Veritone, Inc. 10-Q

Item 1. Financial Statements VERITONE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share and share data) (Unaudited) As of September 30, December 31, 2021 2020 ASSETS Cash and cash equivalents $ 72,645 $ 114,817 Accounts receivable, net 57,903 16,666 Expenditures billable to clients 25,236 18,365 Prepaid expenses and other current assets 10,683 6,719 Total current assets 166,467 156,567 Property, equipment and improvements, net 1,178 2,354 Intangible assets, net 92,904 10,744 Goodwill 27,999 6,904 Long-term restricted cash 855 855 Other assets 1,793 230 Total assets $ 291,196 $ 177,654 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 33,102 $ 15,632 Accrued media payments 75,171 55,874 Client advances 8,402 6,496 Contingent consideration, current 19,307 - Other accrued liabilities 37,131 10,246 Total current liabilities 173,113 88,248 Contingent consideration, non-current 8,533 - Other non-current liabilities 1,884 1,196 Total liabilities 183,530 89,444 Commitments and contingencies (Note 8) Stockholders' equity Common stock, par value $ 0.001 per share; 75,000,000 shares authorized; 34,857,163 and 31,799,354 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively 35 32 Additional paid-in capital 442,870 368,477 Accumulated deficit ( 335,091 ) ( 280,365 ) Accumulated other comprehensive (loss) income ( 148 ) 66 Total stockholders' equity 107,666 88,210 Total liabilities and stockholders' equity $ 291,196 $ 177,654 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 VERITONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except per share and share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Revenue $ 22,655 $ 15,718 $ 60,156 $ 40,890 Operating expenses: Cost of revenue 5,808 4,553 15,862 11,566 Sales and marketing 5,906 5,255 17,586 15,116 Research and development 5,254 3,587 14,860 10,673 General and administrative 15,037 11,950 62,225 34,836 Amortization 1,683 1,346 3,840 4,040 Total operating expenses 33,688 26,691 114,373 76,231 Loss from operations ( 11,033 ) ( 10,973 ) ( 54,217 ) ( 35,341 ) Other expense, net ( 15 ) ( 4 ) ( 37 ) ( 108 ) Loss before provision for income taxes ( 11,048 ) ( 10,977 ) ( 54,254 ) ( 35,449 ) Provision for income taxes 396 36 472 41 Net loss $ ( 11,444 ) $ ( 11,013 ) $ ( 54,726 ) $ ( 35,490 ) Net loss per share: Basic and diluted $ ( 0.34 ) $ ( 0.40 ) $ ( 1.67 ) $ ( 1.31 ) Weighted average shares outstanding: Basic and diluted 33,332,668 27,593,315 32,752,939 27,162,880 Comprehensive loss: Net loss $ ( 11,444 ) $ ( 11,013 ) $ ( 54,726 ) $ ( 35,490 ) Foreign currency translation gain, net of income taxes - 6 7 11 Total comprehensive loss $ ( 11,444 ) $ ( 11,007 ) $ ( 54,719 ) $ ( 35,479 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 VERITONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share amounts) (Unaudited) Three Months Ended September 30, 2021 Accumulated Additional Other Common Stock Paid-in Accumulated Comprehensive Shares Amount Capital Deficit Income Total Balance as of June 30, 2021 32,870,767 $ 33 $ 403,768 $ ( 323,647 ) $ 73 $ 80,227 Common stock issued under employee stock plans, net 281,574 — 2,332 — — 2,332 Common stock issued for acquisition 1,704,822 2 31,498 — — 31,500 Stock-based compensation expense — — 5,272 — — 5,272 Net loss — — — ( 11,444 ) — ( 11,444 ) Other comprehensive loss — — — — ( 221 ) ( 221 ) Balance as of September 30, 2021 34,857,163 $ 35 $ 442,870 $ ( 335,091 ) $ ( 148 ) $ 107,666 Nine Months Ended September 30, 2021 Accumulated Additional Other Common Stock Paid-in Accumulated Comprehensive Shares Amount Capital Deficit Income Total Balance as of December 31, 2020 31,799,354 $ 32 $ 368,477 $ ( 280,365 ) $ 66 $ 88,210 Common stock issued under employee stock plans, net 1,084,941 1 7,125 — — 7,126 Common stock issued for acquisition 1,704,822 2 31,498 — — 31,500 Common stock issued for services 15,828 — 250 — — 250 Stock-based compensation expense — — 33,241 — — 33,241 Exercise of warrants 252,218 — 2,279 — — 2,279 Net loss — — — ( 54,726 ) — ( 54,726 ) Other comprehensive loss — — — — ( 214 ) ( 214 ) Balance as of September 30, 2021 34,857,163 $ 35 $ 442,870 $ ( 335,091 ) $ ( 148 ) $ 107,666 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 VERITONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share amounts) (Unaudited) Three Months Ended September 30, 2020 Accumulated Additional Other Common Stock Paid-in Accumulated Comprehensive Shares Amount Capital Deficit Income Total Balance as of June 30, 2020 27,516,307 $ 28 $ 296,967 $ ( 256,966 ) $ 51 $ 40,080 Common stock offerings, net — — ( 10 ) — — ( 10 ) Common stock issued under employee stock plans, net 97,548 — 216 — — 216 Release of Machine Box holdback consideration 105,898 — — — — — Stock-based compensation expense — — 5,148 — — 5,148 Net loss — — — ( 11,013 ) — ( 11,013 ) Other comprehensive gain — — — — 6 6 Balance as of September 30, 2020 27,719,753 $ 28 $ 302,321 $ ( 267,979 ) $ 57 $ 34,427 Nine Months Ended September 30, 2020 Accumulated Additional Other Common Stock Paid-in Accumulated Comprehensive Shares Amount Capital Deficit Income Total Balance as of December 31, 2019 25,670,737 $ 26 $ 279,828 $ ( 232,489 ) $ 46 $ 47,411 Common stock offerings, net 1,491,317 2 5,994 — — 5,996 Common stock issued under employee stock plans, net 297,490 — 356 — — 356 Release of Machine Box holdback consideration 105,898 — — — — - Stock-based compensation expense — — 13,735 — — 13,735 Exercise of warrants 154,311 — 2,100 — — 2,100 Warrant issuance — — 308 — — 308 Net loss — — — ( 35,490 ) — ( 35,490 ) Other comprehensive gain — — — — 11 11 Balance as of September 30, 2020 27,719,753 $ 28 $ 302,321 $ ( 267,979 ) $ 57 $ 34,427 5 VERITONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Nine Months Ended September 30, 2021 2020 Cash flows from operating activities: Net loss $ ( 54,726 ) $ ( 35,490 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 4,189 4,816 Loss on disposal of fixed assets 1,894 102 Provision for doubtful accounts 14 291 Loss on sublease 1,211 — Change in fair value of warrant liability — 200 