Form 10-Q SOUNDHOUND AI, INC. For: Jun 30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2024
For the transition period from________to________
Commission File No. 001-40193
| (Exact name of registrant as specified in its charter) | ||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) (Zip Code) | ||
| (Registrant’s telephone number, including area code) | ||
| N/A | ||
| (Former name, former address and former fiscal year, if changed since last report) | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| x | o | Accelerated filer | |||||||||
| o | Non-accelerated filer | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x
As of August 7, 2024, there were 325,997,277 shares of the Company’s Class A Common Stock, $0.0001 par value per share, issued and outstanding, and 32,735,408 shares of the Company’s Class B Common Stock, $0.0001 par value per share, issued and outstanding.
SOUNDHOUND AI, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “report”) of SoundHound AI, Inc. (“we,” “us,” “our,” “SoundHound,” or the “Company”) contains “forward-looking statements” (as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) that reflect our current expectations and views of future events. The forward-looking statements are contained principally in the section of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. These forward-looking statements include, but are not limited to, statements concerning our expected financial performance, our ability to implement our business strategy and anticipated business and operations, including our ability to improve our Generative AI Foundation Model, expand our customer partnerships and roll out our AI drive thru service, roll out our Dynamic Interaction, Chat AI for Automotive, and expand the number of platforms on which our voice AI technology will be available, the potential utility of and market for our products and services, and our ability to achieve revenue from our bookings backlog. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results of operations or the results of other matters that we anticipate herein could be materially different from our expectations. Accordingly, readers are cautioned that significant known and unknown risks, uncertainties and other important factors may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Some factors that could cause actual results to differ include:
•our ability to execute our business strategy, including launching new product offerings and expanding information and technology capabilities;
•our market opportunity and our ability to acquire new customers and retain existing customers;
•the timing and impact of our growth initiatives on our future financial performance;
•our ability to protect intellectual property and trade secrets;
•our ability to obtain additional capital, as necessary, including equity or debt financing, on terms that are acceptable to us, if at all, particularly in light of inflationary pressures and resulting increases in the cost of borrowing;
•changes in applicable laws or regulations and extensive and evolving government regulations that impact our operations and business;
•our ability to attract or maintain a qualified workforce;
•level of product service failures that could lead our customers to use competitors’ services;
•investigations, claims, disputes, enforcement actions, litigation and/or other regulatory or legal proceedings, including with respect to our AI technology;
•risks relating to uncertainty of our estimates of market opportunity and forecasts of market growth;
•the possibility that we may be adversely affected by other economic, business, and/or competitive factors; and
•other risks and uncertainties described under the section titled “Risk Factors” herein and in our Annual Report on Form 10-K which was filed with the Securities and Exchange Commission on March 1, 2024.
You should thoroughly read this report and the documents that we refer to with the understanding that our actual future results may be materially different from, and worse than, what we expect. We qualify all of our forward-looking statements by these cautionary statements.
ii
The forward-looking statements made in this report relate only to events or information as of the date of this report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect.
iii
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
SOUNDHOUND AI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| June 30, 2024 | December 31, 2023 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net of allowances of $ | |||||||||||
Contract assets and unbilled receivable, net of allowance for credit losses of $ | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Restricted cash equivalents, non-current | |||||||||||
| Right-of-use assets | |||||||||||
| Property and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Deferred tax asset | |||||||||||
Contract assets and unbilled receivable, non-current, net of allowance for credit losses of $ | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Finance lease liabilities | |||||||||||
| Income tax liability | |||||||||||
| Deferred revenue | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
| Deferred revenue, net of current portion | |||||||||||
| Long-term debt | |||||||||||
| Contingent acquisition liabilities (Note 17) | |||||||||||
| Income tax liability, net of current portion | |||||||||||
| Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 7) | |||||||||||
| Stockholders’ equity: | |||||||||||
Series A Preferred Stock, $ | |||||||||||
Class A Common Stock, $ | |||||||||||
Class B Common Stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive income | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
SOUNDHOUND AI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of revenues | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Change in fair value of contingent acquisition liabilities | ( | ||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Restructuring | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Other expense, net: | |||||||||||||||||||||||
| Loss on early extinguishment of debt | ( | ( | ( | ( | |||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense), net | ( | ( | |||||||||||||||||||||
| Total other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Loss before provision for income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Cumulative dividends attributable to Series A Preferred Stock | ( | ( | ( | ( | |||||||||||||||||||
| Net loss attributable to SoundHound common shareholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Unrealized gains on investments | ( | ||||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share: | |||||||||||||||||||||||
| Basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted-average common shares outstanding: | |||||||||||||||||||||||
| Basic and diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
