Veritone, Inc. 10-K

Item 7. 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 included elsewhere in this Annual Report on Form 10-K. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties. You should review the “Cautionary Note Regarding Forward-Looking Statements” on page ii and Item 1A (Risk Factors) of Part I of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview We are a provider of AI solutions, powered by our proprietary AI operating system, aiWARE™, to deliver differentiated products and solutions to our Commercial Enterprise and Government & Regulated Industries customers. During the year ended December 31, 2021, we generated revenue of $115.3 million as compared to $57.7 million during the year ended December 31, 2020. Our Software Products & Services grew 429% year over year, and represented 51% and 24% of our consolidated revenue in December 31, 2021 and 2020, respectively, and our Managed Services grew 27% year over and year, and represented 49% and 76% of our consolidated revenue in December 31, 2021 and 2020, respectively. During the years ended December 31, 2021 and 2020, our largest customer represented 30% and 8% of our consolidated revenue, respectively. Significant Transactions In September 2021, we completed the acquisition of PandoLogic, a company incorporated under the laws of the state of Israel for total consideration of $122.5 million (the “Merger Consideration”). The Merger Consideration consisted of upfront payments of $58.7 million in cash and $31.5 million in common stock (1.7 million shares), up to $65.0 million payable based on earnouts tied to financial performance of PandoLogic in fiscal years 2021 and 2022, and a net working capital adjustment of $5.8 million. At the acquisition date, the earnout was valued at $30.0 million to be paid in a combination of cash and common stock, of which $26.4 million was deemed to be consideration. In November 2021, we completed an offering of our convertible senior notes in which we issued, at par value, $201.25 million aggregate principal amount of 1.75% convertible senior notes due 2026 (the “Convertible Notes”). In exchange for the Convertible Notes, we received net proceeds of approximately $194.9 million after deducting underwriting discounts and commissions and offering costs of approximately $6.3 million, with $18.6 million of those net proceeds used to purchase the capped call transactions related to the Convertible Notes. The Convertible Notes are our senior, unsecured obligations and will bear interest at a rate of 1.75% per year. Interest will accrue from November 19, 2021 and will be payable semiannually in arrears on May 15 and November 15 of each year, beginning on May 15, 2022. The Convertible Notes will mature on November 15, 2026, unless earlier converted, redeemed, or repurchased in accordance with the terms of the Convertible Notes. The Convertible Notes are convertible at $36.76 per share, and $48.55 per share assuming the capped call provisions are met. Opportunities, Challenges and Risks In 2021 and 2020, we derived our revenue primarily through our Commercial Enterprise customers, and secondarily through our Government & Regulated Industries customers. Beginning in the second half of 2020 and continuing into 2021, we began to experience significant growth in revenue across our Commercial Enterprise business, which increased 100% during the year ended December 31, 2021 as compared to the prior year. The year-over-year growth in Commercial Enterprise revenue was driven largely by the acquisition 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 various markets, including within the U.S. government and energy markets, we expect that both our Commercial Enterprise and Government & Regulated Industries revenues 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. Our proprietary AI operating system, aiWARE, 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. In addition to the year-over-year growth of 429% in our Software Products 31 & Services during the year ended December 31, 2021, we have also demonstrated our ability to grow our AI-based Managed Services, with our revenue from these Managed Services increasing 27% during the year ended December 31, 2021 as compared to the prior year. Historically, we have derived a large portion of our Software Product & Services revenue from applications we internally developed from our aiWARE platform and actively sold across various 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 there 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 where our AI solutions could add tremendous value in content creation and distribution, including in the news, television and film industries. We believe there will be significant near and long-term opportunities for revenue growth from Government & Regulated Industries markets due to customer adoption of our products and services related to AI technologies and more recently with our official Authorization to Operate, or ATO, of our aiWARE platform across the entire U.S. Department of Justice and progress with the Joint Artificial Intelligence Commission (“JAIC”) and Department of Defense (“DOD”) . However, many enterprise-level opportunities with GRI customers can involve long sales cycles, during which we must invest significant time and resources without a guarantee of success. We may seek to acquire businesses with deep relationships and greater scale within the U.S. government and 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 our Government & Regulated Industries division 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 significant near and long-term opportunities to grow our revenue within this market . Our aiWARE platform 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 solutions to address the opportunities in this market. At the end of the fourth quarter of 2021, we reported 529 Software Product & Services customers, which grew 47% from December 31, 2020 on a pro forma basis (including customers from PandoLogic as if owned by Veritone, Inc. since January 1, 2020) . To continue to grow our Software Product & 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 2022 as compared with prior periods. We believe our Software Products & Services will extend the capabilities of many third-party software platforms and products that are widely used today. For example, we recently acquired PandoLogic, a company with technology that utilizes machine-learning and AI to accelerate the hiring process for large enterprises. We believe that, when integrated with aiWARE, PandoLogic users will be given greater visibility and transparency in their hiring processes. In addition, we have historically integrated aiWARE across many platforms, including Alteryx and the NVIDIA ® CUDA ® GPU-based platform, enabling dramatic increases in aiWARE’s processing speed and providing 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 opportunities. 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 year ended December 31, 2021, our non-GAAP gross margin (calculated as described in “Non-GAAP Financial Measures” below) improved to 81%, compared with 73% for the year ended December 31, 2020, driven by growth of new customers across our Software Products & Services and the addition of PandoLogic in late 2021, which generated incremental non-GAAP gross margins in excess of 80% during the three months ended December 31, 2021. Our non-GAAP gross margin is impacted significantly by the mix of our Software Products & Services and our Managed Services revenue in any given period because our Managed Services revenue typically has a lower overall non-GAAP gross margin than our Software Products & Services revenue. With the acquisition of PandoLogic in September 2021, we expect our consolidated non-GAAP gross margin and related non-GAAP gross profit to improve to no less than 80% starting in quarter ended March 31, 2022 and improving each subsequent quarter in 2022 as the mix of PandoLogic revenue becomes seasonally larger throughout 2022. Our non-GAAP 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 non-GAAP gross profit, our ability to attract and retain customers to 32 grow our revenue will be highly dependent on our ability to implement and continually improve upon our technology and services and improve our technology infrastructure and operations as we experience increased network capacity constraints due to our growth. We believe our operating results and performance are, and will continue to be, driven by various factors that affect our industry. Our ability to attract, grow and retain customers for our aiWARE platform is highly sensitive to rapidly changing technology and is dependent on our ability to maintain the attractiveness of our platform, content and services to our customers. Moreover, we have historically reported GAAP operating losses, driven by certain non-cash and non-recurring items such as stock-based compensation and purchase accounting; however, we expect to report substantial improvements in our consolidated operating results for the year ended December 31, 2022 as compared to the year ended December 31, 2021, driven by the growth in our software offerings and customers and the growth of PandoLogic. Our future revenue and operating growth will rely heavily on our ability to grow and retain our Software Products & Services customer base, continue to develop and deploy quality and innovative AI-driven applications and enterprise-level offerings, provide unique and attractive content and advertising services to our customers, continue to grow in newer markets such as Government & Regulated Industries, expand aiWARE 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. We expect to pursue a strategy of acquiring companies to help accelerate our organic growth. We believe there are strategic acquisition targets that can accelerate our entry into key strategic markets, as well as our ability to grow our business. As a result, we are continuing to prioritize corporate development efforts throughout 2022. 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. During the year ended December 31, 2021, we reported positive non-GAAP net income for the first time of $6.8 million as compared to a reported non-GAAP net loss of $20.6 million during the year ended December 31, 2020. While we forecast our full year 2022 to also be profitable on a non-GAAP net income basis and do not expect to show non-GAAP net losses during the quarter ended March 31, 2022, we do expect seasonality in our revenue and operating performance throughout the quarters ended March 31, June 30, September 30 and December 31 from our PandoLogic acquisition. Moreover, and to continue to grow our revenue in 2022, we will need to make substantial investments in people, namely software engineers and sales personnel. Our growth and ultimate profitability could be accelerated or delayed if we cannot hire or retain people in a timely manner. In the years ended December 31, 2021 and 2020, substantially all of our revenue was derived from customers located in the United States. We believe that there is a substantial opportunity over time for us to significantly expand our service offerings and customer base in countries outside of the United States. In the long term, we plan to expand our business further internationally in places such as Europe, Asia Pacific and Latin America, and as a result, we expect to continue to incur significant incremental upfront expenses associated with these expansion opportunities. Impact of the 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 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 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 our 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 December 31, 2021. 33 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). In response to the COVID-19 pandemic during the first half of 2020, 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 initiated a remote 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 Measures 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.” Non-GAAP 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 years ended December 31, 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. In addition, we have provided additional supplemental non-GAAP measures of gross profit, 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 our industry. Management also uses this information internally for forecasting and budgeting. 34 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. (dollars in thousands) Year Ended December 31, 2021 2020 Core Operations (1) Corporate (2) Total Core Operations (1) Corporate (2) Total Net income (loss) $ 8,298 $ (78,891 ) $ (70,593 ) $ (9,060 ) $ (38,816 ) $ (47,876 ) Provision for income taxes 2,658 86 2,744 — 76 76 Depreciation and amortization 8,609 426 9,035 5,538 869 6,407 Stock-based compensation expense 6,575 33,488 40,063 2,720 16,819 19,539 Change in fair value of warrant liability — — — — 200 200 Change in fair value of contingent consideration — 18,325 18,325 — — — Warrant expense — — — — 102 102 Gain on sale of asset — — — — (56 ) (56 ) State sales tax reserve — 306 306 — 818 818 Stock offering costs — — — — 27 27 Lease exit charges (3) — 3,367 3,367 — 16 16 Interest expense — 538 538 — 9 9 Acquisition and due diligence costs — 2,698 2,698 — — — Business realignment, severance and executive search costs (4) — 349 349 — 145 145 Non-GAAP Net Income (Loss) $ 26,140 $ (19,308 ) $ 6,832 $ (802 ) $ (19,791 ) $ (20,593 ) (1) Core Operations consists of our consolidated Software Products & Services (including recently acquired PandoLogic) and Managed Services that include our content licensing and advertising 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. (3) Lease exit charges consists of charges related to a sublease in 2021 and lease termination charges in 2020. (4) Business realignment, severance and executive search costs consists of severance and executive search costs in 2021 and business realignment and officer severance costs in 2020. The following tables set forth the calculation of our non-GAAP gross profit and non-GAAP gross margin, followed by a reconciliation of non-GAAP to GAAP financial information presented in our consolidated financial statements for years ended December 31, 2021 and 2020. Year Ended (dollars in thousands) December 31, 2021 2020 Revenue $ 115,305 $ 57,708 Cost of revenue 22,129 15,663 Non-GAAP gross profit 93,176 42,045 Non-GAAP gross margin 80.8 % 72.9 % 35 Year Ended December 31, 2021 2020 Revenue $ 115,305 $ 57,708 Cost of revenue 22,129 15,663 Non-GAAP gross profit 93,176 42,045 GAAP cost of revenue 22,129 15,663 Stock-based compensation expense (116 ) — Non-GAAP cost of revenue 22,013 15,663 GAAP sales and marketing expenses 28,935 19,877 Stock-based compensation expense (1,716 ) (889 ) Lease exit charges — (5 ) Business realignment and officer severance costs (236 ) — Non-GAAP sales and marketing expenses 26,983 18,983 GAAP research and development expenses 25,075 14,379 Stock-based compensation expense (3,217 ) (1,046 ) Business realignment and officer severance costs (14 ) — Non-GAAP research and development expenses 21,844 13,333 GAAP general and administrative expenses 97,918 50,080 Depreciation (538 ) (1,025 ) Stock-based compensation expense (35,014 ) (17,604 ) Warrant expense — (102 ) Change in fair value of contingent consideration (18,325 ) — State sales tax reserve (306 ) (818 ) Stock offering costs — (27 ) Lease exit charges (3,367 ) — Acquisition and due diligence costs (2,698 ) — Business realignment and officer severance costs (99 ) (145 ) Non-GAAP general and administrative expenses 37,571 30,359 GAAP amortization (8,497 ) (5,382 ) GAAP loss from operations (67,249 ) (47,673 ) Total non-GAAP adjustments (1) 74,143 27,043 Non-GAAP net income (loss) from operations 6,894 (20,630 ) GAAP other expense, net (600 ) (127 ) Change in fair value of warrant liability — 200 Interest expense 538 9 Lease exit charges — 11 Gain on sale of asset — (56 ) Non-GAAP other income (expense), net (62 ) 37 GAAP loss before income taxes (67,849 ) (47,800 ) Total non-GAAP adjustments (1) 74,681 27,207 Non-GAAP net income (loss) before income taxes 6,832 (20,593 ) Income tax provision 2,744 76 GAAP net loss (70,593 ) (47,876 ) Total non-GAAP adjustments (1) 77,425 27,283 Non-GAAP net income (loss) $ 6,832 $ (20,593 ) Shares used in computing non-GAAP basic net earnings (loss) per share 33,298 27,595 Shares used in computing non-GAAP diluted net earnings (loss) per share (2) 43,928 27,595 Non-GAAP basic net earnings (loss) per share $ 0.21 $ (0.75 ) Non-GAAP diluted net earnings (loss) per share $ 0.16 $ (0.75 ) (1) Adjustments are comprised of the adjustments to GAAP 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. 36 Supplemental Financial Information We are providing the following unaudited supplemental financial information regarding our Software Products & Services and Managed Services as a lookback of 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 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. The supplemental financial information for our Managed Services includes: (i) average gross billings per active agency client, and (ii) revenue. Software Products & Services Supplemental Financial Information The following table sets forth the results for each of the key performance indicators (“KPI’s”) for our Software Products & Services. Quarter Ended Sept 30, Dec 31, Mar 31, Jun 30, Sept 30, Dec 31, 2020 2020 2021 2021 2021 2021 Software Revenue - Pro Forma (in 000's) (1) 14,154 30,869 10,183 20,072 21,860 40,223 Ending Customers (2) 322 360 385 419 433 529 Average Annual Revenue (AAR) (in 000's) (3) $ 110 $ 206 $ 199 $ 203 $ 208 $ 209 Total New Bookings (in 000's) (4) $ 2,083 $ 1,437 $ 2,442 $ 4,896 $ 3,356 $ 8,317 Gross Revenue Retention (5) >85% >90% >90% >90% >90% >90% ( 1 ) “Software Revenue - Pro Forma” includes historical Software Products & Services revenue from the past six (6) 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. ( 2 ) “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. ( 3 ) “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. ( 4 ) “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 the third and fourth quarter of fiscal year 2020 as those periods were deemed immaterial and data was not readily available. ( 5 ) “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 Software Products & Services, 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 significant 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. 