Steelberg Brothers Aim for Hot Tech Sector

The brothers behind Newport Beach-based Veritone Inc. are striving for their third hit in Orange County with an initial public offering.

Chad and Ryan Steelberg’s latest venture lends a flavor of artificial intelligence and big data, two of the hottest segments in technology. Its roster of notable customers includes Uber, the Los Angeles Rams, Microsoft and ESPN.

The IPO, which aims to raise about $12 million, faces large obstacles, led by a 36% decline in revenue last year and questions about its ability to continue operations without a cash infusion.

The company’s prospectus had to acknowledge weakness in financial reporting for 2015 and 2016 because of the “lack of competent accounting personnel with the appropriate level of knowledge, experience and training.” That prompted the company in October to hire a new chief financial officer, Peter Collins, and to retain consultants to assist in financial reporting. 

And the company is trying to maintain its revenue in its biggest unit while striving to grow sales in its artificial intelligence unit in a software-as-a-service.

The AI trend is forecast to grow from $8 billion last year to $47 billion by 2020, according to Framingham, Mass.-based market tracker IDC.

Thus far, the company’s effort to catch the hot technology trend hasn’t had much success. It introduced its product two years ago but reported only $500,000 in AI unit sales last year. 

“We are in the early stages of developing our AI platform and SaaS licensing business and have not generated significant revenue from this business,” the prospectus said.

Veritone as of press time hadn’t priced the IPO or disclosed the volume of shares offered, leaving its market value undetermined. Listed underwriters are Wunderlich Securities Inc. and Craig-Hallum Capital Group.

The company declined to comment for this story, citing Securities and Exchange Commission rules regarding public communications.

Big Customer Problems

Veritone, founded in 2014, sped out of the gate with nearly $14 million in revenue in 2015, its first full year of business. Sales slid to $8.9 million last year. The company, which employs 110, posted a loss of $6.2 million in 2015 that widened to $23.2 million last year.

Its biggest unit is its media agency, which placed over $75 million in advertising for clients such as Uber, 1-800 flowers.com Inc. and Casper Sleep, among others.

The sales drop was fueled by the company’s two largest customers, Lifelock and DraftKings, which accounted for roughly 43% of revenue in 2015.

Identity theft prevention provider Lifelock terminated its deal in September 2015 when the Tempe, Ariz.-based company took its media services in-house. DraftKings, a Boston-based fantasy sports wagering site, significantly cut its marketing spend with Veritone last year amid several legal challenges.

Both companies last year accounted for 10.5% of its revenue.

2 for 4

Chad, 45, and Ryan, 43, are Newport Beach natives who came to prominence in the Orange County business community in the 1990s with internet-related businesses. Chad serves as chief executive and chairman of Veritone, and Ryan is president and holds a board seat.

The Steelbergs’ resume boasts two big local hits and two misses.

Their advertising radio company, dMarc Broadcasting Inc., was sold in 2006 to Google Inc. for an initial payment of $102 million and maxed out at more than $400 million when certain benchmarks were hit. Google closed the business three years later.

The duo in 1999 sold AdForce Inc., a web advertising company launched in Costa Mesa in 1995, to CMGI Inc. for $500 million.

Their two other ventures didn’t fare as well.

Winfire Inc., a high-speed internet provider started in 2000, generated some initial buzz with its free digital subscriber line service, but fizzled out six months later.

Their last venture, Irvine-based Brand Affinity Technologies Inc., raised more than $30 million from venture capitalists and had 2011 sales approaching that figure before the business faltered.

The company, which aimed to connect sports figures, other celebrities and advertisers for endorsement deals, filed for Chapter 11 bankruptcy in 2014, listing more than 200 creditors, including California Angels Baseball LLP in Anaheim, several other MLB teams, and the Costa Mesa law firm Latham & Watkins LLP.

Its assets were sold in an online auction seven months later.

Cash Needed

Veritone’s IPO would provide a financial boost for the cash-strapped startup.

If it fails to complete the IPO in the first half of the year, its cash balance and cash flow from operations wouldn’t be “sufficient to meet our debt obligations as they become due over the next twelve months, which raises substantial doubt about our ability to continue,” the company’s 121-page registration statement said.

The company said it would need to raise additional capital if the IPO doesn’t occur.

Veritone entered the year with about $12 million in cash and a working capital deficit of $21.2 million. Its accumulated deficit is roughly $43.6 million.

It recently secured convertible note financing of up to $8 million, though the vast disbursement of the loan is contingent upon completing the IPO by April 30. The lenders, which include Newport Beach-based Acacia Research Corp. and VLOC LLC, aren’t obligated to make further advances on the credit line if Veritone fails to meet the deadline. It accessed $2 million of the loan when the agreement was finalized earlier in this month.

VLOC is an entity controlled by the Steelbergs, who own a 50% stake, and other preferred stock holders, according to the filing.

Veritone raised about $15 million in 2014 in a Series B preferred stock sale to seven accredited investors, according to the filing.

If Veritone closes the IPO, its outlook and long-term viability change significantly, since it will have the ability to call about $30 million in warrants from Acacia, effectively boosting capital by $45 million and its public profile.

Acacia declined to comment on this story.

Veritone’s stock will be listed under the symbol VERI on the NASDAQ.

The Investor

Acacia, which posted sizeable losses the past four years amid strategic shifts, has made a significant bet on Veritone.

The patent licensor announced an agreement in August to make two convertible $10 million loans to Veritone that could hit $50 million under certain benchmarks. The deal also included an equity stake in the company, signaling a new strategy for Acacia, which had primarily licensed patents and litigated infringement claims since it was established in 1992.

The notes, which were secured by all of Veritone’s assets, were scheduled to be repaid by Nov. 25 but will be converted into Veritone common stock following the offering, according to the filing.

Acacia agreed to the debt and warrant conversion, and it appears to have little recourse if the IPO doesn’t materialize. It will remain a secured creditor.

The company has lost nearly $338 million in the past four years as licensing patents and winning infringement claims against industry giants have become much more difficult and harder to project in quarterly outlooks.

Acacia was a hot stock at the turn of the decade, when monetizing patents became a common strategy for hordes of technology companies that tried to wring out revenue from primarily legacy technologies.

In 2011, Acacia reached as high as $46.62 a share with a market value of $2 billion. The shares have since dropped 88% to $5.25 last week, when its value was about $260 million.

Marvin Key, a former senior vice president at Acacia, has served as interim chief executive since the abrupt resignation of Matthew Vella in December 2015.