What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-10 · 173 added, 97 removed, 292 unchanged (48% of the section changed)

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Our Managed Services consist of revenues generated from Commercial Enterprise customers using our content licensing services, advertising agency, influencer management and related services.

During the three months ended March 31, 2024, we generated revenue of $31.6 million as compared to $30.3 million during the three months ended March 31, 2023.

Our Software Products & Services revenue was $15.2 million and $14.1 million during the three months ended March 31, 2024 and 2023, respectively, and represented 48% and 47% of our consolidated revenue for the three months ended March 31, 2024 and 2023, respectively.

The $1.1 million increase in Software Products & Services revenue, or 7.8% year over year, was driven by the Q2 2023 acquisition of Broadbean, which generated $8.5 million in revenue in Q1 2024.

Our Managed Services revenue was $16.4 million and $16.1 million during the three months ended March 31, 2024 and 2023, respectively, and represented 52% and 53% of our consolidated revenue for the three months ended March 31, 2024 and 2023, respectively.

No customer represented more than 10% of our consolidated revenue during the three months ended March 31, 2024 and one customer represented approximately 18% of our consolidated revenue during the three months ended March 31, 2023.

During the three and six months ended June 30, 2024, we generated revenue of $31.0 million and $62.6 million, respectively, as compared to $28.0 million and $58.2 million during the three and six months ended June 30, 2023, respectively.

Our Software Products & Services revenue was $15.6 million during the three months ended June 30, 2024 as compared to $14.1 million for the same period in 2023, while our Managed Services revenue was $15.4 million during the three months ended June 30, 2024 as compared to $13.9 million for the same period in 2023.

Our Software Products & Services revenue was $30.8 million during the six months ended June 30, 2024 as compared to $28.2 million for the same period in 2023, while our Managed Services revenue was $31.8 million during the six months ended June 30, 2024 as compared to $30.0 million for the same period in 2023.

During the three and six months ended June 30, 2024, no customer represented more than 10% of our consolidated revenue.

During the three and six months ended June 30, 2023, one customer represented 15% and 17%, respectively, of our consolidated revenue.

Recent Developments

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Operational Realignment and Restructuring.

During the three months ended March 31, 2024, we enacted certain operational and restructuring initiatives (the “Q1 2024 Restructuring”), the result of which was an approximate 13% reduction in our global workforce.

During the first quarter of 2024, we enacted certain operational and restructuring initiatives (the “Q1 2024 Restructuring”), the result of which was an approximate 13% reduction in our global workforce.

As a result of the Q1 2024 Restructuring, we expect to reduce our annualized operating expenses by over $13.0 million.

We incurred $2.0 million in one-time severance and transition expenses in connection with the Q1 2024 Restructuring, of which $1.3 million was paid as of March 31, 2024.

We incurred $2.5 million in one-time severance and transition expenses in connection with the Q1 2024 Restructuring, of which $2.3 million was paid as of June 30, 2024.

Formal Process to Divest Certain Non-software Assets.

In addition, we have engaged bankers to launch a formal process to sell certain of our non-software assets (the “Asset”).

We currently have received multiple qualified bids and we aim to complete the sale of the Asset within the twelve months following the filing of this Quarterly Report on Form 10-Q.

If consummated, this transaction is expected to generate substantial cash proceeds to be used to repay a portion of our Term Loan and fund future operations.

There can be no assurance that any such transaction resulting from this process will ultimately be completed in the subsequent twelve-month period.

Election of Michael Keithley as a Class I Director .

On June 13, 2024, at our 2024 annual meeting of stockholders (the “Annual Meeting”), Michael Keithley was elected as a Class I Director for a three-year term expiring at the Company’s annual meeting of stockholders in 2027.

Gehl resigned as a member of the Board of Directors immediately prior to the commencement of the Annual Meeting.

Opportunities, Challenges and Risks

During the three months ended March 31, 2024 and 2023, we derived our revenue primarily through our Commercial Enterprise customers, and secondarily, through our Public Sector customers.

During the six months ended June 30, 2024 and 2023, we derived our revenue primarily through our Commercial Enterprise customers, and secondarily, through our Public Sector customers.

We are a leader in AI-based Software Products & Services.

Our proprietary AI operating system, aiWARE, uses machine learning algorithms, or AI models, together with a suite of powerful applications, to reveal valuable insights from vast amounts of structured and unstructured data.

Historically, we have derived a large portion of our Software Product & Services revenue from applications we internally developed from our aiWARE platform and actively sold across various customers.

While management believes there is a substantial opportunity to increase revenue longer term, current economic conditions have negatively impacted parts of our consumption-based operations and financial results, and there is no certainty that any future investments, which could be significant and include future potential acquisitions, will result in significant enterprise revenue realization or revenue growth when compared with historical revenue.

Historically, we have derived a large portion of our Software Product & Services revenue from applications we internally developed from our aiWARE platform and actively sell to various customers.

results, and there is no certainty that any future investments, which could be significant and include future potential acquisitions, will result in significant enterprise revenue realization or revenue growth when compared with historical revenue.

Nevertheless, we continue to see significant opportunities for growth in Software Products & Services and our aiWARE platform sales to existing and newly acquired customers, and where our AI solutions could add near and long-term value in the Public Sector industries and content creation and distribution across the global media and entertainment industry.

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In June 2023, we completed the acquisition of Broadbean, a leader in subscription-based talent acquisition software-as-a-service which has approximately 3,000 subscription-based customers based throughout the world, integrated with over 100 applicant tracking systems (“ATS”) and has direct access to over 2,500 job boards globally.

