SOUNDHOUND AI, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)

0
The following discussion and analysis of the financial condition and results of
operations of SoundHound should be read together with our unaudited interim
condensed consolidated financial statements as of June 30, 2022 and for the
three and six month periods ended June 30, 2022 and 2021, together with related
notes thereto, and our pro forma financial information as of and for year ended
December 31, 2021 and 2020 included in our registration statement on Form S-1,
which was originally filed with the United States Securities and Exchange
Commission (the "SEC") on May 16, 2022 and amended by Amendment No. 1 to Current
Report on Form S-1 on July 13, 2022 hereby, the "Form S-1/A" . Some of the
information contained in this discussion and analysis or set forth elsewhere in
this the Form 10-Q, including information with respect to SoundHound's plans and
strategy for its business and related financing, includes forward-looking
statements that involve risks and uncertainties. As a result of many factors,
including those factors set forth in the "Risk Factors" and "Cautionary
Statement Regarding Forward Looking Statements" section of this the Form 10-Q,
our actual results could differ materially from the results described in or
implied by the forward-looking statements contained in the following discussion
and analysis. Unless otherwise indicated or the context otherwise requires,
references in this section to "SoundHound," "we," "us," "our" and other similar
terms refer to SoundHound AI, Inc.



Company Overview



We are a leading innovator of conversational intelligence, offering an
independent Voice AI platform that enables businesses across industries to
deliver high-quality conversational experiences to their customers. Built on
proprietary Speech-to-Meaning, Deep Meaning Understanding and Collective AI
breakthrough technologies developed over the past 16 years, our advanced Voice
AI platform provides exceptional speed and accuracy and enables humans to
interact with products and services like they interact with each other - by
speaking naturally.



We believe voice-enabled conversational user interface is a more natural
interface for nearly all use cases, and product creators should have the ability
to design, customize, differentiate, innovate and monetize the interface to
their own product, as opposed to outsourcing it to a third-party assistant. For
example, using SoundHound, businesses can voice-enable their products so
consumers can say things like, "Turn off the air conditioning and lower the
windows," while in their cars, "Find romantic comedies released in the last
year," while streaming on their TV and even place food orders before arriving at
a restaurant by talking to their cars, TVs or other IoT devices. Additionally,
SoundHound's technology can address complex user queries such as, "Show me all
restaurants within half a mile of the Space Needle that are open past 9pm on
Wednesdays and have outdoor seating," and follow-on qualifications such as
"Okay, don't show me anything with less than 3 stars or fast food."



The SoundHound developer platform, Houndify, is an open-access platform that
allows developers to leverage SoundHound's Voice AI technology and a library of
over 100 content domains, including commonly used domains for points of
interest, weather, flight status, sports and more. Houndify's Collective AI is
an architecture for connecting domain knowledge that encourages collaboration
and contribution among developers, is always learning, and is greater than the
sum of its parts - ensuring the platform continues to become smarter at a faster
rate.



SoundHound's technology is live in production and at scale with companies around
the globe, including Hyundai, Mercedes-Benz, Pandora, Deutsche Telekom, Snap,
VIZIO, KIA and Stellantis. As a testament to its capabilities, the Houndify
platform surpassed 1 billion annual queries in 2021. Additionally, traffic has
experienced over 100% growth through the first half of 2022, compared to the
same period in 2021.


Our current partners span multiple industries and geographies and together have a combined reach of over 2 billion end users.



Our market position is strengthened by the technical barriers to entry in the
Voice AI space, which tend to discourage new market participants. Furthermore,
our technology is backed by significant investments in intellectual property,
with over 250 granted or pending patents, spanning multiple fields including
speech recognition, natural language understanding, machine learning,
monetization and more. We have achieved this critical momentum in part thanks to
a long-tenured leadership team with deep expertise and proven ability to attract
and retain talent. We believe that SoundHound has extensive technical expertise
and a proven track record of innovation and value creation for us to continue to
attract customers in the growing market for Voice AI transactions, which is
estimated to grow to $160.0 billion per year by 2026.



We believe that SoundHound is well-positioned to fill the growing void and
demand for an independent Voice AI platform. The Voice AI offerings from big
tech companies are primarily an extension of their more core services and
offerings. Rather than strengthening a customer's product, it can take over the
entire experience, thus disintermediating the company's brand, users and data.
As a result, brands relying on big tech mostly lose their ability to innovate,
differentiate and customize. In some cases, these providers even compete with
the products they support, making them increasingly less attractive as a choice
for a voice interface.



The alternative options are generally legacy vendors tending to use dated
technologies at a high price. Furthermore, many of these technologies still
require significant effort by the product creators to turn them into solutions
that can compete with the quality of the big tech offering, which in many cases
is not practical. Due to the high barrier to entry in Voice AI, there are not
many independent players.



                                       34




This creates a great opportunity for SoundHound: we believe that we provide
disruptive technologies that are superior to the alternatives, with better
terms, allowing customers to maintain their brand, control the user experience,
get access to the data and define their own privacy policies, while being able
to customize, differentiate, innovate and monetize.



When it comes to criteria for adoption, our goal is to win on every dimension.
The first two criteria customers typically consider are technology and brand
control. We strive to provide our customers with the best technology, and we
provide a white label solution giving our customers control of their brands. In
some industries you may have to choose between technology and brand control. In
our case, we offer our customers the best of both, we enable them to offer
disruptive technologies to their users while maintaining control of their brand
and user experience.



With our disruptive monetization strategy, we also provide an additional path to
monetization for our customer base. By choosing our platform, product creators
can generate additional revenue while making their product better using Voice
AI, providing further incentive to choose our platform.