Change in fair value of contingent consideration 256 — Stock-based compensation expense 33,491 13,698 Changes in assets and liabilities: Accounts receivable ( 19,907 ) 3,535 Expenditures billable to clients ( 6,871 ) ( 9,822 ) Prepaid expenses and other assets 5,014 ( 131 ) Accounts payable 4,288 4,254 Accrued media payments 19,297 14,562 Client advances 1,906 4,687 Other accrued liabilities 7,016 708 Other liabilities ( 600 ) ( 128 ) Net cash (used in) provided by operating activities ( 3,528 ) 1,282 Cash flows from investing activities: Proceeds from the sale of equipment — 56 Capital expenditures ( 448 ) ( 61 ) Acquisitions, net of cash acquired ( 47,602 ) — Net cash used in investing activities ( 48,050 ) ( 5 ) Cash flows from financing activities: Proceeds from issuances of stock under employee stock plans, net 7,127 356 Proceeds from the exercise of warrants 2,279 2,100 Proceeds from common stock offerings, net — 6,517 Proceeds from loan — 6,491 Repayment of loan — ( 6,491 ) Net cash provided by financing activities 9,406 8,973 Net (decrease) increase in cash and cash equivalents and restricted cash ( 42,172 ) 10,250 Cash and cash equivalents and restricted cash, beginning of period 115,672 44,920 Cash and cash equivalents and restricted cash, end of period $ 73,500 $ 55,170 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 VERITONE, INC. Notes to the Condensed Consolidated Financial Statements (in thousands, except share and per share data and percentages) (Unaudited) NOTE 1. DESCRIPTION OF BUSINESS Description of Business Veritone, Inc., a Delaware corporation (“Veritone”) (together with its wholly owned subsidiaries, collectively, the “Company”), is a provider of artificial intelligence (“AI”) computing solutions. The Company’s proprietary AI operating system, aiWARE TM , uses machine learning algorithms, or AI models, together with a suite of powerful applications, to reveal valuable insights from vast amounts of structured and unstructured data. The platform offers capabilities that mimic human cognitive functions such as perception, prediction and problem solving, enabling users to quickly, efficiently and cost effectively transform unstructured data into structured data, and analyze and optimize data to drive business processes and insights. aiWARE is based on an open architecture that enables new AI models, applications and workflows to be added quickly and efficiently, resulting in a future-proof, scalable and evolving solution that can be leveraged by organizations across a broad range of business sectors,serving commercial enterprises as well as government and regulated industries. The Company also offers cloud-native digital content management solutions and content licensing services, primarily to customers in the media and entertainment market. These offerings leverage the Company’s aiWARE technologies, providing customers with unique capabilities to enrich and drive expanded revenue opportunities from their content. In addition, the Company operates a full-service advertising agency that leverages the Company’s aiWARE technologies to provide differentiated Managed Services to its clients. The Company’s advertising services include media planning and strategy, advertisement buying and placement, campaign messaging, clearance verification and attribution, and custom analytics, specializing in host-endorsed and influencer advertising across primarily radio, podcasting, streaming audio, social media and other digital media channels. The Company’s advertising services also include its VeriAds TM Network, which is comprised of programs that enable broadcasters, podcasters and social media influencers to generate incremental advertising revenue. On September 14, 2021, the Company acquired PandoLogic Ltd., a leading provider of intelligent hiring solutions (“PandoLogic”), a company incorporated under the laws of the state of Israel (“PandoLogic”), as discussed in more detail in Note 3. PandoLogic’s platform, pandoIQ, is an AI-enabled recruitment platform. NOTE 2. PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Preparation The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial statements and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. Such unaudited condensed consolidated financial statements and accompanying notes are based on the representations of the Company’s management, who is responsible for their integrity and objectivity. The information included in this Form 10-Q should be read in conjunction with the information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 5, 2021. Interim results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results the Company will have for the full year ending December 31, 2021. The accompanying condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which are normal, recurring and necessary to fairly state the Company’s financial position, results of operations and cash flows. All significant intercompany transactions have been eliminated in consolidation. The financial data and the other information disclosed in these notes to the condensed consolidated financial statements reflected in the three and nine month periods presented are unaudited. The December 31, 2020 balance sheet included herein was derived from the audited financial statements but does not include all disclosures or notes required by GAAP for complete financial statements. Reclassifications Gross profit, which was previously reflected in the statement of operations and comprehensive loss, is no longer presented. Cost of revenue, which was presented in prior periods within gross profit, is now presented as an operating expense. The Company believes that this presentation more accurately reflects the Company’s cost of revenue and operating expenses. These reclassifications had no effect on reported net loss. 7 Liquidity and Capital Resources During the year ended December 31, 2020, the Company generated cash flows from operations of $ 1,433 and incurred a net loss of $ 47,876 . In the nine months ended September 30, 2021, the Company generated negative