Veritone, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Veritone operates a media agency business and an early-stage AI platform business that analyzes audio, video and other unstructured data. Financial amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $3.72 | $2.32 | $10.91 | $6.41 |
| Gross profit / margin | $3.43 / 92.1% | $1.87 / 80.7% | $10.09 / 92.5% | $5.34 / 83.3% |
| Operating expenses | $22.88 | $7.84 | $44.02 | $21.77 |
| Operating loss | $(19.46) | $(5.97) | $(33.93) | $(16.43) |
| Net loss | $(19.37) | $(7.43) | $(46.81) | $(17.92) |
| Net loss per share, basic and diluted | $(1.31) | $(3.49) | $(5.94) | $(10.37) |
- Revenue mix: Q3 media agency revenue was $3.29 million, up 47.9%; AI platform revenue was $0.43 million, up 339.8%. Nine-month media agency revenue was $9.93 million, up 60.2%; AI platform revenue was $0.99 million, up 368.2%.
- Cash flow, nine months: Operating activities used $20.37 million, investing activities used $40.67 million, and financing activities provided $69.72 million. Investing outflow mainly reflected $39.85 million of marketable-security purchases.
- Liquidity: At September 30, cash and cash equivalents were $20.76 million and marketable securities were $39.67 million. Current assets were $78.51 million versus current liabilities of $31.84 million.
- Debt and equity: Convertible notes and the $8 million bridge loan, including accrued interest, converted into common stock at the May IPO; no convertible notes remained at quarter-end. The IPO raised $32.58 million net, and exercise of Acacia’s primary warrant generated $29.26 million. Common shares outstanding increased from 2.62 million at year-end 2016 to 14.96 million at September 30, 2017.
- Commitments: The company reported $10.59 million of future operating lease obligations, including a new headquarters lease.
Changes, outlook and significant items
- Revenue increased 60.2% year over year in Q3 and 70.3% for the nine months. Management attributed growth mainly to increased media agency volume, new agency customers and digital advertising, alongside growth in AI platform activity. Q3 media/audio processing reached 711,000 hours, up 115% year over year; nine-month volume was 1.516 million hours, up 117%.
- Gross margin improved, but operating losses widened as operating expenses more than doubled for the nine-month period. Q3 general and administrative expense included $8.9 million of stock-based compensation for performance options granted to the CEO and President; the performance condition was met in September. Total stock-based compensation was $11.7 million in Q3 and $13.6 million for the nine months.
- Nine-month other expense, net, was $12.87 million and included debt discount and issuance-cost write-offs, warrant costs and interest expense, partly offset by a $7.11 million gain from the change in fair value of warrant liability. These financing-related items materially affected reported losses.
- Management said IPO and warrant proceeds were expected to fund cash requirements for the next 12 months and beyond. No specific revenue, earnings or margin guidance was provided. Management expected continued significant investment in the AI platform and did not expect profitability in the foreseeable future; it had not determined when profitability would be achieved.
- Key risks include the early-stage nature of the AI licensing business, dependence on third-party cognitive engines and cloud providers, possible limits on access to public media, customer concentration, short-cancellable agency contracts, and substantial ongoing losses. The filing reports no material legal proceedings and no material subsequent events. Management concluded disclosure controls were effective; it also described a previously identified financial-reporting material weakness as remediated.
Important facts for investors to verify
- Whether AI platform revenue can grow meaningfully beyond its small base and become a larger share of total revenue.
- Customer concentration: the filing says the ten largest customers represented 79% of Q3 and 73% of nine-month media agency revenue in one discussion; elsewhere it reports 66% of nine-month total net revenue. Confirm the differing measures and definitions.
- Cash burn relative to the $60.43 million of cash and marketable securities at quarter-end, including how much of the securities balance is readily available for operations.
- The effect of executive performance awards and other equity compensation on future expenses and dilution; 4.56 million options were outstanding at quarter-end.
- Progress against the stated risks in customer retention, public-media access and copyright, third-party technology integration, cloud-service resilience, and internal-control remediation.