The acquisition of Broadbean was strategic to our growth across our hiring applications, as we plan in the near term to offer our existing product offerings to Broadbean’s 3,000 customers, including programmatic advertising capabilities.

The acquisition of Broadbean was strategic to our growth across our Veritone Hire applications, as we plan in the near term to offer our existing product offerings to Broadbean’s 3,000 customers, including programmatic advertising capabilities.

Over the long term, we plan to utilize our AI capabilities to analyze complex data sets through direct access to these ATS, including future integration with aiWARE.

In Public Sector markets, we see growth opportunities with customer adoption of our products and services related to AI technologies and with our official Authorization to Operate, of our aiWARE platform across the entire U.S.

Department of Justice and progress with the Chief Digital and Artificial Intelligence Officer and Department of Defense, including our recently announced iDEMS platform.

In Public Sector markets, we see significant near and long term growth opportunities with customer adoption of our aiWARE platform, including our recently announced iDEMS solution, to facilitate and improve existing and growing demand for more robust digital evidence management systems and services across the entire public safety industry, the U.S.

Department of Justice and the Chief Digital and Artificial Intelligence Officer and Department of Defense.

However, many enterprise-level opportunities with Public Sector customers can involve long sales cycles, during which we must invest significant time and resources without a guarantee of success.

Growing our existing and new Software Products & Services customer base is critical for our success.

Software Products & Services revenue increased by 7.7% during the three months ended March 31, 2024 as compared to the prior year period due to the addition of Broadbean in the second quarter of 2023, partially offset by lower consumption across our legacy Veritone Hire customer base.

During the three months ended March 31, 2024, our largest customer represented less than 10% of our consolidated revenue as compared to 18% during the three months ended March 31, 2023.

As a result of the recent pullback in the macroeconomic environment caused by high inflation, rising interest rates, and geopolitical factors including the Russia-Ukraine conflict and the war in Israel, some of our customers reduced consumption-based and advertising spending across our Commercial Enterprise customer base, namely of our Veritone Hire solutions and Managed Services.

As of March 31, 2024, our total Software Products & Services customers declined to 3,384, which was a decrease of 10.3% as compared to the end of the first quarter of 2023 on a pro forma basis, giving effect to the acquisition of Broadbean as if it occurred on January 1, 2022.

The decrease in customers was largely driven by planned migration of legacy CareerBuilder customers off the Broadbean software platform, which did not have a significant impact on our financial results in 2023 or for the three months ended March 31, 2024.

While we anticipate these trends to continue in the second quarter of 2024, we expect the overall impact will be insignificant to our financial results in 2024.

Software Products & Services revenue increased by 9.3% during the six months ended June 30, 2024 as compared to the prior year period due to the addition of Broadbean in the second quarter of 2023, partially offset by lower consumption across our legacy Veritone Hire customer base.

During the six months ended June 30, 2024, no customer represented more than 10% of our consolidated revenue as compared to one customer that represented 17% of our consolidated revenue during the six months ended June 30, 2023.

As a result of the recent pullback in the macroeconomic environment caused by high inflation, high interest rates, higher unemployment and geopolitical factors including the Russia-Ukraine conflict and the war in Israel, some of our customers reduced consumption-based and advertising spending across our Commercial Enterprise customer base, namely of our Veritone Hire solutions and Managed Services.

As of June 30, 2024, our total Software Products & Services customers declined to 3,437, which was a decrease of 7.1% as compared to the end of the second quarter of 2023 on a pro forma basis, giving effect to the acquisition of Broadbean as if it occurred on January 1, 2022.

The overall impact of this customer decline is insignificant to our financial results in 2024.

To continue our effort to grow our customer base and overall revenue, we have been investing aggressively in existing customers and acquiring new customers.

In addition, in February 2024, we announced certain cost reduction and restructuring initiatives, the results of which was a reduction in our global workforce of approximately 13%.

Since the first quarter of 2023, we have been actively realigning and restructuring our organization, which, as of March 31, 2024, is expected to result in over $37.0 million of net annualized strategic cost reductions, which includes expected cost reductions from our Q1 2024 Restructuring.

Since the first quarter of 2023, we have been actively realigning and restructuring our organization, which, as of June 30, 2024, is expected to result in over $37.0 million of net annualized strategic cost reductions, which includes expected cost reductions from our Q1 2024 Restructuring.

As a result of our efforts to diversify our customer base and increase sales within our existing customer base, as well as the June 2023 acquisition of Broadbean, we increased our sales and marketing spending in the near term as compared to the trailing twelve months;

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We are in the process of developing and marketing more specific use cases for these and future integrations, which we believe will open up new markets for our products and accelerate our long-term revenue growth opportunities.

Our non-GAAP gross margin is impacted significantly by the mix of our Software Products & Services and our Managed Services revenue in any given period because our Managed Services revenue typically has a lower overall non-GAAP gross margin than our Software Products & Services revenue.

Our non-GAAP gross profit (see “Non-GAAP Financial Measures” below) is also dependent upon our ability to grow our revenue by expanding our customer base and increasing business with existing customers, and to manage our costs by negotiating favorable economic terms with cloud computing providers such as AWS and Microsoft Azure.

While we are focused on continuing to improve our non-GAAP gross profit, our ability to attract and retain customers to grow our revenue will be highly dependent on our ability to implement and continually improve upon our technology and services and improve our technology infrastructure and operations as we experience increased network capacity constraints due to our growth.

We believe our operating results and performance are, and will continue to be, driven by various factors that affect our industry.

Our ability to attract, grow and retain customers for our aiWARE platform is highly sensitive to rapidly changing technology and is dependent on our ability to maintain the attractiveness of our platform, content and services to our customers.

