What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-09 · 135 added, 127 removed, 147 unchanged (64% of the section changed)

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We also operate a full-service media advertising agency and our VeriAds™ Network.

The following is a discussion and analysis of certain factors that have affected our results of operations and financial condition during the periods included in the accompanying condensed consolidated financial statements.

In this discussion, we refer to our media advertising agency and our VeriAds Network as our advertising services, our content licensing and live events services as our aiWARE content licensing and media services, and our aiWARE platform and digital content management offerings as our aiWARE SaaS solutions.

For the three months ended March 31, 2021 and 2020, we reported total revenue of $18.3 million and $11.9 million, respectively.

Total revenue from our aiWARE SaaS solutions increased 51% for the three months ended March 31, 2021, compared with the same period in 2020.

Significant Transactions

In the first quarter of 2021, we received $4.3 million from the exercise of stock options and purchases of shares under our ESPP and $2.3 million in proceeds received from the exercise of stock warrants.

Opportunities, Challenges and Risks

In the first quarters of 2021 and 2020, we derived our revenue through our aiWARE SaaS solutions, aiWARE content licensing and media services, and advertising services.

Beginning in the second half of 2020 and continuing into the first quarter of 2021, we began to experience significant growth in revenue across our aiWARE SaaS solutions, which increased 51% during the quarter ended March 31, 2021, compared with the same period in 2020.

The year-over-year growth in aiWARE SaaS solutions revenue was driven primarily by expanded services to existing and new customers in the media and entertainment and government, legal and compliance markets.

As we are at the early stages of new product introductions in these markets, we expect that our aiWARE SaaS revenue will continue to increase in the near and long term, both in absolute dollars and as a percentage of our total revenue.

We believe there will be significant near and long term opportunities for revenue growth from the U.S.

Government adopting our aiWARE SaaS solutions and related AI technologies, as discussed under “Business - Overview” in our Annual Report on Form 10-K for the year ended December 31, 2020 .

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

We may seek to acquire businesses with deep relationships and greater scale with the U.S.

Government to further accelerate our pursuit of the growth opportunities we see in this market.

We are a leader in AI-based SaaS, advertising and content licensing solutions across the media and entertainment market.

In addition to the growth in our aiWARE SaaS solutions in this market, we have also demonstrated our ability to grow our advertising services, including our VeriAds Network, with our revenue from these services increasing 72% during the quarter ended March 31, 2021, compared with the prior year period.

We continue to see significant opportunities for growth in the media and entertainment market, as we continue to extend our customer base beyond radio broadcasters to major media companies and rights holders, where our AI solutions could add tremendous value in content creation and distribution, including in news, television, and film.

During the second half of 2020, we launched our Veritone Energy solutions to help utilities increase profitability and improve grid reliability as they make the transition to renewables.

We believe that our patented technology is uniquely suited to solving some of the most difficult challenges facing utilities today, and we see tremendous near and long term opportunity to grow our revenue within this market, as discussed under “Business - Overview” in our Annual Report on Form 10-K for the year ended December 31, 2020 .

Our aiWARE technology is in the early stages of deployment in the energy market, and we expect to continue making significant investments in product, sales and engineering over the next 12 to 24 months to further develop our current and future technologies to address the opportunities in this market.

At the end of the first quarter of 2021, we reported 1,777 SaaS accounts, which represented growth of 12% compared with the first quarter of 2020.

To continue to grow our SaaS account base, and drive increased sales within our existing customer base, we will need to increase our sales and marketing spending in 2021 compared with 2020.

We believe our aiWARE SaaS technology will extend the capabilities of many third-party software platforms and products that are widely used today.

For example, we integrated aiWARE with the Alteryx platform, enabling Alteryx users to access aiWARE’s AI models and AI analytics capabilities, and we enhanced aiWARE to run on the NVIDIA ® CUDA ® GPU-based platform, enabling dramatic increases in

aiWARE’s processing speed and opening up a wide range of new use cases for our technology.

