Veritone, Inc. 10-Q/A

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements The following discussion and analysis of our financial condition and results of operations should be read together with the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q/A and in our Annual Report on Form 10-K for the year ended December 31, 2021. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed under “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q/A and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. See “Special Note Regarding Forward-Looking Statements” above at page 1. The following information has been adjusted to reflect the Q1 2022 restatement and full year 2021 adjustment of our condensed consolidated financial statements as described in the “Explanatory Note” at the beginning of this Amended Report and in Note 2, “Presentation and Summary of Significant Accounting Policies,” in the Notes to the Condensed Consolidated Financial Statements of this Amended Report. 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 three months ended March 31, 2022, we generated revenue of $34.4 million as compared to $18.3 million during the three months ended March 31, 2021. Our Software Products & Services grew 288% year over year, and represented 53% and 26% of our consolidated revenue during the three months ended March 31, 2022 and 2021, respectively, and our Managed Services grew 19% year over year, and represented 47% and 74% of our consolidated revenue during the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022 our largest customer represented 31% of our consolidated revenue and during the three months ended March 31, 2021 a different customer was our largest customer, with revenues representing 10% of our consolidated revenue. Significant Transactions In March 2022, we completed an acquisition of an influencer-based management services company for total consideration of $5.8 million (the “March Acquisition Consideration”). The March Acquisition Consideration consists of upfront payments of $2.0 million in cash and $1.9 million in common stock (0.1 million shares) and deferred compensation of $3.0 million payable in fiscal 2022 and 2023. Opportunities, Challenges and Risks During the three months ended March 31, 2022 and 2021, we derived our revenue primarily through our Commercial Enterprise customers, and secondarily through our Government & Regulated Industries customers. 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 288% in our Software Products & Services during the three months ended March 31, 2022 as compared to the prior year, we have also demonstrated our ability to grow our AI-based Managed Services, with our revenue from these Managed Services increasing 19% during the three months ended March 31, 2022 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. In September 2021, we acquired PandoLogic, an intelligent hiring platform. Based in Israel, PandoLogic serves high-volume hiring and enterprise level customers today, including the second largest employer in the U.S., Amazon. 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 GRI solutions to help utilities increase profitability and improve grid reliability as they make the transition to renewables. Today, our energy solutions are in production at a major 26 utility and being deployed across global manufactures. 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. Growing our existing and new Software Products & Services customer base is critical for our success. During the first quarter of 2022, our largest customer, Amazon, represented 31% of our consolidated revenue, as compared to 16% in the same quarter of 2021 on a pro forma basis (pro forma basis meaning the inclusion of PandoLogic as if owned by us since January 1, 2021). Approximately 25% of the first quarter 2022 Amazon revenue was from new services, part of our land-and-expand strategy and helped to drive our customer net retention above 120% in the quarter ended March 31, 2022 as compared to the same quarter of 2021. Moreover, we continue to grow our Software Products & Services customer base. At the end of the first quarter of 2022, we reported 559 Software Product & Services customers, which grew 45% from March 31, 2021 on a pro forma basis. On a pro forma basis, we also grew PandoLogic’s customer base as of March 31, 2022 over 100% year over year, and non-volume hiring revenue for the quarter ended March 31, 2022, which excludes Amazon, grew over 200% year over year. To continue to grow our Software Product & Services and diversify our customer base, and drive increased sales within our existing customer base, we plan to continue to increase our sales and marketing spending throughout 2022 as compared with prior periods. Our business has seasonality, driven mostly by hiring patterns across PandoLogic. Typically, hiring patterns are lowest during the first and second quarters, then increase sequentially each quarter in the second half of the year. During the quarter ended March 31, 2022, one of our largest customers accelerated hiring in part to manage the January 2022 Omicron virus outbreak. As a result of this, we do not expect our intelligent hiring platform revenues to sequentially improve substantially from the first quarter of 2022 to the second quarter of 2022, as part of the first half of 2022 planned revenues from this customer accelerated into early 2022. However, we do expect the platform to normalize starting in the third quarter of 2022, and to grow comparably with prior years’ seasonality trends and in accordance with our prior expectations. 