cash flows from operations of $ 3,528 and incurred a net loss of $ 54,726 . As of September 30, 2021, the Company had an accumulated deficit of $ 335,091 . Historically, the Company has satisfied its capital needs with the net proceeds from sales of equity securities, issuances of convertible debt, and the exercise of common stock options and warrants. In 2020, the Company completed an offering of its common stock for aggregate net proceeds of $ 59,771 and raised additional net proceeds of $ 5,986 through sales of its common stock under an Equity Distribution Agreement dated September 1, 2018 (the “Equity Distribution Agreement”). In the first nine months of 2021, the Company received net proceeds of $ 7,127 from the issuance of common stock under the Company’s employee stock plans and $ 2,279 from the exercise of common stock warrants. Beginning in the fourth quarter of 2021 and including the acquisition of PandoLogic in September 2021, the Company expects to generate positive consolidated cash flows from its operations. As a result, management believes that the Company’s existing balances of cash and cash equivalents, which totaled $ 72,645 as of September 30, 2021, will be sufficient to meet its anticipated cash requirements for the foreseeable future. Use of Accounting Estimates The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the accompanying condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The principal estimates relate to the accounting recognition and presentation of revenue, allowance for doubtful accounts, purchase accounting, impairment of long-lived assets, the valuation of contingent consideration, the valuation of stock awards and stock warrants and income taxes, where applicable. There has been uncertainty and disruption in the global economy and financial markets due to the COVID-19 pandemic. The Company is not aware of any specific event or circumstance that would require an update to its estimates or assumptions or a revision of the carrying value of its assets or liabilities as of the date of filing of this Quarterly Report on Form 10-Q. These estimates and assumptions may change as new events occur and additional information is obtained. As a result, actual results could differ materially from these estimates and assumptions. Significant Customers Two individual customers accounted for 27 % of the Company’s net revenues for the three months ended September 30, 2021 and no individual customer accounted for 10 % of the Company’s net revenues for the nine months ended September 30, 2021. No individual customer accounted for 10 % of the Company’s net revenues for the three months ended and nine months ended September 30, 2020. Three Commercial Enterprise Managed Services clients individually accounted for 10 % or more of the Company’s accounts receivable as of September 30, 2021 and two Commercial Enterprise Managed services clients individually accounted for 10 % or more of the Company’s accounts receivable as December 31, 2020. Remaining Performance Obligations As of September 30, 2021, the aggregate amount of the transaction prices under the Company’s contracts allocated to the Company’s remaining performance obligations was $ 8,346 approximately 52 % of which the Company expects to recognize as revenue over the next twelve months , and the remainder thereafter. This aggregate amount excludes amounts allocated to remaining performance obligations under contracts that have an original duration of one year or less and variable consideration that is allocated to remaining performance obligations . Excluded based on this policy are balances related to PandoLogic representing gross purchase orders to be satisfied in less than one year. Revenues will be recognized net of costs to fulfill these orders. Significant Accounting Policies There have been no material changes in the Company’s significant accounting policies from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020. Recently Issued Accounting Pronouncements 8 In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . The amendments under this pronouncement will change the way all leases with duration of one year or more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized in the same manner as capital leases are amortized under current accounting rules, as amortization expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. This standard will be effective for the Company beginning with the first quarter of fiscal year 2022. The Company is currently evaluating the expected impact this standard will have on its policies and procedures pertaining to its existing and future lease arrangements, its disclosure requirements and its consolidated financial statement s, but anticipates that the required recognition of a lease liability and related right-of-use asset may significantly increase both assets and liabilities recognized and reported on its balance sheet. In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) which requires measurement and recognition of expected credit losses for financial assets held. This standard will be effective for the Company beginning in the first quarter of fiscal year 2023, and early adoption is permitted. The Company is currently evaluating the impact that this standard will have on its consolidated financial statements and related disclosures as well as the timing of adoption. In December 2019, the FASB issued ASU No. 2019-12 to simplify the accounting in ASC 740, Income Taxes . This standard removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This standard will be effective for the Company beginning in the first quarter of fiscal year 2022, and early adoption is permitted . The Company is currently evaluating the impact that this standard will have on its financial statements and related disclosures as well as the timing of adoption. NOTE 3. BUSINESS COMBINATIONS On September 14, 2021 , the Company acquired 100 % of PandoLogic. , a company incorporated under the laws of the state of Israel, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated as of July 21, 