We believe that we offer a superior ecosystem, benefitting from our Collective
AI product architecture along with offering customers definable privacy
controls, which are becoming increasingly important in the industry of Voice
AI. Additionally, there is no conflict of interest between us and our partners
and customers as we do not compete with them (as some other Voice AI vendors
do). We also offer edge and hybrid solutions. This means our technology can
optionally run without a cloud connection for increased flexibility and privacy.
Our focus is on delivering the most advanced Voice AI in the world and thus
allowing our partners to differentiate and innovate their overall experiences
for their brands.



We strongly believe that product creators know their product and users best. The
idea of a single third-party assistant taking over their product is not
reflective of our anticipated future. We envision that every product will have
its own identity, and they will have Voice AI customized in different ways. They
can each tap into a single Collective AI to access the ever-growing set of
domains, but the product creators can innovate on top of Collective AI and
create value for the end users in their own way. This is the future that we
are
focusing on enabling.



When a product is voice enabled, we see three stages of integration and value
propositions. The first stage is to enable the core use cases of the product.
For example, the product could be a TV, a coffee machine, a car, a wearable
device, a robot, a smart speaker or an appliance, and with your voice you can
control the functionality of the device and the product. On a TV, you can ask it
to change the channel, increase the volume, rewind by 30 seconds, search for
movies and even add personalization by adding a TV show to your favorites. Note
that this is different from adding a third-party voice assistant to the product.
Our view is that every product needs to have an interface, and voice-AI is a
natural and compelling interface that unlocks new use cases and potential.
Consider just the simple example of rewinding or fast forwarding by a specific
duration. That is a command that can be done with voice within a few seconds,
but it can take many steps to do using alternative interfaces such as a remote
control or a companion app.



Once the core features of a product are voice-enabled, it can be further
enhanced in the second stage of integration: the addition of third-party content
and domains. SoundHound has extensive partnerships with content providers and,
through these partnerships, can fulfill many needs of our customers. For
example, your TV, car or even a coffee machine can answer questions about
weather, sports scores, stock prices or flight status, and even search for local
businesses. The addition of these public domains further enhances the value
proposition of the product.



Finally, as the third step, you enter the world of monetization where you can
add features that deliver value to the end user, and also generate revenues that
we share with the product creators. To summarize with an example, imagine
walking up to your coffee machine and asking for a triple shot extra hot latte.
While you are waiting for your drink, you can ask for weather and sports scores,
and if you desire, you can even order bagels from your favorite nearby bakery.



There are three pillars to our revenue model. The first pillar is Product
Royalties, where we voice enable a product and the product creator pays us a
royalty based on volume, usage or duration. SoundHound collects royalties when
Houndify is placed in a car, smart speaker or an appliance, for example.



The second pillar is Service Subscription. This is when, for example, SoundHound
enables customer service or food ordering for restaurants or content management,
appointments and voice commerce. And, for that, we generate subscription revenue
from the service providers. Pillars one and two can grow independently and they
are proven, established business models.



                                       35




The third pillar creates a monetization ecosystem that brings the services from
pillar two to the products in pillar one. When the users of a voice-enabled
product in pillar one access the voice-enabled services of pillar two, these
services generate new leads and transactions. SoundHound generates monetization
revenue from the services for generating these leads and transactions, and we
will share the revenue with the product creators of pillar one. For example,
when the driver of a voice-enabled car places an order to a restaurant that's
also voice enabled, we will have unlocked a seamless transaction. Accordingly,
the restaurant will pay us for that order, and we will share that revenue with
the product creator or the car manufacturer. In this example, each party
receives value in the ecosystem. The restaurant is happy because they generated
a new lead and booked a sale. The user is happy because they have received value
through a natural ordering process, simply by speaking to their car. And the car
manufacturer is happy because they delivered value to the end user and generated
additional revenue from the usage of their product. During the periods presented
in the condensed consolidated financial statements, we have not generated
revenue from leads and transactions on voice-enabled products from voice-enabled
services other than from the SoundHound music identification app. Going forward,
SoundHound expects monetization revenue to be generated through a combination of
advertising revenue from the music identification app and from leads and
transactions on voice-enabled products from voice-enabled services.



We expect this disruptive, three-pillar business model will create a
monetization flywheel; as more products integrate into our platform, more users
will use it and more services will choose to integrate as well. This creates
even more usage, and results in a flow of revenue share to product creators,
which further encourages even greater adoption and integration with our platform
and the cycle will perpetually continue and expand. This ecosystem increases
adoption and increases our addressable market. All three pillars contribute to
our revenues today in 2022. While the majority of the contribution is currently
from our first pillar of royalties, over time, the subscription and monetization
portions are expected to grow and make a bigger contribution to our overall
revenue.



Recent Developments



ATSP Merger



On November 15, 2021, Archimedes Tech SPAC Partners Co. ("ATSP"), SoundHound,
Inc. ("Legacy SoundHound") and ATSPC Merger Sub, Inc. ("Merger Sub") entered
into a merger agreement ("Merger Agreement") pursuant to which Merger Sub merged
with and into Legacy SoundHound, with Legacy SoundHound continuing as the
surviving corporation resulting in the reverse recapitalization of SoundHound
(the "Business Combination"). The Business Combination was completed on
April 26, 2022 (the "Closing"). In connection with the Closing of the Business
Combination, the Company issued $113 million of securities in the PIPE
investment. Upon the Closing of the Business Combination, ATSP changed its
name
to SoundHound AI, Inc.


Cash proceeds of the Business Combination were funded through a combination of
$5.4 million in cash held in trust by ATSP (following satisfaction of
redemptions by public stockholders) with 532,050 shares of SoundHound AI Class A
common stock remaining outstanding, and $113.0 million in aggregate gross
proceeds from PIPE investors in exchange for 11,300,000 shares of SoundHound
Class A common stock that closed substantially contemporaneously with the
Closing of the Business Combination. The combined company incurred $27.7 million
of expenses related to the transaction. After giving effect to these
transactions, SoundHound received $90.7 million in net proceeds, which are
intended to be used for general corporate purposes, including investments in
sales, marketing and advancement of product development, but which may also be
used to acquire other companies in the Voice AI industry. SoundHound has not
entered into any agreements to acquire companies in the Voice AI industry, nor
does it require consummation of mergers or acquisitions of other businesses to
achieve its stated goals. That said, if there are candidates that makes
strategic, operational and financial sense, the combined company may consider
such opportunities from time to time as they become available.



Accounting impact of the business combination

The Business Combination was accounted for as a "reverse recapitalization," with
no goodwill or other intangible assets recorded, in accordance with GAAP. A
reverse recapitalization did not result in a new basis of accounting, and the
financial statements of the combined entity represent the continuation of the
financial statements of Legacy SoundHound in many respects.



Under this method of accounting, ATSP was treated as the "acquired" company for
financial reporting purposes. For accounting purposes, SoundHound was deemed to
be the accounting acquirer in the transaction and, consequently, the transaction
was treated as a recapitalization of SoundHound (i.e., a capital transaction
involving the issuance of stock by ATSP for the stock of SoundHound).
Accordingly, the consolidated assets, liabilities and results of operations of
SoundHound became the historical financial statements of the combined company,
and ATSP's assets, liabilities and results of operations were consolidated with
SoundHound's beginning on the acquisition date. Operations prior to the Business
Combination were presented as those of SoundHound in future reports. The net
assets of SoundHound were recognized at carrying value, with no goodwill or
other intangible assets recorded.



                                       36





Impact of COVID-19



As the full impact of the COVID-19 pandemic on our business continues to
develop, we are closely monitoring the global situation. As a supplier to
multiple industries, including the automotive industry, we are adversely
impacted by the decline in the production of certain of our customers' products
in connection with the COVID-19 pandemic, including reductions in automotive
production, chip shortages in the semiconductor industry and broader supply
chain challenges across the globe. We are unable at this time to predict the
full impact of COVID-19 on our operations, liquidity and financial results, and,
depending on the magnitude and duration of the COVID-19 pandemic, such impact
may be material. During the three and six months ended June 30, 2021, the
COVID-19 pandemic had an impact on our billings and revenue recognized from per
unit royalties for Houndify Solutions and, although the impact during the three
and six months ended June 30, 2022 was not considered material, the extent of
this impact in future periods is not currently determinable. However, we expect
billings to increase as car manufacturers continue to recover from delayed
production due to the pandemic. Accordingly, it may not be indicative of future
results and trends for reasons other than COVID-19 discussed herein may not be
indicative of future operating results and trends. While we are unable to
accurately predict the full impact that COVID-19 will have on our results from
operations, financial condition, liquidity and cash flows due to numerous
uncertainties, including the duration and severity of the pandemic and
containment measures, these measures have impacted, and may continue to impact,
our business, as well as our customers and consumers.



SoundHound continues to monitor its operations and government recommendations
and has modified its operations because of the COVID-19 pandemic, including
making remote work more accessible to its employees. SoundHound does not yet
know the full extent of potential impacts on our business and operations. Given
the extant uncertainty, SoundHound cannot reasonably estimate the impact on our
future results of operations, cash flows or financial condition.



Known trends, demands, commitments, events or uncertainties affecting our business

SoundHound believes that its performance and future success depend on many factors that present significant opportunities for us, but also pose risks and challenges, including the following:

? Investments in technology. Our business model since its inception has been to

invest significantly in our Houndify platform technology in the form of

dedicated research and development. We will continue to invest in the

development of our software platform to offer consumers

enhance value and enjoyment. Our investments include continuous improvements to

our ASR and NLU models, investments in data to help refine and improve our

underlying algorithms and other costs to attract and retain a

   technical workforce.




 ? Revenue Growth.   Our commercial success, including acceptance and use of our

applications, will depend on a number of factors, some of which are beyond our control.

control, such as the size of the market opportunity, successful integration with

original equipment manufacturers (“OEM”), competition and demand from

audience and members of the conversational AI community. Our product offerings

have disruptive effects on how humans interact with computers and we are

develop new innovative business models that we believe will deliver value

to customers, partners and shareholders. To continue growing our revenues, we

will have to invest in sales and marketing to ensure our messaging,

capabilities and offerings are well understood and appreciated by customers. With

our primary focus on client companies, we must also align with

business sales cycles, which can be longer than consumer cycles.

Additionally, as we build new relationships with our customers, we continually focus on

maintain and develop our existing long-term relationships

partnerships through a significant initial investment in

engineering projects. Our revenue consists of subscription revenue, royalties,

and monetization revenue, which we consider recurring if our customer contract

does not end the relationship and we continue to provide the customer

with the same services or other services the following year. For example, if we perform

a one-time, non-recurring engineering project for a client, even

customer subsequently enters into a royalty agreement with us on products, revenues

within two years, regardless of the specific service, would contribute to our

overall customer retention rate. On the contrary, if SoundHound provides an annual report

subscription contract to a client and that client does not execute

service agreement for the following annual period, SoundHound would not

consider this client as successful. As determined based on the foregoing, based on

on the number of clients to whom we provide services during a year compared to

compared to the prior year period, our customer retention rate in June 30, 2022 is at

   least 90%.




? Revenue cost. The results of our activities will depend in part on our

ability to establish and increase our gross margins by scaling our business

effectively model and manage our costs to produce our applications. Our

revenues will be directly supported by investments in data center technology,

both on-premises and in the cloud. The associated workloads, as well as

support labor costs, will need to be managed effectively as we move towards

improve our margins over time. Our Houndify platform is also powered by a

library of over 100 content areas, including commonly used areas for points

of interest, weather, flight status, sports and more.

