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 the consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2020. 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 II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020. See “Special Note Regarding Forward-Looking Statements” above at page 1. Overview Veritone, Inc. (collectively with our subsidiaries, referred to as “Veritone,” “Company,” “we,” “our,” and “us”) is a provider of artificial intelligence (“AI”) solutions, including our proprietary AI platform, aiWARE™, digital content management solutions and content licensing services. We also operate a full-service media advertising agency and our VeriAds™ Network. For the three and six months ended June 30, 2021 we reported total revenue of $19.2 million and $37.5 million, respectively, as compared to $13.3 million and $25.2 million, respectively, in the corresponding prior year period. Total revenue from our aiWARE SaaS solutions increased 86% and 68%, respectively, for the three and six months ended June 30, 2021, compared with the same periods in 2020. Significant Transactions In the first six months of 2021, we received $4.8 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. In July 2021, the Company entered into a definitive agreement to acquire Pandologic Ltd., a company incorporated under the laws of the state of Israel (“Pandologic”) for total consideration of $150 million (the “Merger Consideration”). The Merger Consideration consists of upfront payments of $50 million in cash and $35 million in common stock (approximately 1.7 million shares) and $65 million payable based on earnouts tied to financial performance of Pandologic in fiscal 2021 and 2022, which amount will be paid in a combination of cash and common stock. The merger close is subject to customary conditions (as defined) and is expected to finalize by late Q3 2021. Opportunities, Challenges and Risks In the first six months 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 half of 2021, we began to experience significant growth in revenue across our aiWARE SaaS solutions, which increased 86% and 68%, respectively, during the three and six months ended June 30, 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 and regulated industries such as energy adopting our aiWARE SaaS solutions and related AI technologies . However, many sales opportunities with these 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 within the U.S. Government and regulated industries such as energy 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 42% and 56%, respectively, during the three and six months ended June 30, 2021, compared with the corresponding prior year periods. 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. 17 At the end of the second quarter of 2021, we reported 1,820 SaaS accounts. 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 recently announced the acquisition of PandoLogic, a technology that utilizes machine-learning and AI to accelerate the hiring process for large enterprises. We believe when integrated with aiWARE, PandoLogic users will be given greater visibility and transparency in their hiring processes. In addition, 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 more 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 second quarter and first half of 2021, our gross margin (calculated as described in “Non-GAAP Financial Measures” below) improved to 73%, compared with 72% for the second quarter and first half of 2020, driven by growth of new customers across our aiWARE SaaS Solutions, which generated incremental gross margins in excess of 80% during the three and six months ended June 30, 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. With the addition of PandoLogic in late Q3 2021, we expect our consolidated gross margin and related gross profit to improve even further beginning in Q4 2021. Our 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 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 through Q3 2021 and in the near term; however, with the addition of PandoLogic, we expect to report substantial improvements in our consolidated operating results as early as Q4 2021. 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, such as the July 2021 announced acquisition of PandoLogic that accelerates our entry into the intelligent hiring of essential workers, as well as our ability to grow our business. As a result, we will continue to prioritize corporate development efforts beyond 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 The COVID-19 outbreak emerged in late 2019 and was declared a global pandemic by the World Health Organization in March 2020. 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, 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 18 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 June 30 , 2021 . 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. 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. 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 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. We expect to continue to enforce these and other actions we deem appropriate until or when the COVID-19 pandemic is officially no longer declared a pandemic by the World Health Organization. 