Veritone, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements The following discussion and analysis of our financial condition and results of operations should be read together with and is qualified in its entirety by reference to the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed under “Risk Factors,” set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023, and any updates thereto set forth in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission (“SEC”), including future SEC filings. See “Cautionary Note Regarding Forward-Looking Statements.” Overview Veritone, Inc., collectively with our subsidiaries, referred to as “Veritone,” “Company,” “we,” “our,” and “us,” is a provider of Artificial Intelligence (“AI”) solutions, powered by our proprietary AI operating system, aiWARE™, to deliver differentiated products and solutions to our Commercial Enterprise and Public Sector (which we previously referred to as Government & Regulated Industries) customers. Our Software Products & Services consist of revenues generated from Commercial Enterprise and Public Sector customers using our aiWARE platform and Veritone Hire solutions, any related support and maintenance services, and any related professional services associated with the deployment and/or implementation of such solutions. 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 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 Appointment of Ryan Steelberg as Chairman. Ryan Steelberg, our Chief Executive Officer, was appointed Chairman of the Board, effective January 22, 2024, replacing Chad Steelberg who resigned as Chairman of the Board on the same date. Chad Steelberg continues to serve as a member of our Board. Operational Realignment and Restructuring. 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 $2.5 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. Jeffrey P. 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 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 sell to 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 29 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. We believe there are significant near and long-term revenue and growth opportunities from our Software Products & Services. 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 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 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 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 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 six months ended June 30, 2024. 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 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; however, these increased investments were partially offset by our 2023 and 2024 cost-reduction initiatives. We believe our Software Products & Services will extend the capabilities of many third-party software platforms and products that are widely used today. For example, we believe that, when integrated with aiWARE, our Veritone Hire solutions customers will be given greater visibility and transparency in their hiring processes. Further and with the recently announced iDEMs launch, we now offer a suite of aiWARE applications to address the growing issue of unstructured digital data management faced by public safety and federal government sectors today. In addition, we recently announced that we achieved Amazon Web Services (“AWS”) Advanced Tier Services status, advancing the deployment of our AI solutions and capabilities across the AWS platform, and we have historically integrated aiWARE across many platforms, including Alteryx, Snowflake and the NVIDIA® CUDA® GPU-based platform, enabling dramatic increases in aiWARE’s processing speed and providing a wide range of new use cases for our technology. 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. 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 30 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. Historically, we have pursued an opportunistic strategy of acquiring companies to help accelerate our organic growth. Our acquisition strategy has been threefold: (i) to increase the scale of our business in markets we are in today, (ii) to accelerate growth in new markets and product categories, including expanding our existing engineering and sales resources, and (iii) to accelerate the adoption of aiWARE as the universal AI operating system through venture or market-driven opportunities. 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 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. 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. 