SoundHound AI, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Financial statements are unaudited. Unless noted otherwise, amounts below are in U.S. dollars.
Business context
SoundHound provides a conversational voice AI platform, Houndify, and related services for products and businesses. Revenue is generated primarily from product royalties, service subscriptions, licensing, professional services and monetization. The April 26, 2022 SPAC business combination was accounted for as a reverse recapitalization; historical results are those of Legacy SoundHound.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $11.2m | $4.0m | $21.6m | $16.0m |
| Gross profit / margin | $8.6m / 77% | $2.4m / 59% | $14.8m / 68% | $11.2m / 70% |
| Operating loss | $(27.0)m | $(17.2)m | $(76.7)m | $(46.3)m |
| Net loss | $(28.9)m | $(23.8)m | $(84.7)m | $(57.7)m |
| Basic and diluted loss per share | $(0.15) | $(0.35) | $(0.59) | $(0.86) |
Q3 revenue rose 178%; nine-month revenue rose 35%. Q3 gross margin improved mainly because of a high-margin Houndify Edge licensing arrangement. Nine-month margin declined from 70% to 68%. Q3 sales and marketing expense increased 468%, R&D increased 35%, and general and administrative expense increased 138% year over year. Nine-month stock-based compensation was $19.5m, compared with $4.0m a year earlier.
Cash flow: For the nine months, operating cash use was $73.6m (versus $51.1m), investing cash use was $1.2m (versus $0.2m), and financing provided $85.6m (versus $34.9m). Cash, cash equivalents and restricted cash totaled $33.6m at September 30, including $33.4m of unrestricted cash and equivalents.
Balance sheet and debt: Current assets were $42.4m and current liabilities $38.3m. Total liabilities were $78.2m. Notes payable were approximately $39.0m, comprising about $16.5m current and $22.5m long-term; the filing’s debt-note detail differs slightly from balance-sheet presentation. Accumulated deficit was $471.4m.
The business combination and PIPE generated $90.7m of net proceeds after $27.7m of transaction costs. Management stated it expected cash on hand to fund operations for at least 12 months, but also noted the possibility of additional financing or expense reductions and no assurance of obtaining sufficient funding on acceptable terms.
Material changes and notable items
- Q3 included $5.3m of Houndify Edge licensing revenue related to minimum-guarantee units for use over the contract term; recognition increased contract assets. This item was a major contributor to Q3 growth and margin improvement.
- Nine-month revenue growth also reflected higher hosted-services revenue, partly offset by lower professional-services revenue. The prior-year comparison included a nonrecurring contract-modification item associated with a German customer.
- The company raised $113.0m gross from PIPE investors and received $5.4m from the SPAC trust after redemptions; transaction costs reduced net proceeds. The convertible note was converted into equity at the business combination, and debt maturities were extended under loan terms.
- Remaining performance obligations were $23.4m at September 30: $10.4m expected within one year, $9.6m in two to five years and $3.4m thereafter.
- Two customers represented 65% of accounts receivable at quarter-end; one customer represented 63% of Q3 revenue. Four customers generated 77% of nine-month revenue.
Outlook, risks and contingencies
- No specific financial guidance or quantified revenue forecast is provided. Management expects continued investment in product development, sales and marketing, and public-company operations. It said gross margins may fluctuate near term with revenue mix and may stabilize as subscription and monetization revenue expand.
- Management reported customer retention of at least 80% as of September 30 and Houndify query traffic growth of more than 100% through the first three quarters versus the same period in 2021. These are company-reported operating indicators, not financial guidance.
- The company committed to at least $98m of cloud-service costs over seven years; disclosed remaining non-cancelable minimum payments were $97m as of September 30, 2022. Usage may increase costs.
- An equity line agreement allows potential sales of up to the lesser of 25m Class A shares and the applicable exchange cap. As of November 14, the resale registration statement was not effective; any proceeds depend on effectiveness, conditions, market prices and company decisions. Shares sold would dilute existing holders.
- Key stated risks include recurring losses and negative operating cash flows, dependence on financing, customer concentration, long enterprise sales cycles, competition, customer product demand and automotive production/supply-chain conditions, COVID-19 effects, inflation, interest rates and geopolitical disruption. The filing states the Ukraine conflict had not materially affected the business to date.
- The company recorded a $1.1m estimated sales-tax liability. Management reported no pending legal claims expected to materially adversely affect its financial position, results or cash flows. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the $5.3m Houndify Edge revenue is representative of recurring revenue, and how contract-asset balances convert to cash and future revenue.
- Customer concentration and the durability of royalty revenue, including the large Q3 contribution from one customer and Korea.
- Cash burn relative to the stated 12-month funding expectation, and whether the company can access the equity line or other funding without substantial dilution.
- Debt terms, interest rates and repayment schedules, plus the scale and timing of the $97m cloud commitment.
- How much of the reported operating expense growth—including stock-based compensation—is expected to continue, and whether gross-margin improvement persists beyond the licensing item.