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 six months ended June 30, 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 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 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. Management also uses this information internally for forecasting and budgeting. 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. 19 (in thousands) Three Months Ended June 30, 2021 2020 Core Operations (1) Corporate (2) Total Core Operations (1) Corporate (2) Total Net loss $ (676 ) $ (12,039 ) $ (12,715 ) $ (2,380 ) $ (9,413 ) $ (11,793 ) Provision for income taxes — 55 55 — 2 2 Depreciation and amortization 1,084 73 1,157 1,353 249 1,602 Stock-based compensation expense 1,016 5,593 6,609 526 3,605 4,131 Change in fair value of warrant liability — — — — 202 202 Warrant expense — — — — 102 102 State sales tax reserve — 146 146 — — — Interest expense — — — — 9 9 Acquisition and due diligence costs — 735 735 — — — Severance and executive search — 92 92 — — — Non-GAAP Net Income (Loss) $ 1,424 $ (5,345 ) $ (3,921 ) $ (501 ) $ (5,244 ) $ (5,745 ) (in thousands) Six Months Ended June 30, 2021 2020 Core Operations (1) Corporate (2) Total Core Operations (1) Corporate (2) Total Net loss $ (3,501 ) $ (39,781 ) $ (43,282 ) $ (6,155 ) $ (18,322 ) $ (24,477 ) Provision for income taxes — 77 77 — 5 5 Depreciation and amortization 2,167 243 2,410 2,709 497 3,206 Stock-based compensation expense 3,711 24,508 28,219 1,089 7,498 8,587 Change in fair value of warrant liability — — — — 200 200 Warrant expense — — — — 102 102 State sales tax reserve — 284 284 — — — Gain on sale of asset — — — — (56 ) (56 ) Interest expense — — — — 9 9 Acquisition and due diligence costs — 735 735 — — — Charges related to sublease — 3,367 3,367 — — — Severance and executive search 250 99 349 — — — Non-GAAP Net Income (Loss) $ 2,627 $ (10,468 ) $ (7,841 ) $ (2,357 ) $ (10,067 ) $ (12,424 ) (1) Core operations consists of our aiWARE operating platform of software, SaaS and related services; content, licensing and advertising agency 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. 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 and six months ended June 30, 2021 and 2020. Three Months Ended Six Months Ended (dollars in thousands) June 30, June 30, 2021 2020 2021 2020 Revenue $ 19,206 $ 13,268 $ 37,501 $ 25,172 Cost of revenue 5,231 3,763 10,054 7,013 Gross profit 13,975 9,505 27,447 18,159 Gross margin 72.8 % 71.6 % 73.2 % 72.1 % 20 (in thousands) Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Revenue $ 19,206 $ 13,268 $ 37,501 $ 25,172 Cost of revenue 5,231 3,763 10,054 7,013 Gross profit 13,975 9,505 27,447 18,159 GAAP sales and marketing expenses 5,253 4,932 11,680 9,861 Stock-based compensation expense (234 ) (198 ) (1,132 ) (376 ) Severance and executive search — — (236 ) — Non-GAAP sales and marketing expenses 5,019 4,734 10,312 9,485 GAAP research and development expenses 4,646 3,440 9,606 7,086 Stock-based compensation expense (566 ) (184 ) (1,585 ) (421 ) Severance and executive search — — (14 ) — Non-GAAP research and development expenses 4,080 3,256 8,007 6,665 GAAP general and administrative expenses 15,644 11,343 47,187 22,886 Depreciation (78 ) (256 ) (253 ) (512 ) Stock-based compensation expense (5,809 ) (3,749 ) (25,502 ) (7,790 ) Warrant expense — (102 ) — (102 ) Charges related to sublease — — (3,367 ) — State sales tax reserve (146 ) — (284 ) — Acquisition and due diligence costs (735 ) — (735 ) — Severance and executive search (92 ) — (99 ) — Non-GAAP general and administrative expenses 8,784 7,236 16,947 14,482 GAAP amortization (1,079 ) (1,346 ) (2,157 ) (2,694 ) GAAP loss from operations (12,647 ) (11,556 ) (43,183 ) (24,368 ) Total non-GAAP adjustments (1) 8,739 5,835 35,364 11,895 Non-GAAP loss from operations (3,908 ) (5,721 ) (7,819 ) (12,473 ) GAAP other expense, net (13 ) (235 ) (22 ) (104 ) Change in fair value of warrant liability — 202 — 200 Interest expense — 9 — 9 Gain on sale of asset — — — (56 ) Non-GAAP other (expense) income, net (13 ) (24 ) (22 ) 49 GAAP loss before income taxes (12,660 ) (11,791 ) (43,205 ) (24,472 ) Total non-GAAP adjustments (1) 8,739 6,046 35,364 12,048 Non-GAAP loss before income taxes (3,921 ) (5,745 ) (7,841 ) (12,424 ) Income tax provision 55 2 77 5 GAAP net loss (12,715 ) (11,793 ) (43,282 ) (24,477 ) Total non-GAAP adjustments (1) 8,794 6,048 35,441 12,053 Non-GAAP net loss $ (3,921 ) $ (5,745 ) $ (7,841 ) $ (12,424 ) Shares used in computing non-GAAP basic and diluted net loss per share 32,741 27,117 32,458 26,945 Non-GAAP basic and diluted net loss per share $ (0.12 ) $ (0.21 ) $ (0.24 ) $ (0.46 ) ( 1 ) Adjustments are comprised of the adjustments to GAAP gross profit, sales and marketing expenses, research and development expenses and general and administrative expenses and other (expense) income, net (where applicable) listed above. 21 Key Performance Indicators We track key performance indicators (“KPIs”) for our advertising services and our aiWARE SaaS solutions. The KPIs for our advertising services include: (i) average gross billings per active agency client, and (ii) revenue. 