SOUNDHOUND AI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended June 30, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Class A Common Stock | Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance of March 31, 2024 | $ | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock under the Equity Distribution Agreement | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock for equity incentive awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock upon conversion of Series A Preferred Stock | ( | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Measurement period adjustments related to the acquisition of SYNQ3 | — | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of June 30, 2024 | $ | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Class A Common Stock | Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance of March 31, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock for equity incentive awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock under the ELOC program | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common shares upon conversion of Class B common shares | — | — | — | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock warrants | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of June 30, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
3
| Six Months Ended June 30, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Class A Common Stock | Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of December 31, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock under the Sales Agreement and Equity Distribution Agreement | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock upon acquisition of SYNQ3 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted shares of Class A common stock, subject to repurchase in connection with acquisition of SYNQ3 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock for equity incentive awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock upon conversion of Class B common shares | — | — | ( | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock upon conversion of Series A Preferred Stock | ( | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock in connection with the cashless exercise of warrants | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of June 30, 2024 | $ | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Class A Common Stock | Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance of December 31, 2022 | $ | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock for equity incentive awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock under the ELOC program | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series A Preferred Stock | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common shares upon conversion of Class B common shares | — | — | — | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock warrants | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of June 30, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SOUNDHOUND AI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows used in operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation | |||||||||||
| Loss on change in fair value of ELOC program | |||||||||||
| Amortization of debt issuance cost | |||||||||||
| Non-cash lease amortization | |||||||||||
| Foreign currency gain/loss from remeasurement | ( | ||||||||||
| Change in fair value of contingent acquisition liabilities | |||||||||||
| Loss on early extinguishment of debt | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Other, net | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | ( | ||||||||||
| Other current assets | ( | ( | |||||||||
| Contract assets | ( | ( | |||||||||
| Other non-current assets | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Accrued liabilities | ( | ||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Deferred revenue | ( | ( | |||||||||
| Other non-current liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows used in investing activities: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Payment related to acquisitions, net of cash acquired | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows provided by financing activities: | |||||||||||
| Proceeds from the issuance of Series A Preferred Stock, net of issuance costs | |||||||||||
| Proceeds from sales of Class A common stock under the ELOC program, net of issuance costs | |||||||||||
| Proceeds from sales of Class A common stock under the Sales Agreement and Equity Distribution Agreement | |||||||||||
| Proceeds from exercise of stock options and employee stock purchase plan | |||||||||||
| Payment of financing costs associated with the Sales Agreement and Equity Distribution Agreement | ( | ||||||||||
| Proceeds from the issuance of long-term debt, net of issuance costs | |||||||||||
| Payments on notes payable | ( | ( | |||||||||
| Payments on finance leases | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Effects of exchange rate changes on cash | |||||||||||
| Net change in cash, cash equivalents, and restricted cash equivalents | |||||||||||
| Cash, cash equivalents, and restricted cash equivalents, beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash equivalents, end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SOUNDHOUND AI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Reconciliation to amounts on the condensed consolidated balance sheets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Non-current portion of restricted cash equivalents | |||||||||||
Total cash, cash equivalents, and restricted cash equivalents shown in the condensed consolidated statements of cash flows | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Noncash investing and financing activities: | |||||||||||
| Conversion of Series A Preferred Stock to Class A common stock | $ | $ | |||||||||
| Issuance of Class A Common Stock to settle commitment shares related to the ELOC program | $ | $ | |||||||||
| Deferred offering costs reclassified to additional paid-in capital | $ | $ | |||||||||
| Unpaid financing costs in connection with the Equity Distribution Agreement | $ | $ | |||||||||
| Non-cash debt discount | $ | $ | |||||||||
| Property and equipment acquired under accrued liabilities | $ | $ | |||||||||
| Fair value of Class A common stock and deferred equity consideration issued for SYNQ3 acquisition | $ | $ | |||||||||
| Fair value of contingent earnout consideration under SYNQ3 acquisition | $ | $ | |||||||||
| Fair value of contingent holdback consideration under SYNQ3 acquisition | $ | $ | |||||||||
| Fair value of deferred cash consideration under other acquisition | $ | $ | |||||||||
6
NOTE 1. ORGANIZATION
Nature of Operations
SoundHound AI, Inc. (“we," "us," "our," "SoundHound” or the “Company”) turns sound into understanding and actionable meaning. SoundHound’s technology applications enable humans to interact with the things around them in the same way they interact with each other: by speaking naturally to mobile phones, cars, televisions, music speakers, coffee machines, and every other part of the emerging “connected” world. SoundHound's voice AI platform enables product creators to develop their own voice interfaces with their customers. The SoundHound Chat AI voice assistant allows businesses and brands to provide a next-generation voice experience for their users, seamlessly integrating Generative AI and a mix of real-time information domains. Houndify is an open-access platform that allows developers to leverage SoundHound’s Voice AI technology. The Company has developed a range of proprietary technologies on our voice AI platform, including Speech-to-Meaning, Deep Meaning Understanding, Collective AI, Dynamic Interaction and SoundHound Chat AI. The SoundHound music app allows customers to identify and play songs by singing or humming into the smartphone’s microphone, or by identifying the sound playing in the background from external sources. SoundHound also provides edge, cloud and hybrid (Edge+Cloud) connectivity solutions that allow brands to optimize their voice-enabled products and devices with options ranging from fully-embedded to exclusively cloud-connected.
