Veritone, Inc.: Form 10-Q for the period ended Sep 30, 2023

Forward-Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read together with and is qualified in its entirety by reference to the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed under “Risk Factors,” set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, and any updates thereto set forth in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission (“SEC”), including future SEC filings. See “Special Note Regarding Forward-Looking Statements.”

Overview

Veritone, Inc., collectively with our subsidiaries, referred to as “Veritone,” “Company,” “we,” “our,” and “us,” is a provider of Artificial Intelligence (“AI”) solutions, powered by our proprietary AI operating system, aiWARE™, to deliver differentiated products and solutions to our Commercial Enterprise and Government & Regulated Industries customers. Our Software Products & Services consist of revenues generated from Commercial Enterprise and Government & Regulated Industries customers using our aiWARE platform and hiring solutions, any related support and maintenance services, and any related professional services associated with the deployment and/or implementation of such solutions. Our Managed Services consist of revenues generated from Commercial Enterprise customers using our content licensing services, advertising agency, influencer management and related services.

During the three and nine months ended September 30, 2023, we generated revenue of $35.1 million and $93.4 million, respectively, as compared to $37.2 million and $105.8 million during the three and nine months ended September 30, 2022, respectively. Our Software Products & Services revenue was $20.4 million during the three months ended September 30, 2023 as compared with $20.8 million for the same period in 2022, while our Managed Services revenue was $14.8 million during the three months ended September 30, 2023 as compared with the $16.4 million for the same period in 2022. Our Software Products & Services revenue was $48.6 million during the nine months ended September 30, 2023 as compared with $57.4 million for the same period in 2022, while our Managed Services revenue was $44.8 million during the nine months ended September 30, 2023 as compared with the $48.5 million for the same period in 2022. During the three and nine months ended September 30, 2023 our largest customer represented less than 10% and 12%, respectively, of our consolidated revenue and during the three and nine months ended September 30, 2022 that same customer represented 31% and 25%, respectively, of our consolidated revenue.

Recent Developments

On January 31, 2023, we announced strategic cost reduction initiatives with the aim of achieving net annualized savings of $12 to $15 million over the course of fiscal 2023. As part of this initiative, we engaged in headcount and various cost reduction initiatives during the nine months ended September 30, 2023, completed the sale of our energy group to GridBeyond Limited (the “Energy Divestiture”) and we have begun and further intend to reduce and consolidate expenses tied to software, outside services, and cloud-based processing throughout 2023. As of September 30, 2023, we have executed over $24 million of net annualized strategic cost reduction initiatives announced in the first quarter of 2023, exceeding the net annualized savings target for 2023.

On November 7, 2023, we entered into a commitment letter with certain funds managed by Highbridge Capital Management, LLC and certain other lenders to provide a senior secured term loan facility in an aggregate principal amount of $77.5 million (the “Term Loan”). We expect to use the proceeds of the Term Loan to repurchase an aggregate $50.0 million principal amount of our existing 1.75% convertible senior notes due 2026 held by the lenders at a purchase price of $37.5 million plus accrued and unpaid interest and for general corporate purposes.

The Term Loan will have a term of four years, accrue interest at a rate of Term SOFR plus 8.50%, with a 3.00% floor for Term SOFR, payable quarterly, and will require quarterly amortization payments of 2.5% of the principal amount, commencing in June 2024. We may, subject to certain conditions and limitations, elect to make any amortization payment in shares of our common stock. We may prepay the term loan, subject to payment of a premium, at any time and is required to prepay the term loan on certain customary events. We may also, subject to certain conditions and limitations, elect to prepay portions of the Term Loan in shares of our common stock.

We have agreed to issue warrants to the lenders to purchase up to 3,008,540 shares of Common Stock, with 20% of the warrants to be issued for entry into the commitment letter and the remaining 80% conditioned on the closing of the Term Loan. We expect the Term Loan to close in the fourth quarter and to replace our credit facility with Alterna Capital Solutions, LLC. For more information on the Term Loan and warrants, see Note 13. Subsequent Events to our condensed consolidated financial statements included in this Quarterly Report.

We have operations and an office in Israel, and as a result of the war with Hamas there, a number of our employees and family members of our employees have been conscripted into military service. In addition, our hiring solutions are sold to businesses that experience performance fluctuations based on factors including the demand for labor and the economic health of current and prospective employers. To the extent that economic uncertainty or attenuated economic conditions cause our current and potential customers to freeze or reduce their headcount, demand for our products and services has been, and may continue to be, negatively affected.

Opportunities, Challenges and Risks

During the nine months ended September 30, 2023 and 2022, we derived our revenue primarily through our Commercial Enterprise customers, and secondarily through our Government & Regulated Industries customers.

We are a leader in AI-based Software Products & Services. Our proprietary AI operating system, aiWARE, uses machine learning algorithms, or AI models, together with a suite of powerful applications, to reveal valuable insights from vast amounts of structured and unstructured data. Historically, we have derived a large portion of our Software Product & Services revenue from applications we internally developed from our aiWARE platform and actively sold across various customers. While management believes there is a substantial opportunity to increase revenue longer term, current economic conditions have negatively impacted parts of our consumption-based operations and financial results, and there is no certainty that any future investments, which could be significant and include future potential acquisitions, will result in significant enterprise revenue realization or revenue growth when compared with historical revenue. Nevertheless, we continue to see significant opportunities for growth in Software Products & Services and our aiWARE platform sales to existing and newly acquired customers, and where our AI solutions could add near and long-term value in the government and regulated industries and content creation and distribution across the global media and entertainment industry.

We believe there are significant near and long-term revenue and growth opportunities from our Software Products & Services. In June 2023, we completed the acquisition of Broadbean, a leader in subscription-based talent acquisition software-as-a-service which has approximately 3,000 subscription-based customers based throughout the world, integrated with over 100 applicant tracking systems (“ATS”) and has direct access to over 2,500 job boards globally. The acquisition of Broadbean was strategic to our HR Solutions growth, as we plan in the near term to offer our existing product offerings to Broadbean’s 3,000 customers, including programmatic advertising capabilities. Over the long term, we plan to utilize our AI capabilities to analyze complex data sets through direct access to these ATS. In Government & Regulated Industries markets, we see growth opportunities with customer adoption of our products and services related to AI technologies and with our official Authorization to Operate, of our aiWARE platform across the entire U.S. Department of Justice and progress with the Chief Digital and Artificial Intelligence Officer and Department of Defense. However, many enterprise-level opportunities with Government & Regulated Industries customers can involve long sales cycles, during which we must invest significant time and resources without a guarantee of success. We may seek to acquire businesses with deep relationships and greater scale within the U.S. government and within regulated industries to further accelerate our pursuit of the growth opportunities we see in this market.

Growing our existing and new Software Products & Services customer base is critical for our success. Since the second quarter of 2022, we have experienced large variances from the consumption of our HR Solutions when compared to the prior year periods from our largest customer, Amazon. In May 2023, Amazon informed us that they planned to reduce their consumption of our HR Solutions further. Overall, our revenues from Amazon during the nine months ended September 30, 2023 declined as compared to the prior year and represented approximately 12% of our consolidated revenue during the nine months ended September 30, 2023 compared to 25% of our consolidated revenue in the comparable prior year period. Offsetting this decline was non-Amazon Software Products & Services revenue, which grew as compared to the prior year, driven in part by Government & Regulated Industries revenue growth of 67% during the nine months ended September 30, 2023 as compared to the prior year. To reduce this risk, we continue to aggressively invest in existing and growing new customers.

As a result of the recent pullback in the macroeconomic environment caused by high inflation, rising interest rates, and geopolitical factors such as the Russia-Ukraine conflict and the war in Israel, some of our customers reduced consumption-based and advertising spending across our Commercial Enterprise customer base, including our hiring solutions and managed services in the first three quarters of 2023 when compared to the same period in the prior year. As of September 30, 2023, our total Software Products & Services customers declined to 3,536, which was a decrease of 7% compared to the third quarter of 2022 on a pro forma basis giving effect to the acquisition of Broadbean as if it occurred on January 1, 2022. The decrease in customers was largely driven by planned migration of legacy CareerBuilder customers off the Broadbean software platform. While we anticipate these trends to continue in the fourth quarter of 2023, we expect the overall impact will not be as severe as it was in the first three quarters of 2023. However, we still expect to see additional declines in existing and new customers consumption of our Software Products & Services. To mitigate these risks, we have been investing aggressively in existing customers and acquiring new customers. In addition, in January 2023 we announced certain cost reduction initiatives and as of September 30, 2023, we had executed over $24 million of net annualized strategic cost reductions. As a result of our efforts to diversify our customer base and increase sales within our existing customer base, we increased our sales and marketing spending in the near term as compared to the trailing twelve months; however, these increased investments were partially offset by our 2023 cost initiatives.

We believe our Software Products & Services will extend the capabilities of many third-party software platforms and products that are widely used today. For example, we believe that, when integrated with aiWARE, our hiring solutions customers will be given greater visibility and transparency in their hiring processes. In addition, we have historically integrated aiWARE across many platforms, including Alteryx, Snowflake and the NVIDIA® CUDA® GPU-based platform, enabling dramatic increases in aiWARE’s processing speed and providing a wide range of new use cases for our technology. We are in the process of developing and marketing more specific use cases for these and future integrations, which we believe will open up new markets for our products and accelerate our long-term revenue growth opportunities.

Our non-GAAP gross margin is impacted significantly by the mix of our Software Products & Services and our Managed Services revenue in any given period because our Managed Services revenue typically has a lower overall non-GAAP gross margin than our Software Products & Services revenue. Our non-GAAP gross profit (see “Non-GAAP Financial Measures” below) is also dependent upon our ability to grow our revenue by expanding our customer base and increasing business with existing customers, and to manage our costs by negotiating favorable economic terms with cloud computing providers such as AWS and Microsoft Azure. While we are focused on continuing to improve our non-GAAP gross profit, our ability to attract and retain customers to grow our revenue will be highly dependent on our ability to implement and continually improve upon our technology and services and improve our technology infrastructure and operations as we experience increased network capacity constraints due to our growth.

We believe our operating results and performance are, and will continue to be, driven by various factors that affect our industry. Our ability to attract, grow and retain customers for our aiWARE platform is highly sensitive to rapidly changing technology and is dependent on our ability to maintain the attractiveness of our platform, content and services to our customers. Our future revenue and operating growth will rely heavily on our ability to grow and retain our Software Products & Services customer base, continue to develop and deploy quality and innovative AI-driven applications and enterprise-level offerings, provide unique and attractive content and advertising services to our customers, continue to grow in newer markets such as Government & Regulated Industries, expand aiWARE into larger and more expansive enterprise engagements and manage our corporate overhead costs. While we believe we will be successful in these endeavors, we cannot guarantee that we will succeed in generating substantial long term operating growth and profitability.

Historically, we have pursued an opportunistic strategy of acquiring companies to help accelerate our organic growth. Our acquisition strategy has been threefold: (i) to increase the scale of our business in markets we are in today, (ii) to accelerate growth in new markets and product categories, including expanding our existing engineering and sales resources, and (iii) to accelerate the adoption of aiWARE as the universal AI operating system through venture or market-driven opportunities. While we believe there are strategic acquisition targets that can accelerate our entry into and expand our existing market share in key strategic markets, as well as our ability to grow our business, there is no certainty our historical or future acquisitions will achieve these objectives. Conversely, we may pursue opportunistic sales of certain business operations that are not strategic to us long-term, such as the Energy Divestiture.

During the three and nine months ended September 30, 2023, we reported net loss of $24.5 million and $70.8 million, respectively, compared to a net loss of $4.9 million and $30.3 million during the three and nine months ended September 30, 2022, respectively. During the three and nine months ended September 30, 2023, we reported a non-GAAP net loss of $7.9 million and $30.5 million, respectively as compared to a non-GAAP net loss of $5.7 million and $18.1 million during the three and nine months ended September 30, 2022, respectively. To continue to grow our revenue, we plan to continue to make targeted investments in people, namely software engineers and sales personnel. In 2022, we made substantial investments in our existing employee base and our corporate infrastructure, including new ERP and workforce systems to help us better manage the scale and growth of our business. However, considering the current challenging macro-economic environment, we have made and are continuing to make significant cost reductions to our operating structure to better streamline our business and prioritization around our growth and corresponding investments.

During the nine months ended September 30, 2023 and 2022, more than 90% of our revenue was derived from customers located in the United States. Since our acquisition of Broadbean in June 2023, we have seen an increase in revenue from customers outside the United States and we believe that there is a substantial opportunity for us to expand our service offerings and customer base in countries outside of the United States. In the long term, we plan to expand our business further internationally in places such as Europe, Asia Pacific and Latin America, and as a result, we expect to continue to incur significant incremental upfront expenses associated with these expansion opportunities.

Impact of the Current Global Economic Conditions

Global economic and business activities continue to face uncertainty as a result of macroeconomic and geopolitical factors, including the ongoing impact of the global economy following the COVID-19 pandemic, labor shortages, inflation rates and the responses by central banking authorities to control inflation, monetary supply shifts, recession risks, disruptions from the Russia-Ukraine conflict and related sanctions, and the recent war in Israel. In particular, business operations at our Tel Aviv office location where we do development work on our hiring solutions products have been, and may continue to be, impacted by the war in Israel. A small portion of our Israel-based employees, and a number of their family members, have been conscripted into military service. The extent of the impact of these factors on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, and the impact on our customers, partners and employees, all of which have uncertainty and cannot be predicted. These global economic conditions and any continued or new disruptions caused by these conditions may negatively impact our business in a number of ways. For example, our hiring solutions are sold to businesses whose financial conditions fluctuate based on general economic and business conditions, particularly the overall demand for labor and the economic health of current and prospective employers. In fiscal 2021, the COVID-19 pandemic forced certain technology and ecommerce companies, like Amazon, to increase hiring to meet increased demand. This, in turn, increased the overall consumption and use of our hiring solutions, and corresponding revenue. In fiscal 2022 and continuing through the third quarter of fiscal 2023, with the easing of COVID-19 restrictions and higher inflation worldwide, demand for certain ecommerce services declined. As a result, companies adversely impacted by this shift in consumer behavior, including Amazon, reduced consumption of our hiring solutions and corresponding revenue declined.

To the extent that economic uncertainty or attenuated economic conditions cause our customers and potential customers to freeze or reduce their headcount, and reduce their advertising spending, demand for our products and services may be negatively affected in the fourth quarter of 2023 and beyond. These adverse economic conditions could also result in reductions in sales of our applications, longer sales cycles, reductions in contract duration and value, slower adoption of new technologies and increased price competition. In addition, economic recessions have historically resulted in overall reductions in spending on software and technology solutions as well as pressure from customers and potential customers for extended billing terms. If economic, political, or market conditions deteriorate, or if there is uncertainty around these conditions, our customers and potential customers may elect to decrease their software and technology solutions budgets by deferring or reconsidering product purchases, which would limit our ability to grow our business and negatively affect our operating results. Any of these events would likely have an adverse effect on our business, operating results and financial position.

Due to the nature of our business, the effect of these macroeconomic conditions may not be fully reflected in our results of operations until future periods. We have assessed the potential credit deterioration of our customers due to changes in the macroeconomic environment and have determined that no additional allowance for credit losses was necessary due to credit deterioration as of September 30, 2023. The most significant risks to our business and results of operations are discussed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31, 2022, and Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q.

Non-GAAP Financial Measures and Key Performance Indicators

In evaluating our cash flows and financial performance, we use certain non-GAAP financial measures, including Pro Forma Software Revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP net income (loss), and non-GAAP net income (loss) per share. We also provide certain key performance indicators (“KPIs”), including Total Software Products & Services Customers, Annual Recurring Revenue, Annual Recurring Revenue (SaaS), Annual Recurring Revenue (Consumption), Total New Bookings and Gross Revenue Retention.

“Pro Forma” information provided in this current report on Form 10-Q represents our historical information combined with the historical information of Broadbean (as defined below) for the applicable period on a pro forma basis as if we had acquired Broadbean on January 1, 2022.

Pro Forma Software Revenue represents Software Products & Services revenue on a Pro Forma basis. Non-GAAP gross margin is defined as Non-GAAP gross profit divided by revenue. Non-GAAP net loss (pro forma) is the Company’s net loss excluding the items set forth below. Non-GAAP net income (loss) and non-GAAP net income (loss) per share is the Company’s net income (loss) and net income (loss) per share, adjusted to exclude provision for income taxes, depreciation expense, amortization expense, stock-based compensation expense, changes in fair value of warrant liability, changes in fair value of contingent consideration, interest income, interest expense, foreign currency gains and losses, acquisition and due diligence costs, gain on sale of energy group, contribution of business held for sale, variable consultant performance bonus expense, and severance and executive transition costs. The results for non-GAAP net income (loss), are presented below for the three and nine months ended September 30, 2023 and 2022. The items excluded from these non-GAAP financial measures, as well as a breakdown of GAAP net loss, non-GAAP net income (loss) and these excluded items between our Core Operations and Corporate, are detailed in the reconciliation below. In addition, we have provided supplemental non-GAAP measures of gross profit, operating expenses, loss from operations, other (expense) income, net, and loss before income taxes, excluding the items excluded from non-GAAP net loss as noted above, and reconciling such non-GAAP measures to the most directly comparable GAAP measures.

We present these non-GAAP financial measures because management believes such information to be important supplemental measures of performance that are commonly used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Management also uses this information internally for forecasting and budgeting. These non-GAAP financial measures are not calculated and presented in accordance with GAAP and should not be considered as an alternative to net income (loss), operating income (loss) or any other financial measures so calculated and presented, nor as an alternative to cash flow from operating activities as a measure of liquidity. Other companies (including our competitors) may define these non-GAAP financial measures differently. These non-GAAP measures may not be indicative of our historical operating results or predictive of potential future results. Investors should not consider this supplemental non-GAAP financial information in isolation or as a substitute for analysis of our results as reported in accordance with GAAP.

Reconciliation of GAAP net loss to Non-GAAP net income (loss)

(in thousands)

(in thousands)

(1) Core operations consists of our consolidated Software Products & Services and Managed Services that include our content licensing and advertising services, and their supporting operations, including direct costs of sales as well as operating expenses for sales, marketing and product development and certain general and administrative costs dedicated to these operations.

(2) Corporate consists of general and administrative functions such as executive, finance, legal, people operations, fixed overhead expenses (including facilities and information technology expenses), other income (expenses) and taxes, and other expenses that support the entire company, including public company driven costs.

(3) Contribution of business held for sale relates to the net loss for the periods presented for our energy group that we divested during the second quarter of 2023. We have not recast Non-GAAP Net Loss for periods ended prior to March 31, 2023 because the change in business strategy to divest the business occurred in the first quarter of 2023 and the prior period contributions were costs to operate the continuing business when incurred in the prior periods. The historical amounts would not have a major effect on prior period results.

For the three months ended September 30, 2023, our total loss from operations increased to $22.9 million compared to $3.6 million in the corresponding prior year period. For the nine months ended September 30, 2023, our total loss from operations increased to $74.7 million compared to $28.0 million in the corresponding prior year period. The following tables set forth the calculation of our non-GAAP gross profit and non-GAAP gross margin, followed by a reconciliation of non-GAAP to GAAP financial information presented in our condensed consolidated financial statements for three and nine months ended September 30, 2023 and 2022.

(dollars in thousands)

36

(1) Adjustments are comprised of the adjustments to GAAP cost of revenue, sales and marketing expenses, research and development expenses and general and administrative expenses and other (expense) income, net (where applicable) listed above.

(2) Contribution of business held for sale relates to the net loss for the periods presented for our energy group that we divested during Q2 2023. We have not recast Non-GAAP Net Loss for periods ended prior to March 31, 2023 because the change in business strategy to divest the business occurred in Q1 2023 and the prior period contributions were costs to operate the continuing business when incurred in the prior periods. The historical amounts would not have a major effect on prior period results.

Supplemental Financial Information

We are providing the following unaudited supplemental financial information regarding our Software Products & Services and Managed Services as a lookback of the prior year to explain our recent historical and year-over-year performance.

The supplemental financial information for our Software Products & Services includes: (i) Pro Forma Software Revenue, (ii) Total Software Products & Services Customers, (iii) Annual Recurring Revenue, (iv) Total New Bookings, and (iv) Gross Revenue Retention, in each case as defined in the footnotes to the table below. The supplemental financial information for our Managed Services includes: (i) average billings per active Managed Services client, and (ii) revenue.

Software Products & Services Supplemental Financial Information

The following table sets forth the results for each of our Software Products & Services supplemental financial information.

(1) All of the supplemental financial information for this period is presented on a Pro Forma basis inclusive of Broadbean.

(2) “Pro Forma Software Revenue” is a non-GAAP measure that represents Software Products & Services revenue on a Pro Forma basis.

(3) “Total Software Products & Services Customers” includes Software Products & Services customers as of the end of each respective quarter set forth above with net revenues in excess of $10 and also excludes any customers categorized by us as trial or pilot status. In prior periods, we provided “Ending Software Customers,” which represented Software Products & Services customers as of the end of each fiscal quarter with trailing twelve-month revenues in excess of $2,400 for both Veritone, Inc. and PandoLogic Ltd. and/or deemed by the Company to be under an active contract for the applicable periods. Total Software Products & Services Customers is not comparable to Ending Software Customers. Total Software Products & Services Customers includes customers based on revenues in the last month of the quarter rather than on a trailing twelve-month basis. Total Software Products & Services Customers includes customers based on revenues in the last month of the quarter rather than on a trailing twelve-month basis and excludes any customers that are on trial or pilot status with us rather than including customers with active contracts. Management uses Total Software Products & Services Customers and we believe Total Software Products & Services Customers are useful to investors because it more accurately reflects our total customers for our Software Products & Services customers inclusive of Broadbean.

(4) “Annual Recurring Revenue (SaaS)” represents an annualized calculation of monthly recurring revenue during the last month of the applicable quarter for all Total Software Products & Services customers, in each case on a Pro Forma basis. In prior periods, we provided “Average Annual Revenue,” which was calculated as the aggregate of trailing twelve-month Software Products & Services revenue divided by the average number of customers over the same period for both Veritone, Inc. and PandoLogic Ltd. Annual Recurring Revenue is not comparable to Average Annual Revenue (SaaS). Annual Recurring Revenue (SaaS) includes only subscription-based SaaS revenue, is not averaged among active customers and uses a calculation of recurring revenue as described above instead of annual revenue. Management uses “Annual Recurring Revenue (SaaS)” and we believe Annual Recurring Revenue (SaaS) is useful to investors because Broadbean significantly increases our mix of subscription-based SaaS revenues as compared to Consumption revenues and the split between the two allows the reader to delineate between predictable recurring SaaS revenues and more volatile Consumption revenues.

(5) “Annual Recurring Revenue (Consumption)” represents the trailing twelve months of all non-recurring and/or consumption-based revenue for all active Total Software Products & Services customers, in each case, on a Pro Forma basis. In prior periods, we provided “Average Annual Revenue,” which was calculated as the aggregate of trailing twelve-month Software Products & Services revenue divided by the average number of customers over the same period for both Veritone, Inc. and PandoLogic Ltd. Annual Recurring Revenue (Consumption) is not comparable to Average Annual Revenue. Annual Recurring Revenue (Consumption) includes only non-recurring and/or consumption-based revenue, is not averaged among active customers and uses a calculation of recurring revenue as described above instead of annual revenue. Management uses “Annual Recurring Revenue (Consumption)” and we believe Annual Recurring Revenue (Consumption) is useful to investors because Broadbean significantly increases our mix of subscription-based SaaS revenues as compared to Consumption revenues and the split between the two allows the reader to delineate between predictable recurring SaaS revenues and more volatile Consumption revenues.

(6) “Total New Bookings” represents the total fees payable during the full contract term for new contracts received in the quarter (including fees payable during any cancellable portion and an estimate of license fees that may fluctuate over the term), excluding any variable fees under the contract (e.g., fees for cognitive processing, storage, professional services and other variable services), in each case on a Pro Forma basis.

(7) “Gross Revenue Retention” represents calculate our dollar-based gross revenue retention rate as of the period end by starting with the revenue from Software Products & Services Customers as of the 3 months in the prior year quarter to such period, or Prior Year Quarter Revenue. We then deduct from the Prior Year Quarter Revenue any revenue from Software Products & Services Customers who are no longer customers as of the current period end, or Current Period Ending Software Customer Revenue. We then divide the total Current Period Ending Software Customer Revenue by the total Prior Year Quarter Revenue to arrive at our dollar-based gross retention rate, which is the percentage of revenue from all Software Products & Services Customers from our Software Products & Services as of the year prior that is not lost to customer churn. All numbers used to determine Gross Revenue Retention are calculated on a Pro Forma basis.

Managed Services Supplemental Financial Information

The following table sets forth the results for each of the key performance indicators for Managed Services.

(1) Avg billings per active Managed Services customer for each quarter reflects the average quarterly billings per active Managed Services customer over the twelve-month period through the end of such quarter for Managed Services clients that are active during such quarter.

(2) Managed Services revenue and metrics exclude content licensing and media services.

We have experienced and may continue to experience volatility in revenue from our Managed Services due to a number of factors, including: (i) the timing of new large customer agreements; (ii) loss of customers who choose to replace our services with new providers or by bringing their advertising placement in-house; (iii) customers who experience reductions in their advertising budgets due to issues with their own businesses; and (iv) the seasonality of the campaigns for certain large customers. We have historically generated a significant portion of our revenue from a few major customers. As we continue to grow and diversify our customer base, we expect that our dependency on a limited number of large customers will be minimized.

Results of Operations

The following tables set forth our results of operations for the three and nine months ended September 30, 2023 and 2022, in dollars and as a percentage of our revenue for those periods. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future.

(dollars in thousands)

39

Three and Nine Months Ended September 30, 2023 Compared with Three and Nine Months Ended September 30, 2022

Revenue

Commercial Enterprise

Commercial Enterprise Software Products & Services revenue decreased $0.9 million or 5% in the three months ended September 30, 2023 compared to the corresponding prior year period and decreased $10.6 million or 19% in the nine months ended September 30, 2023 compared to the corresponding prior year period, with the decreases largely driven by decreased revenue from Amazon, partially offset by revenue from the acquisition of Broadbean in June 2023. Commercial Enterprise Managed Services decreased $1.6 million or 10% in the three months ended September 30, 2023 compared to the corresponding prior year period and decreased $3.7 million or 8% in the nine months ended September 30, 2023 compared to the corresponding prior year period, with the decreases driven primarily due to decreases in advertising revenue driven by the current economic environment.

Government & Regulated Industries

Government & Regulated Industries Software Products & Services revenue increased $0.5 million or 46% in the three months ended September 30, 2023 compared to the corresponding prior year period and increased $1.8 million or 67% in the nine months ended September 30, 2023 compared to the corresponding prior year period, with the increases driven by new and existing customer growth. Government & Regulated Industries Software Products & Services revenue from customers in certain markets, particularly government, is often project-based and is impacted by the timing of projects. As such, we expect that our revenue from these markets could fluctuate significantly from period to period.

Operating Expenses

(dollars in thousands)

Cost of Revenue. Cost of revenue increased by $0.1 million in the three months ended September 30, 2023 compared to the corresponding prior year period and increased by $1.0 million in the nine months ended September 30, 2023 compared with the corresponding prior year period, primarily due to a shift in the mix of revenues from higher margin Software Products & Services products to lower margin Managed Services products.

Sales and Marketing. Sales and marketing expenses decreased by $1.0 million in the three months ended September 30, 2023 compared to the corresponding prior year period, primarily due to cost reduction initiatives announced in the first quarter of 2023 and reduced advertising spend, partially offset by increased sales and marketing expense as a result of the acquisition of Broadbean. Sales and marketing increased by $1.1 million in the nine months ended September 30, 2023 compared with the corresponding prior year period, primarily due to increases in personnel-related costs from the addition of new sales and marketing resources. As a percentage of revenue, sales and marketing expenses increased to 37% and 42% in the three and nine months ended September 30, 2023, respectively, from 37% and 36% in the corresponding prior year periods.

Research and Development. Research and development expenses decreased by $1.4 million or 12% in the three months ended September 30, 2023 and by $0.3 million or 1% in the nine months ended September 30, 2023 compared with the corresponding prior year periods principally due to an increase in capitalized costs for internal use software and decrease in personnel-related costs of due to cost reduction initiatives announced in the first quarter of 2023, partially offset by increased costs for the Steel Holdings Consulting Agreement. As a percentage of revenue, research and development expenses increased to 30% and 35% in the three and nine months ended September 30, 2023, from 32% and 31% in the corresponding prior year periods.

General and Administrative. General and administrative expenses increased by $18.6 million or 743% in the three months ended September 30, 2023 compared with the corresponding prior year period principally due to a non-cash benefit of $14.3 million recognized during the three months ended September 30, 2022 associated with a change in the estimated fair value of contingent consideration. General and administrative expenses increased by $30.4 million or 112% in the nine months ended September 30, 2023 compared with the corresponding prior year period principally due to a non-cash benefit of $23.1 million recognized in the prior year associated with a change in the estimated fair value of contingent consideration, coupled with the increase in accounting and legal fees. As a percentage of revenue, general and administrative expenses increased to 60% and 62% in the three and nine months ended September 30, 2023, respectively, from 7% and 26% in the corresponding prior year periods.

Amortization Expense. Amortization expense increased in the three and nine months ended September 30, 2023 compared with the corresponding prior year period due to the addition of amortization expense related to our 2022 and 2023 acquisitions.

Other Income (Expense), Net

Other expense, net for the three months ended September 30, 2023 was comprised primarily of foreign exchange loss of $2.3 million and interest expense, net of $0.2 million. Other expense, net for the three months ended September 30, 2022 was $1.2 million due primarily to interest expense. Other income, net for the nine months ended September 30, 2023 was comprised primarily of a gain on the sale of the energy group of $2.6 million and foreign exchange gain of $0.5 million, offset by interest expense, net of $1.7 million. Other expense, net for the nine months ended September 30, 2022 was $3.7 million due primarily to interest expense.

Non-GAAP Gross Profit

For the three months ended September 30, 2023, our total loss from operations increased to $22.9 million compared to $3.6 million in the corresponding prior year period. For the nine months ended September 30, 2023, our total loss from operations increased to $74.7 million compared to $28.0 million in the corresponding prior year period. As noted above, our non-GAAP gross profit is calculated as our revenue less our cost of revenue, as follows:

(dollars in thousands)

The decrease in non-GAAP gross profit and non-GAAP gross margin in the three and nine months ended September 30, 2023 compared with the corresponding prior year periods was due primarily to decreases in revenue compared to the corresponding prior year periods.

Liquidity and Capital Resources

We have historically financed our business through the sale of equity and debt securities. Our principal sources of liquidity are our cash and cash equivalents, which totaled $72.1 million as of September 30, 2023, compared with total cash and cash equivalents of $184.4 million as of December 31, 2022. The decrease in our cash and cash equivalents as of September 30, 2023 as compared with December 31, 2022 was primarily due to cash used by operating activities of $48.1 million, investments paid during the nine months ended September 30, 2023, and the payment of the PandoLogic 2022 earnout.

In August 2023, we entered into a three-year credit agreement with Alterna Capital Solutions, LLC (“ACS”) under which we are initially able to borrow, at our discretion and throughout the term, up to $30,000 against certain domestic receivables (the “Credit Facility”), subject to the lender’s approval of such domestic receivables. The Credit Facility bears interest at the greater of Prime rate plus 1 percent or 9.5%, and minimum annual interest of $250 is due if no funds are drawn in a given year. ACS will be a senior secured creditor. The Credit Facility provides additional financial flexibility and liquidity on our balance sheet. As of September 30, 2023, we had not drawn any amounts under the Credit Facility.

On November 7, 2023, we entered into a commitment letter with certain lenders to provide a senior secured term loan facility in an aggregate principal amount of $77.5 million. We expect to use the proceeds of the Term Loan to repurchase an aggregate $50.0 million principal amount of our existing 1.75% convertible senior notes due 2026 held by the lenders at a purchase price of $37.5 million plus accrued and unpaid interest and for general corporate purposes. We expect the Term Loan to close in the fourth quarter and to replace our Credit Facility with Alterna Capital Solutions, LLC. For more information on the Term Loan, see Note 13. Subsequent Events to our condensed consolidated financial statements included in this Quarterly Report.

We believe that our ability to borrow up to $30,000 under the Credit Facility, subject to the lender’s approval of qualifying domestic receivables, or the availability of proceeds from our Term Loan, if consummated, when combined with our cash and cash equivalents, will allow us to meet our anticipated cash requirements for the next twelve months.

Cash Flows

A summary of cash flows from our operating, investing and financing activities is shown in the table below.

(in thousands)

Operating Activities

Our operating activities used cash of $48.1 million in the nine months ended September 30, 2023, due primarily to our net loss of $70.8 million, adjusted by $26.7 million in non-cash expenses, including $20.2 million in depreciation and amortization and $8.6 million in stock-based compensation expense, as well as the net working capital decrease of $4.0 million, primarily due to decreases in accrued media payments of $17.7 million, partially offset by decreases in accounts receivable of $14.1 million.

Our operating activities used cash of $24.6 million in the nine months ended September 30, 2022, due primarily to our net loss of $30.3 million, adjusted by $7.5 million in non-cash expenses, including $16.5 million in depreciation and amortization and $14.7 million in stock-based compensation expense, offset in part by $23.1 million from a change in the fair value of contingent consideration, $2.1 million from a changes in deferred taxes and the net working capital decrease of $1.9 million.

Investing Activities

Our investing activities for the nine months ended September 30, 2023 used cash of $53.7 million primarily for $50.2 million in cash paid for the Broadbean acquisition net of cash acquired and $4.0 million in capital expenditures, with these uses of cash partially offset by $0.5 million in proceeds from the Energy Divestiture.

Our investing activities for the nine months ended September 30, 2022 used cash of $11.1 million primarily for $4.6 million to fund a portion of the consideration for our acquisitions, $3.8 million in capital expenditures and for an equity investment of $2.8 million in a strategic partner.

Financing Activities

Our financing activities for the nine months ended September 30, 2023 used cash of $10.5 million, consisting of $7.8 million to pay the 2022 earnout for PandoLogic, $2.7 million in deferred consideration primarily related to the March 2022 Acquisition and the VocaliD acquisition, and $1.1 million to pay taxes paid related to the net share settlement of equity awards, offset by $1.1 million in proceeds received from the exercise of stock options and purchases of shares under our ESPP.

Our financing activities for the nine months ended September 30, 2022 used cash of $22.9 million, consisting of $14.4 million to pay the 2021 earnout for PandoLogic and $9.7 million to pay taxes paid related to the net share settlement of equity awards, partially offset by $1.2 million in proceeds received from the exercise of stock options and purchases of shares under our ESPP.

Contractual Obligations and Known Future Cash Requirements

As of September 30, 2023, our only debt obligations were the Convertible Notes issued in the fourth quarter of fiscal year 2021, net of amounts repurchased in 2022 and the Credit Facility. The remaining principal on the Convertible Notes of $141.25 million will mature on November 15, 2026, unless earlier converted, redeemed or repurchased in accordance with the terms of the Convertible Notes.

As of September 30, 2023, we have future cash requirements to pay $2.8 million in purchase consideration commitments related to the VSL acquisition, the VocaliD acquisition and the March 2022 Acquisition that will be paid in 2023 and in 2024. We have no other present agreements or commitments with respect to any material acquisitions of businesses or technologies or any other material capital expenditures.

We have generated significant losses since inception; however, we do expect to begin generating profits on a non-GAAP basis in the foreseeable future. We believe that our current cash and cash equivalents balance, combined with available borrowing under the Credit Facility, will be sufficient to fund our operations in the ordinary course of business for at least the next twelve months from the date of this filing. We have not entered into any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect amounts reported in our condensed consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.

Our critical accounting estimates reflecting management’s estimates and judgments are described in our Annual Report on Form 10-K for the year ended December 31, 2022. We have reviewed recently adopted accounting pronouncements and determined that the adoption of such pronouncements is not expected to have a material impact, if any, on our condensed consolidated financial statements. Accordingly, there have been no material changes to critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of September 30, 2023. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives of ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to enable timely decisions regarding required disclosures, and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms promulgated by the SEC. Our management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and there is no assurance that our disclosure controls and procedures will operate effectively under all circumstances. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2023, our disclosure controls and procedures were not effective at the reasonable assurance level due to the following material weakness in internal control over financial reporting.

Material Weaknesses in Internal Control over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

During the preparation of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, management identified a material weakness in internal control over financial reporting relating to the consolidation process and review of financial statements specifically pertaining to the Company’s design of controls to determine the proper accounting for certain foreign exchange transactions and translation between Veritone, Inc. and certain foreign subsidiaries. This material weakness did not result in any identified material misstatements to the financial statements. However, this material weakness could have resulted in a material misstatement to the Company's annual or interim condensed consolidated financial statements that would not be prevented or detected on a timely basis. While the adjustments identified were not material to the financial statements for the three and nine months ended September 30, 2023 and there were no changes to previous periods, based on the volatility of the foreign currency exchange rates and cumulative materiality of the outstanding intercompany balance, the calculated amounts could have resulted in a material misstatement to our annual or interim condensed consolidated financial statements that would not be prevented or detected on a timely basis.

During the preparation of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, management identified a material weakness in internal control over financial reporting relating to information technology general controls (“ITGCs”) in the areas of user access and change-management over certain information technology (“IT”) systems that support the Company’s financial reporting processes. In addition, the Company’s business process automated and manual controls that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted. Although this material weakness did not result in any identified misstatements to the financial statements and there were no changes to previously released financial results, this material weakness could have resulted in a material misstatement to the Company's annual or interim condensed consolidated financial statements that would not be prevented or detected on a timely basis.

Remediation of Material Weaknesses in Internal Control Over Financial Reporting

In order to remediate the material weakness relating to ITGCs, management is taking remediation actions including: (i) developing and enhancing IT compliance oversight capabilities with specific focus over identification and execution of appropriate ITGCs; (ii) developing a training program addressing ITGCs and policies, including educating control owners concerning the principles and requirements of each control, with a focus on those related to user access and change management over IT systems impacting financial reporting; (iii) developing and maintaining documentation of underlying ITGCs to promote knowledge transfer upon personnel and function changes; and (iv) implementing an IT management review and testing plan to monitor ITGCs with a specific focus on systems supporting our financial reporting processes. In order to remediate the material weakness relating to the consolidation process, including the proper accounting of foreign exchange transactions between the Company and its foreign subsidiaries, management plans to implement financial reporting control changes to address the material weakness, evaluate the adequacy of resources surrounding its consolidation process and train individuals in the proper accounting treatment for foreign currency transactions and consolidation under US GAAP. This training is expected to be completed in the fourth quarter of 2023. Management has also hired additional staff to oversee the implementation and testing of these remediation actions. To further remediate the existing material weakness identified herein, the management team, including the Chief Executive Officer and Chief Financial Officer, have reaffirmed and re-emphasized the importance of internal controls, control consciousness and a strong control environment. We are committed to maintaining a strong control environment and believe that these remediation efforts represent continued improvement in our control environment. We also expect to continue to review, optimize and enhance our financial reporting controls and procedures. A material weakness will not be considered remediated until the applicable remediated control operates for a sufficient period of time and management has concluded, through testing, that this enhanced control is operating effectively.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2023, we completed the acquisition of Broadbean. Prior to the acquisition, Broadbean was a privately-held company and was not subject to the Sarbanes-Oxley Act of 2002, the rules and regulations of the SEC, or other corporate governance requirements applicable to public reporting companies. As part of our ongoing integration activities, we are continuing to incorporate our controls and procedures into Broadbean and to augment our company-wide controls to reflect the risks that may be inherent in acquisitions of privately-held companies.

Other than our integration of the Broadbean business and the remediation efforts described above, there have been no changes in our internal control over financial reporting during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Management recognizes that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Our Annual Report on Form 10-K for the year ended December 31, 2022 contains a discussion of the material risks associated with our business. Other than as set forth below, there have been no material changes to the risks described in such Annual Report on Form 10-K.

We entered into a Commitment Letter for a $77.5 million aggregate principal amount senior secured term loan facility, which we expect to close in the fourth quarter of 2023. If the Term Loan does not close, we anticipate we will require additional liquidity to continue our operations for the next twelve months.

As of September 30, 2023, we had $72.1 million in cash and cash equivalents, and in August 2023, we entered into a three-year credit agreement with Alterna Capital Solutions, LLC (“ACS”) under which we are initially able to borrow, at our discretion and throughout the term, up to $30.0 million against certain domestic receivables (the “Credit Facility”), subject to the lender’s approval of such domestic receivables. There were no amounts outstanding under the Credit Facility as of September 30, 2023. In November 2023, we entered into a Commitment Letter for a $77.5 million aggregate principal amount Term Loan, of which we will use $37.5 million to repurchase $50.0 million of our existing Convertible Notes and the remainder will be used for general corporate purposes. We intend to replace our Credit Facility with Alterna Capital Solutions, LLC with the Term Loan. We believe that our ability to borrow up to $30,000 under the Credit Facility, subject to the lender’s approval of qualifying domestic receivables, and the net proceeds from the Term Loan, if consummated, when combined with our cash and cash equivalents, will allow us to meet our anticipated cash requirements for the next twelve months. If we are unable to borrow up to the full $30.0 million under the Credit Facility or the Term Loan does not close, however, we anticipate we will require additional liquidity to continue our operations over the next twelve months.

In determining our cash requirements for the next twelve months, our estimates regarding our operating expense and capital expenditure requirements are based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate. Moreover, it is particularly difficult to estimate with certainty our future expenses given the dynamic nature of our business and widespread macroeconomic and geopolitical uncertainties, including labor shortages, inflation rates and the responses by central banking authorities to control inflation such as higher interest rates, monetary supply shifts, disruptions in access to bank deposits or lending commitments due to bank failures and the threat of recession in the United States and around the world, as well as disruptions from the Russia-Ukraine conflict and the war in Israel. As a result, we may have to delay, reduce the scope of, suspend or eliminate one or more of our product offerings or lines of business.

We expect to close the Term Loan in the fourth quarter of 2023. As a result of closing the Term Loan, we will incur increased interest expense. Also, we have agreed to issue warrants to purchase up to 3,008,540 shares at an exercise price of $2.576 per share and, subject to certain conditions and limitations, we may elect to pay portions of our Term Loan and interest payments with shares of our common stock. These issuances of common stock may be dilutive to our stockholders.

If we are unable to borrow up to the full $30.0 million under the Credit Facility or do not close the Term Loan, we believe we will require additional liquidity to continue our operations over the next twelve months. However, there can be no assurance that we will be able to obtain additional financing or on terms acceptable to us or at all. If we do raise additional funds through future issuances of equity or convertible debt securities, our stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve debt service obligations and restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. Also, market volatility, including as a result of the macroeconomic and geopolitical factors discussed above, could adversely increase our need to access capital and likewise, adversely impact our ability to access capital as and when needed. Our failure to raise capital or on acceptable terms would have a negative impact on our ability to continue to support our business growth, scale our infrastructure, develop product enhancements and respond to business challenges, and we may have to delay, reduce the scope of, suspend or eliminate one or more of our product offerings or programs. Any of the above events could significantly harm our business, financial condition, results of operations, prospects and ability to compete, and cause the price of our common stock to decline.

We have identified material weaknesses in our internal control over financial reporting. If we are unable to develop and maintain effective internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us, materially and adversely affect our business and operating results and expose us to potential litigation.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected and corrected on a timely basis. We have previously identified multiple material weaknesses in our internal control over financial reporting.