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. Advertising KPI Results The following table sets forth the results for each of the KPIs for our advertising services. Quarter Ended Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, 2020 2020 2020 2020 2021 2021 Average gross billings per active agency client (in 000's) (1) 533 614 625 632 713 715 Revenue during quarter (in 000's) $ 5,881 $ 6,140 $ 7,372 $ 8,138 $ 8,371 $ 7,881 (1) For each quarter, reflects the average gross quarterly billings per agency client over the twelve month period through the end of such quarter for agency clients that are active during such quarter. We have experienced and may continue to experience volatility in revenue from our agency services due to a number of factors, including: (i) the timing of new large client wins; (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; 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. As we continue to grow and diversify our client base, we expect that our dependency on a limited number of large clients will be minimized. aiWARE SaaS Solutions KPI Results The following table sets forth the results for each of the KPIs for our aiWARE SaaS solutions. Quarter Ended Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, 2020 2020 2020 2020 2021 2021 Total accounts on platform at quarter end 1,587 1,753 1,791 1,896 1,777 1,820 New bookings received during quarter (in 000's) (1) $ 1,397 $ 2,319 $ 2,083 $ 1,437 $ 1,864 $ 3,579 Total contract value of new bookings received during quarter (in 000’s) (2) $ 2,312 $ 2,502 $ 2,469 $ 2,431 $ 4,068 $ 4,069 Revenue during quarter (in 000's) $ 3,108 $ 3,002 $ 3,351 $ 4,402 $ 4,685 $ 5,580 (1) R epresents the contractually committed fees payable during the first 12 months of the contract term, or the non-cancellable portion of the contract term (if shorter), for new contracts received in the quarter, excluding any variable fees under the contract (i.e., fees for cognitive processing, storage, professional services and other variable services). (2) 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 (i.e., fees for cognitive processing, storage, professional services and other variable services). As we grow our business for our aiWARE SaaS solutions, we expect that our KPI results will be impacted in different ways based on our customer profiles and the nature of their use of our aiWARE SaaS solutions in certain target markets. For example, in the government, legal and compliance markets, use of our aiWARE SaaS solutions is often project-based and, accordingly, in a given period, we may experience significant fluctuations in revenue without any significant change in total accounts or new bookings. The timing of large contract renewals and the variable versus fixed fee nature of certain contracts will impact the amount of new bookings and the total contract value of new bookings from quarter to quarter. 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. 22 Results of Operations The following tables set forth our results of operations for the three and six months ended June 30, 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 periods have been reclassified to conform to the presentation for the 2021 periods. 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 Six Months Ended (dollars in thousands) June 30, June 30, 2021 2020 2021 2020 Revenue $ 19,206 $ 13,268 $ 37,501 $ 25,172 Operating expenses: Cost of revenue 5,231 3,763 10,054 7,013 Sales and marketing 5,253 4,932 11,680 9,861 Research and development 4,646 3,440 9,606 7,086 General and administrative 15,644 11,343 47,187 22,886 Amortization 1,079 1,346 2,157 2,694 Total operating expenses 31,853 24,824 80,684 49,540 Loss from operations (12,647 ) (11,556 ) (43,183 ) (24,368 ) Other expense, net (13 ) (235 ) (22 ) (104 ) Loss before provision for income taxes (12,660 ) (11,791 ) (43,205 ) (24,472 ) Provision for income taxes 55 2 77 5 Net loss $ (12,715 ) $ (11,793 ) $ (43,282 ) $ (24,477 ) Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Operating expenses: Cost of revenue 27.2 28.4 26.8 27.9 Sales and marketing 27.4 37.2 31.1 39.2 Research and development 24.2 25.9 25.6 28.2 General and administrative 81.5 85.5 125.8 90.9 Amortization 5.5 10.1 5.8 10.6 Total operating expenses 165.8 187.1 215.1 196.8 Loss from operations (65.8 ) (87.1 ) (115.1 ) (96.8 ) Other expense, net (0.1 ) (1.8 ) (0.1 ) (0.4 ) Loss before provision for income taxes (65.9 ) (88.9 ) (115.2 ) (97.2 ) Provision for income taxes 0.3 — 0.2 — Net loss (66.2 ) (88.9 ) (115.4 ) (97.2 ) Three and Six Months Ended June 30, 2021 Compared with Three and Six Months Ended June 30, 2020 Revenue Three Months Ended Six Months Ended (dollars in thousands) June 30, June 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Advertising $ 9,969 $ 7,038 $ 2,931 41.6 % $ 20,296 $ 13,039 $ 7,257 55.7 % aiWARE SaaS Solutions 5,580 3,002 2,578 85.9 % 10,265 6,110 4,155 68.0 % aiWARE Content Licensing and Media Services 3,657 3,228 429 13.3 % 6,940 6,023 917 15.2 % Revenue $ 19,206 $ 13,268 $ 5,938 44.8 % $ 37,501 $ 25,172 $ 12,329 49.0 % The increase in advertising revenue in the second quarter and first six months of 2021 compared with the corresponding prior year periods was due in large part to a combination of the addition of new advertising clients and increased business with existing advertising clients. In addition, revenue generated from our VeriAds Network t otaled $2.1 million and $4.0 million for the three and six months ended June 30, 2021, respectively, as compared to $0.9 million and $1.0 million for the three and six months ended June 30, 2020, respectively. 