Our future revenue and operating growth will

rely heavily on our ability to grow and retain our Software Products & Services customer base, continue to develop and deploy quality and innovative AI-driven applications and enterprise-level offerings, provide unique and attractive content and advertising services to our customers, continue to grow in newer markets such as Public Sector, expand aiWARE into larger and more expansive enterprise engagements and manage our corporate overhead costs.

Our future revenue and operating growth will rely heavily on our ability to grow and retain our Software Products & Services customer base, continue to develop and deploy quality and innovative AI-driven applications and enterprise-level offerings, provide unique and attractive content and advertising services to our customers, continue to grow in newer markets such as Public Sector, expand aiWARE into larger and more expansive enterprise engagements

and manage our corporate overhead costs.

While we believe we will be successful in these endeavors, we cannot guarantee that we will succeed in generating substantial long term operating growth and profitability.

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While we believe there are strategic acquisition targets that can accelerate our entry into and expand our existing market share in key strategic markets, as well as our ability to grow our business, there is no certainty our historical or future acquisitions will achieve these objectives.

Conversely, we have pursued and may continue to pursue opportunistic sales of certain business operations that are not strategic to us long-term, such as the divestiture of our energy group in the second quarter of 2023.

For the three months ended March 31, 2024, our total revenues were $31.6 million as compared to $30.3 million for the three months ended March 31, 2023, an increase of 4.3%.

For the three months ended March 31, 2024, our total loss from operations was $21.9 million as compared to $23.6 million for the three months ended March 31, 2023, a decrease of 7.1%.

For the three months ended March 31, 2024, our non-GAAP gross margin (calculated as described in “Non-GAAP Financial Measures” below) increased to approximately 77.7% as compared to 77.5% for the three months ended March 31, 2023, driven in large part by the mix of revenue as compared to the prior year period.

Conversely, we have pursued and may continue to pursue opportunistic sales of certain business operations that are not strategic to us long-term, such as the potential sale of the Asset discussed above and the divestiture of our Energy Group in the second quarter of 2023.

For the three and six months ended June 30, 2024, our total revenues were $31.0 million and $62.6 million, respectively, as compared to $28.0 million and $58.2 million for the three and six months ended June 30, 2023, respectively, an increase of 10.8% and 7.6%, respectively, over the prior year periods.

For the three and six months ended June 30, 2024, our total loss from operations was $17.7 million and $39.5 million, respectively, as compared to $28.2 million and $51.8 million for the three and six months ended June 30, 2023, respectively, a decrease of 37.3% and 23.7%, respectively, over the prior year periods.

For the three and six months ended June 30, 2024, our non-GAAP gross margin (calculated as described in “Non-GAAP Financial Measures” below) increased to approximately 78.8% and 78.2%, respectively, as compared to 72.2% and 75.0% for the three and six months ended June 30, 2023, respectively, driven in large part by increased customer margins and the mix of revenue as compared to the prior year periods.

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During the three months ended March 31, 2024, we reported a net loss of $25.2 million as compared to a net loss of $23.0 million during the three months ended March 31, 2023.

During the three months ended March 31, 2024, we reported a non-GAAP net loss of $7.6 million as compared to a non-GAAP net loss of $9.6 million during the three months ended March 31, 2023.

During the three and six months ended June 30, 2024, we reported a net loss of $22.2 million and $47.4 million, respectively, as compared to a net loss of $23.3 million and $46.3 million during the three and six months ended June 30, 2023, respectively.

During the three and six months ended June 30, 2024, we reported a non-GAAP net loss of $6.9 million and $14.5 million, respectively, as compared to a non-GAAP net loss of $13.0 million and $22.6 million during the three and six months ended June 30, 2023, respectively.

To continue to grow our revenue, we will continue to make targeted investments in people, namely software engineers and sales personnel.

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As a result of these initiatives, we believe we will be able to accelerate our pathway toward long term profitability.

During the three months ended March 31, 2023, substantially all of our revenue was derived from customers located in the United States.

During the three and six months ended June 30, 2023, substantially all of our revenue was derived from customers located in the United States.

With the June 2023 acquisition of Broadbean, we expanded our customer base throughout Europe and Asia Pacific.

In the three months ended March 31, 2024, 32.9% of our consolidated revenue was from customers outside of the U.S., as compared to less than 10% during the three months ended March 31, 2023.

During the three and six months ended June 30, 2024, 33.4% and 33.1%, respectively, of our consolidated revenue was from customers outside of the U.S., principally from customers located throughout Western Europe, as compared to less than 10% during the three and six months ended June 30, 2023.

We believe that there is a substantial opportunity for us to continue expanding our service offerings and customer base in countries outside of the United States.

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A small portion of our Israel-based employees, and a number of their family members, have been conscripted into military service.

The extent of the impact of these factors on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, and the impact on our customers, partners and employees, all of which have uncertainty and cannot be predicted.

These global economic conditions and any continued or new disruptions caused by these conditions may

negatively impact our business in a number of ways.

uncertainty and cannot be predicted.

These global economic conditions and any continued or new disruptions caused by these conditions may negatively impact our business in a number of ways.

For example, our Veritone Hire solutions are sold to businesses whose financial conditions fluctuate based on general economic and business conditions, particularly the overall demand for labor and the economic health of current and prospective employers.

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These adverse economic conditions could also result in reductions in sales of our applications, longer sales cycles, reductions in contract duration and value, slower adoption of new technologies and increased price competition.

In addition, economic recessions have historically resulted in overall reductions in spending on software and technology solutions as well as pressure from customers and potential customers for extended billing terms.

If economic, political, or market conditions deteriorate, or if there is uncertainty around these conditions, our customers and potential customers may elect to decrease their software and technology solutions budgets by deferring or reconsidering product purchases, which would limit our ability to grow our business and negatively affect our operating results.

