Veritone, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are identified where relevant.
Business context
Veritone sells its aiWARE artificial-intelligence platform, which processes audio, video and other data using its own and third-party cognitive engines, and operates a media advertising agency. The agency remained the larger business: management said it intends to emphasize AI while continuing to invest in the agency. The AI business was still early-stage and concentrated primarily in media customers.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net revenue | $14.413 million | $8.911 million |
| Gross profit / margin | $13.343 million / 92.6% | $7.334 million / 82.3% |
| Operating expenses | $60.105 million | $31.114 million |
| Operating loss | $46.762 million | $23.780 million |
| Net loss | $59.601 million | $26.979 million |
| Net loss per share, basic and diluted | $6.20 | $14.59 |
| Cash used in operating activities | $31.911 million | $26.755 million |
Revenue comprised $12.949 million from the media agency and $1.464 million from the AI platform. Fourth-quarter 2017 revenue was approximately $3.499 million, versus $2.503 million in fourth-quarter 2016, based on the quarterly business-line figures disclosed.
At year-end, cash and cash equivalents were $29.545 million and marketable securities were $39.598 million, totaling $69.143 million. Total current assets were $83.805 million and current liabilities $27.256 million. Veritone reported no outstanding debt at year-end; Acacia and bridge-loan borrowings had converted to common stock at the IPO. Net cash from financing was $93.705 million, while investing activities used $44.327 million, largely reflecting purchases of marketable securities and the Atigeo asset acquisition. Management said existing cash and securities should fund requirements for the next 12 months and beyond.
Changes versus FY 2016
- Revenue increased 61.7%; media agency revenue rose 54.1%, primarily from a significant new client and growth with existing and new clients. AI platform revenue rose 188.8% from a small base, primarily due to new media accounts.
- Gross margin rose 10.3 percentage points, mainly because the higher-margin media agency business contributed more revenue. The reported margin should be considered alongside the company’s net presentation of agency commissions.
- Operating expenses increased 93.2%, led by higher sales and marketing, R&D and general and administrative costs. G&A included $16.1 million of stock-based compensation, including $9.3 million related to performance-based executive options.
- Net loss more than doubled. Other expense included debt discount and issuance-cost write-offs and warrant-related expenses associated with the IPO and debt conversions.
- AI platform scale indicators advanced: year-end accounts rose to 467 from 23, active third-party engines to 151 from 41, and quarterly data processed in Q4 to 1.357 million hours from 447,000. Platform revenue remained modest relative to agency revenue.
Outlook, risks and unusual items
- Outlook: No specific financial guidance was provided. Management expects continued significant investment in AI product development, sales and marketing, staffing and expansion, and does not expect profitability in the foreseeable future. It expects expenses in sales and marketing, R&D and G&A to continue increasing.
- Capital and transactions: The May 2017 IPO and November follow-on offering, together with Acacia’s warrant exercise, generated substantial financing proceeds. In December, Veritone acquired Atigeo analytics software and intellectual property for approximately $3.0 million. The company also reported related-party financing involving Acacia and VLOC, in which company executives held an ownership interest.
- Customer and business concentration: The ten largest customers represented about 60.5% of consolidated revenue. Ten media-agency customers represented about 67% of that business’s revenue; The Upside Travel Company and Uber contributed about 14% and 10% of consolidated revenue, respectively. Two national radio customers accounted for about 45% of AI platform revenue.
- Key risks: Continued losses and cash burn; uncertain adoption and monetization of aiWARE; dependence on third-party engines and cloud providers; customer concentration and cancellable agency contracts; competition; privacy, cybersecurity and government-certification requirements; and restrictions on access to public media. The filing cites a 2018 appellate decision that could constrain certain public-media display and search features absent licenses.
- Other items: The Tax Cuts and Jobs Act prompted a roughly $10 million deferred-tax remeasurement expense, offset by a valuation-allowance reduction. A full $18.3 million valuation allowance remained against net deferred tax assets. Management said a material weakness in prior-year financial reporting controls had been remediated; management judged disclosure controls effective at year-end 2017. The auditor gave an unqualified opinion on the financial statements but did not opine on internal-control effectiveness.
- Management reported no legal proceedings expected to have a material adverse effect. The filing also notes a new Costa Mesa headquarters lease, with approximately $10.6 million of future minimum lease payments disclosed at year-end.
Most important facts for investors to verify
- Whether AI platform bookings, recurring revenue and usage growth convert into durable revenue and reduce reliance on the media agency.
- Customer concentration, renewal terms and the effect of any client reductions or cancellations on revenue and cash flow.
- Cash consumption against management’s stated funding horizon, including ongoing operating investment and lease commitments.
- The impact of stock-based compensation, outstanding options and warrants, and equity financing on future dilution.
- Progress on government security certifications, third-party engine availability, public-media licensing exposure and data-security controls.
- Remediation and ongoing effectiveness of financial reporting controls, and governance implications of the company’s controlled-company and related-party arrangements.