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 believe that, when integrated with aiWARE, PandoLogic customers 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 three months ended March 31, 2022, our non-GAAP gross margin (calculated as described in “Non-GAAP Financial Measures” below) improved to 80%, compared with 74% for the three months ended March 31, 2021, 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 March 31, 2022. 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 in 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 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 ending 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 27 sales resources, and (iii) to accelerate the adoption of aiWARE as the universal AI operating system through venture or market-driven opportunities. During the three months ended March 31, 2022, we reported a non-GAAP net loss of $5.2 million as compared to $3.9 million during the three months ended March 31, 2021. While we forecast our full year 2022 to be profitable on a non-GAAP net income basis, we do expect seasonality in our revenue and more losses in operating performance throughout the quarter ended June 30, with increased profitability during the quarters ended September 30 and December 31, driven partly from PandoLogic services. Moreover, and to continue to grow our revenue in 2022, we will continue to make substantial investments in people, namely software engineers and sales personnel. Through April 2022, our headcount grew approximately 25% since the beginning of 2022. In addition, we have made substantial investments in our existing people, including higher annual raises and increased benefits, in order to compete in a challenging and constrained labor environment. Lastly, we are making investments in our corporate infrastructure, including new ERP and workforce systems to help us better manage the scale and growth of our business. These investments in people and infrastructure will weigh heavier on our financial results beginning in Q2 2022 and beyond. If we cannot hire or retain people in a timely manner, and or are incapable of managing the scale of our operations, our growth and ultimate profitability could be accelerated or delayed. In the three months ended March 31, 2022 and 2021, 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 March 31, 2022. The extent to which the COVID-19 pandemic and the related macroeconomic conditions may continue to affect our financial condition or results of operations is uncertain. The severity and duration of the pandemic and the resulting macroeconomic conditions are difficult to predict, and our revenue and operating results may be adversely impacted in future periods. Due to the nature of our business, the effect of the COVID-19 pandemic may not be fully reflected in its results of operations until future periods. The most significant risks to our business and results of operations arising from the COVID-19 pandemic are discussed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31, 2021. In response to the COVID-19, we took actions to control expenses, including temporarily discontinuing non-essential services and instituting controls on travel, entertainment and other expenses. In addition, 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 Measure In evaluating our cash flows and financial performance, we use certain non-GAAP financial measures, including “non-GAAP gross profit,” “non-GAAP gross margin,” “non-GAAP net income (loss),” and “non-GAAP net income (loss) per share.” 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 three months ended March 31, 2022 and 2021. 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. 28 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. 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. (in thousands) Three Months Ended March 31, 2022 (As Restated) 2021 Core Operations ( 1) Corporate ( 2) Total Core Operations ( 1) Corporate ( 2) Total Net loss $ (6,100 ) $ (16,029 ) $ (22,129 ) $ (2,825 ) $ (27,742 ) $ (30,567 ) Provision for income taxes 134 4 138 — 22 22 Depreciation and amortization 5,098 116 5,214 1,083 170 1,253 Stock-based compensation expense 1,983 2,833 4,816 2,695 18,915 21,610 Change in fair value of Contingent consideration — 5,045 5,045 — — — Interest expense — 1,182 1,182 — — — Acquisition and due diligence costs — 561 561 — — — State sales tax reserve — — — — 138 138 Charges related to sublease — — — — 3,367 3,367 Severance and executive search — — — 250 7 257 Non-GAAP Net Income (Loss) $ 