Veritone, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparisons are with FY2017. This is an annual filing, not a standalone fourth-quarter report. Amounts below are in U.S. dollars.
Business context
Veritone provides AI solutions through its aiWARE platform and also operates an advertising agency and digital content management and licensing businesses. FY2018 included partial-year contributions from acquisitions of Performance Bridge, Wazee Digital and Machine Box, completed in the third quarter. Management describes aiWARE SaaS growth as a strategic focus while continuing to invest in advertising.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $27.0 million | $14.4 million |
| Gross profit / margin | $20.6 million / 76.0% | $13.3 million / 92.6% |
| Operating loss | $(62.0) million | $(46.8) million |
| Net loss | $(61.1) million | $(59.6) million |
| Net loss per share, basic and diluted | $(3.48) | $(6.20) |
| Cash used in operating activities | $(42.2) million | $(31.9) million |
| Adjusted EBITDAS (non-GAAP) | $(39.0) million | $(30.2) million |
- Revenue by business: advertising $17.1 million; aiWARE SaaS solutions $6.0 million; content licensing and media services $3.9 million.
- Cash, cash equivalents and marketable securities totaled $51.1 million at year-end, down from $69.1 million. Cash and equivalents alone were $37.5 million; marketable securities were $13.6 million.
- Total liabilities were $57.5 million, including $56.1 million of current liabilities. Veritone reported no outstanding debt at December 31, 2018 and no available credit lines.
- Stockholders’ equity was $60.3 million; accumulated deficit was $170.4 million. The company raised $32.8 million net from a June 2018 stock offering. An at-the-market program had $47.5 million of capacity remaining.
Material changes versus FY2017
- Revenue increased 87.7%, driven in part by $7.0 million of revenue from acquired businesses after acquisition, growth in legacy aiWARE SaaS, and higher advertising revenue.
- Advertising revenue rose 32.4% to $17.1 million; aiWARE SaaS revenue rose to $6.0 million from $1.5 million; content licensing and media services contributed $3.9 million, with no comparable FY2017 revenue.
- Gross margin fell 16.6 percentage points to 76.0%, primarily because advertising, which has higher margins, represented a smaller share of revenue. FY2018 also included $0.8 million of acquired-intangible amortization in cost of revenue.
- Operating expenses increased 37.4% to $82.6 million, including higher personnel and growth investment costs, acquisition expenses and acquired-company costs. Operating loss widened by $15.2 million.
- Net loss increased modestly despite a large improvement in other income/expense: FY2017 included substantial debt- and warrant-related expenses connected with the IPO; FY2018 recorded $0.9 million of other income.
- Operating cash use rose by $10.3 million. The company attributed the increase primarily to higher personnel costs in sales and R&D.
- Customer concentration declined on a consolidated basis: the ten largest customers represented 38.8% of FY2018 revenue versus 60.5% in FY2017. However, two national radio broadcasters still accounted for 44.8% of aiWARE SaaS revenue.
Fourth-quarter indicators and outlook
- Standalone consolidated Q4 revenue is not clearly provided in the filing text. The quarterly operating indicators report Q4 advertising revenue of $4.7 million excluding Performance Bridge and $6.0 million including acquisitions; aiWARE SaaS revenue was $1.5 million excluding acquired businesses and $2.4 million including acquisitions.
- Management expected additional revenue in 2019 from applications launched in late 2018 and from planned legal and compliance applications, then expected around the first half of 2019. The filing provides no specific consolidated revenue, margin or earnings guidance.
- Management expected continued losses and further investment in product development, sales, marketing and operations. It believed year-end liquid resources would fund ordinary-course operations and acquisition contingent payments for at least the next 12 months, but not necessarily fund development through positive operating cash flow.
- Management expected gross margin to trend lower as SaaS and content services become a larger share of revenue, while sales and marketing and R&D expenses could rise in dollars and decline as a percentage of revenue if revenue grows.
- Potential acquisition payments included a finalized $4.4 million Performance Bridge earnout, expected mostly in shares, and Machine Box milestone consideration. The company also disclosed preliminary purchase-price allocations for its 2018 acquisitions.
Risks, contingencies and unusual items
- Financial reporting controls: Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end due to a material weakness in accounting for complex acquisitions. Related adjustments were not material to FY2018 statements; remediation had begun. The auditor did not attest to internal control effectiveness.
- Funding and losses: The company has a history of losses, substantial operating cash burn and no debt or credit line. Additional financing may be needed; equity financing could dilute shareholders.
- Revenue exposure: aiWARE SaaS revenue remains concentrated in a small number of media customers. Advertising clients can cancel on relatively short notice, and advertising revenue can fluctuate with client budgets and campaign timing.
- Execution and technology: aiWARE is an early-stage business facing competition, long sales cycles, dependence on third-party cognitive engines and AWS infrastructure, and risks involving service availability, security and customer adoption.
- Regulatory and content risks: Privacy and data-protection requirements, including GDPR, government security standards, and rights or clearance claims relating to licensed content could increase costs or constrain services.
- Other disclosed matters: No legal proceeding was identified as likely to have a material adverse effect. The company reported a full valuation allowance against deferred tax assets and no cash dividends planned for the foreseeable future.
Important facts for investors to verify
- Whether operating cash burn and losses are declining, and how long available liquidity will support the business.
- Organic aiWARE SaaS growth, recurring revenue and customer diversification, separated from acquisition contributions.
- Whether acquisitions are integrated successfully and whether earnouts, acquired intangible amortization or other costs affect future results.
- Progress in remediating the material weakness and the status of controls in subsequent filings.
- Potential dilution from the remaining ATM offering capacity, acquisition shares, contingent stock consideration and outstanding equity awards.
- Whether management’s 2019 application and market-expansion expectations translated into revenue and customer adoption.