37 Managed Services Supplemental Financial Information The following table sets forth the results for each of the KPIs for our Managed Services. Quarter Ended Sept 30, Dec 31, Mar 31, Jun 30, Sept 30, Dec 31, 2020 2020 2021 2021 2021 2021 Avg billings per active Managed Services client (in 000's) (6) 522 545 582 622 615 625 Revenue during quarter (in 000's) (7) $ 8,764 $ 9,747 $ 10,327 $ 9,968 $ 9,647 $ 10,857 (6) Avg billings per active Managed Services customer for each quarter reflects the average quarterly billings per active Managed Services customer over the twelve-month period through the end of such quarter for Managed Services clients that are active during such quarter. (7) 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 customer wins; (ii) loss of customers who choose to replace our services with new providers or by bringing their advertising placement in-house; (iii) customers who experience reductions in their advertising budgets due to issues with their own businesses; and (iv) the seasonality of the campaigns for certain large customers. We have historically generated a significant portion of our revenue from a few major customers. As we continue to grow and diversify our customer base, we expect that our dependency on a limited number of large customers will be minimized. Net Loss Carryforwards As of December 31, 2021, we had federal and state income tax net operating loss carryforwards (“NOLs”) totaling approximately $217.8 million and $135.1 million, respectively. The U.S. federal and state NOLs are projected to expire beginning in 2034 and 2022, respectively, unless previously utilized. NOLs generated after January 1, 2018 may be carried forward indefinitely, subject to an 80% taxable income limitation on the utilization of the carryforwards. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” (generally defined as a cumulative change (by value) of more than 50% in the equity ownership of certain stockholders over a rolling three-year period) is subject to limitations on its ability to utilize its pre-change NOLs to offset post-change taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes, and our ability to utilize NOLs could be further limited by Section 382 of the Code. In addition, future changes in our stock ownership, some of which may be outside of our control, could result in an ownership change under Section 382 of the Code. The amount of such limitations, if any, has not been determined. There is also a risk that due to other future regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs, even if we attain profitability. Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. 38 Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between expected and actual experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. More information on these critical accounting policies and our significant accounting policies can be found in Note 2 to our audited consolidated financial statements included in Part II, Item 8 (Financial Statements and Supplementary Data) of this Annual Report on Form 10-K . Accounting for Business Combinations As part of the purchase accounting for acquisitions, we estimate the fair values of the assets acquired and liabilities assumed. A fair value measurement is determined as the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. In the context of purchase accounting, the determination of fair value often involves significant judgments and estimates by management, including the selection of valuation methodologies, estimates of future revenues, costs and cash flows, discount rates, and selection of comparable companies. The fair values reflected in the purchase accounting rely on management’s judgment and the expertise of a third-party valuation firm engaged to assist in concluding on the fair value measurements. Impairment of Goodwill and Long-Lived Assets Goodwill is not amortized but instead is tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that goodwill might be impaired. Our annual impairment test is performed during the second quarter. In assessing goodwill impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of a reporting unit is less than its carrying amount. Our qualitative assessment of the recoverability of goodwill considers various macro-economic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of our financial performance; or (iv) a sustained decrease in our market capitalization below its net book value. If, after assessing the totality of events or circumstances, we determine it is unlikely that the fair value of a reporting unit is less than its carrying amount, then a quantitative analysis is unnecessary. However, if we conclude otherwise, or if we elect to bypass the qualitative analysis, then we are required to perform a quantitative analysis that compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, a goodwill impairment loss is recognized for the lesser of: (a) the amount that the carrying amount of a reporting unit exceeds its fair value; or (b) the amount of the goodwill allocated to that reporting unit. We review long-lived assets to be held and used, other than goodwill, for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If an evaluation of recoverability is required, the estimated undiscounted future cash flows directly associated with the asset are compared with the asset’s carrying amount. If the estimated future cash flows from the use of the asset are less than the carrying value, an impairment charge would be recorded to write down the asset to its estimated fair value. Stock-Based Compensation Expense We record stock-based compensation expense associated with restricted stock, restricted stock units and stock options granted under our stock incentive plans, and purchase rights granted under our Employee Stock Purchase Plan (“ESPP”). We have granted stock options with time-based vesting conditions, as well as performance-based stock options, the vesting of which is conditioned upon the achievement of specified target stock prices for our common stock (“Performance Options”). All Performance Options become exercisable in three equal tranches based on the achievement of specific market price targets for our common stock. For each tranche to become exercisable, the closing price per share of our common stock must meet or exceed the applicable stock price target for a period of 30 consecutive trading days. All stock options have terms of ten years following the grant date, subject to earlier termination in the case of cessation of the awardee’s continued service with us. 39 S tock-based compensation expense is estimated at the grant date based on the fair value of the award. Prior to our initial public offering (“ IPO ”) in May 2017 , the fair values of restricted stock awards were estimated at the date of grant by using both the option-pricing method and the probability-weighted expected return method. All restricted stock awards granted prior to our IPO were fully vested as of the fourth quarter of 2020. Following our IPO, the fair values of restricted stock and restricted stock unit awards are based on the closing market price of our common stock on the date of grant. We estimate the fair values of stock options having time-based vesting conditions, as well as purchase rights under our ESPP, using the Black-Scholes-Merton option pricing model. We estimate the fair values of Performance Options utilizing a Monte Carlo simulation model to estimate when the stock price targets will be achieved and the Black-Scholes-Merton option pricing model. A fair value is estimated for each tranche of such Performance Options that is tied to a particular stock price target. Determining the appropriate fair values of stock options and ESPP purchase rights at the grant date requires significant judgment, including estimating the volatility of our common stock, the expected term of awards, and the derived service periods for each tranche of Performance Options. In determining fair values, we estimate volatility based on the historical volatility of our common stock along with the volatility of the peer group. In calculating estimated volatility, as the number of years of trading history for our common stock has increased, the volatility of our common stock has been given a weighting ranging from 25% to 50%, and the volatility of the peer group companies has been given a weighting ranging from 75% to 50%, with each peer company weighted equally. We will continue utilizing this combination and will periodically adjust the weightings as additional historical volatility data for our own shares of common stock becomes available. The expected term for stock options other than Performance Options represents the period of time that stock options are expected to be outstanding and is determined using the simplified method. Under the simplified method, the expected term is calculated as the midpoint between the weighted average vesting date and the contractual term of the options. The expected term for Performance Options considers the remaining term of the option after the attainment date and the ratio of the stock price at the attainment date to the option exercise price. The risk-free rate is based on the implied yield of U.S. Treasury notes as of the grant date with a remaining term approximately equal to the expected term of the award. The fair value of stock-based awards (other than Performance Options) is amortized using the straight-line attribution method over the requisite service period of the award, which is generally the vesting period. For Performance Options, expense is recognized over a graded-vesting attribution basis over the period from the grant date to the estimated attainment date, which is the derived service period of each tranche of the award. We engaged a third-party valuation specialist to assist us in determining the fair values and derived service periods of Performance Options awarded, and to assist us in determining the fair values and new derived service periods of Performance Options in connection with a modification that occurred in August 2020 as a result of certain amendments to the Performance Options outstanding at that time. The valuation specialist used a Monte Carlo simulation model which incorporated three key assumptions: dividend yield, risk-free interest rate; and estimated volatility. The estimated volatility required the most judgment of those three assumptions, and it was based on the historical volatility of our common stock along with the historical volatility of the peer group. The estimated volatility used in valuing Performance Options granted in 2020 and 2019 was 85% and 65%, respectively, and the estimated volatility used in valuing the modified Performance Options in 2020 was 80%. We recognize actual forfeitures as they occur and do not estimate forfeitures in determining our stock-based compensation expense. If Performance Options are modified, the fair values and the new derived service periods of the modified awards as of the date of modification and the fair values of the original awards immediately before the modification are determined. The amount of incremental compensation expense resulting from the modification of each award is equal to the excess of the fair value of the modified award on the date of modification over the fair value of the original award immediately before the modification. The incremental compensation expense is recognized over the new derived service period of the modified award. Accounting for Income Taxes We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are established for temporary differences between the financial statement carrying amounts and the tax bases of our assets and liabilities using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. 40 We assess the likelihood that the deferred tax assets will be recovered from future taxable income and, if recovery is not more likely than not, we establish a valuation allowance to reduce the deferred tax assets to the amounts expected to be realized. Realization of the deferred tax assets is dependent on us generating sufficient taxable income in future years to obtain a benefit from the reversal of temporary differences and from net operating losses. Due to uncertainties related to the ability to utilize certain historical U.S. federal and state deferred tax assets in future periods, we have recorded a valuation allowance against these net deferred tax assets in the amount of $ 81 . 8 million, as of December 31, 2021. These assets consist primarily of net operating loss and tax credit carryovers and non-deductible stock-based compensation. No valuation allowance is recorded against the acquired PandoLogic deferred tax assets as we have determined it is more likely than not they will be utilized. In connection with the acquisition of PandoLogic, 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, $25,141 of which is not deductible for tax purposes. No valuation allowance is recorded on the acquired PandoLogic deferred tax assets attributable to US based entities that are presented separately from net deferred tax liabilities associated with our Israeli subsidiary. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and our valuation allowance. In assessing the need for a valuation allowance, management has considered both the positive and negative evidence available, including but not limited to, our prior history of net losses, projected future outcomes, industry and market trends and the nature of existing deferred tax assets. In management’s judgment, any positive indicators are outweighed by the uncertainties surrounding our estimates and judgments of potential future taxable income, due primarily to uncertainties surrounding the timing of realization of future taxable income. In the event that actual results differ from these estimates or we adjust these estimates should we believe we would be able to realize these deferred tax assets in the future, an adjustment to the valuation allowance would increase income in the period such determination was made. Results of Operations The following tables set forth our results of operations for the years ended December 31, 2021 and 2020, in dollars and as a percentage of our revenue for those periods. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future. (dollars in thousands) Year Ended December 31, 2021 2020 Revenue $ 115,305 $ 57,708 Operating expenses: Cost of revenue 22,129 15,663 Sales and marketing 28,935 19,877 Research and development 25,075 14,379 General and administrative 97,918 50,080 Amortization 8,497 5,382 Total operating expenses 182,554 105,381 Loss from operations (67,249 ) (47,673 ) Other expense, net (600 ) (127 ) Loss before provision for income taxes (67,849 ) (47,800 ) Provision for income taxes 2,744 76 Net loss $ (70,593 ) $ (47,876 ) 41 Year Ended December 31, 2021 2020 Revenue 100.0 % 100.0 % Operating expenses: Cost of revenue 19.2 27.1 Sales and marketing 25.1 34.4 Research and development 21.7 24.9 General and administrative 84.9 86.8 Amortization 7.4 9.3 Total operating expenses 158.3 182.5 Loss from operations (58.3 ) (82.5 ) Other expense, net (0.5 ) (0.2 ) Loss before provision for income taxes (58.8 ) (82.7 ) Provision for income taxes 2.4 0.1 Net loss (61.2 ) (82.8 ) Year Ended December 31, 2021 Compared With Year Ended December 31, 2020 Revenue Revenue for the periods presented were comprised of the following: Year Ended Year Ended (dollars in thousands) December 31, 2021 December 31, 2020 Commercial Government & Commercial Government & Enterprise Regulated Total Enterprise Regulated Total Software Products & Services (1) $ 55,484 $ 4,031 $ 59,515 $ 10,712 $ 3,151 $ 13,863 Managed Services 55,790 - 55,790 43,845 - 43,845 Revenue $ 111,274 $ 4,031 $ 115,305 $ 54,557 $ 3,151 $ 57,708 ( 1 ) Software Products & Services consists of aiWARE SaaS Solutions revenues of $21.2 million and $13.9 million for the years ended December 31, 2021 and December 31, 2020, respectively, as well as PandoLogic revenues of $38.3 million for the year ended December 31, 2021 Commercial Enterprise CE Software Products & Services revenue increased $44.8 million, or 419%, in the year ended December 31, 2021compared to the corresponding prior year period due primarily due to the acquisition of PandoLogic in September 2021 coupled with expanded services to existing customers in media and entertainment. CE Managed Services increased $11.9 million, or 27%, in the year ended December 31, 2021 compared to the corresponding prior year period due to growth in new and existing advertising customers and increases in content licensing revenues in part due to resumption of sporting events in the first quarter of 2021 following the cancellation or postponement of substantially all major sporting events in March 2020 due to the COVID-19 pandemic. Government & Regulated Industries GRI Software Products & Services revenue increased $0.9 million or 28% in the year ended December 31, 2021 compared to the corresponding prior year period primarily due to growth in the government division, offset by timing of early stage energy deliverables. GRI Software Products & Services revenue from customers in certain markets, particularly government and energy customers, is often project-based and is impacted by the timing of projects. As such, we expect that our revenue from these markets could fluctuate significantly from period to period. 