? Seasonality. Our ability to accurately forecast demand for our technology

could be negatively affected by many factors, including seasonal demand. We

anticipate that we will experience fluctuations in customer and user demand

depending on seasonality. Since we address markets across several

industry verticals, the overall associated seasonality impact for us may not be

   consistent year-to-year.




? Development of international markets. We quickly expanded our

capabilities and global reach. We have globalized our solution from 1 to 22

languages, with a roadmap of 38 languages ​​and 114 acoustic variations. We watch

opportunities for conversational voice AI to have global reach, and we expect

   our growth to be fueled across multiple geographies.



? Industry risks. The COVID-19 pandemic has had a negative impact on our business and

results of operations to date. The duration and extent to which COVID-19

pandemic will continue to negatively impact our business and results

remains uncertain and could be significant. Moreover, the army

conflict between Russia and Ukrainewhich started on February 24, 2022had

negative impact on the global economy and financial markets. Although our

business has not been materially affected by this ongoing military conflict,

it is impossible to predict the extent to which our operations, or those of

the suppliers and manufacturers of our customers, will be impacted in the short and

long term, or how the conflict may affect our business. The

the extent and duration of military action, sanctions and the resulting market

    disruptions are impossible to predict but could be substantial.




                                       37





Basis of Presentation



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the WE GAAP for the three and six months ended
June 30, 2022 and 2021.

Components of our operating results


Revenues



SoundHound generates revenues through: (1) "Product Royalties," meaning
royalties from voice-enabled products which are driven by volume, usage or life
of applicable products and are affected by number of devices, users and units of
usage time, (2) "Service Subscriptions," meaning subscription revenues, derived
from monthly fees based on usage-based revenue, revenue per query or revenue per
user, and (3) "Monetization," meaning revenues generated from focused ad
targeting to users of products and services that employ our technologies.
Currently, our monetization revenue is derived from our music identification
application primarily in the form of ad impression revenue - revenue generated
when an ad is shown in our music identification app - and, to a lesser extent,
affiliate revenue for referrals to music stores for content sales and downloads
of our premium music application.



"Houndified Products," meaning products of our customers that employ SoundHound
technology, and "Houndified Services," meaning services provided to customers
related to SoundHound technology, provide our customers with access to our
Houndify platform over a contractual period without taking possession of the
software. This generally includes revenues derived from up-front services
("professional services") that develop and customize the Houndify platform to
fit customers' specific needs. These professional services are included in both
our Product Royalties and Service Subscriptions revenues. Non-distinct
professional services are recognized over the contractual life of the contract,
whereas revenues from distinct professional services are recognized as the
services are performed or when the services are complete depending on the
arrangement.



We have and may continue to experience volatility for our remaining performance
obligations and deferred revenue as a result of the timing for completing our
performance obligations. We had remaining performance obligations in the amount
of $23.1 million as of June 30, 2022, consisting of both billed and unbilled
consideration. Deferred revenue consists of billings or payments received in
advance of revenue being recognized and can fluctuate with changes in billing
frequency and other factors. As a result of these factors, as well as our mix of
revenue streams and billing frequencies, we do not believe that changes in our
remaining performance obligations and deferred revenue in a given period are
directly correlated with our revenue growth in that period.



We anticipate that we will experience fluctuations in our revenue from quarter to quarter due to a variety of factors, including supply and demand for end-user products such as automobiles, the size and success of our force. sales and the number of users who know and use our applications.


Operating Expenses



We classify our operating expenses into the following four categories, which are
cost of revenues, sales and marketing, research and development, and general and
administrative. Excluding cost of revenues, each expense category includes
overhead, including rent and related occupancy costs, which is allocated based
on headcount.



Cost of Revenues



SoundHound's cost of revenues are comprised of direct costs associated directly
with SoundHound's revenue streams as described above. This primarily includes
costs and depreciation related to hosting for cloud-based services, such as data
centers, electricity charges, content fees and certain personnel-related
expenses that are directly related to these revenue streams.



Sales and Marketing


Sales and marketing expenses consist of personnel-related expenses related costs
of the sales and marketing team, promotional campaigns, advertising fees and
other marketing related costs. Advertising costs are expensed to sales and
marketing when incurred. We expect that our sales and marketing expenses will
continue to increase as we continue to increase headcount and program spend to
support a greater investment in go-to-market strategies and customer engagement.



Research and Development


Our research and development expenditures are our largest operating expenses as we continue to develop our software platforms and produce new technology capabilities.



The costs of these activities consist primarily of personnel-related expenses,
third-party consultants and costs associated with technological supplies and
materials, along with other direct and allocated expenses such as facility
costs, depreciation and other shared expenses. We expense research and
development costs in the periods in which they are incurred. We expect that our
research and development expenses will continue to increase as we continue to
invest in development activities related to our current and future applications.



                                       38





General and Administrative


General and administrative costs include personnel costs, accounting and legal costs, third-party consulting costs, insurance and allocated overhead costs, including rent, depreciation and charges.

We expect that our general and administrative expenses will increase due to our
operations as a public company, including expenses related to compliance with
the rules and regulations applicable to companies listed on a national
securities exchange and related to compliance and reporting obligations pursuant
to the rules and regulations of the SEC, as well as increased expenses for
insurance (including director and officer insurance), investor relations
activities and other administrative and professional services such as
accounting, legal, regulatory and tax. We also expect our administrative
expenses, including personnel related expenses, to increase as we increase our
headcount and expand our facilities and information technology to support our
operations as a public company. Our general and administrative expenses may
fluctuate from period-to-period due to seasonality.



Interest Expense


Interest expense includes reported interest incurred on our outstanding convertible notes and debt during the relevant periods, as well as the amortization of debt discounts and issue costs over the life of the instruments or a shorter period if a lender can demand payment in the event that certain events beyond the Company’s control occur.