On January 3, 2024, the Company completed the acquisition of Synq3, Inc. ("SYNQ3") in a cash and stock transaction. On June 14, 2024, the Company completed an immaterial acquisition in a cash transaction. Refer to Note 3 for additional information.
Going Concern
Since inception, the Company has generated recurring losses as well as negative operating cash flows and reported a net loss of $37.3 million and $70.3 million, respectively, for the three and six months ended June 30, 2024. As of June 30, 2024, the Company had an accumulated deficit of $662.7 million. Management expects to continue to incur additional substantial losses in the foreseeable future. The Company has historically funded its operations primarily through equity or debt financings.
Total unrestricted cash and cash equivalents on hand as of June 30, 2024 was $200.2 million. Although the Company has incurred recurring losses each year since its inception, the Company expects it will be able to fund its operations for at least the next twelve months from the date these condensed consolidated financial statements are issued. The Company may seek funding through additional debt or equity financing arrangements to continue financing its operations. Refer to Note 19 for information regarding the Company's equity financing activity subsequent to June 30, 2024. The Company's condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business.
7
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The (a) condensed consolidated balance sheet as of December 31, 2023, which has been derived from audited financial statements as filed in the Company’s Form 10-K, which was originally filed with the Securities and Exchange Commission ("SEC") on March 1, 2024 and (b) the unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and applicable rules and regulations of the SEC regarding annual financial reporting. Any reference in these notes to applicable accounting guidance is meant to refer to the authoritative U.S. GAAP included in the Accounting Standards Codification (“ASC”), and Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board (“FASB”). The condensed consolidated financial statements have been prepared on a basis consistent with the audited consolidated financial statements and in the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of its financial position as of June 30, 2024, and its results of operations for the three and six months ended June 30, 2024, and 2023, and cash flows for the six months ended June 30, 2024 and 2023 have been included. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results for the fiscal year ending December 31, 2024 or any future interim period.
Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
Significant Accounting Policies
With the exception of the significant accounting policies related to the SYNQ3 Acquisition and other acquisition (each as defined in Note 3) which are disclosed below, there have been no material changes to our significant accounting policies disclosed in Note 2 - Basis of Presentation and Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Reclassification
Certain accounts in the prior year condensed consolidated financial statements were reclassified to conform with the current year presentation. The reclassification had an immaterial impact on our consolidated balance sheet and statements of operations and comprehensive loss in the prior year period.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the amounts reported and disclosures in the consolidated financial statements and accompanying notes. Such estimates include revenue recognition, allowance for credit losses, accrued liabilities, derivative and warrant liabilities, calculation of the incremental borrowing rate, financial instruments recorded at fair value on a recurring basis, the accounting for business combinations and allocating purchase price, valuation and estimating the useful life of identifiable intangible assets, probability of achievement of revenue estimates related to contingent earnout consideration and performance-based equity awards, valuation of deferred tax assets and uncertain tax positions and the fair value of common stock and other assumptions used to measure stock-based compensation expense. In connection with the measurement period for the acquisition of SYNQ3, management revised certain significant estimates during the three months ended June 30, 2024, which include, but are not limited to, the recognition and measurement of assumed contingent liabilities and deferred and contingent holdback consideration. The Company bases its estimates on historical experience, the current economic environment, and on assumptions it believes are reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Changes in those estimates resulting from changes in the economic environment will be reflected in the financial statements in future periods. Actual results could differ materially from those estimates.
8
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Segment Information
The Company has determined that the Chief Executive Officer is its chief operating decision maker. The Company’s Chief Executive Officer reviews discrete financial information on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, the Company has determined that it operates as a single reportable segment.
Concentrations of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, the balances of which frequently exceed federally insured limits. The Company regularly monitors its credit risk exposure and takes steps to mitigate the likelihood of these exposures resulting in actual loss.
As of June 30, 2024, accounts receivable balances due from Customer A and C accounted for 27 % and 17 % of the Company’s accounts receivable balance, respectively. As of December 31, 2023, accounts receivable balances due from Customer A, C, and D accounted for 40 %, 32 % and 15 % of the Company’s accounts receivable balance, respectively.
As of June 30, 2024, unbilled receivables from Customer A, C and F accounted for 28 %, 45 % and 19 % of the Company’s unbilled receivables balance, respectively. As of December 31, 2023, unbilled receivables from Customer A, B and C accounted for 59 %, 16 % and 11 % of the Company’s unbilled receivables balance, respectively.
For the three months ended June 30, 2024, Customer A and C accounted for 27 % and 35 % of the revenue, respectively. For the six months ended June 30, 2024, Customer A and C accounted for 27 % and 29 % of the revenue, respectively.
For the three months ended June 30, 2023, Customer A, B and E accounted for 21 %, 44 % and 10 % of revenue, respectively. For the six months ended June 30, 2023, Customer A, B, C and E accounted for 23 %, 36 %, 10 % and 12 % of revenue, respectively.
Business Combinations and Contingent Consideration
Business combinations are accounted for using the acquisition method. The Company allocates the fair value of the purchase price of an acquisition to the assets acquired and liabilities assumed, based on their estimated fair values as of the date of acquisition. The excess of the fair value of the purchase price over the fair values of these net tangible and intangible assets acquired is recorded as goodwill. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but the estimates and assumptions are inherently uncertain and subject to refinement. The estimates and assumptions used in valuing intangible assets include, but are not limited to, the amount and timing of projected future cash flows, discount rate used to determine the present value of these cash flows and asset lives. These estimates are inherently uncertain and, therefore, actual results may differ from the estimates made. As a result, during the measurement period of up to one year from the acquisition date, the Company may make adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the measurement period's conclusion or final determination of the fair value of the purchase price of an acquisition, whichever comes first, any subsequent adjustments are recorded to our condensed consolidated statements of operations. Acquisition-related expenses are recognized separately from the business combination and expensed as incurred.
Goodwill
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SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Intangible Assets with Definite Lives
The Company's intangible assets consist principally of developed technology, customer relationships, tradename, and conversation data. The Company assesses the appropriate method of amortization of the intangible assets that reflects the pattern in which the economic benefits of the intangible assets are consumed. The Company determined that a straight-line method of amortization was appropriate for its intangible assets. The remaining useful lives of long-lived assets are re-assessed periodically at the asset group level for any events and circumstances that may change the future cash flows expected to be generated from the long-lived asset or asset group.
Recent Accounting Pronouncements — Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures," which expands disclosures about a public business entity's reportable segments and provides for more detailed information about a reportable segment's expenses. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective application to all prior periods presented in the financial statements. Early adoption is permitted. Preliminarily, the Company will have increased disclosure requirements for its single reportable segment related to its significant segment expenses as well as additional information on its Chief Operating Decision Maker (“CODM”) and its use of reported measures. The Company will continue to evaluate this ASU to determine its impact on disclosures.
In December 2023, the Financial Accounting Standards Board issued Accounting Standards Update No. 2023-09, which requires more detailed income tax disclosures. The guidance requires entities to disclose disaggregated information about their effective tax rate reconciliation as well as expanded information on income taxes paid by jurisdiction. The disclosure requirements will be applied on a prospective basis, with the option to apply them retrospectively. The standard is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that the updated standard will have on the financial statement disclosures.
NOTE 3. BUSINESS COMBINATIONS
SYNQ3 Acquisition
On January 3, 2024 (the "Closing Date"), the Company acquired all of the issued and outstanding equity of SYNQ3, a provider of voice AI and other technology solutions to the restaurant industry, for total preliminary purchase consideration of $15.7 million (the “SYNQ3 Acquisition”). The Company’s acquisition of SYNQ3 is expected to expand its AI customer
10
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
service solutions and create a Voice AI provider for restaurants. The acquisition is expected to significantly extend the Company's market reach and accelerate the deployment of generative AI capabilities to the industry.
The total preliminary purchase consideration includes $3.9 million in cash paid and 5,755,910 in shares of the Company’s Class A Common Stock issued as of the Closing Date. The Company has also withheld purchase consideration of $0.5 million in cash and 1,179,514 shares of the Company’s Class A Common Stock, subject to customary net working capital adjustments, to partially secure the indemnification obligations of SYNQ3's former stockholders under the merger agreement and agreed to pay up to $0.8 million in cash and 1,434,936 in shares of the Company’s Class A Common Stock to certain former stockholders of SYNQ3 based upon the achievement of specified future milestones. At the Closing Date, the Company also issued 2,033,156 restricted shares of the Company’s Class A Common Stock subject to time and performance-based vesting conditions.
Holdback
The $0.5 million in cash and 1,179,514 shares of the Company's Class A Common Stock is being withheld for a period of 15 months (the "Holdback Amount"). The Company determined that there are two components to the Holdback Amount related to deferred consideration and contingent consideration, each comprised of cash and shares.
The deferred cash holdback consideration of $0.1 million and the deferred share holdback consideration of 361,145 shares of the Company's Class A Common Stock (collectively the "Deferred Consideration") were not recognized as of the Closing Date as such amounts were offset by the indemnification obligations of SYNQ3's former stockholders.
The contingent cash and share holdback consideration to be issued is variable ("Contingent Holdback Consideration"). Final amounts to be issued will be reduced based upon future actions and settlements with third parties to resolve assumed contingent sales tax liabilities and certain other assumed contingent liabilities of SYNQ3 in connection with the SYNQ3 Acquisition. The Company accounted for the Contingent Holdback Consideration as a liability on the condensed consolidated balance sheet. As of the Closing Date, the Contingent Holdback Consideration was estimated to be $0.4 million in aggregate and to be settled in $0.1 million cash and the remainder in shares of the Company’s Class A Common Stock. The Contingent Holdback Consideration will be subsequently remeasured at each reporting date with changes in fair value recognized as a component of operating expense on the Company’s condensed consolidated statement of operations and comprehensive loss. See Note 17 to our unaudited condensed consolidated financial statements included within this report for more information on the fair value measurement of shares associated with the holdback.
