SoundHound AI, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023, compared with the three months ended March 31, 2022. SoundHound develops voice AI products and services, including its Houndify platform. Financial statements are unaudited.
Financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $6.7 million | $4.3 million | Up 56% |
| Gross margin | 71% | 59% | Up 12 percentage points |
| Operating expenses | $31.7 million | $25.0 million | Up 27% |
| Operating loss | $25.0 million | $20.7 million | Loss increased |
| Net loss | $26.4 million | $25.1 million | Loss increased 5% |
| Basic and diluted loss per share | $0.13 | $0.36 | Lower loss per share |
| Cash used in operating activities | $14.5 million | $15.0 million | Use decreased $0.5 million |
Revenue growth was driven mainly by automotive product royalties, which rose 67% to $6.2 million. Product royalties represented most revenue; subscriptions were $0.4 million and monetization was $0.1 million. Management attributed the gross-margin improvement to scale and data-center and hosting efficiencies. Sales and marketing and general and administrative costs rose 89% and 78%, respectively; research and development expense fell 15%.
Balance sheet, liquidity and financing
- Cash and cash equivalents were $46.3 million at March 31, 2023, versus $9.2 million at December 31, 2022. Including restricted cash, quarter-end cash was $46.6 million.
- Total current assets were $53.3 million and current liabilities were $41.5 million. Total liabilities were $70.4 million; stockholders’ equity was $2.4 million, compared with a $35.2 million deficit at year-end.
- Notes payable totaled approximately $30.9 million at quarter-end. Net cash provided by financing was $51.6 million, primarily from $28.4 million net ELOC proceeds and $24.9 million from Series A preferred stock, partly offset by $4.1 million of note payments.
- Management stated that it expected available resources to fund operations for at least the next 12 months, while noting it may need additional financing or expense reductions. The company reported recurring losses, negative operating cash flow and an accumulated deficit of $528.5 million.
Material developments and outlook
- Restructuring: In January 2023, SoundHound announced a workforce reduction of approximately 40%, or 180 positions. It recorded $3.6 million of restructuring expense in the quarter, including $1.3 million of cash payments, and estimated approximately $0.2 million of remaining costs through year-end.
- Subsequent-term loan: On April 14, 2023, after quarter-end, the company borrowed $100 million under a senior secured term loan, used part of the proceeds to repay approximately $30 million of existing loans, and reserved funds for interest, fees and insurance costs. The loan matures in April 2027, has no scheduled principal amortization before maturity, and bears interest at SOFR plus an 8.50% margin or an alternative base rate plus a 7.50% margin. It is secured by substantially all company and subsidiary assets, subject to exclusions, and includes covenants and liquidity requirements. The company also issued a warrant for up to 3.3 million Class A shares. Management expects interest expense to increase substantially from Q2 2023.
- Equity funding and dilution: The January Series A preferred stock issuance raised approximately $25 million. It accrues dividends at 14% annually and is convertible into Class A shares under specified terms. Through April 30, 2023, approximately 12.7 million shares had been sold under the ELOC for about $34.4 million in aggregate proceeds.
- Revenue visibility: Remaining performance obligations were $18.4 million at March 31, with $7.3 million expected within one year. Deferred revenue was $5.3 million current and $5.4 million non-current.
- Commitments and risks: A cloud-provider agreement requires at least $94.3 million in remaining non-cancelable payments, including $5.3 million for the rest of 2023. Four customers accounted for 77% of Q1 revenue; four customers also represented 71% of accounts receivable. Management cited competitive, customer-adoption, financing, macroeconomic, regulatory and execution risks. No material pending legal proceedings were reported.
The filing provides no specific revenue or earnings guidance. Management described plans to continue investing in technology, sales and customer engagement, and said the restructuring was intended to reduce costs and advance profitability; results remain subject to uncertainty.
Most important facts for investors to verify
- Whether revenue growth and gross-margin gains continue, particularly as revenue remains concentrated in product royalties and a small number of customers.
- Cash burn and runway after the April term loan, including its effective interest and insurance costs, covenants, collateral and permitted uses of proceeds.
- The scale of potential dilution from the ELOC, Series A preferred conversion and term-loan warrant.
- Whether restructuring savings offset continuing operating expenses and the higher interest burden.
- Timing and collectability of remaining performance obligations, and ability to meet the substantial cloud-service commitment.