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

We plan to hire additional engineers and business development resources in the near term to further accelerate our pursuit of these potential opportunities, as well as other third-party technology integrations.

For the first quarter of 2021, our gross margin (calculated as described in “Non-GAAP Financial Measures” below) improved to 74%, compared with 73% for the first quarter of 2020, driven by recent enhancements made to the aiWARE platform that significantly reduced our computing and storage costs, coupled with the growth of new customers across our aiWARE SaaS Solutions, which generated incremental gross margins in excess of 80% during the quarter ended March 31, 2021.

Our gross margin is impacted significantly by the mix of our aiWARE SaaS revenue, aiWARE content licensing and media services revenue and advertising revenue in a given period.

Our gross profit (calculated as described in “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 gross profit, our ability to attract new and retain existing 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.

Moreover, we expect to continue to report operating losses in the near term.

The future revenue and operating growth across our platform will rely heavily on our ability to grow our SaaS customer base, continue to develop and deploy quality and innovative AI-driven applications, provide unique and attractive content and advertising services to our customers, continue to grow in newer markets such as government and energy, 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.

Since 2017, we have made acquisitions that extended our business and technology reach in several areas, as discussed in more detail in in our Annual Report on Form 10-K for the year ended December 31, 2020.

We believe there are strategic acquisition targets that can accelerate our entry into key strategic markets, as well as our ability to grow our business.

As a result, we are prioritizing corporate development efforts beginning in the first half of 2021.

Our acquisition strategy is 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.

If we are successful in identifying and entering into agreements to acquire target companies, we may need to raise additional capital to finance such acquisitions and to continue executing on our growth strategy.

Historically, substantially all of our revenue has been derived from customers located in the United States.

We believe that there is a substantial opportunity over time for us to significantly expand 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 growth opportunities.

Impact of the Coronavirus (“COVID-19”) Pandemic

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The COVID-19 pandemic, and the actions being taken by governments worldwide to mitigate the public health consequences of the pandemic, significantly impacted the global economy.

Beginning in March 2020, we began to experience fluctuations in demand for certain services, namely our aiWARE content licensing and media services, a significant amount of revenue from which is typically driven by major live sporting events, which were cancelled or postponed in the United States due to COVID-19.

While many major sporting events have resumed, it is still uncertain as to whether and to what extent collegiate sports and professional sports leagues will be able to navigate through COVID-19 health concerns and hold their respective seasons.

Future cancellations of live sporting events would further reduce demand for our services, and could have a material adverse impact on our revenue generated from our aiWARE content licensing and media services in future quarters.

Beginning in March 2020, we began to experience fluctuations in demand for certain services, particularly our aiWARE content licensing and media services, a significant amount of revenue from which is typically driven by major live sporting events that were cancelled or postponed in the United States due to COVID-19.

While many major sporting events have resumed, future cancellations of live sporting events could have a material adverse impact on our revenue generated from our aiWARE content licensing and media services in future quarters.

The pandemic has affected and may continue to affect some of our customers, which may further reduce the demand and/or delay purchase decisions for our products and services, and may additionally impact the creditworthiness of customers.

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 doubtful accounts was necessary due to credit deterioration as of September 30, 2020.

The extent to which the COVID-19 pandemic and the related macroeconomic conditions may continue to affect our financial condition or results of operations is uncertain.

While we did not experience decreases in revenue from our advertising services and aiWARE SaaS solutions in the first nine months of 2020 compared with the same period in 2019, the severity and duration of the pandemic and the resulting macroeconomic conditions are difficult to predict, and our revenue and operating results may be adversely impacted in future periods.

The severity and duration of the pandemic and the resulting macroeconomic conditions are difficult to predict, and our revenue and operating results may be adversely impacted in future periods.

The extent of the impact on our operational and financial performance will depend on various factors, including the duration and spread of the outbreak;

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Due to the nature of our business, the effect of the COVID-19 pandemic may not be fully reflected in its results of operations until future periods.

The most significant risks to our business and results of operations arising from the COVID-19 pandemic are discussed in Part II, Item 1A (Risk Factors) of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

In response to the COVID-19 pandemic, we have taken actions to control expenses, including temporarily discontinuing non-essential services and instituting controls on travel, entertainment and other expenses.

We will continue to evaluate further cost-cutting measures and whether improved efficiencies can be obtained in our workforce.

The most significant risks to our business and results of operations arising from the COVID-19 pandemic are discussed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31, 2020.

In response to the COVID-19 pandemic, we took actions to control expenses, including temporarily discontinuing non-essential services and instituting controls on travel, entertainment and other expenses.

In addition, in compliance with government mandates, we have temporarily closed our offices and initiated a work from home policy.

Non-GAAP Financial Measure

In evaluating our cash flows and financial performance, we use a measure of Non-GAAP net loss, the results for which measure are presented below for the three and nine months ended September 30, 2020.

In evaluating our cash flows and financial performance, we use a measure of Non-GAAP net loss, the results for which measure are presented below for the three months ended March 31, 2021 and 2020.

The items excluded from Non-GAAP net loss, 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.

Non-GAAP net loss is not a financial measure calculated and presented in accordance with U.S.

generally accepted accounting principles (“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.

Non-GAAP net loss is not a financial measure 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 Non-GAAP net loss differently.

In addition , we have provided additional supplemental non-GAAP measures of gross profit, operating expenses, loss from operations, other income (expense), 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 applicable GAAP measures.

In addition, we have provided additional supplemental non-GAAP measures of 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 applicable GAAP measures.

We present this supplemental non-GAAP financial information 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 its industry, and believes that such measures, and the breakdown between our core operations and corporate, provide a useful comparison of our current period financial results to our historical and future financial results.

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(in thousands)

Three Months Ended September 30,

Core Operations (1)

Corporate (2)

Core Operations (1)

Corporate (2)

Reconciliation of Net Loss to Non-GAAP Net Income (Loss):

Provision for (benefit from) income taxes

Depreciation and amortization

Stock-based compensation expense

Change in fair value of warrant liability

Machine Box contingent payments

Machine Box earn-out fair value adjustment

Non-GAAP Net Income (Loss)

(in thousands)

Nine Months Ended September 30,

For the Three Months Ended March 31,

Core Operations ( 1)

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Corporate ( 2)

Reconciliation of Net Loss to Non-GAAP Net Loss:

Provision for (benefit from) income taxes

Provision for income taxes

Depreciation and amortization

1 unchanged sentence

Change in fair value of warrant liability

Warrant expense

State sales tax reserve

Gain on sale of asset

Interest expense

Machine Box contingent payments

Machine Box earn-out fair value adjustment

Performance Bridge earn-out fair value adjustment

Non-GAAP Net Loss

(1) Core operations consists of the Company’s aiWARE operating platform of software, SaaS and related services;

Charges related to sublease

Severance costs

Non-GAAP Net Income (Loss)

( 1) Core operations consists of our aiWARE operating platform of software, SaaS and related services;

content, licensing and advertising agency services;

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( 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.

The following table sets forth a reconciliation of Non-GAAP to GAAP financial information for the three and nine months ended September 30, 2020 and 2019:

The following tables set forth the calculation of our gross profit and 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, 2021 and 2020.

Three Months Ended

Nine Months Ended

September 30,

GAAP gross profit

(dollars in thousands)

Cost of revenue

Three Months Ended

GAAP sales and marketing expenses

Stock-based compensation expense

Severance costs

Non-GAAP sales and marketing expenses

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Stock-based compensation expense

Machine Box contingent payments

Severance costs

Non-GAAP research and development expenses

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Stock-based compensation expense

Issuance of warrants

Performance Bridge earn-out fair value adjustment

Charges related to sublease

State sales tax reserve

Severance costs

Non-GAAP general and administrative expenses

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Change in fair value of warrant liability

Interest expense

Gain on sale of asset

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Non-GAAP loss before income taxes

GAAP income tax provision (benefit)

Income tax provision

GAAP net loss

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We track key performance indicators (“KPIs”) for our advertising services and our aiWARE SaaS solutions..

We evaluate the KPIs that are most relevant to our business periodically, and beginning in the first quarter of 2020, we made changes to the KPIs that we track.

The KPIs for our advertising services include:

(i) average gross billings per active agency client, and (ii) revenue.

The key performance indicators for our aiWARE SaaS solutions include:

The KPIs for our aiWARE SaaS solutions include:

(i) total accounts on the platform, (ii) new bookings, (iii) total contract value of new bookings, and (iv) revenue.

In the tables below, the ‘revenue during quarter’ amounts for the periods in 2019 reflect amounts reported using the revenue recognition guidance of Topic 605, Revenue Recognition , and the ‘revenue during the quarter’ amounts for the periods in 2020 reflect amounts reported using the revenue guidance in Topic 606, Revenue from Contracts with Customers , following our adoption of Topic 606.

For additional information about our revenue recognition accounting policies, see Recently Adopted Accounting Pronouncements in Note 2 to the Notes to the Condensed Consolidated Financial Statements including in this Quarterly Report on Form 10-Q.

Advertising KPI Results

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(i) the timing of new large client wins;

(ii) loss of clients who choose to replace our services by bringing their advertising placement in-house;

(ii) loss of clients who choose to replace our services with new providers or by bringing their advertising placement in-house;

(iii) clients who experience reductions in their advertising budgets due to issues with their own businesses;

(iv) losses of clients who change providers from time to time based largely on pricing;

and (v) the seasonality of the campaigns for certain large clients.

and (iv) the seasonality of the campaigns for certain large clients.

We have historically generated a significant portion of our revenue from a few major clients.

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As such, our results for different KPIs may fluctuate significantly within the same period, and the result for a particular KPI in one period may not be indicative of the results that we will achieve for that KPI in future periods.

Results of Operations

The following table sets forth items from our condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2020 and 2019, presented as a percentage of revenue:

Results of Operations The following tables set forth our results of operations for the three months ended March 31, 2021 and 2020, in dollars and as a percentage of our revenue for those periods.

Throughout this discussion regarding our results of operations, certain amounts for the 2020 period have been reclassified to conform to the presentation for the 2021 period.

In particular, amortization expense, which was previously presented within cost of revenue, sales and marketing, research and development, and general and administrative operating expenses, has been reclassified and is presented as a single separate line item in operating expenses.

In addition, gross profit, which was previously reflected in the statement of operations and comprehensive loss, is no longer presented, and cost of revenue, which was previously presented within gross profit, is presented as an operating expense.

We believe that this presentation more accurately reflects our cost of revenue and operating expenses.

These reclassifications had no effect on our reported net loss.

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

Three Months Ended

Nine Months Ended

September 30,

Cost of revenue (exclusive of amortization shown separately below)

(dollars in thousands)

Operating expenses:

Cost of revenue

Sales and marketing

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Loss before provision for income taxes

Provision for (benefit from) income taxes

Three and Nine Months Ended September 30, 2020 Compared with Three and Nine Months Ended September 30, 2019

Provision for income taxes

Three Months Ended

Nine Months Ended

Operating expenses:

Cost of revenue

Sales and marketing

Research and development

General and administrative

Total operating expenses

Loss from operations

Other (expense) income, net

Loss before provision for income taxes

Provision for income taxes

Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020

Three Months Ended

(dollars in thousands)

September 30,

aiWARE SaaS Solutions

aiWARE Content Licensing and Media Services

The increases in advertising revenue in the third quarter and first nine months of 2020 compared with the corresponding prior year periods were due primarily to revenue generated from our VeriAds Network, which we launched in late 2019.

Revenue from our VeriAds Network totaled $1.4 million and $2.4 million for the three and nine months ended September 30, 2020, respectively, compared with $0.1 million for both the three and nine months ended September 30, 2019.

aiWARE SaaS solutions revenue increased in the three and nine months ended September 30, 2020 compared with the corresponding prior year periods due primarily to initial revenue received from a customer in the energy market, the addition of new customers and expanded services to some existing customers in the media and entertainment market, and revenue received under a subcontract for a U.S.

Air Force project.

aiWARE content licensing and media services revenue decreased in the three months ended September 30, 2020 compared with the corresponding prior year period due to content licensed for a large project in the 2019 period, which did not recur in the 2020 period.

Revenue from our aiWARE content licensing and media services, a significant portion of which is typically driven by major sporting events and production of entertainment content, was negatively impacted in the first nine months of 2020 compared with the prior year period due to the cancellation or postponement of substantially all major sporting events from March 2020 through July 2020 and the curtailment of entertainment content production as a result of the COVID-19 pandemic.

The increase in advertising revenue in the first quarter of 2021 compared with the corresponding prior year period was due in large part to a combination of the addition of new advertising clients and increased business with existing advertising clients.

In addition, we generated $2.0 million in revenue from our VeriAds Network in the first quarter of 2021, reflecting an increase of $1.8 million, compared to the first quarter of 2020.

aiWARE SaaS solutions revenue increased in the three months ended March 31, 2021 compared with the corresponding prior year period due primarily to expanded services to existing and new customers in the media and entertainment and government, legal and compliance markets.

aiWARE content licensing and media services revenue increased in the three months ended March 31, 2021 compared with the corresponding prior year period.

Revenues from our aiWARE content licensing and media services business, which typically has significant revenue driven by major sporting events, were negatively impacted in the first quarter of 2020 due to the cancellation or postponement of substantially all major sporting events in March 2020 as a result of the COVID-19 pandemic.

Many of these sporting events resumed in the first quarter of 2021.

Revenue from our advertising services is impacted by the timing of particular advertising campaigns of our major clients, in many cases due to the seasonal nature of their advertising activities.

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As such, in general, we expect that our revenue from these services and markets may fluctuate significantly from period to period.

In addition, we anticipate that our revenues in future periods could be impacted by the macroeconomic conditions resulting from the COVID-19 pandemic, as discussed in more detail above.

Cost of Revenu e ;

Gross Profit and Gross Margin

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

Three Months Ended

Nine Months Ended

(dollars in thousands)

September 30,

Cost of revenue

The increases in gross margins in the three and nine months ended September 30, 2020 compared with the corresponding prior year periods resulted primarily from decreases in platform costs in both periods year over year.

The increase in gross margin in the three months ended March 31, 2021 compared with the corresponding prior year period was due primarily to a decrease in platform costs from computing cost reductions and completed enhancements to our aiWARE operating system that have improved our computing efficiency, coupled with the growth in revenue from our customers across our aiWARE SaaS Solutions, which generated incremental gross margins in excess of 80% during the quarter ended March 31, 2021.

Operating Expenses

Three Months Ended

Nine Months Ended

(dollars in thousands)

September 30,

Cost of revenue

Sales and marketing

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General and administrative

Amortization expense

Total operating expenses

We intend to continue to invest in the development of our AI capabilities and enhancement of our aiWARE SaaS solutions and services, and in our sales and marketing efforts in order to drive greater awareness of our offerings, gain new customers and grow our business.

However, we plan to manage our operating expenses prudently, particularly in light of the current uncertainties arising from the COVID-19 pandemic.

Over the past year, we have gained operational efficiencies, implemented computing cost reductions, and completed enhancements to our aiWARE operating system that have improved our computing efficiency.

We believe that these initiatives and our ongoing cost management efforts will continue to support our growth strategy while reducing our expenses and improving our financial performance.

Cost of Revenue.

The increase in cost of revenue in the three months ended March 31, 2021 compared with the corresponding prior year period was due primarily to our higher revenue level, offset in part by the decrease in platform costs, as discussed above.

Sales and Marketing .

The decreases in sales and marketing expenses in the three and nine months ended September 30, 2020 compared with the corresponding prior year periods were due primarily to decreases in personnel-related costs resulting from our focused spending reductions and a decrease in spending on travel, entertainment and trade shows.

As a percentage of revenue, sales and marketing expenses improved to 33% and 37% in the three and nine months ended September 30, 2020, respectively, from 47% and 48% in the corresponding prior year periods.

The increase in sales and marketing expenses in the three months ended March 31, 2021 compared with the corresponding prior year period was due primarily to increases in personnel-related costs, including a $0.7 million increase in stock-based compensation expense attributable primarily to the accelerated recognition of compensation expense related to the vesting of performance-based stock options as a result of our achievement of the stock price milestones applicable to such options during the first quarter of 2021, and $0.2 million in severance costs.

As a percentage of revenue, sales and marketing expenses declined to 35% in the three months ended March 31, 2021 from 41% in the corresponding prior year period.

Research and Development.

The decreases in research and development expenses in the three and nine months ended September 30, 2020 compared with the corresponding prior year periods were due primarily to decreases in personnel-related costs resulting from our focused spending reductions.

The decrease for the nine months ended September 30,2020 was also due to the expense for contingent payments totaling $1.6 million that were made to the former stockholders of Machine Box in the first nine months of 2019 , which did not recur in the current year period, and to a decrease in platform and cognitive processing related costs.

As a percentage of revenue, research and development expenses improved to 23% and 26% in the three and nine months ended September 30, 2020, respectively, from 43% and 49% in the corresponding prior year periods.

The increase in research and development expenses in the three months ended March 31, 2021 compared with the corresponding prior year period was due primarily to $0.8 million increase in stock-based compensation expense attributable primarily to additional expense related to the vesting of performance-based stock options, as discussed above, and a $0.6 million increase in personnel-related costs from the addition of new engineering resources.

As a percentage of revenue, research and development expenses improved to 27% in the three months ended March 31, 2021, from 31% in the corresponding prior year period.

General and Administrative.

General and administrative expenses in the three and nine months ended September 30, 2020 remained at approximately the same levels compared with the corresponding prior year periods.

As a percentage of revenue, general and administrative expenses improved to 76% and 85% in the three and nine months ended September 30, 2020, respectively, from 93% and 95% in the corresponding prior year periods.

General and administrative expenses increased in the three months ended March 31, 2021 compared with the corresponding prior year period due primarily to an increase of $15.7 million in non-cash stock-based compensation expense, attributable primarily to additional expense related to the vesting of performance-based stock options, as discussed above, and $3.4 million in one-time charges related to the sublease of our former Costa Mesa corporate office space in the first quarter of 2021.

Amortization Expense.

Amortization expense increased in the nine months ended September 30, 2020 due to a full year of amortization in 2020 of customer relationships associated with 2018 acquisitions, compared with only eleven months of amortization recorded in 2019 after finalizing the determination of useful lives.

Amortization expense decreased in the three months ended March 31, 2021 compared with the corresponding prior year period due to certain intangible assets that were acquired in 2017 becoming fully amortized during 2020.

Other (Expense) Income, Net

For the nine months ended September 30, 2020, other expense, net was comprised primarily of warrant expense of $0.2 million.

For the three and nine months ended September 30, 2019, other income, net was comprised primarily of interest income on investments in money market funds, which totaled $0.1 million and $0.5 million, respectively.

For the three months ended March 31, 2021 , other expense, net was comprised primarily of currency exchange losses.

For the three months ended March 31, 2020, other income, net was comprised primarily of interest income on investments in money market funds.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash and cash equivalents, which totaled $54.3 million as of September 30, 2020 and $44.1 million as of December 31, 2019.

The increase in our cash and cash equivalents in the nine months ended September 30, 2020 was due primarily to the increase in cash collected from advertising clients of $19.2 million, $6.5 million in proceeds from common stock offerings and $2.1 million in proceeds from the exercise of stock warrants, which offset our Non-GAAP net loss of $16.7 million.

Our principal sources of liquidity are our cash and cash equivalents, which totaled $127.5 million as of March 31, 2021 and $114.8 million as of December 31, 2020.

The increase in our cash and cash equivalents in the three months ended March 31, 2021 was due primarily to $4.3 million in proceeds from the exercise of stock options and purchases of shares under our ESPP, $2.3 million in proceeds from the exercise of stock warrants, and a $1.5 million increase in our working capital.

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

Nine Months Ended

Three Months Ended

(in thousands)

September 30,

Cash provided by (used in) operating activities

Cash (used in) provided by investing activities

Cash provided by operating activities

Cash used in investing activities

Cash provided by financing activities

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Operating Activities

Our operating activities provided cash of $1.3 million in the nine months ended September 30, 2020, due primarily to the net increase of $19.2 million of cash received from advertising clients for future payments to vendors, offset in part by the effect of our net loss of $35.5 million, adjusted by $18.8 million in non-cash expenses, including $13.7 million in stock-based compensation expense.

Our business strategy includes decreasing operational costs while investing in the development of our AI capabilities and enhancement of our aiWARE SaaS solutions and services to grow our business and future revenue.

We gauge the amount of cash utilized in these efforts using the Non-GAAP net loss measure, as presented under the heading “Non-GAAP Financial Measure” above.

Our use of cash as measured by Non-GAAP net loss decreased to $16.7 million for the nine months ended September 30, 2020 from $28.1 million for the nine months ended September 30, 2019, due primarily to the initiatives that we commenced in the fourth quarter of 2019 to decrease our operating costs, including headcount reductions and enhancements to our software architecture, which have resulted in lower cloud computing costs, and to increases in our revenues.

Our operating activities used cash of $18.4 million in the nine months ended September 30, 2019, due primarily to our net loss of $47.2 million, adjusted by $18.6 million in non-cash expenses, including $16.0 million in stock-based compensation expense, and an increase of $7.2 million of cash received from advertising clients for future payments to vendors.

Our operating activities provided cash of $6.2 million in the three months ended March 31, 2021, due primarily to the net increase of $11.1 million of cash received from advertising clients for future payments to vendors, offset in part by the effect of our net loss of $30.6 million, adjusted by $26.0 million in non-cash expenses, including $21.6 million in stock-based compensation expense.

Our business strategy includes streamlining operational costs while investing in the development of our AI capabilities and enhancement of our aiWARE SaaS solutions and services to grow our business and future revenue.

We gauge the amount of cash utilized in these efforts using the Non-GAAP net loss measure, as presented under the heading “Non-GAAP Financial Measures” above.

Our use of cash as measured by Non-GAAP net loss decreased to $3.9 million for the three months ended March 31, 2021 from $6.7 million for the three months ended March 31, 2020, due primarily to the increase in our revenues.

Our operating activities provided cash of $1.5 million in the three months ended March 31, 2020, due primarily to $9.7 million of cash received from advertising clients for future payments to vendors, which more than offset our net loss of $12.7 million, after adjustments of $6.1 million in non-cash expenses, including $4.5 million in stock-based compensation expense.

Investing Activities

Our investing activities consisted of minimal amounts received from the sale of equipment and used for capital expenditures in the nine months ended September 30, 2020.

Our investing activities provided cash of $12.0 million in the nine months ended September 30, 2019.

Net cash provided by investing activities consisted primarily of proceeds from maturing marketable securities, which were used to fund a portion of the cash used in our operating activities, offset in part by $0.9 million of cash paid to the former stockholder of Performance Bridge as additional earnout consideration and $0.5 million of cash to acquire software that we expect will enhance aiWARE.

Our investing activities consisted of minimal amounts used for capital expenditures in the three months ended March 31, 2021 and 2020.

Financing Activities

Our financing activities provided cash of $9.0 million in the nine months ended September 30, 2020.

Net cash provided by financing activities consisted of $6.5 million in net proceeds received from our sales of common stock, $2.1 million in proceeds received from the exercise of stock warrants and $0.4 million received from the exercise of stock options and purchases of shares under our ESPP.

Proceeds received from loans under the Paycheck Protection Program in April 2020 were repaid in full in May 2020.

Our financing activities provided cash of $18.0 million in the nine months ended September 30, 2019.

Our financing activities provided cash of $6.5 million in the three months ended March 31, 2021.

Net cash provided by financing activities consisted of $4.3 million received from the exercise of stock options and purchases of shares under our ESPP and $2.3 million in proceeds received from the exercise of stock warrants.

Our financing activities provided cash of $3.6 million in the three months ended March 31, 2020.

Net cash provided by financing activities consisted of $3.5 million in net proceeds received from our sales of common stock and $0.1 million received from the exercise of stock options and purchases of shares under our ESPP.

Capital Resources

In June 2018, we entered into an Equity Distribution Agreement with JMP Securities LLC, as sales agent (“JMP Securities”), pursuant to which we may offer and sell, from time to time, through JMP Securities, shares of our common stock having an aggregate offering price of up to $50.0 million, of which $18.5 million remains available for sale as of the date of this filing.

Subject to the terms and conditions of the Equity Distribution Agreement and satisfaction of certain conditions, JMP Securities will use commercially reasonable efforts, consistent with its normal

trading and sales practices, applicable state and federal law, rules and regulations, and the rules of The Nasdaq Global Market, to sell shares of our common stock from time to time based upon our instructions, including any price, time or size limits that we specify, in any method deemed to be an “at the market offering” as defined in Rule 415(a)(4) of the Securities Act.

We will pay JMP Securities a commission of 3.0% of the aggregate gross proceeds from each sale of shares.

We are not obligated to sell any shares under the Equity Distribution Agreement.

The Equity Distribution Agreement may be terminated by JMP Securities or us at any time upon notice to the other party, or by JMP Securities at any time in certain circumstances, including the occurrence of a material adverse change in our business or financial condition that makes it impractical or inadvisable to market our shares or to enforce contracts for the sale of the shares.

As of September 30, 2020, we had no outstanding debt obligations.

As of March 31, 2021, we had no outstanding debt obligations.

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

We have generated significant losses since inception and expect to continue to generate losses for the foreseeable future.

Also, we will continue to evaluate potential acquisitions of, or investment in, companies or technologies that complement our business, and those acquisitions may require the use of cash.

We believe that our current cash and cash equivalents balances will be sufficient to fund our operations in the ordinary course of business for at least the next twelve months from the date of this filing.

However, we do not expect that our current cash and cash equivalents will be sufficient to support the development of our business to the point at which we have positive cash flows from operations.

We plan to meet our future needs for additional capital through equity and/or debt financings, particularly if we use cash to finance any acquisitions or investments in the future.

Equity financings may include sales of common stock under the Equity Distribution Agreement.

However, our current cash and cash equivalents may not be sufficient to support the development of our business to the point at which we have positive cash flows from operations.

In addition, we intend to continue to evaluate potential acquisitions of and/or investments in companies or technologies that complement our business and may make such acquisitions and/or investments in the future.

Accordingly, we may need to obtain additional sources of capital in the future.

We plan to meet our future needs for additional capital through equity and/or debt financings.

We currently have no available lines of credit for future borrowings.

Future equity or debt financing may not be available on favorable terms or at all.

If we are unable to obtain adequate financing or financing on terms satisfactory to us when required, our ability to continue to support our business growth, scale our infrastructure, develop product enhancements and respond to business challenges could be significantly impaired.

If we are unable to obtain adequate financing or financing on terms satisfactory to us when required, our ability to continue to support our business growth, including through acquisitions, scale our infrastructure, develop product enhancements and respond to business challenges could be significantly impaired.

If we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis