Veritone, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2020. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed under “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020. See “Special Note Regarding Forward-Looking Statements” above at page 1. Overview Veritone, Inc. (collectively with our subsidiaries, referred to as “Veritone,” “Company,” “we,” “our,” and “us”) is a provider of artificial intelligence (“AI”) solutions, 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 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 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 22 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 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 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 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. While we are focused on continuing to improve our gross profit, our ability to attract new and retain existing customers to grow our revenue will be highly dependent on our ability to implement and continually improve upon our technology and services and improve our technology infrastructure and operations as we experience increased network capacity constraints due to our growth. We believe our operating results and performance are, and will continue to be, driven by various factors that affect our industry. Our ability to attract, grow and retain customers for our aiWARE platform is highly sensitive to rapidly changing technology and is dependent on our ability to maintain the attractiveness of our platform, content and services to our customers. Moreover, 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 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: (i) to increase the scale of our business in markets we are in today, (ii) to accelerate growth in new markets and product categories, including expanding our existing engineering and sales resources, and (iii) to accelerate the adoption of aiWARE as the universal AI operating system through venture or market-driven opportunities. If we are successful in identifying and entering into agreements to acquire target companies, we may need to raise additional capital to finance such acquisitions and to continue executing on our growth strategy. Historically, substantially all of our revenue has been derived from customers located in the United States. We believe that there is a substantial opportunity over time for us to significantly expand our service offerings and customer base in countries outside of the United 23 States. In the long term, we plan to expand our business further internationally in places such as Europe, Asia Pacific and Latin America, and as a result we expect to continue to incur significant incremental upfront expenses associated with these growth opportunities. Impact of the Coronavirus (“COVID-19”) Pandemic The COVID-19 outbreak emerged in late 2019 and was declared a global pandemic by the World Health Organization in March 2020. The COVID-19 pandemic, and the actions being taken by governments worldwide to mitigate the public health consequences of the pandemic, significantly impacted the global economy. Beginning in March 2020, we began to experience fluctuations in demand for certain services, particularly our 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 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. The severity and duration of the pandemic and the resulting macroeconomic conditions are difficult to predict, and our revenue and operating results may be adversely impacted in future periods. Due to the nature of our business, the effect of the COVID-19 pandemic may not be fully reflected in its results of operations until future periods. The most significant risks to our business and results of operations arising from the COVID-19 pandemic are discussed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31, 2020. In response to the COVID-19 pandemic, we took actions to control expenses, including temporarily discontinuing non-essential services and instituting controls on travel, entertainment and other expenses. In addition, in compliance with government mandates, we have temporarily closed our offices and initiated a work from home policy. We expect to continue to enforce these and other actions we deem appropriate until or when the COVID-19 pandemic is officially no longer declared a pandemic by the World Health