42 Non-GAAP Gross Profit As noted above, our non-GAAP gross profit is calculated as our revenue less our cost of revenue, as follows: Year Ended (dollars in thousands) December 31, 2020 2021 2020 $ Change % Change Revenue $ 115,305 $ 57,708 $ 57,597 99.8 % Cost of revenue 22,129 15,663 6,466 41.3 % Non-GAAP gross profit 93,176 42,045 51,131 121.6 % Non-GAAP gross margin 80.8 % 72.9 % The increase in non-GAAP gross profit and non-GAAP gross margin in 2021 compared to 2020 was due primarily to growth in Software Products & Services revenue, including the September 2021 acquisition of PandoLogic, which collectively generated incremental non-GAAP gross margins in excess of 80% during the three months ended December 31, 2021. Operating Expenses Year Ended (dollars in thousands) December 31, 2021 2020 $ Change % Change Cost of revenue $ 22,129 $ 15,663 $ 6,466 41.3 % Sales and marketing 28,935 19,877 9,058 45.6 % Research and development 25,075 14,379 10,696 74.4 % General and administrative 97,918 50,080 47,838 95.5 % Amortization 8,497 5,382 3,115 57.9 % Total operating expenses $ 182,554 $ 105,381 $ 77,173 73.2 % Cost of Revenue. The increase in cost of revenue in 2021 compared to 2020 was primarily due to our higher revenue level, as discussed above. Cost of revenue increased at a lower rate than the increase in revenues due to the introduction of new products with higher non-GAAP gross margin contribution in 2021, including the addition of PandoLogic. Sales and Marketing . The increase in sales and marketing expenses of $9.1 million or 46% in 2021 compared with 2020 was primarily due to the acquisition of PandoLogic, coupled with a $2.1 million increase in personnel-related costs from the addition of new sales and marketing resources and a $0.8 million increase in non-cash stock-based compensation expense. As a percentage of revenue, sales and marketing expenses decreased to 25% in 2021 from 34% in 2020. Research and Development . The increase in research and development expenses of $10.7 million or 74% in 2021 compared with 2020 was primarily due to an increase of $3.6 million in personnel-related costs from the addition of new engineering resources, the September 2021 acquisition of PandoLogic, and a $2.1 million increase in non-cash stock-based compensation attributable primarily to equity awards for new engineering resources and additional expense related to the accelerated vesting of certain Performance Options in the first quarter of fiscal year 2021. As a percentage of revenue, research and development expenses declined to 22% in 2021 from 25% in 2020. General and Administrative. General and administrative expenses increased $47.8 million or 96% in 2021 compared to 2020 principally due to $41.8 million increases in non-recurring and non-cash expenses of (i) $18.3 million change in the fair value of contingent consideration associated with the PandoLogic transaction, (ii) $17.4 million in non-cash stock-based compensation expense, attributable primarily to additional expense related to the accelerated vesting of Performance Options in the first quarter of fiscal year 2021, (iii) $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 (iv) $2.7 million in transaction costs primarily related to the acquisition of PandoLogic. In addition, general and administrative expenses increased $5.3 million associated with higher personnel-related costs and the addition of PandoLogic in the third quarter of fiscal year 2021. As a percentage of revenue, general and administrative expenses declined to 85% in 2021 from 87% in 2020. 43 Amortization. Amortization expense increased in 2021 compared with 2020 due to certain intangible assets that were acquired in 2017 being fully amortized during 2020, offset by the addition of PandoLogic amortization expense in the third quarter of fiscal year 2021. Other Expense, Net O ther expense, net for 2021 was comprised primarily of interest expense of $0.5 million. In 2020, other expense, net was comprised primarily of warrant expense of $0.2 million, offset in part by interest income . Liquidity and Capital Resources We have historically financed our business through the sale of equity and debt securities. Our principal sources of liquidity are our cash and cash equivalents, which totaled $254.7 million as of December 31, 2021, compared with total cash and cash equivalents of $114.8 million as of December 31, 2020. The increase in our cash and cash equivalents in 2021 was primarily due to the issuance of the Convertible Notes in November 2021. The Convertible Notes, issued at par value, provided $201.3 million in gross proceeds, $18.6 million of which were used to fund the capped call transactions related to the Convertible Notes and $6.3 million of which were used to pay debt issuance costs for the Convertible Notes. Our largest use of cash in 2021 was $52.8 million paid in connection with the acquisition of PandoLogic. We also generated cash through proceeds from issuances of stock under employee stock plans of $7.9 million and proceeds from the exercise of warrants of $2.3 million. Cash Flows A summary of our operating, investing and financing activities is shown in the following table: Year Ended (in thousands) December 31, 2021 2020 Cash provided by operating activities $ 7,234 $ 1,433 Cash used in investing activities (53,843 ) (119 ) Cash provided by financing activities 186,514 69,438 Net increase in cash, cash equivalents and restricted cash $ 139,905 $ 70,752 Cash Provided By Operating Activities Our operating activities provided cash of $7.2 million in 2021, primarily due to a net increase of $31.0 million in cash received from advertising customers for future payments to vendors, offset by the effect of our net loss of $70.6 million, adjusted by $70.7 million in non-cash expenses, including $40.1 million in stock-based compensation expense and $18.3 million in change in the fair value of contingent consideration. 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 income (loss) measure, as presented under the heading “Non-GAAP Financial Measures” above. Our provision or usage of cash as measured by Non-GAAP net income (loss) increased to a provision of $6.8 million in 2021 from a use of $20.6 million in 2020, due primarily to an increase in non-GAAP expenses. Our operating activities provided cash of $1.4 million in 2020, primarily due to a net increase of $25.0 million in cash received from advertising customers for future payments to vendors, offset in part by the effect of our net loss of $47.9 million, adjusted by $26.3 million in non-cash expenses, including $19.5 million in stock-based compensation expense. Cash Used in Investing Activities In 2021, our investing activities used cash of $53.8 million, primarily to fund a portion of the consideration for the acquisition of PandoLogic. 44 In 2020, our investing activities used $0.2 million in cash for capital expenditures, which was offset in part by minimal amounts received from the sale of equipment. Cash Provided by Financing Activities Our financing activities provided cash of $186.5 million in 2021. Net cash provided by financing activities consisted of $201.3 million in gross proceeds from the sale of the Convertible Notes, $7.9 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, partially offset by a use of $18.6 million to fund the capped call transactions related to the Convertible Notes and a use of $6.3 million in debt issuance costs for the Convertible Notes. Our financing activities provided cash of $69.4 million in 2020. Net cash provided by financing activities consisted of $66.3 million in net proceeds received from our sales of common stock, $2.1 million in proceeds received from the exercise of stock warrants and $1.1 million received from the exercise of stock options and purchases of shares under our ESPP. Proceeds received from loans that we received under the Paycheck Protection Program in April 2020 were repaid in full in May 2020. Capital Resources As of December 31, 2021, our only debt obligations were the Convertible Notes issued in the fourth quarter of fiscal year 2021. We have no present agreements or commitments with respect to any material acquisitions of businesses or technologies or any other material capital expenditures. We have generated significant losses since inception; however, we do expect to begin generating profits in the foreseeable future. With the acquisition of PandoLogic, we believe we have an opportunity to significantly improve our operating income/(loss) in 2022 as compared to 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. We have not entered into any off-balance sheet arrangements. Item 7A. Quantitative and Qualitati ve 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. 45 Item 8. Financial Statement s and Supplementary Data INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) 47 Consolidated Balance Sheets 48 Consolidated Statements of Operations and Comprehensive Loss 49 Consolidated Statements of Stockholders’ Equity (Deficit) 50 Consolidated Statements of Cash Flows 51 Notes to Consolidated Financial Statements 52 46 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Veritone, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Veritone, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit) , and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2018. Newport Beach, California March 17, 2022 47 VERITONE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share and share data) As of December 31, December 31, 2021 2020 ASSETS Cash and cash equivalents $ 254,722 $ 114,817 Accounts receivable, net 85,063 16,666 Expenditures billable to clients 27,180 18,365 Prepaid expenses and other current assets 12,117 6,719 Total current assets 379,082 156,567 Property, equipment and improvements, net 1,556 2,354 Intangible assets, net 88,247 10,744 Goodwill 34,058 6,904 Long-term restricted cash 855 855 Other assets 954 230 Total assets $ 504,752 $ 177,654 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 46,711 $ 15,632 Accrued media payments 86,923 55,874 Client advances 10,561 6,496 Contingent consideration, current 19,988 - Other accrued liabilities 27,093 10,246 Total current liabilities 191,276 88,248 Convertible senior notes, non-current 195,082 - Contingent consideration, non-current 24,737 - Other non-current liabilities 13,078 1,196 Total liabilities 424,173 89,444 Commitments and contingencies (Note 9) Stockholders' equity Common stock, par value $ 0.001 per share; 75,000,000 shares authorized; 34,972,256 and 31,799,354 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively 35 32 Additional paid-in capital 431,606 368,477 Accumulated deficit ( 350,958 ) ( 280,365 ) Accumulated other comprehensive (loss) income ( 104 ) 66 Total stockholders' equity 80,579 88,210 Total liabilities and stockholders' equity $ 504,752 $ 177,654 The accompanying notes are an integral part of these consolidated financial statements. 48 VERITONE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except per share and share data) Year Ended December 31, 2021 2020 Revenue $ 115,305 $ 57,708 Operating expenses: Cost of revenue 22,129 15,663 Sales and marketing 28,935 19,877 Research and development 25,075 14,379 General and administrative 97,918 50,080 Amortization 8,497 5,382 Total operating expenses 182,554 105,381 Loss from operations ( 67,249 ) ( 47,673 ) Other expense, net ( 600 ) ( 127 ) Loss before provision for income taxes ( 67,849 ) ( 47,800 ) Provision for income taxes 2,744 76 Net loss $ ( 70,593 ) $ ( 47,876 ) Net loss per share: Basic and diluted $ ( 2.12 ) $ ( 1.73 ) Weighted average shares outstanding: Basic and diluted 33,298,382 27,594,911 Comprehensive loss: Net loss ( 70,593 ) ( 47,876 ) Foreign currency translation gain (loss), net of income taxes ( 170 ) 20 Total comprehensive loss $ ( 70,763 ) $ ( 47,856 ) The accompanying notes are an integral part of these consolidated financial statements. 49 VERITONE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands, except share data) Accumulated Additional Other Common Stock Paid-in Accumulated Comprehensive Shares Amount Capital Deficit Income (Loss) Total Balance as of December 31, 2019 25,670,737 $ 26 $ 279,828 $ ( 232,489 ) $ 46 $ 47,411 Common stock offerings, net 4,941,317 5 65,752 — — 65,757 Common stock issued under employee stock plans, net 482,417 1 1,059 — — 1,060 Common stock issued for services 12,100 — 95 — — 95 Release of Machine Box holdback consideration 105,898 — - — — — Stock-based compensation expense — — 19,481 — — 19,481 Exercise of warrants 596,437 — 2,100 — — 2,100 Issuance of warrants — — 308 — — 308 Common stock returned from acquisition escrow ( 9,552 ) — ( 146 ) — — ( 146 ) Net loss — — — ( 47,876 ) — ( 47,876 ) Other comprehensive income — — — — 20 20 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 1,176,984 1 7,902 — — 7,903 Common stock issued for acquisition 1,704,822 2 31,499 — — 31,501 Common stock issued for services 15,828 — 369 — — 369 Stock-based compensation expense — — 39,696 — — 39,696 Exercise of warrants 275,268 — 2,279 — — 2,279 Purchases of capped calls related to convertible notes — — ( 18,616 ) — — ( 18,616 ) Net loss — — — ( 70,593 ) — ( 70,593 ) Other comprehensive loss — — — — ( 170 ) ( 170 ) Balance as of December 31, 2021 34,972,256 $ 35 $ 431,606 $ ( 350,958 ) $ ( 104 ) $ 80,579 The accompanying notes are an integral part of these consolidated financial statements. 50 VERITONE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 70,593 ) $ ( 47,876 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 9,035 6,407 Loss on disposal of fixed assets 1,894 — Warrant expense — 102 Change in fair value of warrant liability — 200 Change in fair value of contingent consideration 18,325 — Provision for doubtful accounts 172 293 Loss on sublease 1,211 — Stock-based compensation expense 40,065 19,539 Common stock returned from acquisition escrow — ( 146 ) Other — ( 46 ) Changes in assets and liabilities: Accounts receivable ( 47,225 ) 4,393 Expenditures billable to clients ( 8,815 ) ( 8,079 ) Prepaid expenses and other current assets 3,368 ( 1,726 ) Other assets ( 241 ) — Accounts payable 17,896 ( 1,382 ) Accrued media payments 31,049 29,210 Client advances 4,065 ( 2,584 ) Other accrued liabilities 8,184 3,311 Other liabilities ( 1,156 ) ( 183 ) Net cash provided by operating activities 7,234 1,433 Cash flows from investing activities: Proceeds from the sale of equipment — 56 Capital expenditures ( 1,016 ) ( 175 ) Acquisitions, net of cash acquired ( 52,827 ) — Net cash used in investing activities ( 53,843 ) ( 119 ) Cash flows from financing activities: Proceeds from common stock offerings, net — 66,278 Proceeds from loan — 6,491 Repayment of loan — ( 6,491 ) Proceeds from issuance of convertible senior notes 201,250 — Payment of debt issuance costs ( 6,304 ) — Purchases of capped calls related to convertible senior notes ( 18,616 ) — Proceeds from the exercise of warrants 2,279 2,100 Proceeds from issuances of stock under employee stock plans, net 7,905 1,060 Net cash provided by financing activities 186,514 69,438 Net increase in cash and cash equivalents and restricted cash 139,905 70,752 Cash and cash equivalents and restricted cash, beginning of period 115,672 44,920 Cash and cash equivalents and restricted cash, end of period $ 255,577 $ 115,672 Supplemental Disclosure of Cash Flow Information Cash paid during periods for: Taxes paid $ 129 $ 69 Non-cash investing and financing activities: Shares issued for acquisition of businesses and holdback consideration $ 31,499 $ — The accompanying notes are an integral part of these consolidated financial statements. 51 VERITONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data and percentages) NOTE 1. 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 aiWARE 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. 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 Network, which is comprised of programs that enable broadcasters, podcasters and social media influencers to generate incremental advertising revenue. The Company also offers cloud-native digital content management solutions and 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. On September 14, 2021, the Company acquired PandoLogic Ltd. (“PandoLogic”), a company incorporated under the laws of the state of Israel, and a leading provider of intelligent hiring solutions, as discussed in more detail in Note 3. PandoLogic’s software platform, PandoIQ, is an AI-enabled talent acquisition and recruitment platform . NOTE 2. PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”). The consolidated financial statements include the accounts of Veritone, Inc. and all of its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Reclassifications Certain reclassifications to other assets have been made to prior year amounts for consistency and comparability with the current year’s financial statement presentation. These reclassifications had no effect on the reported total assets and liabilities. Liquidity and Capital Resources During 2021 and 2020, the Company generated cash flows from operations of $ 7,234 and $ 1,433 , respectively, and incurred net losses of $ 70,593 and $ 47,876 , respectively. Also, the Company had an accumulated deficit of $ 350,958 as of December 31, 2021. Historically, the Company has satisfied its capital needs with the net proceeds from its sales of equity securities, its issuance of convertible debt, and the exercise of common stock warrants. In 2021, the Company completed an offering of its convertible senior notes for aggregate net proceeds of $ 194,946 including $ 6,304 in debt issuance costs, used $ 18,616 of those net proceeds to purchase the capped call transactions related to the convertible senior notes, received net proceeds of $ 7,905 from the issuance of common stock under the Company’s employee stock plans and $ 2,279 from the exercise of common stock warrants. In 2020, the Company completed an offering of its common stock for aggregate net proceeds of $ 59,771 and raised net proceeds of $ 5,986 through sales of its common stock under an Equity Distribution Agreement dated June 1, 2018 (the “Equity Distribution Agreement”). 