Veritone, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unless noted, amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions. Veritone operates a media agency business and an early-stage AI platform business. It completed its IPO on May 17, 2017.
Financial performance and position
- Revenue: Q2 revenue was $4.09 million, up 103% year over year. Media agency revenue was $3.74 million, up 93%; AI platform revenue was $0.35 million, up 377%. First-half revenue was $7.20 million, up 76% year over year.
- Gross profit and margin: Q2 gross profit was $3.75 million and gross margin was 91.8%, versus 85.1% a year earlier. First-half gross profit was $6.66 million and gross margin was 92.6%, versus 84.9%.
- Operating results: Q2 operating expenses rose 41% to $11.60 million, and operating loss widened to $7.85 million from $6.53 million. First-half operating expenses rose 52% to $21.14 million; operating loss was $14.48 million versus $10.46 million.
- Net loss: Q2 net loss was $21.60 million, compared with $6.53 million; net loss attributable to common stockholders was $24.99 million, including $3.40 million of preferred-stock accretion. First-half net loss was $27.44 million versus $10.49 million; loss attributable to common stockholders was $31.91 million.
- Cash flow: First-half operating cash use was $16.48 million, compared with $15.61 million in 2016; investing cash use was $0.03 million. Financing provided $70.34 million, and cash increased by $53.83 million.
- Liquidity and debt: June 30 cash and cash equivalents were $65.91 million. Current assets were $88.83 million and current liabilities were $33.75 million. No convertible notes remained outstanding at quarter-end: the Acacia note and $8 million bridge loan, with accrued interest, converted into common stock in connection with the IPO.
- Equity and potential dilution: Common shares outstanding were 14.96 million at June 30. The company also reported 4.43 million outstanding options and 1.28 million warrants.
Changes versus the prior comparable period
- Revenue growth came primarily from media agency expansion; AI platform revenue also grew rapidly from a small base. The company reported 45 active media agency customers at Q2-end, versus 35 a year earlier, and 169 AI platform accounts.
- First-half audio and video processed rose to 805,000 hours from 367,000. Veritone said it integrated 28 new third-party cognitive engines during the first half.
- Operating expenses increased substantially as the company expanded sales, marketing, research and development, and staffing. First-half R&D expense nearly doubled year over year.
- Cash and stockholders’ equity increased following the IPO and related transactions; preferred stock was converted to common stock, and convertible debt was eliminated. Shares outstanding increased materially.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management said IPO-related proceeds and related financing transactions should fund cash requirements for the next 12 months and beyond. It expects to continue investing significantly in the AI platform and does not expect profitability in the foreseeable future; it has not determined when profitability may be achieved.
- Unusual IPO-related expenses: Q2 other expense, net, was $13.75 million. It included debt discount and issuance-cost write-offs, the fair value of warrants issued to Acacia and bridge lenders, and interest and debt-cost amortization, partly offset by a gain from the warrant liability. These items materially increased reported net loss.
- Customer and business risk: The media agency business generated most revenue and depends on a limited number of customers; the filing says its ten largest customers represented approximately 73% of first-half media agency revenue. Elsewhere, the risk-factor discussion reports that the ten largest customers represented 62.7% of total first-half net revenue. Media agency contracts are generally cancellable on 30–90 days’ notice.
- Execution and market risks: AI platform commercialization is at an early stage. Risks include limited market acceptance, competition, dependence on third-party cognitive engines and cloud providers, privacy and security requirements, and the possibility that access to public media could become restricted or costly. The proposed Safariland relationship was covered by a non-binding memorandum of understanding; a definitive agreement was still being negotiated.
- Lease commitment: After quarter-end, Veritone entered into a headquarters lease for approximately 37,875 square feet, with an 82-month initial term and minimum payments of approximately $9.47 million, net of abatements.
- Controls and legal matters: Management concluded disclosure controls were effective at quarter-end and said the previously identified material weakness in financial reporting had been remediated. The filing describes prior-year restatements related to equity accounting and reporting. Veritone reported no material legal proceedings.
Important facts for investors to verify
- Reconcile the reported customer-concentration measures: 73% of media agency revenue versus 62.7% of total revenue for the first half.
- Assess recurring AI platform revenue, customer conversion and retention, and whether rapid usage growth can translate into material revenue and profitability.
- Separate ongoing operating performance from IPO-related warrant, debt-conversion and financing charges when evaluating losses and cash burn.
- Review dilution from outstanding options and warrants, including executive awards, alongside the post-IPO share count.
- Monitor cash use, management’s stated funding outlook, and the financial impact of the new headquarters lease.
- Track whether remediation of the prior material weakness is sustained and whether future filings remain timely and reliable.