Organization. Non-GAAP Financial Measure In evaluating our cash flows and financial performance, we use 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 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. Investors should not consider this supplemental non-GAAP financial information in isolation or as a substitute for analysis of our results as reported in accordance with GAAP. 24 (in thousands) Three Months Ended September 30, 2021 2020 Core Operations ( 1) Corporate ( 2) Total Core Operations ( 1) Corporate ( 2) Total Net loss $ (427 ) $ (11,017 ) $ (11,444 ) $ (1,670 ) $ (9,343 ) $ (11,013 ) Provision for income taxes 390 6 396 — 36 36 Depreciation and amortization 1,698 81 1,779 1,480 130 1,610 Stock-based compensation expense 878 4,393 5,271 627 4,484 5,111 Change in fair value of Contingent consideration — 256 256 — — — State sales tax reserve — 22 22 — — — Acquisition and due diligence costs — 1,426 1,426 — — — Non-GAAP Net Income (Loss) $ 2,539 $ (4,833 ) $ (2,294 ) $ 437 $ (4,693 ) $ (4,256 ) (in thousands) Nine Months Ended September 30, 2021 2020 Core Operations ( 1) Corporate ( 2) Total Core Operations ( 1) Corporate ( 2) Total Net loss $ (3,933 ) $ (50,793 ) $ (54,726 ) $ (7,825 ) $ (27,665 ) $ (35,490 ) Provision for income taxes 390 82 472 — 41 41 Depreciation and amortization 3,865 324 4,189 4,189 627 4,816 Stock-based compensation expense 4,589 28,902 33,491 1,716 11,982 13,698 Change in fair value of warrant liability — — — — 200 200 Change in fair value of Contingent consideration — 256 256 — 102 102 State sales tax reserve — 306 306 — — — Gain on sale of asset — — — — (56 ) (56 ) Interest expense — — — — 9 9 Acquisition and due diligence costs — 2,161 2,161 — — — Charges related to sublease — 3,367 3,367 — — — Severance and executive search — 349 349 — — — Non-GAAP Net Income (Loss) $ 4,911 $ (15,046 ) $ (10,135 ) $ (1,920 ) $ (14,760 ) $ (16,680 ) ( 1) Core operations consists of our aiWARE operating platform of software, SaaS and related services; content, licensing and advertising agency services; and their supporting operations, including direct costs of sales as well as operating expenses for sales, marketing and product development and certain general and administrative costs dedicated to these operations. ( 2) Corporate consists of general and administrative functions such as executive, finance, legal, people operations, fixed overhead expenses (including facilities and information technology expenses), other income (expenses) and taxes, and other expenses that support the entire company, including public company driven costs. The following tables set forth the calculation of our gross profit and gross margin, followed by a reconciliation of non-GAAP to GAAP financial information presented in our condensed consolidated financial statements for three and nine months ended September 30, 2021 and 2020. Three Months Ended Nine Months Ended (dollars in thousands) September 30, September 30, 2021 2020 2021 2020 Revenue $ 22,655 $ 15,718 $ 60,156 $ 40,890 Cost of revenue 5,808 4,553 15,862 11,566 Non-GAAP gross profit 16,847 11,165 44,294 29,324 Non-GAAP gross margin 74.4 % 71.0 % 73.6 % 71.7 % 25 (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Revenue $ 22,655 $ 15,718 $ 60,156 $ 40,890 Cost of revenue 5,808 4,553 15,862 11,566 Non-GAAP gross profit 16,847 11,165 44,294 29,324 GAAP sales and marketing expenses 5,906 5,255 17,586 15,116 Stock-based compensation expense (226 ) (278 ) (1,358 ) (654 ) Severance and executive search — — (236 ) — Non-GAAP sales and marketing expenses 5,680 4,977 15,992 14,462 GAAP research and development expenses 5,254 3,587 14,860 10,673 Stock-based compensation expense (431 ) (172 ) (2,016 ) (593 ) Severance and executive search — — (14 ) — Non-GAAP research and development expenses 4,823 3,415 12,830 10,080 GAAP general and administrative expenses 15,037 11,950 62,225 34,836 Depreciation (95 ) (264 ) (349 ) (776 ) Stock-based compensation expense (4,615 ) (4,661 ) (30,117 ) (12,451 ) Warrant expense — — — (102 ) Change in fair value of contingent consideration (256 ) — (256 ) — Charges related to sublease — — (3,367 ) — State sales tax reserve (22 ) — (306 ) — Acquisition and due diligence costs (1,426 ) — (2,161 ) — Severance and executive search — — (99 ) — Non-GAAP general and administrative expenses 8,623 7,025 25,570 21,507 GAAP amortization (1,683 ) (1,346 ) (3,840 ) (4,040 ) GAAP loss from operations (11,033 ) (10,973 ) (54,217 ) (35,341 ) Total non-GAAP adjustments (1) 8,754 6,721 44,119 18,616 Non-GAAP loss from operations (2,279 ) (4,252 ) (10,098 ) (16,725 ) GAAP other expense, net (15 ) (4 ) (37 ) (108 ) Change in fair value of warrant liability — — — 200 Interest expense — — — 9 Gain on sale of asset — — — (56 ) Non-GAAP other (expense) income, net (15 ) (4 ) (37 ) 45 GAAP loss before income taxes (11,048 ) (10,977 ) (54,254 ) (35,449 ) Total non-GAAP adjustments (1) 8,754 6,721 44,119 18,769 Non-GAAP loss before income taxes (2,294 ) (4,256 ) (10,135 ) (16,680 ) Income tax provision 396 36 472 41 GAAP net loss (11,444 ) (11,013 ) (54,726 ) (35,490 ) Total non-GAAP adjustments (1) 9,150 6,757 44,591 18,810 Non-GAAP net loss $ (2,294 ) $ (4,256 ) $ (10,135 ) $ (16,680 ) Shares used in computing non-GAAP basic and diluted net loss per share 33,333 27,593 32,753 27,163 Non-GAAP basic and diluted net loss per share $ (0.07 ) $ (0.15 ) $ (0.31 ) $ (0.61 ) ( 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. 26 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 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 Sept 30, Dec 31, Mar 31, Jun 30, Sept 30, 2020 2020 2021 2021 2021 Avg billings per active managed services client (in 000's) ( 1) $522 $545 $582 $622 $615 Revenue during quarter (in 000's) ( 2) $ 8,764 $ 9,747 $ 10,327 $ 9,968 $ 9,648 ( 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; (ii) loss of clients who choose to replace our services with new providers or by bringing their advertising placement in-house; (iii) clients who experience reductions in their advertising budgets due to issues with their own businesses; and (iv) the seasonality of the campaigns for certain large clients. We have historically generated a significant portion of our revenue from a few major clients. As we continue to grow and diversify our client base, we expect that our dependency on a limited number of large clients will be minimized. 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 Sept 30, Dec 31, Mar 31, Jun 30, Sept 30, 2020 2020 2021 2021 2021 Software Revenue - Pro Forma (in 000's) (3) $ 14,154 $ 30,869 $ 10,183 $ 20,072 $ 21,860 Ending Customers ( 4) 322 360 385 419 433 Average Annual Revenue(AAR) ($000) (5) $ 110 $ 206 $ 199 $ 203 $ 208 Total New Bookings ($000) (6) $ 2,083 $ 1,437 $ 2,442 $ 4,896 $ 3,356 Gross Revenue Retention (7) >85% >90% >90% >90% >90% 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. 27 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. In particular, amortization expense, which was previously presented within cost of revenue, sales and marketing, research and development, and general and administrative operating expenses, has been reclassified and is presented as a single separate line item in operating expenses. In addition, gross profit, which was previously reflected in the statement of operations and comprehensive loss, is no longer presented, and cost of revenue, which was previously presented within gross profit, is presented as an operating expense. We believe that this presentation more accurately reflects our cost of revenue and operating expenses. These reclassifications had no effect on our reported net loss. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future. Three Months Ended Nine Months Ended (dollars in thousands) 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 ) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Operating expenses: Cost of revenue 25.6 29.0 26.4 28.3 Sales and marketing 26.1 33.4 29.2 37.0 Research and development 23.2 22.8 24.7 26.1 General and administrative 66.4 76.0 103.4 85.2 Amortization 7.4 8.6 6.4 9.9 Total operating expenses 148.7 169.8 190.1 186.5 Loss from operations (48.7 ) (69.8 ) (90.1 ) (86.5 ) Other expense, net (0.1 ) - (0.1 ) (0.3 ) Loss before provision for income taxes (48.8 ) (69.8 ) (90.2 ) (86.8 ) Provision for income taxes 1.7 0.2 0.8 - Net loss (50.5 ) (70.0 ) (91.0 ) (86.8 ) 28 Three and Nine Months Ended September 30, 2021 Compared with Three and Nine Months Ended September 30, 2020 Revenue Three Months Ended Nine Months Ended September 30, 2021 September 30, 2021 Commercial Government & Commercial Government & Enterprises Regulated Total Enterprises Regulated Total Software Products & Services (1) $ 8,069 $ 958 $ 9,027 $ 16,596 $ 2,696 $ 19,292 Managed Services 13,628 - 13,628 40,864 - 40,864 Revenue $ 21,697 $ 958 $ 22,655 $ 57,460 $ 2,696 $ 60,156 ( 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 September 30, 2020 Commercial Government & Commercial Government & Enterprises Regulated Total Enterprises Regulated Total Software Products & Services $ 2,462 $ 889 $ 3,351 $ 7,686 $ 1,775 $ 9,461 Managed Services 12,367 - 12,367 31,429 - 31,429 Revenue $ 14,829 $ 889 $ 15,718 $ 39,115 $ 1,775 $ 40,890 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. 