What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-15 compared with 2021-08-05 · 182 added, 133 removed, 193 unchanged (62% of the section changed)

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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.

(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 platform, aiWARE™, to deliver differentiated products and solutions to our Commercial Enterprise and Government &Regulated Industries customers.

For the three and nine months ended September 30, 2021 we reported total revenue of $22.7 million and $60.2 million, respectively, as compared to $15.7 million and $40.9 million, respectively, in the corresponding prior year period.

Beginning in the third quarter of 2021 and in conjunction with certain organizational realignment with the acquisition of PandoLogic, we began aggregating our revenue reporting into two customer groups:

(i) Commercial Enterprise and (ii) Government &Regulated Industries.

Total revenue from Commercial Enterprise, which represents over 95% of our consolidated revenue, was $21.7 million and $57.5 million for the three and nine months ended September 30, 2021.

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.

In September 2021, the Company completed the acquisition of PandoLogic Ltd., a company incorporated under the laws of the state of Israel (“PandoLogic”) for total consideration of $116.6 million (the “Merger Consideration”).

The Merger Consideration consists of upfront payments of $58.7 million in cash and $31.5 million in common stock (1.7 million shares) and up to $65.0 million payable based on earnouts tied to financial performance of PandoLogic in fiscal 2021 and 2022.

At the acquisition date, the earnout was valued at $26.4 million which amount will be paid in a combination of cash and common stock.

In the first nine months of 2021, we received $7.1 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 warrants to purchase common stock.

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.

In the first nine months of 2021 and 2020, we derived our revenue primarily through Commercial Enterprise and secondarily through Government & Regulated Industries.

Beginning in the second half of 2020 and continuing into 2021, we began to experience significant growth in revenue across Commercial Enterprise, which increased 46% and 47%, respectively, during the three and nine months ended September 30, 2021, compared with the same periods in 2020.

The year-over-year growth in Commercial Enterprise revenue was driven largely by the addition of PandoLogic in September 2021 as well as expanded services to existing and new customers in the media and entertainment markets.

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

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

In addition to the growth in our aiWARE products, we have also demonstrated our ability to grow our Managed Services’ advertising service, with our revenue from these services increasing 10% and 30%, respectively, during the three and nine months ended September 30, 2021, compared with the corresponding prior year periods.

Historically, we have derived a large portion of our aiWARE Product and Services revenue from applications we internally developed from our aiWARE platform and actively sold across certain media and entertainment, government and energy customers.

Beginning in the second half of 2021, we realigned our organization to also focus on enterprise sales and opportunities across existing and newer markets.

While management believes this is a substantial opportunity to increase revenue longer term, 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.

We also continue to see significant opportunities for growth in cross-selling PandoLogic and aiWARE to existing and newly acquired customers, and within, where our AI solutions could add tremendous value in content creation and distribution, including in news, television, and film.

We believe there will be significant near and long term opportunities for revenue growth from Government& Regulated Industries services, including in the energy sector, due to customer adoption of our products and services related to AI technologies and more recently with our official ATO (authorization to operate) of our aiWARE platform across the entire U.S.

Department of Justice .

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 with in the U.S.

g overnment and within regulated industries such as energy to further accelerate our pursuit of the growth opportunities we see in this market.

During the second half of 2020, we launched our Veritone Energy solutions as part of Government & Regulated Industries 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 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.

At the end of the third quarter of 2021, we reported 433 aiWARE Software Product and Services customers.

To continue to grow our aiWARE product and services customer base, and drive increased sales within our existing customer base, we will need to continue to increase our sales and marketing spending throughout the remainder of 2021 and into 2022 as compared with prior periods.

We believe our software products and services 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 believe when integrated with our aiWARE, PandoLogic users will be given greater visibility and transparency in their hiring processes.

In addition, we have historically integrated aiWARE across many platform, including Alteryx and 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 and future 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.

For the three and nine months ended September 30, 2021, our gross margin (calculated as described in “Non-GAAP Financial Measures” below) improved to 74%, compared with 71% and 72% for the three and first nine months ended September 30, 2020, respectively, driven by growth of new customers across our Software Products and Services, which generated incremental gross margins in excess of 80% during the three months ended September 30, 2021.

Our gross margin is impacted significantly by the mix of our Software Products and Services and our Managed Services revenue, which typically has a lower overall gross margin, in a given period.