Earnout
The Company also agreed to pay in aggregate up to $0.8 million in cash and 1,434,936 in shares of Class A Common Stock, to certain stockholders of SYNQ3 based on tiered annual revenue targets for each fiscal year 2024, 2025 and 2026 (the “Contingent Earnout Consideration”). The Company accounted for the Contingent Earnout Consideration as a liability within contingent acquisition liabilities on the Company's condensed consolidated balance sheet and will subsequently remeasure the liability at each reporting date with changes in fair value recognized as a component of operating expense in the Company’s condensed consolidated statement of operations and comprehensive loss. As of the Closing Date, the Contingent Earnout Consideration was estimated to be $1.7 million in aggregate and to be settled in $0.2 million cash and the remainder in shares of the Company’s Class A Common Stock. See Note 17 to our unaudited condensed consolidated financial statements included within this report for more information on the fair value measurement of Contingent Earnout Consideration.
Restricted stock awards
The 2,033,156 restricted shares of the Company's Class A Common Stock issued at the Closing Date to certain continuing employees of SYNQ3 subject to time and performance-based vesting conditions was determined to be a separate transaction from the SYNQ3 Acquisition and therefore is excluded from purchase consideration. See Note 13 to our unaudited condensed consolidated financial statements included within this report for more information on stock-based awards issued in connection with the SYNQ3 Acquisition.
Preliminary purchase price allocation
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SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The preliminary purchase price allocation was performed as of January 3, 2024 and allocated to the assets acquired and liabilities assumed based on their respective fair values, as follows (in thousands):
| Preliminary: Jan, 3, 2024 | |||||
| Cash paid | $ | ||||
| Equity consideration | |||||
| Contingent earnout consideration | |||||
| Contingent holdback consideration | |||||
| Purchase price | |||||
| Assets acquired: | |||||
| Cash | |||||
| Accounts receivable | |||||
| Prepaid expenses | |||||
| Intangible assets | |||||
| Total identified assets acquired | |||||
| Liabilities assumed: | |||||
| Accounts payable | |||||
| Accrued liabilities | |||||
| Other non-current liabilities | |||||
| Deferred tax liability | |||||
| Total liabilities assumed | |||||
| Fair value of identifiable net assets acquired | $ | ||||
| Goodwill acquired on acquisition | $ | ||||
Goodwill recognized includes synergies expected to be achieved from the operations of the combined company and intangible assets that do not qualify for separate recognition. Expected synergies include both increased revenue opportunities and the cost savings from the planned integration of platform infrastructure, facilities, personnel, and systems. The transaction is considered a non-taxable business combination, and the goodwill is not deductible for tax purposes.
During the three months ended June 30, 2024, the Company recorded measurement period adjustments to decrease the deferred revenue by $0.1 million as the revenue recognition criteria has been met at the acquisition date, to increase the accrued liabilities by $1.9 million resulting from a pre-acquisition legal contingency, and to decrease the deferred tax liability assumed by $0.2 million. Refer to Note 7 to these condensed consolidated financial statements for more information on the loss contingencies. These measurement period adjustments resulted in a decrease of $0.1 million in deferred cash consideration, $0.6 million in deferred equity consideration, and $0.6 million in contingent holdback consideration in accordance with the merger agreement. As a result of the adjusted acquisition-date fair value of assets acquired and liabilities assumed, the Company recorded an increase of $0.3 million to the goodwill recognized. The measurement period adjustments were recorded in the consolidated financial statements as of and for the three months ended June 30, 2024 and were made to reflect facts and circumstances that existed as of the acquisition date.
The preliminary purchase price allocation has not been finalized as of June 30, 2024 primarily due to the final assessment of the fair values of the intangible assets, contingent sales tax liability assumed, and fair value of the contingent acquisition liabilities. The fair value estimates of assets acquired and liabilities assumed is pending the completion of various items,
12
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
including obtaining further information regarding the identification and valuation of all assets acquired and liabilities assumed. Any adjustments to the estimates of purchase price allocation will be made in the periods in which the adjustments are determined, and the cumulative effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date. The Company expects to finalize the purchase price allocation within 12 months from the acquisition date.
The following table summarizes the preliminary fair values of the identifiable intangible assets acquired (in thousands):
| Useful life | Preliminary fair value | |||||||
| Intangible Assets: | (in years) | January 3, 2024 | ||||||
| Developed technology | $ | |||||||
| Customer relationships | ||||||||
| Tradename | ||||||||
| Conversation data | ||||||||
| $ | ||||||||
The Company incurred $1.9 million in acquisition related expenses, of which $0.5 million and $0.8 million were incurred during the three and six months ended June 30, 2024, respectively, and recorded as general and administration expenses in its condensed consolidated statements of operations and comprehensive loss.
