UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 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 May 7, 2024, there were 296,434,620 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, particularly following our recent restructuring efforts;
•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;
•our ability to maintain the listing of our Class A common stock on the Nasdaq Global Market;
•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)
| March 31, 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 | |||||||||||
| 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 March 31, | |||||||||||
| 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 income (expense), net: | |||||||||||
| 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 March 31, 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 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock and deferred equity consideration 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 March 31, 2024 | $ | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 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 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as 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 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of March 31, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
SOUNDHOUND AI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 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 | |||||||||||
| 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 | ( | ( | |||||||||
| Acquisition of SYNQ3, 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 | |||||||||||
| Proceeds from the issuance of Class A common stock upon exercise of options | |||||||||||
| Payment of financing costs associated with ELOC Program | ( | ||||||||||
| Payment of financing costs associated with the Sales Agreement | ( | ||||||||||
| 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.
4
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 | $ | $ | |||||||||
| Unpaid issuance costs in connection with the ELOC program | $ | $ | |||||||||
| Deferred offering costs reclassified to additional paid-in capital | $ | $ | |||||||||
| Property and equipment acquired under finance leases or debt | $ | $ | |||||||||
| Fair value of Class A common stock and deferred equity consideration issued for business combination | $ | $ | |||||||||
| Fair value of deferred cash consideration | $ | $ | |||||||||
| Fair value of contingent earnout consideration | $ | $ | |||||||||
| Fair value of contingent holdback consideration | $ | $ | |||||||||
| Unpaid deferred offering cost | $ | $ | |||||||||
5
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. 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 $33.0 million for the three months ended March 31, 2024. As of March 31, 2024, the Company had an accumulated deficit of $625.4 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 March 31, 2024 was $211.7 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, implement incremental expense reduction measures or a combination thereof to continue financing its operations. Refer to Note 19 for information regarding the Company's equity financing activity subsequent to March 31, 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.
Other Risk and Uncertainties
Inflation has risen significantly worldwide and the United States has recently experienced historically high levels of inflation. This inflation and government efforts to combat inflation, such as recent and future significant increases to benchmark interest rates and other related monetary policies, have and could continue to increase market volatility and have an adverse effect on the domestic and international financial markets and general economic conditions.
Additionally, U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine and the Israel-Hamas war. Although our business has not been materially impacted by the Russia-Ukraine conflict or the Israel-Hamas war, it is impossible to predict the extent to which our operations, or those of our customers’ suppliers and manufacturers, will be impacted in the short and long-term, or the ways in which the conflict may impact our business. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict but could be substantial.
6
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 have been included. The results of operations for the three months ended March 31, 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 (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 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. 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.
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.
7
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 March 31, 2024, accounts receivable balances due from Customer A, B, and C accounted for 16 %, 14 % 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 March 31, 2024, unbilled receivables from Customer A, C and F accounted for 31 %, 23 % and 32 % 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 March 31, 2024, Customer A and C accounted for 26 % and 22 % of the revenue, respectively. For the three months ended March 31, 2023, Customer A, B, C and E accounted for 25 %, 27 %, 11 % and 14 % 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
Intangible Assets with Definite Lives
8
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 COMBINATION
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 $17.0 million (the “SYNQ3 Acquisition”). The Company’s acquisition of SYNQ3 is expected to expand its AI customer 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. 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 at the Closing Date.
Holdback
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 was recorded within other non-current liabilities at present value and the deferred share holdback consideration of 361,145 shares of the Company's Class A Common Stock was recorded within stockholders’ equity in the amount of $0.6 million based on the fair value of the Company's Class A Common Stock as of the Closing Date (the "Deferred Consideration").
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 in connection with the SYNQ3 Acquisition. The Company accounted for the Contingent Holdback Consideration as a liability within contingent acquisition liabilities on the condensed consolidated balance sheet. As of the Closing Date, the Contingent Holdback Consideration was estimated to be $1.0 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. 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. For the three months ended March 31, 2024, the Company recognized a $1.6 million loss related to the Contingent Holdback Consideration. 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. For the three months ended March 31, 2024, the Company recognized a $2.6 million loss related to the Contingent Earnout Consideration, reflected in the change in fair value of contingent acquisition liabilities in the 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 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
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):
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| Cash paid | $ | ||||
| Equity consideration | |||||
| Deferred cash consideration | |||||
| Deferred 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 | |||||
| Deferred revenue | |||||
| 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.
The preliminary purchase price allocation has not been finalized as of March 31, 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, 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):
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| Useful life | Preliminary fair value | |||||||
| Intangible Assets: | (in years) | at acquisition | ||||||
| Developed technology | $ | |||||||
| Customer relationships | ||||||||
| Tradename | ||||||||
| Conversation data | ||||||||
| $ | ||||||||
The Company incurred $1.3 million in acquisition related expenses, of which $0.2 million was incurred during the three months ended March 31, 2024 and recorded as general and administration expenses in its condensed consolidated statements of operations and comprehensive loss.
Restricted stock units
As a condition of the SYNQ3 Acquisition, the Company additionally granted certain employees awards with future vesting conditions. As a result, the Company determined that these awards should be accounted for separately from the acquisition and therefore are excluded from purchase consideration. See Note 13 to our unaudited condensed consolidated financial statements included within this report for more information on these awards.