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. Historically, we have also made investments in our corporate infrastructure, including new ERP and workforce systems to help us better manage the scale and growth of our business. However, considering the current challenging macro-economic environment, we have made and are continuing to make significant cost reductions to our operating structure to better streamline our business and prioritization around our growth and corresponding investments. These cost reduction initiatives began in the latter half of 2022 and will continue through 2024, and include reductions in workforce and certain legacy operating costs, as well as the integration of past acquisitions. As a result of these initiatives, we believe we will be able to accelerate our pathway toward long term profitability. 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. 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. In the long term, we plan to expand our business further internationally in places such as Europe, Asia Pacific and Latin America, and as a result, we expect to continue to incur significant incremental upfront expenses associated with these expansion opportunities. Impact of Current Global Economic Conditions Global economic and business activities continue to face uncertainty as a result of macroeconomic and geopolitical factors, labor shortages, inflation rates and the responses by central banking authorities to control inflation, monetary supply shifts, recession risks, disruptions from the Russia-Ukraine conflict, and the war in Israel. In particular, business operations at our Herzliya office location where we do development work on our Veritone Hire solutions products have been, and may continue to be, impacted by the war in Israel. 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 31 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. To the extent that economic uncertainty or attenuated economic conditions cause our customers and potential customers to freeze or reduce their headcount, and reduce their advertising spending, demand for our products and services may be negatively affected. 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 payment 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. Any of these events would likely have an adverse effect on our business, operating results and financial position. 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 June 30, 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. Non-GAAP Financial Measures and Key Performance Indicators In evaluating our cash flows and financial performance, we use certain non-GAAP financial measures, including Pro Forma Software Revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP net income (loss), and non-GAAP net income (loss) per share. We also provide certain key performance indicators ( “ KPIs”), including Total Software Products & Services Customers, Annual Recurring Revenue, Annual Recurring Revenue (SaaS), Annual Recurring Revenue (Consumption), Total New Bookings and Gross Revenue Retention. “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, 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. In addition, we have provided supplemental non-GAAP measures of gross profit, operating expenses, loss from operations, other (expense) income, net, and loss before income taxes, excluding the items excluded from non-GAAP net loss as noted above, and reconciling such non-GAAP measures to the most directly comparable GAAP measures. We present these non-GAAP financial measures because management believes such information to be important supplemental measures of performance that are commonly used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Management also uses this information internally for forecasting and budgeting. These non-GAAP financial measures are not calculated and presented in accordance with GAAP and should not be considered as an alternative to net income (loss), operating income (loss) or any other financial measures so calculated and presented, nor as an alternative to cash flow from operating activities as a measure of liquidity. Other companies (including our competitors) may define these non-GAAP financial measures differently. These non-GAAP measures may not be indicative of our historical operating results or predictive of potential future results. Investors should not consider this supplemental non-GAAP financial information in isolation or as a substitute for analysis of our results as reported in accordance with GAAP. 32 Reconciliation of GAAP net loss to Non-GAAP net income (loss) (in thousands) Three Months Ended June 30, 2024 2023 Core Operations (1) Corporate (2) Total Core Operations (1) Corporate (2) Total Net loss $ (9,026 ) $ (13,205 ) $ (22,231 ) $ (15,205 ) $ (8,091 ) $ (23,296 ) (Benefit from) provision for income taxes (43 ) — (43 ) (742 ) (632 ) (1,374 ) Depreciation and amortization 6,835 123 6,958 5,818 571 6,389 Stock-based compensation expense 698 1,441 2,139 1,929 768 2,697 Purchase consideration expense (3) — 568 568 — — — Interest expense, net — 4,497 4,497 — 720 720 Foreign currency impact — (49 ) (49 ) (1,631 ) (28 ) (1,659 ) Gain on debt extinguishment — (8 ) (8 ) — — — Acquisition and due diligence costs (4) — 241 241 — 4,271 4,271 Loss (gain) on sale — 172 172 — (2,572 ) (2,572 ) Contribution of business held for sale (5) (5 ) — (5 ) 872 — 872 Variable consultant performance bonus expense (6) — — — 237 — 237 Severance and executive transition costs 831 80 911 474 215 689 Non-GAAP net loss $ (710 ) $ (6,140 ) $ (6,850 ) $ (8,248 ) $ (4,778 ) $ (13,026 ) (in thousands) Six Months Ended June 30, 2024 2023 Core Operations (1) Corporate (2) Total Core Operations (1) Corporate (2) Total Net loss $ (20,018 ) $ (27,411 ) $ (47,429 ) $ (27,775 ) $ (18,484 ) $ (46,259 ) (Benefit from) provision for income taxes (1,088 ) — (1,088 ) (1,246 ) (399 ) (1,645 ) Depreciation and amortization 14,244 216 14,460 11,572 724 12,296 Stock-based compensation expense 1,738 2,009 3,747 4,264 2,350 6,614 Change in fair value of contingent consideration — — — — 651 651 Purchase consideration expense (3) — 885 885 — — — Interest expense, net — 8,488 8,488 9 1,516 1,525 Foreign currency impact — 363 363 (2,777 ) (43 ) (2,820 ) Gain on debt extinguishment — (8 ) (8 ) — — — Acquisition and due diligence costs (4) 140 1,042 1,182 — 5,076 5,076 Loss (gain) on sale — 172 172 — (2,572 ) (2,572 ) Contribution of business held for sale (5) (2 ) — (2 ) 1,789 — 1,789 Variable consultant performance bonus expense (6) — — - 631 — 631 Severance and executive transition costs 3,098 1,663 4,761 1,501 632 2,133 Non-GAAP net loss $ (1,888 ) $ (12,581 ) $ (14,469 ) $ (12,032 ) $ (10,549 ) $ (22,581 ) (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. (6) 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. 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 33 $51.8 million in the corresponding prior year period. 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 and six months ended June 30, 2024 and 2023. (dollars in thousands) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Loss from operations $ (17,662 ) $ (28,180 ) $ (39,502 ) $ (51,769 ) Sales and marketing 12,674 13,124 24,478 25,814 Research and development 6,645 10,519 15,860 22,046 General and administrative 16,765 19,025 36,185 36,422 Amortization 5,990 5,714 11,981 11,143 Non-GAAP gross profit $ 24,412 $ 20,202 $ 49,002 $ 43,656 (dollars in thousands) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Revenue $ 30,992 $ 27,967 $ 62,628 $ 58,230 Cost of revenue 6,580 7,765 13,626 14,574 Non-GAAP gross profit $ 24,412 $ 20,202 $ 49,002 $ 43,656 Non-GAAP gross margin 78.8 % 72.2 % 78.2 % 75.0 % 34 Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Revenue $ 30,992 $ 27,967 $ 62,628 $ 58,230 Cost of revenue 6,580 7,765 13,626 14,574 Non-GAAP gross profit 24,412 20,202 49,002 43,656 GAAP cost of revenue 6,580 7,765 13,626 14,574 Stock-based compensation expense — (17 ) 1 (37 ) Non-GAAP cost of revenue 6,580 7,748 13,627 14,537 GAAP sales and marketing expenses 12,674 13,124 24,478 25,814 Depreciation (24 ) (6 ) (48 ) (12 ) Stock-based compensation expense (306 ) (529 ) (482 ) (705 ) Contribution of business held for sale (2) — (221 ) — (484 ) Severance and executive transition costs (477 ) (190 ) (980 ) (503 ) Non-GAAP sales and marketing expenses 11,867 12,178 22,968 24,110 GAAP research and development expenses 6,645 10,519 15,860 22,046 Depreciation (562 ) (292 ) (1,352 ) (519 ) Stock-based compensation expense (96 ) (1,127 ) (628 ) (2,669 ) Contribution of business held for sale (2) — (559 ) — (1,117 ) Severance and executive transition costs (265 ) (151 ) (1,457 ) (680 ) Non-GAAP research and development expenses 5,722 8,390 12,423 17,061 GAAP general and administrative expenses 16,765 19,025 36,185 36,422 Depreciation (382 ) (377 ) (1,079 ) (622 ) Stock-based compensation expense (1,737 ) (1,024 ) (2,638 ) (3,203 ) Change in fair value of contingent consideration — — — (651 ) Purchase consideration expense (3) (568 ) — (885 ) — Variable consultant performance bonus expense (4) — (237 ) — (631 ) Contribution of business held for sale (2) 5 (92 ) 2 (188 ) Acquisition and due diligence costs (5) (241 ) (4,271 ) (1,182 ) (5,076 ) Severance and executive