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Due to the nature of our business, the effect of these macroeconomic conditions may not be fully reflected in our results of operations until future periods.

We have assessed the potential credit deterioration of our customers due to changes in the macroeconomic environment and have determined that no additional allowance for credit losses was necessary due to credit deterioration as of March 31, 2024.

The most significant risks to our business and results of operations are discussed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31, 2023, and Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q.

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“Pro Forma” information provided in this quarterly report on Form 10-Q represents our historical information combined with the historical information of Broadbean (as defined below) for the applicable period on a pro forma basis as if we had acquired Broadbean on January 1, 2022.

We completed the acquisition of Broadbean on June 13, 2023, and therefore, periods commencing after June 13, 2023 are not presented on a Pro Forma basis.

Pro Forma Software Revenue represents Software Products & Services revenue on a Pro Forma basis.

Non-GAAP gross margin is defined as Non-GAAP gross profit divided by revenue.

Non-GAAP gross profit is calculated as our loss from operations with adjustments to add back sales and marketing expense, research and development expense, general and administrative expense and amortization expense.

Non-GAAP net loss (pro forma) is the Company’s net loss excluding the items set forth below.

Non-GAAP net income (loss) and non-GAAP net income (loss) per share is the Company’s net income (loss) and net income (loss) per share, adjusted to exclude provision for income taxes, depreciation expense, amortization expense, stock-based compensation expense, changes in fair value of contingent consideration, interest income, interest expense, foreign currency gains and losses, acquisition and due diligence costs, gain on sale of energy group, loss from business held for sale, variable consultant performance bonus expense, and severance and executive transition costs.

The results for non-GAAP net income (loss), are presented below for the three months ended March 31, 2024 and 2023.

Non-GAAP net income (loss) and non-GAAP net income (loss) per share is the Company’s net income (loss) and net income (loss) per share, adjusted to exclude provision for income taxes, depreciation expense, amortization expense, stock-based compensation expense, changes in fair value of contingent consideration, interest income, interest expense, foreign currency gains and losses, gain on debt extinguishment, acquisition and due diligence costs, gain or loss on sale of investment assets, loss from business held for sale, variable consultant performance bonus expense, and severance and executive transition costs.

The results for non-GAAP net income (loss), are presented below for the three and six months ended June 30, 2024 and 2023.

The items excluded from these non-GAAP financial measures, as well as a breakdown of GAAP net loss, non-GAAP net income (loss) and these excluded items between our Core Operations and Corporate, are detailed in the reconciliation below.

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(in thousands)

Three Months Ended March 31,

Three Months Ended June 30,

Core Operations (1)

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Stock-based compensation expense

Purchase consideration expense (3)

Interest expense, net

Foreign currency impact

Gain on debt extinguishment

Acquisition and due diligence costs (4)

Loss (gain) on sale

Contribution of business held for sale (5)

Variable consultant performance bonus expense (6)

Severance and executive transition costs

Non-GAAP net loss

(in thousands)

Six Months Ended June 30,

Core Operations (1)

Corporate (2)

Core Operations (1)

Corporate (2)

(Benefit from) provision for income taxes

Depreciation and amortization

Stock-based compensation expense

Change in fair value of contingent consideration

Acquisition compensation expense

Purchase consideration expense (3)

Interest expense, net

Foreign currency impact

Gain on debt extinguishment

Acquisition and due diligence costs (4)

Loss (gain) on sale

Contribution of business held for sale (5)

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Severance and executive transition costs

Non-GAAP Net Income (Loss)

Non-GAAP net loss

(1) Core operations consists of our consolidated Software Products & Services and Managed Services that include our content licensing and advertising services, and their supporting operations, including direct costs of sales as well as operating expenses for sales, marketing and product development and certain general and administrative costs dedicated to these operations.

(2) Corporate consists of general and administrative functions such as executive, finance, legal, people operations, fixed overhead expenses (including facilities and information technology expenses), other income (expenses) and taxes, and other expenses that support the entire company, including public company driven costs.

(3) Purchase consideration expense includes consideration related to acquisitions.

(4) For the three and six months ended June 30, 2024, acquisition and due diligence costs are comprised of professional fees related to acquisitions and divestitures.

(5) Contribution of business held for sale relates to the net loss for the periods presented for our Energy Group that we divested during the second quarter of 2023.

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Chad Steelberg as a result of his achievement of the performance goals pursuant to his consulting agreement with us.

For the three months ended March 31, 2024, our total loss from operations decreased to $21.8 million compared to $23.6 million in the three months ended March 31, 2023.

The following tables set forth the calculation of our non-GAAP gross profit and non-GAAP gross margin, followed by a reconciliation of non-GAAP to GAAP financial information presented in our condensed consolidated financial statements for three months ended March 31, 2024 and 2023.

For the three months ended June 30, 2024, our loss from operations decreased to $17.7 million compared to $28.2 million in the corresponding prior year period.

For the six months ended June 30, 2024 our loss from operations decreased to $39.5 million compared to

$51.8 million in the corresponding prior year period.

(dollars in thousands)

Three Months Ended

Six Months Ended

Loss from operations

Sales and marketing

Research and development

General and administrative

Non-GAAP gross profit

(dollars in thousands)

Three Months Ended

Six Months Ended

Cost of revenue

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Three Months Ended

Six Months Ended

Cost of revenue

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Change in fair value of contingent consideration

Acquisition compensation expense

Purchase consideration expense (3)

Variable consultant performance bonus expense (4)

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GAAP other income (expense), net

Gain on debt extinguishment

Loss (gain) on sale

Foreign currency impact

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Non-GAAP basic and diluted net loss per share

(1) Adjustments are comprised of the adjustments to GAAP cost of revenue, sales and marketing expenses, research and development expenses and general and administrative expenses and other (expense) income, net (where applicable) listed above.