The issuance of debt instruments with direct transaction costs and the
bifurcation of embedded derivatives and warrant instruments has resulted in debt
discounts. Direct transaction costs consist of various transaction fees, such as
bank and legal fees, that are incurred upon issuance. Overall, the discounts
from debt issuance costs result in an increased amount of interest expense
over
the amortization period.



Other Income (Expense), Net


Change in fair value of derivative liabilities and warrants



We account for certain warrants and conversion features as liabilities at fair
value and adjust the instruments to fair value at each reporting period. We
determined that the conversion feature associated with one of our debt
instruments is a freestanding derivative instrument. The derivative and warrant
liabilities' changes in fair value that result from remeasurement at each
balance sheet date is recognized in the Company's condensed consolidated
statement of operations and comprehensive loss as other income (expense), net.



Other Income (Expense), Net



Other income (expense), net consists of realized and unrealized gains and losses
related to foreign currency revaluation. As the functional currency of the
Company and its subsidiaries is the U.S. dollar, transactions denominated in
foreign currency are converted into U.S. dollars at the average rates of
exchange prevailing during the period. Assets and liabilities denominated in
foreign currency are remeasured into U.S. dollars at current exchange rates at
the balance sheet date for monetary assets and liabilities and at historical
exchange rates for non-monetary assets and liabilities.



Provision for Income Taxes



Income tax expense includes federal, state and foreign taxes and is based on
reported income before income taxes. We are in a cumulative loss position for
tax purposes based on historical earnings. As of December 31, 2021, the Company
had net operating loss carry forwards of approximately $301.5 million and
$102.9 million available to reduce future taxable income, if any, for both
federal and state income tax purposes, respectively. Additionally, as of
December 31, 2021, the Company had net operating loss carryforwards of
$3.4 million relating to net operating losses in Germany ("Germany Net Operating
Losses"). The federal and state net operating loss carry forwards will start to
expire in 2025 and 2028, respectively, with the exception of $212.9 million in
federal net operating loss carryforwards, which can be carried forward
indefinitely. The Germany Net Operating Losses can be carried forward
indefinitely. The Company also had federal and state research and development
credit carry forwards of approximately $8.9 million and $8.0 million,
respectively, at December 31, 2021. The federal credits will expire starting in
2029 if not utilized. State research and development tax credits will carry
forward indefinitely.



In addition, we may in the future experience ownership changes as a result of
changes in our stock ownership (some of which are not in our control). For these
reasons, or other factors outside of our control, such as future regulatory or
other changes, our ability to utilize our NOL carryforwards and other tax
attributes to reduce future tax liabilities may be limited.



                                       39





Results of Operations



The following tables set forth the significant components of our results of
operations for the three and six months ended June 30, 2022 and 2021 (in
thousands):



                                           Three Months Ended
                                                June 30,                   Change
                                           2022          2021            $           %
Revenues                                 $   6,152     $   8,279     $  (2,127 )     (26 )%
Operating expenses:
Cost of revenues                             2,488         1,628           860        53 %
Sales and marketing                          4,370         1,008         3,362       334 %
Research and development                    18,862        14,023         4,839        35 %
General and administrative                   9,362         4,119         5,243       127 %
Total operating expenses                    35,082        20,778        14,304        69 %
Loss from operations                       (28,930 )     (12,499 )     (16,431 )     131 %
Other expense, net:
Interest expense                            (1,572 )      (2,294 )         722       (31 )%
Other income, net                              223           184            39        21 %
Total other expense, net                    (1,349 )      (2,110 )         761       (36 )%
Loss before provision for income taxes     (30,279 )     (14,609 )     (15,670 )     107 %
Provision for income taxes                     389            43           346       805 %
Net loss                                 $ (30,668 )   $ (14,652 )   $ (16,016 )     109 %




                                            Six Months Ended
                                                June 30,                   Change
                                           2022          2021            $           %
Revenues                                 $  10,442     $  12,018     $  (1,576 )     (13 %)
Operating expenses:
Cost of revenues                             4,261         3,221         1,040        32 %
Sales and marketing                          6,951         2,084         4,867       234 %
Research and development                    35,512        28,466         7,046        25 %
General and administrative                  13,365         7,365         6,000        81 %
Total operating expenses                    60,089        41,136        18,953        46 %
Loss from operations                       (49,647 )     (29,118 )     (20,529 )      71 %
Other expense, net:
Interest expense                            (4,549 )      (3,042 )      (1,507 )      50 %
Other expense, net                            (834 )      (1,542 )         708       (46 %)
Total other expense, net                    (5,383 )      (4,584 )        (799 )      17 %
Loss before provision for income taxes     (55,030 )     (33,702 )     (21,328 )      63 %
Provision for income taxes                     741           210           531       253 %
Net loss                                 $ (55,771 )   $ (33,912 )   $ (21,859 )      64 %




Revenues


The following tables summarize our revenues by type and by geography for the three and six months ended June 30, 2022 and 2021 (in thousands):


                          Three Months Ended
                               June 30,                   Change
                           2022          2021          $           %
Product Royalties       $    5,561      $ 7,469     $ (1,908 )     (26 )%
Service Subscriptions          372          392          (20 )      (5 )%
Monetization                   219          418         (199 )     (48 )%
                        $    6,152      $ 8,279     $ (2,127 )     (26 )%




                                       40







                          Six Months Ended
                              June 30,                  Change
                          2022         2021          $           %
Product Royalties       $  9,270     $ 10,454     $ (1,184 )     (11 )%
Service Subscriptions        745          795          (50 )      (6 )%
Monetization                 427          769         (342 )     (44 )%
                        $ 10,442     $ 12,018     $ (1,576 )     (13 )%




                  Three Months Ended
                       June 30,                   Change
                   2022          2021          $           %
United States   $    1,858      $ 1,235     $    623        50 %
Japan                  923          921            2         0 %
Germany              1,143        5,198       (4,055 )     (78 )%
France               1,837          393        1,444       367 %
Korea                  241          382         (141 )     (37 )%
Other                  150          150            -        -  %
                $    6,152      $ 8,279     $ (2,127 )     (26 )%




                  Six Months Ended
                      June 30,                  Change
                  2022         2021          $           %
United States   $  3,248     $  2,303     $    945        41 %
Japan              1,850        1,954         (104 )      (5 )%
Germany            1,826        6,217       (4,391 )     (71 )%
France             2,296          393        1,903       484 %
Korea                653          860         (207 )     (24 )%
Other                569          291          278        96 %
                $ 10,442     $ 12,018     $ (1,576 )     (13 )%




Total revenues decreased by $2.1 million, or 26% and $1.6 million, or 13% in the
three and six months ended June 30, 2022, compared to the same periods in 2021.
The decrease is primarily attributed to the recognition of $4.3 million in
nonrecurring revenue as a result of a contract modification to end a distinct
professional service contract prior to completion with a customer in Germany
during the three and six months ended June 30, 2021, partially offset by a
$1.3 million increase in hosted services during the three and six months ended
June 30, 2022 and a $0.9 million and $1.5 million increase in professional
services during the three and six months ended June 30, 2022, respectively. In
addition, monetization revenue decreased by $0.2 million and $0.3 million during
the three and six months ended June 30, 2022, respectively, compared to the same
periods in 2021. The decrease in monetization revenue is due to a decrease in
advertising revenue from lower traffic and less user impressions on the
SoundHound music application.



We benefited from growth across the United States, France and other smaller
foreign regions from scaling our Houndify Products with large automotive and
device makers. We have experienced additional growth of revenue of Houndified
Products in geographic regions of France and the United States of $1.4 million
and $0.6 million, and $1.9 million and $0.9 million, respectively, during the
three and six months ended June 30, 2022 compared to the same periods in 2021.
In France, our revenue increased due to distinct customization services sold to
an existing large automotive company which also commenced production of our
Houndified Product in their vehicles. In the United States, the increase is
primarily attributed to an increase in royalties from one customer due to higher
usage and hosting. Additionally, we experienced a $4.1 million and $4.4 million
decrease in revenue from Germany during the three and six months ended June 30,
2022, respectively, compared to the same periods in 2021. This was primarily due
to a one-time contract modification to end a distinct professional service
contract prior to completion with a customer in Germany during the three and six
months ended June 30, 2021. This customer was retained through ongoing hosting
services. Revenue in both periods came principally from customers across the
automotive and IoT sectors, with less significant amounts derived from other
industry verticals.



                                       41





Cost of Revenues



Cost of revenues increased by $0.9 million, or 53%, and $1.0 million, or 32%, in
the three and six months ended June 30, 2022, respectively, compared to the same
periods in 2021. The increases are primarily related to incurring additional
data center and hosting costs due to system migrations in order to support our
revenue growth. The increase in cost of revenues relative to revenues (gross
margin) was primarily due to the one-time contract modification to end the
distinct professional service contract prior to completion with a customer in
Germany as described above during the three and six months ended June 30, 2021.



Research and Development



Research and development expenses increased by $4.8 million, or 35%, and
$7.0 million, or 25%, in the three and six months ended June 30, 2022,
respectively, compared to the same periods in 2021. This increase in research
and development expenses was primarily related to our investment in technology
and engineering and increasing our full-time engineer headcount to ensure we
remain at the forefront of innovation, while also helping to develop and scale
new products and services.



Sales and Marketing



Sales and marketing expenses increased by $3.4 million, or 334%, and $4.9
million, or 234%, in the three and six months ended June 30, 2022, respectively,
compared to the same periods in 2021. This increase is due to an increase in
headcount and program spend to support a greater investment in go-to-market
strategies and customer engagement.



General and Administrative



General and administrative costs increased by $5.2 million, or 127%, and
$6.0 million, or 81%, in the three and six months ended June 30, 2022,
respectively, compared to the same periods in 2021. This increase represents
investments in our human resources, finance and legal functions, including
increased personnel-related expenses as we prepared and began to function as a
public entity. The increase includes higher salaries and compensation packages
for executive hires as well as an additional $4.3 million and $4.7 million of
stock -based compensation expense in the three and six months ended June 30,
2022, respectively, compared to the same periods in 2021. Our expansion efforts,
focused both on geographical reach and service compatibility, led to an increase
of operational costs and resources incurred. Expenses related to the Business
Combination also contributed to an increase in costs related to third-party
specialists. In addition, an increase in other public readiness costs includes
directors' and officers' insurance, capital markets advisory, accounting and
legal support for SEC filings following the Business Combination. We also
continued our efforts in reviewing and realigning our cost structure based on
teams' evolving responsibilities. As a result, we shifted resources from
research and development to general and administrative activities to better
align with the investments being made to fuel the growth as we scale as a new
public company.



Interest Expense



Interest expense decreased by $0.7 million, or 31%, and increased by
$1.5 million, or 50%, in the three and six months ended June 30, 2022,
respectively, compared to the same periods in 2021. The increase in the six
months ended June 30, 2022, was attributable to the issuance of SoundHound's
2021 note payable ("SVB March 2021 Note") and 2021 convertible note ("SCI
June 2021 Note"), resulting in $30.0 million and $15.0 million draws,
respectively. These debt instruments were accompanied by the issuances of
related common stock warrants, resulting in debt discounts to be amortized over
the life of the instrument. The increase in our debt balance related to these
draws in 2021 has led to increases in interest expense and amortization of debt
issuance costs during the six months ended June 30, 2022.



The decrease in interest expense in the three months ended June 30, 2022 was
attributable to the conversion of the promissory note issued in June 2020 ("SNAP
June 2020 Note"). On April 26, 2022, all outstanding principal of $15.0 million
and accrued interest of $1.4 million were converted into Class A Common Stock.
As our debt balance significantly decreased in the three months ended June 30,
2022, our interest expense and amortization of debt issuance costs have
decreased as well. In addition, the Business Combination extended the SVB March
2021 Note's maturity date, leading to a reduction in interest expense due to
discounts being amortized over longer periods starting on April 26, 2022.



                                       42





Other Income (Expense), Net



The following tables summarize our other income (expense), net, by type (in
thousands):



                                               Three Months Ended
                                                    June 30,                       Change
                                              2022             2021            $             %
Interest income                            $       37       $        1     $      36          3600 %
Change in fair value of derivative and
warrant liability                                 (14 )             89          (103 )        (116 )%
Other income, net                                 200               94           106           113 %
                                           $      223       $      184     $      39           (21 )%




                                               Six Months Ended
                                                   June 30,                     Change
                                              2022          2021            $             %
Interest income                            $       39     $       6     $      33           550 %
Change in fair value of derivative and
warrant liability                                (606 )      (1,314 )         708           (54 )%
Other expense, net                               (267 )        (234 )         (33 )          14 %
                                           $     (834 )   $  (1,542 )   $     708           (46 )%



Change in fair value of derivative liabilities and warrants

The gain attributable to the change in fair value of derivative and warrant
liability decreased by $0.1 million, or 116%, in the three months ended June 30,
2022, compared to the same period in 2021. The loss attributable to the change
in fair value of derivative and warrant liability decreased by $0.7 million, or
54%, in the six months ended June 30, 2022, compared to the same period in 2021.
The changes were partially attributed to $0.6 million and $0.9 million in
losses, from the change in fair value of the warrant liability during the three
and six months ended June 30, 2021, respectively, as compared to no change in
the fair value of the warrant liability during the three and six months ended
June 30, 2022, due to the exercise of Series C Warrants in December 2021, which
extinguished the Company's corresponding warrant liability.



The balances during the three and six months ended June 30, 2022 solely reflect
the changes in fair value of the embedded derivative from the SNAP June 2020
Note. The fair value of the derivative liability decreased by a nominal amount
and $0.6 million during the three and six months ended June 30, 2022,
respectively, compared to an increase of $0.7 million and a decrease of
$0.5 million during the three months and six months ended June 30, 2021,
respectively. The changes in fair value of the derivative liability represent
corresponding gains or losses on the Condensed Consolidated Statement of
Operations and Comprehensive Loss due to changes in probability assumptions of a
change in control or SPAC transaction as the transaction approached closing.



Other Income (Expense), Net



Other income, net increased by $0.1 million, or 113%, in the three months ended
June 30, 2022, compared to the same period in 2021. This increase was primarily
due to favorable foreign currency exchange rates during the three months ended
June 30, 2022, resulting in greater gain from currency revaluation on
transactions denominated in a foreign currency compared to those conducted in
the three months ended June 30, 2021.



Other expense, net increased by a nominal amount in the six months ended
June 30, 2022, compared to the same period in 2021. This increase was primarily
due to unfavorable foreign currency exchange rates during the six months ended
June 30, 2022, resulting in greater loss from currency revaluation on
transactions denominated in a foreign currency compared to those conducted in
the six months ended June 30, 2021.



Provision for Income Taxes



Provision for income taxes increased by $0.3 million, or 805%, and $0.5 million,
or 253%, during the three and six months ended June 30, 2022, respectively,
compared to the same periods in 2021. Our effective tax rates increased by
approximately a percentage point for each of the three and six months ended June
30, 2022 when compared to the same periods in 2021.



The increase in the effective tax rate for the three and six month periods
June 30, 2022compared to the three and six months ended June 30, 2021is primarily due to the amount and composition of income (losses) from multiple tax jurisdictions and withholding taxes in jurisdictions where losses are excluded.



The Company's recorded effective tax rate differs from the U.S. statutory rate
primarily due to an increase in the domestic valuation allowance caused by tax
losses, foreign withholding taxes and foreign tax rate differentials from the
U.S. domestic statutory tax rate.



                                       43




Cash and capital resources


Sources and Uses of Liquidity



As a result of the Business Combination, we raised gross proceeds of
$118.4 million including a combination of $5.4 million in cash held in trust by
ATSP (following satisfaction of redemptions by public stockholders), and
$113.0 million in aggregate gross proceeds from PIPE investors. The combined
company incurred $27.7 million of expenses related to the transaction.



We had $65.0 million in cash and cash equivalents as of June 30, 2022. We
believe our operating cash flows together with our cash on hand is sufficient to
meet our current working capital and capital expenditure requirements for a
period of at least twelve months from the date of the Form 10-Q. However, the
Company may choose to raise additional capital through a debt or equity
financing in order to pursue additional strategic investment opportunities.
Additional capital, if required, may not be available on reasonable terms,
if at
all.


Contractual and other obligations



Because we expect to continue significantly increasing our investments in
software application and development, we enter into various contracts and
agreements to increase our availability of capital.. Cash that is received
through these obligations is used to meet both short and long-term liquidity
requirements as discussed above. These requirements generally include funding
for the research and development of software, the development of applications
that enable voice interaction, marketing programs and personnel-related costs.
The primary types of obligations into which we enter include contractual
obligations, operating and finance lease obligations and a diversified spread of
debt instruments. See Note 7 and Note 14 to our unaudited condensed consolidated
financial statements included within this Quarterly Report on Form 10-Q for
more
information.