transition costs (169 ) (348 ) (2,324 ) (950 ) Non-GAAP general and administrative expenses 13,673 12,676 28,079 25,101 GAAP amortization (5,990 ) (5,714 ) (11,981 ) (11,143 ) GAAP loss from operations (17,662 ) (28,180 ) (39,502 ) (51,769 ) Total non-GAAP adjustments (1) 10,812 15,155 25,033 29,190 Non-GAAP loss from operations (6,850 ) (13,025 ) (14,469 ) (22,579 ) GAAP other income (expense), net (4,612 ) 3,510 (9,015 ) 3,865 Gain on debt extinguishment (8 ) — (8 ) — Loss (gain) on sale 172 (2,572 ) 172 (2,572 ) Foreign currency impact (49 ) (1,659 ) 363 (2,820 ) Interest expense, net 4,497 720 8,488 1,525 Non-GAAP other expense, net — (1 ) — (2 ) GAAP loss before income taxes (22,274 ) (24,670 ) (48,517 ) (47,904 ) Total non-GAAP adjustments (1) 15,424 11,644 34,048 25,323 Non-GAAP loss before income taxes (6,850 ) (13,026 ) (14,469 ) (22,581 ) (Benefit from) provision for income taxes (43 ) (1,374 ) (1,088 ) (1,645 ) GAAP net loss (22,231 ) (23,296 ) (47,429 ) (46,259 ) Total non-GAAP adjustments (1) 15,381 10,270 32,960 23,678 Non-GAAP net loss $ (6,850 ) $ (13,026 ) $ (14,469 ) $ (22,581 ) Shares used in computing non-GAAP basic and diluted net loss per share (in 000's) 37,814 36,849 37,584 36,719 Non-GAAP basic and diluted net loss per share $ (0.18 ) $ (0.35 ) $ (0.38 ) $ (0.61 ) (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. 35 Supplemental Financial Information 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: (i) Pro Forma Software Revenue, (ii) Total Software Products & Services Customers, (iii) Annual Recurring Revenue, (iv) Total New Bookings, and (iv) Gross Revenue Retention, in each case as defined in the footnotes to the table below. The supplemental financial information for our Managed Services includes: (i) average billings per active Managed Services client, and (ii) revenue. Software Products & Services Supplemental Financial Information The following table sets forth the results for each of our Software Products & Services supplemental financial information. Quarter Ended Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, 2022 (1) 2022 (1) 2022 (1) 2022 (1) 2023 (1) 2023 (1) 2023 2023 2024 2024 Pro Forma Software Revenue (in 000's) (2) $ 26,319 $ 26,650 $ 28,603 $ 35,612 $ 22,423 $ 20,859 $ 20,361 $ 19,824 $ 15,223 $ 15,632 Total Software Products & Services Customers (3) 3,673 3,718 3,787 3,824 3,773 3,705 3,536 3,459 3,384 3,437 Annual Recurring Revenue (SaaS) (in 000's) (4) $ 48,392 $ 44,465 $ 43,925 $ 46,248 $ 45,453 $ 47,720 $ 47,756 $ 49,122 $ 49,064 $ 49,223 Annual Recurring Revenue (Consumption) (in 000's) (5) $ 87,445 $ 85,901 $ 85,091 $ 71,754 $ 67,242 $ 60,229 $ 41,543 $ 30,967 $ 23,510 $ 18,701 Total New Bookings (in 000's) (6) $ 16,643 $ 22,009 $ 23,793 $ 26,342 $ 22,794 $ 8,388 $ 15,501 $ 17,457 $ 12,964 $ 14,047 Gross Revenue Retention (7) >90% >90% >90% >90% >90% >90% >90% >90% >90% >90% (1) All of the supplemental financial information for this period is presented on a Pro Forma basis inclusive of Broadbean. (2) “Pro Forma Software Revenue” is a non-GAAP measure that represents Software Products & Services revenue on a Pro Forma basis. (3) “Total Software Products & Services Customers” includes Software Products & Services customers as of the end of each respective quarter set forth above with net revenues in excess of $10 and also excludes any customers categorized by us as trial or pilot status. In prior periods, we provided “Ending Software Customers,” which represented Software Products & Services customers as of the end of each fiscal quarter with trailing twelve-month revenues in excess of $2,400 for both Veritone, Inc. and PandoLogic Ltd. and/or deemed by the Company to be under an active contract for the applicable periods. Total Software Products & Services Customers is not comparable to Ending Software Customers. Total Software Products & Services Customers includes customers based on revenues in the last month of the quarter rather than on a trailing twelve-month basis. Total Software Products & Services Customers includes customers based on revenues in the last month of the quarter rather than on a trailing twelve-month basis and excludes any customers that are on trial or pilot status with us rather than including customers with active contracts. Management uses Total Software Products & Services Customers and we believe Total Software Products & Services Customers are useful to investors because it more accurately reflects our total customers for our Software Products & Services customers inclusive of Broadbean. (4) “Annual Recurring Revenue (SaaS)” represents an annualized calculation of monthly