Veritone(VERI) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements (Unaudited) Unaudited financial statements show revenue growth from acquisitions, alongside substantial net losses and negative operating cash flow Condensed Consolidated Balance Sheets Total assets slightly increased to $118.4 million, while total liabilities rose to $67.6 million, leading to a decline in stockholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $49,188 | $37,539 | | Total current assets | $89,039 | $86,520 | | Goodwill | $7,241 | $5,509 | | Total assets | $118,374 | $117,754 | | Liabilities & Equity | | | | Total current liabilities | $66,159 | $56,085 | | Total liabilities | $67,576 | $57,471 | | Accumulated deficit | $(217,605) | $(170,411) | | Total stockholders' equity | $50,798 | $60,283 | Condensed Consolidated Statements of Operations and Comprehensive Loss Net revenues surged 69.7% year-over-year to $12.8 million in Q3 2019, but net loss widened to $47.2 million for the nine-month period Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net revenues | $12,805 | $7,545 | $37,200 | $16,101 | | Gross profit | $8,048 | $5,975 | $24,009 | $13,148 | | Loss from operations | $(16,196) | $(16,265) | $(49,439) | $(43,947) | | Net loss | $(14,197) | $(15,941) | $(47,194) | $(43,319) | | Net loss per share | $(0.64) | $(0.86) | $(2.26) | $(2.55) | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities improved to $18.4 million, with overall cash increasing due to investing and financing activities Cash Flow Summary for the Nine Months Ended Sep 30 (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(18,428) | $(24,967) | | Net cash provided by investing activities | $11,972 | $7,201 | | Net cash provided by financing activities | $18,024 | $34,348 | | Net increase in cash, cash equivalents and restricted cash | $11,568 | $16,582 | Notes to the Condensed Consolidated Financial Statements The notes detail the company's AI solutions business, accounting policies, and financial condition, including significant acquisitions and ongoing net losses - The company is a provider of AI solutions through its proprietary aiWARE operating system, supplemented by a full-service advertising agency and digital content management services acquired in 2018[28][29][30] - The company has a history of net losses and negative operating cash flows, with an accumulated deficit of $217.6 million as of September 30, 2019. Management expects to continue generating net losses for the foreseeable future[33] - Details of the 2018 acquisitions of Performance Bridge, Wazee Digital, and Machine Box are provided, including purchase considerations and contingent payments. These acquisitions significantly expanded the company's offerings and asset base[50][55][59] Net Revenues by Segment (in thousands) | Segment | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Advertising | $6,291 | $4,730 | $17,847 | $11,159 | | aiWARE SaaS Solutions | $2,350 | $1,406 | $7,781 | $3,533 | | aiWARE Content Licensing and Media Services | $4,164 | $1,409 | $11,572 | $1,409 | - Stock-based compensation expense was $4.8 million for Q3 2019 and $16.0 million for the nine months ended September 30, 2019, a significant non-cash expense[101] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth from acquisitions, key performance indicators, operating results, and liquidity, noting ongoing losses and future financing needs Acquisitions The report details the 2018 acquisitions of Performance Bridge, Wazee Digital, and Machine Box, which expanded the company's offerings - Acquired Performance Bridge in August 2018 to expand advertising offerings into comprehensive podcast solutions[114] - Acquired Wazee Digital in August 2018 for $12.6 million to add digital content management and licensing services[115] - Acquired Machine Box in September 2018 to enhance aiWARE platform capabilities with state-of-the-art machine learning technologies. Contingent payments were treated as compensation expense due to continued employment requirements[116][117] Key Performance Indicators Veritone tracks separate KPIs for its Advertising and aiWARE SaaS businesses, showing client growth and new contract bookings Advertising Business KPIs (Q3 2019, including acquisition) | KPI | Value | | :--- | :--- | | Net new advertising clients added | 11 | | Clients with active advertising campaigns | 111 | | Average advertising spend per active client | $505,000 | | Net revenue during quarter | $6,291,000 | aiWARE SaaS Solutions KPIs (Q3 2019, including acquisitions) | KPI | Value | | :--- | :--- | | Total customers at quarter end | 153 | | Total accounts on platform at quarter end | 980 | | Total contract value of new bookings | $1,384,000 | | Monthly recurring revenue at quarter end | $547,000 | | Net revenue during quarter | $2,350,000 | Results of Operations Net revenues grew 69.7% due to acquisitions, while gross margin declined, and operating expenses showed improved leverage - Net revenues for Q3 2019 increased 69.7% YoY, driven by a 33.0% increase in Advertising, a 67.1% increase in aiWARE SaaS Solutions, and a 195.5% increase in aiWARE Content Licensing (the latter two primarily from acquisitions)[134] - Gross margin decreased to 63% in Q3 2019 from 79% in Q3 2018. This was due to the changing revenue mix, with lower-margin aiWARE businesses comprising a larger portion of total revenue[140] - Operating expenses as a percentage of net revenue decreased significantly across all categories (Sales & Marketing, R&D, G&A), demonstrating increased operating leverage from higher revenue levels[143][145][147] Liquidity and Capital Resources The company's liquidity is supported by $49.2 million in cash and recent equity sales, but future financing is anticipated due to ongoing losses - Principal sources of liquidity are cash and cash equivalents, which totaled $49.2 million as of September 30, 2019[151] - The company has an Equity Distribution Agreement to sell up to $50.0 million of common stock, with $27.7 million remaining available for sale[161] - Management believes current cash is sufficient for the next 12 months but expects to need additional financing for long-term growth, as the company continues to generate significant losses[165] Non-GAAP Financial Measure Adjusted EBITDAS, a non-GAAP measure, showed a loss of $9.6 million for Q3 2019, reflecting adjustments from net loss Reconciliation of Net Loss to Adjusted EBITDAS (in thousands) | Line Item | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(14,197) | $(15,941) | $(47,194) | $(43,319) | | Adjustments | $4,567 | $6,810 | $19,069 | $13,497 | | Adjusted EBITDAS | $(9,630) | $(8,631) | $(28,125) | $(29,822) | Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Veritone is not required to provide the information for this item - The company is exempt from this disclosure requirement as a smaller reporting company[170] Item 4. Controls and Procedures Disclosure controls and procedures were deemed ineffective due to a material weakness in accounting for complex business combinations - Disclosure controls and procedures were concluded to be not effective as of the end of the reporting period[173] - The ineffectiveness is due to a material weakness identified in 2018 related to accounting for complex business combinations[173] - Measures to remediate the material weakness have been initiated but were not fully implemented as of September 30, 2019[173][174] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered equity sales, and exhibits Item 1. Legal Proceedings Veritone is not currently involved in any material legal proceedings that would adversely affect its financial position - Veritone is not currently involved in any material legal proceedings[178] Item 1A. Risk Factors No material changes to risk factors have occurred since the last Annual Report on Form 10-K - No material changes to risk factors have occurred since the last Annual Report on Form 10-K[179] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued 129,552 shares of common stock as contingent consideration for the Machine Box acquisition, exempt from registration - On September 6, 2019, Veritone issued 129,552 shares of common stock as part of the contingent consideration for the Machine Box acquisition[180] - The issuance was an unregistered sale, exempt from registration under Section 4(a)(2) of the Securities Act[181] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - Exhibits filed include certifications by the CEO and CFO and XBRL interactive data files[183] Signatures Signatures The quarterly report was signed and authorized on November 8, 2019, by the Chief Executive Officer and Chief Financial Officer - The report was signed on November 8, 2019, by the CEO and CFO[185]