2021 . PandoLogic is a leading provider of intelligent hiring solutions and utilizes its proprietary platform to accelerate the time and improve the efficiency in the process for employers hiring at scale for both mass market and difficult-to-source candidates. PandoLogic’s fully autonomous recruiting platform helps employers source talent faster and more efficiently with predictive algorithms, machine learning and AI. The total purchase consideration for PandoLogic was $ 116,633 (the “Merger Consideration”), which consisted of upfront consideration of $ 58,733 in cash and $ 31,500 for the fair value of the Company’s 1,704,822 shares of common stock, and up to $ 65,000 in contingent consideration based on achieving certain 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 “Earnout”). The total purchase consideration is preliminary and subject to net working capital adjustments that the Company expects to finalize and settle in the measurement period. The final settlement amount may vary materially as amounts are finalized and ultimately agreed to by the parties. The Company utilized a Monte Carlo simulation model to estimate the fair value of the Earnout. The fair value of the Earnout was estimated to be $ 30,000 as of September 14, 2021, $ 26,400 of which was deemed to be purchase consideration and recorded within contingent consideration current and contingent consideration non-current on the condensed consolidated balance sheet. The remaining $ 3,600 will be recognized as compensation expense over the earnout period in the general and administrative expenses on the condensed consolidated statement of operations and comprehensive loss. Subsequent to the acquisition date, the Company is required to reassess its estimate of the fair value of the Earnout, including certain future Earnout obligations triggered on employment status of certain PandoLogic management, and record any changes in earnings when the estimate is based on information not known as of the acquisition date (See Note 5). The Company incurred $ 2,161 in acquisition related expenses and has recorded them in general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss . The following table summarizes the fair value of the purchase price consideration (in thousands): Acquisition consideration Amount Cash consideration at closing $ 58,733 Equity consideration at closing 31,500 Contingent earnout 26,400 Total $ 116,633 The preliminary allocation of the purchase consideration to tangible and intangible assets acquired and liabilities assumed is based on estimated fair values and is as follows (in thousands): 9 Purchase price allocation** Amount Cash $ 11,131 Accounts receivable 21,344 Prepaid and other current assets 8,986 Property and equipment 618 Intangible assets 86,000 Other assets 1,543 Total assets acquired 129,622 Accounts payable 13,183 Accrued expenses and other current liabilities 8,828 Deferred tax liability 12,073 Total liabilities assumed 34,084 Identifiable net assets acquired $ 95,538 Goodwill 21,095 Total preliminary purchase consideration $ 116,633 **The purchase price allocation has been prepared on a preliminary basis and changes to the preliminary purchase price allocation may occur as additional information concerning asset and liability valuations is finalized. The preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations, and those estimates and assumptions regarding certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, income taxes, and goodwill are subject to change as the Company obtains additional information during the measurement period ( up to one year from the acquisition date ). The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities is recorded as goodwill. Goodwill is primarily attributable to operational efficiencies from operating PandoLogic products on aiWARE as well as opportunities to cross-sell into our commercial enterprise customer base. Identifiable Intangible Assets The identifiable intangible assets acquired consisted of developed technology, customer relationships and tradename with estimated useful lives of 4 - 7 years. The Company amortizes the fair value of these intangible assets on a straight-line basis over their respective useful lives. The fair value of the intangible assets has been estimated using a combination of the income and cost approaches. Under the income approach, the after-tax cash flows associated with the asset are discounted to present value. The key assumptions include the Company's estimates of the projected cash flows and discount rates. Under the cost approach, the replacement cost is used to estimate the value of the asset. The key assumptions include the Company's estimates of the direct and indirect costs required to replace the asset. The valuation of the intangible assets acquired from PandoLogic along with their estimated useful lives, is as follows (in thousands): Estimated Fair Value Estimated Useful Lives (in years) Customer relationships 68,000 7 Developed technology 16,000 4 Trade name 2,000 5 Total intangible assets $ 86,000 Taxes In connection with the acquisition, a deferred tax liability is established for the future consequences attributable to differences between the financial statement carrying amounts of the acquired non-goodwill intangible assets and their respective tax basis. No deferred tax asset or liability is recorded on PandoLogic goodwill, most of which is not deductible for tax purposes. No valuation allowance is recorded on the acquired PandoLogic deferred tax assets that are presented net of deferred tax liability in the preliminary purchase price allocation. The Company’s tax expense for the three and nine-month periods ended September 30, 2021 is primarily attributable to PandoLogic. Unaudited Pro Forma Results The unaudited pro forma financial information in the table below summarizes the combined results of operations for Veritone and PandoLogic, as if the companies were combined for the nine-month period ended September 30, 2021. The unaudited pro forma financial information for all periods presented included the business combination accounting effects resulting from this acquisition, including adjustments to reflect recognition of intangible asset amortization and accretion of contingent consideration. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of January 1, 2020. 10 The unaudited pro forma financial information was as follows (in thousands): The Company recognized $ 4,311 in revenue and $ 1,889 of net income related to PandoLogic since the acquisition date of September 14 through September 30, 2021 in the condensed consolidated statement of operations and comprehensive loss. Three Months Ended Nine Months ended September 30, September 30, 2021 2021 Net revenue $ 35,488 $ 92,980 Loss before provision for income taxes $ ( 8,910 ) $ ( 52,199 ) Net loss $ ( 9,237 ) $ ( 53,445 ) Three Months Ended Nine Months ended September 30, September 30, 2020 2020 Net revenue $ 26,521 $ 61,809 Loss before provision for income taxes $ ( 8,311 ) $ ( 36,880 ) Net loss $ ( 7,974 ) $ ( 35,273 ) NOTE 4. NET LOSS PER SHARE The following table presents the computation of basic and diluted net loss per share: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Numerator Net loss $ ( 11,444 ) $ ( 11,013 ) $ ( 54,726 ) $ ( 35,490 ) Denominator Weighted-average common shares outstanding 33,342,828 27,606,061 32,767,752 27,180,059 Less: Weighted-average shares subject to repurchase ( 10,160 ) ( 12,746 ) ( 14,813 ) ( 17,179 ) Denominator for basic and diluted net loss per share attributable to common stockholders 33,332,668 27,593,315 32,752,939 27,162,880 Basic and diluted net loss per share $ ( 0.34 ) $ ( 0.40 ) $ ( 1.67 ) $ ( 1.31 ) The Company reported net losses for all periods presented and, as such, all potentially dilutive shares of common stock would have been antidilutive for such periods. The table below presents the weighted-average securities (in common equivalent shares) outstanding during the periods presented that have been excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Common stock options and restricted stock units 9,533,421 10,022,826 9,917,997 9,954,904 Warrants to purchase common stock 520,112 1,592,840 559,361 1,521,720 Total 10,053,533 11,615,666 10,477,358 11,476,624 NOTE 5. FINANCIAL INSTRUMENTS Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs that may be used to measure fair value. Level 1 and Level 2 are considered observable and Level 3 is considered unobservable, as follows: 11 • Level 1—quoted prices (unadjusted) in active markets for identical assets or liabilities; • Level 2—inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or • Level 3—unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Cash and Cash Equivalents The Company’s money market funds are categorized as Level 1 within the fair value hierarchy. As of September 30, 2021, the Company’s cash and cash equivalents balances were as follows: Gross Cash and Unrealized Fair Cash Cost Losses Value Equivalents Cash $ 71,616 $ — $ 71,616 $ 71,616 Level 1: Money market funds 1,029 — 1,029 1,029 Total $ 72,645 $ — $ 72,645 $ 72,645 As of December 31, 2020, the Company’s cash and cash equivalents balances were as follows: Gross Cash and Unrealized Fair Cash Cost Losses Value Equivalents Cash $ 44,795 $ — $ 44,795 $ 44,795 Level 1: Money market funds 70,022 — 70,022 70,022 Total $ 114,817 $ — $ 114,817 $ 114,817 Contingent Consideration All of the Company’s contingent consideration liabilities are categorized as Level 3 within the fair value hierarchy. Contingent consideration was valued at the time of acquisition using the Monte Carlo simulation model. This model incorporates revenue volatility, internal rate of return, and risk free rate. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management with the assistance of a third-party valuation specialist. As of September 30, 2021, the Company’s contingent consideration liabilities current and non-current balances were as follows: Changes in Indemnified Fair Contingent Cost Fair Value Accretion Value Consideration Level 3: Contingent consideration, current $ 19,199 $ 106 $ 2 $ 19,307 $ 19,307 Contingent consideration, non-current 8,383 150 — 8,533 8,533 Total $ 27,582 $ 256 $ 2 $ 27,840 $ 27,840 Included in the contingent consideration liabilities as of September 30, 2021 is $ 1,261 which relates to contingent consideration resulting from an acquisition made by Pandologic prior to execution of the Merger Agreement. As discussed in Note 8, the Company is indemnified against this contingent consideration and related accretion. Stock Warrants All of the Company’s outstanding stock warrants are categorized as Level 3 within the fair value hierarchy. Stock warrants have been recorded at their fair value using either a probability weighted expected return model, the Monte Carlo simulation model or the Black-Scholes option-pricing model. These models incorporate contractual terms, maturity, risk-free interest rates and volatility. The value of the Company’s stock warrants would increase if a higher risk-free interest rate was used, and would decrease if a lower risk-free interest rate was used. Similarly, a higher volatility assumption would increase the value of the stock warrants, and a lower volatility assumption would decrease the 12 value of the stock warrants. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management with the assistance of a third-party valuation specialist. 