SoundHound AI, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; filed November 15, 2023. SoundHound develops voice AI products and services, including Houndify and SoundHound Chat AI. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $13.3 million | $11.2 million | $28.7 million | $21.6 million |
| Gross margin | 73% | 77% | 74% | 68% |
| Operating loss | $14.5 million | $27.1 million | $56.2 million | $76.7 million |
| Net loss | $20.2 million | $30.1 million | $70.9 million | $85.8 million |
| Net loss per share, basic and diluted | $0.09 | $0.15 | $0.33 | $0.60 |
- Q3 revenue grew 19% year over year; nine-month revenue grew 33%. Product royalties drove the increase, while subscriptions and monetization declined.
- Q3 gross margin fell from 77% to 73%, primarily reflecting unusually high margins on Houndify Edge licensing in the prior-year quarter. Nine-month margin improved from 68% to 74%, which management attributed partly to scaling and hosting efficiencies.
- For the first nine months, operating cash outflow was $54.4 million, versus $73.6 million in 2022. Investing cash outflow was $0.3 million. Financing provided $155.2 million, including term-loan proceeds, ELOC share sales, and preferred-stock proceeds.
- At September 30, cash and cash equivalents were $96.1 million, with another $13.8 million restricted; accounts receivable were $3.4 million. Current assets were $109.4 million and current liabilities $21.4 million.
- Term-loan principal was $100 million, with a reported carrying value of $83.3 million after unamortized discount and issuance costs. The loan bears approximately 14% interest, is secured by substantially all company assets, and matures April 2027, with no scheduled principal payments before maturity. The company reported covenant compliance.
Changes, outlook, and notable items
- Q3 operating expenses declined 27% year over year, mainly following the January 2023 restructuring, which reduced the workforce by approximately 40% (about 180 positions). Nine-month restructuring expense was $3.8 million, including $1.4 million in cash payments; the plan was substantially complete by quarter-end.
- Interest expense increased substantially, reflecting the higher-cost term loan and debt issuance costs. Nine-month net loss improved year over year, but the company continued to incur significant losses and cash burn.
- A customer contract modification increased revenue by $5.4 million and contract assets; management accounted for it prospectively. Remaining performance obligations were $13.9 million, with $6.8 million expected to be recognized within one year. A separate German hosting-contract modification moved certain remaining consideration into 2023 revenue recognition.
- Customer concentration is significant: Customer A represented 72% of Q3 revenue. For the nine months, Customer A and Customer D represented 46% and 20%, respectively. Korea accounted for $9.6 million of Q3 revenue.
- Management said unrestricted cash was expected to fund operations for at least the next 12 months. It may seek further debt or equity financing and/or additional expense reductions. No specific revenue or earnings guidance is provided in the filing.
- The company has a $150 million at-the-market equity offering facility, but had sold no shares under it as of the filing. It had already sold all 25 million shares available under its ELOC, raising approximately $71.7 million. Series A preferred stock carries a 14% cumulative dividend and a liquidation preference with a 2.5x alternative payout feature; conversions and potential future share issuance may dilute common shareholders.
- The company committed to at least $90.75 million in future cloud-provider payments under a seven-year agreement. Management reported no material pending legal proceedings. Inflation, interest rates, geopolitical disruption, customer demand, competition, and execution risks could affect results.
- Management concluded disclosure controls were not effective at September 30 because of material weaknesses involving risk-responsive controls, complex financing accounting, segregation of duties, and IT general controls. The filing reports revisions to prior-period financial statements for errors deemed immaterial to those periods, and describes remediation efforts that were still in progress.
Investor verification points
- Track whether revenue growth broadens beyond product royalties and the highly concentrated customer base, and whether contract-related revenue and contract assets convert to cash.
- Assess ongoing cash burn, the restricted portion of cash, high borrowing costs, debt covenants and prepayment terms, and the need for additional financing.
- Monitor dilution from equity facilities, preferred-stock conversion and dividends, stock-based compensation, and outstanding potential securities.
- Review progress in remediating the disclosed material weaknesses and any further financial-statement revisions or auditor findings.
- Evaluate whether restructuring-related cost savings and hosting efficiencies translate into sustainable margin improvement without impairing product development or customer growth.