52 In 2022, driven by 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 $ 254,722 as of December 31, 2021, will be sufficient to meet its anticipated cash requirements for the foreseeable future. Use of Accounting Estimates The preparation of the accompanying 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 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 Annual Report on Form 10-K. 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. Business Combinations The results of a business acquired in a business combination are included in the Company’s consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business generally being recorded at their estimated fair values as of the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill. Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss. The Company performs valuations of assets acquired and liabilities assumed and allocates the purchase price to its respective assets and liabilities. Determining the fair value of assets acquired and liabilities assumed may require management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenues, costs and cash flows, discount rates, and selection of comparable companies. The Company engages the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination. Cash Equivalents All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Accounts Receivable and Expenditures Billable to Clients Accounts receivable consist primarily of amounts due from the Company’s clients and customers under normal trade terms. Allowances for uncollectible accounts are recorded based upon a number of factors that are reviewed by the Company on an ongoing basis, including historical amounts that have been written off, an evaluation of current economic conditions, and an assessment of customer creditworthiness. Judgment is required in assessing the ultimate realization of accounts receivable. The amounts due from clients based on costs incurred or fees earned that have not yet been billed to advertising clients are reflected as expenditures billable to clients in the accompanying consolidated balance sheets. Fair Value of 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, which is based on three levels of inputs, the first two of which are considered observable and the last unobservable, that may be used to measure fair value, is as follows: • Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities; 53 • 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. The Company classifies its cash equivalents within Level 1 of the fair value hierarchy on the basis of valuations based on quoted prices for the specific securities in an active market. The Company’s stock warrants are categorized as Level 3 within the fair value hierarchy. Stock warrants are recorded within other accrued liabilities and equity in the Company’s consolidated balance sheets as of December 31, 2021 and 2020. The warrants have been recorded at their fair values using a probability weighted expected return model or Black-Scholes-Merton option pricing model. These models incorporate contractual terms and assumptions regarding expected term, risk-free 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 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. The Company’s contingent consideration is categorized as Level 3 within the fair value hierarchy. Contingent consideration is recorded within contingent consideration, current and contingent consideration, non-current in the Company’s consolidated balance sheets as of December 31, 2021. The contingent consideration has been recorded at its fair values using a Monte Carlo simulation option pricing framework. These models incorporate contractual terms and assumptions regarding financial forecasts for PandoLogic, discount rates, and volatility of forecasted revenue. The value of the Company’s contingent consideration would increase if a lower discount rate was used and would increase if a higher discount rate was used. Similarly, a higher revenue volatility assumption would increase the value of the contingent consideration, and a lower revenue volatility assumption would decrease the value of the contingent consideration. 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. The Company’s senior convertible notes are categorized as Level 2 within the fair value hierarchy based on quoted prices in markets that are not active, given that few of the senior convertible notes have been traded since issuance in November 2022. The Company has determined that the carrying value of the senior convertible notes approximates fair value as of December 31, 2021 due to the issuance at fair value occurring in close proximity to the period measured. The Company’s other financial instruments consist primarily of cash, accounts receivable and accounts payable. The Company has determined that the carrying values of these financial instruments approximate fair value for the periods presented due to their short-term nature and the relatively stable current interest rate environment. Long-Term Restricted Cash Long-term restricted cash consists primarily of collateral required as security for the Company’s corporate credit cards. Property, Equipment and Improvements Property, equipment and improvements are stated at cost. Repairs and maintenance to these assets are charged to expense as incurred. Major improvements enhancing the function and/or useful life of the related assets are capitalized. Depreciation and amortization are computed using the straight-line method over the estimated useful lives (or lease term, if shorter) of the related assets. At the time of retirement or disposition of these assets, the cost and accumulated depreciation or amortization are removed from the accounts and any related gains or losses are recorded in the Company’s statement of operations and comprehensive loss. The useful lives of property, equipment and improvements are as follows: • Property and equipment — 3 years • Leasehold improvements — 5 years or the remaining lease term, whichever is shorter The Company assesses the recoverability of property, equipment and improvements whenever events or changes in circumstances indicate that their carrying value may not be recoverable. No property, equipment and improvements were impaired in the periods presented. 54 Goodwill and Intangible Assets Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method. Intangible assets include acquired developed technology, licensed technology, customer relationships, noncompete covenants, and trademarks and tradenames. Intangible assets are amortized on a straight-line basis over the applicable amortization period as set forth below. The amortization periods for intangible assets are as follows: • Developed technology — 4 to 5 years • Customer relationships — 5 to 7 years • Noncompete agreements — 3 to 4 years • Trademarks and trade names —2 to 5 years • Licensed technology — lesser of the term of the agreement, or the estimated useful life Intangible asset amortization expense is recorded in amortization on the consolidated statements of operations and comprehensive loss. Impairment of Goodwill and Long-Lived Assets Goodwill is not amortized but instead is tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that goodwill might be impaired. The Company’s annual impairment test is performed during the second quarter. In assessing goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of a reporting unit is less than its carrying amount. The Company’s qualitative assessment of the recoverability of goodwill considers various macro-economic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization below its net book value. If, after assessing the totality of events or circumstances, the Company determines it is unlikely that the fair value of such reporting unit is less than its carrying amount, then a quantitative analysis is unnecessary. However, if the Company concludes otherwise, or if it elects to bypass the qualitative analysis, then it is required to perform a quantitative analysis that compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, a goodwill impairment loss is recognized for the lesser of: (a) the amount that the carrying amount of a reporting unit exceeds its fair value; or (b) the amount of the goodwill allocated to that reporting unit. The Company reviews long-lived assets to be held and used, other than goodwill, for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If an evaluation of recoverability is required, the estimated undiscounted future cash flows directly associated with the asset are compared with the asset’s carrying amount. If the estimated future cash flows from the use of the asset are less than the carrying value, an impairment charge would be recorded to write down the asset to its estimated fair value. No impairment of goodwill or long-lived assets was recorded for the years ended December 31, 2021 and 2020. Revenue Recognition The Company recognizes revenue under its contracts with customers in accordance with ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”). The Company derives its revenues primarily from two sources: (1) Software Products & Services, which are comprised primarily of subscription and related fees from customers for access to and use of the Company’s platforms and associated services delivered as software-as-a-service (“SaaS”) and (2) Managed Services, which are composed of content licensing revenues made up primarily of fees from customers for licenses to third-party content owners’ digital assets and advertising revenues. The Company recognizes revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company follows a five-step process to determine revenue recognition, as follows: • Identifies the contract(s) with a customer; • Identifies the performance obligations in the contract; • Determines the transaction price; 55 • Allocates the transaction price to the performance obligations in the contract; and • Recognizes revenue when (or as) performance obligations are satisfied. The Company enters into contracts with customers that may include promises to transfer multiple services. The Company evaluates these services to determine whether they represent distinct, separately identifiable performance obligations that should be accounted for separately or as a single performance obligation. For contracts containing multiple performance obligations, to meet the allocation objective of Topic 606, the Company allocates the transaction price to each performance obligation on a relative standalone selling price (“SSP”) basis. The SSP is the price at which the Company would sell a promised service separately to a customer. For certain arrangements, the determinations regarding whether a contract contains multiple performance obligations and, if so, the SSP of each performance obligation, may require judgment by management. Software Products & Services Revenues aiWARE Revenues The Company has agreements with its customers under which it provides customers with access to and use the Company’s aiWARE and digital content management platforms. Under most agreements, the Company provides access to the platform, specified applications and associated data ingestion, hosting and/or processing services, and standard user support. Fees for these services typically take the form of a fixed monthly subscription fee, with certain contracts specifying usage-based fees for data processing services in excess of the data processing services included as part of such subscription services. Fees for excess usage-based data processing services are accounted for as variable consideration. In certain cases, the fixed monthly subscription fee may adjust during each monthly period of the contract based on changes in the monthly volume of services, at the rates established in the contract. These contracts typically have terms ranging from one to three years, with renewal options, and do not contain refund-type provisions. All significant services provided as part of these subscription arrangements are highly interdependent and constitute a single performance obligation comprised of a series of distinct services transferred to the customer in a similar manner throughout the contract term (collectively, the “subscription services”). The fixed subscription fees are recognized as revenue over the contract term using the output method of passage of time, as this best depicts the pattern of control transfer. If a portion of the term of a contract is cancellable, the Company determines the transaction price for, and recognizes revenue ratably over, the non-cancellable portion of the term of the contract. In certain SaaS arrangements with broadcasters, the fees for subscription services are paid by broadcasters with advertising inventory that is provided to and monetized by the Company. The Company recognizes revenue for these arrangements based on the estimated fair value of the advertising inventory. The Company also makes data processing, storage and transfer services available to customers through its aiWARE and digital content management platforms under usage-based arrangements with no minimum fees, either separately or in addition to subscription services as described above. Fees are charged for actual usage of such services at the rates specified in the contract for each particular service. Each of these distinct services represents an individual performance obligation. When sold in connection with subscription services, the Company considers the allocation guidance of Topic 606. Variable consideration for usage-based data processing, storage and transfer services is recognized in the month in which it is earned, as the payment terms relate to a specific outcome (amount of data processed, stored or transferred) of delivering the distinct time increment (the month) of services, and represents the fees to which the Company expects to be entitled for providing the services, and allocating the variable fees in this way is consistent with the allocation objective of Topic 606. The Company also enters into software license agreements with customers under which the Company provides software representing an on-premises deployment of its aiWARE platform or components thereof. Under these license agreements, the customer is responsible for the installation and configuration of the software in the customer-controlled environment. The Company recognizes the license fees as revenue under these agreements at the time that the software is made available by the Company for download by the customer. The Company typically invoices its aiWARE SaaS customers for subscription services monthly, for on-premises software at the time the software is made available for download by the customer, and for professional services either monthly or in accordance with an agreed upon invoicing schedule. Invoices are typically due and payable within 30 days following the date of invoice. Amounts that have been invoiced are recorded in revenue or in deferred revenue, depending on whether transfer of control to customers of the promised services has occurred. PandoLogic Revenues 56 The Company generates revenue primarily from platform services where it provides its customers access to intelligent hiring services, including ad placements on job boards. Revenue is derived from AI-enabled services, 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 hiring campaigns at scale, which are typically ordered through monthly purchasing commitments. The Company charges clients a fee based on various performance indicators as outlined in our customer contracts including job advertisements placed, potential job applicants or other outputs of services placed through its platform, which is accounted for as variable consideration. All services provided as part of these arrangements are highly interdependent and constitute a single performance obligation comprised of a series of distinct services transferred to the customer in a similar manner throughout the contract term. Revenue is recognized over time using the input method of cost incurred as platform services are provided during each campaign as this best depicts the transfer of control. The Company determined that it is not a principal in the purchase and sale of job placements in its arrangements, and as a result, reports its revenue on a net basis for solution fees charged to clients. Costs to source applicants are recorded monthly over the period the services are delivered as an offset to revenue. Managed Services Revenues Advertising Revenues The Company’s advertising services consist primarily of placing advertisements for clients with media vendors, including broadcasters, podcasters and digital media