13 NOTE 6. GOODWILL AND INTANGIBLE ASSETS, NET Goodwill The carrying amount of goodwill was $ 27,999 as of September 30, 2021 and $ 6,904 December 31, 2020. Goodwill Balance at December 31, 2020 $ 6,904 Acquisition of PandoLogic 21,095 Balance at September 30, 2021 $ 27,999 Intangible Assets The following table sets forth the Company’s finite-lived intangible assets resulting from business acquisitions and other purchases, which continue to be amortized: September 30, 2021 December 31, 2020 Weighted Average Remaining Useful Life (in years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Software and technology 0.7 $ 3,582 $ ( 3,477 ) $ 105 $ 3,582 $ ( 3,357 ) $ 225 Licensed technology 0.0 500 ( 500 ) - 500 ( 375 ) 125 Developed technology 3.6 25,600 ( 6,087 ) 19,513 9,600 ( 4,480 ) 5,120 Customer relationships 6.5 77,300 ( 6,157 ) 71,143 9,300 ( 4,340 ) 4,960 Noncompete agreements 0.9 800 ( 640 ) 160 800 ( 486 ) 314 Trade names 5.0 2,000 ( 17 ) 1,983 - - - Total 5.8 $ 109,782 $ ( 16,878 ) $ 92,904 $ 23,782 $ ( 13,038 ) $ 10,744 The following table presents future amortization of the Company’s finite-lived intangible assets at September 30, 2021: 2021 (3 months) $ 4,671 2022 18,534 2023 17,091 2024 14,571 2025 13,409 Thereafter 24,628 Total $ 92,904 NOTE 7. CONSOLIDATED FINANCIAL STATEMENTS DETAILS Consolidated Balance Sheets Details Cash and cash equivalents As of September 30, 2021 and December 31, 2020, the Company had cash and cash equivalents of $ 72,645 and $ 114,817 , respectively, including $ 56,996 and $ 40,052 , respectively, of cash received from Commercial Managed Services clients for future payments to vendors. Accounts Receivable, Net Accounts receivable consisted of the following: As of September 30, December 31, 2021 2020 Accounts receivable — Commercial Managed Services $ 18,001 $ 14,916 Accounts receivable — Other 40,762 1,868 58,763 16,784 Less: allowance for doubtful accounts ( 860 ) ( 118 ) Accounts receivable, net $ 57,903 $ 16,666 14 Property, Equipment and Improvements, Net Property, equipment and improvements, net consisted of the following: As of September 30, December 31, 2021 2020 Property and equipment $ 3,730 $ 2,365 Leasehold improvements 199 2,899 3,929 5,264 Less: accumulated depreciation ( 2,751 ) ( 2,910 ) Property, equipment and improvements, net $ 1,178 $ 2,354 During the nine months ended September 30, 2021, in connection with the sublease of its former corporate office space located in Costa Mesa, California, the Company wrote-off approximately $ 3,559 in property and equipment and leasehold improvements and recorded a net loss on disposal of $ 1,894 . Depreciation expense was $ 95 and $ 349 for the three and nine months ended September 30, 2021, respectively. Depreciation expense was $ 264 and $ 776 for the three and nine months ended September 30, 2020, respectively. Accounts Payable Accounts payable consisted of the following: As of September 30, December 31, 2021 2020 Accounts payable — Commercial Managed Services $ 22,738 $ 14,688 Accounts payable — Other 10,364 944 Total $ 33,102 $ 15,632 Consolidated Statement of Operations and Comprehensive Loss Details Revenue Revenue for the periods presented were comprised of the following: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Commercial Enterprise $ 21,697 $ 14,829 $ 57,460 $ 39,115 Government & Regulated Industries 958 889 2,696 1,775 Total revenue $ 22,655 $ 15,718 $ 60,156 $ 40,890 In Q3 2021, we realigned our organization to improve focus and growth into two customer groups: (1) Commercial Enterprise, which today consists of customers in the commercial sector, including our media and entertainment customers, advertising customers, content licensing customers and customers through PandoLogic that are not from government or regulated industries, and (2) Government & Regulated Industries (GRI), which today consists of customers in the government and regulated industries sectors, including our state, local and federal government, legal, compliance and energy customers. Software Products & Services consists of revenue generated from our aiWARE platform and through Pandologic’s software product solutions, any related support and maintenance services, and any related professional services associated with the deployment and or implementation of such solutions. Managed Services consists of revenues generated from our advertising agency and related services and content licensing. The table below illustrates the presentation of our revenues based on the above definitions: 15 Three Months Ended Nine Months Ended September 30, 2021 September 30, 2021 Government & Government & Commercial Regulated Commercial Regulated Revenue Presentation Enterprises Industries Total Enterprises Industries Total Software Products & Services $ 8,069 $ 958 $ 9,027 $ 16,596 $ 2,696 $ 19,292 Managed Services Advertising 9,648 - 9,648 29,943 - 29,943 Licensing 3,980 - 3,980 10,921 - 10,921 Total Managed Services 13,628 - 13,628 40,864 - 40,864 Total Revenue $ 21,697 $ 958 $ 22,655 $ 57,460 $ 2,696 $ 60,156 (1) Software Products & Services consists of aiWARE SaaS Solutions of $ 4,716 and $ 19,292 for the three and nine months ended September 30, 2021 respectively as well PandoLogic of $ 4,311 for the three months September 30 , 2021. Three Months Ended Nine Months Ended September 30, 2020 September 30, 2020 Government & Government & Commercial Regulated Commercial Regulated Revenue Presentation Enterprises Industries Total Enterprises Industries Total Software Products & Services $ 2,462 $ 889 $ 3,351 $ 7,686 $ 1,775 $ 9,461 Managed Services Advertising 8,764 - 8,764 21,803 - 21,803 Licensing 3,603 - 3,603 9,626 - 9,626 Total Managed Services 12,367 - 12,367 31,429 - 31,429 Total Revenue $ 14,829 $ 889 $ 15,718 $ 39,115 $ 1,775 $ 40,890 PandoLogic Revenue Recognition The Company generates revenue primarily from platform services where it provides access to digital job advertising done programmatically. Revenue is derived from AI-enabled programmatic advertising, which uses software and algorithms to match buyers and sellers of digital job advertising in a technology-driven marketplace. The Company provides the use of its solution to clients to execute digital job advertising campaigns. Campaigns are typically ordered through monthly purchase orders. The Company charges clients a fee based on the number of job searches by potential applicants through its solution during each campaign. Revenue is recognized as platform advertising services are provided during each campaign. The Company determined that it is not the principal in the purchase and sale of jobs placements in all of its arrangements, and therefore, it reports revenue on a net basis for the solution fees charged to clients. Costs to source the applicants which