Veritone(VERI) - 2019 Q4 - Annual Report

PART I Business Veritone, Inc. delivers AI solutions through its aiWARE™ platform, with core businesses in SaaS, advertising, and content licensing - Veritone provides AI computing solutions through its proprietary aiWARE™ platform, which integrates and orchestrates a wide ecosystem of machine learning algorithms (cognitive engines)[17] - The company operates a full-service advertising agency, Veritone One, which leverages the aiWARE platform for ad verification and analytics[21] - Strategic acquisitions in 2018 (Wazee Digital, Machine Box, Performance Bridge) expanded Veritone's offerings in content licensing, media services, and podcast advertising[20][27][28] - In 2019, Veritone launched VeriAds™, a network leveraging aiWARE to help broadcasters and podcasters generate incremental advertising revenue[22] aiWARE SaaS Solutions The aiWARE platform is Veritone's core SaaS offering, managing the data lifecycle with an open ecosystem of cognitive engines and flexible deployment options - The aiWARE platform's process includes four key stages: Ingestion, Orchestration and Processing, Proprietary Indexing and Storage (Temporal Elastic Database), and Applications/Cognitive Analytics[31] - The platform incorporates an open ecosystem of hundreds of cognitive engines from major third-party vendors like Amazon, Google, IBM, and Microsoft, as well as proprietary engines[35][36] - Proprietary Conductor™ technology intelligently orchestrates cognitive engines to optimize performance and accuracy, which is a key competitive advantage[38][40] - Deployment models are flexible, including cloud-based options on AWS and Azure (commercial and secure government clouds), on-premises, and hybrid configurations; the company achieved FedRAMP Authority to Operate (ATO) in March 2019[43][44][45] Solutions for Target Markets Veritone provides tailored aiWARE solutions for Media and Entertainment, and Government, Legal, and Compliance markets, with future expansion into security and surveillance - In Media and Entertainment, solutions enable ad tracking, verification, and attribution, helping clients like radio and television broadcasters unlock value from their content[48][50] - For Government, Legal, and Compliance, applications like IDentify (suspect identification), Redact (automated redaction), and Illuminate (eDiscovery) streamline critical workflows for agencies and legal professionals[52][53][56] - The company is developing solutions for other markets, with an expected 2020 release for an integration with security and video management systems for surveillance purposes[56] aiWARE Content Licensing and Media Services Veritone provides digital content licensing and media services, managing and syndicating content for rights holders via its Commerce web portal, enhanced by aiWARE - The company manages and licenses digital content on behalf of rights holders through its Commerce web portal, which is enhanced by aiWARE's cognitive search capabilities[60][61] - Veritone provides live event services, allowing rights holders to capture, tag, and immediately syndicate content like sports highlights globally[62] Advertising Veritone One is a full-service advertising agency specializing in host-endorsed and influencer advertising, leveraging aiWARE for analytics and launching the VeriAds™ network - The advertising agency placed $216.5 million in media for clients in 2019, including notable names like Audible, DraftKings, HelloFresh, and Uber[66] - The VeriAds™ network was launched in late 2019 to generate incremental ad revenue for broadcasters and influencers through unique ad units and performance-based programs[68][69] Customers Veritone's customer base shows segment-specific concentration, with top ten clients accounting for significant revenue shares, yet no single customer exceeded 10% of consolidated net revenues in 2019 - In 2019, customer concentration was notable within segments but not on a consolidated basis: for aiWARE SaaS, the top 10 customers were 49% of revenue; for Advertising, 43%; and for Content Licensing, 38%[74][75][76] - No single customer accounted for 10% or more of consolidated net revenues in 2019[77] Competition Veritone faces intense competition in the AI market from large vendors and specialized firms, differentiating with its open aiWARE ecosystem, while also competing in advertising and content licensing - aiWARE SaaS competitors include large cloud vendors (IBM Watson, Microsoft Azure, Amazon AWS), smaller specialized AI vendors, and system integrators[81] - Veritone's primary competitive advantage is its AI operating system with an open ecosystem of numerous third-party cognitive engines accessible from a single platform[80] - Advertising competitors are mainly traditional and niche agencies; Content licensing competition comes from rights holders managing licensing in-house and other representation firms[82][83] Intellectual Property Veritone protects its proprietary technology through patents, copyrights, trademarks, and trade secrets, holding 26 issued U.S. patents and 9 foreign patents as of February 29, 2020 Patent Portfolio as of Feb 29, 2020 | Jurisdiction | Issued Patents | Pending Applications | | :--- | :--- | :--- | | United States | 26 | 31 | | Foreign | 9 | 44 | Risk Factors Veritone faces significant risks including an unproven AI market, need for capital, history of losses, reliance on third-party tech, regulatory challenges, and stock volatility Risks Related to Business, Industry and Financial Condition Veritone's business risks include dependence on aiWARE SaaS growth in an unproven AI market, a history of losses, reliance on third-party technologies, and evolving data privacy regulations - The company's success is heavily dependent on the growth and adoption of its aiWARE platform, which is still under development, in a new and unproven AI market[98][101] - Veritone has a history of significant net losses, reporting a net loss of $62.1 million in 2019 and an accumulated deficit of $232.5 million as of year-end, and may be unable to achieve profitability[116] - The business relies on third-party cloud providers (AWS, Microsoft Azure) for hosting and third-party developers for cognitive engines, creating dependencies and potential risks if these relationships are disrupted[109][111][136] - The company faces risks from recent and proposed laws regarding data privacy (GDPR, CCPA) and the use of facial recognition technology, which could limit demand for certain products like its IDentify application[125][126][145] Risks Related to Ownership of Securities and Public Company Operations Ownership of Veritone's common stock carries significant risks, including extreme price volatility, reduced reporting requirements as an emerging growth company, identified material weaknesses in internal control, and potential future dilution - The common stock price has been extremely volatile, ranging from a low of $2.16 to a high of $65.91 between its IPO in May 2017 and February 29, 2020[170] - Material weaknesses in internal control over financial reporting were identified for the years ended December 31, 2018 (related to accounting for complex transactions) and 2019 (related to accounting for advertising net revenues)[180] - As an "emerging growth company" and "smaller reporting company," Veritone is subject to reduced reporting requirements, which could make its stock less attractive to investors[183] - The company does not expect to pay any cash dividends in the foreseeable future, as funds will be retained for business operations and expansion[185] Properties Veritone's principal executive offices are leased in Costa Mesa, California, with additional leased office spaces across several U.S. states and London, as the company owns no real property - The company's headquarters are in Costa Mesa, CA, under a lease for approximately 39,000 sq. ft. expiring in December 2024[193] - Additional offices are leased in Newport Beach and San Diego, CA; Denver, CO; Binghamton and New York, NY; Seattle, WA; and London, England[194] Legal Proceedings The company is not currently involved in any legal proceedings deemed to have a material adverse effect on its financial results, position, or cash flows - As of the report date, Veritone is not a party to any material legal proceedings[195] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Veritone's common stock trades on NASDAQ under "VERI"; the company has never paid cash dividends and does not anticipate doing so, retaining earnings for business operations - The company's common stock is listed on NASDAQ under the symbol "VERI"[198] - Veritone has never declared or paid cash dividends and does not expect to in the foreseeable future[199] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, net revenues grew 83.6% to $49.6 million, driven by acquisitions, while net loss remained stable at $62.1 million; gross margin declined due to revenue mix, and operating expenses increased Acquisitions In 2018, Veritone completed three key acquisitions: Performance Bridge for podcast advertising, Wazee Digital for content management, and Machine Box for machine learning technology - Performance Bridge was acquired on August 21, 2018, for initial consideration of $5.2 million and $3.9 million in earnouts[208] - Wazee Digital was acquired on August 31, 2018, for an aggregate purchase price of $12.6 million[209] - Machine Box was acquired on September 6, 2018, for initial consideration of $1.5 million and $3.0 million in contingent payments treated as compensation expense[210][211] Key Performance Indicators Veritone tracks KPIs for advertising and aiWARE SaaS, showing stable advertising clients with increased average spend, and growth in aiWARE SaaS customers and new bookings Advertising KPI Results (Quarterly) | KPI | Q4 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | | Clients with active campaigns | 115 | 107 | 108 | 111 | 108 | | Avg. ad spend per client (in 000's) | $478 | $486 | $497 | $505 | $567 | | Net revenue (in 000's) | $5,986 | $5,714 | $5,842 | $6,291 | $6,517 | aiWARE SaaS Solutions KPI Results (Quarterly) | KPI | Q4 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total customers (end of quarter) | 123 | 129 | 136 | 153 | 172 | | Total contract value of new bookings (in 000's) | $1,196 | $1,316 | $1,362 | $1,384 | $2,522 | | Monthly recurring revenue (in 000's) | $544 | $494 | $545 | $547 | $568 | | Net revenue (in 000's) | $2,426 | $2,754 | $2,677 | $2,350 | $2,872 | Results of Operations (2019 vs. 2018) In 2019, net revenues increased 83.6% to $49.6 million driven by acquisitions, while gross margin declined to 65.2% due to revenue mix, and net loss was $62.1 million Net Revenues by Segment (in thousands) | Segment | 2019 | 2018 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Advertising | $24,364 | $17,146 | $7,218 | 42.1% | | aiWARE Content Licensing & Media Services | $14,631 | $3,943 | $10,688 | 271.1% | | aiWARE SaaS Solutions | $10,653 | $5,958 | $4,695 | 78.8% | | Total Net Revenues | $49,648 | $27,047 | $22,601 | 83.6% | - Gross margin decreased from 76.0% in 2018 to 65.2% in 2019, reflecting a lower proportion of high-margin advertising revenue in the total revenue mix[276] Operating Expenses (in thousands) | Expense Category | 2019 | 2018 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $25,305 | $22,470 | $2,835 | 12.6% | | Research and development | $23,801 | $22,095 | $1,706 | 7.7% | | General and administrative | $47,324 | $37,993 | $9,331 | 24.6% | | Total Operating Expenses | $96,430 | $82,558 | $13,872 | 16.8% | - The increase in General and Administrative expenses was primarily due to a $4.9 million increase in stock-based compensation and $3.9 million in expenses from acquired businesses[281] Liquidity and Capital Resources As of December 31, 2019, Veritone had $44.1 million in cash and equivalents, primarily impacted by cash used in operations offset by financing activities, with management believing current cash is sufficient for the next twelve months Cash Flow Summary (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Cash used in operating activities | $(30,117) | $(41,770) | | Cash provided by investing activities | $11,961 | $15,929 | | Cash provided by financing activities | $24,615 | $34,292 | - Cash and cash equivalents totaled $44.1 million as of December 31, 2019[284] - The company raised $24.4 million in net proceeds from common stock sales in 2019 through its Equity Distribution Agreement with JMP Securities[225][284] Financial Statements and Supplementary Data Consolidated financial statements show net revenues increased to $49.6 million in 2019, with a net loss of $62.1 million, and an accumulated deficit growing to $232.5 million Consolidated Statement of Operations Highlights (in thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Revenues | $49,648 | $27,047 | | Gross Profit | $32,359 | $20,568 | | Loss from Operations | $(64,071) | $(61,990) | | Net Loss | $(62,078) | $(61,104) | | Net Loss Per Share | $(2.85) | $(3.48) | Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $44,065 | $37,539 | | Total Assets | $108,526 | $117,754 | | Total Liabilities | $61,115 | $57,471 | | Total Stockholders' Equity | $47,411 | $60,283 | | Accumulated Deficit | $(232,489) | $(170,411) | Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of December 31, 2019, due to a material weakness in accounting for advertising net revenues, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2019[480] - A material weakness in internal control over financial reporting was identified related to the accounting for advertising net revenues[484] - The company has initiated remediation efforts for the current material weakness and successfully remediated a separate material weakness from 2018 related to complex transactions[485][487] PART III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accounting Fees Information for directors, executive officers, corporate governance, compensation, and principal accounting fees is incorporated by reference from the forthcoming 2020 definitive proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the forthcoming definitive proxy statement for the 2020 annual stockholders' meeting[491][492][493][494][495] PART IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including financial statements and a comprehensive list of exhibits, with all financial statement schedules omitted - The financial statements are filed as part of the report, but all financial statement schedules have been omitted[499][500] - A detailed list of exhibits is provided, including governance documents, stock plans, material contracts, and required certifications[501]