providers. Under the most common billing arrangements, the Company bills and collects the gross cost of the advertisement it places, less any discounts negotiated with its client from the media vendor’s standard agency fee. The Company then remits to the media vendor the gross amount less the standard agency fee. The amount billed to the client, less the amount payable to the media vendor, represents the Company’s fees and is recognized as revenue. All significant services performed by the Company under its contracts with advertising clients in conjunction with media placements, including planning and placing media and verifying that advertisements have aired, represent a single performance obligation as such services are highly interrelated. The Company’s fee, which represents the transaction price, is recognized as revenue at a point in time when the advertisement is aired, which is the point at which the Company has an enforceable right to payment of its fees. The Company’s clients may be required to make a deposit or prepay the gross costs of advertisements, including the Company’s fees. Such amounts are reflected as accrued media payments on the Company’s consolidated balance sheets until all revenue recognition criteria have been met. For certain advertising products, we provide advertisers with the opportunity to reach unique ad units and markets. Leveraging our aiWARE platform to programmatically manage clearance, verification and analysis of advertising performance, we create marketable advertising products through the curation of our broadcaster and influencer networks. We receive fees from advertisers or resellers as consideration for combined software and services performed by us. The amount expected to be received from the advertiser or through the reseller represents our fees which are recognized when our services are transferred to the customer. The Company concluded that it is the principal in delivering these products to customers and as a result reports revenue on a gross basis. Licensing Revenues The Company has agreements with third-party owners of digital assets pursuant to which the Company licenses those assets to customers and remits royalties to the content owners. In licensing such third-party digital assets, the Company hosts public and private content libraries on the Company’s platform to enable customers to view and search for digital assets to be licensed, establishes and negotiates with customers the scope and term of, and the prices for, licenses to those digital assets, and makes the licensed digital assets available to the end-customers. The Company is considered the principal under most agreements that have this range of services due to obtaining control prior to transfer of the assets, and the Company records the revenue from the customer gross of royalties due to the content owner. In limited cases, the Company does not obtain control prior to transfer of the assets, and accordingly, the Company records revenues net of royalties due to the content owner. The Company licenses digital assets under (i) individual license agreements, pursuant to which the customer licenses a particular digital asset (or set of digital assets) for a specified license fee, and (ii) bulk license agreements, pursuant to which the customer pays a fixed fee to have access to view and search third-party owners’ content and to license a specified number 57 of minutes of that content in each year over the term of the contracts, which typically range from one to three years, with certain contracts specifying usage-based license fees for additional digital assets that may be licensed by the customer. Under individual license agreements, the Company has a single performance obligation, which is to make the licensed digital assets available to the customer, generally by download. The Company recognizes the license fees charged for the digital assets as revenue when the licensed digital assets are made available to the customer. Under bulk license agreements, the Company’s obligations include hosting the content libraries for access and searching by the customer, updating the libraries with new content provided by the content owner, and making assets selected by the customer available for download, throughout the term of the contract. All of these services are highly interdependent and constitute a single performance obligation comprised of a series of distinct services transferred to the customer in a similar manner throughout the contract term. The predominant item in the single performance obligation is a license providing a right to access the content library throughout the license period. For these arrangements, the Company recognizes the total fixed fees under the contract as revenue ratably over the term of the contract as the performance obligation is satisfied, as this best depicts the pattern of control transfer. If the customer selects digital assets in excess of the amount included in the fixed fees under the contract, the Company constrains the variable consideration until the usage occurs and recognizes such usage-based license fees as the digital assets are made available to the customer, consistent with the usage-based royalty accounting of Topic 606. Gross Versus Net Revenue Recognition The Company reports revenue on a gross or net basis based on management’s assessment of whether the Company acts as a principal or agent in the transaction. To the extent the Company acts as the principal, revenue is reported on a gross basis, net of any sales tax from customers, when applicable. The determination of whether the Company acts as a principal or an agent in a transaction is based on an evaluation of whether the Company controls the good or service prior to transfer to the customer. The Company has determined that it acts as the principal in providing all of its services with the exception of certain content licensing services, advertising services and PandoLogic services, where the Company recognizes its fees on a net basis. Remaining Performance Obligations As of December 31, 2021, the aggregate amount of the transaction prices under the Company’s contracts allocated to the Company’s remaining performance obligations was $ 8,186 , approximately 56 % 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. Cost of Revenue Cost of revenue related to the Company’s advertising business consists of production costs relating to advertising content for advertisements placed for clients, and amounts payable to media vendors under revenue sharing arrangements for ad inventory transferred to and monetized by the Company. Cost of revenue related to the Company’s Software Products & Services consists primarily of fees charged by vendors for cloud infrastructure, computing and storage services and cognitive processing services related to the operation of the Company’s platforms. The Company’s arrangements with cloud infrastructure providers typically require fees that are based on computing time, data storage and transfer volumes, and reserved computing capacity. The Company also pays fees to third-party providers of AI models, which are generally based upon the hours of media processed through their models. Cost of revenue related to the Company’s Managed Services include royalties paid to content owners on revenue generated from the Company’s licensing of their content, and fees charged by vendors that provide products and services in support of the Company’s live event services and obtaining of talent and property clearances. 58 Stock-Based Compensation Stock-based compensation expense is estimated at the grant date based on the fair value of the award. Prior to the Company’s initial public offering (“IPO”), the fair values of restricted stock awards were estimated at the date of grant by using both the option-pricing method and the probability-weighted expected return method. All restricted stock awards granted prior to the Company’s IPO have vested in full as of the fourth quarter of 2020. Following the Company’s IPO, the fair values of restricted stock and restricted stock unit awards granted by the Company are based on the closing market price of the Company’s common stock on the date of grant. The Company estimates the fair values of stock options having time-based vesting conditions, as well as purchase rights under the Company’s Employee Stock Purchase Plan (“ESPP”), using the Black-Scholes-Merton option pricing model. The Company’s performance-based stock options vest if a specified target price for the Company’s common stock is achieved. The Company estimates the fair values of performance-based stock options utilizing a Monte Carlo simulation model, to estimate the date that the specified stock price targets will be achieved (the attainment date), and the Black-Scholes-Merton option pricing model. A fair value is determined for each tranche of such performance-based stock options that is tied to a particular stock price target. Determining the appropriate fair values of stock options and ESPP purchase rights at the grant date requires significant judgment, including estimating the volatility of the Company’s common stock, the expected term of awards, and the derived service periods for each tranche of performance stock options. In determining fair values, the Company estimated volatility based on the historical volatility of its own common stock along with the volatility of the peer group. In calculating estimated volatility, as the number of years of trading history for the Company’s common stock has increased, the volatility of the Company’s common stock has been given a weighting ranging from 25 % to 50 % and the volatility of the peer group companies has been given a weighting ranging from 75 % to 50 %, with each peer company weighted equally. The Company will continue utilizing this combination and will periodically adjust the weightings as additional historical volatility data for its own shares of common stock becomes available. The expected term for stock options other than performance-based stock options represents the period of time that stock options are expected to be outstanding and is determined using the simplified method. Under the simplified method, the expected term is calculated as the midpoint between the weighted average vesting date and the contractual term of the options. The expected term for performance-based stock options considers the remaining term of the option after the attainment date and the ratio of the stock price at the attainment date to the option exercise price. The risk-free rate is based on the implied yield of U.S. Treasury notes as of the grant date with a remaining term approximately equal to the expected term of the award. The assumptions used in the Company’s Black-Scholes-Merton option-pricing and Monte Carlo simulation models represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. The fair value of stock-based awards (other than performance-based stock options) is amortized using the straight-line attribution method over the requisite service period of the award, which is generally the vesting period. For performance-based stock options, expense is recognized over a graded-vesting attribution basis over the period from the grant date to the estimated attainment date, which is the derived service period of each tranche of the award. In recording stock-based compensation expense, the Company accounts for actual forfeitures as they occur and does not estimate forfeitures. If performance options are modified, the fair values and the new derived service periods of the modified awards as of the date of modification and the fair values of the original awards immediately before the modification are determined. The amount of incremental compensation expense resulting from the modification of each award is equal to the excess of the fair value of the modified award on the date of modification over the fair value of the original award immediately before the modification. The incremental compensation expense is recognized over the new derived service period of the modified award. 59 Advertising and Marketing Costs Advertising and marketing costs are expensed as incurred and are primarily included in sales and marketing expenses in the Company’s consolidated statements of operations and comprehensive loss. Advertising and marketing costs include personnel-related costs for sales and marketing resources, online and print advertising, public relations, tradeshows, and sponsorships. For the years ended December 31, 2021 and 2020, the Company recorded expense of $ 2,681 and $ 1,214 , respectively, for advertising and marketing costs. Research and Development Costs and Software Development Costs Research and development costs are expensed as incurred. Costs related to the development of computer software to be sold, leased, or otherwise marketed by the Company in the future are expensed as incurred. The costs of internal-use software that is developed to meet the Company’s needs and will not be marketed externally is subject to capitalization. The company capitalized $ 413 of software development costs in 2021 and $ 72 software development costs were capitalized in 2020. Income Taxes The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are established for temporary differences between the financial statement carrying amounts and the tax bases of the Company’s assets and liabilities using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The Company assesses the likelihood that the deferred tax assets will be recovered from future taxable income and, if recovery is not more likely than not, the Company establishes a valuation allowance to reduce the deferred tax assets to the amounts expected to be realized. Realization of the deferred tax assets is dependent on the Company generating sufficient taxable income in future years to obtain a benefit from the reversal of temporary differences and from net operating losses. The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions. The first step is to determine whether the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. If the first test is met, then the second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. Comprehensive Loss Comprehensive loss consists of net loss and other gains and losses affecting equity that are excluded from net loss. These consist of foreign currency translation adjustments. Segment Information The Company reports segment information based on the internal reporting used by the chief operating decision maker for making decisions and assessing performance as the source of the Company’s reportable segments. As of October 1, 2021, the Company determined that there was a change in the internal reporting for such information reviewed by the chief operating decision maker. As a result, the Company determined that it has one reportable segment. The chief operating decision maker reviews financial information on a consolidated basis, accompanied by more detailed revenue information for Commercial Enterprise and Government & Regulated Industries (see Note 8), but does not evaluate other metrics such as cost of revenue, operating expenses, total assets, net income (loss), capital expenditures, goodwill or other intangible assets financial information on a more disaggregated basis. The Company’s revenues are generated primarily in the United States of America and it therefore does not report additional information on geographic segments. Significant Customers One individual customer accounted for 10 % or more of the Company’s revenue for the year ended December 31, 2021. No individual customers accounted for 10 % or more of the Company’s revenue for the year ended December 31, 2020. Two individual customers accounted for 10 % or more of the Company’s accounts receivable as of December 31, 2021, and two individual customers accounted for 10 % or more of accounts receivable as of December 31, 2020. Concentration of Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with what management believes are quality financial institutions in the United States and performs periodic evaluations of the relative credit standing of these financial institutions in order to limit the amount of credit exposure with any one institution. At times, the value of the United States deposits exceeds federally insured limits. The Company has not experienced any losses in such accounts. 60 Recently Adopted Accounting Pronouncements The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. The Company has elected to use the extended transition period for complying with new or revised accounting standards under Section 107 of the JOBS Act. This election allows the Company to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. In August 2020, the FASB issued ASU No. 2020—06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The Company early adopted the standard as of January 1, 2021 and applied this guidance to the convertible senior notes issued in November 2021. Refer to Note 4 for additional information. Recently Issued Accounting Pronouncements 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 will adopt on January 1, 2022 using the modified retrospective method, with the new guidance applied prospectively as of the date of adoption and prior periods not restated. Upon adoption, the Company expects to recognize operating lease liabilities of $ 4.5 million and operating lease right-of-use assets of $ 1.1 million. 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. In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers , in order to align the recognition of a contract liability with the definition of a performance obligation. 