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 financings.  Such equity financings may include sales of common stock under the Company’s equity distribution 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 business 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.

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:

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:

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.

The amortization periods for intangible assets are as follows:

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:

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.

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.

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.

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 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): Identifying 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 2016-10 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 emerging growth company, 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 December 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.

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 measurements. 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 financial statements.