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 $3.0 million and net loss of $1.6 million to the Company for the period from January 3, 2024 to March 31, 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 | |||||
| March 31, 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 input and output measures. During the three months ended March 31, 2024, $1.5 million of professional service revenue was recognized over time. During the three months ended March 31, 2024, there was no 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 months ended March 31, 2023, $0.7 million of professional service revenue was recognized over time, with the remaining $0.9 million 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, 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
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SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 months ended March 31, 2024 and 2023, revenue under each performance obligation was as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Hosted services | $ | $ | |||||||||
| Professional services | |||||||||||
| Licensing | |||||||||||
| Monetization | |||||||||||
| Total | $ | $ | |||||||||
For the three months ended March 31, 2024 and 2023, the disaggregated revenue by geographic location was as follows* (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| United States | $ | $ | |||||||||
| Korea | |||||||||||
| France | |||||||||||
| Other | |||||||||||
| Japan | |||||||||||
| Germany | |||||||||||
| Total | $ | $ | |||||||||
For the three months ended March 31, 2024 and 2023, the disaggregated revenue by recognition pattern was as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 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,
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SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 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 months ended March 31, 2024 and 2023, the disaggregated revenue by service type was as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 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 March 31, 2024 and December 31, 2023 consists of the following (in thousands):
| Balance Sheet Presentation | March 31, 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 $1.9 million for the three months ended March 31, 2024 and $1.8 million for the three months ended March 31, 2023.
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SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of March 31, 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 $11.8 million. Given the applicable contract terms, $6.3 million is expected to be recognized as revenue within one year , $3.4 million is expected to be recognized between 2 to 5 years and the remainder of $2.1 million is expected to be recognized after 5 years. This amount does not 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 for the three months ended March 31, 2024, was as follows (in thousands):
| Balance as of December 31, 2023 | $ | ||||
| Acquisition of SYNQ3 | |||||
| Balance as of March 31, 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.
Intangible Assets
The gross carrying value, accumulated amortization and net carrying value of intangible assets consisted of the following (in thousands):
| March 31, 2024 | |||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Carrying Value | |||||||||
| Developed technology | $ | $ | $ | ||||||||
| Customer relationships | |||||||||||
| Tradename | |||||||||||
| Conversation data | |||||||||||
| Total | $ | $ | $ | ||||||||
Amortization expense of intangible assets was $1.1 million for the three months ended March 31, 2024. These expenses were recorded as $0.5 million within cost of revenues, and $0.6 million within operating expenses for the respective periods. There was no amortization expense during the three months ended March 31, 2023.
Future amortization expense of intangible assets held as of March 31, 2024, are as follows (in thousands):
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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):
| March 31, 2024 | December 31, 2023 | ||||||||||
| Accrued compensation expenses | $ | $ | |||||||||
| Accrued vendor payables | |||||||||||
| Accrued lender fees | |||||||||||
| 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 March 31, 2024 (in thousands):
| Remainder of 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Total | $ | ||||
Legal Proceedings
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues contingent liabilities when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. In the opinion of management, there are no pending claims for which the outcome is expected to result in a material adverse effect on the financial position, results of operations or cash flows of the Company.
Other Matters
The Company has not historically collected U.S. state or local sales and use tax, or other similar taxes, in any jurisdiction. On June 21, 2018, the U.S. Supreme Court decided, in South Dakota v. Wayfair, Inc., that state and local jurisdiction may, in certain circumstances, enforce sales and use tax collection obligations on remote vendors that have no physical presence
18
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
in such jurisdiction. A number of states have already begun, or have positioned themselves to begin, requiring sales and use tax collection from remote vendors. The details and effective dates of these collection requirements vary from state to state. The Company continues to analyze potential sales tax exposure using a state-by-state assessment. In accordance with ASC 450, Contingencies, the Company estimated and recorded a liability of $1.0 million as of March 31, 2024 and $0.2 million as of December 31, 2023.
NOTE 8. WARRANTS
Term Loan Warrants
In connection with the Credit Agreement (as defined in Note 9), on the Term Loan Closing Date the Company issued warrants to purchase up to 3,301,536 shares of the Company’s Class A Common Stock to the Agent and its assign (the “Term Loan Warrants”). The Term Loan Warrants have a per share exercise price of $2.59 and may be exercised, including on a cashless basis, by the holder at any time prior to the 10-year anniversary of the issue date. The Term Loan Warrants will be automatically cashless exercised immediately prior to a change in control of the Company. The Term Loan Warrants are indexed to the Company's stock and were classified as an equity instrument. On the Term Loan Closing Date, this resulted in the Company allocating the gross proceeds and issuance costs between the Term Loan and the Term Loan Warrants based on their relative fair values, resulting in the initial recognition of the Term Loan Warrant at $4.1 million as additional paid-in-capital on the condensed consolidated balance sheets.
In March 2024, the Company issued 2,269,982 shares of the Company's Class A Common Stock resulting from the cashless exercise in full of the Term Loan Warrants that were outstanding. As of March 31, 2024, all of the Term Loan Warrants had been exercised and no Term Loan Warrants are outstanding.
