| Summary of Significant Accounting Policies | NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). The summary of
significant accounting policies presented below is designed to
assist in understanding the Company’s consolidated financial
statements. Such consolidated financial statements and accompanying
notes are the representations of the Company’s management,
who is responsible for their integrity and objectivity.
The accompanying consolidated financial statements as of
September 30, 2017 and for the nine months ended
September 30, 2017 and 2016 have been prepared on the same
basis as the May 11, 2017 Prospectus and, in the opinion of
management, reflect all adjustments, which are normal and
recurring, necessary to fairly state its financial position,
results of operations and cash flows. The financial data and other
information disclosed in these notes to the consolidated financial
statements reflected in the nine-month periods presented herein are
unaudited.
Restatement of Previously Issued Financial Statements
The Company’s previously issued financial statements as of
and for the year ended December 31, 2016 have been restated to
reflect the correction of the accounting for the Primary Common
Stock Purchase Warrant issued to Acacia Research Corporation
(Acacia) in August 2016 (the Primary Warrant). The Primary Warrant
had a fair value of $8,064 as of the date it was issued.
Previously, the Company recorded the fair value of the Primary
Warrant as a deferred stock offering cost. The correct treatment of
the Primary Warrant is as a discount to the first tranche of the
convertible note issued to Acacia in August 2016. Once the book
value of the convertible note is reduced by the discount associated
with the Primary Warrant, the conversion feature of the convertible
note becomes a beneficial conversion feature, which results in an
additional discount of $1,812 being recorded against the
convertible note’s book value and a corresponding credit to
the Company’s additional paid in capital. Also, the legal
fees of $253 which were incurred to set up the Primary Warrant have
been removed from deferred stock offering cost and expensed in
Other Income in the Company’s 2016 statement of
operations.
Following the recognition of the discount to the convertible note
for the Primary Warrant and the beneficial conversion feature, the
Company recorded additional interest expense of $3,460 from August
2016 through December 2016 to amortize a portion of the increase in
the discount.
The correction of the error is presented in the Company’s
consolidated financial statements as of and for the year ended
December 31, 2016 as follows:
Consolidated Balance Sheet
As Restatement As
Deferred offering costs $ 8,317 $ (8,317 ) $
—
Total current assets 29,684 (8,317 ) 21,367
Total assets 30,665 (8,317 ) 22,348
Convertible note payable, net of discount 19,804 (6,416 ) 13,388
Total current liability 50,917 (6,416 ) 44,501
Total liabilities 50,939 (6,416 ) 44,523
Additional paid-in (2,105 ) 1,812 (293 )
Accumulated deficit (41,523 ) (3,713 ) (45,236 )
Total stockholders’ equity (deficit) (43,624 ) (1,901 ) (45,525 )
Total liabilities, redeemable convertible preferred stock and
stockholders’ 30,665 (8,317 ) 22,348
Consolidated Statement of Operations
As Restatement As Restated
Interest expense $ (430 ) $ (3,460 ) $ (3,890 )
Other income (expense) 950 (253 ) 697
Total other income (expense), net 520 (3,713 ) (3,193 )
Loss before provision for income taxes (23,260 ) (3,713 ) (26,973 )
Net loss $ (23,266 ) (3,713 ) $ (26,979 )
Net loss attributable to common stockholders $ (26,470 ) (3,713 ) $ (30,183 )
Basic and diluted net loss per share attributable to common
stockholders $ (12.80 ) (1.79 ) $ (14.59 )
Weighted-average shares used to compute basic and diluted net loss
per share 2,068,334 2,068,334
Liquidity and Capital Resources
The Company incurred net losses of $(26,979) and $(6,210) in the
years ended December 31, 2016 and 2015, respectively. The net
losses were incurred as the Company expanded the capabilities of
its platform and increased its sales and marketing initiatives to
develop customer relationships in its SaaS licensing business. In
addition, the Company had convertible notes payable of $20,286 that
were due in November 2017, which significantly contributed to the
Company’s net working capital deficit of $(23,134) as of
December 31, 2016. Net cash used in operating activities was
$(26,755) during the year ended December 31, 2016.
The combination of a history of operating losses, significant cash
used in operating activities, and a net working capital deficit
raised substantial doubt as to the Company’s ability to
continue as a going concern.