1,115 $ (6,288 ) $ (5,173 ) $ 1,203 $ (5,123 ) $ (3,920 ) (1) Core operations consists of our aiWARE operating platform of software, SaaS and related services; content, licensing and advertising agency services; and their supporting operations, including direct costs of sales as well as operating expenses for sales, marketing and product development and certain general and administrative costs dedicated to these operations. (2) Corporate consists of general and administrative functions such as executive, finance, legal, people operations, fixed overhead expenses (including facilities and information technology expenses), other income (expenses) and taxes, and other expenses that support the entire company, including public company driven costs. The following tables set forth the calculation of our gross profit and gross margin, followed by a reconciliation of non-GAAP to GAAP financial information presented in our condensed consolidated financial statements for three months ended March 31, 2022 and 2021. Three Months Ended (dollars in thousands) March 31, 2022 2021 Revenue $ 34,407 $ 18,295 Cost of revenue 6,923 4,823 Non-GAAP gross profit 27,484 13,472 Non-GAAP gross margin 79.9 % 73.6 % 29 Three Months Ended March 31, 2022 (As Restated) 2021 Revenue $ 34,407 $ 18,295 Cost of revenue 6,923 4,823 Non-GAAP gross profit 27,484 13,472 GAAP cost of revenue 6,923 4,823 Stock-based compensation expense (20 ) — Non-GAAP cost of revenue 6,903 4,823 GAAP sales and marketing expenses 11,069 6,427 Stock-based compensation expense (463 ) (898 ) Severance and executive search — (236 ) Non-GAAP sales and marketing expenses 10,606 5,293 GAAP research and development expenses 9,883 4,960 Stock-based compensation expense (1,004 ) (1,019 ) Severance and executive search — (14 ) Non-GAAP research and development expenses 8,879 3,927 GAAP general and administrative expenses 22,321 31,543 Depreciation (198 ) (175 ) Stock-based compensation expense (3,329 ) (19,693 ) Warrant expense — — Change in fair value of contingent consideration (5,045 ) — Charges related to sublease — (3,367 ) State sales tax reserve — (138 ) Acquisition and due diligence costs (561 ) — Severance and executive search — (7 ) Non-GAAP general and administrative expenses 13,188 8,163 GAAP amortization (5,016 ) (1,078 ) GAAP loss from operations (20,805 ) (30,536 ) Total non-GAAP adjustments (1) 15,636 26,625 Non-GAAP loss from operations (5,169 ) (3,911 ) GAAP other expense, net (1,186 ) (9 ) Interest expense 1,182 — Non-GAAP other expense, net (4 ) (9 ) GAAP loss before income taxes (21,991 ) (30,545 ) Total non-GAAP adjustments (1) 16,818 26,625 Non-GAAP loss before income taxes (5,173 ) (3,920 ) Income tax provision 138 22 GAAP net loss (22,129 ) (30,567 ) Total non-GAAP adjustments (1) 16,956 26,647 Non-GAAP net loss $ (5,173 ) $ (3,920 ) Shares used in computing non-GAAP basic and diluted net loss per share 35,477 32,172 Non-GAAP diluted net loss per share $ (0.15 ) $ (0.12 ) (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. 30 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 our Software Products & Services supplemental financial information. Quarter Ended Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, 2021 2021 2021 2021 2022 Software Revenue - Pro Forma (in 000's) (1) $ 10,183 $ 20,072 $ 21,860 $ 40,223 $ 18,167 Ending Customers (2) 385 419 433 529 559 Average Annual Revenue (AAR) (in 000's) (3) $ 199 $ 203 $ 208 $ 209 $ 207 Total New Bookings (in 000's) (4) $ 2,442 $ 4,896 $ 3,356 $ 8,317 $ 9,574 Gross Revenue Retention (5) >90% >90% >90% >90% >90% (1 ) “Software Revenue - Pro Forma” includes historical Software Products & Services revenue from the past five (5) fiscal quarters of each of Veritone, Inc. and PandoLogic (unaudited) and presents such revenue on a combined pro forma basis treating PandoLogic 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 and/or deemed by us to be under an active contract for the applicable periods. ( 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. ( 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). ( 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, our 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 pro forma basis for comparability. Managed Services Supplemental Financial Information The following table sets forth the results for each of the KPIs for our Managed Services. Quarter Ended Mar 31, Jun 30, Sept 30, Dec 31, Mar 31, 2021 2021 2021 2021 2022 Avg billings per active Managed Services client (in 000's) (6) $ 582 $ 622 $ 615 $ 625 $ 684 Revenue during quarter (in 000's) (7) $ 10,327 $ 9,968 $ 9,647 $ 10,857 $ 10,735 ( 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 customers that are active during such quarter. ( 7 ) Managed Services revenue and metrics exclude content licensing and 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 agreements; (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. 31 Results of Operations The following tables set forth our results of operations for the three months ended March 31, 2022 and 2021, 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. Three Months Ended (dollars in thousands) March 31, 2022 (As Restated) 2021 Revenue $ 34,407 $ 18,295 Operating expenses: Cost of revenue 6,923 4,823 Sales and marketing 11,069 6,427 Research and development 9,883 4,960 General and administrative 22,321 31,543 Amortization 5,016 1,078 Total operating expenses 55,212 48,831 Loss from operations (20,805 ) (30,536 ) Other expense, net (1,186 ) (9 ) Loss before provision for income taxes (21,991 ) (30,545 ) Provision for income taxes 138 22 Net loss $ (22,129 ) $ (30,567 ) Three Months Ended March 31, 2022 (As Restated) 2021 Revenue 100.0 % 100.0 % Operating expenses: Cost of revenue 20.1 26.4 Sales and marketing 32.2 35.1 Research and development 28.7 27.1 General and administrative 64.9 172.4 Amortization 14.6 6.0 Total operating expenses 160.5 267.0 Loss from operations (60.5 ) (167.0 ) Other expense, net (3.4 ) - Loss before provision for income taxes (63.9 ) (167.0 ) Provision for income taxes 0.4 0.1 Net loss (64.3 ) (167.1 ) Three Months Ended March 31, 2022 Compared with Three Months Ended March 31, 2021 Revenue Three Months Ended Three Months Ended March 31, 2022 March 31, 2021 Commercial Government & Commercial Government & Enterprise Regulated Total Enterprise Regulated Total Software Products & Services (1) $ 17,386 $ 781 $ 18,167 $ 3,395 $ 1,290 $ 4,685 Managed Services 16,240 - 16,240 13,610 - 13,610 Revenue $ 33,626 $ 781 $ 34,407 $ 17,005 $ 1,290 $ 18,295 (1) Software Products & Services consists of aiWARE SaaS Solutions revenues of $3.4 million and $4.7 million for the three months ended March 31, 2022 and 2021, respectively, as well PandoLogic revenues of $14.8 million for the three months ended March 31, 2022. Commercial Enterprise (“CE”) CE Software Products & Services revenue increased $14.0 million, or 412%, in the three months ended March 31, 2022 compared to the corresponding prior year period due primarily due to our acquisition of PandoLogic in September 2021 coupled with expanded services we provided to existing media and entertainment customers. CE Managed Services increased $2.6 million, or 19%, in the three months ended 32 March 31, 202 2 compared to the corresponding prior year period due to growth of our licensing platform, in new advertising customers and in expanded services for existing advertising customers. Government & Regulated Industries (“GRI”) GRI Software Products & Services revenue decreased $0.5 million or 39% in the three months ended March 31, 2022 compared to the corresponding prior year period primarily due to 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. Non-GAAP Gross Profit As noted above, our non-GAAP gross profit is calculated as our revenue less our cost of revenue, as follows: Three Months Ended (dollars in thousands) March 31, 2022 2021 $ Change % Change Revenue $ 34,407 $ 18,295 $ 16,112 88.1 % Cost of revenue 6,923 4,823 2,100 43.5 % Non-GAAP gross profit 27,484 13,472 14,012 104.0 % Non-GAAP gross margin 79.9 % 73.6 % The increase in non-GAAP gross profit and non-GAAP gross margin in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was due primarily to growth in Software Products & Services revenue, including our acquisition of PandoLogic in September 2021, which collectively generated incremental non-GAAP gross margins in excess of 80% during the three months ended March 31, 2022. Operating Expenses Three Months Ended (dollars in thousands) March 31, 2022 (As Restated) 2021 $ Change % Change Cost of revenue $ 6,923 $ 4,823 $ 2,100 43.5 % Sales and marketing 11,069 6,427 4,642 72.2 % Research and development 9,883 4,960 4,923 99.3 % General and administrative 22,321 31,543 (9,222 ) -29.2 % Amortization 5,016 1,078 3,938 365.3 % Total operating expenses $ 55,212 $ 48,831 $ 6,381 13.1 % Cost of Revenue. The increase in cost of revenue in the three months ended March 31, 2022 compared with the corresponding prior year periods was due primarily 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 the second half of 2021, including the addition of PandoLogic. Sales and Marketing . The increase in sales and marketing expenses of $4.6 million or 72% in the three months ended March 31, 2022 compared with the corresponding prior year period was primarily due to our acquisition of PandoLogic in September 2021, coupled with a $0.8 million increase in personnel-related costs from the addition of new sales and marketing resources. As a percentage of revenue, sales and marketing expenses decreased to 32% in 2022 from 35% in 2021. Research and Development. The increase in research and development expenses of $4.9 million or 99% in the three months ended March 31, 2022 compared with the corresponding prior year period was primarily due to an increase of $2.2 million in personnel-related costs from the addition of new engineering resources and our September 2021 acquisition of PandoLogic in September 2021. As a percentage of revenue, research and development expenses increased to 29% in 2022 from 27% in 2021. General and Administrative. General and administrative expenses decreased $9.2 million or 29% in the three months ended March 31, 2022 compared with the corresponding prior year period principally due to a one-time expense in the prior year period associated with the vesting of performance-based stock options. As a percentage of revenue, general and administrative expenses declined to 65% in 2022 from 172% in 2021. 33 Amortization Expense. Amortization expense increased in the three months ended March 31, 2022 compared with the corresponding prior year period due to the addition of PandoLogic amortization expense. Other (Expense) Income, Net Other expense, net for the three months ended March 31, 2022 was comprised primarily of interest expense of $1.2 million due to the Convertible Notes we issued in November 2021. 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 $237.6 million as of March 31, 2022, compared with total cash and cash equivalents of $254.7 million as of December 31, 2021. The decrease in our cash and cash equivalents in the three months ended March 31, 2022 as compared with December 31, 2021 was primarily due to investments made during the period, taxes paid related to net share settlement of equity awards, and the payment of the PandoLogic 2021 earnout. We generated $10.1 million through cash provided by operating activities and also generated cash through proceeds from issuances of stock under employee stock incentive plans and stock purchases made under the ESPP of $0.6 million. Cash Flows A summary of cash flows from our operating, investing and financing activities is shown in the table below. Three Months Ended (in thousands) March 31, 2022 2021 Cash provided by operating activities $ 10,134 $ 6,209 Cash used in investing activities (4,054 ) (100 ) Cash (used in) provided by financing activities (23,248 ) 6,533 Net (decrease) increase in cash, cash equivalents and restricted cash $ (17,168 ) $ 12,642 Operating Activities Our operating activities provided cash of $10.1 million in the three months ended March 31, 2022, due primarily to our net loss of $22.1 million, adjusted by $15.2 million in non-cash expenses, including $5.0 million from a change in the fair value of contingent consideration and $4.8 million in stock-based compensation expense, offset in part by the net working capital increase of $17.1 million, primarily due to decreases in our accounts receivable of $19.0 million. Our business strategy includes streamlining operational costs while investing in the development of our AI capabilities and enhancement of our Software Products & Services to grow our business and future revenue. We gauge the amount of cash utilized in these efforts using the Non-GAAP net loss measure, as presented under the heading “Non-GAAP Financial Measures” above. Our use of cash as measured by Non-GAAP net loss decreased to $5.2 million for the three months ended March 31, 2022 from $3.9 million for the three months ended March 31, 2021, due primarily to the increase in our revenues, partially offset by an increase in non-GAAP expenses. Our operating activities provided cash of $6.2 million in the three months ended March 31, 2021, due primarily to the net increase of $11.1 million of cash received from advertising clients for future payments to vendors, offset in part by the effect of our net loss of $30.6 million, adjusted by $26.0 million in non-cash expenses, including $21.6 million in stock-based compensation expense. 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. Investing Activities Our investing activities for the three months ended March 31, 2022 used cash of $4.1 million primarily for an equity investment of $2.0 million in a strategic partner, $1.3 million to fund a portion of the consideration for the March 2022 acquisition, and $0.7 million in capital expenditures. Our investing activities consisted of minimal amounts used for capital expenditures and proceeds from the sale of equipment in the three months ended March 31, 2021. Financing Activities Our financing activities for the three months ended March 31, 2022 used cash of $23.2 million, consisting of $14.4 million to pay the 2021 earnout for PandoLogic and $9.4 million to pay taxes paid related to the net share settlement of equity awards, partially offset by $0.6 million in proceeds received from the exercise of stock options and purchases of shares under our ESPP. Our financing activities provided cash of $6.5 million for the three months ended March 31, 2021, consisting of $4.3 million in proceeds 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. 34 Capital Resources As of March 31, 2022, our only debt obligations were the Convertible Notes issued in the fourth quarter of fiscal year 2021. We have $3.0 million in purchase consideration commitments related to our March 2022 acquisition that will be paid 50% in 2023 and 50% in 2024. We have no other 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 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, we are not required to provide the information required by Item 305 of Regulation S-K.