Unaudited pro forma financial information
The financial results of SYNQ3 are included in these unaudited condensed consolidated financial statements from the date of the acquisition. The acquired business contributed revenue of $6.1 million and net loss of $3.1 million to the Company for the period from January 3, 2024 to June 30, 2024.
The following table includes unaudited pro forma financial information that presents combined results of the Company as if the business combination was completed on January 1, 2023, the beginning of the comparable prior annual reporting period.
| Unaudited | ||||||||
| Three Months Ended | Six Months Ended | |||||||
| June 30, 2023 | June 30, 2023 | |||||||
| Revenue | $ | $ | ||||||
| Net loss attributable to SoundHound AI, Inc. | $ | ( | $ | ( | ||||
The unaudited pro forma financial information includes the combined historical operating results of the Company and SYNQ3 prior to the acquisition, with adjustments to give effect for the SYNQ3 Acquisition and related events. Pro forma adjustments have been made to reflect the incremental intangible asset amortization to be incurred based on the fair values and useful lives of each identifiable intangible asset, incremental stock-based compensation related to inducement equity awards, incremental compensation related to amended severance agreements, incremental transaction costs related to the acquisition, change in fair value of contingent acquisition liabilities, elimination of interest expense related to SYNQ3’s previously outstanding debt, elimination of amortization expense related to SYNQ3's previously recognized goodwill, and the related tax effects of pro forma adjustments for the period. These unaudited pro forma results are presented for informational purpose only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations. The unaudited pro forma results are based on the preliminary purchase price allocation and will be updated to reflect the final amounts as the allocation is finalized during the measurement period.
The Company did not have any material nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.
13
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Other Acquisition
On June 14, 2024, the Company completed an immaterial acquisition for total preliminary purchase consideration of $1.0 million. As part of the acquisition, the Company acquired net assets of $2.2 million, including intangible assets of $2.6 million, and recognized a preliminary gain on bargain purchase of $1.2
The preliminary purchase price allocation has not been finalized as of June 30, 2024 primarily due to the final assessment of the fair values of the intangible assets. The fair value estimates of assets acquired and liabilities assumed is pending the completion of various items, including obtaining further information regarding the identification and valuation of all assets acquired and liabilities assumed. Any adjustments to the estimates of purchase price allocation will be made in the periods in which the adjustments are determined, and the cumulative effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date. The Company expects to finalize the purchase price allocation within 12 months from the acquisition date.
The following table summarizes the preliminary fair values of the identifiable intangible assets acquired (in thousands):
| Useful life | Fair value | |||||||
| Intangible Assets: | (in years) | at acquisition | ||||||
| Developed technology | $ | |||||||
| Customer relationships | ||||||||
| Tradename | ||||||||
| $ | ||||||||
The Company incurred $0.1
Unaudited pro forma financial information
The financial results of the acquired entity are included in these unaudited condensed consolidated financial statements from the date of the acquisition. The Company has not separately presented pro forma results of operations reflecting the acquisition or revenue and operating losses of the acquired entity for the period from acquisition date to June 30, 2024 as the impacts were not material to the condensed consolidated financial statements.
NOTE 4. REVENUE RECOGNITION
Revenue Recognition
The Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenues are generally recognized upon the transfer of control of promised products or services provided to customers, reflecting the amount of consideration the Company expects to receive for those products or services.
The Company’s arrangements with customers may contain multiple obligations. Individual services are accounted for separately if they are distinct — that is, if a service is separately identifiable from other items in the contract and a customer can benefit from it in its own or with other resources that are readily available to the customer.
14
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company derives its revenue primarily from the following performance obligations: (1) hosted services, (2) professional services, (3) monetization, and (4) licensing. Revenues are reported net of applicable sales and use taxes that are passed through to customers. The Company applies significant judgement in identifying and evaluating any terms and conditions in contracts which impact revenue recognition.
The Company has the following performance obligations in contracts with customers:
Hosted Services
The Company has determined that the hosted services arrangements are a single performance obligation comprised of a series of distinct services, since each day of providing access to hosted services is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided. These services are provided either on a usage basis (i.e., variable consideration) or on a fixed fee subscription basis. The Company recognizes revenue as each distinct service period is performed.
Hosted services generally include up-front services to develop and/or customize the Houndify application to each customer’s specification. Judgement is required to determine whether these professional services are distinct from the hosted services. In making this determination, factors such as the degree of integration, the customers’ ability to start using the software prior to customization, and the availability of these services from other independent vendors are considered.
In instances where the Company concluded that the up-front services are not distinct performance obligations, revenues for these activities are recognized over the period which the hosted services are provided and is included within hosted services revenue.
Revenues derived as a result of the SYNQ3 Acquisition are categorized as hosted services revenue.
Professional Services
Revenues from distinct professional services, such as non-integrated development services, are either recognized over time based upon the progress towards completion of the project, or at a point in time at project completion. The Company assesses distinct professional services to determine whether the transfer of control is over-time or at a point in time. The Company considers three criteria in making their assessment including (1) the customer simultaneously receives and consumes the benefits; (2) the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or (3) the Company’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. If none of the criteria are met, revenues are determined to be recognized at a point in time.
For distinct professional services determined to be recognized over-time, measuring the stage of completion of a project requires significant judgement and estimates and is based on either input or output measure. During the three and six months ended June 30, 2024, $1.4 million and $2.9 million, respectively, of professional service revenue was recognized over time. During the three and six months ended June 30, 2024, there was immaterial professional service revenue recognized at a point in time when the performance obligation was fulfilled and control of the service was transferred to the customer. During the three and six months ended June 30, 2023, $4.3 million and $5.0 million, respectively, of professional service revenue was recognized over time. During the three and six months ended June 30, 2023, there was zero and $0.9 million, respectively, of professional service revenue recognized at a point in time when the performance obligation was fulfilled and control of the service was transferred to the customer.
Monetization
Monetization revenues are primarily derived from advertising payments associated with ad impressions placed on the SoundHound music identification application. The amount of revenue is based on actual monetization generated or usage,
15
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
which represent a variable consideration with constrained estimates. Therefore, the Company recognizes the related revenues at a point in time when advertisements are placed, when commissions are paid or when the SoundHound application is downloaded. The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether the Company is acting as a principal or an agent in the transaction. The Company has determined that it does not act as the principal in monetization arrangements because it does not control the transfer of the service and it does not set the price. Based on these factors, the Company reports revenue on a net basis.
Licensing
The Company licenses voice solutions that are embedded in customer’s products. Licensing revenues are a distinct performance obligation that is recognized when control is transferred to the customer, which is at a point in time for non-customized solutions. For licenses with non-distinct customized solutions, revenues are recognized over time based on the progress towards completion of the customized solution. Revenues generated from licensing are based on royalty models with a combination of minimum guarantees and per unit pricing. Royalty periods are generally subsequent to when control of the license passes to the customer. The Company records licensing revenue as a usage-based royalty from customers’ usage of intellectual property in the same period in which the underlying sale occurs. For royalty arrangements that include fixed considerations related to a minimum guarantee from a customer, the fixed consideration allocated to the license is recognized when the control of the license passes to the customer. The Company provides assurance-type warranty services and to date, post-contract support has been an immaterial performance obligation within the context of the contract.
When a contract has multiple performance obligations, the transaction price is allocated to each performance obligation based on its relative estimated standalone selling price (“SSP”). Judgments are required to determine the SSP for each distinct performance obligation. SSP is determined by maximizing observable inputs from pricing of standalone sales, when possible. Since prices vary from customer to customer based on customer relationship, volume discount and contract type, in instances where the SSP is not directly observable, the Company estimates SSP by considering the following factors:
•Costs of developing and supplying each performance obligation;
•Industry standards;
•Major product groupings; and
•Gross margin objectives and pricing practices, such as contractually stated prices, discounts offered, and applicable price lists.
These factors may vary over time, depending upon the unique facts and circumstances related to each deliverable. If the facts and circumstances underlying the factors considered change or should future facts and circumstances lead the Company to consider additional factors, the Company’s best estimate of SSP may also change.
The Company’s long-term contracts do not have significant financing components, as there is generally payment and performance in each year of the contract. The Company has elected the practical expedient to not adjust promised amounts of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. If there is a period of one year or longer between the transfer of promised services and payment, it is generally for reasons other than financing, thus, the Company does not adjust the transaction price for financing components.
For the three and six months ended June 30, 2024 and 2023, revenue under each performance obligation was as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
16
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| Hosted services | $ | $ | $ | $ | |||||||||||||||||||
| Professional services | |||||||||||||||||||||||
| Licensing | |||||||||||||||||||||||
| Monetization | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
For the three and six months ended June 30, 2024 and 2023, the disaggregated revenue by geographic location was as follows* (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| United States | |||||||||||||||||||||||
| Korea | |||||||||||||||||||||||
| France | |||||||||||||||||||||||
| Japan | |||||||||||||||||||||||
| Germany | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
*Revenue by geographic region is allocated to individual countries based on the billing location of the customer. The end customer location may be different than the customer's billing location.
For the three and six months ended June 30, 2024 and 2023, the disaggregated revenue by recognition pattern was as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Over time revenue | $ | $ | $ | $ | |||||||||||||||||||
| Point-in-time | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The Company also disaggregates revenue by service type. This disaggregation consists of Product Royalties, Service Subscriptions and Monetization. Product Royalties revenues are derived from Houndified Products, which are voice-enabled tangible products across the automotive and consumer electronics industries. Revenues from Product Royalties are based on volume, usage or life of the products, which are driven by number of devices, users or unit of time. Service Subscription revenues are generated through Houndified Services, which include customer services, food ordering, content, appointments and voice commerce. Subscription revenues are derived from monthly fees based on usage-based revenue, revenue per query or revenue per user. Both Houndified Products and Houndified Services may include professional
17
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
services that develop and customize the Houndify platform to fit customers’ specific needs. Revenues from Monetization are generated from the SoundHound music identification app and are primarily attributable to user ad impression revenue.