(1) Adjustments are comprised of the adjustments to GAAP cost of revenue, sales and marketing expenses, research and development expenses and general and administrative expenses and other income (expense), net (where applicable) listed above.

(2) Contribution of business held for sale relates to the net loss for the periods presented for our Energy Group that we divested during Q2 2023.

(3) Purchase consideration expense includes consideration related to acquisitions.

(4) Variable consultant performance bonus expense represents the bonus payments paid to Mr.

Chad Steelberg as a result of his achievement of the performance goals pursuant to his consulting agreement with us.

(5) For the three and six months ended June 30, 2024, acquisition and due diligence costs are comprised of professional fees related to acquisitions and divestitures.

Supplemental Financial Information

We are providing the following unaudited supplemental financial information regarding our Software Products & Services and Managed Services as a lookback of the prior year to explain our recent historical and year-over-year performance.

We are providing the following unaudited supplemental financial information regarding our Software Products & Services and Managed Services as a lookback of prior years to explain our recent historical and year-over-year performance.

The supplemental financial information for our Software Products & Services includes:

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Pro Forma Annual Recurring Revenue (in 000’s) (2)

(1) “Pro Forma Software Revenue” includes historical Software Products & Services Revenue from the past eight (8) fiscal quarters of each of Veritone, Inc.

(1) “Pro Forma Software Revenue” includes historical Software Products & Services Revenue from the past ten (10) fiscal quarters of each of Veritone, Inc.

and Broadbean and presents such revenue on a combined pro forma basis treating Broadbean as owned by Veritone, Inc.

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Results of Operations

The following tables set forth our results of operations for the three months ended March 31, 2024 and 2023, in dollars and as a percentage of our revenue for those periods.

The following tables set forth our results of operations for the three and six months ended June 30, 2024 and 2023, in dollars and as a percentage of our revenue for those periods.

The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future.

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Three Months Ended

Six Months Ended

Operating expenses:

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Three Months Ended

Six Months Ended

Operating expenses:

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(Benefit from) provision for income taxes

Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023

Three Months Ended

March 31, 2024

Three Months Ended

March 31, 2023

Three and Six Months Ended June 30, 2024 Compared with Three and Six Months Ended June 30, 2023

Three Months Ended June 30,

Software Products & Services

Managed Services

Six Months Ended June 30,

Software Products & Services

Managed Services

Commercial Enterprise

Commercial Enterprise Software Products & Services revenue increased $1.0 million, or 7.6%, in the three months ended March 31, 2024 compared to the corresponding prior year period, primarily due to the addition of Broadbean in the second quarter of 2023, partially offset by decreased revenue from consumption-based customers, including Amazon.

Commercial Enterprise Managed Services increased $0.3 million, or 1.7%, in the three months ended March 31, 2024 compared to the corresponding prior year period, primarily due to increases in advertising revenue driven by the current advertising economic environment.

Commercial Enterprise Software Products & Services revenue increased $2.0 million, or 16.2%, in the three months ended June 30, 2024 compared to the corresponding prior year period and increased $3.0 million, or 11.8%, in the six months ended June 30, 2024 compared to the corresponding prior year period, in each case, primarily due to the addition of Broadbean in the second quarter of 2023, partially offset by decreased revenue from consumption-based customers, including Amazon.

We also realized a 3.1% increase from recurring subscription-based SaaS revenue customers for the three months ended June 30, 2024 compared to the prior year period.

Commercial Enterprise Managed Services increased $1.5 million, or 10.7%, in the three months ended June 30, 2024 compared to the corresponding prior year period and increased $1.8 million, or 5.9%, in the six months ended June 30, 2024 compared to the corresponding prior year period, in each case, primarily due to increases in advertising revenue driven by the current advertising economic environment.

Public Sector

Public Sector Software Products & Services revenue increased $0.1 million or 8.7% in the three months ended March 31, 2024 compared to the corresponding prior year period, primarily due to organic growth in software revenues from public safety and federal customers, offset slightly by the divestiture of our energy group in the second quarter of 2023.

In some cases, Public Sector Software Products & Services revenue from customers in certain markets, particularly our government customers, can involve project-based and be impacted by the timing of such projects.

Public Sector Software Products & Services revenue decreased $0.5 million, or 29.9%, in the three months ended June 30, 2024 compared to the corresponding prior year period and decreased $0.4 million, or 11.9%, in the six months ended June 30, 2024 compared to the corresponding prior year period, primarily due to certain one-time service revenues in the three months ended June 30, 2023 that did not recur in three months ended June 20, 2024, partially offset by organic growth in software revenues from public safety and federal customers.

In some cases, Software Products & Services revenue from Public Sector customers in certain markets, particularly our government customers, can be project-based and impacted by the timing of such projects.

As such, we expect that our revenue from these markets could fluctuate significantly from period to period.

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Three Months Ended

Six Months Ended

Cost of revenue

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Cost of Revenue.

Cost of revenue increased by $0.2 million in the three months ended March 31, 2024 compared to the corresponding prior year period, primarily due to the increase in revenue.

As a percentage of revenue, cost of revenue remained flat at approximately 22%

Cost of revenue decreased by $1.2 million and $0.9 million in the three and six months ended June 30, 2024, respectively, compared to the corresponding prior year periods, in each case, primarily due to improved margins from certain of our customers and a shift in the mix of revenues from lower margin Managed Services products to higher margin Software Products & Services products.