With the addition of PandoLogic in September 2021, we expect our consolidated gross margin and related gross profit to improve even further beginning in the fourth quarter of 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.

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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.

Moreover, historically we have reported operating losses;

however, we expect to report substantial improvements in our consolidated operating results as early as the fourth quarter of 2021, following the acquisition of PandoLogic in September 2021.

The future revenue and operating growth across our platform will rely heavily on our ability to grow and retain our aiWARE Software Products and Services 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 regulated entities, expand our aiWARE platform into larger and more expansive enterprise engagements and manage our corporate overhead costs.

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

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.

We believe there are strategic acquisition targets that can accelerate our entry into key strategic markets, such as the acquisition of PandoLogic that accelerates our entry into the intelligent hiring of workers, as well as our ability to grow our business.

As a result, we will continue to prioritize corporate development efforts for the remainder of 2021 and beyond.

Our acquisition strategy is threefold:

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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.

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

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.

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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, 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.

Beginning in March 2020, we began to experience fluctuations in demand for certain services, particularly our Commercial Enterprise Managed 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 Commercial Enterprise Managed 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 June 30 , 2021 .

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, 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.

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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.

In evaluating our cash flows and financial performance, we use certain non-GAAP financial measures, including “non-GAAP gross profit,” “non-GAAP gross margin,” “non-GAAP net income (loss),” and “non-GAAP net income (loss) per share.” Gross profit is the Company’s revenue less its cost of revenue.

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 interest expense, provision for income taxes, depreciation expense, amortization expense, stock-based compensation expense, changes in fair value of warrant liability, changes in fair value of contingent consideration, a reserve for state sales taxes, charges related to a facility sublease, gain on sale of asset, warrant expense, acquisition and due diligence costs, and severance and executive search costs.

The results for non-GAAP net income (loss), are presented below for the three and nine months ended September 30, 2021 and 2020.

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.

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.

In addition, we have provided additional supplemental non-GAAP measures gross profit, 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 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 its 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.

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(in thousands)

Three Months Ended June 30,

Three Months Ended September 30,

Core Operations ( 1)

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Stock-based compensation expense

Change in fair value of warrant liability

Warrant expense

Change in fair value of Contingent consideration

State sales tax reserve

Interest expense

Acquisition and due diligence costs

Severance and executive search

Non-GAAP Net Income (Loss)

(in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Core Operations ( 1)

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Change in fair value of warrant liability

Warrant expense

Change in fair value of Contingent consideration

State sales tax reserve

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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 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

Nine Months Ended

(dollars in thousands)

September 30,

Cost of revenue

Non-GAAP gross profit

Non-GAAP gross margin

(in thousands)

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of revenue

Non-GAAP gross profit

GAAP sales and marketing expenses

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Warrant expense

Change in fair value of contingent consideration

Charges related to sublease

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Non-GAAP basic and diluted net loss per share

( 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.

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:

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

Supplemental Financial Information

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

The Software Products & Services supplemental financial information is presented on a pro forma basis, as further described below.

The supplemental financial information for our Managed 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.

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

(i) Software Revenue – Pro Forma, (ii) Ending Customers, (iii) Average Annual Revenue (AAR), (iv) Total New Bookings, and (iv) Gross Revenue Retention, in each case as defined in the footnotes to the table below.

Managed Services Supplemental Financial Information

The following table sets forth the results for each of the KPIs for our Commercial Managed Services.

Quarter Ended

Average gross billings per active agency client (in 000's) (1)

Avg billings per active managed services client (in 000's) ( 1)

Revenue during quarter (in 000's) ( 2)

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:

( 1) Avg billings per active Managed Services client for each quarter reflects the average quarterly billings per active Managed Services client over the twelve-month period through the end of such quarter for Managed Services clients that are active during such quarter.

(2) Managed Services revenue and metrics exclude content licensing & media services.

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 client wins;

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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.

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

Total accounts on platform at quarter end

New bookings received during quarter (in 000's) (1)

Total contract value of new bookings received during quarter (in 000’s) (2)

Revenue during quarter (in 000's)

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).

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.

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.

Software Revenue - Pro Forma (in 000's) (3)

Ending Customers ( 4)

Average Annual Revenue(AAR) ($000) (5)

Total New Bookings ($000) (6)

Gross Revenue Retention (7)

3) “Software Revenue - Pro Forma” includes historical Software Products & Services revenue from the past five (5) fiscal quarters of each of Veritone, Inc.

and PandoLogic Ltd.

