The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data and percentages)
NOTE 1. DESCRIPTION OF BUSINESS
Description of Business
Veritone, Inc., a Delaware corporation (“Veritone”) (together with its wholly owned subsidiaries, collectively, the “Company”), is a provider of artificial intelligence (“AI”) computing solutions. The Company has developed aiWARE
TM
, a proprietary AI operating system that integrates and orchestrates an open ecosystem of top performing cognitive engines, together with a suite of powerful applications, to reveal valuable multivariate insights from vast amounts of unstructured and structured data and conduct cognitive workflows based on these insights. The Company’s aiWARE platform incorporates proprietary technology to integrate and intelligently orchestrate a wide variety of cognitive engine capabilities to mimic human cognitive functions such as perception, prediction and problem solving in order to quickly, efficiently and cost effectively transform unstructured data into structured data. It stores the results in a time-correlated database, creating a rich, online, searchable index of the unstructured and structured data that users can use and analyze in near real-time through the platform’s suite of general and industry-specific applications to drive business processes and insights. aiWARE is based on an open architecture that enables new cognitive engines and applications to be added quickly and efficiently, resulting in a future proof, scalable and evolving solution that can be easily leveraged for a broad range of industries that capture or use audio, video and other unstructured data including, without limitation, the media and entertainment, legal and compliance, and government vertical markets.
In August 2018, the Company acquired Wazee Digital, Inc. (“Wazee Digital”), a provider of cloud-native digital content management and content licensing services, as discussed in more detail in Note 3. The Wazee Digital offerings serve customers primarily in the media and entertainment market, enabling these customers to more effectively monetize and enrich their content.
In addition, the Company operates a full-service advertising agency. The Company’s expertise in media buying, planning and creative development, coupled with its proprietary technology platform, enables the Company to analyze the effectiveness of advertising in a way that is simple, scalable and trackable. In August 2018, the Company acquired S Media Limited, doing business as Performance Bridge Media (“Performance Bridge”), a podcast advertising agency, as discussed in more detail in Note 3. The Performance Bridge offerings have enhanced the Company’s advertising offerings to include more comprehensive podcast solutions.
NOTE 2. PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”). The consolidated financial statements include the accounts of Veritone Inc. and all of its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Liquidity and Capital Resources
During 2018 and 2017, the Company generated negative cash flows from operations of $42,227 and $31,911, respectively, and incurred net losses of $61,104 and $59,601, respectively. Also, the Company had an accumulated deficit of $170,411 as of December 31, 2018. Historically, the Company has satisfied its capital needs with the net proceeds from its sales of equity securities, its issuance of convertible debt, and the exercise of common stock warrants. In June 2018, the Company raised $32.8 million through an underwritten offering of common stock.
The Company expects to continue to generate net losses for the foreseeable future as it makes significant investments in developing and selling its aiWARE SaaS solutions. Also, the Company will continue to evaluate potential acquisitions of, or investments in, companies or technologies that complement its business, which acquisitions may require the use of cash. Management believes that the Company’s existing balances of cash, cash equivalents and marketable securities, which totaled $51,104 as of December 31, 2018, will be sufficient to meet its anticipated cash requirements for at least twelve months from the date that these financial statements are issued. However, the Company’s does not expect that its current cash, cash equivalents and marketable securities will be sufficient to support the development of its business to the point at which the Company has positive cash flows from operations, particularly if it uses cash to finance any acquisitions or investments in the future. The Company plans to meet its future needs for additional capital through equity and/or debt
57
financings. Such equity financings may include sales of common stock under the Company’s equity distri
bution agreement pursuant to which the Company may offer and sell, from time to time, shares of its common stock having an aggregate
available
offering price of up to $
47,500
. Such financing may not be available on terms favorable to the Company or at all.
If the Company is unable to obtain adequate financing or financing on terms satisfactory to it when required, the Company’s ability to continue to support its business growth, scale its infrastructure, develop product enhancements and to respond to busin
ess challenges could be significantly impaired.
Use of Estimates
In the opinion of the Company’s management, the consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary to fairly state its financial position, results of operations and cash flows. The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Business Combinations
The results of a business acquired in a business combination are included in the Company’s consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business generally being recorded at their estimated fair values as of the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.
Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss.
The Company performs valuations of assets acquired and liabilities assumed and allocates the purchase price to its respective assets and liabilities. Determining the fair value of assets acquired and liabilities assumed may require management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenues, costs and cash flows, discount rates, and selection of comparable companies. The Company engages the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination.
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 securities. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the classifications at each balance sheet date. Marketable securities are classified as short-term based on their availability for use in current operations. The Company’s marketable securities are carried at fair value, with unrealized gains and losses, net of income taxes, reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity, with the exception of unrealized losses believed to be other-than-temporary, which are reported in the Company’s consolidated statement of operations and comprehensive loss in the period in which such determination is made.
Accounts Receivable and Expenditures Billable to Clients
Accounts receivable consist primarily of amounts due from advertising clients and aiWARE customers under normal trade terms. Allowances for uncollectible accounts are recorded based upon a number of factors that are reviewed by the Company on an ongoing basis, including historical amounts that have been written off, an evaluation of current economic conditions, and an assessment of customer creditworthiness. A considerable amount of judgment is required in assessing the ultimate realization of accounts receivable.
The amounts due from clients based on costs incurred or fees earned that have not yet been billed to clients are reflected as expenditures billable to clients in the accompanying consolidated balance sheets.
58
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 (unadjusted) 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; or
|
|
•
|
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 classifies its cash equivalents (including money market funds) and marketable securities within Level 1 or Level 2 of the fair value hierarchy on the basis of valuations using quoted market prices or alternate pricing sources and models utilizing market observable inputs, respectively. The Company’s money market funds are valued based on quoted prices for the specific securities in an active market and are therefore classified as Level 1. The Company’s marketable securities include government securities, commercial paper and corporate debt securities. These financial instruments are valued on the basis of valuations provided by a third-party pricing service.
The Company’s stock warrants are categorized as Level 3 within the fair value hierarchy. Stock warrants have been recorded within other accrued liabilities and equity in the Company’s consolidated balance sheet for the years ended December 31, 2018 and 2017. The warrants have been recorded at their fair value using a probability weighted expected return model. This model incorporates contractual terms, maturity, risk-free rates and volatility. 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 Company’s other financial instruments consist primarily of cash, accounts receivable and accounts payable. The Company has determined that the carrying values of these financial instruments approximate fair value for the periods presented due to their short-term nature and the relatively stable current interest rate environment.
Property, Equipment and Improvements
Property, equipment and improvements 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 of the related assets 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. At the time of retirement or disposition of these assets, the cost and accumulated depreciation or amortization are removed from the accounts and any related gains or losses are recorded to earnings.
The useful lives of property, equipment and improvements are as follows:
|
•
|
Property and equipment — 3 years
|
|
•
|
Leasehold improvements — 5 years or the remaining lease term, 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. No property, equipment and improvements were impaired in the periods presented.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method. Intangible assets include acquired developed technology, licensed technology, customer relationships, noncompete covenants, and trademarks and tradenames. Intangible assets are amortized on a straight-line basis over the applicable amortization period as set forth below.
59
The
amortization periods for
intangible assets are as follows:
|
•
|
Developed technology — 5 years
|
|
•
|
Customer relationships — 5 years
|
|
•
|
Noncompete agreements — 3 to 4 years
|
|
•
|
Trademarks and trade names — approximately 2 years
|
|
•
|
Licensed technology — lesser of the terms of the agreement, or estimated useful life
|
Intangible asset amortization expense is recorded to cost of revenues, sales and marketing, or research and development expense in the consolidated statements of operations and comprehensive loss.
Impairment of Goodwill and Long-Lived Assets
Goodwill is not amortized but instead is tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that goodwill might be impaired. The Company’s annual impairment test is performed during the second quarter. In assessing goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of such reporting unit is less than its carrying amount. The Company’s qualitative assessment of the recoverability of goodwill considers various macro-economic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization below its net book value. If, after assessing the totality of events or circumstances, the Company determines it is unlikely that the fair value of such reporting unit is less than its carrying amount, then a quantitative analysis is unnecessary. However, if the Company concludes otherwise, or if it elects to bypass the qualitative analysis, then it is required to perform a quantitative analysis that compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, a goodwill impairment loss is recognized for the lesser of: (a) the amount that the carrying amount of a reporting unit exceeds its fair value; or (b) the amount of the goodwill allocated to that reporting unit.
The Company reviews long-lived assets to be held and used, other than goodwill, for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If an evaluation of recoverability is required, the estimated undiscounted future cash flows directly associated with the asset are compared to the asset’s carrying amount. If the estimated future cash flows from the use of the asset are less than the carrying value, an impairment write-down would be recorded to reduce the asset to its estimated fair value.
No impairment of goodwill or long-lived assets was recorded for the years ended December 31, 2018 and 2017.
Other Assets
Other assets consist primarily of
security deposits for certain operating leases and collateral required as security for the Company’s corporate credit cards.
Revenue Recognition
The Company derives its revenues primarily from three sources: (1) advertising revenues, (2) subscription revenues, which are comprised primarily of subscription fees from customers for accessing the Company’s platforms delivered as software-as-a-service (“SaaS”), and (3) content licensing and media services revenues, which are comprised primarily of fees from customers for licenses to third-party content owners’ digital assets.
The Company commences revenue recognition when all of the following conditions are satisfied:
|
•
|
There is persuasive evidence of an arrangement;
|
|
•
|
The service has been or is being provided to the customer;
|
|
•
|
The collection of the fees is reasonably assured; and
|
|
•
|
The amount of fees to be paid by the customer is fixed or determinable.
|
60
Advertising
Revenues
The Company’s advertising business places advertisements for clients, primarily with radio broadcasters, podcasters and digital media producers. The Company negotiates its commission rates with its clients. Under the most common billing arrangements, the Company bills clients for the gross cost of the advertisement, which is set by the broadcaster, less any discounts negotiated with the client off of the broadcaster’s standard commission rate. The Company remits to the broadcaster the gross amount less the standard commission set by the broadcaster. The gross cost of advertising billed to the client, less amounts payable to the broadcaster, are recorded net within advertising revenue, representing the Company’s commission. Advertising revenue is recognized when the advertisement is aired by the broadcaster in accordance with the client arrangement.
The Company’s clients are sometimes required to make a deposit or pre-pay the media advertising plan. Such amounts are reflected as client advances on the Company’s consolidated balance sheets until all revenue recognition criteria have been met.
aiWARE SaaS Revenues
aiWARE SaaS revenues include fixed fee subscription services and usage-based fee arrangements related to access and use of the Company’s aiWARE and digital content management platforms, which include applications and cognitive engines that are integrated components used by the customer as part of the overall aiWARE offering and therefore represent a single unit of accounting. These arrangements provide the right to access the platforms, are generally non-cancelable, and do not contain refund-type provisions. Customers under SaaS arrangements do not take possession of the software at any time during the term of the agreement. Subscription revenues are generally recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date the Company’s service is made available to customers. These agreements typically have terms ranging from one to three years, with renewal options and, in many cases, specify the amount of data or media feeds to be processed each month. Each arrangement includes a fixed monthly fee for access to the platform and for the amount of data that will be processed and/or stored (if applicable), as well as the number and classes of cognitive engines that will be used to process the data and the number of licensed users. If the contractual amount of processing is exceeded in a monthly period, fees for additional processing are billed based on the contractual rate. These additional processing fees are recognized in the period earned as the services have been provided.
In certain SaaS arrangements with broadcasters, the amount of monthly license fees payable under the SaaS agreement is variable based upon the total media spend for advertisements that the Company places on the broadcaster’s network during the month for the Company’s advertising clients. The Company records revenue from the monthly fees billed to broadcasters based on the relative selling prices of the SaaS and advertising services. For these arrangements, the Company recognizes the variable portion of SaaS revenues in the later of the month in which the SaaS service is provided or the associated advertisements are aired, at which time the fees become fixed or determinable.
