LOAN RECEIVABLE AND INVESTMENT IN WARRANTS

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 Loans”), 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 initially had a one-year term. On November 25, 2016, Acacia funded the second $10 million loan (the “Second Loan”), which has a one-year term. In addition, upon the funding of the Second Loan, the maturity date of the First Loan was automatically extend to the maturity date of the Second Loan. As a result, both the First Loan and the Second Loan are due and payable on November 25, 2017. Veritone’s obligations under the Veritone Loans 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 Loans, Acacia has the right, under certain circumstances, to convert all or a portion of the principal and accrued interest of the Veritone Loans 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 Loans. If Veritone consummates a qualified public offering of its common stock, any outstanding principal and accrued interest under the Veritone Loans will automatically convert into shares of Veritone’s common stock at the applicable conversion rate.

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. The actual number of shares to be purchased upon exercise of the warrant is determined by dividing the warrant value by the applicable exercise price. Upon funding of the Second Loan, Veritone issued 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 Loans, 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 Loans 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 December 31, 2016, the Veritone Loans are 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 Veritone Loans do not meet the criteria for classification as a debt security. As such, the Veritone Loans 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 $20 million amount of the Veritone Loans allocated to (1) the Veritone Loans, which are accounted for as long-term loan receivables and (2) the common stock purchase warrants. The estimated relative fair value allocation of the $20 million investment to the Veritone Loans 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 transactions, 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%
	Funding scenario probabilities	25	%	-	75%
	Recovery	100%

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



	As of and For the Year Ended December 31, 2016
Face value of loan receivable	$	20,000
Unamortized loan discount	(1,384		)
Carrying value of loan receivable	18,616
Investment in warrants (initial loan discount)	1,960
Total	$	20,576

Interest receivable	$	286
Accretion of loan discount	576
Interest income	$	862

The loan discount, representing the difference between the face amount of the Veritone Loans and the relative fair value allocated to the Veritone Loans, is accreted over the expected life of the loans, 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. The effective yield for the First Loan and Second Loan was 20% and 9%, respectively.

Management performs a review of the Veritone Loans on a quarterly basis to assess the need for allowances for uncollectibility, based on current trends and other factors affecting collectibility, and to determine if any impairment has occurred. A loan receivable is considered impaired when it is probable that amounts related to the loan receivable will not be collected according to the contractual terms of the agreement. As of December 31, 2016, no allowances for uncollectibility have been recorded. An allowance for uncollectibility would be reflected as a charge to earnings in the consolidated statement of operations.