The Company’s board of directors and management took the
following actions to provide sufficient capital for the Company to
operate for at least the next year:
• Entered into a Bridge Loan in March
2017 that provided $8,000 of cash;
• Completed its IPO in May 2017 and
sold 2,500,000 shares of common stock at $15.00 per share for net
proceeds of $32,580 after underwriting discounts, commissions and
offering costs of $4,920.;
• Arranged a stock warrant that was
issued to Acacia, which resulted in the Company receiving $29,263
immediately following the IPO through the exercise of this stock
warrant;
• Structured the convertible notes
payable, which had a principal and accrued interest balance of
$20,286 as of December 31, 2016, such that they converted into
shares of the Company’s common stock at the time of the IPO;
and
• Negotiated with the Bridge Loan
lenders so that the outstanding balance of the line of credit
converted into shares of the Company’s common stock at the
time of the IPO.
The Company’s ability to raise sufficient capital was
uncertain. The accompanying consolidated financial statements have
been prepared assuming the Company will continue as a going
concern; however, the above conditions raised substantial doubt
about the Company’s ability to do so. The financial
statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that may result
should the Company be unable to continue as a going concern.
The company completed an IPO of its common stock in May 2017 and
raised net proceeds of $32,580. Concurrent with the closing of the
IPO, the Series A and B preferred Stock, Convertible Note and
Bridge Loan were all converted to common stock, and the Primary
Warrant was exercised resulting in additional cash proceeds of
$29,263. As a result, the substantial doubt regarding the
Company’s ability to continue as a going concern was
mitigated.
Principles of Consolidation
The accompanying consolidated financial statements include the
balances of Veritone, Inc. and its subsidiaries. All significant
intercompany transactions have been eliminated in
consolidation.
Use of Accounting Estimates
The preparation of the accompanying consolidated financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the accompanying consolidated
financial statements and the reported amounts of revenue and
expenses during the reporting period. The principal estimates
relate to the valuation of common stock, stock awards, and stock
warrants. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value
must maximize the use of observable inputs and minimize the use of
unobservable inputs. The fair value hierarchy, which is based on
three levels of inputs, the first two of which are considered
observable and the last unobservable, that may be used to measure
fair value, is as follows:
• Level 1—Quoted prices in active
markets for identical assets or liabilities.
• Level 2—Inputs other than
Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
• Level 3—Unobservable inputs
that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
The Company’s financial instruments, other than its money
market funds, marketable securities and stock warrants, consist
primarily of cash and cash equivalents, accounts receivable,
accounts payable and convertible notes payable. The Company has
determined that the carrying values of these instruments for the
periods presented approximate fair value due to their short-term
nature and the relatively stable current interest rate
environment.
The Company’s money market funds and marketable securities
are categorized as Level 1 and 2, respectively, within the
fair value hierarchy. The following table shows the Company’s
cash and available-for-sale
Cost Gross Unrealized Losses Fair Value Cash and Cash Equivalents Marketable Securities
Cash $ 13,711 $
— $ 13,711 $ 13,711 $
—
Level 1:
Money market funds 3,057
— 3,057 3,057
—
Level 2:
Corporate securities 43,726 (62 ) 43,664 3,994 39,670
Total $ 60,494 $ (62 ) $ 60,432 $ 20,762 $ 39,670
The Company’s stock warrants are categorized as Level 3
within the fair value hierarchy. Stock warrants have been recorded
at their fair value using a probability expected weighted return
model. This model incorporates contractual terms, maturity, risk
free rates and volatility. The value of the Company’s stock
warrants would increase if a higher risk free interest rate were
used, and the value of the Company’s stock warrants would
decrease if a lower risk free interest rate were used. Similarly, a
higher volatility assumption would increase the value of the stock
warrants, and a lower volatility assumption would decrease the
value of the stock warrants. The development and determination of
the unobservable inputs for Level 3 fair value measurements
and fair value calculations are the responsibility of the
Company’s management with the assistance of a third party
valuation specialist.
The following table summarizes quantitative information with
respect to the significant unobservable inputs used for the
Company’s stock warrants that are categorized within the
Level 3 fair value hierarchy:
December 31, 2016
Volatility 80.0 %
Risk free rate 1.84 %
Discount for lack of marketability 20.0 %
The following table represents a reconciliation of the Level 3
measurement of the Company’s Primary Warrant:
Balance, January 1, 2016 $
—
Issuance of warrant 8,064
Change in fair value of warrant liability (950 )
Balance, December 31, 2016 $ 7,114
Change in fair value of warrant liability (7,114 )
Balance, September 30, 2017 (unaudited) $
—
In May 2017, upon exercise of the Primary Warrant, the Company
issued to Acacia a five-year warrant to purchase 809,400 shares of
the Company’s common stock, or 10% Warrant. The fair value of
the 10% Warrant under Level 3 measurement is $5,790 (see
related discussion in Note 3).
The following table summarizes quantitative information with
respect to the significant unobservable inputs used for the
Company’s 10% Warrant that are categorized as Level 3
within the fair value hierarchy:
May 17, 2017
Volatility 70.0 %
Risk free rate 1.44 %
Discount for lack of marketability 0 %
Cash Equivalents and Marketable Securities
All highly liquid investments with maturities of three months or
less at the date of purchase are classified as cash equivalents.
The Company’s marketable securities have been classified and
accounted for as available-for-sale.
Revenue Recognition
Net revenues for the periods presented were comprised of the
following:
Year Ended Nine Months Ended
2016 2015 2017 2016
(Unaudited)
Media agency revenues $ 8,404 $ 13,887 $ 9,926 $ 6,197
SaaS revenues 507 41 988 211
Total net revenues $ 8,911 $ 13,928 $ 10,914 $ 6,408
Media Agency Revenues
The Company generates revenues primarily from services performed
under advertising contracts. The Company’s contracts
typically provide for the Company to receive a percentage of the
total fees for the advertising placements of its customers. Media
providers, such as radio stations, are required to provide proof of
service that the advertising was run or aired before the Company
can invoice its customers. Under the advertising contracts, the
Company is deemed to be an agent and, as such, presents revenues on
a net basis, reflecting the percentage of the total fees earned by
the Company.
Revenue is recognized when the advertisement is aired by the media
provider in accordance with the client arrangement. Prior to
recognizing revenue, persuasive evidence of an arrangement must
exist, the sales price must be fixed or determinable, performance
by the media provider must be completed in accordance with the
client arrangement, and collection must be reasonably assured.
Expenditures billable to clients are primarily comprised of
production and media costs that have been incurred but have not yet
been billed to clients, as well as fees that have been earned which
have not yet been billed to clients. Unbilled amounts are presented
in expenditures billable to clients regardless of whether they
relate to our fees or production or media costs.
The Company’s customers are often required to make a deposit
or pre-pay
During the years ended December 31, 2016 and 2015, the Company
made $75,074 and $109,919 in gross media placements, including
$64,923 and $98,631 billed directly to customers, respectively. Of
the amounts billed directly to customers, $56,519 and $85,050
represented media-related costs netted against billings during the
years ended December 31, 2016 and 2015, respectively. For the
nine months ended September 30, 2017 and 2016, the Company
made $87,756 (unaudited) and $53,910 (unaudited) in gross media
placements, of which $74,717 (unaudited) and $46,496 (unaudited),
respectively, were billed directly to customers. Of the amounts
billed directly to customers, $64,791 (unaudited) and $40,299
(unaudited) represented media-related costs netted against billings
for the nine months ended September 30, 2017 and 2016,
respectively.
SaaS Revenues
The Company also derives its revenue from software-as-a-service
SaaS revenue arrangements and time-based software subscriptions
typically have an initial term ranging in duration from three to 24
months and are renewable on an annual basis. The Company allocates
the value of the SaaS arrangement to each separate unit of
accounting based on the best estimated selling price. Revenue
allocated to the SaaS/software subscription element is recognized
ratably over the non-cancellable
The Company’s arrangements do not contain general rights of
return. However, credits may be issued to customers on a
case-by-case
Accounts Receivable and Expenditures Billable to Clients
Accounts receivable consisted primarily of amounts due from
customers under normal trade terms. Allowances for uncollectible
accounts are provided for based upon a variety of factors,
including historical amounts written-off,
The amounts due from customers under normal trade terms that were
not yet billed as of December 31, 2016 and 2015 and
September 30, 2017 are reflected as expenditures billable to
clients. The balance of expenditures billable to clients can
increase or decrease depending upon the timing of when vendor
invoices were received for media placements and the timing of when
the period end financial statements are prepared.
Property, Equipment and Improvements
Property, equipment and improvements, net are stated at cost.
Repairs and maintenance to these assets are charged to expense as
incurred; major improvements enhancing the function and/or useful
life are capitalized. Depreciation and amortization are computed
using the straight-line method over the estimated useful lives (or
lease term, if shorter) of the related assets.
The useful lives of property, equipment and improvements, net are
as follows:
• Property and equipment—3
years
• Leasehold improvements—5 years
or the remaining life of the lease, whichever is shorter
The Company assesses the recoverability of property, equipment and
improvements whenever events or changes in circumstances indicate
that their carrying value may not be recoverable. There was no
impairment of property, equipment and improvements for the periods
presented.
Patents
The Company and certain of its subsidiaries currently have
registered or have applied for 87 patents in the United States and
a number of foreign countries. Costs related to filing and pursuing
patent applications are charged to expense as incurred, as
recoverability of such expenditures is uncertain. On July 15,
2014, the Company capitalized $1,500 of patent development costs as
the result of the acquisition of NM. The Company evaluates its
patents typically in the fourth quarter of each year for
impairment, or more frequently if indicators are present or changes
in circumstances suggest that impairment may exist. See
Note 3—Property, Equipment, Improvements and Intangible
Assets for further details.
Stock-Based Compensation
The Company recognizes stock based compensation expense related to
grants to employees based on grant date fair values of the stock
options and restricted stock granted, amortized over the requisite
service period.
Tax benefits related to stock-based compensation are recognized as
a reduction to deferred taxes until the related tax deductions
reduce current income taxes. When such event occurs, the tax
benefits are then recognized through additional paid in capital.
The Company allocates the tax benefits based on the provisions in
the tax laws that identify the sequence in which the amounts are
utilized for tax purposes. See
Note 5—Stockholders’ Equity (Deficit).
Software Development Costs
Software development costs required to be capitalized under ASC
985-20, 350-40, Internal-use 985-20
Other Income (Expense), Net
Other income (expense), net for the years ended December 31,
2016 and 2015 and the nine-month periods ended September 30,
2017 and 2016 were comprised of the following:
Years Ended Nine Months Ended
2016 2015 2017 2016
(unaudited)
Interest income (expense), net $ (3,890 ) $ 17 $ (4,198 ) $ (1,341 )
Stock warrants issued
—
— (5,790 )
—
Write-off
—
— (10,132 )
—
Write-off
—
—
— (253 )
Gain on fair value change of warrant liability 950
— 7,114 117
Other (253 ) 68 134 (6 )
Other income (expense), net $ (3,193 ) $ 85 $ (12,872 ) $ (1,483 )
Interest income (expense), net for the year ended December 31,
2016 and 2015 and the nine-month period ended September 30,
2017 and 2016 included amortization of deferred debt discounts and
issuance costs of $3,603 and $0, respectively, and $3,740 and
$1,271, respectively, related to the Company’s convertible
notes payable.
Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are
established for temporary differences between the financial
reporting basis and the tax basis of the Company’s assets and
liabilities at tax rates expected to be in effect when such
temporary differences are expected to reverse.
The Company assesses the likelihood that the deferred tax assets
will be recovered from future taxable income and, if recovery is
not more likely than not, the Company establishes a valuation
allowance to reduce the deferred tax assets to the amounts expected
to be realized. Realization of the deferred tax assets is dependent
on the Company generating sufficient taxable income in future years
to obtain a benefit from the reversal of temporary differences and
from net operating losses.
The Company utilizes a two-step
Debt Issuance Costs
The Company defers and amortizes fees paid in connection with the
issuance of the convertible note payable. These fees are amortized
using a method that approximates the effective interest method over
the term of the related financing. The unamortized debt issuance
cost is netted against the principal amount of the convertible note
payable.
Discounts for Debt and Redeemable Convertible Stock
The Company amortizes debt discounts over the term of the debt
using a method that approximates the effective interest method. The
Company amortizes redeemable convertible stock discounts from the
issuance date to the earliest redemption date using a method that
approximates the effective interest method.
Concentration of Risk
The Company places its cash and cash equivalents with what
management believes are quality financial institutions in the
United States. At times, the value of the United States deposits
exceed federally insured limits. The Company has not experienced
any losses in such accounts.
Two customers accounted for approximately 30% of the
Company’s net revenues for the year ended December 31,
2016. These same customers accounted for $939, respectively, of the
Company’s accounts receivable balance as of December 31,
2016. The Company had three vendors which accounted for $5,220 of
its accounts payable balance as of December 31, 2016.
Two customers accounted for approximately 43% of the
Company’s net revenues for the year ended December 31,
2015. These same customers accounted for $3,352 of the
Company’s accounts receivable balance as of December 31,
2015. The Company had three vendors which accounted for $10,019 of
its accounts payable balance as of December 31, 2015.
Two customers accounted for approximately 28% (unaudited) and 30%
(unaudited) of the Company’s net revenues for the nine months
ended September 30, 2017 and 2016. These same customers
accounted for $5,392 (unaudited) of the Company’s accounts
receivable balance as of September 30, 2017. The Company had
three vendors which accounted for $4,268 (unaudited) of its
accounts payable balance as of September 30, 2017.
Earnings Per Share
Basic and diluted net loss per common share is presented in
conformity with the two-class A-1, as-converted
Under the two-class if-converted
The following table presents the computation of basic and diluted
net loss per common share:
Year Ended Nine Month Ended
2016 2015 2017 2016
(Unaudited)
Historical net loss per share
Numerator
Net loss $ (26,979 ) $ (6,210 ) $ (46,811 ) $ (17,915 )
Accretion of redeemable convertible preferred stock (3,204 ) (3,330 ) (4,470 ) (2,383 )
Net loss attributable to common stockholders $ (30,183 ) $ (9,540 ) $ (51,281 ) $ (20,298 )
Denominator
Weighted-average common shares outstanding 2,205,577 1,631,660 8,820,609 2,068,164
Less: Weighted-average shares subject to repurchase (137,243 ) (214,928 ) (180,431 ) (110,568 )
Denominator for basic and diluted net loss per share attributable
to common stockholders 2,068,334 1,416,732 8,640,178 1,957,596
Basic and diluted net loss per share attributable to common
stockholders $ (14.59 ) $ (6.73 ) $ (5.94 ) $ (10.37 )
Potentially dilutive securities that were not included in the
calculation of diluted net loss per share attributable to common
stockholders because their effect would be anti-dilutive are as
follows (in common equivalent shares):
Year Ended
2016 2015
Common stock subject to repurchase 208,885 79,650
Common stock options 680,437 634,198
Warrants to purchase common stock 2,493,449
—
Shares issuable upon conversion of the convertible note payable 1,490,651
—
Redeemable convertible preferred stock 5,083,932 4,708,398
9,957,354 5,422,246
Nine Months Ended
2017 2016
(Unaudited)
Common stock options 2,636,548 660,762
Warrants to purchase common stock 987,200 1,185,214
Shares issuable upon conversion of convertible to note payable
— 736,076
Shares issuable upon conversion of redeemable convertible preferred
stock
— 4,830,323
Total 3,623,748 7,412,375
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2014-09, 2014-09), 2014-09 2014-09 2014-09: No. 2016-08, 2016-08); No. 2016-10, 2016-10); No. 2016-12, 2016-12). 2016-08, 2016-10 2016-12 2014-09
In August 2014, the FASB issued ASU 2014—15,
“Disclosure of Uncertainties About an Entity’s Ability
to Continue as a Going Concern,” which requires management to
perform interim and annual assessments of an entity’s ability
to continue as a going concern (meet its obligations as they become
due) within one year after the date that the financial statements
are issued. If conditions or events raise substantial doubt about
the entity’s ability to continue as a going concern, certain
disclosures are required. This ASU has been adopted and the
provisions of this update are reflected in its accompanying
consolidated financial statements as of December 31, 2016.
In April 2015, the FASB issued ASU 2015-03,
In February 2016, the FASB issued ASU No. 2016-02, right-of-use right-of-use
In March 2016, the FASB issued ASU No. 2016-09, 2016-09). 2016-09
In August 2016, the FASB issued ASU 2016-15,
In May 2017, the FASB issued ASU No. 2017-09, 2017-09 |