are measured and invoiced monthly over the period the services are delivered. Other Expense, Net Other expense, net for the periods presented was comprised of the following: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Interest (expense) income, net $ ( 3 ) $ 2 $ 4 $ 84 Change in fair value of warrant liability — — — ( 200 ) Other ( 12 ) ( 6 ) ( 41 ) 8 Other expense, net $ ( 15 ) $ ( 4 ) $ ( 37 ) $ ( 108 ) NOTE 8. COMMITMENTS AND CONTINGENCIES Leases 16 The Company leases facilities under operating lease arrangements expiring on various dates through fiscal year 2024. Certain of the Company’s leases contain standard rent escalation and renewal clauses. Under certain leases, the Company is required to pay operating expenses in addition to base rent. Rent expense for lease payments is recognized on a straight-line basis over the lease term. In February 2021, the Company entered into an office sublease (the “Sublease”) with a third party (the “Subtenant”), pursuant to which the Company has subleased its former office space located in Costa Mesa, California, consisting of approximately 37,875 square feet, which the Company leases pursuant to an existing lease agreement expiring in 2024 (the “Lease”). The term of the Sublease commenced in March 2021 and will continue through December 31, 2024 , coterminous with the Lease. Pursuant to the Sublease, the Subtenant will pay to the Company monthly base rent, which is subject to annual rent escalations, as well as a portion of the operating expenses and taxes payable by the Company under the Lease. The Company recognized contract termination costs as a liability when it ceased using the rights conveyed under the Lease. During the nine months ended September 30, 2021, the Company recorded approximately $ 3,367 in charges resulting from the Sublease, consisting of $ 1,894 loss on disposal of property and equipment and leasehold improvements, $ 1,211 loss on sublease, and $ 262 in initial direct costs. As of September 30, 2021, future minimum lease payments were as follows: 2021 (three months) $ 589 2022 2,223 2023 1,768 2024 1,730 Total minimum payments $ 6,310 As of September 30, 2021, minimum sublease rental income to be received in the future under noncancelable subleases was approximately $ 3,686 . The total rent expense for all operating leases, excluding the charges related to the Sublease discussed above, was $ 428 and $ 4,672 for the three and nine months ended September 30, 2021, and $ 748 and $ 2,265 for the three and nine months ended September 30, 2020, respectively. Sales Taxes The Company collects and remits sales tax in jurisdictions in which it has a physical presence or it believes nexus exists, which therefore obligates the Company to collect and remit sales tax. During the three and nine months ended September 30, 2021, the Company recorded a liability net of payments remitted to states of $ 22 and $ 306 , respectively, for potential exposure in several states where there is uncertainty about the point in time at which the Company established a sufficient business connection to create nexus. Other Contingencies From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. The Company currently is not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on the Company’s results of operations, financial position or cash flows. In conjunction with our acquisition of PandoLogic as outlined in Note 3, there are certain contingencies outlined in the Merger Agreement for which the Company is indemnified including, but not limited to, contingent consideration arising from a previous acquisition, and international as well as state and local tax matters. An indemnification asset has been recognized related to fair value of the contingent consideration acquired in the opening balance sheet of $ 1,259 . As of September 30, 2021, the Company was investigating potential sales tax exposure for PandoLogic, of which potential maximum exposure is estimated to be covered and reserved for under escrow with the sellers of PandoLogic. As a result, the Company has not accrued any contingency estimates for sales tax exposure for PandoLogic as of September 30, 2021. NOTE 9. STOCKHOLDERS’ EQUITY (DEFICIT) Common Stock Issuances During the nine months ended September 30, 2021 and 2020, the Company issued an aggregate of 1,084,941 and 297,490 shares of its common stock, respectively the exercise of stock options, issuance of stock awards and vesting of restricted stock units under its stock incentive plans and purchases under its Employee Stock Purchase Plan (the “ESPP”). During the nine months ended September 30, 2021, the Company issued a total of 1,704,822 shares of its common stock in connection with the acquisition of PandoLogic. 17 During the nine months ended September 30, 2021, the Company issued a total of 252,218 shares of its common stock upon the exercise of warrants for an aggregate exercise price of $ 2,279 and issued an aggregate of 84,723 shares of its common stock upon exercises of warrants to purchase an aggregate of 91,833 shares of its common stock, which were effected on a net exercise basis without cash payment of the exercise price. During the nine months ended September 30, 2020, the Company issued a total of 154,311 shares of its common stock upon the exercise of warrants for an aggregate exercise price of $ 2,100 . During the nine months ended September 30, 2021, the Company issued an aggregate of 15,828 shares of its common stock for services provided to the Company. During the nine months ended September 30, 2020, the Company issued an aggregate of 105,898 shares of common stock to the former stockholders of Machine Box, representing all of the shares previously held back from issuance by the Company with respect to the initial consideration and the additional contingent consideration. During the nine months ended September 30, 2020, the Company issued and sold an aggregate of 1,491,317 shares of its common stock pursuant to the Equity Distribution Agreement with JMP Securities (as sales agent) and received net proceeds from such sales of $ 5,996 after deducting expenses of $ 281 . The Company voluntarily terminated the Equity Distribution Agreement in January 2021. 