During the six months ended June 30, 2024, Software Products & Services products accounted for 49.3% of revenues compared to 48.5% in the prior year period.

Cost of revenues as a percentage of revenue improved to 21.2% and 21.8% in the three and six months ended June 30, 2024, respectively, as compared to 27.8% and 25.0% in the three and six months ended June 30, 2023, respectively.

Sales and Marketing .

Sales and marketing expenses decreased by $0.9 million in the three months ended March 31, 2024 compared to the corresponding prior year period, primarily due to cost reduction initiatives announced in the first quarter of 2023 and reduced advertising spend, partially offset by increased sales and marketing expense as a result of the acquisition of Broadbean in June 2023.

As a percentage of revenue, sales and marketing expenses decreased to 37% from 42% during the three months ended March 31, 2024 and 2023, respectively.

Sales and marketing expenses decreased by $0.5 million and $1.3 million in the three and six months ended June 30, 2024, respectively, compared to the corresponding prior year periods, in each case, primarily due to cost reduction initiatives announced in the first quarter of 2023 and reduced advertising spend, partially offset by increased sales and marketing expense as a result of the acquisition of Broadbean in June 2023.

As a percentage of revenue, sales and marketing expenses decreased to 40.9% and 39.1% during the three and six months ended June 30, 2024, respectively, from 46.9% and 44.3% during the three and six months ended June 30, 2023, respectively.

Research and Development.

Research and development expenses decreased by $2.3 million, or 20.1%, in the three months ended March 31, 2024 compared with the corresponding prior year period, principally due to a $3.2 million decrease in personnel-related costs due to various cost reduction initiatives executed over the trailing twelve months, partially offset by $0.2 million in one-time severance and transition expenses, a $0.5 million increase in research and development costs from the acquisition of Broadbean in June 2023, and a $0.3 million increase in capitalized costs for internal use software.

As a percentage of revenue, research and development expenses decreased to 29% from 38% during the three months ended March 31, 2024 and 2023, respectively.

Research and development expenses decreased by $3.9 million, or 36.8%, and $6.2 million, or 28.1%, in the three and six months ended June 30, 2024, respectively, compared with the corresponding prior year periods, in each case, principally due to decreased personnel-related costs resulting from various cost reduction initiatives, partially offset by increases in research and development costs from the acquisition of Broadbean in June 2023 and increased capitalized costs for internal use software.

As a percentage of revenue, research and development expenses decreased to 21.4% and 25.3% during the three and six months ended June 30, 2024, respectively, from 37.6% and 37.9% during the three and six months ended June 30, 2023, respectively.

General and Administrative.

General and administrative expenses increased by $2.0 million, or 11.6% in the three months ended March 31, 2024 compared with the corresponding prior year period, principally due to the addition of $3.0 million in costs resulting from the June 2023 Broadbean acquisition, partially offset by expense reductions in stock based compensation and personnel related costs.

As a percentage of revenue, general and administrative expenses increased to 61% from 57% in the three months ended March 31, 2024 and 2023, respectively.

General and administrative expenses decreased by $2.3 million, or 11.9% in the three months ended June 30, 2024 compared with the corresponding prior year period, principally due to reductions in non-recurring professional fees largely associated with the Broadbean acquisition and personnel-related costs resulting from various cost reduction initiatives, partially offset by additional costs resulting from the June 2023 Broadbean acquisition.

General and administrative expenses decreased by $0.2 million, or 0.7% in the six months ended June 30, 2024 compared with the corresponding prior year period, primarily due to the decrease in the second quarter

of 2024, described above, partially offset by a net increase in the first quarter of 2024 compared to the prior year period, which was driven by increased costs from the June 2023 Broadbean acquisition, partially offset by expense reductions in stock based compensation and personnel related costs.

Amortization Expense.

Amortization expense increased in the three months ended March 31, 2024 compared with the corresponding prior year period due to the addition of amortization expense related to our June 2023 acquisition of Broadbean.

Amortization expense increased in the three and six months ended June 30, 2024 compared with the corresponding prior year period primarily due to the addition of amortization expense related to our June 2023 acquisition of Broadbean, partially offset by certain assets being fully amortized in the third quarter of 2023.

Other Income (Expense), Net

Other income (expense), net for the three months ended March 31, 2024 of ($4.4) million increased $4.8 million from $0.4 million during the three months ended March 31, 2023.

The $4.8 million increase was largely due to a $3.2 million increase in net interest expense driven from the December 2023 Term Loan, which included $1.3 million of non-cash amortization expense associated with the initial discount and issuance costs of the debt.

The remaining $1.4 million increase was largely driven by changes in foreign exchange.

Other expense, net of $4.6 million for the three months ended June 30, 2024 was primarily due to interest expense, net of $4.5 million, driven by increased interest expense from our Term Loan.

Other income, net of $3.5 million for the three months ended June 30, 2023 was comprised primarily of a gain on the sale of the energy group of $2.6 million and a foreign exchange gain of $1.7 million, offset by interest expense, net of $0.7 million.

Other expense, net of $9.0 million for the six months ended June 30, 2024 was primarily due to interest expense, net of $8.5 million, driven by increased interest expense from our Term Loan, and a foreign exchange loss of $0.4 million.

Other income, net of 3.9 million for the six months ended June 30, 2023 was comprised primarily of a gain on the sale of the energy group of $2.6 million and a foreign exchange gain of $2.8 million, offset by interest expense, net of $1.5 million.

Non-GAAP Gross Profit

For the three months ended March 31, 2024, our total loss from operations decreased to $21.9 million compared to $23.6 million in the corresponding prior year period.

