NOTE 3. FINANCIAL INSTRUMENTS

Cash and 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 and cash equivalents and marketable securities as of March 31, 2018:

As of December 31, 2017, the Company’s cash and cash equivalents and marketable securities balances were as follows:

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 March 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.

Stock Warrants

The Company’s stock warrants are categorized as Level 3 within the fair value hierarchy. Stock warrants have been recorded at their fair value using a probability weighted expected return model. This model incorporates contractual terms, maturity, risk-free rates and volatility. The value of the Company’s stock warrants would increase if a higher risk-free interest rate was used, and the value of the Company’s stock warrants 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 (the “Acacia Note Warrants”) and a five-year warrant (the “Primary Warrant”). In March 2017, each of the Primary Warrant and the Acacia Note Warrants was amended to provide that the exercise prices thereof shall be equal to the lower of $13.6088 or the Company’s IPO price per share.

The following table summarizes quantitative information with respect to the significant unobservable inputs that were used to value these stock warrants that were modified in the three months ended March 31, 2017. These inputs are categorized as Level 3 within the fair value hierarchy:

The following table represents a rollforward of the fair value of the Primary Warrant in the three months ended March 31, 2017:

In the first quarter of 2017, the total fair value of the Acacia Note Warrants increased by $334 to $841.

In March 2017, the Company entered into a Note Purchase Agreement with Acacia and Veritone LOC I, LLC (“VLOC”), (collectively the “Bridge Loan Lenders”), which provided for an $8 million line of credit pursuant to secured convertible notes (the “Bridge Loan”). In connection with the funding of the Bridge Loan in March 2017, the Company issued to the Bridge Loan Lenders warrants to purchase shares of the Company’s common stock. The following table summarizes quantitative information with respect to the significant unobservable inputs used for the valuation of the Company’s warrants which were issued to the Bridge Loan Lenders; these inputs are categorized as Level 3 within the fair value hierarchy:

The fair value of the Bridge Loan Warrants was $549 as of March 31, 2017.