SoundHound AI(SOUN) - 2024 Q4 - Annual Report

Part I Business Overview SoundHound AI provides an independent Voice AI platform, leveraging proprietary technology and a three-pillar revenue model for conversational intelligence solutions Company Overview & Strategy SoundHound aims to integrate conversational intelligence into products, positioning Voice AI as the next computing disruption through its proprietary platform - SoundHound's mission is to voice-enable the world with conversational intelligence through an independent AI platform[17] - The company believes Voice AI will be the next major technology disruption, following the popularization of the keyboard/mouse and touch screens[22][23] - The company's technology is protected by a significant intellectual property portfolio, with over 192 patents granted and over 109 patents pending[20] Products and Technology The Houndify Voice AI platform features core innovations like Speech-to-Meaning® and Deep Meaning Understanding®, offering products such as Smart Ordering and Chat AI with flexible connectivity - The company's core technological innovations are Speech-to-Meaning®, Deep Meaning Understanding®, and Collective AI[46][48][49] - Key product offerings include Smart Ordering for restaurants, Dynamic Interaction for real-time responses, SoundHound Chat AI with integrated Generative AI, and Smart Answering for handling customer phone calls[51][52][54][56] - The Houndify platform provides APIs, custom domains, and supports Edge (embedded), Cloud, and Hybrid connectivity options to ensure devices are always responsive[36][65][67] Revenue Model and Market Position SoundHound's three-pillar revenue model, including royalties, subscriptions, and monetization, differentiates it by offering customizable Voice AI solutions with client brand and data control - The company's three-pillar revenue model consists of: - Royalties: From voice-enabling products like cars and smart TVs[79] - Subscription: From voice-enabling services like customer service and food ordering[84] - Monetization: An ecosystem enabling transactions between voice-enabled products and services, with revenue sharing[79][84] - SoundHound positions itself as a superior alternative to big tech competitors by allowing customers to maintain their brand, control the user experience, and access their data, avoiding brand "hijacking"[69][74] Human Capital and Operations As of December 31, 2024, SoundHound employed 842 staff, focusing on R&D and leveraging a strong intellectual property portfolio with over 192 patents - As of December 31, 2024, the company had approximately 842 full-time employees, with 54% in the U.S. and 46% in international locations[95] - The company's intellectual property portfolio includes over 192 granted patents and over 109 pending patents worldwide, with a significant focus on conversational monetization[91][92] Risk Factors The company faces significant risks including persistent net losses, intense competition, customer concentration, acquisition integration challenges, AI-related liabilities, and internal control weaknesses Business and Financial Risks SoundHound faces substantial net losses, customer concentration, intense market competition, and integration risks from recent acquisitions like SYNQ3 and Amelia - The company has a history of substantial net losses and negative operating cash flows and may never achieve or maintain profitability[106][190] - Significant customer concentration exists: In 2024, one customer accounted for 14% of total revenues; at the end of 2023, three customers accounted for 87% of consolidated accounts receivable[128] - The acquisitions of SYNQ3 and Amelia subject the company to various risks, including integration challenges, potential write-downs of goodwill, and the possibility that the transactions may not be accretive[180][183][184] Technology and Operational Risks Generative AI use, evolving regulations, reliance on third-party infrastructure, and intellectual property issues pose significant technology and operational risks - The use of generative AI creates risks of false or "hallucinatory" output, which could lead to reputational damage, legal liability, and competitive harm[110] - The business is subject to evolving AI regulations, such as the European Union's AI Act, which could impose additional costs and increase liability risk[114][115] - The company relies on third-party data center hosting facilities and public clouds; interruptions or delays in these services could impair service delivery and harm the business[148] - The company faces risks of intellectual property infringement claims from third parties and the potential for unauthorized use of its own proprietary technology[209][210] Internal Control and Market Risks Material weaknesses in internal controls, stock