(unaudited) and presents such revenue on a combined pro forma basis treating PandoLogic Ltd.

as owned by Veritone, Inc.

since January 1, 2020.

(4) “Ending Customers” includes Software Products & Services customers as of the end of each respective quarter set forth above with trailing twelve-month revenues in excess of $2,400 for both Veritone, Inc.

and PandoLogic Ltd.

(5) “Average Annual Revenue (AAR)” is 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.

(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).

This also excludes PandoLogic new bookings for Q3 and Q4 2020 as those periods were deemed immaterial and data was not readily available.

(7) “Gross Revenue Retention”:

We calculate our dollar-based gross retention rate as of the period end by starting with the revenue from Ending Customers for Software Products & Services 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 Ending Customers who are no longer customers as of the current period end, or Current Period Ending Customer Revenue.

We then divide the total Current Period Ending 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 Ending Customers from our Software Products & Services as of the year prior that is not lost to customer churn.

As we grow our business for our aiWARE SaaS products, we expect that our supplemental financial information will be impacted in different ways based on our customer profiles and the nature of target markets.

For example, the PandoLogic business has revenue concentration in a single customer which has a material impact on the average contract value and gross retention.

As a result, we have shown the supplemental financial information on a proforma basis for comparability.

Results of Operations

The following tables set forth our results of operations for the three and nine months ended September 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.

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Three Months Ended

Six Months Ended

Nine Months Ended

(dollars in thousands)

September 30,

Operating expenses:

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Operating expenses:

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Provision for income taxes

Three and Six Months Ended June 30, 2021 Compared with Three and Six Months Ended June 30, 2020

Three and Nine Months Ended September 30, 2021 Compared with Three and Nine Months Ended September 30, 2020

Three Months Ended

Six Months Ended

(dollars in thousands)

aiWARE SaaS Solutions

aiWARE Content Licensing and Media Services

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.

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.

Nine Months Ended

September 30, 2021

Software Products & Services (1)

Managed Services

( 1) Software Products & Services consists of aiWARE SaaS Solutions of $4.7M and $19.3M for the three and nine months ended September 30, 2021 respectively as well PandoLogic of $4.3 million for the three months September 30, 2021

Three Months Ended

Nine Months Ended

September 30, 2020

Software Products & Services

Managed Services

Commercial Enterprise

Commercial Enterprise Software Products and Services revenue increased in the three and nine months ended September 30, 2021 compared with the corresponding prior year periods due primarily to expanded services to existing customers in media and entertainment, in addition to the PandoLogic business in Q3 2021 .

Commercial Managed Services increased in the three months and nine months ended September 30, 2021 compared with the corresponding prior year periods was due to a combination of the addition of new advertising clients and increased business with existing advertising clients.

Revenues from our content licensing Managed Services, 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.

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

Government & Regulated Industries (“GRI”)

GRI software Product &Services revenue remained relatively flat in dollars year over year during the three and nine months ended September 30, 2021 as compared to the same periods in 2020.

GRI Software Products and Services revenue from customers in certain markets, particularly with government, legal and energy customers, is often project-based and is impacted by the timing of projects.

As such, and beyond 2021, we expect that our revenue from these markets may fluctuate significantly from period to period.

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

Three Months Ended

Six Months Ended

Nine Months Ended

(dollars in thousands)

September 30,

Cost of revenue

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.

Non-GAAP gross profit

Non-GAAP gross margin

The increase in non-GAAP gross profit and non-GAAP gross margin in the three and nine months ended September 30, 2021 compared with the corresponding prior year period was due primarily to growth in revenue from the addition of PandoLogic as well existing customers across our Software Products and Services, which collectively generated incremental gross margins in excess of 80% during the three months ended September 30, 2021.

Operating Expenses

Three Months Ended

Six Months Ended

Nine Months Ended

(dollars in thousands)

September 30,

Cost of revenue

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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.

The increase in cost of revenue in the three and nine months ended September 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.

The increase in sales and marketing expenses in the three months ended September 30, 2021 compared with the corresponding prior year periods was due primarily to the addition of PandoLogic.