Debt Financing


Below are our material debt agreements at June 30, 2022:

? SVB March 2021 – In March 2021we have entered into a loan and guarantee agreement

with a commercial bank to borrow $30.0 million (“SVB March 2021 Note”). In

April 2022the Company has entered into a loan modification agreement, which

extended the SVB March 2021 Early maturity date of the note from April 26, 2022 at

May 26, 2022. Like the SNAP June 2020 Note converted on April 26, 2022 the

performance milestone has been reached and the SVB March 2021 The maturity date of the note was

extended to September 1, 2024.

? SCI June 2021 Note – In June 2021we issued a note under a loan and

collateral agreement with a lender to borrow up to a commitment amount of

$15.0 million in $5.0 million increments (“SCI June 2021 Note”). By

December 31, 2021we had borrowed $15.0 million. The due date of the loan

   is May 31, 2025.




Cash Flows



The following table summarizes our cash flows for the six months ended June 30, 2022 and 2021 (in thousands):


                                               Six Months Ended
                                                   June 30,
                                              2022          2021

Net cash used in operating activities ($46,767) ($32,625)
Net cash used in investing activities

            (982 )        (111 )

Net cash provided by financing activities 90,167 35,254

                                            $  42,418     $   2,518




                                       44




Cash flows used in operating activities

Net cash used in operating activities during the six months ended June 30, 2022
was $46.8 million, consisting primarily of our net loss of $55.8 million,
adjusted for non-cash charges of $16.9 million and net cash used by changes in
our operating assets and liabilities of $7.9 million. The non-cash charges were
driven by $10.3 million in stock-based compensation expense, $2.2 million in
amortization of debt issuance cost, $2.3 million in depreciation and
amortization expense, $1.5 million in non-cash lease amortization and
$0.6 million in remeasurement of derivative and warrant liability fair value.
Net cash used in changes in our operating assets and liabilities of $7.9 million
was primarily due to a decrease of $5.4 million in deferred revenue due to
amortization of customers' contracts during the six months ended June 30, 2022,
an increase of $3.4 million in prepaid expenses due to a prepayment for
directors and officers insurance as well as our increased activity with more
subscriptions and prepaid costs, a decrease in operating lease liabilities of
$2.3 million due to monthly lease payments and the maturity of some of our
leases during the six months ended June 30, 2022 and was partially offset by an
increase of $1.8 million in accounts payable.



Net cash used in operating activities during the six months ended June 30, 2021
was $32.6 million, consisting primarily of our net loss of $33.9 million,
adjusted for non-cash charges of $10.1 million and net cash used by changes in
our operating assets and liabilities of $8.8 million. The non-cash charges were
driven by depreciation and amortization expense of $2.8 million, stock-based
compensation expense of $2.7 million, non-cash lease amortization of
$1.8 million, amortization of debt issuance costs of $1.4 million and change in
fair value of derivative and warrant liability of $1.3 million. Net cash used by
changes in our operating assets and liabilities of $8.8 million was primarily
due to a $4.8 million decrease in deferred revenue, a $2.3 million increase in
accounts receivable, a $2.1 million decrease in operating lease liabilities and
was partially offset by an increase of $1.5 million in accrued liabilities. The
decrease in deferred revenue is primarily attributed to upfront billings in 2020
for three projects that began in 2021.



Cash flows used in investing activities

Net cash used in investing activities during the six months ended June 30, 2022
and 2021 were $1.0 million and $0.1 million, respectively, driven by purchases
of property and equipment.


Cash flows generated by financing activities

Net cash provided by financing activities during the six months ended June 30,
2022 was $90.2 million, consisting primarily of $91.7 million in proceeds from
the Business Combination, net of transaction costs paid and $2.9 million in
proceeds from common stock options exercised. This was partially offset by
$3.4 million in repayments of the SVB March 2021 Note and the SCI June 2021 Note
principal balances and $1.0 million in repayments of finance lease obligations.



Net cash provided by financing activities during the six months ended June 30,
2021 was $35.3 million, consisting primarily of $34.9 million in proceeds from
the issuance of the SVB March 2021 Note and the SCI June 2021 Note and
$1.7 million in proceeds from common stock options exercised. This was partially
offset by $1.3 million in repayments of finance lease obligations.



Off-balance sheet arrangements

We did not have during the periods presented, and we do not currently have, any
off-balance sheet arrangements, as defined in the rules and regulations of
the
SEC.


Commitments and contingencies

We have no material changes to our commitments and contingencies as of June 30,
2022 as disclosed in the contractual obligations and commitment section in our
audited consolidated financial statements as of December 31, 2021 included
within our Form S-1/A.



Indemnification Agreements


We enter into standard indemnification arrangements in the ordinary course of
business. Pursuant to these arrangements, we indemnify, hold harmless and agree
to reimburse the indemnified parties for losses suffered or incurred by the
indemnified party, in connection with any trade secret, copyright, patent or
other intellectual property infringement claim by any third party with respect
to its technology. The term of these indemnification agreements is generally
perpetual any time after the execution of the agreement. The maximum potential
amount of future payments we could be required to make under these arrangements
is not determinable. We have never incurred costs to defend lawsuits or settle
claims related to these indemnification agreements. As a result, we believe the
fair value of these agreements is minimal.



                                       45




Significant Accounting Policies and Significant Management Estimates



Our management's discussion and analysis of our financial condition and results
of operations is based on our unaudited condensed consolidated financial
statements included elsewhere in the Form 10-Q that have been prepared in
accordance with U.S. GAAP. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported
income (loss) generated and expenses incurred during the reporting periods. Our
estimates are based on our historical experience and on various other factors
that we believe are reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions and any
such differences may be material.



For a discussion of our significant accounting policies, see “Management’s Discussion and Analysis of the Financial Condition and Results of Operations of
SoundHound” in our last filed Form S-1/A, and the notes to the consolidated financial statements appearing in Form S-1/A at December 31, 2021.

© Edgar Online, source Previews

Share.

About Author

Comments are closed.