SoundHound AI, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts below are in U.S. dollars; financial statement figures have been converted from thousands to millions unless noted. SoundHound develops conversational voice AI technology, including its Houndify platform. The April 26, 2022 SPAC business combination was accounted for as a reverse recapitalization; the historical results are those of Legacy SoundHound.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $6.15m | $8.28m | $10.44m | $12.02m |
| Operating loss | $(28.93)m | $(12.50)m | $(49.65)m | $(29.12)m |
| Net loss | $(30.67)m | $(14.65)m | $(55.77)m | $(33.91)m |
| Operating cash flow | Not separately presented for the quarter | $(46.77)m | $(32.63)m |
- Revenue declined 26% in Q2 and 13% for the first half year-over-year. Product royalties were the largest revenue source: $5.56m in Q2 and $9.27m in the first half.
- Management attributed the comparison in part to $4.3m of nonrecurring German professional-services revenue recognized in 2021. Hosted-services revenue increased by $1.3m for both the quarter and first half; lower music-app advertising revenue weighed on results.
- Gross margin was approximately 59.6% in Q2 and 59.2% for the first half, calculated from reported revenue less cost of revenue; comparable 2021 margins were approximately 80.3% and 73.2%. The filing attributes cost growth partly to hosting and data-center costs and the prior-year one-time revenue item.
- Operating expenses rose 69% in Q2 and 46% in the first half. R&D investment, sales and marketing expansion, public-company costs, and increased stock-based compensation contributed. First-half stock-based compensation was $10.3m.
- Cash and cash equivalents were $65.01m at June 30, 2022; restricted cash was another $0.23m. Current assets were $71.76m and current liabilities $40.88m, implying working capital of about $30.88m.
- Notes payable totaled approximately $43.06m on the balance sheet, with $16.93m current and $26.13m long-term. First-half financing cash flow was $90.17m, including net business-combination and PIPE proceeds; investing cash use was $0.98m.
Material changes and business combination
- The April 2022 combination and PIPE generated $90.7m net proceeds after redemptions and $27.7m of transaction costs. The company converted legacy preferred stock and a $15.0m convertible note plus accrued interest into common shares; no goodwill or other intangible assets were recorded.
- Q2 net loss more than doubled year-over-year. Operating expenses increased while revenue decreased; the first-half operating cash outflow also grew from the prior year.
- At June 30, the company had 156.3m Class A and 40.4m Class B shares outstanding. Class B shares carry ten votes per share; the filing cautions that retained Class B holdings may concentrate voting power. Options, RSUs, and warrants create additional potential dilution.
Outlook, risks, and contingencies
- Management expects cash and cash equivalents to fund operations for at least the next 12 months, while anticipating substantial future losses and continuing R&D investment. The filing provides no quantified revenue or earnings guidance and says additional capital may be sought.
- The company committed to at least $98m in cloud-hosting costs over seven years, subject to usage-related increases. The filing also reports $23.1m of remaining performance obligations, with $8.9m expected within one year.
- Management cited COVID-related customer production, semiconductor and supply-chain constraints, uncertain demand, long enterprise sales cycles, and geopolitical and capital-market disruption as risks. It said the Ukraine conflict had not materially affected the business to date, but future effects were uncertain.
- Four customers represented 77% of Q2 revenue and 70% of first-half revenue. Revenue from investor-related parties was $5.19m for the first half; verify the nature and continuation of these relationships.
- Management reported no material pending legal proceedings and no material changes to previously disclosed risk factors. A $1.105m estimated sales-tax liability was recorded. Disclosure controls were assessed as effective; no material internal-control change was reported.
Important facts for investors to verify
- Whether the reported hosted-services and product-royalty growth can offset revenue volatility, customer concentration, and the loss of prior-year one-time revenue.
- Cash-burn trajectory and funding needs relative to management’s 12-month runway statement, outstanding debt, and the $98m cloud commitment.
- Customer and investor-related-party revenue concentration, contract renewals, and the timing and collectability of remaining performance obligations.
- Potential dilution from options, RSUs, warrants, and equity-plan reserves, along with the voting implications of the dual-class share structure.
- Margin trends as hosting costs, sales and marketing, R&D, public-company expenses, and stock-based compensation scale.