18 NOTE 10. STOCK PLANS Stock-Based Compensation During the nine months ended September 30, 2021, the Company granted options to purchase an aggregate of 298,455 shares of its common stock that are subject to time-based vesting conditions. The Company valued these stock options using the Black-Scholes Merton option pricing model. The following assumptions were used to compute the grant date fair values of the stock options granted during the nine months ended September 30, 2021: Expected term (in years) 5.5 - 6.1 Expected volatility 80% - 83% Risk-free interest rate 0.6% - 1.0% Expected dividend yield — The assumptions used in calculating the fair values of purchase rights granted under the ESPP during the nine months ended September 30, 2021 are set forth in the table below: Expected term (in years) 0.5 - 2.0 Expected volatility 67% - 119% Risk-free interest rate 0.1 % Expected dividend yield — The Company’s stock-based compensation expense by type of award and by operating expense grouping are presented below: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Stock-based compensation expense by type of award: Restricted stock units $ 4,264 $ 2,308 $ 14,014 $ 3,203 Stock awards — 43 19 152 Machine Box contingent common stock issuances — ( 37 ) — ( 37 ) Performance-based stock options — 1,996 16,314 5,917 Stock options 791 644 2,426 4,099 Employee stock purchase plan 86 157 337 364 Common stock issued for services 131 — 381 - Total $ 5,272 $ 5,111 $ 33,491 $ 13,698 Stock-based compensation expense by operating expense grouping: Sales and marketing $ 226 $ 278 $ 1,358 $ 654 Research and development 431 172 2,016 593 General and administrative 4,615 4,661 30,117 12,451 $ 5,272 $ 5,111 $ 33,491 $ 13,698 19 Equity Award Activity Under Stock Plans Stock Awards The Company’s stock award activity for the nine months ended September 30, 2021 was as follows: Weighted Average Grant Shares Date Fair Value Unvested at December 31, 2020 - $ - Granted 581 $ 32.33 Forfeited - - Vested ( 581 ) $ 32.33 Unvested at September 30, 2021 - - All stock awards granted during the nine months ended September 30, 2021 were fully vested upon grant. As of September 30, 2021, there was no unrecognized compensation cost related to stock awards granted under the Company’s stock plans. Restricted Stock Units The Company’s restricted stock unit activity for the nine months ended September 30, 2021 was as follows: Weighted Average Grant Shares Date Fair Value Unvested at December 31, 2020 829,124 $ 11.53 Granted 448,020 $ 41.31 Forfeited ( 24,439 ) $ 42.92 Vested ( 749,374 ) $ 10.77 Unvested at September 30, 2021 503,331 $ 37.64 As of September 30, 2021, total unrecognized compensation cost related to restricted stock units was $ 8,033 , which is expected to be recognized over a weighted average period of 1.0 year. Performance-Based Stock Options The activity during the nine months ended September 30, 2021 related to stock options that are subject to performance-based vesting conditions tied to the achievement of stock price goals by the Company was as follows: Weighted-Average Remaining Aggregate Exercise Contractual Intrinsic Options Price Term Value Outstanding at December 31, 2020 4,234,020 $ 10.55 — — Exercised ( 346,137 ) $ 5.78 — — Forfeited ( 12,552 ) $ 5.92 — — Expired ( 8,787 ) $ 5.28 — — Outstanding at September 30, 2021 3,866,544 $ 11.01 6.76 years $ 49,819 Exercisable at September 30, 2021 3,886,544 $ 11.01 6.76 years $ 49,819 During the first nine months of 2021, the Company achieved all of the stock price milestones applicable to substantially all of the performance-based stock options and, as a result, such performance-based stock options vested and all associated unrecognized compensation was accelerated and recognized in full as a one-time expense of $ 16,268 during the nine months ended September 30, 2021. The aggregate intrinsic value of the options exercised during the nine months ended September 30, 2021 was $ 7,665 . No options were exercised during the nine months ended September 30, 2020. No performance-based stock options were granted during the nine months ended September 30, 2021 and 2020, and no performance-based stock options vested during the nine months ended September 30, 2020. Stock Options The activity during the nine months ended September 30, 2021 related to all other stock options was as follows: 20 Weighted-Average Remaining Aggregate Exercise Contractual Intrinsic Options Price Term Value Outstanding at December 31, 2020 5,400,070 $ 12.60 — — Granted 298,455 $ 28.69 — — Exercised ( 488,636 ) $ 9.69 — — Forfeited ( 169,965 ) $ 15.86 — — Expired ( 3,579 ) $ 6.45 — — Outstanding at September 30, 2021 5,036,345 $ 13.73 6.33 years $ 52,783 Exercisable at September 30, 2021 4,114,851 $ 13.74 5.82 years $ 41,747 The weighted average grant date fair value of stock options granted during the nine months ended September 30, 2021 and 2020 was $ 19.95 and $ 2.46 per share, respectively. The aggregate intrinsic value of the stock options exercised during the nine months ended September 30, 2021 and 2020 was $ 9,521 and $ 484 , respectively. The total grant date fair value of stock options vested during the nine months ended September 30, 2021 and 2020 was $ 1,797 and $ 4,659 , respectively. At September 30, 2021, total unrecognized compensation expense related to stock options was $ 7,502 and is expected to be recognized over a weighted average period of 2.97 years. The aggregate intrinsic values in the tables above represent the difference between the fair market value of the Company’s common stock and the average option exercise price of in-the-money options, multiplied by the number of such stock options. Employee Stock Purchase Plan During the nine months ended September 30, 2021, a total of 67,068 shares of common stock were purchased under the Company’s ESPP. As of September 30, 2021, accrued employee contributions for future purchases under the ESPP totaled $ 157 . 21