Veritone(VERI) - 2019 Q2 - Quarterly Report

Special Note Regarding Forward-Looking Statements The report contains forward-looking statements subject to risks and uncertainties, and actual results may differ materially - The report contains forward-looking statements subject to risks and uncertainties, and actual results may differ materially[8][9] - Factors influencing actual results include financial condition, operations, capital needs, competitive position, and risks detailed in Item 2 of Part I and Item 1A of the Annual Report on Form 10-K[8][9] - The company assumes no obligation to publicly update forward-looking statements unless required by law[11] PART I. FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements of Veritone, Inc. for the periods ended June 30, 2019, and December 31, 2018, along with management's discussion and analysis of financial condition and results of operations, market risk disclosures, and controls and procedures Item 1. Financial Statements (Unaudited) This section provides the unaudited condensed consolidated financial statements, including the balance sheets, statements of operations and comprehensive loss, statements of stockholders' equity, and statements of cash flows, along with their accompanying notes Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 The condensed consolidated balance sheets show a decrease in total assets and stockholders' equity from December 31, 2018, to June 30, 2019, primarily driven by a reduction in marketable securities and an accumulated deficit, despite an increase in cash and cash equivalents | Metric | June 30, 2019 | December 31, 2018 | Change ($) | Change (%) | | :--------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Cash and cash equivalents | $40,275 | $37,539 | $2,736 | 7.3% | | Marketable securities | $4,998 | $13,565 | $(8,567) | -63.2% | | Total current assets | $80,524 | $86,520 | $(5,996) | -6.9% | | Total assets | $109,562 | $117,754 | $(8,192) | -7.0% | | Total current liabilities | $53,694 | $56,085 | $(2,391) | -4.3% | | Total liabilities | $55,063 | $57,471 | $(2,408) | -4.2% | | Accumulated deficit | $(203,408) | $(170,411) | $(32,997) | 19.4% | | Total stockholders' equity | $54,499 | $60,283 | $(5,784) | -9.6% | Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2019 and 2018 The company experienced significant revenue growth for both the three and six months ended June 30, 2019, compared to the prior year, primarily driven by acquisitions, though net losses also increased due to higher operating expenses, particularly in general and administrative, and research and development | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change ($) | Change (%) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change ($) | Change (%) | | :--------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Net revenues | $12,270 | $4,168 | $8,102 | 194.4% | $24,395 | $8,556 | $15,839 | 185.1% | | Gross profit | $7,708 | $3,348 | $4,360 | 130.2% | $15,961 | $7,172 | $8,789 | 122.5% | | Total operating expenses | $24,444 | $17,801 | $6,643 | 37.3% | $49,205 | $34,855 | $14,350 | 41.2% | | Loss from operations | $(16,736) | $(14,453) | $(2,283) | 15.8% | $(33,244) | $(27,683) | $(5,561) | 20.1% | | Net loss | $(16,691) | $(14,330) | $(2,361) | 16.5% | $(32,997) | $(27,379) | $(5,618) | 20.5% | | Basic and diluted net loss per share | $(0.80) | $(0.88) | $0.08 | -9.1% | $(1.64) | $(1.69) | $0.05 | -3.0% | Condensed Consolidated Statements of Stockholders' Equity as of June 30, 2019 The statements of stockholders' equity show an increase in common stock and additional paid-in capital due to common stock offerings, exercise of options, and stock-based compensation, but this was offset by a significant increase in accumulated deficit from net losses, leading to an overall decrease in total stockholders' equity | Metric | December 31, 2018 | June 30, 2019 | Change ($) | | :--------------------------------- | :---------------- | :------------ | :--------- | | Common Stock (shares) | 19,335,220 | 21,918,406 | 2,583,186 | | Common Stock (amount) | $19 | $22 | $3 | | Additional Paid-in Capital | $230,674 | $257,813 | $27,139 | | Accumulated Deficit | $(170,411) | $(203,408) | $(32,997) | | Total Stockholders' Equity | $60,283 | $54,499 | $(5,784) | - Common stock offerings, net, contributed $12,215 thousand to additional paid-in capital in the six months ended June 30, 2019[20] - Stock-based compensation expense for the six months ended June 30, 2019, was $10,058 thousand[20] Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 The company continued to use cash in operating activities, though at a reduced rate compared to the prior year, while cash provided by investing activities decreased, and financing activities also saw a significant reduction, leading to a smaller net increase in cash, cash equivalents, and restricted cash | Metric | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change ($) | Change (%) | | :--------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Net cash used in operating activities | $(16,606) | $(21,341) | $4,735 | -22.2% | | Net cash provided by investing activities | $7,048 | $11,031 | $(3,983) | -36.1% | | Net cash provided by financing activities | $12,192 | $33,457 | $(21,265) | -63.6% | | Net increase in cash, cash equivalents and restricted cash | $2,634 | $23,147 | $(20,513) | -88.6% | | Cash, cash equivalents and restricted cash, end of period | $41,410 | $52,692 | $(11,282) | -21.4% | - Net loss was $(32,997) thousand for the six months ended June 30, 2019, a primary driver of cash used in operating activities[24] - Stock-based compensation expense, a non-cash adjustment, was $11,285 thousand for the six months ended June 30, 2019[24] Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures regarding the company's accounting policies, business operations, recent acquisitions, financial instruments, goodwill, intangible assets, and other financial statement line items, offering crucial context to the condensed consolidated financial statements NOTE 1. DESCRIPTION OF BUSINESS Veritone, Inc. is an AI-based computing solutions provider, primarily known for its proprietary aiWARE™ operating system, also offering digital content management and licensing services through its acquisition of Wazee Digital and operating a full-service advertising agency, enhanced by the acquisition of Performance Bridge Media - Veritone provides AI-based computing solutions, centered on its proprietary aiWARE™ operating system[27] - aiWARE™ integrates cognitive engines and applications to derive insights from unstructured and structured data, supporting various industries like media, entertainment, legal, compliance, and government[27] - The acquisition of Wazee Digital in August 2018 expanded offerings to include cloud-native digital content management and licensing services for the media and entertainment market[28] - The acquisition of Performance Bridge Media in August 2018 enhanced the company's full-service advertising agency with comprehensive podcast solutions[29] NOTE 2. PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis of presentation for the unaudited interim financial statements, confirms the consistency of accounting policies with the prior annual report, and discusses the company's liquidity, capital resources, use of accounting estimates, significant customers, and recently adopted and issued accounting pronouncements Basis of Presentation and Preparation The condensed consolidated financial statements are prepared in accordance with GAAP for interim reporting and SEC regulations, reflecting management's adjustments for fair presentation, and should be read in conjunction with the 2018 Annual Report on Form 10-K, with interim results not indicative of full-year performance - Financial statements are unaudited and prepared in accordance with GAAP for interim reporting and SEC rules[30] - Interim results for the three and six months ended June 30, 2019, are not necessarily indicative of full-year results[30] Liquidity and Capital Resources The company has historically generated negative cash flows from operations and net losses, with an accumulated deficit of $203,408 thousand as of June 30, 2019, and while current cash and marketable securities are believed sufficient for the next twelve months, additional equity and/or debt financing will be needed for future growth and potential acquisitions - The company generated negative cash flows from operations of $16,606 thousand and a net loss of $32,997 thousand for the six months ended June 30, 2019[32] - Accumulated deficit stood at $203,408 thousand as of June 30, 2019[32] - Cash, cash equivalents, and marketable securities totaled $45,273 thousand as of June 30, 2019, expected to be sufficient for at least the next twelve months[34] - The company anticipates continued net losses and will require additional capital through equity and/or debt financings for future growth and potential acquisitions[33][34] Use of Accounting Estimates The preparation of financial statements requires management to make significant estimates and assumptions, particularly concerning revenue recognition, allowance for doubtful accounts, valuation of stock awards and warrants, income taxes, and business acquisition allocations, with actual results potentially differing from these estimates - Significant estimates are made for revenue recognition, doubtful accounts, stock awards/warrants valuation, income taxes, and business acquisition allocations[35] Significant Customers The top ten customers accounted for a decreasing percentage of net revenues in 2019 compared to 2018, with no single customer representing 10% or more of net revenues for the three and six months ended June 30, 2019, indicating a reduced dependency on a few major clients | Period | Top Ten Customers' % of Net Revenues | | :--------------------------------- | :----------------------------------- | | Three months ended June 30, 2019 | 25.9% | | Six months ended June 30, 2019 | 24.9% | | Three months ended June 30, 2018 | 49.7% | | Six months ended June 30, 2018 | 52.1% | - No individual customer accounted for 10% or more of net revenues for the three and six months ended June 30, 2019[36] Significant Accounting Policies There have been no material changes to the company's significant accounting policies during the six months ended June 30, 2019, from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes in significant accounting policies during the six months ended June 30, 2019[37] Recently Adopted Accounting Pronouncements The company adopted ASU No. 2016-15 (Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments) and ASU No. 2016-18 (Statement of Cash Flows: Restricted Cash) in the first quarter of 2019, neither of which had a material impact on its consolidated financial statements - ASU No. 2016-15 (Cash Flow Classification) and ASU No. 2016-18 (Restricted Cash) were adopted in Q1 2019[38][39] - Adoption of these standards did not have a material impact on the consolidated financial statements[38][39] Recently Issued Accounting Pronouncements The company is evaluating the impact of several recently issued accounting pronouncements, including ASU No. 2014-09 (Revenue from Contracts with Customers), ASU No. 2016-02 (Leases), ASU No. 2017-04 (Goodwill Impairment), ASU No. 2018-07 (Nonemployee Share-Based Payment Accounting), and ASU No. 2018-13 (Fair Value Measurement Disclosures), which will become effective in future fiscal years - The new revenue standard (ASU 2014-09) will be effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019, with the company evaluating its impact[40][42] - ASU No. 2016-02 (Leases) will be effective in Q1 2020, requiring capitalization of most leases on the balance sheet, and the company is evaluating its impact[43] - ASU No. 2017-04 (Goodwill Impairment) will simplify the impairment test, effective fiscal year 2022, and is not expected to have a material impact[44] NOTE 3. BUSINESS COMBINATIONS This note details the acquisitions of Performance Bridge, Wazee Digital, and Machine Box in August and September 2018, outlining the purchase consideration, preliminary purchase price allocations, and the strategic rationale for each acquisition, which expanded the company's advertising, digital content management, and AI platform capabilities Acquisition of Performance Bridge In August 2018, Veritone acquired Performance Bridge for an estimated purchase price of $8,962 thousand, comprising cash, equity, and contingent earnout consideration, which expanded the company's media agency offerings to include comprehensive podcast solutions - Acquired Performance Bridge on August 21, 2018, for an estimated purchase price of $8,962 thousand[47][49] - The acquisition expanded the company's media agency offerings with comprehensive podcast solutions[48] | Asset/Liability | Amount | | :--------------------------------- | :----- | | Identifiable net assets acquired | $5,919 | | Goodwill | $3,043 | | Total purchase price | $8,962 | Acquisition of Wazee Digital, Inc. In August 2018, Veritone acquired Wazee Digital for an aggregate purchase price of $12,552 thousand, consisting of cash and equity, which expanded the company's offerings to include digital content management and licensing solutions, primarily serving the media and entertainment market - Acquired Wazee Digital on August 31, 2018, for an aggregate purchase price of $12,552 thousand[50][52] - The acquisition expanded offerings to include digital content management and licensing solutions[51] | Asset/Liability | Amount | | :--------------------------------- | :------ | | Identifiable net assets acquired | $11,448 | | Goodwill | $1,104 | | Total purchase price | $12,552 | Acquisition of Machine Box, Inc. In September 2018, Veritone acquired Machine Box for initial consideration of $1,484 thousand, with potential additional contingent payments up to $3,000 thousand tied to technical development and integration milestones and continued employment, enhancing the company's aiWARE™ platform capabilities with state-of-the-art machine learning technologies - Acquired Machine Box on September 6, 2018, for initial consideration of $1,484 thousand, with up to $3,000 thousand in contingent amounts[54][60] - Contingent amounts are treated as compensation expense for post-combination services, with $453 thousand and $1,333 thousand recognized in R&D expense for the three and six months ended June 30, 2019, respectively[55] - The acquisition enhanced the company's aiWARE™ platform capabilities with machine learning technologies[59] | Asset/Liability | Amount | | :--------------------------------- | :----- | | Identifiable net assets acquired | $350 | | Goodwill | $1,134 | | Total purchase price | $1,484 | Assumptions in the Allocations of Purchase Price Management's preliminary purchase price allocations for acquired businesses rely on significant estimates and assumptions, including third-party valuations for intangible assets and contingent earn-outs, and these allocations are subject to change upon finalization of valuation analyses, with corresponding adjustments to goodwill - Purchase price allocations are preliminary and based on management's estimates and third-party valuation expert reports[61] - Goodwill recognized is the excess of purchase price over the fair value of net assets acquired[61] NOTE 4. NET LOSS PER SHARE This note provides the computation of basic and diluted net loss per share, indicating a decrease in net loss per share for both the three and six months ended June 30, 2019, compared to the prior year, despite an increase in net loss, due to a higher weighted average number of shares outstanding | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(16,691) | $(14,330) | $(32,997) | $(27,379) | | Denominator for basic and diluted net loss per share | 20,759,396 | 16,314,236 | 20,138,756 | 16,192,569 | | Basic and diluted net loss per share | $(0.80) | $(0.88) | $(1.64) | $(1.69) | - Potentially dilutive securities, including common stock options, restricted stock units, and warrants, were anti-dilutive and thus excluded from diluted EPS calculation due to net losses[63] NOTE 5. FINANCIAL INSTRUMENTS This note describes the company's fair value hierarchy for financial instruments, classifying cash, cash equivalents, and marketable securities as Level 1 or Level 2, and stock warrants as Level 3, and provides details on the valuation methods and inputs used for these instruments Cash and Cash Equivalents and Marketable Securities The company's cash, cash equivalents, and marketable securities are valued using Level 1 (money market funds) and Level 2 (corporate debt securities) inputs, and as of June 30, 2019, total cash and marketable securities decreased to $45,273 thousand from $51,104 thousand at December 31, 2018, primarily due to a reduction in marketable securities | Metric | June 30, 2019 | December 31, 2018 | Change ($) | Change (%) | | :--------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Cash | $16,258 | $13,337 | $2,921 | 21.9% | | Money market funds (Level 1) | $24,017 | $24,202 | $(185) | -0.8% | | Corporate debt securities (Level 2) | $4,998 | $11,067 | $(6,069) | -54.8% | | U.S. government securities (Level 2) | $0 | $2,498 | $(2,498) | -100.0% | | Total | $45,273 | $51,104 | $(5,831) | -11.4% | - All marketable securities held as of June 30, 2019, will mature in one year or less[67] Stock Warrants The company's outstanding stock warrants are classified as Level 3 financial instruments and are valued using either a probability-weighted expected return model or the Black-Scholes option-pricing model, incorporating unobservable inputs like volatility and risk-free rates, with the fair value of the April 2018 Warrant increasing to $73 thousand as of June 30, 2019, from $23 thousand at December 31, 2018 - All outstanding stock warrants are categorized as Level 3 within the fair value hierarchy[69] - Warrants are valued using probability-weighted expected return or Black-Scholes models, incorporating contractual terms, maturity, risk-free rates, and volatility[69] | Metric | December 31, 2018 | June 30, 2019 | Change ($) | Change (%) | | :--------------------------------- | :---------------- | :------------ | :--------- | :--------- | | Balance | $23 | $73 | $50 | 217.4% | NOTE 6. GOODWILL AND INTANGIBLE ASSETS, NET This note details the changes in goodwill and the composition of intangible assets, with goodwill decreasing slightly due to a purchase accounting adjustment for Wazee Digital, while net intangible assets decreased from $20,480 thousand at December 31, 2018, to $18,823 thousand at June 30, 2019, primarily due to amortization Goodwill Goodwill decreased slightly from $5,509 thousand at December 31, 2018, to $5,420 thousand at June 30, 2019, primarily due to a purchase accounting adjustment related to the Wazee Digital acquisition | Metric | December 31, 2018 | June 30, 2019 | Change ($) | Change (%) | | :--------------------------------- | :---------------- | :------------ | :--------- | :--------- | | Balance | $5,509 | $5,420 | $(89) | -1.6% | - The decrease was primarily due to a $123 thousand Wazee Digital purchase accounting adjustment, partially offset by a $34 thousand Performance Bridge working capital adjustment[73] Intangible Assets Net intangible assets decreased to $18,823 thousand at June 30, 2019, from $20,480 thousand at December 31, 2018, primarily due to amortization, with developed technology and customer relationships representing the largest components of the company's intangible assets | Asset Type | June 30, 2019 (Net Carrying Amount) | December 31, 2018 (Net Carrying Amount) | Change ($) | Change (%) | | :--------------------------------- | :------------------------------------ | :------------------------------------ | :--------- | :--------- | | Acquired software and technology | $1,545 | $1,963 | $(418) | -21.3% | | Developed technology | $8,464 | $8,808 | $(344) | -3.9% | | Customer relationships | $7,750 | $8,567 | $(817) | -9.5% | | Total | $18,823 | $20,480 | $(1,657) | -8.1% | | Period | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Total Amortization Expense | $1,322 | $307 | $2,163 | $618 | - Future amortization of finite-lived intangible assets is projected to be $2,697 thousand for the remaining six months of 2019 and $5,382 thousand in 2020[75] NOTE 7. CONSOLIDATED FINANCIAL STATEMENTS DETAILS This note provides further disaggregation and details for selected line items within the condensed consolidated balance sheets and statements of operations and comprehensive loss, including cash, accounts receivable, property and equipment, accounts payable, net revenues by segment, and other income Cash, cash equivalents, and restricted cash Total cash, cash equivalents, and restricted cash increased to $41,410 thousand at June 30, 2019, from $38,776 thousand at December 31, 2018, with restricted cash held as collateral for a stand-by letter of credit and credit cards | Metric | June 30, 2019 | December 31, 2018 | Change ($) | Change (%) | | :--------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Cash and cash equivalents | $40,275 | $37,539 | $2,736 | 7.3% | | Long-term restricted cash | $1,135 | $1,237 | $(102) | -8.2% | | Total | $41,410 | $38,776 | $2,634 | 6.8% | Accounts Receivable, Net Net accounts receivable decreased to $26,820 thousand at June 30, 2019, from $29,142 thousand at December 31, 2018, with advertising receivables remaining the largest component, while aiWARE Content Licensing and Media Services receivables saw a significant increase | Metric | June 30, 2019 | December 31, 2018 | Change ($) | Change (%) | | :--------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Accounts receivable — Advertising | $23,167 | $26,226 | $(3,059) | -11.7% | | Accounts receivable — aiWARE SaaS Solutions | $2,166 | $2,418 | $(252) | -10.4% | | Accounts receivable — aiWARE Content Licensing and Media Services | $1,558 | $538 | $1,020 | 189.6% | | Less: allowance for doubtful accounts | $(71) | $(40) | $(31) | 77.5% | | Accounts receivable, net | $26,820 | $29,142 | $(2,322) | -8.0% | - The average commission earned by the company from advertising clients is less than 15% of the total invoiced amount[78] Property, equipment and improvements, net Net property, equipment, and improvements decreased to $3,660 thousand at June 30, 2019, from $4,008 thousand at December 31, 2018, primarily due to accumulated depreciation | Metric | June 30, 2019 | December 31, 2018 | Change ($) | Change (%) | | :--------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Property and equipment | $2,151 | $2,019 | $132 | 6.5% | | Leasehold improvements | $2,876 | $2,875 | $1 | 0.0% | | Less: accumulated depreciation | $(1,367) | $(886) | $(481) | 54.3% | | Net | $3,660 | $4,008 | $(348) | -8.7% | - Depreciation expense for the six months ended June 30, 2019, was $555 thousand, compared to $215 thousand in the prior year period[79] Accounts Payable Total accounts payable decreased significantly to $18,459 thousand at June 30, 2019, from $28,714 thousand at December 31, 2018, primarily driven by a reduction in advertising-related payables | Metric | June 30, 2019 | December 31, 2018 | Change ($) | Change (%) | | :--------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Accounts payable — Advertising | $17,148 | $27,655 | $(10,507) | -38.0% | | Accounts payable — Other | $1,311 | $1,059 | $252 | 23.8% | | Total | $18,459 | $28,714 | $(10,255) | -35.7% | - Accounts payable – Advertising reflects the cost of advertisements placed with media vendors[80] Net Revenues Net revenues significantly increased across all segments for both the three and six months ended June 30, 2019, compared to the prior year, with aiWARE Content Licensing and Media Services, a new segment from the Wazee Digital acquisition, contributing substantially to this growth | Segment | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change ($) | Change (%) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change ($) | Change (%) | | :--------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Advertising | $5,842 | $3,308 | $2,534 | 76.6% | $11,556 | $6,429 | $5,127 | 79.7% | | aiWARE SaaS Solutions | $2,677 | $860 | $1,817 | 211.3% | $5,457 | $2,127 | $3,330 | 157.0% | | aiWARE Content Licensing and Media Services | $3,751 | $0 | $3,751 | NM | $7,382 | $0 | $7,382 | NM | | Total net revenues | $12,270 | $4,168 | $8,102 | 194.4% | $24,395 | $8,556 | $15,839 | 185.1% | - Gross media placements were $52,973 thousand and $103,755 thousand for the three and six months ended June 30, 2019, respectively[81] Other Income, Net Other income, net, remained relatively stable at $51 thousand for the three months ended June 30, 2019, and $262 thousand for the six months ended June 30, 2019, primarily consisting of interest income, offset by changes in the fair value of warrant liability and other minor items | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Interest income, net | $160 | $168 | $329 | $349 | | Change in fair value of warrant liability | $(37) | $(15) | $(50) | $(15) | | Other income, net | $51 | $133 | $262 | $316 | NOTE 8. COMMITMENTS AND CONTINGENCIES This note outlines the company's lease commitments and other potential legal contingencies, with future minimum lease payments totaling $11,143 thousand through fiscal year 2024, and no current involvement in legal proceedings expected to have a material adverse effect Leases The company leases facilities under operating lease arrangements expiring through fiscal year 2024, with total minimum payments of $11,143 thousand, and rent expense for the six months ended June 30, 2019, was $1,479 thousand, an increase from the prior year | Year | Amount | | :--------------------------------- | :----- | | 2019 (6 months) | $1,256 | | 2020 | $2,414 | | 2021 | $2,211 | | 2022 | $1,852 | | 2023 | $1,680 | | Thereafter | $1,730 | | Total | $11,143 | - Total rent expense for operating leases was $1,479 thousand for the six months ended June 30, 2019, compared to $833 thousand in the prior year period[85] Other Contingencies The company is not currently a party to any legal proceedings that management believes would have a material adverse effect on its financial position, results of operations, or cash flows - No current legal proceedings are expected to have a material adverse effect on the company's financial results[86] NOTE 9. STOCKHOLDERS' EQUITY This note details changes in stockholders' equity, including common stock issuances from offerings, option exercises, and acquisitions, as well as information on outstanding common stock warrants Common Stock Issuances During the first six months of 2019, the company issued 1,668,663 shares of common stock through its Equity Distribution Agreement, generating $12,215 thousand in net proceeds, with additional shares issued for acquisitions (Performance Bridge and Machine Box) and employee stock plans - 1,668,663 shares of common stock were issued through the Equity Distribution Agreement, yielding $12,215 thousand in net proceeds[87] - 580,713 shares were issued to former Performance Bridge stockholders and 186,135 shares to former Machine Box stockholders[87][88] - 147,675 shares were issued for stock option exercises, restricted stock unit vesting, and ESPP purchases[88] Common Stock Warrants As of June 30, 2019, and December 31, 2018, the company had outstanding warrants to purchase an aggregate of 1,297,151 shares of its common stock | Date | Shares | | :--------------------------------- | :----------- | | June 30, 2019 | 1,297,151 | | December 31, 2018 | 1,297,151 | NOTE 10. STOCK PLANS This note details the company's stock-based compensation, including grants of time-based and performance-based stock options, restricted stock awards, and restricted stock units, along with the valuation assumptions and recognized compensation expense Stock-Based Compensation Stock-based compensation expense significantly increased to $11,285 thousand for the six months ended June 30, 2019, from $5,125 thousand in the prior year, driven by performance-based stock options, stock options, and Machine Box contingent common stock issuances - Granted 555,346 Time-Based Options and 1,545,849 Performance Options during the six months ended June 30, 2019[90] - Performance Options vest in three tranches based on stock price goals ($49.15, $98.31, $196.62 per share)[91] | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Restricted stock units | $299 | $99 | $497 | $147 | | Restricted stock awards | $96 | $135 | $256 | $353 | | Machine Box contingent common stock issuances | $523 | $0 | $1,227 | $0 | | Performance-based stock options | $2,020 | $53 | $3,956 | $53 | | Stock options | $2,703 | $2,246 | $5,060 | $4,282 | | Employee stock purchase plan | $137 | $118 | $289 | $290 | | Total | $5,778 | $2,651 | $11,285 | $5,125 | - General and administrative expenses accounted for the largest portion of stock-based compensation expense, totaling $8,787 thousand for the six months ended June 30, 2019[94] Equity Award Activity This section provides a breakdown of the activity for restricted stock awards, restricted stock units, performance-based stock options, and other stock options during the six months ended June 30, 2019, detailing grants, vesting, forfeitures, and unrecognized compensation costs Restricted Stock Awards Unvested restricted stock awards decreased to 40,963 shares at June 30, 2019, from 72,208 shares at December 31, 2018, due to vesting, with total unrecognized compensation cost of $246 thousand, expected to be recognized over 1.3 years | Metric | Shares | | :--------------------------------- | :----- | | Unvested at December 31, 2018 | 72,208 | | Vested | (31,245) | | Unvested at June 30, 2019 | 40,963 | Restricted Stock Units Unvested restricted stock units increased to 162,745 shares at June 30, 2019, from 49,143 shares at December 31, 2018, primarily due to new grants, with total unrecognized compensation cost of $950 thousand, expected to be recognized over 1.2 years | Metric | Shares | | :--------------------------------- | :------- | | Unvested at December 31, 2018 | 49,143 | | Granted | 150,211 | | Vested | (35,609) | | Unvested at June 30, 2019 | 162,745 | Performance-Based Stock Options Outstanding performance-based stock options increased to 4,610,526 shares at June 30, 2019, from 3,167,325 shares at December 31, 2018, due to new grants, with no performance-based options vesting during the period, and total unrecognized compensation expense of $26,231 thousand, expected to be recognized over 3.7 years | Metric | Options | | :--------------------------------- | :-------- | | Outstanding at December 31, 2018 | 3,167,325 | | Granted | 1,545,849 | | Forfeited | (102,648) | | Outstanding at June 30, 2019 | 4,610,526 | Stock Options Outstanding stock options increased to 5,420,587 shares at June 30, 2019, from 5,154,691 shares at December 31, 2018, due to new grants, partially offset by exercises, forfeitures, and expirations, with total unrecognized compensation expense of $13,924 thousand, expected to be recognized over 2.1 years | Metric | Options | | :--------------------------------- | :-------- | | Outstanding at December 31, 2018 | 5,154,691 | | Granted | 555,346 | | Exercised | (47,099) | | Forfeited | (183,892) | | Expired | (58,459) | | Outstanding at June 30, 2019 | 5,420,587 | Employee Stock Purchase Plan In January 2019, 64,967 shares of common stock were purchased under the ESPP, and as of June 30, 2019, accrued employee contributions for future purchases totaled $277 thousand - 64,967 shares of common stock were purchased under the ESPP on January 31, 2019[101] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition for the three and six months ended June 30, 2019, compared to the prior year periods, covering an overview of the business, impact of recent acquisitions, key performance indicators, detailed analysis of revenues and expenses, and discussion of liquidity and capital resources Forward-Looking Statements This subsection reiterates that the discussion contains forward-looking statements based on current expectations, which involve risks and uncertainties that could cause actual results to differ materially, as detailed in the 'Risk Factors' section of the Annual Report on Form 10-K - Discussion contains forward-looking statements subject to risks and uncertainties[103] - Actual results may differ materially due to factors discussed in "Risk Factors" in the Annual Report on Form 10-K[103] Overview Veritone is an AI solutions provider, leveraging its aiWARE™ operating system, with recent acquisitions of Wazee Digital and Performance Bridge expanding its offerings to include digital content management, licensing services, and comprehensive podcast advertising solutions, categorizing its businesses into advertising, aiWARE SaaS solutions, and aiWARE content licensing and media services - Veritone provides AI solutions, including its proprietary aiWARE™ operating system[104] - Acquisitions of Wazee Digital and Performance Bridge expanded offerings to digital content management, licensing, and podcast advertising[104] - Businesses are categorized as advertising, aiWARE SaaS solutions, and aiWARE content licensing and media services[105] Acquisitions This section provides a summary of the acquisitions of Performance Bridge, Wazee Digital, and Machine Box in 2018, detailing the purchase consideration, including cash, equity, and contingent earnout payments, and the strategic contributions of each acquisition to Veritone's business Performance Bridge Veritone acquired Performance Bridge on August 21, 2018, for $5.2 million initial consideration and $3.9 million in contingent earnout amounts, paid in cash and common stock, which enhanced the company's podcast advertising solutions - Acquired Performance Bridge on August 21, 2018, for $5.2 million initial consideration and $3.9 million in contingent earnout amounts[106] - Consideration included cash and 349,072 shares of common stock initially, with additional shares and cash for earnouts[106] Wazee Digital Veritone acquired Wazee Digital on August 31, 2018, for an aggregate purchase price of $12.6 million, paid in cash and common stock, which expanded the company's digital content management and licensing services - Acquired Wazee Digital on August 31, 2018, for $12.6 million[107] - Consideration included $7.4 million cash and 491,157 shares of common stock[107] Machine Box Veritone acquired Machine Box on September 6, 2018, for $1.5 million initial consideration and up to $3.0 million in contingent payments tied to technical milestones and continued employment, with these contingent payments recognized as R&D compensation expense, and $1.3 million recognized in the first six months of 2019 - Acquired Machine Box on September 6, 2018, for $1.5 million initial consideration and up to $3.0 million in contingent amounts[109] - Contingent payments are treated as compensation expense, with $1.3 million recognized in R&D expense for the six months ended June 30, 2019[110] - Machine Box achieved technical milestones in March and June 2019, triggering contingent payments in cash and common stock[111][112] Sales of Common Stock During the first six months of 2019, Veritone sold 1,668,663 shares of common stock through its Equity Distribution Agreement, generating approximately $11.8 million in net proceeds - Sold 1,668,663 shares of common stock via Equity Distribution Agreement in H1 2019[113] - Generated approximately $11.8 million in net proceeds from common stock sales[113] Key Performance Indicators The company tracks KPIs for its advertising and aiWARE SaaS solutions businesses, incorporating results from recent acquisitions, including client numbers, advertising spend, customer accounts, cognitive engines, data processed hours, new bookings, and monthly recurring revenue, which are subject to fluctuations based on market dynamics and project-based work Advertising KPI Results The advertising business showed growth in net new clients and active campaigns, with average advertising spend per active client remaining relatively stable, and net revenue increased significantly, partly due to the Performance Bridge acquisition, though the business experiences volatility due to client wins/losses, budget changes, and seasonality | Metric | Q2 2018 | Q3 2018 | Q4 2018 | Q1 2019 | Q2 2019 | | :--------------------------------- | :------ | :------ | :------ | :------ | :------ | | Net new advertising clients added during quarter | 14 | 10 | 14 | 14 | 21 | | Clients with active advertising campaigns during quarter | 74 | 78 | 115 | 107 | 108 | | Average advertising spend per active client during quarter | $425 | $540 | $478 | $486 | $497 | | Net revenue during quarter | $3,308 | $4,730 | $5,986 | $5,714 | $5,842 | - Advertising net revenues increased by $1.5 million and $3.1 million for the three and six months ended June 30, 2019, respectively, due to the Performance Bridge acquisition[124] - Volatility in advertising net revenues is influenced by timing of large client wins, client retention, budget changes, and seasonality[118] aiWARE SaaS Solutions KPI Results The aiWARE SaaS solutions business demonstrated growth in total customers, accounts on the platform, active cognitive engines, and hours of data processed, with total contract value of new bookings and monthly recurring revenue also increasing, partly due to the Wazee Digital and Machine Box acquisitions, but results can fluctuate due to project-based work and varying customer usage patterns | Metric | Q2 2018 | Q3 2018 | Q4 2018 | Q1 2019 | Q2 2019 | | :--------------------------------- | :------ | :------ | :------ | :------ | :------ | | Total customers at quarter end | 86 | 93 | 123 | 129 | 136 | | Total accounts on platform at quarter end | 625 | 634 | 840 | 911 | 941 | | Active cognitive engines at quarter end | 214 | 252 | 287 | 343 | 357 | | Hours of data processed during quarter | 2,729,000 | 2,830,000 | 3,566,000 | 4,061,000 | 4,015,050 | | Total contract value of new bookings received during quarter | $583 | $226 | $1,196 | $1,316 | $1,362 | | Monthly recurring revenue under agreements in effect at quarter end | $214 | $191 | $544 | $494 | $545 | | Net revenue during quarter | $860 | $1,406 | $2,426 | $2,754 | $2,677 | - Wazee Digital acquisition contributed $0.9 million and $2.1 million to aiWARE SaaS solutions net revenues for the three and six months ended June 30, 2019, respectively[125] - Revenues from legal and government markets are often project-based, leading to potential fluctuations in net revenue and data processed hours without changes in customer counts or MRR[122] Results of Operations This section provides a detailed comparative analysis of the company's net revenues, cost of revenues, gross profit, and operating expenses for the three and six months ended June 30, 2019, versus the corresponding periods in 2018, highlighting the impact of acquisitions and increased operating leverage Net Revenues Total net revenues significantly increased by 194.4% to $12,270 thousand in Q2 2019 and 185.1% to $24,395 thousand in H1 2019, primarily driven by the acquisitions of Performance Bridge and Wazee Digital, which introduced the new aiWARE Content Licensing and Media Services segment | Segment | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change ($) | Change (%) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change ($) | Change (%) | | :--------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Advertising | $5,842 | $3,308 | $2,534 | 76.6% | $11,556 | $6,429 | $5,127 | 79.7% | | aiWARE SaaS Solutions | $2,677 | $860 | $1,817 | 211.3% | $5,457 | $2,127 | $3,330 | 157.0% | | aiWARE Content Licensing and Media Services | $3,751 | $0 | $3,751 | NM | $7,382 | $0 | $7,382 | NM | | Total net revenues | $12,270 | $4,168 | $8,102 | 194.4% | $24,395 | $8,556 | $15,839 | 185.1% | - Advertising net revenues increased due to Performance Bridge acquisition and new/existing clients[124] - All aiWARE content licensing and media services revenues in 2019 were from the Wazee Digital acquisition[126] Cost of Revenues; Gross Profit and Gross Margin Gross margin decreased to 63% in Q2 2019 and 65% in H1 2019 from 80% and 84% respectively in the prior year periods, attributed to a higher proportion of net revenues coming from aiWARE businesses, which have lower gross margins than the advertising business, and increased amortization of intangible assets from acquisitions | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change ($) | Change (%) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change ($) | Change (%) | | :--------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Cost of net revenue | $4,562 | $820 | $3,742 | 456.3% | $8,434 | $1,384 | $7,050 | 509.4% | | Gross profit | $7,708 | $3,348 | $4,360 | 130.2% | $15,961 | $7,172 | $8,789 | 122.5% | | Gross margin | 63% | 80% | -17% | -21.3% | 65% | 84% | -19% | -22.6% | - The decrease in gross margin is due to a lower proportion of advertising revenues (48% in Q2 2019 vs. 79% in Q2 2018), as advertising has significantly higher gross margins[129] - Amortization of intangible assets from 2018 acquisitions reduced gross margin by approximately 3.9% in Q2 2019 and 3.3% in H1 2019[129] Operating Expenses Total operating expenses increased significantly in absolute dollars for both the three and six months ended June 30, 2019, primarily due to expenses from acquired businesses, amortization of intangibles, and increased stock-based compensation, but as a percentage of net revenues, operating expenses declined due to increased operating leverage from higher revenue levels Sales and Marketing Sales and marketing expenses increased in absolute dollars due to the inclusion of Wazee Digital and Performance Bridge expenses and amortization of customer relationships, but as a percentage of net revenues, they decreased significantly from 123.4% to 52.6% in Q2 2019, reflecting improved operating leverage | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change ($) | Change (%) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change ($) | Change (%) | | :--------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Sales and marketing | $6,448 | $5,142 | $1,306 | 25.4% | $12,581 | $10,890 | $1,691 | 15.5% | | As % of net revenues | 52.6% | 123.4% | -70.8% | -57.4% | 51.6% | 127.3% | -75.7% | -59.5% | - Increases were primarily due to $1.0 million (Q2) and $1.9 million (H1) from Wazee Digital and Performance Bridge, and $0.4 million (Q2) and $0.5 million (H1) in amortization of customer relationships[130] Research and Development Research and development expenses increased in absolute dollars due to expenses from Wazee Digital and Machine Box, along with amortization of intangibles and earn-out compensation, but as a percentage of net revenues, R&D expenses decreased from 123.5% to 51.8% in Q2 2019, indicating improved operating leverage | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change ($) | Change (%) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change ($) | Change (%) | | :--------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Research and development | $6,351 | $5,146 | $1,205 | 23.4% | $13,289 | $9,674 | $3,615 | 37.4% | | As % of net revenues | 51.8% | 123.5% | -71.7% | -58.0% | 54.5% | 113.1% | -58.6% | -51.8% | - Increases were primarily due to $0.9 million (Q2) and $1.7 million (H1) from Wazee Digital and Machine Box, and $0.6 million (Q2) and $1.1 million (H1) in amortization of intangibles and earn-out compensation[131][132] General and Administrative General and administrative expenses increased in absolute dollars due to higher stock-based compensation and expenses from acquired businesses, but as a percentage of net revenues, G&A expenses decreased from 180.3% to 94.9% in Q2 2019, reflecting improved operating leverage | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change ($) | Change (%) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change ($) | Change (%) | | :--------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | General and administrative | $11,645 | $7,513 | $4,132 | 55.0% | $23,335 | $14,291 | $9,044 | 63.3% | | As % of net revenues | 94.9% | 180.3% | -85.4% | -47.4% | 95.7% | 167.0% | -71.3% | -42.7% | - Increases were primarily due to $2.4 million (Q2) and $4.6 million (H1) in stock-based compensation, and $1.3 million (Q2) and $2.8 million (H1) from Wazee Digital and Performance Bridge[133][134] - The company plans to manage operating expenses prudently, growing them at a rate less than net revenues to further decrease them as a percentage of revenues[135] Other Income, Net Other income, net, remained relatively stable at $51 thousand for the three months and $262 thousand for the six months ended June 30, 2019 and 2018, primarily comprising interest income from investments | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Interest income, net | $160 | $168 | $329 | $349 | | Change in fair value of warrant liability | $(37) | $(15) | $(50) | $(15) | | Other income, net | $51 | $133 | $262 | $316 | - Primarily comprised of interest income on investments in money market funds and marketable securities[136] Liquidity and Capital Resources The company's liquidity is primarily from cash, cash equivalents, and marketable securities, which totaled $45.3 million as of June 30, 2019, and while current balances are expected to cover the next twelve months, the company anticipates needing additional financing for future growth and potential acquisitions, as it continues to generate losses Cash Flows The company's cash flows for the six months ended June 30, 2019, showed a net increase of $2,634 thousand, significantly lower than the $23,147 thousand increase in the prior year, driven by reduced cash used in operations, but also by substantially lower cash provided by financing activities | Metric | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change ($) | Change (%) | | :--------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Cash used in operating activities | $(16,606) | $(21,341) | $4,735 | -22.2% | | Cash provided by investing activities | $7,048 | $11,031 | $(3,983) | -36.1% | | Cash provided by financing activities | $12,192 | $33,457 | $(21,265) | -63.6% | | Net increase in cash and cash equivalents | $2,634 | $23,147 | $(20,513) | -88.6% | Operating Activities Cash used in operating activities decreased to $16.6 million for the six months ended June 30, 2019, from $21.3 million in the prior year, with this improvement primarily due to leveraging increased net revenues, despite a net loss of $33.0 million, and aided by non-cash expenses like stock-based compensation - Cash used in operating activities decreased by $4.7 million (22.2%) to $16.6 million in H1 2019[139][140] - Net loss of $33.0 million was partially offset by $14.0 million in non-cash expenses, including $11.3 million in stock-based compensation[140] - Adjusted EBITDAS loss decreased to $18.5 million in H1 2019 from $21.2 million in H1 2018, reflecting improved operating leverage[140] Investing Activities Cash provided by investing activities decreased to $7.0 million for the six months ended June 30, 2019, from $11.0 million in the prior year, mainly due to lower proceeds from marketable securities sales and cash used for acquisition earnout payments and software acquisitions - Cash provided by investing activities decreased by $4.0 million (36.1%) to $7.0 million in H1 2019[139][142] - Proceeds from sales of marketable securities were $8.6 million in H1 2019, down from $14.0 million in H1 2018[24][143] - Cash was used for acquisition earnout payments ($0.9 million for Performance Bridge) and intangible assets acquired ($0.5 million for software)[142] Financing Activities Cash provided by financing activities significantly decreased to $12.2 million for the six months ended June 30, 2019, from $33.5 million in the prior year, with this reduction primarily due to lower net proceeds from common stock offerings compared to the large offering in June 2018 - Cash provided by financing activities decreased by $21.3 million (63.6%) to $12.2 million in H1 2019[139][144] - Net proceeds from common stock offerings were $11.8 million in H1 2019, compared to $32.5 million in H1 2018[24][145] Capital Resources As of June 30, 2019, the company had no outstanding debt and $35.5 million remaining available under its Equity Distribution Agreement, and while current cash is deemed sufficient for the next twelve months, additional capital may be needed for future acquisitions or investments, which may not be available on favorable terms or at all - No outstanding debt obligations as of June 30, 2019[148] - $35.5 million remains available for sale under the Equity Distribution Agreement[146] - Current cash and marketable securities are believed sufficient for the next twelve months, but additional financing may be required for future acquisitions/investments[149] - The company expects to use an additional $0.2 million in cash in Q3 2019 to fund the final Machine Box contingent payment[148] Off-Balance Sheet Arrangements The company has not entered into any off-balance sheet arrangements and does not hold any interests in variable interest entities - No off-balance sheet arrangements or holdings in variable interest entities[151] Non-GAAP Financial Measure This section presents Adjusted EBITDAS as a non-GAAP financial measure, which management uses to evaluate performance and for internal forecasting, believing it provides a useful supplemental comparison, and reconciles net loss to Adjusted EBITDAS, showing a decrease in Adjusted EBITDAS loss for the six months ended June 30, 2019, compared to the prior year - Adjusted EBITDAS is a non-GAAP measure used by management for performance evaluation and internal forecasting[152] | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(16,691) | $(14,330) | $(32,997) | $(27,379) | | Depreciation and amortization | $1,586 | $473 | $2,719 | $828 | | Stock-based compensation expense | $5,255 | $2,651 | $10,058 | $5,125 | | Machine Box contingent payments | $530 | $0 | $1,447 | $0 | | Adjusted EBITDAS | $(9,207) | $(10,974) | $(18,499) | $(21,192) | - Adjusted EBITDAS loss decreased to $18.5 million in H1 2019 from $21.2 million in H1 2018, reflecting improved operating leverage from increased net revenues[140][153] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Veritone is not required to provide the detailed market risk disclosures typically required by Item 305 of Regulation S-K - As a smaller reporting company, the registrant is exempt from providing detailed market risk disclosures[154] Item 4. Controls and Procedures This section addresses the effectiveness of the company's disclosure controls and procedures and internal control over financial reporting Evaluation of Disclosure Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were not effective as of June 30, 2019, due to a previously reported material weakness related to accounting for infrequent complex transactions, such as business combinations, but despite this, the condensed consolidated financial statements are deemed to fairly present the company's financial position - Disclosure controls and procedures were not effective as of June 30, 2019[155] - Material weakness identified relates to accounting for infrequent complex transactions, specifically the three business combinations in Q3 2018[155] - Management believes the condensed consolidated financial statements fairly present the financial position, results of operations, and cash flows in all material respects[155] Changes in Internal Control over Financial Reporting There were no material changes in internal control over financial reporting during the period, other than on