Warrants Related to the ATSP Merger
Public Warrants
On April 26, 2022 (the "Closing"), pursuant to a merger agreement dated as of November 15, 2021 by and among Archimedes Tech SPAC Partners Co. (“ATSP”), ATSPC Merger Sub, Inc. and SoundHound, Inc. (“Legacy SoundHound”), the parties consummated the merger of ATSPC Merger Sub, Inc. with and into Legacy SoundHound, with Legacy SoundHound continuing as the surviving corporation, as well as the other transactions contemplated by the Merger Agreement (the merger and such other transactions collectively referred to the “ATSP Merger”).
Prior to the ATSP Merger, ATSP issued public warrants ("Public Warrants"). Each Public Warrant entitles the holder to the right to purchase one share of common stock at an exercise price of $11.50 per share. No fractional shares were issued upon exercise of the Public Warrants. The Company may redeem the outstanding warrants, for $0.01 per warrant, upon not less than 30 days’ prior written notice of redemption, if the reported last sale price of the common stock equals or exceeds $18.00 per share (as adjusted for stock dividends, sub-divisions, reorganizations, recapitalizations and the like) for any 20 trading days within a 30 -trading day period commencing after the warrants become exercisable and ending on the third trading day before the Company sends the notice of redemption to the warrant holders. Upon issuance of a redemption notice by the Company, the warrant holders may, at any time after the redemption notice, exercise the Public Warrants for cash, or on a cashless basis.
Subsequent to the closing of the ATSP Merger, the Company’s Public Warrants continue to be classified as equity instruments, as they are indexed to the Company’s stock.
Private Warrants
Prior to the ATSP Merger, ATSP issued private warrants ("Private Warrants"). The Private Warrants were initially issued in the same form as the Public Warrants with the exception that the Private Warrants: (i) would not be redeemable by the Company and (ii) may be exercised for cash or on a cashless basis, so long as they are held by the initial purchasers or any of their permitted transferees. If the Private Warrants are held by holders other than the initial purchasers or any of their
19
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by the holders on the same basis as the Public Warrants.
The Private Warrants were initially classified as derivative liability instruments as they met the definition of a derivative and were not considered indexed in the Company’s own stock as the settlement value could be dependent on who held the Private Warrants at the time of exercise. Upon the Closing of the ATSP Merger, the Company modified its Private Warrants to be identical to its Public Warrants. Therefore, the Private Warrants met requirements for classification as equity instruments, as they are indexed to the Company’s stock.
NOTE 9. NOTE PAYABLE
SVB March 2021 Note
In March 2021, the Company entered into a loan and security agreement with a commercial bank to borrow $30.0 million. The loan bore interest at an annual rate equal to the greater of 9.00 % or 5.75 % above the Prime Rate. During the three months ended March 31, 2023, the interest rate was 13.50 %. Payments were interest-only for the first twelve months and are now principal and interest through maturity. During the three months ended March 31, 2023, the Company recorded $0.6 million in interest expense related to the debt discounts.
Concurrently with the Company's entry into the Credit Agreement (as defined below), the Company used a portion of the proceeds to prepay in full all outstanding obligations under, and terminated, the SVB March 2021 Note. In connection with the SVB March 2021 Note prepayment, the Company paid a total of $18.5 million on April 14, 2023, which consisted of (i) the remaining principal amount outstanding of $18.1 million, (ii) a prepayment premium of $0.3 million, (iii) accrued and unpaid interest of $0.1 million and (iv) a nominal amount for transaction expenses, resulting in a loss on debt extinguishment of $0.4 million.
SCI June 2021 Note
In June 2021, the Company entered into a loan and security agreement with a lender to obtain credit extensions to the Company. Extensions were available in $5.0 million increments up to a total commitment amount of $15.0 million. The Company drew an initial $5.0 million on June 14, 2021 and the remaining $10.0 million on December 1, 2021. The loan bore interest at an annual rate equal to the greater of 9.00 % or 5.75 % above the Prime Rate. During the three months ended March 31, 2023, the interest rate was 0.14 %. Payments were interest-only for the first twelve months and principal and interest through maturity. During the three months ended March 31, 2023, the Company recorded $0.4 million in interest expense related to the debt discounts.
Concurrently with the Company’s entry into the Credit Agreement (as defined below), the Company used a portion of the proceeds to prepay in full all outstanding obligations under, and terminated, the SCI June 2021 Note. In connection with the SCI June 2021 Note prepayment on April 14, 2023, the Company paid a total of approximately $11.7 million, which consisted of (i) the remaining principal amount outstanding of approximately $11.5 million, (ii) a prepayment premium of approximately $0.2 million and (iii) a nominal amount for transaction expenses, resulting in loss on debt extinguishment of $0.4 million.
Term Loan
On April 14, 2023 (the “Term Loan Closing Date”), the Company entered into a Senior Secured Term Loan Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for a term loan facility in an aggregate principal amount of up to $100.0 million (the “Term Loan”). The Credit Agreement also permits the Company to request additional commitments of up to $25.0 million in the aggregate, with funding of such commitments in the sole discretion of the lenders under certain circumstances, which will be subject to the same terms as the Term Loan if funded. On the Term Loan closing date, the Company also entered into a Guarantee and Collateral Agreement. In addition, the Company is
20
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
obligated to pay incremental lender fees (the "Lender fees"), beginning on the Term Loan closing date, initially at a rate of 3.5 % of the principal amount of the Term Loans for the first 18 months paid semi-annually to provide a collateral protection insurance policy on behalf of the lenders. Such rate for the Lender Fees will decrease to 2.5 % after the 18-month anniversary of the Term Loan Closing Date. As the lenders are the sole beneficiary of the insurance policy, the Lender Fees are deemed to be additional fees payable to the Lenders and is therefore being recognized as interest expense over the term of the Term Loan based on effective interest method.
The Company used the proceeds from the Term Loan to (i) repay outstanding amounts equal to approximately $30.0 million under the Company’s existing loan facilities, (ii) fund an escrow account on the Term Loan Closing Date in the name of the Agent for an amount equal to the first four interest payments, (iii) pay certain fees and expenses incurred in connection with entering into the Credit Agreement, and (iv) fund the Lender Fees, together with related taxes, with the remaining proceeds to be used to fund growth investments and for general corporate purposes as permitted under the Credit Agreement.
The outstanding principal balance of the Term Loan bears interest at the applicable margin plus, at the Company’s election, either (i) the Term SOFR rate published by CME Group Benchmark Administration Limited for a one-month interest period plus 0.15 % or (ii) the alternate base rate (“ABR”), which is a per annum rate equal to the greatest of (a) the Prime Rate (as defined in the Credit Agreement), (b) the NYFRB Rate (as defined in the Credit Agreement) plus 0.50 % and (c) the Term SOFR rate plus 1.00 %. The applicable margin under the Credit Agreement is 8.50 % per annum with respect to SOFR loans, and 7.50 % per annum with respect to ABR loans. As of March 31, 2024, the contractual interest rate was approximately 14.0 %. The Company was amortizing the discounts on an effective interest basis over the period from issuance through the Early Maturity Date. The effective interest rate was 25.18 % for the quarter ended March 31, 2024. The Company incurred and paid $3.5 1.1 million in interest expense related to the debt discount. The remaining period over which the discount will be amortized is 3.04 years as of March 31, 2024.
Subject to certain exceptions as set forth in the Credit Agreement, interest on the Term Loan is payable quarterly in arrears on the last business day of each fiscal quarter. The Term Loan is set to mature on April 14, 2027 (the “Maturity Date”). The Credit Agreement provides for no scheduled principal payments prior to the Maturity Date.
The Term Loan is secured by substantially all of the assets of the Company and its subsidiaries and is guaranteed by the Company’s subsidiaries other than Excluded Subsidiaries. As set forth in more detail in the Credit Agreement, the Company is required to make mandatory prepayments on the Term Loan in the event of certain specified events, including in the event of certain capital raises by the Company and its subsidiaries. The Company may also elect to prepay amounts at any time. If the Term Loan is prepaid for any reason prior to the second anniversary of the Closing Date, in additional to principal and accrued interest, the Company will have to pay an amount equal to the discounted future interest payments from the date of redemption through the second anniversary of the Closing Date, calculated on the basis of the interest rate in effect on the redemption date and discounted based on the applicable rate for US treasury securities of equal tenor plus 50 basis points. Additionally, the Company will have to pay the excess of 14 % of the Term Loans over the amount of the Lender Fees paid through the Redemption Date.
The Credit Agreement also contains customary representations and warranties for a facility of this nature and affirmative and negative covenants. In particular, the Credit Agreement requires the Company to have liquidity at least equal to the Interest Escrow Required Amount (as defined in the Credit Agreement) as of the last day of each fiscal quarter. The Interest Escrow Required Amount is included in restricted cash equivalents, non-current on the condensed consolidated balance sheet as of March 31, 2024. In addition, the Credit Agreement limits the Company’s and its subsidiaries’ ability to incur indebtedness, make restricted payments, including cash dividends on its common stock, make certain investments, loans and advances, enter into mergers and acquisitions, sell, assign transfer or otherwise dispose of its assets, enter into transactions with its affiliates and engage in sale and leaseback transactions, among other restrictions. As of March 31, 2024, the Company was in compliance with all covenants prescribed in the Credit Agreement.
The Credit Agreement includes customary events of default, including, but not limited to, nonpayment of principal or interest, breaches of representations and warranties, failure to perform or observe covenants, cross-defaults with certain
21
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
other indebtedness, final judgments or orders, certain change of control events, and certain bankruptcy-related events or proceedings. Upon the occurrence of an event of default (subject to notice and grace periods), obligations under the Credit Agreement could be accelerated.
The aggregate long-term debt maturities were as follows as of March 31, 2024 (in thousands):
| Remainder of 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Total | |||||
| Less: unamortized discount | ( | ||||
| Long-term portion of debt | $ | ||||
The following table summarizes the Company’s debt balances as of March 31, 2024 and December 31, 2023 (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
| Term Loan | $ | $ | |||||||||
| Current portion of debt | |||||||||||
| Unamortized discount and debt issuance costs | ( | ( | |||||||||
| Carrying value of long-term debt | $ | $ | |||||||||
NOTE 10. RESTRUCTURING
In January 2023, the Company announced a restructuring plan (the “Restructuring Plan”) intended to reduce operating costs, improve operating margins, improve cash flows and accelerate the Company’s path to profitability. The Restructuring Plan included a reduction of the Company’s then-current workforce by approximately 40 % or 180 positions globally.
NOTE 11. PREFERRED STOCK
Series A Preferred Stock
Between January 18, 2023 and January 20, 2023, the Company entered into Preferred Stock Purchase Agreements (the “Purchase Agreements”) with certain investors (the “Investors”), pursuant to which the Company issued and sold to the Investors an aggregate of 835,011 shares of its newly designated Series A Convertible Preferred Stock for issuance price of $30.00 per share, raising an aggregate of approximately $25.0 million in cash proceeds.
Liquidation Preference
The Liquidation Preference per share of Preferred Stock was initially equal to $30.00 , the original issue price per share. On January 1, 2024, the Company's Series A Preferred Stock holders received their latest dividends paid-in-kind as an increase
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SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
in Liquidation Preference, thereby increasing the Liquidation Preference per share to approximately $34.13 . Additionally, as of March 31, 2024, the Series A Preferred Stock had accrued additional dividends since the last dividend payment date which has the effect of increasing the Liquidation Preference to approximately $35.32 .
Redemption
The Series A Preferred Stock is not mandatorily redeemable.
Conversion
Each share of Series A Preferred Stock is convertible, at the option of the holder, into such number of shares of Class A Common Stock equal to the Liquidation Preference per share at the time of conversion divided by $1.00 (the “Conversion Price”). In addition, each share of Series A Preferred Stock will automatically convert into shares of Class A Common Stock at the Conversion Price on or after January 20, 2024 if and when the daily volume-weighted average closing price per share of Class A Common Stock is at least 2.5 times the Conversion Price for each of any 90 trading days during any 120 consecutive trading day period, which 120 -trading day period may commence (but may not end) prior to January 20, 2024. As of March 31, 2024, the condition of automatic conversion was not met and no Series A Preferred Stock were automatically converted.
During the three months ended March 31, 2024, certain Investors optionally converted 404,764 shares of preferred stock into 14,070,854 shares of Class A Common Stock. The conversion was pursuant to the original terms of the agreement and therefore the carrying value of Series A Preferred Stock was converted into Class A Common Stock with no
Since issuance, there have been a total of 764,770 shares of preferred stock converted into shares of Class A Common Stock. As of March 31, 2024, 70,241 shares of preferred stock remain outstanding.
Voting Rights
The Investors do not have voting rights, except with respect to certain protective provisions and as required by the Delaware General Corporation Law. However, as long as the Series A Preferred Stock are outstanding, the Company may not take certain actions that may materially and adversely impact the powers, preferences, or rights of the Investors without the consent of at least a majority of the Investors.
NOTE 12. COMMON STOCK
The Company is authorized to issue 500,000,000 shares of capital stock, consisting of (a) 455,000,000 shares of Class A Common Stock with a par value of $0.0001 per share, (b) 44,000,000 shares of Class B Common Stock with a par value of $0.0001 per share, and (c) 1,000,000 shares of preferred stock with a par value of $0.0001 per share. The outstanding shares of the Company’s common stock are fully paid and non-assessable.
On all matters to be voted upon, subject to the rights of any holders of any series of preferred stock, holders of shares of Class A Common Stock and Class B Common Stock will vote together as a single class on all matters submitted to the stockholders for their vote or approval. Holders of Class A and B Common Stock are entitled to one vote and ten votes per share respectively on all matters submitted to the stockholders for their vote or approval.
Each share of Class B Common Stock shall convert into one fully paid and nonassessable share of Class A Common Stock upon mandatory or optional conversion. Shares of Class B Common Stock will be automatically converted into shares of Class A Common Stock upon the occurrence of certain future events, generally including transfers, subject to limited exceptions set forth in the amended charter. The conversion of Class B Common Stock to Class A Common Stock will have the effect, over time, of increasing the relative voting power of those holders of Class B Common Stock who retain their shares in the long term. As a result, it is possible that one or more of the persons or entities holding our Class B Common Stock could gain significant voting control as other holders of Class B Common Stock sell or otherwise convert their shares into Class A Common Stock.
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SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
During the three months ended March 31, 2024, certain holders of Class B Common Stock optionally converted 4,750,000 shares of Class B Common Stock into the same number of shares of Class A Common Stock. There were no conversions during the three months ended March 31, 2023.
Equity Line of Credit ("ELOC")
On August 16, 2022, the Company entered into a common stock purchase agreement (“Common Stock Purchase Agreement”) and related registration rights agreement (the “CFPI Registration Rights Agreement”) with CF Principal Investments LLC (the “Counterparty”). Pursuant to the Common Stock Purchase Agreement, the Company had the right, but not the obligation, to direct the Counterparty to purchase up to 25,000,000 shares of Class A Common Stock, subject to certain limitations and conditions (the "ELOC Program") at a purchase price equal to 97 % of the volume weighted average stock price for a given purchase date. In connection with the execution of the Common Stock Purchase Agreement and the side letter on February 14, 2023, the Company issued 250,000 shares of Common Stock (the “Initial Commitment Shares”), and additional cash commitment fee of $0.3 million.
The Company recorded Common Stock Purchase Agreement as a derivative liability with an initial fair value of $1.1 million based on the upfront commitment fee in the form of proceeds from future issuance of commitment shares to the Counterparty plus certain fees and expenses as specified in the Purchase Agreement.
The Company recorded changes in the fair value of the derivative liability associated with the ELOC Program of $0.6 million for the three months ended March 31, 2023 as other income (expense), net on its condensed consolidated statements of operations and comprehensive loss. The Company incurred third-party costs of $0.2 million related to the execution of the Common Stock Purchase Agreement which were recorded as general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2023.
During the year ended December 31, 2023, the Company sold the entirety of the 25,000,000 shares for aggregate proceeds of approximately $71.7 million, with the volume weighted average stock price of shares purchased by the Counterparty ranging from $1.75 to $4.26 per share.
Sales Agreement
On July 28, 2023, the Company entered into a Controlled Equity Offering Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co., H.C. Wainwright & Co., LLC, and D.A. Davidson & Co. (each a “Sales Agent” and collectively, the “Sales Agents”), pursuant to which the Company may offer and sell up to $150,000,000 of shares of our Class A Common Stock from time to time through or to the Sales Agents acting as agent or principal. Sales of our Class A Common Stock, if any, under the Sales Agreement will be made at market prices by any method that is deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act. We will pay the Sales Agents commission for their services in acting as agent in the sale of our Class A Common Stock. The Sales Agents are entitled to aggregate compensation at a fixed commission rate of 2.5 % of the gross sales price per share sold under the Sales Agreement. We have also agreed to reimburse the Sales Agents for certain specified expenses, including the reasonable and documented fees and disbursements of its legal counsel in an amount not to exceed $75,000 in the aggregate in connection with the execution of the Sales Agreement.
During the three months ended March 31, 2024, the Company sold a total of 37,907,219 shares of our common stock under the Sales Agreement, at a weighted-average price of $3.62 per share and raised $137.3 million of gross proceeds, which resulted in complete utilization of the Sales Agreement. After deducting approximately $3.4 million of commissions and offering costs incurred by the Company, the net proceeds from sales of common stock was $133.8 million.
NOTE 13. STOCK INCENTIVE PLANS
2016 Equity Incentive Plan
In April 2016, we adopted the 2016 Equity Incentive Plan (the “2016 Plan”) as a successor and continuation of the 2006 Plan. Under the 2016 Plan, the Company was permitted to grant awards of stock options and Restricted Stock Units
24
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
("RSUs"), as well as stock appreciation rights and other stock awards. The Company no longer has shares available for issuance under the 2016 Plan.
2022 Incentive Award Plan
The Company adopted the 2022 Incentive Award Plan (the “2022 Incentive Plan”, collectively, with the 2006 Plan and the 2016 Plan, the “Plans”) effective April 26, 2022. As of March 31, 2024, the Company had 10,027,862 shares remaining for issuance under the 2022 Incentive Plan.
The Company adopted the 2022 Employee Stock Purchase Plan (the “ESPP”) effective April 26, 2022. An aggregate of 3,930,074 shares of the Company’s Class A Common Stock has been reserved for issuance or transfer pursuant to rights granted under the ESPP (“Aggregate Number”). As of March 31, 2024, 478,023 shares of Class A Common Stock were issued under the ESPP.
Stock Options
Options granted generally have a maximum term of 10 years from grant date, are exercisable upon vesting unless otherwise designated for early exercise by the Board of Directors at the time of grant, and generally vest over a four-year period, with a 25 % cliff vesting after one year and then ratably on a monthly basis for the remaining three years.
As of March 31, 2024, the total unrecognized stock-based compensation expense related to the unvested stock options was approximately $3.7 million, which we expect to recognize over a weighted-average period of 1.29 years. There were no options granted during the three months ended March 31, 2024.
Restricted Stock Units ("RSUs")
RSUs granted generally vest over a four-year period, with 25 % cliff vesting after one year and then ratably on a quarterly basis for the remaining three years. Besides RSUs with vesting condition tied to requisite service period, the Company also issues RSUs with vesting conditions tied to certain market conditions (“Market-Based RSUs”) and RSUs with vesting conditions tied to certain performance criteria ("Performance-Based RSUs").
In connection with the SYNQ3 Acquisition, the Company granted 1,434,978 RSUs (the "Retention Pool"), 25 % of which is subject to service conditions that vest at the end of each of the upcoming fiscal years and 75 % of which is subject to both service and performance-based vesting conditions at the end of each of the upcoming fiscal years, respectively.
The performance level for each of the fiscal years 2024, 2025 and 2026 is based on tiered annual revenue targets, subject to a floor of $9.0 million, $21.0 million and $30.0 million, respectively, with vesting ranging from 50 % to 100 % of the RSUs granted depending on the level of achievement of the specified revenue target in each year.
The Company assesses the probability of vesting of the above performance-based awards from the Retention Pool every reporting period. As of March 31, 2024, performance level of 2024 revenue amount was not probable of being met and performance levels of 2025 and 2026 were probable of being met.
The Company also granted 1,952,000 RSUs that vest over a four-year requisite service period to SYNQ3 employees. Additionally, the Company granted 398,200 RSUs to other employees of the Company during the three months ended March 31, 2024. As a result, the Company granted total of 3,785,178 RSUs during the three months ended March 31, 2024.
As of March 31, 2024, the total unrecognized stock-based compensation expense related to the unvested RSUs with service conditions was approximately $45.0 million.
As of March 31, 2024, the total unrecognized stock-based compensation expense related to the unvested Market-based RSUs was approximately $0.3 million. There were no Market-Based RSUs granted during the period ended March 31, 2024.
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SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of March 31, 2024, the total unrecognized stock-based compensation expense related to the unvested Performance-based RSUs was approximately $8.4 million. There were 1,076,234 Performance-Based RSUs granted during the period ended March 31, 2024.
The total unrecognized stock-based compensation related to unvested RSUs is $53.8 million and this will vest over a weighted average period of 2.37 years.
Restricted Stock Awards
In connection with the SYNQ3 Acquisition, a total of 2,033,156 unvested restricted Class A Common Stock shares ("RSAs") were issued, 25 % of which are subject to service conditions that vest at the end of each of the upcoming fiscal years in three tranches, and 75 % of which is subject to both service and performance-based vesting conditions in three tranches.
The performance level for each of the fiscal years 2024, 2025 and 2026 is based on tiered annual revenue targets, subject to a floor of $9.0 million, $21.0 million and $30.0 million, respectively, with vesting ranging from 50 % to 100 % of the RSAs granted depending on the level of achievement of the specified revenue target in each year.
The Company assesses the probability of vesting of the above performance-based awards every reporting period. As of March 31, 2024, the performance level of the 2024 revenue amount was not probable of being met and performance levels of 2025 and 2026 were probable of being met.
As of March 31, 2024, the total unrecognized stock-based compensation expense related to the unvested RSAs subject to service-based vesting condition and unvested RSAs subject to performance-based vesting condition was approximately $1.8 million and $2.9 million, respectively, over a weighted average period of 2.52 years. Refer to Note 3 for further information on the SYNQ3 Acquisition.
Stock-Based Compensation
Stock-based compensation is classified in the following expense accounts on the condensed consolidated statements of operations and comprehensive loss for the period ended March 31, 2024, and 2023 (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cost of revenues | $ | $ | |||||||||
| Sales and marketing | |||||||||||
| Research and development | |||||||||||
| General and administrative | |||||||||||
Restructuring costs | $ | ||||||||||
| Total | $ | $ | |||||||||
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SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 14. OTHER INCOME (EXPENSE), NET
Other income (expense), net on the condensed consolidated statements of operations is comprised of the following for the three months ended March 31, 2024 and 2023 (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Other income (expense), net | |||||||||||
| Interest income | $ | $ | |||||||||
| Loss on change in fair value of ELOC program | ( | ||||||||||
| ELOC commitment fees and reimbursement cost to Counterparty | ( | ||||||||||
| Other income (expense), net | ( | ( | |||||||||
| Total other income (expense), net | $ | $ | ( | ||||||||
NOTE 15. NET LOSS PER SHARE
The following table presents the calculation of basic and diluted net loss per share attributable to common stockholders for the three months ended March 31, 2024 and 2023:
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Numerator: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Cumulative dividends attributable to Series A Preferred Stock | ( | ( | |||||||||
| Net loss attributable to SoundHound common shareholders (in thousands) | $ | ( | $ | ( | |||||||
| Denominator: | |||||||||||
| Weighted average shares outstanding – basic and dilutive | |||||||||||
| Basic and diluted net loss per share | $ | ( | $ | ( | |||||||
For the three months ended March 31, 2024 and 2023, the diluted net loss per share is equal to the basic net loss per share as the effect of potentially dilutive securities would have been antidilutive.
The following table summarizes the outstanding shares of potentially dilutive securities that were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive for the three months ended March 31, 2024 and 2023:
| As of March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Stock-based awards | |||||||||||
| Series A Preferred Stock | |||||||||||
| Common stock warrants | |||||||||||
| Unvested restricted share awards | |||||||||||
| Contingently issuable shares | |||||||||||
| Total | |||||||||||
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SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 16. INCOME TAXES
The tax expense and the effective tax rate were as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Loss before income taxes | $ | ( | $ | ( | |||||||
| Income tax expense | |||||||||||
| Effective tax rate | ( | % | ( | % | |||||||
NOTE 17. FAIR VALUE MEASUREMENTS
The following table presents the fair value of the Company's financial instruments that are measured or disclosed at fair value on a recurring basis (in thousands):
| March 31, 2024 | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| Assets: | |||||||||||||||||
| Cash equivalents | |||||||||||||||||
| Treasury bills | $ | $ | $ | ||||||||||||||
| Money market funds | $ | $ | |||||||||||||||
| Total assets | $ | $ | $ | ||||||||||||||
| Liabilities: | |||||||||||||||||
Contingent acquisition liabilities | |||||||||||||||||
Contingent holdback consideration | $ | $ | $ | ||||||||||||||
Contingent earnout consideration | $ | $ | |||||||||||||||
| Total liabilities | $ | $ | $ | ||||||||||||||
| December 31, 2023 | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| Assets: | |||||||||||||||||
| Cash equivalents: | |||||||||||||||||
| Treasury bills | $ | $ | $ | ||||||||||||||
| Money market funds | |||||||||||||||||
| Total assets | $ | $ | $ | ||||||||||||||
Contingent Acquisition Liabilities
Contingent Holdback Consideration
The reconciliation of the Company's Contingent Holdback Consideration measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:
28
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| Balance as of December 31, 2023 | $ | ||||
| Acquisition of SYNQ3 | |||||
| Change in the fair value of liability | |||||
| Balance as of March 31, 2024 | $ | ||||
The fair value of the cash portion of the Contingent Holdback Consideration was estimated based upon the holdback period of fifteen months, and discounted using the risk-free interest rate based on the U.S. Treasury zero-coupon yield curve on the valuation date for a maturity similar to the fifteen-month holdback period. The fair value of the equity portion of the Contingent Holdback Consideration was estimated based upon the value of the Company’s Class A Common Stock price. The fair value of the Contingent Holdback Consideration was initially measured on January 3, 2024, the date on which the Company completed the acquisition of SYNQ3.