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 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 Ltd ., 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 61 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 $ 122,451 (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, 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”), and a net working capital adjustment of $ 5,818 paid in cash. 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 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 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 employees, and record any changes in earnings when the estimate is based on information not known as of the acquisition date (See Note 6). The Company incurred $ 2,161 in acquisition related expenses and has recorded them in general and administrative expenses in the 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 Net working capital adjustment 5,818 Total $ 122,451 The 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): Purchase price allocation** Amount Cash $ 11,581 Accounts receivable 21,344 Prepaid and other current assets 8,710 Property and equipment 618 Intangible assets 86,000 Other assets 1,653 Total assets acquired 129,906 Accounts payable 13,183 Accrued expenses and other current liabilities 9,443 Deferred tax liability 11,828 Total liabilities assumed 34,454 Identifiable net assets acquired $ 95,452 Goodwill 26,999 Total purchase consideration $ 122,451 **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. 62 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 5 - 7 Developed technology 16,000 4 Trade name 2,000 5 Total intangible assets $ 86,000 Taxes In connection with the acquisition, a net deferred tax liability of $ 11,828 was established primarily for the differences between the fair value of the acquired non-goodwill intangible assets and PandoLogic’s historical tax basis in these assets. No deferred tax asset or liability is recorded on PandoLogic goodwill, $ 25,141 of which is not deductible for tax purposes. In August 2021, PandoLogic obtained the approval for Preferred Technology Enterprise status under which its Israeli tax rate is reduced from the 23 % statutory rate to a 12 % beneficial rate. This arrangement is scheduled to expire in December 2025. The acquired Israel deferred tax assets and liabilities are computed based on the tax rate in the year of their expected reversal. No valuation allowance is recorded against acquired PandoLogic deferred tax assets as it is more likely than not they will be utilized to offset future taxable income. 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 years ended December 31, 2021 and December 31, 2020. 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. The unaudited pro forma financial information was as follows (in thousands): Year Ended Year Ended December 31, December 31, 2021 2020 Net revenue $ 148,129 $ 105,094 Loss before provision for income taxes $ ( 69,474 ) $ ( 33,965 ) Net loss $ ( 73,145 ) $ ( 32,191 ) The Company recognized $ 38,315 in revenue and $ 18,317 of net income related to PandoLogic since the acquisition date of September 14 through December 31, 2021 in the consolidated statement of operations and comprehensive loss. NOTE 4. DEBT Convertible Senior Notes In November, 2021, the Company issued, at par value, $ 201.3 million aggregate principal amount of 1.75 % convertible senior notes due 2026 (the “Convertible Notes”). The issuance included the full exercise of an option granted by the Company to the initial purchasers of the Convertible Notes to purchase an additional $ 26.25 million aggregate principal amount of Convertible Notes. The Convertible Notes were issued pursuant to and are subject to the terms and conditions of an indenture, which is referred to as the Indenture, between the Company and U.S. Bank National Association, as trustee. The Convertible Notes were offered and sold in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. 63 The Convertible Notes are senior, unsecured obligations of the Company and will bear interest at a rate of 1.75 % per year. Interest will accrue from November 19, 2021 and will be payable semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2022. The Convertible Notes will mature on November 15, 2026 , unless earlier converted, redeemed, or repurchased in accordance with the terms of the Convertible Notes . Holders of the Convertible Notes may convert all or any portion of their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding May 15, 2026, only under the following conditions: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2022 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $ 1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the conversion rate for the Convertible Notes on each such trading day; (3) if the Company calls such Convertible Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the applicable redemption date; or (4) upon the occurrence of specified corporate events. On or after May 15, 2026 , holders may convert all or any portion of their Convertible Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date regardless of the foregoing conditions. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of our common stock, at the Company’s election. The conversion rate for the Convertible Notes will initially be 27.2068 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $ 36.76 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or following the Company’s issuance of a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate event or who elects to convert its Convertible Notes called (or deemed called) for redemption during the related redemption period, as the case may be. The Company may not redeem the Convertible Notes prior to November 20, 2024 . The Company may redeem for cash all or any portion of the Convertible Notes (subject to certain limitations), at its option, on or after November 20, 2024 if the last reported sale price of the Company’s common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes. If the Company undergoes a fundamental change prior to the maturity date, subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their Convertible Notes. The fundamental change repurchase price will be equal to 100 % of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Convertible Notes are the Company’s senior unsecured obligations and rank senior in right of payment to all of the Company’s indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment with all existing and future liabilities of the Company that are not so subordinated; effectively junior to any of secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) and any preferred equity of the Company’s current or future subsidiaries. The net proceeds from the issuance of the Convertible Notes were approximately $ 194.9 million, after deducting debt issuance costs. The total debt issuance costs incurred and recorded by the Company amounted to $ 6.3 million, which were recorded as a reduction to the face amount of the Convertible Notes and will be amortized to interest expense using the effective interest method over the contractual term of the Convertible Notes. The Convertible Notes are recorded as a liability within convertible senior notes, non-current. For the year ended December 31, 2021, interest expense related to the Convertible Notes and amortization of the issuance costs was $ 0.5 million. The effective annual interest rate for 2021 was approximately 2.42 %. As of December 31, 2021, the if-converted value of the Convertible Notes did no t exceed the outstanding principal amount. As of December 31, 64 2021, the total principal at issuance of the Convertible Notes of $ 201.3 million approximates fair value due to the issuance at fair value occurring in close proximity to the period measured. Capped Calls In connection with the pricing of the Convertible Notes, with the full exercise by the initial purchasers of their option to purchase additional Convertible Notes in November 2021, the Company used approximately $ 18.6 million of the net proceeds from the issuance of the Convertible Notes to enter into privately negotiated capped call transactions, which are referred to as the capped calls, with various financial institutions. The capped call transactions will cover, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes, the number of shares of the Company’s common stock underlying the Convertible Notes. The capped call transactions are expected generally to reduce the potential dilution to the Company’s common stock upon conversion of the Convertible Notes and/or offset some or all of any cash payments the Company is required to make in excess of the principal amount of converted Convertible Notes, as the case may be, in the event that the market price per share of the Company’s common stock, as measured under the terms of the capped call transactions, is greater than the strike price of the capped call transactions, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. If, however, the market price per share of the Company’s common stock, as measured under the terms of the capped call transactions, exceeds the cap price of the capped call transactions, there would nevertheless be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that such market price exceeds the cap price of the capped call transactions. The initial cap price of the capped calls is $ 48.55 per share of common stock, which represents a premium of 75 % over the last reported sale price of the Company’s common stock of $ 27.74 per share on November 16, 2021, and is subject to certain customary adjustments under the terms of the capped calls; provided that the cap price will not be reduced to an amount less than the strike price of $ 35.76 per share. The capped call transactions are separate transactions and are not part of the terms of the Convertible Notes. The capped calls meet the criteria for classification as equity and, as such, are not remeasured each reporting period and are included as a reduction to additional paid-in-capital within stockholders’ equity. NOTE 5. NET LOSS PER SHARE The following table presents the computation of basic and diluted net loss per share: Year Ended December 31, 2021 2020 Numerator Net loss $ ( 70,593 ) $ ( 47,876 ) Denominator Weighted-average common shares outstanding 33,310,794 27,609,403 Less: Weighted-average shares subject to repurchase ( 12,412 ) ( 14,492 ) Denominator for basic and diluted net loss per share attributable to common stockholders 33,298,382 27,594,911 Basic and diluted net loss per share $ ( 2.12 ) $ ( 1.73 ) 65 The Company reported net losses for both 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: Year Ended December 31, 2021 2020 Common stock options and restricted stock units 9,913,421 10,251,790 Warrants to purchase common stock 548,374 1,470,812 Common stock issuable in connection with convertible senior notes 5,475,369 — Total 15,937,164 11,722,602 NOTE 6. FINANCIAL INSTRUMENTS Cash, Cash Equivalents The Company’s money market funds are categorized as Level 1 within the fair value hierarchy. As of December 31, 2021, the Company’s cash and cash equivalents were as follows: Gross Cash and Unrealized Fair Cash Cost Losses Value Equivalents Cash $ 253,693 $ — $ 253,693 $ 253,693 Level 1: Money market funds 1,029 — 1,029 1,029 Total $ 254,722 $ — $ 254,722 $ 254,722 As of December 31, 2020, the Company’s cash and cash equivalents 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. The following table summarizes quantitative information with respect to the significant unobservable inputs that were used to value the contingent consideration as of December 31, 2021: Contingent Consideration Revenue volatility 15 % Internal rate of return 45 % Risk-free rate 1.9 % 66 As of December 31, 2021, the Company’s contingent consideration liabilities current and non-current balances were as follows: Changes in Fair Contingent Cost Fair Value Value Consideration Level 3: Contingent consideration, current 18,017 1,971 19,988 19,988 Contingent consideration, non-current 8,383 16,354 24,737 24,737 Total $ 26,400 $ 18,325 $ 44,725 $ 44,725 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 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. In April 2020, in connection with a consulting agreement between the Company and a consulting firm, the Company issued to such firm a warrant to purchase up to 50,000 shares of the Company’s common stock (the “Compensation Warrant”). The Compensation Warrant was fully vested and exercisable upon issuance, had an exercise price of $ 3.01 per share and was fully exercised prior to its expiration on December 31, 2021 . The holder was able to redeem the warrant for a number of shares having a value equal to the in-the-money value of the warrant. The fair value of this stock warrant was $ 59 , which was determined using the Black-Scholes option-pricing model and was recorded in general and administrative operating expenses during the year ended December 31, 2020. The Company also issued to such firm in connection with the consulting agreement an additional warrant to purchase up to 400,000 shares of the Company’s common stock (the “Performance Warrant” and collectively with the Compensation Warrant, the “2020 Stock Warrants”). The Performance Warrant has an exercise price of $ 3.01 per share, shall vest and become exercisable in three substantially equal installments of 133,333 shares upon the achievement of specified performance goals and/or a market condition, and expires on December 31, 2023 . The market condition was achieved in 2020 and, accordingly, the first installment of 133,333 shares underlying the Performance Warrant has vested and is exercisable. The fair value of the installment of the Performance Warrant tied to the market condition is $ 43 , which was determined using a Monte Carlo simulation model and was recorded in general and administrative operating expenses for the year ended December 31, 2020. The Company has not recorded any fair value with respect to the remaining installments linked to performance goals, because the achievement of such performance goals is not considered probable. The following table summarizes quantitative information with respect to the significant unobservable inputs that were used to value the 2020 Stock Warrants: Compensation Performance Warrant Warrant Volatility 88 % 85 % Risk-free rate 0.23 % 0.34 % Term 1.7 years 4 In April 2018, in connection with the advisory agreement between the Company and a financial advisory firm, the Company issued such firm a five-year warrant to purchase up to 20,000 shares of the Company’s common stock (“April 2018 Warrant”). The April 2018 Warrant was fully vested and exercisable upon issuance and has an exercise price of $ 11.73 per share and expires on April 6, 2023. The Company recorded this stock warrant at its fair value of $ 207 using the Black-Scholes option-pricing model. The holder may redeem the warrant for a number of shares having a value equal to the in-the-money value of the warrant. The April 2018 Warrant was outstanding at December 31, 2021. 67 NOTE 7. GOODWILL AND INTANGIBLE ASSETS, NET Goodwill The carrying amount of goodwill was $ 34,058 as of December 31, 2021 and $ 6,904 as of December 31, 2020. The increase in the carrying amount of goodwill is due solely to the acquisition of PandoLogic in September 2021. 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: December 31, 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 0.2 $ 3,582 $ ( 3,515 ) $ 67 $ 3,582 $ ( 3,357 ) $ 225 Licensed technology 0.0 500 ( 500 ) — 500 ( 375 ) 125 Developed technology 3.3 25,600 ( 7,564 ) 18,036 9,600 ( 4,480 ) 5,120 Customer relationships 6.2 77,300 ( 9,157 ) 68,143 9,300 ( 4,340 ) 4,960 Noncompete agreements 0.6 800 ( 683 ) 117 800 ( 486 ) 314 Trade names 4.7 2,100 ( 216 ) 1,884 — — — Total 5.6 $ 109,882 $ ( 21,635 ) $ 88,247 $ 23,782 $ ( 13,038 ) $ 10,744 The following table presents future amortization of the Company’s finite-lived intangible assets at December 31, 2021: 2022 $ 18,549 2023 17,091 2024 14,571 2025 13,405 2026 9,988 Thereafter 14,643 Total $ 88,247 NOTE 8. CONSOLIDATED FINANCIAL STATEMENTS DETAILS Consolidated Balance Sheets Details Cash and cash equivalents As of December 31, 2021 and December 31, 2020, the Company had cash and cash equivalents of $ 254,722 and $ 114,817 , respectively, including $ 66,401 and $ 40,052 , respectively, of cash received from advertising customers and content licensees for future payments to vendors. Accounts Receivable, Net Accounts receivable consisted of the following: As of December 31, December 31, 2021 2020 Accounts receivable — Managed Services (1) $ 21,347 $ 14,916 Accounts receivable — Software Products & Services (2) 59,568 — Accounts receivable — Other 4,926 1,868 85,841 16,784 Less: allowance for doubtful accounts ( 778 ) ( 118 ) Accounts receivable, net $ 85,063 $ 16,666 (1) Accounts receivable – Managed Services reflects the amounts due from the Company’s advertising customers. 