For the three and six months ended June 30, 2024 and 2023, the disaggregated revenue by service type was as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Product royalties | $ | $ | $ | $ | |||||||||||||||||||
| Service subscriptions | |||||||||||||||||||||||
| Monetization | |||||||||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||||||||
Contract Balances
The Company performs its obligations under a contract with a customer by providing access to software, licensing right to use software, or providing services in exchange for consideration from the customer. The timing of the Company’s performance often differs from the timing of the customer’s payment, which results in the recognition of a receivable, a contract asset or deferred revenue.
As of January 1, 2023, accounts receivable, net of allowances, was $3.4 million, contract assets were $8.7 million and deferred revenue was $13.4 million.
The contract asset and unbilled accounts receivable, net as of June 30, 2024 and December 31, 2023 consists of the following (in thousands):
| Balance Sheet Presentation | June 30, 2024 | December 31, 2023 | |||||||||||||||
| Unbilled account receivables - current | Contract assets and unbilled receivables, net of allowance for credit losses | $ | $ | ||||||||||||||
| Contract assets - current | Contract assets and unbilled receivables, net of allowance for credit losses | ||||||||||||||||
| Unbilled account receivables - non-current | Contract assets and unbilled receivables, non-current, net of allowance for credit losses | ||||||||||||||||
| Contract assets - non-current | Contract assets and unbilled receivables, non-current, net of allowance for credit losses | ||||||||||||||||
The change in the Company's contract assets and contract liabilities during the current period was primarily the result of the timing differences between the Company's performance, invoicing and customer payments. The Company has not recorded any asset impairment charges related to contract assets during the periods presented in the condensed consolidated financial statements.
Revenues recognized included in the balances of the deferred revenue at the beginning of the reporting period were $1.3 million and $3.0 million, respectively, for the three and six months ended June 30, 2024 as compared to $2.2 million and $5.0 million, respectively, for the three and six months ended June 30, 2023.
As of June 30, 2024, the aggregate amount of the transaction price allocated to the remaining performance obligations related to customer contracts that were unsatisfied or partially unsatisfied was $10.6 million. Given the applicable contract terms, $5.5 million is expected to be recognized as revenue within one year , $3.1 million is expected to be recognized between 2 to 5 years and the remainder of $2.0 million is expected to be recognized after 5 years. This amount does not
18
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
include contracts to which the customer is not committed, contracts for which the Company recognizes revenue equal to the amount the Company has the right to invoice for services performed or future sales-based or usage-based royalty payments in exchange for access to the Company’s hosted services. This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications or currency adjustments. The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and is affected by changes to scope, changes in timing of delivery of products and services or contract modifications.
NOTE 5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The change in the carrying value of goodwill including the effect of measurement period adjustments for the six months ended June 30, 2024, was as follows (in thousands):
| Balance as of December 31, 2023 | $ | ||||
| Acquisition of SYNQ3 | |||||
| Balance as of June 30, 2024 | $ | ||||
The Company has applied the acquisition method of accounting in accordance with ASC 805 and recognized assets acquired and liabilities assumed of SYNQ3 at their fair value as of the date of acquisition, with the excess purchase consideration recorded to goodwill. As the Company finalizes the estimation of the fair value of the assets acquired and liabilities assumed, additional adjustments to the amount of goodwill may be necessary. Refer to Note 3 for further information on the measurement period adjustments of SYNQ3 Acquisition.
Intangible Assets
The gross carrying value, accumulated amortization and net carrying value of intangible assets consisted of the following (in thousands):
| June 30, 2024 | |||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Carrying Value | |||||||||
| Developed technology | $ | $ | $ | ||||||||
| Customer relationships | |||||||||||
| Tradename | |||||||||||
| Conversation data | |||||||||||
| Total | $ | $ | $ | ||||||||
Amortization expense of intangible assets was $1.0 million and $2.1 million for the three and six months ended June 30, 2024. These expenses were recorded as $0.4 million and $0.9 million, respectively, within cost of revenues for the three and six months ended June 30, 2024, and $0.6 million and $1.2 million, respectively, within operating expenses for the three and six months ended June 30, 2024. There was no
Future amortization expense of intangible assets held as of June 30, 2024, are as follows (in thousands):
19
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| Year ending December 31, | |||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Total | $ | ||||
NOTE 6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
| June 30, 2024 | December 31, 2023 | ||||||||||
| Accrued compensation expenses | $ | $ | |||||||||
| Accrued vendor payables | |||||||||||
| Accrued lender fees | |||||||||||
| Accrued litigation liabilities | |||||||||||
| Other accrued liabilities | |||||||||||
| $ | $ | ||||||||||
NOTE 7. COMMITMENTS AND CONTINGENCIES
Contracts
In August 2021, the Company entered into an exclusive agreement with a cloud service provider to host its voice artificial intelligence platform pursuant to which the Company committed to pay a minimum of $98.0 seven-year period subject to variable increases based on usage.
Aggregate non-cancelable future minimum payments were as follows as of June 30, 2024 (in thousands):
| Remainder of 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||