As noted above, our non-GAAP gross profit is calculated as our revenue less our cost of revenue, as follows:

Our non-GAAP gross profit is calculated as our revenue less our cost of revenue for the three and six months ended June 30, 2024 and 2023.

A reconciliation of non-GAAP gross profit to loss from operations presented in our condensed consolidated financial statements for the three and six months ended June 30, 2024 and 2023 is shown below.

(dollars in thousands)

Three Months Ended

Six Months Ended

Loss from operations

Sales and marketing

Research and development

General and administrative

Non-GAAP gross profit

Non-GAAP gross margin

(dollars in thousands)

Three Months Ended

Six Months Ended

Cost of revenue

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Non-GAAP gross margin

The increase in non-GAAP gross profit and non-GAAP gross margin in the three months ended March 31, 2024 compared with the corresponding prior year period was primarily due to an increase in revenue compared to the corresponding prior year period.

Liquidity and Capital Resources

The improvement in loss from operations for the three and six months ended June 30, 2024 compared to the prior year periods resulted from our increase in revenue and decrease in total operating expenses for the reasons noted above.

The increase in non-GAAP gross profit and non-GAAP gross margin in the three and six months ended June 30, 2024 compared with the corresponding prior year periods was primarily due to an increases in revenue and improved Non-GAAP gross margins compared to the corresponding prior year periods.

Liquidity, Capital Resources and Going Concern

We have historically financed our business through the sale of equity and debt securities.

Our principal sources of liquidity are our cash and cash equivalents, which totaled $90.7 million as of March 31, 2024, compared with total cash and cash equivalents of $79.4 million as of December 31, 2023.

The increase in our cash and cash equivalents as of March 31, 2024 as compared with December 31, 2023 was primarily due to cash provided by operating activities of $15.9 million during the three months ended March 31, 2024.

In December 2023, we and certain of our subsidiaries, as guarantors, entered into the Credit Agreement with certain lenders and Wilmington Savings Fund Society, FSB, as administrative agent and collateral agent.

The Credit Agreement provides for a $77.5 million senior secured Term Loan, which was fully drawn by us on closing of the Term Loan.

Based on our liquidity position as of March 31, 2024 and our current forecast of operating results and cash flows, absent any other action, management determined that we will need additional liquidity to continue our operations for the foreseeable future, including over the next twelve months.

In the near term and to meet our obligations as they come due, we expect to capture cost synergies from our past acquisitions coupled with expected cost savings from additional planned cost reduction measures through optimization of the Company's operational structure.

We expect these cost synergies and cost reduction measures to enable us to continue our operations for the foreseeable future, including over the next twelve months.

Our principal sources of liquidity are our cash and cash equivalents, which totaled $46.0 million as of June 30, 2024, compared with total cash and cash equivalents of $79.4 million as of December 31, 2023.

The decrease in our cash and cash equivalents as of June 30, 2024 as compared with December 31, 2023 was primarily due to cash used in operating activities of $27.8 million during the six months ended June 30, 2024.

In December 2023, we and certain of our subsidiaries, as guarantors, entered into a Credit and Guaranty Agreement (the “Credit Agreement”), by and among the Company and certain of our subsidiaries, as guarantors, and certain funds managed by Highbridge Capital Management, LLC and with certain other lenders (collectively, the “Lenders”) and Wilmington Savings Fund Society, FSB, as administrative agent and collateral agent.

The Credit Agreement provides for a $77.5 million senior secured term loan (the “Term Loan”), which was fully drawn by us on closing of the Term Loan.

Based on our liquidity position at June 30, 2024 and our current forecast of operating results and cash flows, absent any other action, management determined that there is substantial doubt about our ability to continue as a going concern

over the twelve months following the filing of this Quarterly Report on Form 10-Q, principally driven by our current debt service obligations, historical negative cash flows and recurring losses.

We will require additional liquidity to continue our operations over the next twelve months.

In the near term, and to meet our obligations as they come due, management is evaluating strategies to obtain funding for future operations.

These strategies may include, but are not limited to, obtaining equity financing, debt and/or further restructuring of operations to grow revenues and decrease operating expenses, which include capturing past cost reductions and potential future cost synergies from our past acquisitions.

In addition, management recently announced a formal process to divest the Asset, which transaction management intends to close within the twelve months following the filing of this Quarterly Report on Form 10-Q.

If consummated, this transaction is expected to generate substantial cash proceeds to be used to repay a portion of our Term Loan and fund future operations.

There is no assurance that such transaction will close in the subsequent twelve-month period, or at all, and as a result these cash flows have been excluded from management’s plans to remediate the doubt of going concern.

The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

We may not be able to access additional equity under acceptable terms, and may not be successful in future operational restructurings or at growing our revenue base.

If we are unable to sell the Asset on terms favorable to us, or at all, our ability to execute on our operating plans may be materially adversely impacted.

If we become unable to continue as a going concern, we may have to dispose of other or additional assets and might realize significantly less value than the values at which they are carried on our condensed consolidated financial statements.

These actions may cause stockholders to lose all or part of their investment in our common stock.

Our condensed consolidated financial statements do not include any adjustments that might result from our being unable to continue as a going concern.

If we cannot continue as a going concern, adjustments to the carrying values and classification of our assets and liabilities and the reported amounts of income and expenses could be required and could be material.

A summary of cash flows from our operating, investing and financing activities is shown in the table below.

(in thousands)

Three Months Ended

Cash provided by (used in) operating activities

Six Months Ended

Cash used in operating activities

Cash used in investing activities

Cash used in financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

Net decrease in cash, cash equivalents and restricted cash

Operating Activities

Our operating activities generated cash of $15.9 million in the three months ended March 31, 2024, due primarily to the net working capital impact of $31.1 million, primarily due to net cash inflow from changes in accounts receivable of $23.3 million, client advances of $12.8 million, and accounts payable of $3.8 million, partially offset by net cash outflows due to the timing of accrued media payments of $9.0 million and prepaid expenses and other current assets of $1.3 million.