68 ( 2 ) Accounts receivable – Software Products & Services reflects the amounts due from the Company’s PandoLogic customers . Property, Equipment and Improvements, Net Property, equipment and improvements consisted of the following: As of December 31, December 31, 2021 2020 Property and equipment $ 4,262 $ 2,365 Leasehold improvements 167 2,899 4,429 5,264 Less: accumulated depreciation ( 2,873 ) ( 2,910 ) Property, equipment and improvements, net $ 1,556 $ 2,354 Depreciation expense was $ 538 and $ 1,025 for the years ended December 31, 2021 and 2020, respectively. During 2021, primarily in connection with the sublease of its former corporate office space located in Costa Mesa, California, the Company wrote-off approximately $ 3,852 in property and equipment and leasehold improvements and recorded a net loss on disposal of $ 1,894 . During the year ended December 31, 2020, the Company disposed of $ 34 in property, equipment, and improvements and recorded a $ 10 loss on disposal. Accounts Payable Accounts payable consisted of the following: As of December 31, December 31, 2021 2020 Accounts payable — Managed Services (1) $ 23,613 $ 14,688 Accounts payable — Other 23,098 944 Total $ 46,711 $ 15,632 (1) Accounts payable –Managed Services reflects the amounts due to media vendors for advertisements placed on behalf of the Company’s advertising clients. Consolidated Statements of Operations and Comprehensive Loss Details Revenue Revenue for the periods presented were comprised of the following: Year Ended December 31, 2021 2020 Commercial Enterprise $ 111,274 $ 54,557 Government & Regulated Industries 4,031 3,151 Total revenue $ 115,305 $ 57,708 In the third quarter of fiscal year 2021, the Company realigned its 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 PandoLogic customers; and (2) Government & Regulated Industries, 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 PandoLogic’s talent acquisition solutions, any related support and maintenance services, and any related professional services associated with the deployment and or implementation of such solutions. 69 Managed Services consists of revenues generated from our content licensing customers and advertising agency customers and related services. The tables below illustrate the presentation of our revenues based on the above definitions: Year Ended December 31, 2021 Government & Commercial Regulated Enterprise Industries Total Total Software Products & Services (1) $ 55,484 $ 4,031 $ 59,515 Managed Services Advertising 40,800 — 40,800 Content Licensing 14,990 — 14,990 Total Managed Services 55,790 — 55,790 Total Revenue $ 111,274 $ 4,031 $ 115,305 ( 1 ) Software Products & Services consists of aiWARE revenues of $ 21,200 as well as PandoLogic revenues of $ 38,315 70 Year Ended December 31, 2020 Government & Commercial Regulated Enterprise Industries Total Total Software Products & Services $ 10,712 $ 3,151 $ 13,863 Managed Services Advertising 31,550 — 31,550 Content Licensing 12,295 — 12,295 Total Managed Services 43,845 — 43,845 Total Revenue $ 54,557 $ 3,151 $ 57,708 Other Expense, Net Other expense, net for the periods presented was comprised of the following: Year Ended December 31, 2021 2020 Interest (expense) income, net $ ( 538 ) $ 85 Change in fair value of warrant liability — ( 200 ) Other ( 62 ) ( 12 ) Other expense, net $ ( 600 ) $ ( 127 ) NOTE 9. COMMITMENTS AND CONTINGENCIES Leases The Company leases facilities under operating lease arrangements expiring at various years through fiscal 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 year ended December 31, 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. On December 8, 2021, the Company signed an office lease (the “Lease”) pursuant to which the Company will lease office space located at 5921 California Avenue, Irvine, California, consisting of approximately 13,437 square feet. The Lease agreement is between the Company and Cloudvirga, Inc. (the “Sublessor”), subject to the written consent of the Landlord to the Sublessor’s original lease. The term of the Lease will commence on January 1, 2022 and will continue through December 31, 2023 . Pursuant to the Lease, the Company will pay to the Sublessor base rent in an amount of $ 27 per month, with rent abated during the second month of the term. While the Lease had not yet commenced during the year ending December 31, 2021, because the Lease was signed in 2021 the payments for the Lease are included within our future minimum lease payments below. 71 As of December 31, 2021, future minimum lease payments were as follows: 2022 2,532 2023 2,091 2024 1,730 Total minimum payments $ 6,353 As of December 31, 2021, minimum sublease rental income to be received in the future under noncancelable subleases was approximately $ 3,402 . The total rent expense for all operating leases was $ 4,668 and $ 2,987 for the years ended December 31, 2021 and 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 years ended December 31, 2021 and 2020, the Company recorded a $ 516 liability and a $ 1,036 liability, 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. NOTE 10. STOCKHOLDERS’ EQUITY December 2020 Common Stock Offering In December 2020, the Company completed an offering of its common stock, pursuant to which the Company sold an aggregate of 3,450,000 shares of common stock (which included the full exercise of the underwriters’ option to purchase additional shares) at a price of $ 18.50 per share, for aggregate net proceeds of approximately $ 59,771 after deducting underwriting discounts and commissions and offering costs of approximately $ 4,054 . Other Common Stock Transactions In 2021 and 2020, the Company issued an aggregate of 1,176,984 and 482,417 shares of its common stock, respectively, in connection with the exercise of stock options, grants of restricted stock awards and vesting of restricted stock units (net of forfeitures of restricted stock) under its stock incentive plans, and purchases under its Employee Stock Purchase Plan (the “ESPP”). In June 2018, the Company entered into an Equity Distribution Agreement with JMP Securities as sales agent, pursuant to which it could offer and sell, from time to time, through JMP Securities, shares of its common stock having an aggregate offering price of up to $ 50,000 . In 2020 and 2019, the Company issued an aggregate of 1,491,317 and 5,205,430 shares of its common stock, respectively, which were sold pursuant to the Equity Distribution Agreement. In 2020 and 2019, the Company received net proceeds from such sales of $ 5,986 and $ 24,373 after deducting expenses of $ 291 and $ 756 , respectively. The Company voluntarily terminated the Equity Distribution Agreement in January 2021. In 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 23,050 shares of its common stock upon exercises of warrants to purchase an aggregate of 26,000 shares of its common stock, which were effected on a net exercise basis without cash payment of the exercise price. In 2020, the Company issued 154,311 shares of its common stock upon the exercise of warrants for an aggregate exercise price of $ 2,100 , and issued an aggregate of 442,126 shares of common stock upon exercises of warrants to purchase an aggregate of 813,400 shares of common stock, which were effected on a net exercise basis without cash payment of the exercise price. 72 In 2021 and 2020, the Company issued 15,828 and 12,100 shares of its common stock, respectively, to consultants in consideration for services rendered. The Company valued these stock issuances based on the closing price of its common stock on the issuance date and recorded the expense of $ 369 and $ 95 in general and administrative expenses in the Company’s consolidated statement of operations and comprehensive loss for the years ended December 31, 2021 and December 31, 2020, respectively. In September 2018, the Company acquired all of the outstanding capital stock of Machine Box, Inc. (“Machine Box”). The purchase consideration for the acquisition was comprised of the initial consideration paid at closing and additional contingent amounts that were payable if Machine Box achieved certain technical development and integration milestones within 12 months after the closing of the acquisition, and 80 % of such consideration was payable by issuance of shares of the Company’s common stock to the former stockholders of Machine Box. During 2019, the Company determined that Machine Box had achieved the technical development and integration milestones required to be completed during such period and, as a result, the former Machine Box stockholders became entitled to receive an aggregate of 394,604 shares of the Company’s common stock, valued at $ 2,389 based on the closing price of the Company’s common stock on the respective milestone dates, of which an aggregate of 315,687 shares were issued to them, and 78,917 shares were held back from issuance by the Company to secure certain indemnification and other obligations of the former stockholders. In 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. In 2020, 9,552 shares of common stock, which represented a portion of the consideration for the Company’s acquisition of Wazee Digital, Inc. (“Wazee”) in 2018 that was previously deposited in a third-party escrow account to secure certain indemnification obligations of the former stockholders of Wazee Digital, were returned to the Company and cancelled in connection with the resolution of a claim for indemnification made by the Company. Common Stock Warrants As discussed in Note 6 and above, in 2020, the Company issued warrants to purchase an aggregate of 450,000 shares of the Company’s common stock and warrants to purchase an aggregate of 967,711 shares of common stock were exercised in 2020. The table below summarizes the warrants outstanding at December 31, 2021: Number of Exercise Shares of Issuance Date Life in Years Price Common Stock Various dates in 2017 10 $ 13.6088 145,945 April 2018 5 $ 11.73 20,000 April 2020 Performance Warrant 3.7 $ 3.01 330,667 496,612 The table below summarizes the warrants outstanding at December 31, 2020: Number of Exercise Shares of Issuance Date Life in Years Price Common Stock Various dates in 2017 10 $ 13.6088 313,440 April 2018 5 $ 11.73 20,000 April 2020 Compensation Warrant 1.7 $ 3.01 50,000 April 2020 Performance Warrant 3.7 $ 3.01 396,000 779,440 NOTE 11. STOCK PLANS 2014 Stock Incentive Plan In 2014, the Company’s Board of Directors and stockholders approved and adopted the 2014 Stock Option/Stock Issuance Plan (the “2014 Plan”), which was amended in March 2015, October 2016 and April 2017. Under the 2014 Plan, incentive stock options, nonstatutory stock options, restricted stock and restricted stock units may be granted to eligible employees, directors and consultants. The Company’s Board of Directors resolved not to make any further awards under the 2014 Plan following the completion of the Company’s IPO. The 2014 Plan will continue to govern all outstanding awards granted thereunder. 73 2017 Stock Incentive Plan In April 2017, the Company’s Board of Directors and stockholders approved and adopted the 2017 Stock Incentive Plan (the “2017 Plan”), which became effective on May 11, 2017. Under the 2017 Plan, incentive stock options, nonstatutory stock options, stock appreciation rights, stock awards and restricted stock units may be granted to employees, non-employee directors, consultants and advisors. Awards granted under the 2017 Plan may be subject to time-based and/or performance-based vesting conditions. The Company had initially reserved 2,000,000 shares of its common stock for issuance under the 2017 Plan. The share reserve increases automatically on the first trading day of January each calendar year by an amount equal to 3 % of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year, up to an annual maximum of 750,000 shares. As of December 31, 2021, an aggregate of 97,797 shares of common stock were available for future grant under the 2017 Plan. 2018 Performance-Based Stock Incentive Plan In June 2018, the Company’s stockholders approved the Company’s 2018 Performance-Based Stock Incentive Plan (the “2018 Plan”), and approved grants under the 2018 Plan of nonstatutory stock options, having performance-based vesting conditions tied to the future achievement of stock price milestones by the Company (each, a “Performance Option”), to the Company’s Chief Executive Officer for 1,809,900 shares (the “CEO Award”) and to the Company’s President for 1,357,425 shares (the “President Award”). In May 2018, the CEO Award and the President Award had been approved by a special committee of the Board of Directors of the Company (the “Special Committee”), and the 2018 Plan had been approved by the Company’s Board of Directors, subject to stockholder approval. The 2018 Plan allows the Company to grant Performance Options to its executive officers and other employees as an incentive for them to remain in service with the Company and to further align their interests with the interests of the Company’s stockholders. A total of 4,200,000 shares of the Company’s common stock have been authorized for issuance under the 2018 Plan. As of December 31, 2021, 8,798 shares of common stock were available for future grant under the 2018 Plan. Inducement Grant Plan In October 2020, the Company’s Board of Directors adopted the Company’s Inducement Grant Plan. Under the Inducement Grant Plan, nonstatutory stock options, stock appreciation rights, stock awards, restricted stock units and dividend equivalent rights may be granted as an inducement material for eligible persons to enter into employment with the Company in accordance with NASDAQ Marketplace Rule 5635(c)(4) and the related guidance under NASDAQ IM 5635-1, and any amendments or supplements thereto. The Company has initially reserved 750,000 shares of common stock for issuance under the Inducement Grant Plan. As of December 31, 2021, an aggregate of 157,505 shares of common stock were available for future grant under the Inducement Grant Plan. Terms of Awards Under Stock Plans The 2014 Plan, 2017 Plan, 2018 Plan and Inducement Grant Plan are collectively referred to herein as the “Stock Plans.” The Stock Plans are administered by the Compensation Committee of the Board of Directors, which determines the recipients and the terms of the awards granted (with the exception of the CEO Award and President Award, which were approved by the Special Committee). All stock options granted under the Stock Plans have exercise prices equal to or greater than the fair market value of the Company’s common stock on the grant date, and expire ten years after the grant date, subject to earlier expiration in the event of termination of the optionee’s continuous service with the Company as further described in each Stock Plan. The vesting of all awards granted under the Stock Plans is generally subject to the awardee’s continuous service with the Company, with certain exceptions, as further described in each Stock Plan. 74 The Company has granted to employees, non-employee directors and consultants awards of stock options, restricted stock and restricted stock units that are subject to time-based vesting conditions. The time-based stock options that have been granted to employees and consultants generally vest over a period of four years ( with the exception of certain stock options granted to the Company’s Chief Executive Officer and President in 2017, which vested over a period of three years , and certain other limited exceptions). Restricted stock units that have been awarded to employees generally vest over periods of one to two years . The restricted stock units awarded to members of the Company’s Board of Directors under the automatic grant program provisions of the 2017 Plan generally vest over a period of one year . The Company has also granted Performance Options under the 2018 Plan, the 2017 Plan and the Inducement Grant Plan. All such Performance Options become exercisable in three equal tranches based on the achievement of specific stock price milestones for the Company’s common stock. These stock price milestones were amended in August 2020 with respect to substantially all of the Performance Options outstanding at such time, as discussed below. For each tranche to become exercisable, the closing price per share of the Company’s common stock must meet or exceed the applicable stock price target for a period of 30 consecutive trading days. In the first quarter of 2021, the Company achieved all of the stock price milestones and, accordingly, substantially all of the then-outstanding Performance Options have vested in full. Modifications to Performance-Based Stock Options In August 2020, the disinterested members of the Board of Directors of the Company adopted certain amendments (the “Amendments”) to the Company’s 2018 Plan, and to the then outstanding Performance Options granted under the 2018 Plan and the 2017 Plan. Such Amendments were approved by the Company’s stockholders at the Company’s annual meeting of stockholders held on July 24, 2020. The Amendments include (i) amendment of the stock price milestones applicable to the Performance Options, and (ii) reduction of the exercise prices of the Performance Options held by the Company’s Chief Executive Officer and the Company’s President, which resulted in a modification of the Performance Options. The Company values the Performance Options using a Monte Carlo simulation model. A fair value per share and a derived service period is determined for each of the three equal tranches of each Performance Award. The Company determined the fair values and the new derived service periods of the modified awards as of the date of modification and the fair values of the original awards immediately before the modification. The amount of incremental compensation expense resulting from the modification of each award is equal to the excess of the fair value of the modified award on the date of modification over the fair value of the original award immediately before the modification. The total incremental compensation expense resulting from the August 2020 modification of the Performance Options for approximately 215 employees was $ 3,011 . The assumptions used in the Monte Carlo simulation model for computing the fair values of the Performance Options on the August 2020 modification date and immediately before the modification are set forth in the table below: Amendment date stock price $ 8.83 Expected volatility 80 % Risk-free interest rate 0.6 % Expected dividend yield — % Cost of equity 12 % Stock-based Compensation The Company recognizes stock-based compensation expense for awards granted under the Stock Plans ratably over the requisite service period. For awards subject to time-based vesting conditions, the service period is generally the vesting period. For Performance Options, a derived service period is estimated for each tranche under the Monte Carlo simulation model. The Company also recognizes stock-based compensation expense related to the Company’s ESPP ratably over each purchase interval. The Company has also issued shares of common stock to consultants in exchange for services under separate agreements outside of the Stock Plans. These share-based payment transactions are measured based on the fair value of the common stock issued and are recognized in the period in which the services are rendered. 75 The fair values of time-based stock options granted under the Stock Plan s and purchase rights under the ESPP are determined as of the grant date using the Black-Scholes -Merton option-pricing model. The assumptions used in calculating the fair values of time-based stock options granted during the years ended December 31, 2021 and 2020 are set forth in the table below: Year Ended Year Ended December 31, December 31, 2021 2020 Expected term (in years) 5.5 - 6.1 6.0 - 6.1 Expected volatility 80% - 83% 68% - 83% Risk-free interest rate 0.6% - 1.4% 0.4% - 1.2% Expected dividend yield — — The assumptions used in calculating the fair values of purchase rights granted under the ESPP during the years ended December 31, 2021 and 2020 are set forth in the table below: Year Ended Year Ended December 31, December 31, 2021 2020 Expected term (in years) 0.5 - 2.0 0.5 - 2.0 Expected volatility 67% - 119% 65% - 130% Risk-free interest rate 0.1 % 0.1% - 1.5% Expected dividend yield — — The Company values Performance Options using a Monte Carlo simulation model. A fair value per share is determined for each of the three equal tranches of each Performance Option. No Performance Options were granted during the year ended December 31, 2021. The assumptions used in the Monte Carlo simulation model for computing the grant date fair values of the Performance Options granted during the year ended December 31, 2020 are set forth in the table below: Year Ended December 31, 2020 Grant date stock price $ 11.10 Dividend yield — % Risk-free interest rate 0.8 % Estimated volatility 85 % 76 The stock-based compensation expense by type of award and by operating expense grouping are presented below: Year Ended December 31, 2021 2020 Stock-based compensation expense by type of award: Restricted stock units $ 19,088 $ 5,560 Restricted stock awards 19 181 Machine Box contingent common stock issuances — ( 37 ) Performance-based stock options 16,315 8,480 Stock options 3,720 4,767 Employee stock purchase plan 423 493 Common stock issued for services 500 95 Total $ 40,065 $ 19,539 Stock-based compensation expense by operating expense grouping: Cost of revenue $ 116 — Sales and marketing 1,716 889 Research and development 3,217 1,046 General and administrative 35,016 17,604 $ 40,065 $ 19,539 Stock Plan Activity Restricted Stock Awards The Company’s restricted stock award activity for the year ended December 31, 2021 was as follows: Weighted Average Grant Shares Date Fair Value Unvested at December 31, 2020 — $ — Granted 581 $ 32.33 Vested ( 581 ) $ 32.33 Unvested at December 31, 2021 — As of December 31, 2021, there was no unrecognized compensation cost related to restricted stock awards. Stock awards with respect to a total of 581 shares of common stock were granted during the year ended December 31, 2021, which were fully vested upon grant. The fair values of restricted stock awards that vested during the year ended December 31, 2021 totaled $ 19 . Stock awards with respect to a total of 6,903 shares of common stock were granted during the year ended December 31, 2020, which were fully vested upon grant. The fair values of restricted stock awards that vested during the year ended December 31, 2020 totaled $ 238 . Restricted Stock Units The Company’s restricted stock units activity for the year ended December 31, 2021 was as follows: Weighted Average Grant Shares Date Fair Value Unvested at December 31, 2020 829,124 $ 11.53 Granted 896,329 $ 33.33 Forfeited ( 34,618 ) $ 39.00 Vested ( 804,374 ) $ 11.47 Unvested at December 31, 2021 886,461 $ 32.56 77 As of December 31, 2021, total unrecognized compensation cost related to restricted stock units was $ 14,324 , which is expected to be recognized over a period of 2.6 years. The weighted average grant date fair values per share of restricted stock units granted in the years ended December 31, 2021 and 2020 were $ 33.33 and $ 10.94 , respectively. The fair values of restricted stock units vested during the years ended December 31, 2021 and 2020 totaled $ 18,886 and $ 2,519 , respectively. Performance Options The activity related to Performance Options for the year ended December 31, 2021 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 ( 373,041 ) $ 5.77 Forfeited ( 12,552 ) $ 5.92 Expired ( 13,986 ) $ 5.41 Outstanding at December 31, 2021 3,834,441 $ 11.05 6.51 years $ 438,278 Exercisable at December 31, 2021 3,834,441 $ 11.05 6.51 years $ 438,278 During 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 . The aggregate intrinsic value of the options exercised during the year ended December 31, 2021 was $ 8,288 . No performance-based stock options were granted during the year ended December 31, 2021. The weighted average grant date fair values per share of Performance Options granted during the year ended December 31, 2020 was $ 7.36 . No performance-based stock options vested during the year ended December 31, 2020. Stock Options The activity related to all other stock options for the year ended December 31, 2021 was as follows: Weighted-Average Remaining Aggregate Exercise Contractual Intrinsic Options Price Term Value Outstanding at December 31, 2020 5,400,070 $ 12.60 Granted 848,955 $ 28.18 Exercised ( 515,807 ) $ 9.58 Forfeited ( 220,109 ) $ 17.45 Expired ( 4,501 ) $ 7.48 Outstanding at December 31, 2021 5,508,608 $ 15.10 6.23 years $ 45,262 Exercisable at December 31, 2021 4,207,518 $ 13.71 5.62 years $ 36,982 The weighted average grant date fair values per share of stock options granted in the years ended December 31, 2021 and 2020 were $ 18.64 and $ 4.69 , respectively. The aggregate intrinsic values of the options exercised during the years ended December 31, 2021 and 2020 were $ 10,145 and $ 2,238 , respectively. The total grant date fair values of stock options vested during the years ended December 31, 2021 and 2020 were $ 2,665 and $ 5,205 , respectively. At December 31, 2021, total unrecognized compensation expense related to stock options was $ 14,831 and is expected to be recognized over a weighted average period of 3.3 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 options. 78 Employee Stock Purchase Plan In April 2017, the Company’s Board of Directors and stockholders approved and adopted the ESPP, which became effective on May 11, 2017. The ESPP is administered by the Compensation Committee of the Board of Directors and is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. Under the ESPP, each offering period is generally 24 months with four, six-month purchase intervals, and new offering periods generally commence every six months, as determined by the Compensation Committee of the Board of Directors. The purchase price for shares of the Company’s common stock under the ESPP will be established by the plan administrator prior to the start of the offering period, but will not be less than 85 % of the lower of the fair market value of the Company’s common stock on (i) the first day of the offering period and (ii) the purchase date. Each purchase right granted to an employee will provide an employee with the right to purchase up to 1,000 shares of common stock on each purchase date within the offering period, subject to an aggregate limit of 200,000 shares purchased under the ESPP on each purchase date, and subject to the purchase limitations in each calendar year under Section 423 of the Internal Revenue Code. The Company had initially reserved 1,000,000 shares of its common stock for issuance under the ESPP. The share reserve increases automatically on the first trading day of January each calendar year by an amount equal to 1 % of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year, up to an annual maximum of 250,000 shares. The ESPP contains a reset provision, which provides that, if the Company’s stock price on any purchase date under an offering period is less than the stock price on the start date of that offering period, then all employees participating in that offering period will be automatically transferred to the new offering period starting on the next business day following such purchase date, so long as the stock price on that start date is lower than the stock price on the start date of the offering period in which they are enrolled. This reset feature was triggered under the ESPP on February 1, 2019 and February 1, 2020. These resets constituted modifications pursuant to the guidance in ASC 718, Stock Based Compensation . The Company engaged specialists to determine the incremental cost associated with the modification by calculating the expense related to the modified awards using the assumptions before and after the trigger dates. The modifications did not have a material effect on the Company’s stock-based compensation expense for the years ended December 31, 2021 and 2020. Employee payroll deductions accrued under the ESPP as of December 31, 2021 and 2020 totaled $ 282 and $ 135 , respectively. During the years ended December 31, 2021 and 2020, a total of 135,636 and 126,550 shares of common stock were purchased under the ESPP at a weighted average purchase price of $ 6.77 and $ 1.90 , respectively. NOTE 12. PROVISION FOR INCOME TAXES The components of the Company’s loss before the provision for income taxes consisted of the following: Year Ended December 31, 2021 2020 United States of America $ ( 88,092 ) $ ( 47,831 ) Foreign 20,243 31 Total $ ( 67,849 ) $ ( 47,800 ) 79 The provision for income taxes consisted of the following for the years ended December 31, 2021 and 2020: Year Ended December 31, 2021 2020 Current Federal $ 249 $ — State 99 70 Foreign 2,988 6 Total current provision 3,336 76 Deferred Federal ( 10,549 ) ( 11,573 ) State ( 6,197 ) ( 4,532 ) Foreign ( 520 ) — Change in valuation allowance 16,674 16,105 Total deferred benefit ( 592 ) — Total provision for income taxes $ 2,744 $ 76 A reconciliation of the statutory U.S. federal income tax rate to the Company's effective tax rate for the years ended December 31, 2021 and 2020 is as follows: Year Ended December 31, 2021 2020 Tax, computed at the federal statutory rate 21.00 % 21.00 % State taxes, net of federal tax benefit 9.37 9.36 Foreign rate differential 3.54 — Global intangible low-taxed income ( 6.84 ) — Stock-based compensation 6.47 1.49 Earn-out revaluation ( 7.08 ) — Meals, entertainment and other ( 5.92 ) 1.68 Change in valuation allowance ( 24.58 ) ( 33.69 ) (Provision for) benefit from income taxes ( 4.04 )% ( 0.16 )% The significant components of the Company’s deferred income tax assets and liabilities as of December 31, 2021 and 2020 were as follows: Year Ended December 31, 2021 2020 Net operating loss carryforwards $ 55,385 $ 44,711 Stock-based compensation 21,003 15,866 Accrued expenses 1,146 2,352 Research credits 4,632 3,193 Other 669 518 Total gross deferred tax assets 82,835 66,640 Valuation allowance ( 81,784 ) ( 65,110 ) Total deferred tax assets 1,051 1,530 Other - fixed assets and intangibles ( 589 ) ( 1,530 ) Acquired intangibles ( 11,367 ) — Total deferred tax liabilities ( 11,956 ) ( 1,530 ) Net deferred tax liabilities $ ( 10,905 ) $ — 80 The Company has evaluated the available positive and negative evidence supporting the realization of its gross deferred tax assets, including its cumulative losses, and the amount and timing of future taxable income, and has determined it is more likely than not that certain historical U.S. federal and state deferred tax assets will not be realized. Accordingly, the Company recorded a valuation allowance as of December 31, 2021 and 2020 against these deferred tax assets. The change in the valuation allowance for the years ended December 31, 2021 and 2020 is as follows: Year Ended December 31, 2021 2020 Valuation allowance, at beginning of year $ 65,110 $ 49,005 Increase in valuation allowance 16,674 16,105 Valuation allowance, at end of year $ 81,784 $ 65,110 As of December 31, 2021, the Company has federal and state income tax net operating loss carryforwards of approximately $ 217,754 and $ 135,075 , respectively. The U.S. federal and state net operating losses are projected to expire beginning in 2034 and 2022 , respectively, unless previously utilized. Net federal operating loss carryforwards generated after January 1, 2018 may be carried forward indefinitely, subject to the 80% taxable income limitation on the utilization of the carryforwards. In addition, the Company had federal and state research and development credit carryforwards of approximately $ 3,636 and $ 2,545 , respectively, as of December 31, 2021. The federal research and development credit will begin to expire in 2036 if unused and the state research and expenditure credit may be carried forward indefinitely. Utilization of the Company's U.S. net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382 and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization In connection with our acquisition of PandoLogic in September 2021, we recorded a net deferred tax liability primarily related to acquired non-goodwill intangible fair value in excess of tax basis. No valuation allowance is recorded against acquired PandoLogic deferred tax assets as it is more likely than not they will be utilized to offset future taxable income. In August 2021, PandoLogic obtained the approval for the Israeli Preferred Technology Enterprise (“PTE”) status which provides beneficial tax treatment for Israeli companies engaged in R&D activities that own the intellectual property rights . Under PTE status, our Israeli tax rate is reduced from the 23 % statutory rate to a 12 % beneficial rate. This arrangement is scheduled to expire in December 2025 and is subject to certain conditions which we have complied with during 2021. The effect of this tax incentive arrangement reduced our income tax provision, as compared to the statutory rate, by $ 2,257 in 2021. The Company continues to permanently reinvest its foreign cumulative earnings in its foreign subsidiaries and has not recorded any provision for deferred income taxes on the undistributed earnings. In accordance with the U.S. global intangible low-taxed income (“GILTI”) provisions, we include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. We account for the GILTI tax in the period in which it is incurred, and therefore have not provided any deferred tax impacts of GILTI in our consolidated financial statements. At December 31, 2021 and 2020, the Company had approximately $ 1,111 and $ 720 , respectively, of unrecognized tax benefits netted against its deferred tax assets within other assets, none of which would impact the Company’s effective tax rate if recognized due to the valuation allowance. If recognized, $ 1,015 would result in a deferred tax asset for tax attribute carryforwards, which is expected to require a full valuation allowance based on present circumstances. The Company estimates that none of its unrecognized tax benefits will materially change within the next twelve months. Amounts accrued for interest and penalties related to uncertain tax positions were not material for any period presented. 81 A reconciliation of the unrecognized tax benefits from January 1, 2020 to December 31, 2021 is as follows: Year Ended December 31, 2021 2020 Unrecognized tax benefits as of January 1 $ 720 $ — Gross increase for tax positions of prior years — 470 Gross increase for tax positions of current year 391 250 Unrecognized tax benefits balance at December 31 $ 1,111 $ 720 The Company is subject to taxation in the United States, Israel, the United Kingdom, and various U.S. states. Due to our tax loss carryovers in some jurisdictions, certain U.S. federal tax returns and state tax returns are open for examination since inception. The Israeli statute of limitations period is generally three years commencing at the end of the year in which the return was filed. The Company is not currently under examination from income tax authorities in the jurisdictions in which the Company does business. On March 27, 2020, the U.S federal government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak which, among other things, contains numerous income tax provisions. Some of these tax provisions are effective retroactively for years ended before the date of the enactment. The provisions of the CARES Act did not materially impact the Company's tax position. NOTE 13. RELATED PARTY TRANSACTIONS There were no related party transactions as of or during the years ended December 31, 2021 and 2020. NOTE 14. SUBSEQUENT EVENTS On March 1, 2022, the Company closed the acquisition of a talent agency that manages social media influencers. Consideration at close was made up of $ 1.5 million in cash, $ 2.0 million in stock and deferred cash payments and earnout consideration totaling up to $ 7.5 million. 82 Item 9. Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure. None