recurring revenue during the last month of the applicable quarter for all Total Software Products & Services customers, in each case on a Pro Forma basis. In prior periods, we provided “Average Annual Revenue,” which was calculated as the aggregate of trailing twelve-month Software Products & Services revenue divided by the average number of customers over the same period for both Veritone, Inc. and PandoLogic Ltd. Annual Recurring Revenue is not comparable to Average Annual Revenue (SaaS). Annual Recurring Revenue (SaaS) includes only subscription-based SaaS revenue, is not averaged among active customers and uses a calculation of recurring revenue as described above instead of annual revenue. Management uses “Annual Recurring Revenue (SaaS)” and we believe Annual Recurring Revenue (SaaS) is useful to investors because Broadbean significantly increases our mix of subscription-based SaaS revenues as compared to Consumption revenues and the split between the two allows the reader to delineate between predictable recurring SaaS revenues and more volatile Consumption revenues. (5) “Annual Recurring Revenue (Consumption)” represents the trailing twelve months of all non-recurring and/or consumption-based revenue for all active Total Software Products & Services customers, in each case, on a Pro Forma basis. In prior periods, we provided “Average Annual Revenue,” which was calculated as the aggregate of trailing twelve-month Software Products & Services revenue divided by the average number of customers over the same period for both Veritone, Inc. and PandoLogic Ltd. Annual Recurring Revenue (Consumption) is not comparable to Average Annual Revenue. Annual Recurring Revenue (Consumption) includes only non-recurring and/or consumption-based revenue, is not averaged among active customers and uses a calculation of recurring revenue as described above instead of annual revenue. Management uses “Annual Recurring Revenue (Consumption)” and we believe Annual Recurring Revenue (Consumption) is useful to investors because Broadbean significantly increases our mix of subscription-based SaaS revenues as compared to Consumption revenues and the split between the two allows the reader to delineate between predictable recurring SaaS revenues and more volatile Consumption revenues. (6) “Total New Bookings” represents the total fees payable during the full contract term for new contracts received in the quarter (including fees payable during any cancellable portion and an estimate of license fees that may fluctuate over the term), excluding any variable fees under the contract (e.g., fees for cognitive processing, storage, professional services and other variable services), in each case on a Pro Forma basis. (7) “Gross Revenue Retention” represents a calculation of our dollar-based gross revenue retention rate as of the period end by starting with the revenue from Software Products & Services Customers as of the 3 months in the prior year quarter to such period, or Prior Year Quarter Revenue. We then deduct from the Prior Year Quarter Revenue any revenue from Software Products & Services Customers who are no longer customers as of the current period end, or Current Period Ending Software Customer Revenue. We then divide the total Current Period Ending Software Customer Revenue by the total Prior Year Quarter Revenue to arrive at our dollar-based gross retention rate, which is the percentage of revenue from all Software Products & Services Customers from our Software Products & Services as of the year prior that is not lost to customer churn. All numbers used to determine Gross Revenue Retention are calculated on a Pro Forma basis. 36 The following table sets forth the reconciliation of revenue to pro forma revenue and the calculation of pro forma annual recurring revenue. Quarter Ended Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, 2022 2022 2022 2022 2023 2023 2023 2023 2024 2024 Software Products & Services Revenue (in 000’s) $ 18,167 $ 18,379 $ 20,812 $ 27,220 $ 14,127 $ 14,093 $ 20,361 $ 19,820 $ 15,220 $ 15,632 Broadbean Revenue (in 000’s) (1) 6,204 6,974 7,639 8,230 8,156 8,374 8,739 8,662 8,517 8,690 Broadbean Revenue included in Software Products & Services Revenue (in 000’s) — — — — — (1,716 ) (8,739 ) (8,662 ) (8,517 ) (8,690 ) Pro Forma Software Revenue (in 000’s) $ 24,371 $ 25,353 $ 28,451 $ 35,450 $ 22,283 $ 20,751 $ 20,361 $ 19,820 $ 15,220 $ 15,632 Managed Services Revenue (in 000’s) 16,240 15,856 16,384 16,670 16,136 13,874 14,772 14,377 16,416 15,360 Total Pro Forma Revenue (in 000’s) $ 40,611 $ 41,209 $ 44,835 $ 52,120 $ 38,419 $ 34,625 $ 35,133 $ 34,197 $ 31,636 $ 