Veritone, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. Veritone provides cloud-based AI software for audio and video data and also operates a media advertising agency. Substantially all revenue still came from the media agency business.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $3.108 million | $2.076 million; up 49.7% |
| Gross profit / margin | $2.912 million / 93.7% | $1.756 million / 84.6% |
| Operating expenses | $9.543 million | $5.686 million; up 67.8% |
| Operating loss | $6.631 million | $3.930 million |
| Net loss | $5.847 million | $3.963 million |
| Net loss attributable to common stockholders | $6.920 million; $3.09 per share | $4.757 million; $3.86 per share |
| Cash used in operating activities | $5.112 million | $14.677 million |
| Cash and cash equivalents, March 31 | $8.782 million | $12.078 million at December 31, 2016 |
At March 31, total assets were $26.344 million and current liabilities were $51.339 million. Convertible notes had a carrying value of $15.323 million, net of discounts and issuance costs; principal outstanding was $22 million, including a $2 million Bridge Loan draw. Preferred stock was recorded at $23.869 million. Cash declined by $3.296 million during the quarter. The filing reports no material off-balance-sheet arrangements.
Changes and operating developments
- Media agency revenue increased 42.5% to $2.899 million; AI platform revenue increased to $209,000 from approximately $41,000. AI remained a small share of total revenue.
- Media agency customers rose to 39 from 30 a year earlier. The company added 36 AI platform accounts, reaching 57, and processed 367,000 hours of audio and video, up 93% year over year.
- Operating expenses grew faster than revenue, led by research and development, which more than doubled, as the company increased hiring and product investment. The operating loss widened by $2.701 million.
- Other income included a $3.118 million noncash gain from a lower fair value of the Acacia warrant liability. Debt discount and issuance-cost amortization was $2.054 million.
Outlook, financing, risks, and unusual items
- Outlook: Management provided no quantified revenue or earnings guidance and had not determined when it expected to achieve profitability. It expected continued significant investment in AI platform development, sales, and marketing, and did not expect near-term profitability.
- Post-quarter financing and IPO: The company completed its IPO on May 17, 2017, issuing 2.5 million shares at $15 per share and receiving approximately $32.6 million net proceeds. Acacia’s warrant exercise generated approximately $29.3 million; the remaining $4 million Bridge Loan was funded. Management stated that approximately $68 million of cash investments from these transactions should fund requirements for the next 12 months and beyond.
- At the IPO, $20 million principal and accrued interest on the Acacia note, and $8 million principal and accrued interest on the Bridge Loan, converted into common stock. Preferred shares also converted. The company expected to record a second-quarter pretax charge of approximately $8.6 million related to note conversion and warrant issuance, and approximately $2.9 million of preferred-stock accretion. It also expected to record $5.790 million of fair value for a new Acacia warrant as other income in Q2.
- Management cited customer concentration, short-cancellable media agency contracts, the early and unproven AI market, competition, dependence on third-party cognitive engines and cloud providers, data-access and privacy risks, and continued losses as significant risks. The ten largest customers represented approximately 76.6% of total net revenue in Q1; separately, the ten largest represented approximately 82% of media agency net revenue.
- The 2016 audit report included a going-concern explanatory paragraph, citing recurring operating losses and operating cash use. Management said it believed the IPO-related funding addressed near-term cash requirements, but profitability remained uncertain.
- The company disclosed a prior material weakness in financial reporting related to accounting expertise for equity transactions, which had led to adjustments and restatements of 2015 and 2016 financial statements. Management said remediation measures had been implemented; it also concluded disclosure controls were effective at the quarter-end at a reasonable-assurance level.
- Related-party financing merits attention: the Bridge Loan lenders included Acacia and an entity 50% owned by the CEO and President. Their employment agreements included substantial time-based and performance-based stock-option awards tied to the IPO and future service/performance conditions.
Important facts for investors to verify
- Whether AI platform revenue and customer adoption grow enough to reduce dependence on concentrated, cancellable media agency accounts.
- Post-IPO cash balance, burn rate, and whether the stated funding runway is supported by operating results and planned spending.
- The accounting and dilution effects of converted notes, warrants, preferred shares, and executive option awards, including the disclosed Q2 charges.
- Whether the reported remediation fully resolves the prior material weakness and whether controls remain effective as a newly public company.
- The filing contains different concentration figures for media agency revenue and total net revenue; confirm the relevant denominator when assessing customer concentration.