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. Gross Profit As noted above, our non-GAAP gross profit is calculated as our revenue less our cost of revenue, as follows: Three Months Ended Nine Months Ended (dollars in thousands) September 30, September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Revenue $ 22,655 $ 15,718 $ 6,937 44.1 % $ 60,156 $ 40,890 $ 19,266 47.1 % Cost of revenue 5,808 4,553 1,255 27.6 % 15,862 11,566 4,296 37.1 % Non-GAAP gross profit 16,847 11,165 5,682 50.9 % 44,294 29,324 14,970 51.1 % Non-GAAP gross margin 74.4 % 71.0 % 73.6 % 71.7 % 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 29 Three Months Ended Nine Months Ended (dollars in thousands) September 30, September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Cost of revenue $ 5,808 $ 4,553 $ 1,255 27.6 % $ 15,862 $ 11,566 $ 4,296 37.1 % Sales and marketing 5,906 5,255 651 12.4 % 17,586 15,116 2,470 16.3 % Research and development 5,254 3,587 1,667 46.5 % 14,860 10,673 4,187 39.2 % General and administrative 15,037 11,950 3,087 25.8 % 62,225 34,836 27,389 78.6 % Amortization 1,683 1,346 337 25.0 % 3,840 4,040 (200 ) -5.0 % Total operating expenses $ 33,688 $ 26,691 $ 6,997 26.2 % $ 114,373 $ 76,231 $ 38,142 50.0 % Cost of Revenue. 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 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 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 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 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 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 $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. Cash Flows A summary of cash flows from our operating, investing and financing activities is shown in the table below. 30 Nine Months Ended (in thousands) September 30, 2021 2020 Cash (used in) provided by operating activities $ (3,528 ) $ 1,282 Cash used in investing activities (48,050 ) (5 ) Cash provided by financing activities 9,406 8,973 Net (decrease) increase in cash, cash equivalents and restricted cash $ (42,172 ) $ 10,250 Operating Activities 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 $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 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 $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. Proceeds received from loans under the Paycheck Protection Program in April 2020 were repaid in full in May 2020. Capital Resources 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. However, our current cash and cash equivalents may not be sufficient to support the development of our business to the point at which we have positive cash flows from operations, including the acquisition of PandoLogic. In addition, we intend to continue to evaluate potential new acquisitions of and/or investments in companies or technologies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital in the future. We plan to meet our future needs for additional capital through equity and/or debt financings. We currently have no available lines of credit for future borrowings. We have a shelf registration statement that allows us to sell up to $300 million of our equity or debt securities, at prices and on terms to be determined in the future. Future equity or debt financing may not be available on favorable terms or at all. If we are unable to obtain adequate 31 financing or financing on terms satisfactory to us when required, our ability to continue to support our business growth, including through acquisitions, scale our infrastructure, develop product enhancements and respond to business challenges could be significantly impaired. If we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing. Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities. Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, we are not required to provide the information required by Item 305 of Regulation S-K.