Cash generated by operating activities in the three months ended March 31, 2024 was partially offset by our net loss of $25.2 million, adjusted by $9.8 million in non-cash expenses, including $7.5 million in depreciation and amortization, $1.6 million in stock-based compensation expense and $1.3 million of amortized debt issuance costs.

Our operating activities used cash of $33.8 million in the three months ended March 31, 2023, due primarily to our net loss of $23.0 million, adjusted by $10.6 million in non-cash expenses, including $5.9 million in depreciation and amortization and $3.9 million in stock-based compensation expense, as well as the net working decrease of $21.4 million, primarily due to decreases in accrued media payments of $19.7 million and client advances of $15.6 million from our Managed Services, partially offset by decreases in expenditures billable to clients of $9.3 million.

Our operating activities used cash of $27.8 million in the six months ended June 30, 2024, due primarily to our net loss of $47.4 million, adjusted by $19.4 million in non-cash expenses, including $14.5 million in depreciation and amortization, $3.7 million in stock-based compensation expense and $3.0 million of amortized debt issuance costs.

Cash generated by operating activities in the six months ended June 30, 2024 was partially offset by a net working capital impact of $0.3 million, primarily due to net cash inflows from changes in accounts receivable of $14.8 million, client advances of $17.9 million, and prepaid expenses and other current assets of $1.6 million, partially offset by net cash outflows due to the timing of accrued media payments of $24.6 million and expenditures billable to clients of $9.3 million.

Our operating activities used cash of $58.5 million in the six months ended June 30, 2023, due primarily to our net loss of $46.3 million, adjusted by $16.2 million in non-cash expenses, including $12.3 million in depreciation and amortization and $6.6 million in stock-based compensation expense, as well as the net working capital decrease of $28.4 million, primarily due to decreases in accrued media payments of $34.6 million, partially offset by decreases in accounts receivable of $16.3 million.

Investing Activities

Our investing activities for the three months ended March 31, 2024 used cash of $1.9 million driven by capital expenditures.

Our investing activities for the three months ended March 31, 2023 used cash of $2.9 million primarily for $1.5 million in deferred consideration paid for our acquisition in March 2022 of an influencer-based management company, pursuant to a securities purchase agreement, and $1.4 million in capital expenditures.

Our investing activities for the six months ended June 30, 2024 used cash of $1.6 million driven by capital expenditures, partially offset by proceeds from the sale of our interest in GridBeyond Limited, an Ireland-based privately held company.

Our investing activities for the six months ended June 30, 2023 used cash of $55.1 million primarily for $50.2 million in cash paid for the Broadbean acquisition net of cash acquired and $2.7 million in deferred consideration primarily related to our March 2022 Acquisition and the VocaliD acquisition, and $2.7 million in capital expenditures, with these uses of cash partially offset by $0.5 million in proceeds from the sale of our energy group in June 2023.

Financing Activities

Our financing activities for the three months ended March 31, 2024 used cash of $2.7 million, driven primarily by $1.8 million in deferred consideration paid related to the 2022 acquisitions and $1.0 million for the payment of contingent consideration.

Our financing activities for the three months ended March 31, 2023 used cash of $8.0 million, consisting of $7.8 million to pay the 2022 earnout for PandoLogic and $0.9 million to pay taxes related to the net share settlement of equity awards, partially offset by $0.6 million in proceeds received from the exercise of stock options and purchases of shares under our ESPP.

Our financing activities for the six months ended June 30, 2024 used cash of $4.0 million, driven primarily by $1.9 million of principal paid on our Term Loan and $1.8 million in deferred consideration paid related to the 2022 acquisitions.

Our financing activities for the six months ended June 30, 2023 used cash of $8.1 million, consisting of $7.8 million to pay the 2022 earnout for PandoLogic and $1.0 million to pay taxes paid related to the net share settlement of equity awards, partially offset by $0.6 million in proceeds received from the exercise of stock options and purchases of shares under our ESPP.

Contractual Obligations and Known Future Cash Requirements

As of March 31, 2024, our debt obligations are comprised of our Term Loan and 2026 Convertible Notes.

As of March 31, 2024, we have $77.5 million principal amount outstanding under our Term Loan that matures in December 2027 and $91.2 million aggregate principal amount outstanding of our 2026 Convertible Senior Notes that mature in November 2026.

As of March 31, 2024, we have future cash requirements to pay $1.0 million in purchase consideration commitments related to the VocaliD acquisition that will be paid in 2024.

We have no other present agreements or commitments with respect to any material acquisitions of businesses or technologies or any other material capital expenditures.

As of March 31, 2024, we have recorded $2.0 million of gross liability for uncertain tax positions, including interest and penalties.

As of June 30, 2024, our debt obligations are comprised of our Term Loan and our 1.75% convertible senior notes due in 2026 (the “Convertible Notes”).

As of June 30, 2024, we have $75.6 million principal amount outstanding under our Term Loan that matures in December 2027 and $91.2 million aggregate principal amount outstanding of our Convertible Notes that mature in November 2026.

As of June 30, 2024, we have no other present agreements or commitments with respect to any material acquisitions of businesses or technologies or any other material capital expenditures.

As of June 30, 2024, we have recorded $2.0 million of gross liability for uncertain tax positions, including interest and penalties.

Based upon the information available and possible outcomes, we cannot reasonably estimate the amount and period in which the liability might be paid.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis