Veritone(VERI) - 2020 Q1 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section cautions readers about forward-looking statements, which are subject to risks and uncertainties that may cause actual results to differ materially Forward-Looking Statements Disclosure This disclosure identifies forward-looking statements and warns that actual results may differ due to various risks, with no obligation to update unless legally required - Forward-looking statements are identified by words such as 'anticipates,' 'believes,' 'estimates,' 'expects,' 'intends,' 'plans,' 'projects,' 'should,' 'will,' or similar expressions, and refer to future financial condition, operations, capital needs, competitive position, growth, market opportunities, and acquisition strategies[8] - Actual results may differ materially due to numerous known and unknown risks, uncertainties, and other factors, including those detailed in Item 2 (Management's Discussion and Analysis) and Item 1A (Risk Factors) of this report, and the Annual Report on Form 10-K for December 31, 2019[9] - The company operates in an evolving environment with new risks emerging, and management does not undertake any obligation to publicly update forward-looking statements unless required by law[10][11] PART I. FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the first quarter of 2020 Item 1. Financial Statements (Unaudited) This section provides Veritone, Inc.'s unaudited condensed consolidated financial statements for Q1 2020 and comparative periods Condensed Consolidated Balance Sheets The balance sheets show Veritone's financial position as of March 31, 2020, with slight decreases in assets and equity | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------- | :----------------------------- | :----------------------------- | | Cash and cash equivalents | $49,165 | $44,065 | | Total current assets | $80,398 | $81,112 | | Total assets | $106,217 | $108,526 | | Total current liabilities | $62,608 | $59,736 | | Total liabilities | $63,945 | $61,115 | | Total stockholders' equity | $42,272 | $47,411 | Condensed Consolidated Statements of Operations and Comprehensive Loss The statements of operations reflect decreased net revenues and a reduced net loss for Q1 2020 compared to Q1 2019 | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net revenues | $11,904 | $12,125 | | Gross profit | $8,093 | $8,253 | | Total operating expenses | $20,905 | $24,761 | | Loss from operations | $(12,812) | $(16,508) | | Net loss | $(12,684) | $(16,306) | | Basic and diluted net loss per share | $(0.47) | $(0.84) | Condensed Consolidated Statements of Stockholders' Equity This statement details changes in equity components for Q1 2020 and 2019, including stock offerings and net losses | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------- | :----------------------------- | :----------------------------- | | Total Stockholders' Equity | $42,272 | $47,411 | | Common stock offerings, net | $2,984 | $4,160 | | Stock-based compensation expense | $4,456 | $4,803 | | Net loss | $(12,684) | $(16,306) | Condensed Consolidated Statements of Cash Flows Cash flow statements show improved operating cash flow and increased cash and equivalents in Q1 2020 | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Net cash provided by (used in) operating activities | $1,503 | $(4,632) | | Net cash (used in) provided by investing activities | $(9) | $2,375 | | Net cash provided by financing activities | $3,606 | $4,484 | | Net increase in cash, cash equivalents and restricted cash | $5,100 | $2,227 | | Cash, cash equivalents and restricted cash, end of period | $50,020 | $41,003 | Notes to the Condensed Consolidated Financial Statements These notes provide detailed explanations for the financial statements, covering business, policies, and specific account details NOTE 1. DESCRIPTION OF BUSINESS Veritone, Inc. is an AI computing solutions provider offering aiWARE, content management, licensing, and advertising services - Veritone provides AI computing solutions, including its proprietary aiWARE™ operating system, which integrates cognitive engines to transform unstructured data into structured, searchable insights for industries like media, entertainment, government, legal, and compliance[26] - The company also offers cloud-native digital content management and content licensing services, leveraging aiWARE for media and entertainment