23 aiWARE SaaS solutions revenue increased in the three and six months ended June 30, 2021 compared with the corresponding prior year periods due primarily to expanded services to existing customers in media and entertainment, and to a lesser extent, from customers in government, legal and compliance. aiWARE content licensing and media services revenue increased in the three and six months ended June 30, 2021 compared with the corresponding prior year periods. 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. Our aiWARE SaaS solutions revenue from customers in certain markets, particularly in the government, legal and compliance markets, is often project-based and is impacted by the timing of projects. Revenue from our aiWARE content licensing and media services is impacted by the timing of major sporting events throughout the year. As such, in general, we expect that our revenue from these services and markets may fluctuate significantly from period to period. Gross Profit As noted above, our gross profit is calculated as our revenue less our cost of revenue, as follows: Three Months Ended Six Months Ended (dollars in thousands) June 30, June 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Revenue $ 19,206 $ 13,268 $ 5,938 44.8 % $ 37,501 $ 25,172 $ 12,329 49.0 % Cost of revenue 5,231 3,763 1,468 39.0 % 10,054 7,013 3,041 43.4 % Gross profit 13,975 9,505 4,470 47.0 % 27,447 18,159 9,288 51.1 % Gross margin 72.8 % 71.6 % 73.2 % 72.1 % The increase in gross profit and gross margin in the three and six months ended June 30, 2021 compared with the corresponding prior year period was due primarily to growth in revenue from existing customers across our aiWARE SaaS Solutions, which generated incremental gross margins in excess of 80% during the three and six months ended June 30, 2021. Operating Expenses Three Months Ended Six Months Ended (dollars in thousands) June 30, June 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Cost of revenue $ 5,231 $ 3,763 $ 1,468 39.0 % $ 10,054 $ 7,013 $ 3,041 43.4 % Sales and marketing 5,253 4,932 321 6.5 % 11,680 9,861 1,819 18.4 % Research and development 4,646 3,440 1,206 35.1 % 9,606 7,086 2,520 35.6 % General and administrative 15,644 11,343 4,301 37.9 % 47,187 22,886 24,301 106.2 % Amortization 1,079 1,346 (267 ) -19.8 % 2,157 2,694 (537 ) -19.9 % Total operating expenses $ 31,853 $ 24,824 $ 7,029 28.3 % $ 80,684 $ 49,540 $ 31,144 62.9 % Cost of Revenue. The increase in cost of revenue in the three and six months ended June 30, 2021 compared with the corresponding prior year periods was due primarily to our higher revenue level, as discussed above. Sales and Marketing . The increase in sales and marketing expenses in the three and six months ended June 30, 2021 compared with the corresponding prior year periods was due primarily to increases in personnel-related costs. The six months ended June 30, 2021 includes a $0.8 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 six months ended June 30, 2021, and $0.2 million in severance costs. As a percentage of revenue, sales and marketing expenses declined to 27% and 31% in the three and six months ended June 30, 2021, respectively, from 37% and 39% in the corresponding prior year periods. Research and Development. The increase in research and development expenses in the three and six months ended June 30, 2021 compared with the corresponding prior year periods was due primarily to an increase of $0.6 million and $1.2 million, respectively, in personnel-related costs from the addition of new engineering resources. Stock-based compensation increased in the three and six months ended June 30, 2021 compared with the corresponding prior year periods by $0.4 million and $1.2 million, respectively, attributable primarily to awards for new engineering resources and additional expense related to the vesting of performance-based stock options, as discussed above. As 24 a percentage of revenue, research and development expenses declined to 24 % and 26% in the three and six months ended June 30 , 202 1, respectively, from 26 % and 28% in the corresponding prior year period s . General and Administrative. General and administrative expenses increased in the three months ended June 30, 2021 compared with the corresponding prior year period due to a $2.1 million increase in stock-based compensation, primarily for senior executive stock grants in 2021, and a $1.6 million increase in salaries, bonuses and other personnel-related costs. General and administrative expenses increased in the six months ended June 30, 2021 compared with the