30,992 Trailing Twelve Months Ended Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, 2022 2022 2022 2022 2023 2023 2023 2023 2024 2024 Software Products & Services Revenue (in 000’s) $ 72,997 $ 85,796 $ 97,581 $ 84,578 $ 80,538 $ 76,252 $ 75,801 $ 68,401 $ 69,494 $ 71,033 Broadbean Revenue (in 000’s) (1) 29,599 30,006 30,136 29,047 30,999 32,399 33,499 33,931 34,292 34,608 Broadbean Revenue included in Software Products & Services Revenue (in 000’s) — — — — — (1,716 ) (10,455 ) (19,117 ) (27,634 ) (34,608 ) Pro Forma Software Revenue (in 000’s) $ 102,596 $ 115,802 $ 127,717 $ 113,625 $ 111,537 $ 106,935 $ 98,845 $ 83,215 $ 76,152 $ 71,033 Managed Services Revenue (in 000’s) 58,419 60,546 63,406 65,150 65,046 63,064 61,452 59,159 59,439 60,925 Total Pro Forma Revenue (in 000’s) $ 161,015 $ 176,348 $ 191,123 $ 178,775 $ 176,583 $ 169,999 $ 160,297 $ 142,374 $ 135,591 $ 131,958 Pro Forma Total Number of Customers 3,673 3,718 3,787 3,824 3,773 3,705 3,536 3,459 3,384 3,437 Pro Forma Annual Recurring Revenue (in 000’s) (2) $ 135,837 $ 130,366 $ 129,016 $ 118,002 $ 112,695 $ 107,949 $ 89,299 $ 80,089 $ 72,574 $ 67,924 (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. since January 1, 2022. (2) “Pro Forma Annual Recurring Revenue” represents an annualized calculation of the monthly recurring revenue in the last period of the calculated quarter, combined with the trailing twelve month calculation for all non-recurring and/or consumption based revenue for all active customers. Managed Services Supplemental Financial Information The following table sets forth the results for each of the key performance indicators for Managed Services. Quarter Ended Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, 2022 2022 2022 2022 2023 2023 2023 2023 2024 2024 Avg billings per active Managed Services client (in 000's) (1) $ 684 $ 736 $ 747 $ 823 $ 771 $ 576 $ 620 $ 647 $ 793 $ 727 Revenue during quarter (in 000's) (2) $ 10,735 $ 9,625 $ 10,035 $ 11,074 $ 9,337 $ 6,876 $ 8,827 $ 8,612 $ 9,333 $ 8,402 (1) Avg billings per active Managed Services customer for each quarter reflects the average quarterly billings per active Managed Services customer over the twelve-month period through the end of such quarter for Managed Services customers that are active during such quarter. (2) Managed Services revenue and metrics exclude content licensing and media services and Table Rock Management. We have experienced and may continue to experience volatility in revenue from our Managed Services due to a number of factors, including: (i) the timing of new large customer agreements; (ii) loss of customers who choose to replace our services with new providers or by bringing their advertising placement in-house; (iii) customers who experience reductions in their advertising budgets due to issues with their own businesses; and (iv) the seasonality of the campaigns for certain large customers. We have historically generated a significant portion of our revenue from a few major customers. As we continue to grow and diversify our customer base, we expect that our dependency on a limited number of large customers will be minimized. 37 Results of Operations 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. (dollars in thousands) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Revenue $ 30,992 $ 27,967 $ 62,628 $ 58,230 Operating expenses: Cost of revenue 6,580 7,765 13,626 14,574 Sales and marketing 12,674 13,124 24,478 25,814 Research and development 6,645 10,519 15,860 22,046 General and administrative 16,765 19,025 36,185 36,422 Amortization 5,990 5,714 11,981 11,143 Total operating expenses 48,654 56,147 102,130 109,999 Loss from operations (17,662 ) (28,180 ) (39,502 ) (51,769 ) Other income (expense), net (4,612 ) 3,510 (9,015 ) 3,865 Loss before provision for income taxes (22,274 ) (24,670 ) (48,517 ) (47,904 ) (Benefit from) provision for income taxes (43 ) (1,374 ) (1,088 ) (1,645 ) Net loss $ (22,231 ) $ (23,296 ) $ (47,429 ) $ (46,259 ) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Operating expenses: Cost of revenue 21.2 27.8 21.8 25.0 Sales and marketing 40.9 46.9 39.1 44.3 Research and development 21.4 37.6 25.3 37.9 General and administrative 54.1 68.0 57.8 62.5 Amortization 19.3 20.4 19.1 19.1 Total operating expenses 156.9 200.7 163.1 188.8 Loss from operations (56.9 ) (100.7 ) (63.1 ) (88.8 ) Other income (expense), net (14.9 ) 12.6 (14.4 ) 6.6 Loss before provision for income taxes (71.8 ) (88.1 ) (77.5 ) (82.2 ) (Benefit from) provision for income taxes (0.1 ) (4.9 ) (1.7 ) (2.8 ) Net loss (71.7 ) (83.2 ) (75.8 ) (79.4 ) Three and Six Months Ended June 30, 2024 Compared with Three and Six Months Ended June 30, 2023 Revenue Three Months Ended June 30, 2024 2023 Commercial Public Commercial Public Enterprise Sector Total Enterprise Sector Total Software Products & Services $ 14,510 $ 1,122 $ 15,632 $ 12,492 $ 1,601 $ 14,093 Managed Services 15,360 — 15,360 13,874 — 13,874 Revenue $ 29,870 $ 1,122 $ 30,992 $ 26,366 $ 1,601 $ 27,967 Six Months Ended June 30, 2024 2023 Commercial Public Commercial Public Enterprise Sector Total Enterprise Sector Total Software Products & Services $ 28,212 $ 2,640 $ 30,852 $ 25,224 $ 2,996 $ 28,220 Managed Services 31,776 — 31,776 30,010 — 30,010 Revenue $ 59,988 $ 2,640 $ 62,628 $ 55,234 $ 2,996 $ 58,230 38 Commercial Enterprise 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 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. Operating Expenses (dollars in thousands) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 $ Change % Change 2024 2023 $ Change % Change Cost of revenue $ 6,580 $ 7,765 $ (1,185 ) (15.3 )% $ 13,626 $ 14,574 $ (948 ) (6.5 )% Sales and marketing 12,674 13,124 (450 ) (3.4 )% 24,478 25,814 (1,336 ) (5.2 )% Research and development 6,645 10,519 (3,874 ) (36.8 )% 15,860 22,046 (6,186 ) (28.1 )% General and administrative 16,765 19,025 (2,260 ) (11.9 )% 36,185 36,422 (237 ) (0.7 )% Amortization 5,990 5,714 276 4.8 % 11,981 11,143 838 7.5 % Total operating expenses $ 48,654 $ 56,147 $ (7,493 ) (13.3 )% $ 102,130 $ 109,999 $ (7,869 ) (7.2 )% Cost of Revenue. 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 $0.5 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 $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 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 39 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 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 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 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 June 30, Six Months Ended June 30, 2024 2023 $ Change % Change 2024 2023 $ Change % Change Loss from operations $ (17,662 ) $ (28,180 ) $ 10,518 (37.3 )% $ (39,502 ) $ (51,769 ) $ 12,267 (23.7 )% Sales and marketing 12,674 13,124 (450 ) (3.4 )% 24,478 25,814 (1,336 ) (5.2 )% Research and development 6,645 10,519 (3,874 ) (36.8 )% 15,860 22,046 (6,186 ) (28.1 )% General and administrative 16,765 19,025 (2,260 ) (11.9 )% 36,185 36,422 (237 ) (0.7 )% Amortization 5,990 5,714 276 4.8 % 11,981 11,143 838 7.5 % Non-GAAP gross profit $ 24,412 $ 20,202 $ 4,210 20.8 % $ 49,002 $ 43,656 $ 5,346 12.2 % Non-GAAP gross margin 78.8 % 72.2 % 78.2 % 75.0 % (dollars in thousands) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 $ Change % Change 2024 2023 $ Change % Change Revenue $ 30,992 $ 27,967 $ 3,025 10.8 % $ 62,628 $ 58,230 $ 4,398 7.6 % Cost of revenue 6,580 7,765 (1,185 ) (15.3 )% 13,626 14,574 (948 ) (6.5 )% Non-GAAP gross profit $ 24,412 $ 20,202 $ 4,210 20.8 % $ 49,002 $ 43,656 $ 5,346 12.2 % Non-GAAP gross margin 78.8 % 72.2 % 78.2 % 75.0 % 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 $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 40 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. Cash Flows A summary of cash flows from our operating, investing and financing activities is shown in the table below. (in thousands) Six Months Ended June 30, 2024 2023 Cash used in operating activities $ (27,791 ) $ (58,533 ) Cash used in investing activities (1,599 ) (55,078 ) Cash used in financing activities (3,959 ) (8,132 ) Net decrease in cash, cash equivalents and restricted cash $ (33,349 ) $ (121,743 ) Operating Activities 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 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. 41 Financing Activities 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 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. Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect amounts reported in our condensed consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. Our critical accounting estimates reflecting management’s estimates and judgments are described in our Annual Report on Form 10-K for the year ended December 31, 2023. We have reviewed recently adopted accounting pronouncements and determined that the adoption of such pronouncements is not expected to have a material impact, if any, on our condensed consolidated financial statements. Accordingly, there have been no material changes to critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023. 42 Item 3. Quantitative and Qualitat ive Disclosures About Market Risk As a smaller reporting company, we are not required to provide the information required by Item 305 of Regulation S-K.