customers[27] - Veritone operates a full-service advertising agency specializing in host-endorsed and influencer advertising across radio, podcasting, streaming audio, social media, and other digital channels[28] NOTE 2. PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines accounting policies, liquidity, COVID-19 impact, estimates, and revenue recognition changes for Q1 2020 - The company generated positive cash flow from operations of $1,503 thousand in Q1 2020, a significant improvement from negative cash flows in prior periods, but still incurred a net loss of $12,684 thousand[32] - Management believes existing cash and cash equivalents ($49,165 thousand as of March 31, 2020) will be sufficient for at least twelve months, but not enough to achieve sustained positive cash flows from operations, necessitating future equity and/or debt financings[32][35] - The COVID-19 pandemic negatively impacted aiWARE content licensing and media services revenues in Q1 2020 due to event cancellations, with expected material adverse impacts in Q2 2020 and potentially beyond, though advertising and aiWARE SaaS solutions did not see decreases in Q1[36][38] - The company adopted Topic 606 (Revenue from Contracts with Customers) in Q1 2020, changing revenue recognition for multi-year contracts with fixed annual price increases and certain variable consideration[44][45][50] NOTE 3. NET LOSS PER SHARE This note details basic and diluted net loss per share, with all potentially dilutive securities being anti-dilutive | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net loss | $(12,684) | $(16,306) | | Denominator for basic and diluted net loss per share | 26,773,163 | 19,511,220 | | Basic and diluted net loss per share | $(0.47) | $(0.84) | - Potentially dilutive securities, including common stock options, restricted stock units, and warrants, totaling 11,078,959 in Q1 2020 and 10,597,934 in Q1 2019, were excluded from diluted EPS calculation as their effect would be anti-dilutive due to net losses[52] NOTE 4. FINANCIAL INSTRUMENTS This note describes fair value measurement for financial instruments, including cash and stock warrants, and their valuation inputs | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :---------------------- | :----------------------------- | :----------------------------- | | Cash and Cash Equivalents | $49,165 | $44,065 | | Money market funds | $13,416 | $20,355 | - All outstanding stock warrants are categorized as Level 3 within the fair value hierarchy and valued using either a probability-weighted expected return model or the Black-Scholes option-pricing model, incorporating contractual terms, maturity, risk-free interest rates, and volatility[56] | Warrant Valuation Input | March 31, 2020 | December 31, 2019 | | :---------------------- | :------------- | :---------------- | | Volatility | 70% | 70% | | Risk-free rate | 0.29% | 1.62% | | Term | 3.0 years | 3.25 years | - The fair value of the April 2018 Warrant decreased from $7 thousand at December 31, 2019, to $5 thousand at March 31, 2020, resulting in a $2 thousand gain for the three months ended March 31, 2020[58] NOTE 5. GOODWILL AND INTANGIBLE ASSETS, NET This note details the carrying amounts and amortization expense for goodwill and finite-lived intangible assets - The carrying amount of goodwill remained constant at $6,904 thousand as of December 31, 2019, and March 31, 2020[60] | Intangible Asset Category | March 31, 2020 Net Carrying Amount (in thousands) | December 31, 2019 Net Carrying Amount (in thousands) | | :------------------------ | :---------------------------------------------- | :---------------------------------------------- | | Software and technology | $1,113 | $1,411 | | Developed technology | $6,560 | $7,040 | | Customer relationships | $6,355 | $6,820 | | Total Intangible Assets | $14,778 | $16,126 | | Amortization Expense Category | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :---------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Cost of revenues | $561 | $370 | | Sales and marketing | $531 | $213 | | Research and development | $256 | $256 | | Total Amortization Expense | $1,348 | $841 | NOTE 6. CONSOLIDATED FINANCIAL STATEMENTS DETAILS This note provides a detailed breakdown of specific balance sheet and income statement line items, including revenues by segment | Accounts Receivable Category | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------- | :----------------------------- | :----------------------------- | | Advertising | $18,760 | $19,184 | | aiWARE SaaS Solutions | $2,154 | $1,269 | | aiWARE Content Licensing and Media Services | $1,032 | $928 | | Total Accounts Receivable, net | $21,907 | $21,352 | | Net Revenues by Segment | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :---------------------- | :--------------------------------------------- | :--------------------------------------------- | | Advertising | $6,001 | $5,714 | | aiWARE SaaS Solutions | $3,108 | $2,754 | | aiWARE Content Licensing and Media Services | $2,795 | $3,657 | | Total Net Revenues | $11,904 | $12,125 | | Other Income, Net | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :---------------- | :--------------------------------------------- | :--------------------------------------------- | | Interest income, net | $77 | $169 | | Change in fair value of warrant liability | $2 | $(13) | | Total Other income, net | $131 | $211 | NOTE 7. COMMITMENTS AND CONTINGENCIES This note outlines lease commitments and confirms no material adverse legal proceedings are currently anticipated | Future Minimum Lease Payments | Amount (in thousands) | | :---------------------------- | :-------------------- | | 2020 (nine months) | $1,803 | | 2021 | $2,242 | | 2022 | $1,884 | | 2023 | $1,685 | | 2024 | $1,730 | | Total minimum payments | $9,344 | - Total rent expense for operating leases was $766 thousand for Q1 2020, compared to $745 thousand for Q1 2019[71] - The company is not currently a party to any legal proceedings that, in management's opinion, would have a material adverse effect on its results of operations, financial position, or cash flows[72] NOTE 8. STOCKHOLDERS' EQUITY (DEFICIT) This note describes common stock issuances, including sales under the Equity Distribution Agreement and employee plans - The company issued 1,292,208 shares of common stock in Q1 2020 (vs. 662,000 in Q1 2019) under an Equity Distribution Agreement, generating net proceeds of $2,984 thousand (vs. $4,160 thousand in Q1 2019)[73] - Additional shares were issued in Q1 2019 for the Machine Box and Performance Bridge acquisitions, and for employee stock plans[74][75][76] NOTE 9. STOCK PLANS This note details stock-based compensation, including option grants, valuation assumptions, and restricted stock activity - The company granted options to purchase 487,500 shares of common stock in Q1 2020, subject to time-based vesting conditions[77] | Stock-Based Compensation Expense | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Restricted stock units | $142 | $198 | | Performance-based stock options | $1,968 | $1,935 | | Stock options | $2,149 | $2,358 | | Total | $4,456 | $5,507 | - Total unrecognized compensation cost for restricted stock, restricted stock units, performance-based stock options, and other stock options was $104 thousand, $217 thousand, $19,319 thousand, and $6,283 thousand, respectively, as of March 31, 2020[80][81][82][83] NOTE 10. SUBSEQUENT EVENTS This note discloses the company's receipt of Paycheck Protection Program (PPP) loans in April 2020 for payroll and expenses - On April 14 and 15, 2020, the company received $6,491 thousand in unsecured loans under the Paycheck Protection Program (PPP) of the CARES Act[86] - The PPP loans have a 1.00% interest rate, with principal and interest payments commencing seven months after the effective date, amortizing fully by the second anniversary[87] - Loan proceeds are designated for payroll costs, rent, and utilities, and recipients can apply for forgiveness, though no assurance is given that the company will seek or obtain full or partial forgiveness[88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Veritone's financial performance for Q1 2020, including COVID-19 impact, revenues, expenses, and liquidity Overview Veritone is an AI solutions provider with aiWARE, content management, and advertising agency segments - Veritone provides artificial intelligence (AI) solutions, including its proprietary aiWARE™ platform, digital content management solutions, and content licensing services[91] - The company also operates a full-service media advertising agency, with business segments referred to as advertising, aiWARE content licensing and media services, and aiWARE SaaS solutions[91][92] Impact of the Coronavirus ("COVID-19") Pandemic The COVID-19 pandemic began impacting Veritone in March 2020, particularly reducing demand for content licensing services - The COVID-19 pandemic led to a reduction in demand for certain products and services starting March 2020, particularly impacting net revenues from aiWARE content licensing and media services due to the cancellation or postponement of major live sporting events[93] - The company expects a material adverse impact on aiWARE content licensing and media services revenues in Q2 2020 and potentially beyond, but advertising and aiWARE SaaS solutions did not experience decreases in Q1 2020[93][95] - The extent of the pandemic's impact on financial condition and results of operations is uncertain, depending on factors like duration, spread, government measures, and stimulus actions[95] Sales of Common Stock Veritone raised $3.0 million in net proceeds from common stock sales under its Equity Distribution Agreement in Q1 2020 | Metric | Q1 2020 (in millions) | Q1 2019 (in millions) | | :-------------------- | :-------------------- | :-------------------- | | Shares sold | 1.29 million | 0.66 million | | Net proceeds received | $3.0 | $4.2 | Key Performance Indicators Veritone tracks KPIs for its advertising and aiWARE SaaS solutions, updated in Q1 2020, to monitor business performance - The company tracks KPIs for its advertising business (average gross billings per active client, net revenue) and aiWARE SaaS solutions business (total accounts on platform, new bookings, total contract value of new bookings, net revenue)[97][99] Advertising KPI Results (in 000's): | Metric | Mar 31, 2019 | Jun 30, 2019 | Sept 30, 2019 | Dec 31, 2019 | Mar 31, 2020 | | :-------------------------------- | :----------- | :----------- | :------------ | :----------- | :----------- | | Average gross billings per active client | $469 | $488 | $490 | $511 | $533 | | Net revenues during quarter | $5,714 | $5,842 | $6,291 | $6,517 | $6,001 | aiWARE SaaS Solutions KPI Results (in 000's): | Metric | Mar 31, 2019 | Jun 30, 2019 | Sept 30, 2019 | Dec 31, 2019 | Mar 31, 2020 | | :-------------------------------- | :----------- | :----------- | :------------ | :----------- | :----------- | | Total accounts on platform at quarter end | 911 | 941 | 980 | 1,069 | 1,587 | | New bookings received during quarter | $1,316 | $1,362 | $1,384 | $2,522 | $1,397 | | Total contract value of new bookings received during quarter | $2,092 | $1,351 | $1,724 | $12,872 | $2,312 | | Net revenues during quarter | $2,754 | $2,677 | $2,350 | $2,872 | $3,108 | Results of Operations This section analyzes Q1 2020 financial performance, noting a slight revenue decrease but significant operating expense reductions Net Revenues (in thousands): | Segment | Q1 2020 | Q1 2019 | $ Change | % Change | | :-------------------------------- | :------ | :------ | :------- | :------- | | Advertising | $6,001 | $5,714 | $287 | 5.0% | | aiWARE SaaS Solutions | $3,108 | $2,754 | $354 | 12.9% | | aiWARE Content Licensing and Media Services | $2,795 | $3,657 | $(862) | (23.6)% | | Total Net Revenues | $11,904 | $12,125 | $(221) | (1.8)% | Operating Expenses (in thousands): | Expense Category | Q1 2020 | Q1 2019 | $ Change | % Change | | :--------------- | :------ | :------ | :------- | :------- | | Sales and marketing | $5,460 | $6,133 | $(673) | -11.0% | | Research and development | $3,902 | $6,938 | $(3,036) | -43.8% | | General and administrative | $11,543 | $11,690 | $(147) | -1.3% | | Total Operating Expenses | $20,905 | $24,761 | $(3,856) | -15.6% | - Gross margin remained stable at approximately 68.0% in Q1 2020 (vs. 68.1% in Q1 2019), with advertising revenues (gross margins >95%) accounting for 50% of total revenues in Q1 2020[114] - The decrease in operating expenses was primarily due to reduced compensation costs from focused spending reductions, non-recurring contingent payments in 2019, and lower platform/cognitive engine expenses[115][116][117] Liquidity and Capital Resources This section discusses Veritone's liquidity, cash flow activities, and future capital needs, including recent PPP loans - Cash and cash equivalents increased to $49.2 million as of March 31, 2020, from $44.1 million at December 31, 2019, driven by positive operating cash flow and proceeds from common stock offerings[120] Cash Flows (in thousands): | Activity | Q1 2020 | Q1 2019 | | :-------------------------------- | :------ | :------ | | Operating activities | $1,503 | $(4,632) | | Investing activities | $(9) | $2,375 | | Financing activities | $3,606 | $4,484 | | Net increase in cash, cash equivalents and restricted cash | $5,100 | $2,227 | - Operating activities provided $1.5 million in cash in Q1 2020, primarily due to timing of prepayments and advances from advertising clients, offsetting a $12.7 million net loss[123] - The company expects to continue generating losses and will need additional capital through equity and/or debt financings, with $21.7 million remaining available under its Equity Distribution Agreement[128][132] Reconciliation of Net Loss to Non-GAAP Net Loss (in thousands): | Metric | Q1 2020 | Q1 2019 | | :-------------------------------- | :------ | :------ | | Net loss | $(12,684) | $(16,306) | | Depreciation and amortization | $1,604 | $1,133 | | Stock-based compensation expense | $4,456 | $4,803 | | Non-GAAP Net Loss | $(6,679) | $(9,292) | Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Veritone, Inc. is exempt from detailed market risk disclosures - Veritone, Inc. is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[136] Item 4. Controls and Procedures Disclosure controls were ineffective due to a material weakness in advertising revenue accounting, though financial statements are fairly presented - Disclosure controls and procedures were deemed not effective as of March 31, 2020, due to a material weakness in accounting for advertising net revenues, previously reported in the 2019 Annual Report on Form 10-K[138] - Remediation measures, including process documentation, personnel training, and control monitoring, have been initiated but were not fully remediated by March 31, 2020[138][139] - Despite the material weakness, management concluded that the condensed consolidated financial statements fairly present the company's financial position, results of operations, and cash flows in all material respects[138] PART II. OTHER INFORMATION This part includes legal proceedings, updated risk factors, equity sales, defaults, and other required disclosures Item 1. Legal Proceedings Veritone is not involved in legal proceedings expected to materially adversely affect its operations or financial position - The company is not currently a party to any legal proceedings that, in management's opinion, would individually or in aggregate have a material adverse effect on its results of operations, financial position, or cash flows[143] Item 1A. Risk Factors This section updates risk factors, emphasizing new and exacerbated risks from the COVID-19 pandemic - The COVID-19 pandemic has significantly impacted the global economy and Veritone's business, leading to reduced demand for certain products and services, particularly aiWARE content licensing and media services due to event cancellations[145][146] - Operational disruptions may arise from continued office closures and increased reliance on a remote workforce, potentially affecting employee effectiveness and productivity[146] - Other risks include potential inability to collect revenue from customers, limitations on obtaining future financing due to market volatility, and increased exposure to cybersecurity breaches[146] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity securities were sold during the first quarter of 2020 - There were no sales of unregistered equity securities during the first quarter of 2020[147] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[148] Item 4. Mine Safety Disclosures This item is not applicable to Veritone, Inc - Mine Safety Disclosures are not applicable to the company[148] Item 5. Other Information No other information was reported under this item - No other information was reported[148] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including certifications and XBRL documents - Exhibits include certifications pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act (31.1, 31.2), certifications pursuant to Rule 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350 (32.1), and various XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[149] SIGNATURES This section contains the official signatures of Veritone, Inc.'s CEO and CFO, attesting to the report's accuracy Report Signatures The report was signed by Veritone, Inc.'s CEO and CFO on May 11, 2020 - The report was signed by Chad Steelberg, Chief Executive Officer and Chairman of the Board, and Peter F. Collins, Executive Vice President and Chief Financial Officer, on May 11, 2020[154]