Under certain SaaS arrangements, customers contract with the Company to provide cloud storage services. The cloud storage services are coterminous with the related SaaS arrangements and recognized in the period in which the service is provided.
aiWARE Content Licensing and Media Services
The Company enters into arrangements with customers to grant licenses and access to third-party content owners’ digital assets. Revenue from licensing digital assets is recognized when the customer receives the right to use the digital assets and is billed based on prices set by the Company. In certain situations, customers pay a fixed fee to license a specific amount of third-party content owners’ digital assets over a specified period of time, often with additional fees required for additional usage. In most cases the digital asset libraries are updated by the content owners throughout the contract period. For these fixed fees, the Company recognizes revenue ratably over the term of the arrangement, which typically ranges from one to three years as the Company is contracted to provide access to the updated content throughout the contract period.
In addition, the Company offers other optional services such as obtaining talent and property clearances, which the customer can purchase from the Company or from other vendors on an as needed basis. Revenue is recognized for these services in the period in which the service is performed and is recorded as a component of aiWARE content licensing and media services segment revenue.
61
Cost of Revenues
Cost of revenues related to the Company’s aiWARE SaaS solutions consist of fees charged by vendors for cloud infrastructure and to process and store media in the platform solution. The Company’s arrangements with cloud infrastructure providers typically require fees that are based on computing time, data storage and transfer volumes, and reserved computing capacity. The Company also pays fees to third-party providers of cognitive engines, which are generally based upon the hours of media processed through their engines. Cost of revenues related to the Company’s aiWARE content licensing and media services include royalties paid to content owners on revenues generated from the Company’s licensing of their content, and fees charged by vendors that provide products and services in support of the Company’s live event services and obtaining of talent and property clearances. Cost of revenues also includes amortization expense primarily for developed technology acquired in business combinations.
In the Company’s advertising business, cost of revenues consists of production costs relating to advertising content.
Stock-Based Compensation
Stock-based compensation expense is estimated at the grant date based on the fair value of the award.
Prior to the Company’s initial public offering (“IPO”), the fair values of restricted stock awards were estimated at the date of grant by using both the option-pricing method and the probability-weighted expected return method. Following the Company’s IPO, the fair values of restricted stock and restricted stock unit awards granted by the Company are based on the closing market price of the Company’s common stock on the date of grant.
The Company generally estimates the fair value of stock options, as well as purchase rights under the Company’s Employee Stock Purchase Plan (“ESPP”), using the Black-Scholes-Merton option pricing model. The Company estimates the fair values of certain performance-based stock options granted under the Company’s 2018 Performance-Based Stock Incentive Plan, the vesting of which is conditioned upon the achievement of specified target stock prices for the Company’s common stock, utilizing a Monte Carlo simulation model based on the probability of targets being achieved. Fair values are estimated separately for each tranche of such performance stock options that is tied to a particular stock price target.
Determining the appropriate fair value of stock options and ESPP awards at the grant date requires significant judgment, including estimating the volatility of the Company’s common stock, the expected term of awards, and the derived service periods for each tranche of performance stock options. For stock options granted prior to June 2018, the Company estimated volatility based on the historical volatility of the shares of a group of publicly traded peer companies, equally weighted, over the expected term. For the performance stock options granted in May 2018 (which were approved by stockholders in June 2018), and for all stock options granted thereafter, the Company included the historical volatility of its own common stock along with the volatility of the peer group since the Company’s common stock had been trading publicly for over 12 months. In calculating estimated volatility, the volatility of the Company’s common stock has been given a 25% weighting, and the volatility of the peer group companies has been given 75% weighting, with each peer company weighted equally. The Company will continue utilizing this combination and will periodically assess the weightings as additional historical volatility data for its own shares of common stock becomes available.
The expected term for stock options other than performance-based stock options represents the period of time that stock options are expected to be outstanding and is determined using the simplified method. Under the simplified method, the expected term is calculated as the midpoint between the weighted average vesting date and the contractual term of the options. For performance-based stock options, the Company used a Monte Carlo simulation model to develop a derived service period.
The risk-free rate is based on the implied yield of U.S. Treasury notes as of the grant date with a remaining term approximately equal to the expected term of the award.
The assumptions used in the Company’s option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment.
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2016-09 –
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which was meant to simplify the treatment of estimated forfeitures related to stock-based compensation expense accounting. The Company has elected to recognize only actual forfeitures, as they occur, and not estimate forfeitures in its stock-based compensation expense.
62
The fair value of stock-based awards is amortized using the straight-line attribution method over the requisite service period of the award, which is generally the vesting period
(other than performance-based
stock options)
.
For performance
-based
stock options,
expense is recognized over a graded-vesting attribution basis over the
derived service period
of the award
.
Segment Information
The Company reports segment information based on the internal reporting used by the chief operating decision maker for making decisions and assessing performance as the source of the Company’s reportable segments. The Company’s reportable segments include Advertising, aiWARE SaaS Solutions, and aiWARE Content Licensing and Media Services, which was formed in 2018 as it is made up of a portion of Wazee Digital’s business that was acquired in 2018. In making decisions and assessing performance, the chief operating decision maker evaluates net revenues of each reportable segment (see Note 7) but does not utilize other metrics such as total assets, net income (loss), capital expenditures, goodwill or other intangible assets financial information outside of net revenues by reportable segment The Company evaluates the cost of revenues for aiWARE SaaS Solutions and aiWARE Content Licensing and Media Services on a combined but not allocated basis, and evaluates all operating expenses on a consolidated basis. The Company’s presence is primarily in the United States of America and therefore does not have geographic segments to report.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred and are primarily included in sales and marketing expenses in the Company’s consolidated statements of operations and comprehensive loss. Advertising and marketing costs include online and print advertising, public relations, tradeshows, and sponsorships. For the years ended December 31, 2018 and 2017, the Company recorded expense of $1,564 and $1,252, respectively, for advertising and marketing costs.
Research and Development Costs and Software Development Costs
Research and development costs are expensed as incurred.
Costs related to the development of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers because the Company intends to license its aiWARE software in the future. In most instances, the Company’s products are released soon after technological feasibility has been established and, as a result, software development costs are expensed as incurred. No software development costs were capitalized in 2018 or 2017.
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 statement carrying amounts and the tax bases of the Company’s assets and liabilities using statutory tax rates expected to apply to taxable income in the years in which those 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 approach to recognizing and measuring uncertain tax positions. The first step is to determine whether the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. If the first test is met, then the second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.
Debt Issuance Costs
The Company deferred and amortized fees paid in connection with the issuance of its convertible notes payable. These fees were amortized using a method that approximates the effective interest method over the term of the related financing.
Discounts for Debt and Redeemable Convertible Preferred Stock
The Company amortized debt discounts over the term of the debt using a method that approximates the effective interest method. The Company amortized discounts on its redeemable convertible preferred stock from the issuance date to the earliest redemption date using a method that approximates the effective interest method.
63
Comprehensive
Loss
Comprehensive loss consists of net loss and other gains and losses affecting equity that are excluded from net loss. These consist of unrealized gain (loss) on marketable securities, net of income tax, and foreign currency translation adjustments.
Significant Customers
The Company’s top ten customers accounted for approximately 38.8% and 60.5% of the Company’s net revenues for the years ended December 31, 2018 and 2017, respectively. No individual customer accounted for 10% or more of the Company’s net revenues for the year ended December 31, 2018. Revenues from two advertising business customers accounted for approximately 23.8% of the Company’s consolidated net revenues for the year ended December 31, 2017. One advertising client made up 41.4% of accounts receivable as of December 31, 2018,, and three advertising clients made up 33.2% of accounts receivable as of December 31, 2017.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. The Company places its cash and cash equivalents with what management believes are quality financial institutions in the United States and performs periodic evaluations of the relative credit standing of these financial institutions in order to limit the amount of credit exposure with any one institution. At times, the value of the United States deposits exceeds federally insured limits. The Company has not experienced any losses in such accounts. The majority of the Company’s marketable securities are managed by an investment management firm, under the oversight of the Company’s senior financial management team. The portfolio manager invests the funds in accordance with the Company’s investment policy, which, among other things, limits the amounts that may be invested with one issuer. Such policy is reviewed periodically by the Company’s senior financial management team and the Audit Committee of the Company’s Board of Directors.
Recently Adopted Accounting Pronouncements
In the third quarter of 2018, the Company adopted ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses and provide criteria to determine if a set of assets and activities is a business. The adoption of this update did not have a material impact on the Company’s consolidated financial position and results of operations for the year ended December 31, 2018.
Beginning in the first quarter of 2018, the Company adopted ASU No. 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The standard is intended to simplify several areas of accounting for stock-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and treatment of forfeitures. The Company has elected to recognize actual forfeitures as they occur and not estimate forfeitures in determining its stock-based compensation expense. The Company recorded the cumulative impact of this new accounting standard as a charge to its accumulated deficit as of January 1, 2018. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Reform”) was enacted by the U.S. government. On December 22, 2017, the U.S. Securities and Exchange Commission Staff, or SEC Staff, issued guidance in Staff Accounting Bulletin No. 118 (“SAB 118”) to address certain fact patterns where the accounting for changes in tax laws or tax rates under ASC Topic 740 is incomplete upon issuance of an entity's financial statements for the reporting period in which the Tax Reform is enacted. As permitted in SAB 118, in 2017, the Company took a measurement period approach and reported certain provisional amounts, based on reasonable estimates, for certain tax effects in which the accounting under ASC 740 is incomplete. Such provisional amounts were subject to adjustment during a limited measurement period, not to extend beyond one year from the tax law enactment date, until the accounting under ASC 740 was complete. As of December 31, 2018, the Company has completed its accounting required due to the Tax Reform. No further adjustments were made with respect to the previously recorded provisional amounts.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount that the entity expects to be entitled to receive when products are transferred to customers. Subsequently, the FASB has issued the following standards related to
64
ASU 2014-09: ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(“ASU 2016-08”); ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Iden
tifying Performance Obligations and Licensing
(“ASU 2016-10”); and ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12
,
”
and together with ASU 2014-09,
ASU 2016-08
and
ASU 201
6-10 the
“
new revenue standard”). The new revenue standard may be applied retrospectively to each prior period presented or
retrospectively
with the cumulative effect recognized as of the date of adoption.
As an
e
merging
g
rowth
c
ompany,
the Company is
not required to accelerate the application of the revenue standard to interim periods.
The new revenue standard will be effective for the Company beginning
after December 15, 2018 and to interim periods within annual reporting periods beginning after Dece
mber 15, 2019
.
The Company will apply the new revenue standards on a modified retrospective basis with an adjustment to retained earnings to recognize the cumulative effect of adoption. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The amendments under this pronouncement will change the way all leases with duration of one year or more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized in the same manner as capital leases are amortized under current accounting rules, as amortization expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. This standard will be effective for the Company beginning the first quarter of 2020. The Company is currently evaluating the impact this standard will have on its policies and procedures pertaining to its existing and future lease arrangements, disclosure requirements and on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB’s Emerging Issues Task Force)
, which provides guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This standard will be effective for the Company beginning in the first quarter of 2019, with early adoption permitted. The Company does not expect the adoption of this new standard to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The amendments in this update will be effective for the Company beginning with fiscal year 2022, including interim periods, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of the amendments in this update is not expected to have a material impact on the Company's consolidated financial position and results of operations.
In June 2018, the FASB issued ASU No. 2018-07,
Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
, which provides expanded guidance to simplify the accounting for stock-based compensation by aligning the treatment of stock-based awards for nonemployees with that of stock-based awards for employees. This standard will be effective for the Company beginning in the first quarter of fiscal year 2019. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.
65
In August 2018, the FASB issued ASU No. 2018-13
, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement
, as part of its disclosure framework project intended to improve the effectiveness of disclosures in the notes to the financial statements by updating certain disclosure requirements related to fair value measurement
s. The standard will be effective for the Company beginning in the first quarter of fiscal year 2020, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financi
al statements.
NOTE 3. BUSINESS COMBINATIONS
Acquisition of Performance Bridge
On August 21, 2018, the Company acquired all of the outstanding capital stock of Performance Bridge by means of a merger of an indirect, wholly owned subsidiary of the Company with and into Performance Bridge, with Performance Bridge surviving the merger as an indirect, wholly owned subsidiary of the Company. The Company paid initial consideration of $5,158 and the Company expects to pay an additional $4,414 in contingent earnout amounts for certain revenue milestones achieved by Performance Bridge in its 2018 fiscal year (see Note 15). The initial consideration was comprised of $1,220 paid in cash and $3,938 paid by the issuance of a total of 349,072 shares of the Company’s common stock based on the Company’s closing stock price on August 21, 2018. The initial consideration was subject to adjustment based on a final calculation of Performance Bridge’s net assets at closing, which has been completed in the first quarter of 2019 and resulted in the issuance of an additional 6,482 shares of common stock to the former stockholder of Performance Bridge. A portion of the initial consideration, consisting of $120 in cash and 34,335 shares of common stock, was deposited into a third-party escrow account at closing and will be held in such account until August 21, 2020, to secure certain indemnification and other obligations of the former stockholder of Performance Bridge.
The Company incurred $46 in transaction costs relating to this acquisition, which have been expensed as incurred and are included in general and administrative expenses in the accompanying statement of operations and comprehensive loss for the year ended December 31, 2018.
The acquisition of Performance Bridge has expanded the Company’s advertising offerings to include more comprehensive podcast advertising solutions.
The following table summarizes the fair value of purchase price consideration to acquire Performance Bridge:
|
|
|
|
|
Acquisition consideration
|
|
Amount
|
|
Cash consideration at closing
|
|
$
|
1,220
|
|
Equity consideration at closing
|
|
|
3,938
|
|
Contingent earnout
|
|
|
3,770
|
|
Total
|
|
$
|
8,928
|
|
The following allocation of the purchase price as of the August 21, 2018 closing date under the acquisition method of accounting is preliminary as to the determination of deferred taxes as the information is not available at the time of this filing. The purchase price allocation is based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company in the acquisition:
Preliminary purchase price allocation
|
|
Amount
|
|
Cash
|
|
$
|
2,283
|
|
Accounts receivable
|
|
|
3,551
|
|
Prepaid and other current assets
|
|
|
23
|
|
Property and equipment
|
|
|
43
|
|
Intangible assets
|
|
|
5,800
|
|
Accounts payable
|
|
|
(1,402
|
)
|
Accrued expenses and other current liabilities
|
|
|
(4,337
|
)
|
Accrued compensation
|
|
|
(42
|
)
|
Identifiable net assets acquired
|
|
$
|
5,919
|
|
Goodwill
|
|
|
3,009
|
|
Total purchase price
|
|
$
|
8,928
|
|
66
The following table presents details of the acquired intangible assets of Performance Bridge:
|
|
Estimated
Useful Life (in years)
|
|
|
Fair Value
|
|
Customer relationships
|
|
|
5.0
|
|
|
$
|
5,100
|
|
Noncompete agreement
|
|
|
4.0
|
|
|
|
700
|
|
Total intangible assets
|
|
|
|
|
|
$
|
5,800
|
|
Acquisition of Wazee Digital, Inc.
On August 31, 2018, the Company acquired all of the outstanding capital stock of Wazee Digital by means of a merger of a wholly owned subsidiary of the Company with and into Wazee Digital, with Wazee Digital surviving the merger as a wholly owned subsidiary of the Company. The Company paid an aggregate purchase price of $12,552, comprised of $7,423 paid in cash and $5,129 paid by the issuance of a total of 491,157 shares of the Company’s common stock based on the Company’s closing stock price on August 31, 2018. A portion of the consideration, consisting of $925 in cash and 60,576 shares of common stock, was deposited into a third-party escrow account at closing and will be held in such account to secure certain indemnification and other obligations of the former stockholders of Wazee Digital. A portion of such escrowed consideration was released in March 2019, and the balance will be held in such account until August 31, 2020.
The Company incurred $1,998 in transaction costs relating to this acquisition, which have been expensed as incurred. Subsequent to the business combination, severance costs of $344 were recorded in connection with the resignation of a former Wazee Digital executive. Both the transaction costs and severance expense were included in general and administrative expenses in the accompanying statement of operations and comprehensive loss for the year ended December 31, 2018.
The acquisition of Wazee Digital has expanded the Company’s offerings to include digital content management and content licensing solutions.
The following table summarizes the fair value of purchase price consideration to acquire Wazee Digital:
|
|
|
|
|
Acquisition consideration
|
|
Amount
|
|
Cash consideration at closing
|
|
$
|
7,423
|
|
Equity consideration at closing
|
|
|
5,129
|
|
Total
|
|
$
|
12,552
|
|
The following is an allocation of the purchase price as of the August 31, 2018 closing date under the acquisition method of accounting and
is preliminary as to the determination of deferred taxes as the information is not available at the time of this filing. The purchase price allocation is based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company in the acquisition:
Preliminary purchase price allocation:
|
|
Amount
|
|
Cash
|
|
$
|
975
|
|
Accounts receivable
|
|
|
2,396
|
|
Prepaid and other current assets
|
|
|
376
|
|
Property and equipment
|
|
|
292
|
|
Acquired intangible assets
|
|
|
13,300
|
|
Accounts payable
|
|
|
(825
|
)
|
Accrued expenses and other current liabilities
|
|
|
(3,639
|
)
|
Accrued compensation
|
|
|
(850
|
)
|
Other long-term liabilities
|
|
|
(700
|
)
|
Identifiable net assets acquired
|
|
$
|
11,325
|
|
Goodwill
|
|
|
1,227
|
|
Total purchase price
|
|
$
|
12,552
|
|
67
The following table presents details of the acquired intangible assets of Wazee Digital:
|
|
Estimated
Useful Life (in years)
|
|
|
Fair Value
|
|
Developed technology
|
|
|
5.0
|
|
|
$
|
9,100
|
|
Customer relationships
|
|
|
5.0
|
|
|
|
4,200
|
|
Total intangible assets
|
|
|
|
|
|
$
|
13,300
|
|
Acquisition of Machine Box, Inc.
On September 6, 2018, the Company acquired all of the outstanding capital stock of Machine Box, Inc. (“Machine Box”) by means of a merger of a wholly owned subsidiary of the Company with and into Machine Box, with Machine Box surviving the merger as a wholly owned subsidiary of the Company. The Company paid initial consideration of $1,484, and the Company may pay up to an additional $3,000 in contingent amounts if Machine Box achieves certain technical development and integration milestones within 12 months after the closing of the acquisition. The initial consideration was comprised of $423 paid in cash and $1,061 paid by issuance of a total of 128,300 shares of the Company’s common stock, based on the Company’s closing stock price on September 6, 2018, of which $80 in cash and 26,981 shares of common stock were held back from payment and issuance by the Company until September 6, 2020, to secure certain indemnification and other obligations of the former stockholders of Machine Box. The additional contingent payments (if earned) will be comprised of 20% cash and 80% shares of the Company’s common stock.
The fair value of the contingent amount totaled $2,880 and is treated as compensation expense for post-combination services as payment of such amount is conditioned upon the continued employment of certain key employees of Machine Box in addition to the achievement of certain performance milestones by Machine Box. The preliminary fair value of the contingent amount was determined using a probability-weighted expected payment model. This expense is being recognized as research and development expense over three separate intervals tied to the specific performance milestones during the 12 months following the acquisition.
The Company incurred $32 in transaction costs relating to this acquisition, which have been expensed as incurred and are included in general and administrative expenses in the accompanying statement of operations and comprehensive loss for the year ended December 31, 2018.
Machine Box is a developer of state-of-the-art machine learning technologies, which have enhanced the Company’s aiWARE platform capabilities.
The following table summarizes the fair value of purchase price consideration to acquire Machine Box:
|
|
|
|
|
Acquisition consideration
|
|
Amount
|
|
Cash consideration at closing
|
|
$
|
423
|
|
Equity consideration at closing
|
|
|
1,061
|
|
Total
|
|
$
|
1,484
|
|
The following is an allocation of the purchase price as of the September 6, 2018 closing date under the acquisition method of accounting and is preliminary as to the determination of deferred taxes as the information is not available at the time of this filing. The purchase price allocation is based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company in the acquisition:
Preliminary purchase price allocation:
|
|
Amount
|
|
Cash
|
|
$
|
25
|
|
Intangible assets
|
|
|
700
|
|
Accrued expenses
|
|
|
(375
|
)
|
Identifiable net assets acquired
|
|
$
|
350
|
|
Goodwill
|
|
|
1,134
|
|
Total purchase price
|
|
$
|
1,484
|
|
68
The following table presents details of the acquired intangible assets of Machine Box:
|
|
Estimated
Useful Life
(in years)
|
|
|
Fair Value
|
|
Developed technology
|
|
|
5.0
|
|
|
$
|
500
|
|
Trademarks and tradenames
|
|
|
2.3
|
|
|
|
100
|
|
Noncompete agreement
|
|
|
3.0
|
|
|
|
100
|
|
Total intangible assets
|
|
|
|
|
|
$
|
700
|
|
Assumptions in the Allocations of Purchase Price
Management prepared the purchase price allocations for the acquired businesses, and in doing so considered or relied in part upon a report of a third-party valuation expert to calculate the fair value of certain acquired assets and assumed liabilities of each acquired business, which would primarily include identifiable intangible assets and the contingent earn-out amounts. Determining the fair value of assets and liabilities requires management to make significant estimates and assumptions which are preliminary and subject to change upon finalization of the valuation analysis. The goodwill recognized is the excess of the purchase price over the fair value of net assets acquired. Certain liabilities and deferred taxes included in the purchase price allocations are based on management's best estimates of the amounts to be paid or settled and based on information available at the time the purchase price allocations were prepared. Updates to and/or completion of the Company’s evaluation of certain income tax positions may result in changes to the recorded amounts of assets and liabilities, with corresponding adjustments to goodwill amounts in subsequent periods. The Company does not expect to deduct any of the acquired goodwill for tax purposes.
Unaudited Supplemental Pro Forma Information
The following table presents unaudited pro forma combined financial information for each of the periods presented, as if the acquisition of Wazee Digital had occurred at the beginning of fiscal year 2017:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net revenue - pro forma combined
|
|
$
|
39,196
|
|
|
$
|
33,719
|
|
Net loss - pro forma combined
|
|
|
(62,086
|
)
|
|
|
(63,882
|
)
|
Accretion of redeemable convertible preferred stock
|
|
—
|
|
|
|
(4,470
|
)
|
Net loss attributable to common stockholders - pro forma combined
|
|
$
|
(62,086
|
)
|
|
$
|
(68,352
|
)
|
The following adjustments were included in the unaudited pro forma combined net revenues:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net revenue
|
|
$
|
27,047
|
|
|
$
|
14,413
|
|
Add: Net revenue - acquired business
|
|
|
12,149
|
|
|
|
19,306
|
|
Net revenue - pro forma combined
|
|
$
|
39,196
|
|
|
$
|
33,719
|
|
69
The following unaudited adjustments were included in the unaudited pro forma combined net loss:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net loss attributable to common stockholders
|
|
$
|
(61,104
|
)
|
|
$
|
(64,071
|
)
|
Add: Results of operations - acquired business
|
|
|
570
|
|
|
|
(1,737
|
)
|
Less: Pro forma adjustments
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,552
|
|
|
|
2,544
|
|
Net loss - pro forma combined
|
|
$
|
(62,086
|
)
|
|
$
|
(68,352
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share - pro forma combined:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(3.35
|
)
|
|
$
|
(6.06
|
)
|
|
|
|
|
|
|
|
|
|
Shares used to compute net loss per share - pro forma combined:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
18,515
|
|
|
|
11,275
|
|
The pro forma combined financial information is presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations of the consolidated business had the acquisition of Wazee Digital actually occurred at the beginning of fiscal year 2017 or of the results of future operations of the consolidated business. The unaudited pro forma financial information does not reflect any operating efficiencies or cost savings that may be realized from the integration of the acquired business.
NOTE 4. NET LOSS PER SHARE
Basic and diluted net loss per common share is presented in conformity with the two-class method in 2017. Holders of Series B and A preferred stock (as described in Note 10) were each entitled to receive cumulative dividends at a rate of eight percent per year, payable prior to any dividends on the Company’s common stock. In the event a dividend was paid on common stock, the holders of redeemable convertible preferred stock were entitled to a proportionate share of any such dividend as if they were holders of common stock on an as-converted to common stock basis.
Under the two-class method, basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding. Net loss attributable to common stockholders is calculated as net loss less current period redeemable convertible preferred stock dividends and accretion. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding, including potential dilutive shares of common stock assuming the dilutive effect of redeemable convertible preferred stock and outstanding stock options, warrants and restricted stock units using the treasury stock method or if-converted method, whichever is more dilutive.
The following table presents the computation of basic and diluted net loss per common share:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(61,104
|
)
|
|
$
|
(59,601
|
)
|
Accretion of redeemable convertible preferred stock
|
|
|
—
|
|
|
|
(4,470
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(61,104
|
)
|
|
$
|
(64,071
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
17,683,459
|
|
|
|
10,515,411
|
|
Less: Weighted-average shares subject to repurchase
|
|
|
(110,521
|
)
|
|
|
(182,818
|
)
|
Denominator for basic and diluted net loss per share
attributable to common stockholders
|
|
|
17,572,938
|
|
|
|
10,332,593
|
|
Basic and diluted net loss per share attributable to common stockholders
|
|
$
|
(3.48
|
)
|
|
$
|
(6.20
|
)
|
70
The Company reported net losses attributable to common stockholders for
both
periods presented and, as such, all potentially dilutive shares of common stock would have been antidilutive for such periods. The table below presents the weighted-average
securities (in common equivalent shares) outstanding during the periods presented that have been excluded from the calculation of diluted net loss per share attributable to common stockholders because their effect would be anti-dilutive
:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Common stock options and restricted stock units
|
|
|
8,625,088
|
|
|
|
3,148,931
|
|
Warrants to purchase common stock
|
|
|
1,232,734
|
|
|
|
1,120,053
|
|
|
|
|
9,857,822
|
|
|
|
4,268,984
|
|
NOTE 5. FINANCIAL INSTRUMENTS
Cash, Cash Equivalents and Marketable Securities
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 cost, gross unrealized losses and fair value, with a breakdown by significant investment category, of the Company’s cash, cash equivalents and marketable securities as of December 31, 2018:
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Cash and
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Cash
|
|
|
Marketable
|
|
|
|
Cost
|
|
|
Losses
|
|
|
Value
|
|
|
Equivalents
|
|
|
Securities
|
|
Cash
|
|
$
|
13,337
|
|
|
$
|
—
|
|
|
$
|
13,337
|
|
|
$
|
13,337
|
|
|
$
|
—
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
24,202
|
|
|
|
—
|
|
|
|
24,202
|
|
|
|
24,202
|
|
|
|
—
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
|
2,500
|
|
|
|
(2
|
)
|
|
|
2,498
|
|
|
|
—
|
|
|
|
2,498
|
|
Corporate debt securities
|
|
|
11,113
|
|
|
|
(46
|
)
|
|
|
11,067
|
|
|
|
—
|
|
|
|
11,067
|
|
Subtotal
|
|
|
13,613
|
|
|
|
(48
|
)
|
|
|
13,565
|
|
|
|
—
|
|
|
|
13,565
|
|
Total
|
|
$
|
51,152
|
|
|
$
|
(48
|
)
|
|
$
|
51,104
|
|
|
$
|
37,539
|
|
|
$
|
13,565
|
|
The following table shows the cost, gross unrealized losses and fair value, with a breakdown by significant investment category, of the Company’s cash, cash equivalents and marketable securities as of December 31, 2017:
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Cash and
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Cash
|
|
|
Marketable
|
|
|
|
Cost
|
|
|
Losses
|
|
|
Value
|
|
|
Equivalents
|
|
|
Securities
|
|
Cash
|
|
$
|
8,925
|
|
|
$
|
—
|
|
|
$
|
8,925
|
|
|
$
|
8,925
|
|
|
$
|
—
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
20,620
|
|
|
|
—
|
|
|
|
20,620
|
|
|
|
20,620
|
|
|
|
—
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
|
4,505
|
|
|
|
(17
|
)
|
|
|
4,488
|
|
|
|
—
|
|
|
|
4,488
|
|
Commercial paper
|
|
|
4,959
|
|
|
|
(5
|
)
|
|
|
4,954
|
|
|
|
—
|
|
|
|
4,954
|
|
Corporate debt securities
|
|
|
30,268
|
|
|
|
(112
|
)
|
|
|
30,156
|
|
|
|
—
|
|
|
|
30,156
|
|
Subtotal
|
|
|
39,732
|
|
|
|
(134
|
)
|
|
|
39,598
|
|
|
|
—
|
|
|
|
39,598
|
|
Total
|
|
$
|
69,277
|
|
|
$
|
(134
|
)
|
|
$
|
69,143
|
|
|
$
|
29,545
|
|
|
$
|
39,598
|
|
The following tables show information about the Company’s marketable securities that have been in a continuous unrealized loss position for less than 12 months and for 12 months or greater as of December 31, 2018 and 2017:
|
|
December 31, 2018
|
|
|
|
Continuous Unrealized Losses
|
|
|
|
Less than
|
|
|
12 Months
|
|
|
|
|
|
|
|
12 Months
|
|
|
or Greater
|
|
|
Total
|
|
Fair value of marketable securities
|
|
$
|
13,565
|
|
|
$
|
—
|
|
|
$
|
13,565
|
|
Unrealized losses
|
|
$
|
(48
|
)
|
|
$
|
—
|
|
|
$
|
(48
|
)
|
71
|
|
December 31, 2017
|
|
|
|
Continuous Unrealized Losses
|
|
|
|
Less than
|
|
|
12 Months
|
|
|
|
|
|
|
|
12 Months
|
|
|
or Greater
|
|
|
Total
|
|
Fair value of marketable securities
|
|
$
|
39,576
|
|
|
$
|
—
|
|
|
$
|
39,576
|
|
Unrealized losses
|
|
$
|
(134
|
)
|
|
$
|
—
|
|
|
$
|
(134
|
)
|
All marketable securities held by the Company as of December 31, 2018 will mature in one year or less.
The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. As of December 31, 2018, the Company considered the declines in market value of its marketable securities to be temporary in nature. The Company typically invests in highly-rated securities, and its investment policy generally limits the amounts that may be invested with any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the securities portfolio.
There were no transfers between Level 1, Level 2 or Level 3 financial instruments in the year ended December 31, 2018.
Stock Warrants
All of the Company’s outstanding stock warrants are categorized as Level 3 within the fair value hierarchy. Stock warrants have been recorded at their fair value using either a probability weighted expected return model or the Black-Scholes option-pricing model. These models incorporate contractual terms, maturity, risk-free interest rates and volatility. The value of the Company’s stock warrants would increase if a higher risk-free interest rate was used, and would decrease if a lower risk-free interest rate was 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.
In 2016, in connection with the Investment Agreement between the Company and Acacia Research Corporation (“Acacia”) and the convertible secured promissory note issued by the Company to Acacia (the “Acacia Note”), the Company issued three four-year warrants, each to purchase 51,437 shares of the Company’s common stock (the “Acacia Note Warrants”) and a five-year warrant (the “Primary Warrant”). The Company determined, using the Black-Scholes option-pricing model, that the fair values of the Acacia Note Warrants and the Primary Warrant were $841 and $8,064, respectively, at the time of issuance. The Company recorded the fair value of the Primary Warrant as a liability because its notional amount was not fixed, and recorded the Acacia Note Warrants as equity. In March 2017, each of the Primary Warrant and the Acacia Note Warrants was amended to provide that the exercise price thereof is equal to the lower of $13.6088 or the Company’s IPO price per share (which was $15.00). As of December 31, 2018 the Acacia Note Warrants were outstanding.
In connection with the funding of the Bridge Loan (see Note 8), in March 2017, April 2017 and May 2017, the Company issued to the Bridge Loan Lenders warrants to purchase shares of common stock (the “Bridge Loan Warrants”). Such warrants were automatically adjusted upon completion of the IPO. At issuance date, the Company determined the fair value of the Bridge Loan Warrants of $6,534 using the Black-Scholes option-pricing model. The Bridge Loan Warrants were recorded as equity and were outstanding at December 31, 2018.
The following table summarizes quantitative information with respect to the significant unobservable inputs used for the Bridge Loan Warrants that were categorized within the Level 3 fair value hierarchy at the time of issuance:
Volatility
|
|
|
70
|
%
|
Risk-free rate
|
|
|
2.40
|
%
|
Discount for lack of marketability
|
|
|
10
|
%
|
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 (the “10% Warrant”) at an exercise price of $13.6088. At the issuance date, the fair value of the 10% Warrant under Level 3 measurement was $5,790 using the Black-Scholes option-pricing model and was classified as equity. The 10% Warrant was outstanding at December 31, 2018.
72
The following table summarizes quantitati
ve information with respect to the significant u
n
observable inputs used for the Company’s 10% Warrant
at issuance
:
|
|
May 17, 2017
|
|
Volatility
|
|
|
70
|
%
|
Risk-free rate
|
|
|
1.44
|
%
|
Discount for lack of marketability
|
|
|
0
|
%
|
In April 2018, in connection with the advisory agreement between the Company and a financial advisory firm, the Company issued such firm a five-year warrant to purchase up to 20,000 shares of the Company’s common stock (“April 2018 Warrant”). The April 2018 Warrant was fully vested and exercisable upon issuance and has an exercise price of $11.73 per share. The Company recorded these stock warrants at their fair value using the Black-Scholes option-pricing model. The holder is able to redeem the warrant for a number of shares equal to the in-the-money value of the warrant. The Company recorded the fair value of the award as a liability that is remeasured each reporting period. The April 2018 Warrant is outstanding at December 31, 2018.
The following table summarizes quantitative information with respect to the significant unobservable inputs that were used to value the April 2018 Warrant:
|
|
December 31, 2018
|
|
|
April 6, 2018
|
|
Volatility
|
|
|
70
|
%
|
|
|
70
|
%
|
Risk-free rate
|
|
|
2.51
|
%
|
|
|
2.58
|
%
|
Term
|
|
4.25 years
|
|
|
5 years
|
|
The following table represents a roll-forward of the fair value of the April 2018 Warrant, which was recorded within other accrued liabilities in the consolidated balance sheet during the year ended December 31, 2018:
Balance, December 31, 2017
|
|
$
|
—
|
|
Issuance of warrant
|
|
|
207
|
|
Change in fair value
|
|
|
(184
|
)
|
Balance, December 31, 2018
|
|
$
|
23
|
|
The expense at issuance of the April 2018 Warrant has been recorded in general and administrative expense and the change in fair value has been recorded in other income (expense), net in the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2018.
NOTE 6. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
The following table presents the changes in the carrying amount of goodwill:
|
|
Carrying Amount
|
|
Balance as of December 31, 2017
|
|
$
|
139
|
|
Acquisitions
|
|
|
5,370
|
|
Balance as of December 31, 2018
|
|
$
|
5,509
|
|
73
Intangible Assets
The following table sets forth the Company’s finite-lived intangible assets resulting from business acquisitions and other purchases, which continue to be amortized:
|
|
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Weighted
Average Useful
Life (in years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Acquired software and
technology
|
|
|
3.0
|
|
|
$
|
3,576
|
|
|
$
|
(1,613
|
)
|
|
$
|
1,963
|
|
|
$
|
3,505
|
|
|
$
|
(351
|
)
|
|
$
|
3,154
|
|
Licensed technology
|
|
|
3.0
|
|
|
|
500
|
|
|
|
(42
|
)
|
|
|
458
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Developed technology
|
|
|
5.0
|
|
|
|
9,600
|
|
|
|
(792
|
)
|
|
|
8,808
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Customer relationships
|
|
|
5.0
|
|
|
|
9,300
|
|
|
|
(733
|
)
|
|
|
8,567
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Trademarks and trade names
|
|
|
2.3
|
|
|
|
100
|
|
|
|
(15
|
)
|
|
|
85
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Noncompete agreements
|
|
|
3.8
|
|
|
|
800
|
|
|
|
(201
|
)
|
|
|
599
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
4.6
|
|
|
$
|
23,876
|
|
|
$
|
(3,396
|
)
|
|
$
|
20,480
|
|
|
$
|
3,505
|
|
|
$
|
(351
|
)
|
|
$
|
3,154
|
|
The following table presents amortization expense associated with the Company’s finite-lived intangible assets, which is included in the consolidated statements of operations as follows:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
|
|
2017
|
|
Cost of revenue
|
|
$
|
920
|
|
|
|
|
$
|
193
|
|
Sales and marketing
|
|
|
967
|
|
|
|
|
|
—
|
|
Research and development
|
|
|
1,076
|
|
|
|
|
|
—
|
|
General and administrative
|
|
|
13
|
|
|
|
|
|
8
|
|
Total
|
|
$
|
2,976
|
|
|
|
|
$
|
201
|
|
Amortization of finite-lived intangible assets in cost of revenue in the consolidated statements of operations results primarily from acquired developed technology.
The following table summarizes the future estimated annual amortization expense for these assets at December 31, 2018:
2019
|
|
$
|
5,054
|
|
2020
|
|
|
5,143
|
|
2021
|
|
|
4,026
|
|
2022
|
|
|
3,887
|
|
2023
|
|
|
2,370
|
|
Total
|
|
$
|
20,480
|
|
74
NOTE
7
. CONSOLIDATED FINANCIAL STATEMENTS DETAILS
Consolidated Balance Sheets Details
Accounts Receivable, Net
Accounts receivable consisted of the following:
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accounts receivable
—
Advertising
|
|
$
|
26,226
|
|
|
$
|
7,087
|
|
Accounts receivable
—
aiWARE SaaS
|
|
|
2,418
|
|
|
|
642
|
|
Accounts receivable
—
aiWARE Content Licensing and Media Solutions
|
|
|
538
|
|
|
|
—
|
|
|
|
|
29,182
|
|
|
|
7,729
|
|
Less: allowance for doubtful accounts
|
|
|
(40
|
)
|
|
|
(38
|
)
|
Accounts receivable, net
|
|
$
|
29,142
|
|
|
$
|
7,691
|
|
The amount that the Company invoices and collects from advertising clients includes the cost of the advertisement placed for them with broadcasters and the amount of the commission earned by the Company. The average commission earned by the Company is less than 15% of the total amount invoiced and collected from the advertising clients.
Property, Equipment and Improvements, Net
Property, equipment and improvements consisted of the following:
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Property and equipment
|
|
$
|
2,019
|
|
|
$
|
378
|
|
Leasehold improvements
|
|
|
2,875
|
|
|
|
27
|
|
Construction in progress
|
|
|
—
|
|
|
|
435
|
|
|
|
|
4,894
|
|
|
|
840
|
|
Less: accumulated depreciation
|
|
|
(886
|
)
|
|
|
(160
|
)
|
Property, equipment and improvements, net
|
|
$
|
4,008
|
|
|
$
|
680
|
|
The construction in progress balance at December 31, 2017 consisted primarily of expenditures related to the build-out of office space at the Company’s headquarters, which was completed in the first half of 2018. Depreciation expense was $725 and $52 for the years ended December 31, 2018 and 2017, respectively.
Accounts Payable
Accounts payable consisted of the following:
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accounts payable
—
Advertising
|
|
$
|
27,655
|
|
|
$
|
12,421
|
|
Accounts payable
—
Other
|
|
|
1,059
|
|
|
|
917
|
|
Total
|
|
$
|
28,714
|
|
|
$
|
13,338
|
|
Accounts payable – advertising reflects the cost of advertisements placed with broadcasters on behalf of the Company’s advertising clients.
75
Consol
idated Statements of Operations and Comprehensive Loss Details
Net Revenues
Net revenues for the periods presented were comprised of the following:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Advertising
|
|
$
|
17,146
|
|
|
$
|
12,949
|
|
aiWARE SaaS Solutions
|
|
|
5,958
|
|
|
|
1,464
|
|
aiWARE Content Licensing and Media Services
|
|
|
3,943
|
|
|
|
—
|
|
Total net revenues
|
|
$
|
27,047
|
|
|
$
|
14,413
|
|
During the years ended December 31, 2018 and 2017, the Company’s advertising business made $145,352 and $113,513 in gross media placements, of which $121,143 and $95,989, respectively, were billed directly to customers. Of the amounts billed directly to clients, $105,737 and $83,040 represented media-related costs netted against billings during the years ended December 31, 2018 and 2017, respectively.
Other Income (Expense), Net
Other income (expense), net for the periods presented was comprised of the following:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Interest income (expense), net
|
|
$
|
803
|
|
|
$
|
(4,025
|
)
|
Stock warrants issued
|
|
|
—
|
|
|
|
(5,790
|
)
|
Write-off of deferred debt discounts and issuance costs
|
|
|
—
|
|
|
|
(10,132
|
)
|
Gain on fair value change of warrant liability
|
|
|
184
|
|
|
|
7,114
|
|
Other
|
|
|
(79
|
)
|
|
|
—
|
|
Other income (expense), net
|
|
$
|
908
|
|
|
$
|
(12,833
|
)
|
Interest expense, net for the year ended December 31, 2017 included amortization of deferred debt discounts and issuance costs of $3,740 related to the Company’s convertible notes payable.
NOTE 8. CONVERTIBLE NOTES PAYABLE
Acacia Note
In 2016, the Company borrowed a total of $20,000 under the Acacia Note. The Acacia Note had an interest rate of 6.0% per year, with interest payable at maturity in November 2017, and was secured by substantially all of the Company’s assets.
In conjunction with the Acacia Note, the Company issued to Acacia the Acacia Note Warrants to purchase a number of shares of the Company’s common stock that would be determined in the future depending upon a number of factors, including whether the Acacia Note was converted to the Company’s common stock or repaid at maturity. The Company also issued to Acacia the Primary Warrant. Under the Primary Warrant, Acacia could purchase shares of the Company’s common stock if certain events occurred in the future in an amount equal to $50,000 less the balance of the Acacia Note principal and accrued interest.
The total fair value of the Acacia Note Warrants was $841 and was treated as a debt discount to the Acacia Note. The fair value of the Primary Warrant was $8,064 and was treated as a warrant liability.
76
At the time of the Company’s IPO, the Acacia Note, which had a principal balance of $
20,000 and accrued interest of $737, was automatically converted into 1,523,746 shares of the Company’s common stock at a conversion price per share of $13.6088. As a result of the conversion of the Acacia Note, the Company recorded a charge of $4,347, rep
resenting the unamortized balances of the debt discounts and debt issuance costs, which was presented as an expense in other expense, net in the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2017.
Bridge Loan
In March 2017, the Company entered into a Note Purchase Agreement with Acacia and Veritone LOC I, LLC (collectively the “Bridge Loan Lenders”), which provided for the Bridge Loan. The convertible promissory notes issued to the Bridge Loan Lenders pursuant to the Bridge Loan accrued interest at the rate of 8% per annum, compounded quarterly. The borrowings were due and payable on November 25, 2017, and the Company’s obligations under this facility were secured by a security interest in substantially all of the assets of the Company, which was of equal priority to the security interests of Acacia under the Acacia Note. The Company drew down the initial $2,000 installment under the Bridge Loan upon the execution of the Note Purchase Agreement. In April 2017, the Company borrowed an additional $2,000 under the Bridge Loan. In May 2017, the Bridge Loan Lenders funded the remaining undrawn amounts of $4,000 under the Bridge Loan, which increased the outstanding principal balance of the Bridge Loan to $8,000.
Upon the execution of the Note Purchase Agreement, the Company issued an aggregate of 120,000 shares of the Company’s common stock to the Bridge Loan Lenders in accordance with the agreement. In addition, in connection with the funding of the $8,000 principal amount of the Bridge Loan in March 2017, April 2017 and May 2017, the Company issued to the Bridge Loan Lenders an aggregate of 180,000 shares of the Company’s common stock and warrants to purchase an aggregate of 240,000 shares of common stock. Such warrants were automatically adjusted upon completion of the IPO to be exercisable to purchase an aggregate of 313,440 shares of the Company’s common stock (which was equal to 1.5% of the fully diluted shares of common stock outstanding immediately following the closing of the IPO).
The fair value of the common stock and warrants that were issued to the Bridge Loan Lenders in March 2017 and April 2017 totaled $3,664 and was treated as a debt discount to the Bridge Loan.
Concurrent with the closing of the IPO on May 17, 2017, the $8,000 principal balance of the Bridge Loan and accumulated accrued interest of $45 were automatically converted into an aggregate of 590,717 shares of the Company’s common stock at a conversion price per share of $13.6088. As a result of the conversion of the Bridge Loan, the Company recorded a charge of $2,915, representing the unamortized balance of the debt discounts and debt issuance costs, which was presented as an expense in other expense, net in the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2017. In addition, upon the issuance of the additional common stock and warrants to the Bridge Loan Lenders upon the funding of the remaining undrawn amounts of $4,000 under the Bridge Loan in connection with the IPO, the Company recorded charges of $1,100 and $1,770, related to such common stock and warrants, respectively. Such amounts were presented as an expense in other expense in the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2017 with a corresponding credit to additional paid-in capital in the Company’s consolidated balance sheet.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Gain on Settlement of Insurance Claim
In December 2017, the Company entered into a settlement agreement and mutual release with the Company’s professional employer organization (“PEO”) and the PEO’s employment practices liability insurer related to the Company’s claim for reimbursement of legal fees that it had incurred in defending a lawsuit brought by a former employee. In the agreement, the insurer agreed to pay $400 to the Company in settlement of its claim, with the payment to be made within 14 days after the agreement’s effective date. Under ASC450-30,
Gain Contingencies
, a gain contingency should be recognized when realization is assured beyond a reasonable doubt. As such, since the settlement payment was subsequently collected in full in January 2018, the Company recorded the gain as a credit to general and administrative expenses in its consolidated statement of operations and comprehensive loss for the year ended December 31, 2017.
77
Employment Agreements
In March 2017, the Company entered into a three-year employment agreement with Chad Steelberg, the Company’s Chief Executive Officer, pursuant to which the Company paid Mr. Steelberg’s salary by issuance of common stock at the end of each calendar quarter during the term of the agreement (following March 31, 2017). The number of shares of common stock issued at the end of each quarter was determined by dividing $125 by the fair market value (as defined in the agreement) of the Company’s common stock. During the year ended December 31, 2017, Mr. Steelberg received 17,807 shares of common stock pursuant to this agreement.
In March 2018, the Compensation Committee of the Company’s Board of Directors and Mr. Steelberg agreed to amend the compensation terms of his employment agreement to provide that Mr. Steelberg will earn a base salary of $250 payable in cash, and Mr. Steelberg’s compensation no longer includes the issuance of common stock each quarter.
Leases
The Company leases facilities under operating lease arrangements expiring at various years through fiscal 2024. Certain of the Company’s leases contain standard rent escalation and renewal clauses. Under certain leases, the Company is required to pay operating expenses in addition to base rent. Rent expense for lease payments is recognized on a straight-line basis over the lease term.
As of December 31, 2018, future minimum lease payments were as follows:
|
|
Minimum
|
|
|
|
Annual
|
|
|
|
Lease
|
|
Year Ending December 31,
|
|
Payments
|
|
2019
|
|
$
|
2,279
|
|
2020
|
|
|
2,398
|
|
2021
|
|
|
2,211
|
|
2022
|
|
|
1,852
|
|
2023
|
|
|
1,680
|
|
Thereafter
|
|
|
1,730
|
|
Total minimum payments
|
|
$
|
12,150
|
|
The total rent expense for all operating leases was $2,134 and $866 for the years ended December 31, 2018 and 2017, respectively.
Other Contingencies
From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. The Company currently is not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on the Company’s results of operations, financial position or cash flows.
NOTE 10. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In connection with the ROIM Acquisition Corp. (“RAC”) and NextMedium, LLC (“NM”) transactions, the Company issued 2,666,667 and 3,000,000 shares of Series A-1 preferred stock and Series A preferred stock, respectively. In July 2014, the Company issued 3,092,781 shares of Series B preferred stock at $4.85 per share for gross proceeds of approximately $15,000. In July 2016, all outstanding shares of Series A-1 preferred stock were converted on a one-for-one basis into shares of Series A preferred stock.
The Series B preferred stock was recorded at the amount of the cash received at the date the shares were issued, with an offset for stock issuance costs. Stock issuance costs are amortized using a method that approximates the effective interest method over the term of the related financing. In the Company’s consolidated financial statements, the value of the Series B Preferred Stock was accounted for as temporary equity and was increased each period by the liquidation preference and by the amortization of the stock issuance costs over a five-year life, at which point the Series B preferred stock holders have the right of redemption. The liquidation preference and the amortization of stock issuance costs were reflected as accretion of redeemable convertible preferred stock in the consolidated statements of operations and comprehensive loss and were accounted for as an increase to net loss attributable to common shareholders.
78
The Series A preferred stock, along with shares of the Company’s common stock, were issued to the holders of NM’s membership interests in exch
ange for such interests. NM was under common control with the Company, and NM’s assets had a net book value of $1,500. Following the guidance of ASC 805-50, the assets and liabilities of NM were recorded by the Company at their historical basis, and the Se
ries A preferred stock and common stock issued to the holders of NM’s membership interests were assigned values at the merger date based on the relative fair value of the preferred stock and common stock issued. The fair value attributed to the Series A pr
eferred stock was less than its original issue price of approximately $1.76 per share. The Series A preferred stock was accounted for as temporary equity and was increased each period to reflect the increased liquidation preference and the amortization of
the discount to the original issue price over a five-year life, at which point the Series A preferred stockholders have the right of redemption. The liquidation preference and the amortization of discount were reflected as accretion of redeemable convertib
le preferred stock in the consolidated statements of operations and comprehensive loss and were accounted for as an increase to net loss attributable to common shareholders.
Each share of the redeemable convertible preferred stock had a liquidation preference equal to the applicable original issue price of each series, plus an eight percent compounded annual return, subject to adjustment for stock dividends, splits, combinations, recapitalizations and the like with respect to such shares. The preferred stock was redeemable at any time after July 15, 2019 if the holders of the minimum number of outstanding shares made that election. As of December 31, 2016, the holders of Series B preferred stock had a liquidation preference over the holders of Series A preferred stock and common stock by approximately $5.86 per share. As of December 31, 2016, the holders of Series A preferred stock had a liquidation preference over the holders of common stock by approximately $2.14 per share.
The redeemable convertible preferred stock was convertible into the Company’s common stock at the option of the holders. Also, the redeemable convertible preferred stock would automatically convert into the Company’s common stock upon a public offering with gross proceeds of at least $15,000. In the conversion to common stock, the holders of the redeemable convertible preferred stock would receive one share of the Company’s common stock for each share of redeemable convertible preferred stock multiplied by the share’s liquidation preference divided by its original issue price.
Concurrent with the closing of the IPO, the Series B preferred stock, which had a liquidation preference of $18,668 and a net book value of $18,463, was automatically converted into 2,309,135 shares of the Company’s common stock, and the Series A preferred stock, which had a liquidation preference of $8,598 and a net book value of $6,272, was automatically converted into 2,922,798 shares of the Company’s common stock. The differences between the liquidation preference and book value of the Series B and Series A preferred stock of $205 and $2,326, respectively, were recorded as accretion of redeemable convertible preferred stock in the Company’s statement of operations and comprehensive loss for the year ended December 31, 2017 and an increase to additional paid-in capital in the Company’s consolidated balance sheet at December 31, 2017.
For the year ended December 31, 2017, the Company recorded the amount of the beneficial conversion feature of the Series B and Series A preferred stock amounting to $226 and $328, respectively, as the respective conversion prices for such shares were less than the fair market value of the underlying preferred stock. The beneficial conversion feature resulted in the recording of a discount against the preferred stock and a corresponding credit to the Company’s additional paid-in capital. For the year ended December 31, 2017, the aggregate amortization of the discount for the Series B and Series A preferred stock were $67 and $96, respectively, and were presented as an addition to accretion of redeemable convertible preferred stock in the Company’s statement of operations and comprehensive loss for that period. As a result of the conversion of the Series B and Series A preferred stock, the Company recorded the write-off of the unamortized portion of the beneficial conversion feature of $159 and $232, respectively, as accretion of redeemable convertible preferred stock in the Company’s statement of operations and comprehensive loss for the year ended December 31, 2017.
In May 2017, the Board of Directors and the stockholders of the Company approved the decrease in the Company’s authorized preferred stock from 11,500,000 shares to 1,000,000 shares (par value $0.001 per share), effective immediately following the closing of the IPO upon the filing of the Company’s amended and restated certificate of incorporation.
NOTE 11. STOCKHOLDERS’ EQUITY (DEFICIT)
Common Stock Offerings
Initial Public Offering
On May 17, 2017, the Company completed its IPO. In connection with the IPO, the Company sold 2,500,000 shares of its common stock at $15.00 per share for aggregate net proceeds of $32,580, after deducting underwriting discounts, commissions and offering costs of $4,920.
79
Concurrent with the clo
sing of the IPO, the following transactions were completed in accordance with the related agreements (see Notes
8
and
10
for additional information):
|
(a)
|
The Series B Preferred Stock, which had a liquidation preference of $18,668 and a net book value of $18,463, was automatically converted into 2,309,135 shares of the Company’s common stock;
|
|
(b)
|
The Series A Preferred Stock, which had a liquidation preference of $8,598 and a net book value of $6,272, was automatically converted into 2,922,798 shares of the Company’s common stock;
|
|
(c)
|
The Acacia Note, which had a principal balance of $20,000 and accrued interest of $737, was automatically converted into 1,523,746 shares of the Company’s common stock;
|
|
(d)
|
The Primary Warrant was automatically exercised by Acacia, which resulted in the issuance of 2,150,335 shares of the Company’s common stock to Acacia in exchange for cash proceeds of $29,263, and upon exercise of the Primary Warrant, the Company issued to Acacia the 10% Warrant;
|
|
(e)
|
The Bridge Loan Lenders funded the remaining undrawn amounts under the Bridge Loan, which provided cash proceeds of $4,000 to the Company. In connection with this funding, the Company issued to the Bridge Loan Lenders (a) an aggregate of 90,000 shares of its common stock, and (b) fully vested warrants to purchase 120,000 shares of common stock;
|
|
(f)
|
The Bridge Loan, which had a principal balance of $8,000 and accrued interest of $45, was then automatically converted into an aggregate of 590,717 shares of the Company’s common stock; and
|
|
(g)
|
The warrants to purchase an aggregate of 240,000 shares of the Company’s common stock that were issued in connection with the Bridge Loan were automatically adjusted upon completion of the IPO to be exercisable to purchase an aggregate of 313,440 shares of the Company’s common stock (which was equal to 1.5% of the fully diluted shares of common stock outstanding immediately following the closing of the IPO).
|
Other Common Stock Offerings
On November 21, 2017, the Company completed an offering of its common stock, pursuant to which the Company sold an aggregate of 1,121,250 shares of its common stock (which included the full exercise of the underwriters’ option to purchase additional shares) at $23 per share for aggregate net proceeds of $23,762, after deducting underwriting discounts and commissions and offering costs of $2,027.
On June 25, 2018, the Company completed an offering of its common stock, pursuant to which the Company sold an aggregate of 1,955,000 shares of common stock (which included the full exercise of the underwriters’ option to purchase additional shares) at $18.00 per share, for aggregate net proceeds of approximately $32,780 after deducting underwriting discounts and commissions and offering costs of approximately $2,300.
Other Common Stock Transactions
In 2018, the Company issued a total of 941,548 shares of its common stock in connection with its acquisitions of Performance Bridge, Wazee Digital and Machine Box. See Note 3 for additional information.
In 2018, the Company issued an aggregate of 276,561 shares of its common stock in connection with the exercise of stock options, the vesting of restricted stock units under its stock incentive plans, and purchases under its Employee Stock Purchase Plan (the “ESPP”). Also in 2018, the Company cancelled a total of 4,184 shares of its common stock in connection with the forfeiture of restricted stock due to terminations or in payment of withholding taxes. In 2017, the Company issued an aggregate of 145,069 shares of its common stock in connection with the exercise of stock options and issuance of stock awards, and cancelled a total of 23,470 of its common stock in connection with the forfeiture of restricted stock due to terminations or in payment of withholding taxes. See Note 12 for additional information.
In 2018 and 2017, the Company issued 7,412 shares and 6,000 shares of its common stock, respectively, to accredited investors in consideration for services rendered. The Company valued these stock issuances based on the closing price of its common stock on the issuance date and recorded the expense of $130 and $90 in general and administrative expenses in the Company’s consolidated statement of operations for the years ended December 31, 2018 and 2017, respectively.
In March and April 2017, the Company issued a total of 210,000 shares of its common stock to the Bridge Loan Lenders. See Note 8 for additional information.
80
In
January
2017, the Company repurchased 7,500 shares of its common stock
at the estimated fair market value prior to the IPO
from a former employee
in connection with
a settlement agreement.
Dividends on Common Stock
The Company has never declared or paid cash dividends on its common stock. The Company currently intends to retain all available funds and any future earnings for use in the operation of the business and does not anticipate paying any dividends on its common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of the Company’s Board of Directors and will depend on the Company’s financial condition, operating results, capital requirements, general business conditions and other factors that the Board of Directors may deem relevant.
Reverse Split
In April 2017, the Company’s Board of Directors and stockholders approved a 0.6-for-1.0 reverse split of the Company’s common stock, which was effected on April 20, 2017 (the “Reverse Split”). In connection with the Reverse Split, each share of the Company’s issued and outstanding common stock was converted and combined into 0.6 shares of common stock. No fractional shares were issued in connection with the reverse split, and any fractional shares resulting from the Reverse Split were cashed out. The Company has reflected the effect of the Reverse Split in these consolidated financial statements as if it had occurred at the beginning of the earliest period presented. As a result of the Reverse Split, the conversion price of each series of preferred stock and the exercise prices of options and stock warrants were proportionally increased.
Increase in Authorized Shares of Common Stock
In May 2017, the Company’s Board of Directors and stockholders approved the increase in the Company’s authorized common stock to 75,000,000 shares from 38,500,000 shares (par value of $0.001 per share), effective immediately following the closing of the IPO upon the filing of the Company’s amended and restated certificate of incorporation. The authorized number of shares of common stock remains unchanged at 75,000,000 shares.
Common Stock Warrants
As of December 31, 2018 and 2017, the Company had a total of 1,297,151 and 1,524,573 warrants issued and outstanding, respectively. The Company issued a five-year warrant in April 2018 which enables the holder to purchase up to 20,000 shares of the Company’s common stock. In June 2018, the Company canceled the warrant issued to Westwood One (“WWO”), which enabled WWO to purchase up to 247,422 shares of the Company’s common stock.
The table below summarizes the warrants outstanding at December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Shares of
|
|
Description
|
|
Issuance Date
|
|
Vesting Terms
|
|
Life in Years
|
|
Price
|
|
|
Common Stock
|
|
10% Warrant
|
|
May 2017
|
|
50% on issuance; 50% in May 2018
|
|
5
|
|
$
|
13.6088
|
|
|
|
809,400
|
|
Bridge Loan Warrants
|
|
Various 2017
|
|
Fully vested on issuance
|
|
10
|
|
$
|
13.6088
|
|
|
|
313,440
|
|
Acacia Note Warrants
|
|
Various 2016
|
|
Fully vested on issuance
|
|
4
|
|
$
|
13.6088
|
|
|
|
154,311
|
|
April 2018 Warrant
|
|
April 2018
|
|
Fully vested on issuance
|
|
5
|
|
$
|
11.7300
|
|
|
|
20,000
|
|
NOTE 12. STOCK PLANS
2014 Stock Incentive Plan
In 2014, the Company’s Board of Directors and stockholders approved and adopted the 2014 Stock Option/Stock Issuance Plan (the “2014 Plan”), which was amended in March 2015, October 2016 and April 2017. The Plan provides that awards granted may be options, restricted stock or restricted stock units. Stock option awards may be either incentive stock options or non-qualified options. Awards may be granted to eligible employees, directors and consultants under the 2014 Plan. The Company’s Board of Directors has resolved not to make any further awards under the 2014 Plan following the completion of the Company’s IPO. The 2014 Plan will continue to govern all outstanding awards granted thereunder.
81
2017
Stock Incentive Plan
In April 2017, the Company’s Board of Directors and stockholders approved and adopted the 2017 Stock Incentive Plan (the “2017 Plan”), which became effective on May 11, 2017. Under the 2017 Plan, employees, non-employee directors, consultants and advisors may be granted options, stock appreciation rights, stock awards and restricted stock units. The Company had initially reserved 2,000,000 shares of its common stock for issuance under the 2017 Plan. The share reserve increases automatically on the first trading day of January each calendar year by an amount equal to 3% of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year, up to an annual maximum of 750,000 shares. As of December 31, 2018, an aggregate of 941,827 shares of common stock were available for future grant under the 2017 Plan.
2018 Performance-Based Stock Incentive Plan
In June 2018, the Company’s stockholders approved the Company’s 2018 Performance-Based Stock Incentive Plan (the “2018 Plan”), and approved grants of performance-based nonstatutory stock options (each, a “Performance Option”) to the Company’s Chief Executive Officer (the “CEO Award”) and President (the “President Award”), under the 2018 Plan. In May 2018, the CEO Award and the President Award had been approved by a special committee of the Board of Directors of the Company (the “Special Committee”), and the 2018 Plan had been approved by the Company’s Board of Directors, subject to stockholder approval.
The 2018 Plan allows the Company to grant Performance Options to its executive officers and other employees as an incentive for them to remain in service with the Company and to further align their interests with the interests of the Company’s stockholders. A total of 4,200,000 shares of the Company’s common stock have been authorized for issuance under the 2018 Plan. The numbers of shares underlying the CEO Award and the President Award are 1,809,900 and 1,357,425, respectively.
All Performance Options granted under the 2018 Plan will become exercisable in three equal tranches based on the achievement of specific market price goals for the Company’s common stock. For each tranche to become exercisable, the closing price per share of the Company’s common stock must meet or exceed the applicable stock price goal for a period of 30 consecutive trading days. The exercise price of each of the CEO Award and the President Award is $21.25 per share, which was the closing market price of the Company’s common stock on the Nasdaq Global Market on May 4, 2018, the last trading day prior to the date on which the Special Committee approved such awards (which was not a trading day).
As of December 31, 2018, an aggregate of 1,032,675 shares of common stock were available for future grant under the 2018 Plan.
The 2014 Plan, 2017 Plan and 2018 Plan are collectively referred to herein as the “Stock Plans.” The Stock Plans are administered by the compensation committee of the Board of Directors, which determines the recipients and the terms of the awards granted (with the exception of the CEO Award and President Award, which were approved by the Special Committee). All stock options granted under the Stock Plans have exercise prices equal to or greater than the fair market value of the Company’s common stock on the grant date, and expire ten years after the grant date, subject to earlier expiration in the event of termination of the optionee’s continuous service with the Company as further described in each Stock Plan.
Equity awards that have been granted under the 2014 Plan and 2017 Plan to employees (with the exception the Company’s Chief Executive Officer and President) and consultants generally vest over a period of four years (with certain limited exceptions), subject to the optionee’s continuous service with the Company. The restricted stock units awarded to members of the Company’s Board of Directors under the automatic grant program provisions of the 2017 Plan generally vest over a period of one year.
82
In May 2017, the Company granted under the 2014 Plan to the Company’s Chief Executive Officer, Chad Steelberg, and President, Ryan Steelberg, pursuant to the terms of their employment agreements, (i) options to purchase an aggregate of 2,089,638 shar
es of the Company’s common stock, which are subject to time-based vesting conditions, and (ii) options to purchase an aggregate of 1,044,818 shares of the Company’s common stock, which are subject to performance-based vesting conditions. The exercise price
of all such stock options is $15
.00
per share, which was the IPO price of the Company’s common stock. The time-based stock options vest in equal monthly increments over three years, subject to each executive’s continuous service with the Company, and subj
ect to acceleration of vesting under certain circumstances as set forth in the option agreements.
The weighted average grant date fair value of performance-based stock options granted under the 2014 Plan during the year ended December 31, 2017 was $8.88 pe
r share. The weighted average remaining contractual term is 8.4 years.
The performance-based stock options
provided for the awards
to vest upon the earlier of the first date on which the market capitalization of the Company’s common stock equaled or excee
ded $400,000 over five consecutive business days, or five years after the IPO. In September 2017, the performance-based stock options vested in full, as the performance measure relating to the Company’s market capitalization was achieved. Total stock-based
compensation expense of $9,282
, which was calculated using the Black-Scholes option-pricing model,
was recorded in 2017 for these performance-based stock options.
Stock-based Compensation
The Company recognizes stock-based compensation expense for awards granted under the Stock Plans ratably over the requisite service period. For awards granted under the 2014 Plan and 2017 Plan, the service period is generally the vesting period. For the Performance Options granted under the 2018 Plan, a derived service period is estimated for each tranche under the Monte Carlo simulation model. The Company also recognizes stock-based compensation expense related to the Company’s ESPP ratably over each purchase interval.
The fair values of stock options granted under the 2014 Plan and 2017 Plan and purchase rights under the ESPP are determined as of the grant date using the Black-Scholes option-pricing model. The assumptions used in calculating the fair values of options granted during the years ended December 31, 2018 and 2017 are set forth in the table below:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Expected term (in years)
|
|
6.01 - 6.07
|
|
|
5.83 - 6.31
|
|
Expected volatility
|
|
53% - 69%
|
|
|
52% - 65%
|
|
Risk-free interest rate
|
|
2.63% - 3.08%
|
|
|
1.79% - 2.20%
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
The assumptions used in calculating the fair values of purchase rights granted under the ESPP during the year ended December 31, 2018 and 2017 are set forth in the table below:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Expected term (in years)
|
|
|
0.5
|
|
|
|
0.5
|
|
Expected volatility
|
|
50.5% - 53.0%
|
|
|
|
53
|
%
|
Risk-free interest rate
|
|
1.18% - 1.89%
|
|
|
|
1.15
|
%
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
The Company valued the CEO Award and the President Award granted under the 2018 Plan using a Monte Carlo simulation model. The grant date of such awards was June 29, 2018, the date that was such awards were approved by the Company’s stockholders. The following assumptions were used in the Monte Carlo simulation model for computing the grant date fair values of the CEO Award and the President Award:
Grant date stock price
|
|
$
|
16.82
|
|
Dividend yield
|
|
|
—
|
%
|
Risk-free interest rate
|
|
|
2.85
|
%
|
Estimated volatility
|
|
|
73.0
|
%
|
83
The fair value per share was determined for each of the three
equal tranches of each award and is presented in the table below:
Tranche 1
|
|
$
|
9.22
|
|
Tranche 2
|
|
$
|
10.05
|
|
Tranche 3
|
|
$
|
9.50
|
|
The total fair value of such awards is $30,375 and is being recorded as stock-based compensation expense over the derived service periods.
The stock-based compensation expense by type of award and by operating expense grouping are presented below:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Stock-based compensation expense by type of award:
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
$
|
427
|
|
|
$
|
327
|
|
Restricted stock awards
|
|
|
463
|
|
|
|
891
|
|
Common stock awards
|
|
|
—
|
|
|
|
375
|
|
Performance-based stock options under the 2018 Plan
|
|
|
3,799
|
|
|
|
—
|
|
Stock options
|
|
|
10,050
|
|
|
|
14,391
|
|
Employee stock purchase plan
|
|
|
754
|
|
|
|
105
|
|
Total
|
|
$
|
15,493
|
|
|
$
|
16,089
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense by operating expense grouping:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
1,018
|
|
|
$
|
438
|
|
Research and development
|
|
|
2,278
|
|
|
|
464
|
|
General and administrative
|
|
|
12,197
|
|
|
|
15,187
|
|
|
|
$
|
15,493
|
|
|
$
|
16,089
|
|
Restricted Stock Awards
The Company’s restricted stock activity for the year ended December 31, 2018 was as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
Unvested at December 31, 2017
|
|
|
147,456
|
|
|
$
|
6.30
|
|
Forfeited
|
|
|
(1,975
|
)
|
|
$
|
7.50
|
|
Vested
|
|
|
(73,273
|
)
|
|
$
|
5.32
|
|
Unvested at December 31, 2018
|
|
|
72,208
|
|
|
$
|
7.26
|
|
As of December 31, 2018, total unrecognized compensation cost related to restricted stock was $400, which is expected to be recognized over a period of 1.6 years. The weighted average grant date fair value per share of restricted stock granted was $15.47 for the year ended December 31, 2017. There was no restricted stock granted during the year ended December 31, 2018. The fair values of restricted stock vested during the years ended December 31, 2018 and 2017 totaled $1,022 and $2,185, respectively.
84
Restricted Stock Units
The Company’s restricted stock units activity for the year ended December 31, 2018 was as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
Unvested at December 31, 2017
|
|
|
35,576
|
|
|
$
|
14.76
|
|
Granted
|
|
|
69,198
|
|
|
$
|
13.46
|
|
Forfeited
|
|
|
(8,918
|
)
|
|
$
|
16.82
|
|
Vested
|
|
|
(46,713
|
)
|
|
$
|
14.74
|
|
Unvested at December 31, 2018
|
|
|
49,143
|
|
|
$
|
12.57
|
|
As of December 31, 2018, total unrecognized compensation cost related to restricted stock units was $362, which is expected to be recognized over a period of 0.6 year. The weighted average grant date fair value per share of restricted stock units granted was $13.46 and $14.76 for the years ended December 31, 2018 and 2017. The fair values of restricted stock units vested during the years ended December 31, 2018 and 2017 totaled $901 and $0, respectively.
Performance-Based Stock Options Under 2018 Plan
The activity related to performance-based stock options granted under the 2018 Plan for the year ended December 31, 2018 was as follows:
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
Outstanding at December 31, 2017
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
3,167,325
|
|
|
$
|
21.25
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
3,167,325
|
|
|
$
|
21.25
|
|
|
9.35 years
|
|
|
$
|
—
|
|
Exercisable at December 31, 2018
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
The weighted average grant date fair value of performance-based stock options granted under the 2018 Plan during the year ended December 31, 2018 was $9.59 per share. No performance-based stock options vested during the year ended December 31, 2018. At December 31, 2018, total unrecognized compensation expense related to performance-based stock options was $26,534 and is expected to be recognized over a weighted average period of 3.9 years.
Stock Options
The activity related to stock options granted under the 2014 Plan and 2017 Plan for the year ended December 31, 2018 was as follows:
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
Value
|
|
Outstanding at December 31, 2017
|
|
|
4,802,594
|
|
|
$
|
13.89
|
|
|
9.17 years
|
|
$
|
44,712
|
|
Granted
|
|
|
1,031,091
|
|
|
$
|
13.19
|
|
|
|
|
|
|
|
Exercised
|
|
|
(151,121
|
)
|
|
$
|
3.63
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(516,419
|
)
|
|
$
|
16.56
|
|
|
|
|
|
|
|
Expired
|
|
|
(11,454
|
)
|
|
$
|
14.23
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
5,154,691
|
|
|
$
|
13.78
|
|
|
8.41 years
|
|
$
|
707
|
|
Exercisable at December 31, 2018
|
|
|
2,743,923
|
|
|
$
|
13.47
|
|
|
8.04 years
|
|
$
|
677
|
|
85
The aggregate intrinsic value in the table above represents the difference between the fair market value of the Company’s common stock and the average option exercise price of in-the-money options multiplied by the number of such options.
The weighted average grant date fair value per share of stock options granted was $
7.40
and $
8.95
for the years ended December 31,
2018
and 201
7
, respectively. The aggregate intrinsic value of the options exercised during the years ended December 31,
2018
and
2017
was $1,
984
and $
1,875
, respectively. The total grant date fair value of stock options vested during the years ended December 31, 201
8
and 201
7
was $
8,929
and $
13,094
, respectively.
At December 31, 2018, total unrecognized compensation expense related to stock options was $18,232 and is expected to be recognized over a weighted average period of 2.3 years.
Employee Stock Purchase Plan
In April 2017, the Company’s Board of Directors and stockholders approved and adopted the ESPP, which became effective on May 11, 2017. The ESPP is administered by the compensation committee of the Board of Directors and is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. Under the ESPP, each offering period is generally 24 months with four, six-month purchase intervals, and new offering periods generally commence every six months, as determined by the compensation committee of the Board of Directors.
The purchase price for shares of the Company’s common stock under the ESPP will be established by the plan administrator prior to the start of the offering period, but will not be less than 85% of the lower of the fair market value of the Company’s common stock on (i) the first day of the offering period and (ii) the purchase date. Each purchase right granted to an employee will provide an employee with the right to purchase up to 1,000 shares of common stock on each purchase date within the offering period, subject to an aggregate limit of 200,000 shares purchased under the ESPP on each purchase date, and subject to the purchase limitations in each calendar year under Section 423 of the Internal Revenue Code.
The Company had initially reserved 1,000,000 shares of its common stock for issuance under the ESPP. The share reserve increases automatically on the first trading day of January each calendar year by an amount equal to 1% of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year, up to an annual maximum of 250,000 shares.
The ESPP contains a reset provision, which provides that, if the Company’s stock price on any purchase date under an offering period is less than the stock price on the start date of that offering period, then all employees participating in that offering period will be automatically transferred to the new offering period starting on the next business day following such purchase date, so long as the stock price on that start date is lower than the stock price on the start date of the offering period in which they are enrolled. This reset feature was triggered under the ESPP on August 1, 2018 and, as a result, all employees participating in the ESPP were automatically transferred to the offering period that commenced on August 1, 2018. This reset constituted a modification pursuant to the guidance in ASC 718,
Stock Based Compensation
. The Company engaged specialists to determine the incremental cost associated with the modification by calculating the expense related to the modified awards using the assumptions before and after the trigger date. The modification did not have a material effect on the Company’s stock-based compensation expense for the year ended December 31, 2018.
Employee payroll deductions accrued under the ESPP as of December 31, 2018 and 2017 totaled $448 and $253, respectively. During the year ended December 31, 2018 a total of 80,654 shares of common stock were purchased under the ESPP at a weighted average purchase price of $12.72.
NOTE 13. PROVISION FOR INCOME TAXES
The Tax Reform was enacted in December 2017. Impacts of the Tax Reform for the year ended December 31, 2017 included remeasuring federal deferred tax assets and liabilities due to the reduction of the U.S. corporate income tax rate from 35.0% to 21.0%. In connection with the Tax Reform, the Securities and Exchange Commission issued guidance which allowed the Company a year to finalize the income tax effect of the Tax Reform. Other aspects of the Tax Reform did not take effect until 2018.
86
The Company
has
completed
its
accounting
related
to
the
Tax Reform
. No further adjustments were made with respect to the previously recorded provisional amounts.
The components of the Company’s loss before the provision for income taxes consisted of the following:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
United States of America
|
|
$
|
(61,169
|
)
|
|
$
|
(59,595
|
)
|
Foreign
|
|
|
87
|
|
|
|
—
|
|
Total
|
|
$
|
(61,082
|
)
|
|
$
|
(59,595
|
)
|
The provision for income taxes consisted of the following for the years ended December 31, 2018 and 2017:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
6
|
|
|
|
6
|
|
Foreign
|
|
|
16
|
|
|
|
—
|
|
Total Current Provision
|
|
|
22
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(12,146
|
)
|
|
|
(7,216
|
)
|
State
|
|
|
(4,809
|
)
|
|
|
(1,210
|
)
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
16,955
|
|
|
|
8,426
|
|
Total deferred provision
|
|
|
—
|
|
|
|
—
|
|
Total provision
|
|
$
|
22
|
|
|
$
|
6
|
|
A reconciliation of the statutory U.S. federal income tax rate to the Company's effective tax rate for the years ended December 31, 2018 and 2017 is as follows:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Tax, computed at the federal statutory rate
|
|
|
21.00
|
%
|
|
|
34.00
|
%
|
State taxes, net of federal tax benefit
|
|
|
6.23
|
|
|
|
1.28
|
|
Mark to market adjustment on stock warrants
|
|
|
—
|
|
|
|
4.06
|
|
Meals, entertainment and other
|
|
|
(0.02
|
)
|
|
|
1.67
|
|
Debt discount amortization
|
|
|
—
|
|
|
|
(2.42
|
)
|
Loss on stock warrants issued
|
|
|
—
|
|
|
|
(3.30
|
)
|
Loss on write-off of deferred debt discount
|
|
|
—
|
|
|
|
(5.78
|
)
|
Change in valuation allowance
|
|
|
(27.25
|
)
|
|
|
(12.61
|
)
|
Rate change due to tax law change
|
|
|
—
|
|
|
|
(16.89
|
)
|
Provision for income taxes
|
|
|
(0.04
|
)%
|
|
|
0.01
|
%
|
87
The significant components of the Company’s deferred income tax assets and liabilities as of December 31,
201
8
and
201
7
were as follows:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net operating losses
|
|
$
|
30,112
|
|
|
$
|
13,844
|
|
Stock-based compensation
|
|
|
7,141
|
|
|
|
3,416
|
|
Accrued expenses
|
|
|
178
|
|
|
|
445
|
|
Research credits
|
|
|
547
|
|
|
|
490
|
|
Other - fixed assets and intangibles
|
|
|
—
|
|
|
|
13
|
|
Other
|
|
|
682
|
|
|
|
70
|
|
Gross deferred tax assets
|
|
|
38,660
|
|
|
|
18,278
|
|
Less: valuation allowance
|
|
|
(35,233
|
)
|
|
|
(18,278
|
)
|
Total deferred tax assets
|
|
|
3,427
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Other - fixed assets and intangibles
|
|
|
(3,427
|
)
|
|
|
—
|
|
Total deferred tax liabilities
|
|
|
(3,427
|
)
|
|
|
—
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company has evaluated the available positive and negative evidence supporting the realization of its gross deferred tax assets, including its cumulative losses, and the amount and timing of future taxable income, and has determined it is more likely than not that the assets will not be realized. Accordingly, the Company recorded a full valuation allowance as of December 31, 2018 and 2017 against its U.S. federal and state deferred tax assets as of December 31, 2018 and 2017.
The change in the valuation allowance for the years ended December 31, 2018 and 2017 is as follows:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Valuation allowance, at beginning of year
|
|
$
|
18,278
|
|
|
$
|
9,852
|
|
Increase in valuation allowance
|
|
|
16,955
|
|
|
|
8,426
|
|
Valuation allowance, at end of year
|
|
$
|
35,233
|
|
|
$
|
18,278
|
|
As of December 31, 2018, the Company has federal and state income tax net operating loss carryforwards of approximately $122,300 and $119,601, respectively. The U.S. federal and state net operating losses will begin to expire in 2034 and 2019, respectively, unless previously utilized. Net operating loss carryforwards generated after January 1, 2018 may be carried forward indefinitely, subject to the 80% taxable income limitation on the utilization of the carryforwards. In addition, the Company had federal and state research and development credit carryforwards of approximately $342 and $260, respectively, as of December 31, 2018. The federal research and development credit will begin to expire in 2036 if unused and the state research and development credit may be carried forward indefinitely. Certain tax attributes may be subject to an annual limitation in the event there has been or is a change of ownership as defined under Internal Revenue Code Section 382.
The Company is subject to taxation in the United States and various states. Its U.S. federal tax returns and state returns are open for examination for tax years 2014 and forward. Neither the Company nor any of its subsidiaries are currently under examination from tax authorities in the jurisdictions in which the Company does business.
NOTE 14. RELATED PARTY TRANSACTIONS
In March 2017, the Company entered into three-year employment agreements with each of Chad Steelberg, the Company’s Chief Executive Officer, and Ryan Steelberg, the Company’s President. Under the agreement with Chad Steelberg, as of the end of each calendar quarter during the term of the agreement (following March 31, 2017) during which Chad Steelberg is still employed by the Company, the Company will issue to Mr. Steelberg a number of shares of its common stock calculated by dividing $125 by the fair market value (as defined in the agreement) of the Company’s common stock. During the year ended December 31, 2017, Chad Steelberg received 17,807 shares of common stock pursuant to this agreement.
88
The Company reimbursed Chad Steelberg and Ryan Steelberg for the costs of their healthcare plans. During the years
ended December 31,
2018
and
2017
, the Company expensed $
56
and $
58
for the cost of such plans, respectively. As of December 31,
2018
and
2017
, the Company has an accrual of $
5
and $
0
, respectively, related to these healthcare plans
.
There were no other related party transactions as of December 31, 2018 and 2017.
NOTE 15. SUBSEQUENT EVENTS.
As discussed above in Note 3, the Company has finalized the calculation of the contingent earnout payment and expects to pay an additional $4,414 to the former stockholder of Performance Bridge based on Performance Bridge’s achievement of certain revenue milestones in its 2018 fiscal year. The additional earnout payment will be comprised of 20% cash ($883) and 80% shares of the Company’s common stock (approximately 600,000 shares). The Company expects to make these earnout payments by the end of the first quarter of 2019.