corresponding prior year period due primarily to an increase of $17.7 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, a $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, and a $2.6 million increase in salaries, bonuses and other personnel-related costs. We expect general and administrative expenses to increase as a result of the acquisition of Pandologic. Amortization Expense. Amortization expense decreased in the three and six months ended June 30, 2021 compared with the corresponding prior year periods due to certain intangible assets that were acquired in 2017 becoming fully amortized during 2020. Other (Expense) Income, Net For the three and six months ended June 30, 2021 , other expense, net was comprised primarily of currency exchange losses. For the three months ended June 30, 2020, other income, net was comprised primarily warrant expense of $0.2 million. Liquidity and Capital Resources Our principal sources of liquidity are our cash and cash equivalents, which totaled $120.6 million as of June 30, 2021 and $114.8 million as of December 31, 2020. The increase in our cash and cash equivalents in the six months ended June 30, 2021 was due primarily to $4.8 million in proceeds from the exercise of stock options and purchases of shares under our ESPP and $2.3 million in proceeds from the exercise of stock warrants. Cash Flows A summary of cash flows from our operating, investing and financing activities is shown in the table below. Six Months Ended (in thousands) June 30, 2021 2020 Cash used in operating activities $ (991 ) $ (2,777 ) Cash (used in) provided by investing activities (272 ) 26 Cash provided by financing activities 7,073 8,767 Net increase in cash, cash equivalents and restricted cash $ 5,810 $ 6,016 Operating Activities Our operating activities used cash of $1.0 million in the six months ended June 30, 2021, due primarily to our net loss of $43.3 million, adjusted by $33.7 million in non-cash expenses, including $28.2 million in stock-based compensation expense, offset in part by the net increase of $8.2 million of cash received from advertising clients for future payments to vendors. 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 $7.8 million for the six months ended June 30, 2021 from $12.4 million for the six months ended June 30, 2020, due primarily to the increase in our revenues, partially offset by an increase in non-GAAP expenses. Our operating activities used cash of $2.8 million in the six months ended June 30, 2020, due primarily to our net loss of $24.5 million, adjusted by $12.3 million in non-cash expenses, including $8.6 million in stock-based compensation expense, and an increase of $9.2 million of cash received from advertising clients for future payments to vendors Investing Activities Our investing activities consisted of minimal amounts used for capital expenditures and proceeds from the sale of equipment in the six months ended June 30, 2021 and 2020. Financing Activities 25 Our financing activities provided cash of $ 7.1 million in the six months ended June 30, 2021 . Net cash provided by financing activities consisted of $ 4.8 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 $8.8 million in the six months ended June 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 $0.1 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. Capital Resources As of June 30, 2021, we had no outstanding debt obligations. In July 2021, we entered into a definitive agreement to acquire Pandologic Ltd., a company incorporated under the laws of the state of Israel (“Pandologic”) for total consideration of $150.0 million, comprised of upfront payments of $50.0 million in cash and $35.0 million in common stock (approximately 1.7 million shares) at closing and $65.0 million payable based on earnouts tied to financial performance of Pandologic in fiscal 2021 and 2022, which amount will be paid in a combination of cash and common stock. The merger close is subject to customary conditions (as defined) and is expected to finalize by late Q3 2021. We have generated significant losses since inception and expect to continue to generate losses for the foreseeable future. With the acquisition of PandoLogic, which is expected to generate over $25.0 million of operating cash flows in its fiscal year 2021, we believe we have an opportunity to drastically improve our operating income/(loss) as early as Q4 2021. We believe that our current cash and cash equivalents balance 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, 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, including the acquisition of PandoLogic. In addition, we intend to continue to evaluate potential new 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. We have a shelf registration statement that allows us to sell up to $300 million of our equity or debt securities, at prices and on terms to be determined in the future. 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, 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. Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities. Item 3. Quantitative and Qualitative 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.