior judgment in SYNQ3's favor84288 - During Q2 2024, Chief Product Officer James M. Hom and Director Eric Ball adopted or modified Rule 10b5-1 trading plans for the future sale of company stock290291 - There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2023289