During the preparation of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, management identified a material weakness in internal control over financial reporting relating to the consolidation process and review of financial statements specifically pertaining to the Company’s design of controls to determine proper accounting for certain foreign exchange transactions and translation between Veritone, Inc. and certain foreign subsidiaries. This material weakness did not result in any identified material misstatements to the financial statements. However, this material weakness could have resulted in a material misstatement to the Company's annual or interim condensed consolidated financial statements that would not be prevented or detected on a timely basis. While the adjustments identified were not material to the financial statements for the three and nine months ended September 30, 2023 and there were no changes to previous periods, based on the volatility of the foreign currency exchange rates and cumulative materiality of the outstanding intercompany balance, the calculated amounts could have resulted in a material misstatement to our annual or interim condensed consolidated financial statements that would not be prevented or detected on a timely basis.

During the preparation of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, management identified a material weakness in internal control over financial reporting relating to information technology general controls (“ITGCs”) in the areas of user access and change-management over certain information technology (“IT”) systems that support our financial reporting processes. Our business process automated and manual controls that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted. These control deficiencies were a result of user access and change management processes over certain IT systems. Although this material weakness did not result in any identified misstatements to the financial statements and there were no changes to previously released financial results, this material weakness could have resulted in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis. Management is taking remediation actions with respect to this material weakness including: (i) developing and enhancing IT compliance oversight capabilities with specific focus over identification and execution of appropriate ITGCs; (ii) developing a training program addressing ITGCs and policies, including educating control owners concerning the principles and requirements of each control, with a focus on those related to user access and change management over IT systems impacting financial reporting; (iii) developing and maintaining documentation of underlying ITGCs to promote knowledge transfer upon personnel and function changes; and (iv) implementing an IT management review and testing plan to monitor ITGCs with a specific focus on systems supporting our financial reporting processes.

During the preparation of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, management identified that a material weakness in internal control over financial reporting existed relating to the appropriate oversight and sufficient review of the work performed by third-party specialists on our behalf and the coordination of work being performed by more than one specialist. Such third-party specialists were used in the preparation of (i) our valuation of contingent consideration, (ii) our valuation of certain identified intangible assets and (iii) our purchase price allocation pursuant to ASC 805, Business Combinations, in connection with our acquisition of PandoLogic Ltd. The material weakness resulted in the restatement of the unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2022 and immaterial misstatements to the consolidated financial statements for the year ended December 31, 2021. Additionally, this material weakness could have resulted in a misstatement of certain accounting estimates or disclosures that would have resulted in a material misstatement of our annual consolidated financial statements that would not have been prevented or detected on a timely basis. We concluded this material weakness had been remediated as of December 31, 2022.

To further remediate the material weakness identified herein, the management team, including the Chief Executive Officer and Chief Financial Officer, have reaffirmed and re-emphasized the importance of internal controls, control consciousness and a strong control environment. If we are not able to remediate the existing material weaknesses, or if we identify any new material weaknesses in the future, we may be unable to maintain compliance with the requirements of securities laws, stock exchange listing rules, or debt instrument covenants regarding timely filing of information; we could lose access to sources of capital or liquidity; and investors may lose confidence in our financial reporting and our stock price may decline as a result. Though we are taking steps to remediate the existing material weaknesses, we cannot be assured that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weakness or avoid potential future material weaknesses.

As a result of the material weaknesses described above and other related matters raised or that may in the future be identified, we face potential for adverse regulatory consequences, including investigations, penalties or suspensions by the SEC or NASDAQ, litigation or other disputes which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the restatement and material weakness in our internal control over financial reporting and the preparation of our consolidated financial statements. As of the date of this filing, we have no knowledge of any such regulatory consequences, litigation, claim or dispute. However, we can provide no assurance that such regulatory consequences, litigation, claim or dispute will not arise in the future. Any such regulatory consequences, litigation, claim or dispute, whether successful or not, could subject us to additional costs, divert the attention of our management, or impair our reputation. Each of these consequences could have a material adverse effect on our business, results of operations and financial condition.

Our business has been and may continue to be negatively affected by macroeconomic and geopolitical factors, including economic disruption caused by the COVID-19 pandemic, the Russia-Ukraine conflict and related sanctions, the war in Israel, inflation rates and the responses by central banking authorities to control inflation, monetary supply shifts and the threat of recession in the United States and around the world .

Global economic and business activities continue to face widespread macroeconomic and geopolitical uncertainties, including labor shortages, inflation rates and the responses by central banking authorities to control inflation such as higher interest rates, monetary supply shifts, disruptions in access to bank deposits or lending commitments due to bank failures, the ongoing impact of the COVID-19 pandemic, and the threat of recession in the United States and around the world, as well as disruptions from the Russia-Ukraine conflict and the war in Israel. We continue to actively monitor the impact of these macroeconomic factors on our financial condition, liquidity, operations, suppliers, industry and workforce, and instituted certain cost saving measures for the during the second half of 2022 and the first nine months of 2023 as a result of these factors. The extent of the impact of these factors on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, and the impact on our customers, partners and employees, all of which are uncertain and cannot be predicted. These and other global economic conditions, including any new disruptions, have and may again negatively impact our business. For example, we have operations and an office in Israel, and as a result of the war with Hamas there, a number of our employees and family members of our employees have been conscripted into military service. In addition, our hiring solutions are sold to businesses that experience performance fluctuations based on factors including the demand for labor and the economic health of current and prospective employers. To the extent that economic uncertainty or attenuated economic conditions cause our current and potential customers to freeze or reduce their headcount, demand for our products and services has been, and may continue to be negatively affected. Adverse economic conditions have also caused and could continue to result in reductions in sales of our applications, longer sales cycles, reductions in contract duration and value, slower adoption of new technologies and increased price competition. For instance, beginning in March 2022, we experienced a reduction in hiring consumption from our largest customer, Amazon, and found that advertisers reduced spending across our managed services when compared to the same periods in the prior year. In addition, economic recessions have historically resulted in overall reductions in spending on software and technology solutions as well as pressure from customers and potential customers for extended billing terms. If economic, political, or market conditions deteriorate, or if there is uncertainty around these conditions, our current and potential customers may elect to decrease their software and technology solutions budgets by deferring or reconsidering product purchases, which could limit our ability to grow our business and negatively affect our operating results. Any of these events would likely have an adverse effect on our business, operating results and financial position.