The fair value of the Contingent Holdback Consideration has been estimated as of the Closing Date and the three month period ended March 31, 2024, under the following assumptions:
| January 3, 2024 | March 31, 2024 | |||||||
| Risk-free interest rate | % | % | ||||||
| Holdback period | ||||||||
Contingent Earnout Consideration
The reconciliation of the Company's Earnout Consideration measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:
| Balance as of December 31, 2023 | $ | ||||
| Acquisition of SYNQ3 | |||||
| Change in the fair value of liability | |||||
| Balance as of March 31, 2024 | $ | ||||
The Company utilizes a Monte Carlo simulation to value the Contingent Earnout Consideration. The Company selected this model as it believes it is reflective of all significant assumptions that market participants would likely consider in negotiating the transfer of the Contingent Earnout Consideration. Such assumptions include, among other inputs, expected stock price volatility, risk-free rates, and change in control assumptions. The Company estimates the expected volatility of its common stock based on historical volatility of a peer group, considering the remaining term of the Contingent Earnout Consideration. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the valuation date for a maturity similar to the expected remaining life of the Contingent Earnout Consideration. The expected life of the Contingent Earnout Consideration is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates to remain at zero.
The fair value of the Contingent Earnout Consideration has been estimated as of the Closing Date and the three month period ended March 31, 2024, with the following assumptions for the unobservable inputs:
| January 3, 2024 | March 31, 2024 | |||||||
| Discount rate | % | % | ||||||
| Expected stock price volatility | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
| Expected dividend yield | % | % | ||||||
| Expected life | ||||||||
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SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
There were no transfers of financial instruments between Level 1, Level 2 and Level 3 during the three months ended March 31, 2024 and 2023.
NOTE 18. REVISION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
During the period ended September 30, 2023, the Company identified immaterial prior period errors related to following: 1) accounting for the ELOC as a derivative instrument; 2) classification of Lender Fees and allocation of the warrants in connection with the Term Loan; and 3) the incorrect recording of in-kind dividends associated with the Company’s Series A Preferred Stock. The identified errors were included in the Company's previously issued quarterly condensed consolidated financial statements for the three and six months ended March 31, 2023 and June 30, 2023.
In accordance with SEC Staff Accounting Bulletin No. 99, “Materiality,” and SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements;” the Company evaluated the errors and determined that the related impacts were not material to its condensed consolidated financial statements for the prior year periods when they occurred, but the Company determined it would be appropriate to correct the errors in the current period in the Company’s consolidated statements of operations and comprehensive loss, consolidated balance sheets, consolidated statements of cash flows or consolidated statements of stockholders’ deficit for any periods impacted.
The Company has revised the previously issued condensed consolidated balance sheets, condensed consolidated statements of operations and comprehensive loss, condensed consolidated statements of cash flows and condensed consolidated statements of redeemable convertible preferred stock and stockholders’ deficit as of and for the three and six months ended June 30, 2023, and as of and for the three months ended March 31, 2023. All relevant prior period amounts affected by these revisions have been corrected in the notes in this Form 10-Q.
The following tables reflect the impact of these revisions on the Company’s unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2023 (dollars in thousands, except per share amounts):
| June 30, 2023 | |||||||||||||||||
| Condensed Consolidated Balance Sheet | As Previously Reported | Adjustment | As Revised | ||||||||||||||
| Accrued liabilities | $ | $ | ( | $ | |||||||||||||
| Total current liabilities | ( | ||||||||||||||||
| Notes payable, net of current portion | |||||||||||||||||
| Other non-current liabilities | ( | ||||||||||||||||
| Total liabilities | |||||||||||||||||
| Additional paid-in capital | |||||||||||||||||
| Accumulated deficit | ( | ( | ( | ||||||||||||||
| Total stockholders’ equity | ( | ||||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | $ | ||||||||||||||
30
SOUNDHOUND AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| Three Months Ended June 30, 2023 | |||||||||||||||||
| Condensed Consolidated Statements of Operations And Comprehensive Loss | As Previously Reported | Adjustment | As Revised | ||||||||||||||
| General and administrative | $ | $ | $ | ||||||||||||||
| Loss from operations | ( | ( | ( | ||||||||||||||
| Other income (expense), net | ( | ( | |||||||||||||||
| Total other expense, net | ( | ( | ( | ||||||||||||||
| Loss before provision for income taxes | ( | ( | ( | ||||||||||||||
| Net loss | ( | ||||||||||||||||