Veritone, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Veritone provides AI solutions through its aiWARE platform, SaaS and content services, and advertising agency and VeriAds Network. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise stated.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $15.7 | $12.8 | $40.9 | $37.2 |
| Gross profit | $11.2 | $8.6 | $29.3 | $25.5 |
| Gross margin | 71% | 67% | Approximately 72% | Approximately 68% |
| Operating loss | $(11.0) | $(16.2) | $(35.3) | $(49.4) |
| Net loss | $(11.0) | $(14.2) | $(35.5) | $(47.2) |
| Basic and diluted loss per share | $(0.40) | $(0.64) | $(1.31) | $(2.26) |
| Operating cash flow | Not presented for the quarter | $1.3 | $(18.4) |
At September 30, 2020, cash and cash equivalents were $54.3 million, current assets $97.0 million, current liabilities $83.9 million, total liabilities $85.2 million, and stockholders’ equity $34.4 million. The company reported no outstanding debt. Cash and cash equivalents included $34.2 million received from advertising clients and content licensees for future vendor payments; this is an important qualification when assessing available liquidity. The company stated that cash should fund ordinary operations for at least 12 months from filing, but not support operations through sustained positive operating cash flow without additional capital.
Changes versus prior comparable periods
- Q3 revenue increased 22.7%; nine-month revenue increased 10.0%. Advertising revenue rose 39.3% in Q3 and 22.2% year to date, mainly reflecting growth in VeriAds, launched in late 2019. aiWARE SaaS revenue increased 42.6% in Q3 and 21.6% year to date.
- Content licensing and media services revenue declined 13.5% in Q3 and 16.8% year to date. The filing attributes pressure to a nonrecurring large project in the prior-year quarter and COVID-related sports cancellations or postponements and reduced entertainment production.
- Gross margin improved, which management attributed primarily to lower platform costs. Operating expenses declined 10.8% in Q3 and 13.7% year to date, including lower sales and marketing and R&D expenses from cost reductions.
- Net losses narrowed year over year, while nine-month operating cash flow improved to positive $1.3 million from negative $18.4 million. Management said the 2020 operating cash result benefited substantially from a $19.2 million increase in cash collected from advertising clients for future vendor payments, alongside noncash expense adjustments.
Liquidity, outlook, risks and unusual items
- Management expects continued net losses as it invests in aiWARE SaaS development and sales. It may pursue acquisitions or investments and expects to seek additional capital through equity and/or debt financing. Up to $18.5 million remained available under its equity distribution agreement; financing may be unavailable or dilutive. No available credit lines were reported.
- The company repaid in full, in May 2020, $6.5 million of PPP loans received in April. It also raised $6.0 million net from common-stock sales and received $2.1 million from warrant exercises during the first nine months. Shares outstanding increased from 25.7 million at year-end 2019 to 27.7 million at September 30, 2020.
- COVID-19 created uncertainty around customer demand, customer creditworthiness, sports schedules and future advertising and content activity. Management reported no additional allowance for doubtful accounts was needed for customer credit deterioration as of September 30, but warned that future revenue and results could be adversely affected.
- Advertising revenue can fluctuate with campaign timing, client budgets and client concentration. SaaS revenue, bookings and contract values may also vary with project timing, renewals and contract structure. Remaining performance obligations were $3.8 million, approximately 78% expected to be recognized within 12 months; this excludes certain short-duration contracts and variable consideration.
- Disclosure controls were deemed ineffective because of an unremediated material weakness in accounting for advertising revenue. Remediation measures had begun, but the weakness remained at September 30. Management nevertheless stated that the filed financial statements were prepared in accordance with GAAP and fairly presented in all material respects.
- Other notable items: a modification of performance-based stock awards resulted in approximately $3.0 million of incremental compensation expense; Q3 stock-based compensation was $5.1 million. Future minimum operating lease payments totaled $8.2 million. The company reported no material adverse litigation proceedings and no material changes to previously disclosed risk factors.
- Non-GAAP net loss was $4.3 million in Q3 and $16.7 million for the first nine months, versus $9.6 million and $28.1 million, respectively, in 2019. These measures exclude specified items, including stock compensation and amortization, and should not be treated as substitutes for GAAP results or operating cash flow.
Important facts for investors to verify
- Whether operating cash flow remains positive after separating the timing and amount of client funds held for future vendor payments.
- Progress in remediating the material weakness in advertising revenue accounting and whether disclosure controls become effective.
- Cash available for corporate use after considering client-related balances, ongoing losses, investment needs and any acquisition plans.
- Whether VeriAds and SaaS growth persists, and whether it can offset continued weakness or volatility in content licensing and media services.
- Potential dilution from future equity issuance, stock awards and outstanding warrants; confirm current share count and remaining ATM capacity.
- COVID-related effects on sports, entertainment production, customer demand and collections, as well as the timing and conversion of reported SaaS bookings and remaining obligations into revenue.