price volatility, and a dual-class stock structure concentrating voting power present significant internal control and market risks - The company identified material weaknesses in internal control over financial reporting as of December 31, 2024, related to the control environment, accounting for complex transactions, segregation of duties, and IT general controls[199][201] - The dual-class common stock structure concentrates voting control with holders of Class B Common Stock, who have ten votes per share, limiting the ability of Class A stockholders to influence corporate matters[225][226] - The company's ability to use its net operating loss carryforwards, which totaled $548.4 million (federal) and $208.1 million (state) as of December 31, 2024, may be limited[237] Cybersecurity SoundHound maintains a comprehensive cybersecurity program, overseen by its audit committee, which has not materially impacted business operations to date - Cybersecurity risk is managed by a dedicated Information Security Management committee and overseen by the board's audit committee[248][249] - The risk management program includes regular assessments, employee training, continuous monitoring, and annual reviews of third-party vendors, including requiring SOC 1 or SOC 2 reports[244][246] - To date, cybersecurity threats and breaches have not materially affected the company's business[242] Properties and Legal Proceedings The company's corporate headquarters is a leased facility in Santa Clara, California, and it is not currently involved in any material legal proceedings - The company's corporate headquarters is located in a 61,360 square-foot leased building in Santa Clara, California, with the lease set to expire in 2026[254] - The company is not currently a party to any actions, claims, or legal proceedings expected to have a material adverse effect on its business or financial condition[99][255] Part II Market for Common Equity and Related Matters SoundHound's Class A common stock and warrants trade on Nasdaq, with no anticipated cash dividends in the foreseeable future - The company's Class A common stock trades under the symbol "SOUN" and its redeemable warrants trade under "SOUNW" on the Nasdaq Global Market[259] - The company does not anticipate paying cash dividends in the foreseeable future[260] Equity Compensation Plan Information (in thousands) | Plan Category | Securities to be Issued Upon Exercise of Outstanding Options | Weighted Average Exercise Price of Outstanding Options | Granted Restricted Stock Awards Outstanding | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 5,926 | $4.44 | 23,654 | 11,216 | Management's Discussion and Analysis (MD&A) In FY2024, revenue grew 85% to $84.7 million driven by acquisitions, though net loss widened to $350.7 million due to non-cash charges, while liquidity improved from equity offerings Results of Operations FY2024 revenue increased 85% to $84.7 million, driven by service subscriptions, but net loss widened to $350.7 million due to non-cash charges, and gross margin declined Consolidated Results of Operations (in thousands) | | Year Ended December 31, 2024 | Year Ended December 31, 2023 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $84,693 | $45,873 | $38,820 | 85% | | Gross Profit | $41,384 | $34,566 | $6,818 | 20% | | Gross Margin | 49% | 75% | - | (26)% | | Loss from Operations | $(341,353) | $(68,608) | $(272,745) | 398% | | Net Loss | $(350,681) | $(88,937) | $(261,744) | 294% | Revenue by Type (in thousands) | Revenue by Type | Year Ended December 31, 2024 | Year Ended December 31, 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Service Subscriptions | $56,347 | $1,940 | 2804% | | Product royalties | $27,964 | $43,299 | (35)% | | Monetization | $382 | $634 | (40)% | | Total | $84,693 | $45,873 | 85% | - The significant increase in net loss was primarily driven by a non-cash charge of $222.7 million related to the change in fair value of contingent acquisition liabilities, which is linked to the company's stock price movement[317][326] Liquidity and Capital Resources As of December 31, 2024, SoundHound held $198.2 million in cash, bolstered by $407.3 million from equity offerings used to repay debt and fund operations - The company held $198.2 million in unrestricted cash and cash equivalents as of December 31, 2024[337] - During 2024, the company raised a total of $407.3 million in gross proceeds from three separate at-the-market (ATM) equity programs[340][342][370] - The company fully repaid its $100.0 million Term Loan in June 2024 and the remaining $39.8 million of assumed Amelia Debt in December 2024[373][375] Cash Flow Activity (in thousands) | Cash Flow Activity | Year Ended Dec 31, 2024 | Year Ended Dec 31, 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(108,878) | $(68,265) | | Net cash used in investing activities | $(12,372) | $(392) | | Net cash provided by financing activities | $210,906 | $168,237 | Acquisitions In 2024, SoundHound acquired SYNQ3 for $15.8 million and Amelia for $98.6 million, expanding its market presence and revenue, but increasing expenses and integration complexities - On January 3, 2024, the company acquired SYNQ3, a voice AI provider for the restaurant industry, for a total purchase consideration of $15.8 million[345][562] - On August 6, 2024, the company acquired Amelia, an enterprise conversational AI company, for a preliminary purchase consideration of $98.6 million, including significant contingent earnout shares[289][357]358 Unaudited Pro Forma Financials (in thousands) | Unaudited Pro Forma Financials | Year Ended Dec 31, 2024 | Year Ended Dec 31, 2023 | | :--- | :--- | :--- | | Revenue | $143,498 | $153,586 | | Net loss attributable to SoundHound AI, Inc. | $(374,469) | $(158,339) | Critical Accounting Policies Critical accounting policies involve significant judgment in revenue recognition, business combinations, goodwill valuation, and contingent consideration, impacting financial reporting - Key critical accounting policies include revenue recognition, business combinations, goodwill and intangible assets, and contingent consideration[391] - Revenue recognition follows the five-step model of ASC 606, with significant judgment applied to identifying performance obligations and determining their standalone selling prices (SSP)[392][401] - Business combinations are accounted for using the acquisition method, requiring fair value estimates for assets acquired and liabilities assumed; contingent consideration is remeasured to fair value each reporting period, with changes recognized in the consolidated statements of operations[409]411 Financial Statements and Supplementary Data This section presents audited financial statements for FY2024 and FY2023, with the auditor issuing an adverse opinion on internal controls due to material weaknesses, but an unqualified opinion on the financial statements Consolidated Financial Statements Audited financial statements show total assets of $554.0 million, total liabilities of $371.3 million, $84.7 million in revenue, and a $350.7 million net loss for FY2024 Consolidated Balance Sheet (in thousands) | Consolidated Balance Sheet | December 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $255,520 | $113,542 | | Total Assets | $553,953 | $151,122 | | Total Current Liabilities | $67,742 | $24,223 | | Total Liabilities | $371,300 | $122,954 | | Total Stockholders' Equity | $182,653 | $28,168 | Consolidated Statement of Operations (in thousands) | Consolidated Statement of Operations | Year Ended Dec 31, 2024 | Year Ended Dec 31, 2023 | | :--- | :--- | :--- | | Revenues | $84,693 | $45,873 | | Loss from Operations | $(341,353) | $(68,608) | | Net Loss | $(350,681) | $(88,937) | | Net Loss Per Share (Basic & Diluted) | $(1.04) | $(0.40) | Notes to Consolidated Financial Statements Notes detail accounting policies, acquisition accounting, revenue disaggregation, debt repayment, stock-based compensation, NOL carryforwards, and subsequent equity offerings - Details the purchase price allocation for the SYNQ3 and Amelia acquisitions, including goodwill of $6.0 million and $95.7 million respectively, and significant contingent earnout liabilities (Note 3)[571]586 - The company fully repaid its $100.0 million Term Loan in June 2024 and the assumed Amelia Debt in December 2024, resulting in a total loss on extinguishment of debt of $15.6 million (Note 10)[666][668]330 - As of Dec 31, 2024, the company had U.S. federal net operating loss carryforwards of $548.4 million and state NOLs of $208.1 million (Note 19)[782] - Subsequent to year-end, in January and February 2025, the company sold 4,248,900 shares under a new at-the-market equity program, raising $67.7 million in gross proceeds (Note 23)[800] Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2024, due to material weaknesses in internal control, with a remediation plan underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2024[803] - Material weaknesses were identified in several areas: - Ineffective control environment and risk assessment[804] - Ineffective controls for identifying and accounting for non-routine, unusual, or complex transactions (e.g., financing, acquisitions)[805] - Ineffective controls to verify appropriate segregation of duties805 - Ineffective IT general controls (user access, change management, computer operations)805 - A remediation plan is in progress, including engaging a third party for risk assessment, implementing an automated Segregation of Duties tool, enhancing user access reviews, and hiring additional personnel with risk and control expertise[808]