INVESTMENTS

On August 15, 2016, Acacia entered into an Investment Agreement with Veritone, Inc. (“Veritone”), which provides for Acacia to invest up to $50 million in Veritone, consisting of both debt and equity components. Pursuant to the Investment Agreement, on August 15, 2016, Acacia entered into a secured convertible promissory note with Veritone (the “Veritone Loan”), which permits Veritone to borrow up to $20 million through two $10 million advances, each bearing interest at the rate of 6.0% per annum (included in Other Income (Expense) in the consolidated statement of operations). On August 15, 2016, Acacia funded the initial $10 million loan (the “First Loan”), which has a one-year term. If Veritone draws the second $10 million loan (the “Second Loan”), the Second Loan will also have a one-year term from the date of issuance, and the maturity date of the First Loan will automatically extend to the maturity date of the Second Loan. As a result, if Veritone draws the Second Loan, both the First Loan and the Second Loan will become due and payable on the first anniversary of the issuance date of the Second Loan. Veritone’s obligations under the Veritone Loan are secured by substantially all of Veritone’s assets pursuant to a security agreement that Acacia entered into with Veritone dated August 15, 2016.

In addition, commencing on the earlier of Veritone’s consummation of a private round of financing of at least $10 million (a “Next Equity Financing”) and the maturity date of the Veritone Loan, Acacia has the right, under certain circumstances, to convert all or a portion of the principal and accrued interest of the First Loan into shares of Veritone’s Series B Preferred Stock or, if Veritone consummates a Next Equity Financing, into shares of Veritone capital stock issued in such financing, at various conversion rates, with the exact conversion rate to depend upon (i) whether Veritone consummates a Next Equity Financing, (ii) the price per share in such Next Equity Financing and (iii) whether or not Acacia elects to convert all of the outstanding principal and accrued interest under the Veritone Loan. If Acacia funds the Second Loan, it will have the right, under certain circumstances, to convert all or a portion of the principal and accrued interest of the Second Loan into shares of Veritone’s Series B Preferred Stock or, if Veritone consummates a Next Equity Financing, into shares of Veritone capital stock issued in such financing, at various conversion rates, with the exact conversion rate to depend upon (i) whether Veritone consummates a Next Equity Financing, (ii) the price per share in such Next Equity Financing and (iii) whether or not Acacia elects to convert all of the principal and accrued interest under the Veritone Loan. If Veritone consummates a qualified public offering of its common stock, any outstanding principal and accrued interest under the Veritone Loan will automatically convert into shares of Veritone’s common stock.

In conjunction with the First Loan, Veritone issued Acacia a four-year $700,000 warrant to purchase shares of Veritone’s common stock at various exercise prices, with the actual exercise price to be determined by the type and/or valuation of Veritone’s future equity financings, if any. If Acacia funds the Second Loan, Veritone will issue to Acacia two additional four-year $700,000 warrants to purchase shares of Veritone’s common stock with similar terms.

In addition, pursuant to the Investment Agreement, Veritone issued Acacia a five-year Primary Warrant to purchase up to $50 million, less all converted amounts or amounts repaid under the Veritone Loan, worth of shares of Veritone’s common stock at various exercise prices, with the actual exercise price per share to be determined by the amount of principal and accrued interest under the Veritone Loan converted into shares of Veritone common stock. Acacia may exercise the Primary Warrant at any time during its five year term after the earlier of August 15, 2017 or the completion of a public offering with gross proceeds to Veritone of at least $15.0 million. Immediately subsequent to such a public offering, Veritone has the right to elect that Acacia exercise the Primary Warrant, and upon such election, Acacia agrees to exercise the Primary Warrant in full, provided that the then current fair market value of Veritone common stock is equal to or greater than the exercise price per share of the Primary Warrant. Immediately following Acacia’s exercise of the Primary Warrant in full, Veritone has the obligation to issue to Acacia an additional 10% Warrant that provides for the issuance of additional shares of Veritone common stock, with 50% of the shares underlying the 10% Warrant vesting as of the issuance date of the 10% Warrant, and the remaining 50% of shares vesting on the anniversary of the issuance date of the 10% Warrant.

Our Investment Agreement, as described above, represents a variable interest in Veritone for which Acacia is not the primary beneficiary, primarily due to a lack of a controlling interest in Veritone. As of September 30, 2016, the First Loan is not considered in-substance common stock and the common stock purchase warrants are unexercised, and therefore, the equity method of accounting is not applied. In addition, the First Loan does not meet the criteria for classification as a debt security. As such, the First Loan and the related common stock purchase warrants described above are accounted for as separate units of account based on the relative estimated fair values of the separate units as of the effective date of the transaction, with the $10 million amount of the First Loan allocated to (1) the First Loan, which is accounted for as a long-term loan receivable and (2) the common stock purchase warrants, which are accounted for at cost. The estimated relative fair value allocation of the $10 million investment to the First Loan and the related common stock purchase warrants was determined using a Monte Carlo simulation model. Key inputs to the model included the estimated value of Veritone's equity on the effective date of the transaction, related volatility of equity assumptions, discounts for lack of marketability, assumptions related to liquidity scenarios, and assumptions related to recovery scenarios on the Veritone Loans. A summary of assumptions used in connection with estimating the relative fair values were as follows:



Valuation Technique	Significant Unobservable Inputs	Range of Inputs
Monte Carlo simulation model	Volatility	40	%	-	50%
	Marketability discount	7%
	Scenario probabilities	25	%	-	75%

The loan and warrants are reflected in the accompanying financial statements as follows (in thousands):



	August 15, 2016 (Effective Date)		As of and For the Three Months Ended September 30, 2016
Loan receivable	$	8,280	$	8,280
Accretion on loan discount	—		194
Adjusted Veritone Loan balance	—		8,474
Investment at cost	1,720		1,720
Total	$	10,000	$	10,194

Interest receivable			$	75
Interest income			$	269

The loan discount, representing the difference between the face amount of the First Loan and the relative fair value allocated to the First Loan, is accreted over the expected life of the loan, which is one year, using the effective interest method, with the related interest amounts reflected in Other Income in the consolidated statement of operations. Acacia will re-evaluate its variable interest in Veritone and related accounting conclusions and disclosure requirements each reporting period.