The increase in sales and marketing expenses in the nine months ended September 30, 2021 compared with the corresponding prior year period includes a $1.1 million increase in personnel-related costs from the addition of new sales and marketing resources and $0.7 million 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 nine months ended September 30, 2021 as well as the addition of PandoLogic in Q3 2021.

As a percentage of revenue, sales and marketing expenses declined to 26% and 29% in the three and nine months ended September 30, 2021, respectively, from 33% and 37% 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.

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 .

The increase in research and development expenses in the three and nine months ended September 30, 2021 compared with the corresponding prior year periods was due primarily to an increase of $1.2 million and $2.0 million, respectively, in personnel-related costs from the addition of new engineering resources as well as the addition of PandoLogic costs in Q3 2021.

Stock-based compensation increased in the three and nine months ended September 30, 2021 compared with the corresponding prior year periods by $0.3 million and $1.4 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 a percentage of revenue, research and development expenses were flat for the three months ended September 30, 2021 and declined to 25% from 26% for the and nine months ended September 30, 2021.

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.

General and administrative expenses increased in the three months ended September 30, 2021 compared with the corresponding prior year period due to a $1.3 million increase in salaries, bonuses and other personnel-related costs as well as $1.4 million in transaction costs related to the acquisition of PandoLogic.

General and administrative expenses increased in the nine months ended September 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, $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 $3.9 million increase in salaries, bonuses and other personnel-related costs and $2.2 million in transaction costs related to the acquisition of PandoLogic.

As a percentage of revenue, general and administrative expenses declined to 66% and 103% in the three and nine months ended September 30, 2021 respectively, from 76% and 85% in the corresponding prior year periods

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.

Amortization expense increased in the three months and nine months ended September 30, 2021 compared with the corresponding prior year period due to certain intangible assets that were acquired in 2017 becoming fully amortized during 2020 offset by the addition of PandoLogic in Q3 2021.

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.

For the three and nine months ended September 30, 2021 , other expense, net was comprised primarily of currency exchange losses.

For the nine months ended September 30, 2020, other income, net was comprised primarily of 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.

Our principal sources of liquidity are our cash and cash equivalents, which totaled $72.6 million as of September 30, 2021 and $114.8 million as of December 31, 2020.

The decrease in our cash and cash equivalents in the nine months ended September 30, 2021 was due primarily to the cash used to fund the acquisition of PandoLogic Ltd.

that we completed in the third quarter of 2021, partially offset by $9.0 million in cash from financing activities from the exercise of stock options and purchases of shares under our ESPP and from the exercise of stock warrants.

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

Six Months Ended

Nine Months Ended

(in thousands)

Cash used in operating activities

Cash (used in) provided by investing activities

September 30,

Cash (used in) provided by operating activities

Cash used in investing activities

Cash provided by financing activities

Net increase in cash, cash equivalents and restricted cash

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

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.

Our operating activities used cash of $3.5 million in the nine months ended September 30, 2021, due primarily to our net loss of $54.7 million, adjusted by $41.0 million in non-cash expenses, including $33.5 million in stock-based compensation expense, offset in part by the net working capital increase of $10.2 million of cash received from Managed Services 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 Software Products & 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

Our use of cash as measured by Non-GAAP net loss decreased to $16.6 million for the nine months ended September 30, 2021 from $16.7 million for the nine months ended September 30, 2020, due primarily to the increase in our revenues, partially offset by an increase in non-GAAP expenses.

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 Managed Services 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.

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.

Our investing activities for the nine months ended September 30, 2021 used cash of $48.1 million primarily to fund a portion of the consideration for the acquisition completed in the third quarter of 2021.

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

Financing Activities

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.

Our financing activities provided cash of $9.4 million in the nine months ended September 30, 2021.

Net cash provided by financing activities consisted of $7.1 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 $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.

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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.

As of September 30, 2021, we had no outstanding debt obligations.

In September 2021, the Company completed the acquisition PandoLogic for total consideration of $116.6 million, comprised of upfront payments of $58.7 million in cash and $31.5 million in common stock (1.7 million shares) and up to $65.0 million payable based on earnouts tied to financial performance of PandoLogic in fiscal 2021 and 2022.

At the acquisition date, the earnout was valued at $26.4 million which amount will be paid in a combination of cash and common stock.

We have generated significant losses since inception;

however, we do expect to begin generating profits in 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 significantly 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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis