NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
As used herein, “we,” “us,” “our,”
“Acacia” and the “Company” refer to Acacia Research Corporation and/or its wholly and majority-owned and controlled
operating subsidiaries, and/or where applicable, its management.
Acacia was incorporated on January 25, 1993 under the laws of the State
of California. In December 1999, Acacia changed its state of incorporation from California to Delaware.
Acacia acquires businesses and operating assets that the Company believes
to be undervalued and where the Company believes it can leverage its resources and skill sets to realize and unlock value. The Company
intends to leverage its (i) access to flexible capital that can be deployed unconditionally, (ii) expertise in corporate governance and
operational restructuring, (iii) willingness to invest in out of favor industries and businesses that suffer from a complexity discount
and untangle complex, multi-factor situations, and (iv) expertise and relationships in certain sectors, to complete strategic acquisitions
of businesses, divisions, and/or assets with a focus on mature technology, healthcare, industrial and certain financial segments. Acacia
seeks to identify opportunities where the Company believes it is an advantaged buyer, where the Company can avoid structured sale processes
and create the opportunity to purchase businesses, divisions and/or assets of companies at an attractive price due to the Company’s
unique capabilities, relationships, or expertise, or where Acacia believes the target would be worth more to the Company than to other
buyers.
Acacia operates its business based on three key principles of People,
Process and Performance and has built a management team with identified expertise in Research, Execution and Operation of the Company’s
targeted acquisitions.
Acacia, through its operating subsidiaries, also currently engages
in its legacy business of investing in, licensing and enforcing patented technologies. Acacia’s operating subsidiaries partner with
inventors and patent owners, applying their legal and technology expertise to patent assets to unlock the financial value in their patented
inventions. In recent years, Acacia has also invested in technology companies. Acacia leverages its experience, expertise, data and relationships
developed as a leader in the intellectual property (“IP”) industry to pursue these opportunities. In some cases, these opportunities
will complement and/or supplement Acacia’s primary licensing and enforcement business.
Acacia’s operating subsidiaries generate revenues and related
cash flows from the granting of IP rights (hereinafter, “IP Rights”) for the use of patented technologies that its operating
subsidiaries control or own. Acacia’s operating subsidiaries assist patent owners with the prosecution and development of their
patent portfolios, the protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of
their patented technologies and, where necessary, with the enforcement against unauthorized users of their patented technologies through
the filing of patent infringement litigation.
Acacia’s operating subsidiaries are principals in the licensing
and enforcement effort, obtaining control of the rights in the patent portfolio, or control of the patent portfolio outright. Acacia’s
operating subsidiaries own or control the rights to multiple patent portfolios, which include U.S. patents and certain foreign counterparts,
covering technologies used in a wide variety of industries.
Neither Acacia nor its operating subsidiaries invent new technologies
or products; rather, Acacia depends upon the identification and investment in new patents, inventions and companies that own IP through
its relationships with inventors, universities, research institutions, technology companies and others. If Acacia’s operating subsidiaries
are unable to maintain those relationships and identify and grow new relationships, then they may not be able to identify new technology-based
opportunities for sustainable revenue and/or revenue growth.
During the nine months ended September 30, 2021, Acacia obtained
control of one 1
new patent portfolio. During fiscal year 2020, Acacia obtained control of five 5 new patent portfolios.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Acacia and its wholly and majority-owned and controlled subsidiaries. All intercompany transactions and balances
have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information
and note disclosures required by U.S. GAAP in annual financial statements have been omitted or condensed in accordance with quarterly
reporting requirements of the Securities and Exchange Commission (“SEC”). These interim unaudited condensed consolidated financial
statements and notes hereto should be read in conjunction with the consolidated financial statements and notes thereto for the year ended
December 31, 2020, as reported by Acacia in its Annual Report on Form 10-K filed with the SEC on March 29, 2021, as well as in our other
public filings with the SEC. The condensed consolidated interim financial statements of Acacia include all adjustments of a normal recurring
nature which, in the opinion of management, are necessary for a fair statement of Acacia’s consolidated financial position as of
September 30, 2021, and results of its operations and its cash flows for the interim periods presented. The consolidated results of operations
for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the entire fiscal
year.
Reclassifications
Certain prior period amounts in the consolidated financial statements
have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported consolidated
results of operations or cash flows.
COVID-19 Pandemic
The full impact of the COVID-19 pandemic continues to evolve as of
the date of this report. While the Company does not expect the current situation to present direct risks to its business, and it has not
had a material impact to date, the COVID-19 pandemic could adversely impact the Company’s operations, as well as the operations
of its licensees and other business partners. Our cash is held in major financial institutions primarily in government instruments. Our
business is fully able to operate in a socially distanced and/or remote capacity and in accordance with applicable laws, policies and
best practices. Our workforce is provided ample paid sick leave, and we have in place robust disaster recovery and business continuity
policies that have been revised to account for a long-term remote work contingency such as this. However, the ongoing pandemic may present
risks that we do not currently consider material or risks that may evolve quickly that could have a materially adverse effect on our business,
results of operations and financial condition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles
The consolidated financial statements and accompanying notes are prepared
on the accrual basis of accounting in accordance with U.S. GAAP.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include
the accounts of Acacia and its wholly and majority-owned and controlled subsidiaries. All intercompany transactions and balances have
been eliminated in consolidation.
Noncontrolling interests in Acacia’s majority-owned and controlled
operating subsidiaries (“noncontrolling interests”) are separately presented as a component of stockholders’ equity.
Consolidated net income or (loss) is adjusted to include the net (income) or loss attributed to noncontrolling interests in the consolidated
statements of operations. Refer to the accompanying Consolidated Statements of Series A Redeemable Convertible Preferred Stock and Stockholders’
Equity for total noncontrolling interests.
In 2020, in connection with the transaction with Link Fund Solutions
Limited, which is more fully described in Note 3, the Company acquired equity securities of Malin J1 Limited (“MalinJ1”).
MalinJ1 is included in the Company’s consolidated financial statements because the Company, through its interest in the equity securities
of MalinJ1, has the ability to control the operations and activities of MalinJ1. Viamet HoldCo LLC, a Delaware limited liability company
and wholly-owned subsidiary of Acacia, is the majority shareholder of MalinJ1.
A wholly-owned subsidiary of Acacia is the general partner of the Acacia
Intellectual Property Fund, L.P. (the “Acacia IP Fund”), which was formed in August 2010. The Acacia IP Fund has been included
in the Company’s consolidated financial statements since 2010, as Acacia’s wholly-owned subsidiary, the general partner of
Acacia IP Fund, has the ability to control the operations and activities of the Acacia IP Fund. The Acacia IP Fund was terminated as of
December 31, 2017 and dissolved in 2020.
Segment Reporting
Acacia uses the management approach, which designates the internal
organization that is used by management for making operating decisions and assessing performance as the basis of Acacia’s reportable
segments. The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Acacia believes that, of the significant accounting policies described
herein, the accounting policies associated with revenue recognition, the valuation of the equity instruments, the valuation of Series
A redeemable convertible preferred stock (the “Series A Redeemable Convertible Preferred Stock”), embedded derivatives, Series
A warrants (the “Series A Warrants”), Series B warrants (the “Series B Warrants”), stock-based compensation expense,
impairment of patent-related intangible assets, the determination of the economic useful life of amortizable intangible assets, income
taxes and valuation allowances against net deferred tax assets, require its most difficult, subjective or complex judgments.
Revenue Recognition
Revenue is recognized upon transfer of control (i.e., by the granting)
of promised bundled IP Rights and other contractual performance obligations to licensees in an amount that reflects the consideration
we expect to receive in exchange for those IP Rights. Revenue contracts that provide promises to grant the right to use IP Rights as they
exist at the point in time at which the IP Rights are granted, are accounted for as performance obligations satisfied at a point in time
and revenue is recognized at the point in time that the applicable performance obligations are satisfied and all other revenue recognition
criteria have been met.
For the periods presented, revenue contracts executed by the Company
primarily provided for the payment of contractually determined, one-time, paid-up license fees in consideration for the grant of certain
IP Rights for patented technologies owned or controlled by Acacia. Revenues also included license fees from sales-based revenue contracts,
the majority of which were originally executed in prior periods, which provide for the payment of quarterly license fees based on quarterly
sales of applicable product units by licensees (“Recurring Revenue Agreements”). Revenues may also include court ordered settlements
or awards related to our patent portfolio or sales of our patent portfolio. IP Rights granted included the following, as applicable: (i)
the grant of a non-exclusive, future license to manufacture and/or sell products covered by patented technologies, (ii) a covenant-not-to-sue,
(iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The IP Rights granted were generally
perpetual in nature, extending until the legal expiration date of the related patents. The individual IP Rights are not accounted for
as separate performance obligations, as (i) the nature of the promise, within the context of the contract, is to grant combined items
to which the promised IP Rights are inputs and (ii) the Company's promise to grant each individual IP right described above to the customer
is not separately identifiable from other promises to grant IP Rights in the contract.
Since the promised IP Rights are not individually distinct, the Company
combined each individual IP Right in the contract into a bundle of IP Rights that is distinct, and accounted for all of the IP Rights
promised in the contract as a single performance obligation. The IP Rights granted were “functional IP rights” that have significant
standalone functionality. Acacia’s subsequent activities do not substantively change that functionality and do not significantly
affect the utility of the IP to which the licensee has rights. Acacia’s operating subsidiaries have no further obligation with respect
to the grant of IP Rights, including no express or implied obligation to maintain or upgrade the technology, or provide future support
or services. The contracts provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon
execution of the contract. Licensees legally obtain control of the IP Rights upon execution of the contract. As such, the earnings process
is complete and revenue is recognized upon the execution of the contract, when collectability is probable and all other revenue recognition
criteria have been met. Revenue contracts generally provide for payment of contractual amounts within 15-90 days of execution of the contract,
or the end of the quarter in which the sale or usage occurs for Recurring Revenue Agreements. Contractual payments made by licensees are
generally non-refundable.
For sales-based royalties, the Company includes in the transaction
price some or all of an amount of estimated variable consideration to the extent that it is probable that a significant reversal in the
amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently
resolved. Notwithstanding, revenue is recognized for a sales-based royalty promised in exchange for a license of IP Rights when the later
of (i) the subsequent sale or usage occurs, or (ii) the performance obligation to which some or all of the sales-based royalty has been
allocated has been satisfied. Estimates are generally based on historical levels of activity, if available.
Revenues from contracts with significant financing components (either
explicit or implicit) are recognized at an amount that reflects the price that a licensee would have paid if the licensee had paid cash
for the IP Rights when they are granted to the licensee. In determining the transaction price, the Company adjusts the promised amount
of consideration for the effects of the time value of money. As a practical expedient, the Company does not adjust the promised amount
of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between
when the entity grants promised IP Rights to a customer and when the customer pays for the IP Rights will be one year or less.
In general, the Company is required to make certain judgments and estimates
in connection with the accounting for revenue contracts with customers. Such areas may include identifying performance obligations in
the contract, estimating the timing of satisfaction of performance obligations, determining whether a promise to grant a license is distinct
from other promised goods or services, evaluating whether a license transfers to a customer at a point in time or over time, allocating
the transaction price to separate performance obligations, determining whether contracts contain a significant financing component, and
estimating revenues recognized at a point in time for sales-based royalties.
Revenues
were comprised of the following for the periods presented:
|
Disaggregation
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(In
thousands)
|
|
|
Paid-up
revenue agreements
|
|
$
|
1,100
|
|
|
$
|
19,385
|
|
|
$
|
23,110
|
|
|
$
|
24,477
|
|
|
Recurring
Revenue Agreements
|
|
|
482
|
|
|
|
81
|
|
|
|
1,675
|
|
|
|
922
|
|
|
Total
revenue
|
|
$
|
1,582
|
|
|
$
|
19,466
|
|
|
$
|
24,785
|
|
|
$
|
25,399
|
|
Refer to “Inventor Royalties and
Contingent Legal Expenses” below for information on related direct costs of revenues.
Patent Portfolio Operations
Cost of revenues include the costs and expenses incurred in connection
with Acacia’s patent licensing and enforcement activities, including inventor royalties paid to original patent owners, patent maintenance
and prosecution costs, contingent legal fees paid to external patent counsel, other patent-related legal expenses paid to external patent
counsel, licensing and enforcement related research, consulting and other expenses paid to third-parties and the amortization of patent-related
investment costs. These costs are included under the caption “Patent portfolio operations” in the consolidated statements
of operations.
Inventor Royalties and Contingent Legal Expenses
Inventor royalties are expensed in the consolidated statements of operations
in the period that the related revenues are recognized. Patent costs, including any upfront advances paid to patent owners by Acacia’s
operating subsidiaries, that are recoverable from future net revenues are amortized over the estimated economic useful life of the related
patents, or as the prepaid royalties are earned by the inventor, as appropriate, and the related expense is included in amortization expense
in the consolidated statements of operations. Any unamortized upfront advances recovered from net revenues are expensed in the period
recovered and included in amortization expense in the consolidated statements of operations.
Contingent legal fees are expensed in the consolidated statements of
operations in the period that the related revenues are recognized. In instances where there are no recoveries from potential infringers,
no contingent legal fees are paid; however, Acacia’s operating subsidiaries may be liable for certain out of pocket legal costs
incurred pursuant to the underlying legal services agreement.
Inventor royalty and contingent legal agreements generally provide
for payment by the Company of contractual amounts 30 days subsequent to the fiscal quarter end during which related license fee payments
are received from licensees by the Company.
Concentrations
Financial instruments that potentially subject Acacia to concentrations
of credit risk are cash equivalents, equity securities and accounts receivable. Acacia places its cash equivalents and equity securities
primarily in highly rated money market funds and investment grade marketable securities. Cash and cash equivalents are also invested in
deposits with certain financial institutions and may, at times, exceed federally insured limits. Acacia has not experienced any significant
losses on its deposits of cash and cash equivalents.
Four licensees individually accounted for 32%, 25%, 22% and 13% of
revenues recognized during the three months ended September 30, 2021, and one licensee accounted for 98% of revenues recognized during
the three months ended September 30, 2020. Three licensees individually accounted for 50%, 19% and 12% of revenues recognized during the
nine months ended September 30, 2021, and two licensees accounted for 75% and 9% of revenues recognized during the nine months ended September
30, 2020.
The Company does not have any material foreign operations. Based on
the jurisdiction of the entity obligated to satisfy payment obligations pursuant to the applicable revenue arrangement, for the three
and nine months ended September 30, 2021, 8% and 15%, respectively, of revenues were attributable to licensees domiciled in foreign jurisdictions.
For the three and nine months ended September 30, 2020, 0.1% and 5%, respectively, of revenues were attributable to licensees domiciled
in foreign jurisdictions.
Two licensees represented 100% of accounts receivable at September
30, 2021. Two licensees individually represented approximately 62% and 21% of accounts receivable at December 31, 2020.
Related Party Transactions
During 2019, the Company purchased shares of common stock of Drive
Shack, Inc. (“Drive Shack”) for an aggregate purchase price of $2.4 million. At the time, Drive Shack and Clifford Press,
Chief Executive Officer and director of Acacia, were related parties as Mr. Press was a board member of Drive Shack until June 2021. The
market value of the investment was $1.4 million as of December 31, 2020. During the nine months ended September 30, 2021, the Company
sold its investment receiving proceeds of $1.8 million and recognized a loss of $515,000.
Cash and Cash Equivalents
Acacia considers all highly liquid, equity securities with original
maturities of three months or less when purchased to be cash equivalents. For the periods presented, Acacia’s cash equivalents are
comprised of investments in AAA rated money market funds that invest in first-tier only securities, which primarily includes: domestic
commercial paper and securities issued or guaranteed by the U.S. government or its agencies. Acacia’s cash equivalents are measured
at fair value using observable inputs.
Equity Securities at Fair Value
Investments in equity securities are reported at fair value on a recurring
basis, with related realized and unrealized gains and losses in the value of such securities recorded in the consolidated statements of
operations in other income or (expense). Dividend income is included in the consolidated statements of operations in other income or (expense).
Refer to Note 7 for additional information related to fair value measurements.
Equity securities at fair value for the periods presented were comprised
of the following:
|
Schedule
of equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
Type
|
|
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
|
|
(In
thousands)
|
|
|
September
30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities - Life Sciences Portfolio (Note 3)
|
|
$
|
62,042
|
|
|
$
|
288,508
|
|
|
$
|
(1,812
|
)
|
|
$
|
348,738
|
|
|
Equity
securities - other equity
|
|
|
35,178
|
|
|
|
3,289
|
|
|
|
(85
|
)
|
|
|
38,382
|
|
|
Total
|
|
$
|
97,220
|
|
|
$
|
291,797
|
|
|
$
|
(1,897
|
)
|
|
$
|
387,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
- Life Sciences Portfolio (Note 3)
|
|
$
|
32,765
|
|
|
$
|
72,689
|
|
|
$
|
(583
|
)
|
|
$
|
104,871
|
|
|
Equity
securities - other equity
|
|
|
4,086
|
|
|
|
1,410
|
|
|
|
(1,264
|
)
|
|
|
4,232
|
|
|
Total
|
|
$
|
36,851
|
|
|
$
|
74,099
|
|
|
$
|
(1,847
|
)
|
|
$
|
109,103
|
|
Equity Securities Without Readily Determinable Fair Value
For equity securities that do not have readily determinable fair value,
the Company elected to report them under the measurement alternative. They are reported at cost minus impairment, if any, plus or minus
changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. The
fair values of the private company securities were estimated based on recent financing transactions and secondary market transactions
and factoring in any adjustments for illiquidity or preference of these securities. Changes in fair value are reported in the consolidated
statements of operations in other income or (expense). Refer to Note 3 for additional information.
Equity Method Investments
Equity investments in common stock and in-substance common stock without
readily determinable fair values in companies over which the Company has the ability to exercise significant influence, are accounted
for using the equity method of accounting. Acacia includes its proportionate share of earnings and/or losses of its equity method investees
in earnings on equity investment in joint venture in the consolidated statements of operations. Refer to Note 3 for additional information.
Investment at Fair Value
On an individual investment basis, Acacia may elect to account for
investments in companies where the Company has the ability to exercise significant influence over operating and financial policies of
the investee, at fair value. If the fair value method is applied to an investment that would otherwise be accounted for under the equity
method of accounting, it is applied to all of the financial interests in the same entity that are eligible items (i.e., common stock and
warrants). We elected the fair value method for our investment in Veritone, Inc. (“Veritone”) upon acquisition of the investment.
Since March 2021, we have no more investment in Veritone stocks and warrants. Refer to Note 4 for additional information.
Impairment of Investments
Acacia reviews its investments quarterly for indicators of other-than-temporary
impairment. This determination requires significant judgment. In making this judgment, Acacia considers available quantitative and qualitative
evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, Acacia evaluates,
among other factors, general market conditions and the duration and extent to which the fair value is less than cost. Acacia also considers
specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance,
changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary,
an impairment charge is recorded in the consolidated statements of operations and a new cost basis in the investment is established.
Long-Term Restricted Cash
Restricted cash relates primarily to the proceeds received from the
issuance of Series A Redeemable Convertible Preferred Stock which are held in an escrow account (refer to Note 6). The amounts are to
be released to the Company upon, among other things, (i) the consummation of a suitable investment or acquisition by the Company or (ii)
the conversion of Series A Redeemable Convertible Preferred Stock into common stock. During October 2021, the Company consummated a suitable
acquisition, accordingly $35.0 million was released to the Company. Refer to Note 11 for additional information related to the subsequent
period acquisition.
Patents
Patents include the cost of patents or patent rights acquired from
third-parties or obtained in connection with business combinations. Patent costs are amortized utilizing the straight-line method over
their remaining economic useful lives. Refer to Note 5 for additional information.
Impairment of Long-lived Assets
Acacia reviews long-lived assets and intangible assets for potential
impairment annually (quarterly for patents) and when events or changes in circumstances indicate the carrying amount of an asset may not
be recoverable. In the event the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying
amount of the asset, an impairment loss is recorded in an amount equal to the excess of the asset’s carrying value over its fair
value. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If
quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value
of estimated future cash flows. In the event that management decides to no longer allocate resources to a patent portfolio, an impairment
loss equal to the remaining carrying value of the asset is recorded. Refer to Note 5 for additional information.
Fair value is generally estimated using the “Income Approach,”
focusing on the estimated future net income-producing capability of the patent portfolios over their estimated remaining economic useful
life. Estimates of future after-tax cash flows are converted to present value through “discounting,” including an estimated
rate of return that accounts for both the time value of money and investment risk factors. Estimated cash inflows are typically based
on estimates of reasonable royalty rates for the applicable technology, applied to estimated market data. Estimated cash outflows are
based on existing contractual obligations, such as contingent legal fee and inventor royalty obligations, applied to estimated license
fee revenues, in addition to other estimates of out-of-pocket expenses associated with a specific patent portfolio’s licensing and
enforcement program. The analysis also contemplates consideration of current information about the patent portfolio including, status
and stage of litigation, periodic results of the litigation process, strength of the patent portfolio, technology coverage and other pertinent
information that could impact future net cash flows.
Series A and B Warrants
The fair value of the Series A and B Warrants are estimated using a
Black-Scholes option-pricing model. Refer to Notes 6 and 7 for additional information related to the Series A and B Warrants and their
fair value measurements.
Embedded derivatives
Embedded derivatives that are required to be bifurcated from their
host contract are valued separately from the host instrument. A binomial lattice framework is used to estimate the fair value of the embedded
derivative in the Series A Redeemable Convertible Preferred Stock issued by the Company in 2019. Refer to Notes 6 and 7 for additional
information related to the embedded derivatives and their fair value measurements.
Fair Value Measurements
U.S. GAAP defines fair value as the price that would be received for
an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction
between market participants on the measurement date, and also establishes a fair value hierarchy which requires an entity to maximize
the use of observable inputs, where available. Refer to Note 7 for additional information.
Treasury Stock
Repurchases of the Company’s outstanding common stock are accounted
for using the cost method. The applicable par value is deducted from the appropriate capital stock account on the formal or constructive
retirement of treasury stock. Any excess of the cost of treasury stock over its par value is charged to additional paid-in capital and
reflected as treasury stock in the consolidated balance sheets. Refer to Note 9 for additional information.
Stock-Based Compensation
The compensation cost for all stock-based awards is measured at the
grant date, based on the fair value of the award, and is recognized as an expense on a straight-line basis over the employee’s requisite
service period (generally the vesting period of the equity award) which is generally one to three years. The fair value of restricted
stock awards (“RSAs”) and restricted stock units (“RSUs”) are determined by the product of the number of shares
or units granted and the grant date market price of the underlying common stock. The fair value of each option award is estimated on the
date of grant using a Black-Scholes option-pricing model. Forfeitures are accounted for as they occur.
RSUs granted in September 2019 with market-based vesting conditions
vest based upon the Company achieving specified stock price targets over a three-year period. The effect of a market condition is reflected
in the estimate of the grant-date fair value of the options utilizing a Monte Carlo valuation technique. Compensation cost is recognized
with a market-based vesting condition provided that the requisite service is rendered, regardless of when, if ever, the market condition
is satisfied. Assumptions utilized in connection with the Monte Carlo valuation technique, that resulted in a fair value of $1.42 per
unit, included: estimated risk-free interest rate of 1.38 percent; term of 3.00 years; expected volatility of 38 percent; and expected
dividend yield of 0 percent. The risk-free interest rate was determined based on the yields available on U.S. Treasury zero-coupon issues.
The expected stock price volatility was determined using historical volatility. The expected dividend yield was based on expectations
regarding dividend payments. During the nine months ended September 30, 2021, 450,000 RSUs were forfeited, leaving 450,000 units with
market-based vesting conditions outstanding and unvested at period end.
During the nine months ended September 30, 2021, the Company granted
324,401 RSAs at a weighted average grant-date fair value of $5.56 per share, 473,000 RSUs at a weighted average grant-date fair value
of $5.86 per unit and 393,750 non-qualified stock options at a grant-date fair value of $1.79 per share.
Stock-based compensation is reported in the consolidated statements
of operations in general and administrative expenses. Total stock-based compensation for the three and nine months ended September 30,
2021 was $300,000 and $1,279,000, respectively. Total unrecognized stock-based compensation expense as of September 30, 2021 was $5,952,000,
which will be amortized over a weighted average remaining vesting period of 2.20 years. Total stock-based compensation for the three and
nine months ended September 30, 2020 was $488,000 and $1,243,000, respectively.
Profits Interest Units (“PIUs”) were accounted for in accordance
with Accounting Standards Codification (“ASC”) 718-10, “Compensation - Stock Compensation.” The vesting conditions
did not meet the definition of service, market or performance conditions, as defined in ASC 718. As such, the PIUs were classified as
liability awards. Compensation expense was adjusted for changes in fair value prorated for the portion of the requisite service period
rendered. Initially, compensation expense was recognized on a straight-line basis over the employee’s requisite service period (generally
the vesting period of the equity award) which was five years. Upon full vesting of the award, which occurred during the three months ended
September 30, 2017, previously unrecognized compensation expense was immediately recognized in the period. The Company has a purchase
option to purchase the vested PIUs that are not otherwise forfeited after termination of continuous service. The exercise price of the
purchase option is the fair market value of the PIUs on the date of termination of continuous service. The individuals holding PIUs are
no longer employed by the Company. Included in other long-term liabilities in the consolidated balance sheets as of September 30, 2021
and December 31, 2020, the PIUs totaled $591,000, which was their fair value as of December 31, 2018 after termination of service.
Income Taxes
Income taxes are accounted for using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been
recognized in Acacia’s consolidated financial statements or consolidated income tax returns. A valuation allowance is established
to reduce deferred tax assets if all, or some portion, of such assets will more than likely not be realized, or if it is determined that
there is uncertainty regarding future realization of such assets.
The provision for income taxes for interim periods is determined using
an estimate of Acacia’s annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant
period. Each quarter, Acacia updates the estimate of the annual effective tax rate, and if the estimated tax rate changes, a cumulative
adjustment is recorded.
The Company’s effective tax rates were 0% and (1%) for the three
and nine months ended September 30, 2021, respectively, and 0% and (4%) for the three and nine months ended September 30, 2020, respectively.
Tax expense/benefit for the periods presented primarily reflects the impact of state taxes and foreign tax withholding (or refund) incurred
on revenue agreements executed with third-party licensees domiciled in foreign jurisdictions. The Company has recorded a full valuation
allowance against our net deferred tax assets as of September 30, 2021 and December 31, 2020. These assets primarily consist of foreign
tax credits, capital loss carryforwards and net operating loss carryforwards.
Recent Accounting Pronouncements
Recently Adopted
In December of 2019, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income
Taxes.” The update removed certain exceptions to the general principles in Topic 740 in U.S. GAAP. The Company adopted the update
on January 1, 2021. The adoption of the update did not have a material effect on the Company’s financial position, results of operations
or financial statement disclosures.
Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” to replace the incurred loss methodology with an expected
credit loss model that requires consideration of a broader range of information to estimate credit losses over the lifetime of the asset,
including current conditions and reasonable and supportable forecasts in addition to historical loss information, to determine expected
credit losses. Pooling of assets with similar risk characteristics and the use of a loss model are also required. Also, in April 2019,
the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815,
Derivatives and Hedging, and Topic 825, Financial Instruments,” to clarify the inclusion of recoveries of trade receivables previously
written off when estimating an allowance for credit losses. The amendments in these updates will currently be effective for the Company
on January 1, 2023, with early adoption permitted. Management is currently evaluating the impact that the amendments in these updates
may have on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt
with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” to simplify the accounting for convertible
instruments by eliminating large sections of the existing guidance in this area. It also eliminates several triggers for derivative accounting,
including a requirement to settle certain contracts by delivering registered shares. This update reduces the number of accounting models
for convertible instruments, revises the derivatives scope exception, and provides targeted improvements for earnings per share. Upon
adoption, companies have the option to apply a modified or full retrospective transition approach. The amendments in this update will
currently be effective for the Company on January 1, 2024, with early adoption permitted. Management is currently evaluating the impact
that the amendments in this update may have on the Company’s consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations
(Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” to require that an acquirer
recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with “Revenue from
Contracts with Customers (Topic 606).” At the acquisition date, an acquirer should account for the related revenue contracts in
accordance with Topic 606 as if it had originated the contracts. The amendments in this update should be applied prospectively and will
be effective for the Company on January 1, 2023, with early adoption permitted. Management is currently evaluating the impact that the
amendments in this update may have on the Company’s consolidated financial statements.
3. EQUITY SECURITIES PORTFOLIO INVESTMENT
On April 3, 2020, the Company entered into an Option Agreement with
LF Equity Income Fund (“Seller”), which included general terms through which the Company was provided the option to purchase
life sciences equity securities in a portfolio of public and private companies (“Life Sciences Portfolio”) for an aggregate
purchase price of £223.9 million, approximately $277.5 million at the exchange rate on April 3, 2020.
On June 4, 2020, the Company executed the Transaction Agreement between
Link Fund Solutions Limited, Seller, and the Company. Pursuant to the Transaction Agreement, the Company agreed to purchase from Seller
and Seller agreed to transfer to the Company the specified equity securities of all companies in the Life Sciences Portfolio at set prices
at various future dates. The transfer dates would vary among the Life Sciences Portfolio companies as the Transaction Agreement gives
the Company the exclusive right to determine when to call for transfer of each security, and because each Life Sciences Portfolio company
(or its existing equity holders) may be required to approve the transfer due to rights of first refusals and other company-specific terms
and conditions. Thus, the execution of the Transaction Agreement resulted in forward contracts for the Company to purchase equity securities
in each public and private company at a specified price on a future date.
In accordance with the Transaction Agreement, the Company transferred
the total purchase price of £223.9 million into an escrow account. Upon the transfer of equity securities in the Life Sciences Portfolio
to the Company, the associated funds were released from the escrow account to Seller based on the consideration amount assigned to the
equity securities for such Life Sciences Portfolio company in the Transaction Agreement. As of December 31, 2020, all of the equity securities
in the Life Sciences Portfolio were transferred to the Company pursuant to the Transaction Agreement. The Company has sold a portion of
the equity securities of such Life Sciences Portfolio while retaining an interest in a number of operating businesses, including a controlling
interest in one of the companies.
For accounting purposes, the total purchase price of the Life Sciences
Portfolio was allocated to the individual equity securities based on their individual fair values as of April 3, 2020, in order to establish
an appropriate cost basis for each of the acquired securities. The fair values of the public company securities were based on their quoted
market price. The fair values of the private company securities were estimated based on recent financing transactions and secondary market
transactions and factoring in a discount for the illiquidity of these securities. As of September 30, 2021 and December 31, 2020, the
fair value of the Life Sciences Portfolio equity securities, excluding the equity method investment discussed below, was $354.6 million
and $248.1 million, respectively.
Changes in the fair value of Acacia’s investment in the Life
Sciences Portfolio are recorded as unrealized gains or losses in the consolidated statements of operations. In late September 2021, the
Company sold one security which resulted in a gain of $18.6 million. The proceeds of that sale were settled and received in early October
2021, and therefore the Company recorded a $21.5 million other receivable as included in the consolidated balance sheet as of September
30, 2021. Accordingly, this trade date receivable from the sale of equity securities has been reflected as a noncash investing activity
in the consolidated statement of cash flows for the nine months ended September 30, 2021.
For the three and nine months ended September 30, 2021 and 2020, the
consolidated statements of operations reflected the following from the Life Sciences Portfolio:
|
Schedule
of unrealized gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(In
thousands)
|
|
|
Change
in fair value of equity securities
|
|
$
|
63,907
|
|
|
$
|
84,299
|
|
|
$
|
112,180
|
|
|
$
|
83,230
|
|
|
Change in
fair value of equity securities derivative
|
|
|
–
|
|
|
|
10,651
|
|
|
|
–
|
|
|
|
17,542
|
|
|
Change in
fair value of equity securities forward contract
|
|
|
–
|
|
|
|
(74,662
|
)
|
|
|
–
|
|
|
|
–
|
|
|
Gain (loss)
on sale of equity securities
|
|
|
37,112
|
|
|
|
1,908
|
|
|
|
52,167
|
|
|
|
(4,202
|
)
|
|
Gain
on sale of prepaid investment and derivative
|
|
|
–
|
|
|
|
2,845
|
|
|
|
–
|
|
|
|
2,845
|
|
|
Net
realized and unrealized gain
|
|
$
|
101,019
|
|
|
$
|
25,041
|
|
|
$
|
164,347
|
|
|
$
|
99,415
|
|
As part of the Company’s
acquisition of equity securities in the Life Sciences Portfolio, the Company acquired a majority interest in the equity securities of
MalinJ1 (63.9%), which were transferred to the Company on December 3, 2020. The acquisition of the MalinJ1 securities was accounted for
as an asset acquisition as there was a change of control of MalinJ1 and substantially all of the fair value of the assets acquired was
concentrated in a single identifiable asset, an investment in Viamet Pharmaceuticals Holdings, LLC (“Viamet”). As such, the
cost basis of the MalinJ1 securities was used to allocate to the Viamet investment, the single identifiable asset, and no goodwill was
recognized. The Company through its consolidation of MalinJ1 accounts for the Viamet investment under the equity method as MalinJ1 owns
41.0% of outstanding shares of Viamet.
4. INVESTMENT AT FAIR VALUE
During 2016 and 2017, Acacia made certain investments in Veritone.
As a result of these transactions, Acacia received an aggregate total of 4,119,521 shares of Veritone common stock and warrants to purchase
a total of 1,120,432 shares of Veritone common stock at an exercise price of $13.61 per share expiring between 2020 and 2027. During the
nine months ended September 30, 2020, Acacia sold all remaining 298,450 shares Veritone common stock and recorded a realized loss of $3.3
million.
During the nine months ended September 30, 2020, Acacia exercised 154,312
warrants, and recognized a realized gain of $554,000 on the sale of common stock. During the nine months ended September 30,
2021, Acacia exercised all remaining 156,720 warrants, and recognized a realized gain of $3.6 million on the sale of common stock. The
Company no longer has an investment in Veritone common stock and warrants.
Changes in the fair value of Acacia’s investment in Veritone
are recorded as unrealized gains or losses in the consolidated statements of operations. For the three and nine months ended September
30, 2021 and 2020, the consolidated statements of operations reflected the following:
|
Schedule
of gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(In
thousands)
|
|
|
Change
in fair value of investment, warrants
|
|
$
|
–
|
|
|
$
|
(3,081
|
)
|
|
$
|
(2,752
|
)
|
|
$
|
225
|
|
|
Change in
fair value of investment, common stock
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,479
|
|
|
Gain on sale
of investment, warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
3,591
|
|
|
|
554
|
|
|
Loss
on sale of investment, common stock
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,316
|
)
|
|
Net
realized and unrealized (loss) gain
|
|
$
|
–
|
|
|
$
|
(3,081
|
)
|
|
$
|
839
|
|
|
$
|
942
|
|
5. PATENTS, NET OF ACCUMULATED AMORTIZATION
Acacia’s only identifiable intangible assets as of September
30, 2021 and December 31, 2020 are patents and patent rights. Patent-related accumulated amortization totaled $291.6 million and $319.9
million as of September 30, 2021 and December 31, 2020, respectively. Acacia’s patents have remaining estimated economic useful
lives ranging from twenty-six to fifty-two months. The weighted average remaining estimated economic useful life of Acacia’s patents
is approximately four years.
The following table presents the scheduled annual aggregate amortization
expense as of September 30, 2021:
|
Schedule
of intangible assets
|
|
|
|
|
For the years ending December 31,
|
|
|
|
(In
thousands)
|
|
Remainder
of 2021
|
$
|
2,612
|
|
|
2022
|
|
10,448
|
|
|
2023
|
|
10,381
|
|
|
2024
|
|
9,005
|
|
|
2025
|
|
6,630
|
|
|
Thereafter
|
|
750
|
|
|
Patents,
net
|
$
|
39,826
|
|
For the nine months ended September 30, 2021, Acacia accrued patent
and patent rights acquisition costs totaling $13.0 million, of which $8.0 million is due December 1, 2021 and $5.0 million is due February
18, 2023. Such amounts are included in accrued patent investment costs and other long-term liabilities in the consolidated balance sheet
as of September 30, 2021, respectively.
6. STARBOARD INVESTMENT
Series A Redeemable Convertible Preferred Stock
On November 18, 2019, the Company entered into a Securities Purchase
Agreement with Starboard Value LP (“Starboard”) and certain funds and accounts affiliated with, or managed by, Starboard (collectively,
the “Buyers”) pursuant to which the Company issued (i) 350,000 shares of Series A Redeemable Convertible Preferred Stock with
a par value of $0.001 per share and a stated value of $100 per share, and (ii) Series A Warrants to purchase up to 5,000,000 shares of
the Company’s common stock to the Buyers. The Securities Purchase Agreement also established the terms of certain senior secured
notes and additional Series B Warrants which may be issued to Starboard in the future. On June 4, 2020, the Company entered into a Supplemental
Agreement, as defined below under “Senior Secured Notes”, with certain contractual agreements affecting the Series A Redeemable
Convertible Preferred Stock, reflected below.
The Series A Redeemable Convertible Preferred Stock can be converted
into a number of shares of common stock equal to (i) the stated value thereof plus accrued and unpaid dividends, divided by (ii) the conversion
price of $3.65 (subject to certain anti-dilution adjustments). Holders may elect to convert the Series A Redeemable Convertible Preferred
Stock into common stock at any time. The Company may elect to convert the Series A Redeemable Convertible Preferred Stock into shares
of Common Stock any time on or after November 15, 2025, provided that the closing price of the Company’s common stock equals or
exceeds 190% of the conversion price for 30 consecutive trading days and assuming certain other conditions of the common stock have been
met.
Holders have the option to redeem all or a portion of the Series A
Redeemable Convertible Preferred Stock during the periods of May 15, 2021 through August 15, 2021 and May 15, 2022 through August 15,
2022, provided that there is not outstanding at least $50.0 million aggregate principal of senior secured notes to the Buyers pursuant
to the Securities Purchase Agreement at the time of the redemption. Holders also have the option to redeem all or a portion of the Series
A Redeemable Convertible Preferred Stock during the period of November 15, 2024 through February 15, 2025. Additionally, holders have
the option to redeem all or a portion of the Series A Redeemable Convertible Preferred Stock upon the occurrence of (i) a change of control
or (ii) various other triggering events, such as the suspension from trading or delisting of the Company’s common stock. If the
Series A Redeemable Convertible Preferred Stock is redeemed at the option of the holders, the redemption price may include a make-whole
amount or a stated premium, depending on the redemption scenario.
The Company may redeem all, and not less than all, of the Series A
Redeemable Convertible Preferred Stock (i) upon a change of control or (ii) during the period of May 15, 2022 through August 15, 2022,
provided that there is not outstanding at least $50.0 million aggregate principal of the senior secured notes at the time of the redemption,
and assuming certain conditions of the common stock have been met. If the Series A Redeemable Convertible Preferred Stock is redeemed
at the option of the Company, the redemption price would include a make-whole amount or a 15% premium depending on the circumstances.
If any Series A Redeemable Convertible Preferred Stock remains outstanding
on November 15, 2027, the Company shall redeem such Series A Redeemable Convertible Preferred Stock in cash.
In all redemption scenarios, the redemption price for the Series A
Redeemable Convertible Preferred Stock includes the stated value plus accrued and unpaid dividends. In addition, depending on the redemption
scenario, the redemption price may also include a make-whole amount or stated premium as described above.
When the Company issues Notes, the Holder may exchange the Series A
Redeemable Convertible Preferred Stock for (i) Notes and (ii) Series B Warrants to purchase common stock.
The Series A Redeemable Convertible Preferred Stock accrues cumulative
dividends quarterly at annual rate of 3.0% on the stated value. Upon consummation of the approved investment in June 2020, the dividend
rate increased to 8.0% on the stated value. Upon certain triggering events, the dividend rate will increase to 7.0% if the triggering
event occurs before an approved investment or 10.0% on the stated value if the triggering event occurs after an approved investment. In
connection with the approved investment in June 2020, the Company and the Buyers agreed that the dividend rate on the Series A Redeemable
Convertible Preferred Stock would accrue at 3.0% so long as no triggering event occurs and the Company maintains $35.0 million in escrow.
Series A Redeemable Convertible Preferred Stock also participates on an as-converted basis in any regular or special dividends paid to
common stockholders. No accrued and unpaid dividends as of September 30, 2021. During October 2021, the Company consummated a suitable
acquisition, accordingly $35.0 million was released to the Company. Upon consummation of the approved acquisition in October 2021, the
dividend rate increased to 8.0% on the stated value. Refer to Note 11 for additional information related to the subsequent period acquisition.
Holders of the Series A Redeemable Convertible Preferred Stock have
the right to vote with common stockholders on an as-converted basis on all matters. Holders of Series A Redeemable Convertible Preferred
Stock will also be entitled to a separate class vote with respect to amendments to the Company’s organizational documents that generally
have an adverse effect on the Series A Redeemable Convertible Preferred Stock.
Upon liquidation of the Company, holders of Series A Redeemable Convertible
Preferred Stock have a liquidation preference over holders of our common stock and will be entitled to receive, prior to any distribution
to holders of our common stock, an amount equal to the greater of (i) the stated value plus accrued and unpaid dividends or (ii) the amount
that would have been received if the Series A Redeemable Convertible Preferred Stock had been converted into common stock immediately
prior to the liquidation event at the then effective conversion price.
The Company determined that certain features of the Series A Redeemable
Convertible Preferred Stock should be bifurcated and accounted for as a derivative. Each of these features are bundled together as a single,
compound embedded derivative.
During 2019, total proceeds received and transaction costs incurred
from the issuance of the Series A Redeemable Convertible Preferred Stock amounted to $35.0 million and $1.3 million, respectively. Proceeds
received were allocated based on the fair value of the instrument without the Series A Warrants and of the Series A Warrants themselves
at the time of issuance. The proceeds allocated to the Series A Redeemable Convertible Preferred Stock were then further allocated between
the host preferred stock instrument and the embedded derivative, with the embedded derivative recorded at fair value and the Series A
Redeemable Convertible Preferred Stock recorded at the residual amount. The portion of the proceeds allocated to the Series A Warrants,
embedded derivative, and Series A Redeemable Convertible Preferred Stock was $4.8 million, $21.2 million, and $8.9 million, respectively.
Transaction costs were also allocated between the Series A Redeemable Convertible Preferred Stock and the Series A Warrants on the same
basis as the proceeds. The transaction costs allocated to the Series A Redeemable Convertible Preferred Stock were treated as a discount
to the Series A Redeemable Convertible Preferred Stock. The transaction costs allocated to the Series A Warrants were expensed as incurred.
The Company classifies the Series A Redeemable Convertible Preferred
Stock as mezzanine equity as the instrument will become redeemable at the option of the holder in various scenarios or otherwise on November
15, 2027. As it is probable that the Series A Redeemable Convertible Preferred Stock will become redeemable, the Company accretes the
instrument to its redemption value using the effective interest method and recognizes any changes against additional paid in capital in
the absence of retained earnings. Accretion for the three and nine months ended September 30, 2021 was $991,000 and $2.8 million, respectively.
In connection with the issuance of the Series A Redeemable Convertible
Preferred Stock, the Company executed a Registration Rights Agreement with Starboard and the Buyers and a Governance Agreement with Starboard
and certain affiliates of Starboard. Under the Registration Rights Agreement, the Company agreed to provide certain registration rights
with respect to the Series A Redeemable Convertible Preferred Stock and shares of Common Stock issued upon conversion. In accordance with
the Governance Agreement, the Company agreed to (i) increase the size of the Board of Directors from six to seven members, (ii) appoint
Jonathan Sagal as a director of the Company, (iii) grant Starboard the right to recommend two additional directors for appointment to
the board, (iv) form a Strategic Committee of the Board tasked with sourcing and performing due diligence on potential acquisition targets,
(v) appoint certain directors to the Strategic Committee, and (vi) appoint a director to the Nominating and Corporate Governance Committee.
The following features of the Series A Redeemable Convertible Preferred
Stock are required to be bifurcated from the host preferred stock and accounted for separately as an embedded derivative: (i) the right
of the holders to redeem the shares (the “put option”), (ii) the right of the holders to receive common stock upon conversion
of the shares (the “conversion option”), (iii) the right of the Company to redeem the shares (the “call option”),
and (iv) the change in dividend rate upon consummation of an approved investment or a triggering event (the “contingent dividend
rate feature”).
These features are required to be accounted for separately from the
Series A Redeemable Convertible Preferred Stock because the features were determined to be not clearly and closely related to the debt-like
host and also did not meet any other scope exceptions for derivative accounting. Therefore, these features are bundled together and are
accounted for as a single, compound embedded derivative liability.
Accordingly, we have recorded an embedded derivative liability representing
the combined fair value of each of these features. The embedded derivative liability is adjusted to reflect fair value at each period
end with changes in fair value recorded other income or (expense) in the “Change in fair value of the Series A and B warrants and
embedded derivatives” financial statement line item of the consolidated statements of operations. As of September 30, 2021 and December
31, 2020, the fair value of the Series A embedded derivative liabilities was $41.4 million and $26.7 million, respectively.
Series A Warrants
On November 18, 2019, in connection with the issuance of the Series
A Redeemable Convertible Preferred Stock, the Company issued a detachable Series A Warrants to acquire up to purchase 5 million shares
of common stock at a price of $3.65 per share (subject to certain anti-dilution adjustments) at any time during a period of eight years
beginning on the instrument’s issuance date of the Series A Warrants. The fair value of the Series A Warrants was $4.8 million upon
issuance. The Series A Warrants will be recognized at fair value at each reporting period until exercised, with changes in fair value
recognized in other income or (expense) in the consolidated statements of operations. As of September 30, 2021 and December 31, 2020,
the fair value of the Series A Warrants was $18.5 million and $6.6 million, respectively. As of September 30, 2021, the Series A Warrants
have not been exercised.
The Series A Warrants are classified as a liability in accordance with
ASC 480, “Distinguishing Liabilities from Equity”, as the agreement provides for net cash settlement upon a change in control,
which is outside the control of the Company.
Series B Warrants
On February 25, 2020, pursuant to the terms of the Securities Purchase
Agreement with Starboard and the Buyers, the Company issued Series B Warrants to purchase up to 100 million shares of the Company’s
common stock at an exercise price (subject to certain price-based anti-dilution adjustments) of either (i) $5.25 per share, if exercising
by cash payment, within 30 months from the issuance date (i.e., August 25, 2022); or (ii) $3.65 per share, if exercising by cancellation
of a portion of Notes. The Company issued the Series B Warrants for an aggregate purchase price of $4.6 million. The Series B Warrants
expire on November 15, 2027.
In connection with the issuance of the Notes on June 4, 2020, the terms
of certain of the Series B Warrants were amended to permit the payment of the lower exercise price of $3.65 through the payment of cash,
rather than only through the cancellation of Notes outstanding, at any time until the expiration date of November 15, 2027. 31,506,849
of the Series B Warrants are subject to this adjustment with the remaining balance of 68,493,151 Series B Warrants continuing under their
original terms. As of September 30, 2021, the Series B Warrants have not been exercised.
The Series B Warrants will be recognized at fair value at each reporting
period until exercised, with changes in fair value recognized in other income or (expense) in the consolidated statements of operations.
As of September 30, 2021 and December 31, 2020, the fair value of the Series B Warrants was $229.6 million and $52.3 million, respectively.
The Series B Warrants are classified as a liability in accordance with
ASC 480, “Distinguishing Liabilities from Equity”, as the agreement provides for net cash settlement upon a change in control,
which is outside the control of the Company.
Senior Secured Notes
Pursuant to the Securities Purchase Agreement dated November 18, 2019
with Starboard and the Buyers, on June 4, 2020, the Company issued $115.0 million in Notes to the Buyers. Also on June 4, 2020, in connection
with the issuance of the Notes, the Company entered into a Supplemental Agreement with Starboard (the “Supplemental Agreement”),
pursuant to which the Company agreed to redeem $80.0 million aggregate principal amount of the Notes by September 30, 2020, and $35.0
million aggregate principal amount of the Notes by December 31, 2020, resulting in the total principal outstanding being paid by December
31, 2020. Per the Supplemental Agreement, interest is payable semiannually at a rate of 6.00% per annum, and in an event of default, the
interest rate is increased to 10.00% per annum. The Notes include certain financial and non-financial covenants. Additionally, all or
any portion of the principal amount outstanding under the Notes may, at the election of Starboard, be surrendered to the Company for cancellation
in payment of the exercise price upon the exercise of Series B Warrants.
On June 30, 2020, the Company entered into an Exchange Agreement (the
“Exchange Agreement”) with Merton Acquisition HoldCo LLC, a Delaware limited liability company and wholly-owned subsidiary
of the Company (“Merton”) and Starboard, on behalf of itself and on behalf of certain funds and accounts under its management,
including the holders of the Notes. Pursuant to the Exchange Agreement, the holders of the Notes exchanged the entire outstanding principal
amount for new senior notes (the “New Notes”) issued by Merton having an aggregate outstanding original principal amount of
$115.0 million.
The New Notes bear interest at a rate of 6.00% per annum and had a
maturity date of December 31, 2020. The New Notes are fully guaranteed by the Company and are secured by an all-assets pledge of the Company
and Merton and non-recourse equity pledges of each of the Company’s material subsidiaries. Pursuant to the Exchange Agreement, the
New Notes (i) are deemed to be “Notes” for purposes of the Securities Purchase Agreement, (ii) are deemed to be “June
2020 Approved Investment Notes” for purposes of the Supplemental Agreement, and with the Company agreeing to redeem $80 million
principal amount of the New Notes by September 30, 2020 and $35 million principal amount of the New Notes by December 31, 2020, and (iii)
are deemed to be “Notes” for the purposes of the Series B Warrants, and therefore may be tendered pursuant to a Note Cancellation
under the Series B Warrants on the terms set forth in the Series B Warrants and the New Notes. Delivery of notes in the form of the New
Notes will also satisfy the delivery of Exchange Notes pursuant to Section 16(i) of the Certificate of Designations of the Company’s
Series A Convertible Preferred Stock, par value $0.001 per share. The New Notes will not be deemed to be “Notes” for the purposes
of the Registration Rights Agreement, dated as of November 18, 2019, by and among the Company, Starboard and the Buyers.
Because the New Notes are to be settled within twelve months pursuant
to their terms, they are classified as current liabilities in the consolidated balance sheets. The Company capitalized $4.6 million in
lender fees and $0.5 million in other issuance costs associated with the issuance of the Notes. The $4.6 million of lender fees are recognized
as long-term deferred debt issuance costs and are included in other non-current assets in the consolidated balance sheets, and will be
amortized to interest expense until November 15, 2027, the maturity date of Series A Redeemable Convertible Preferred Stock. The $0.5
million issuance costs are recognized as a discount on the Notes and will be amortized to interest expense over the contractual life of
the Notes. There was $3.1 million and $863,000 accrued and unpaid interest on the New Notes as of September 30, 2021 and December 31,
2020, respectively.
On January 29, 2021, the Company redeemed $50.0 million of the New
Notes and on March 31, 2021, the Company reissued $50.0 million of the New Notes. On June 30, 2021, the Company issued $30.0 million in
additional New Notes (the “June 2021 Merton Notes”) and amended the maturity date of the New Notes to October 15, 2021. On
September 30, 2021, the Company issued $35.0 million in additional New Notes (the “September 2021 Merton Notes”) and amended
the maturity date of the New Notes to December 1, 2021. The June and September 2021 Merton Notes cannot be used to exercise Series B Warrants
issued to Starboard Value. The total principal amount outstanding of New Notes as of September 30, 2021 and December 31, 2020 was $180.0
million and $115.0 million, respectively.
Modifications to Series A Redeemable Convertible Preferred Stock
and Series B Warrants
The June 4, 2020 Supplemental Agreement also provided for (i) a waiver
of increased dividends under the original terms of the Series A Redeemable Convertible Preferred Stock that would have otherwise accrued
due to the Company’s use of the $35.0 million proceeds received from Starboard and the Buyers upon the issuance of the Series A
Redeemable Convertible Preferred Stock in November 2019, (ii) the replacement of original optional redemption rights for the Series A
Redeemable Convertible Preferred Stock provided to both the Company and the holders that otherwise would have been nullified through the
issuance of the Notes, and (iii) an amendment to the terms of the previously issued Series B Warrants to permit the payment of the lower
exercise price of $3.65 through the payment of cash, rather than only through the cancellation of Notes outstanding, at any time until
the expiration of the Series B Warrants on November 15, 2027. 31,506,849 of the Series B Warrants are subject to this adjustment with
the remaining balance of 68,493,151 Series B Warrants continuing under their original terms.
We analyzed the amendments to the terms of the Series A Redeemable
Convertible Preferred Stock and determined that the amendments were not significant. Therefore, the amendments are accounted for as a
modification on a prospective basis.
The incremental fair value of the Series B Warrants associated with
the modification of their terms in connection with the issuance of the Notes was $1.3 million and is recognized as a discount on the Notes
and will be amortized to interest expense over the contractual life of the Notes. As of September 30, 2021, $1.2 million was amortized
to interest expense and $151,000 is remaining to be amortized until the maturity date of December 1, 2021.
7. FAIR VALUE MEASUREMENTS
U.S. GAAP defines fair value as the price that would be received for
an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction
between market participants on the measurement date, and also establishes a fair value hierarchy which requires an entity to maximize
the use of observable inputs, where available. The three-level hierarchy of valuation techniques established to measure fair value is
defined as follows:
|
(i)
|
Level 1 - Observable Inputs: Quoted prices in active markets for identical investments;
|
|
(ii)
|
Level 2 - Pricing Models with Significant Observable Inputs: Other significant observable inputs, including quoted prices for similar investments, interest rates, credit risk, etc.; and
|
|
(iii)
|
Level 3 - Unobservable Inputs: Unobservable inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Management estimates include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs, including the entity’s own assumptions in determining the fair value of derivatives and certain investments.
|
Whenever possible, the Company is required to use observable market
inputs (Level 1 - quoted market prices) when measuring fair value. In such cases, the level at which the fair value measurement falls
is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of
a particular input requires judgment and considers factors specific to the asset or liability being measured. In certain cases, inputs
used to measure fair value may fall into different levels of the fair value hierarchy.
Acacia holds the following types of financial instruments at September
30, 2021 and December 31, 2020:
Equity Securities at Fair Value. Equity securities includes
investments in public company common stock and are recorded at fair value based on the quoted market price of each share on the valuation
date. The fair value of these securities are within Level 1 of the valuation hierarchy. Equity investments that do not have regular market
pricing, but for which fair value can be determined based on other data values or market prices, are recorded at fair value within Level
2 of the valuation hierarchy. At September 30, 2021, our Level 2 equity securities include an investment measured with an applied pricing
model that includes significant observable inputs to the public company common stock value. The fair value of the Level 2 equity securities
investment as of September 30, 2021 was estimated based on a discount of 7.5 percent determined using the following significant inputs
to the pricing model: expected term of restriction of 6 months and volatility of approximately 45 percent.
Investments at Fair Value - Common Stock and Warrants. Acacia’s
equity investment in Veritone common stock was recorded at fair value based on the quoted market price of Veritone’s common stock
on the applicable valuation date (Level 1). Warrants were recorded at fair value, as based on the Black-Scholes option-pricing model (Level
2). Refer to Note 4 for additional information.
Series A Warrants. Series A Warrants are recorded at fair value,
using Black-Scholes option-pricing model (Level 3). In the quarter ended March 31, 2021, there was a change in estimate with regard to
the calculation of the volatility assumption used in the Black Scholes option-pricing model. As a result, the Series A Warrants are now
measured as Level 3 as opposed to Level 2 as measured previously. The fair value of the Series A Warrants as of September 30, 2021 was
estimated based on the following significant assumptions: volatility of 30 percent, risk-free rate of 1.16 percent, term of 6.04 years
and a dividend yield of 0 percent.
Series B Warrants. Series B Warrants are recorded at fair value,
using Black-Scholes option-pricing model (Level 3). In the quarter ended March 31, 2021, there was a change in methodology used to an
acceptable Black-Scholes option-pricing model from a Monte Carlo valuation technique used to value the Series B Warrants as of December
31, 2020. The fair value of the Series B Warrants as of September 30, 2021 was estimated based on the following significant assumptions:
(1) volatility of 30 percent, risk-free rate of 1.17 percent, term of 6.13 years and a dividend yield of 0 percent, and (2) volatility
of 25 percent, risk-free rate of 0.08 percent, term of 0.90 years and a dividend yield of 0 percent.
Embedded Derivative Liability. Embedded derivatives that are
required to be bifurcated from their host contract are evaluated and valued separately from the host instrument. A binomial lattice framework
is used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock issued by the Company
in 2019 (Level 3). The binomial model utilizes the Tsiveriotis and Fernandes implementation in which a convertible instrument is split
into two separate components within a single lattice framework: a cash-only component which is subject to the selected risk-adjusted discount
rate and an equity component which is subject only to the risk-free rate. The model considers the (i) implied volatility of the value
of our common stock, (ii) appropriate risk-free interest rate, (iii) credit spread, (iv) dividend yield, (v) dividend accrual (and a step-up
in rates), and (vi) event probabilities of the various conversion and redemption scenarios.
The volatility of the Company’s common stock is estimated by
analyzing the Company’s historical volatility, implied volatility of publicly traded stock options, and the Company’s current
asset composition and financial leverage. The selected volatility, as described below, represents a haircut from the Company’s actual
realized historical volatility. A volatility haircut is a concept used to describe a commonly observed occurrence in which the volatility
implied by market prices involving options, warrants, and convertible debt is lower than historical actual realized volatility. The assumed
base case term used in the valuation model is the period remaining until November 15, 2027, the Series A Redeemable Convertible Preferred
Stock maturity date. The risk-free interest rate is based on the yield on the U.S. Treasury with a remaining term equal to the expected
term of the conversion and early redemption options. The significant assumptions utilized in the Company’s valuation of the embedded
derivative at September 30, 2021 are as follows: volatility of 30 percent, risk-free rate of 1.20 percent, term of 6.13 years, discount
rate of 9.40 percent and a dividend yield of 0 percent. The fair value measurement of the embedded derivative is sensitive to these assumptions
and changes in these assumptions could result in a materially different fair value measurement.
Financial assets and liabilities measured at fair value on a recurring
basis were as follows:
|
Schedule
of financial assets and liabilities at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Assets
|
|
(In
thousands)
|
|
|
September
30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities at fair value
|
|
$
|
119,280
|
|
|
$
|
267,840
|
|
|
$
|
–
|
|
|
$
|
387,120
|
|
|
Total
|
|
$
|
119,280
|
|
|
$
|
267,840
|
|
|
$
|
–
|
|
|
$
|
387,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
at fair value
|
|
$
|
109,103
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
109,103
|
|
|
Investment
at fair value - warrants
|
|
|
–
|
|
|
|
2,752
|
|
|
|
–
|
|
|
|
2,752
|
|
|
Total
|
|
$
|
109,103
|
|
|
$
|
2,752
|
|
|
$
|
–
|
|
|
$
|
111,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
warrants
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
18,527
|
|
|
$
|
18,527
|
|
|
Series A
embedded derivative liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
41,411
|
|
|
|
41,411
|
|
|
Series
B warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
229,637
|
|
|
|
229,637
|
|
|
Total
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
289,575
|
|
|
$
|
289,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
warrants
|
|
$
|
–
|
|
|
$
|
6,640
|
|
|
$
|
–
|
|
|
$
|
6,640
|
|
|
Series A
embedded derivative liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
26,728
|
|
|
|
26,728
|
|
|
Series
B warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
52,341
|
|
|
|
52,341
|
|
|
Total
|
|
$
|
–
|
|
|
$
|
6,640
|
|
|
$
|
79,069
|
|
|
$
|
85,709
|
|
The following tables set forth a summary of the changes in the estimated
fair value of the Company’s Level 3 liabilities, which are measured at fair value on a recurring basis:
|
Schedule
of changes in fair value Level 3 liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A
Warrant
Liability
|
|
|
Series
A
Embedded
Derivative
Liability
|
|
|
Series
B
Warrant
Liability
|
|
|
Total
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2021
|
|
$
|
–
|
|
|
$
|
26,728
|
|
|
$
|
52,341
|
|
|
$
|
79,069
|
|
Transfers
to Level 3
|
|
|
6,640
|
|
|
|
–
|
|
|
|
–
|
|
|
|
6,640
|
|
|
Remeasurement
to fair value
|
|
|
11,824
|
|
|
|
14,463
|
|
|
|
178,198
|
|
|
|
204,485
|
|
|
Balance at June 30, 2021
|
|
|
18,464
|
|
|
|
41,191
|
|
|
|
230,539
|
|
|
|
290,194
|
|
|
Remeasurement
to fair value
|
|
|
63
|
|
|
|
220
|
|
|
|
(902
|
)
|
|
|
(619
|
)
|
|
Balance
at September 30, 2021
|
|
$
|
18,527
|
|
|
$
|
41,411
|
|
|
$
|
229,637
|
|
|
$
|
289,575
|
|
|
|
|
Series
A
Warrant
Liability
|
|
|
Series
A
Embedded
Derivative
Liability
|
|
|
Series
B
Warrant
Liability
|
|
|
Total
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2020
|
|
$
|
3,568
|
|
|
$
|
17,974
|
|
|
$
|
–
|
|
|
$
|
21,542
|
|
Transfers
to Level 3
|
|
|
–
|
|
|
|
–
|
|
|
|
5,929
|
|
|
|
5,929
|
|
|
Remeasurement
to fair value
|
|
|
3,384
|
|
|
|
11,539
|
|
|
|
52,361
|
|
|
|
67,284
|
|
|
Balance at June 30, 2020
|
|
|
6,952
|
|
|
|
29,513
|
|
|
|
58,290
|
|
|
|
94,755
|
|
|
Remeasurement
to fair value
|
|
|
(1,348
|
)
|
|
|
(3,831
|
)
|
|
|
(15,493
|
)
|
|
|
(20,672
|
)
|
|
Balance
at September 30, 2020
|
|
$
|
5,604
|
|
|
$
|
25,682
|
|
|
$
|
42,797
|
|
|
$
|
74,083
|
|
In accordance with U.S. GAAP, from time to time, the Company measures
certain assets at fair value on a nonrecurring basis. The Company reviews the carrying value of equity securities without readily determinable
fair value, equity method investments and patents on a quarterly basis for indications of impairment, and other long-lived assets at least
annually. When indications of potential impairment are identified, the Company may be required to determine the fair value of those assets
and record an adjustment for the carrying amount in excess of the fair value determined. Any fair value determination would be based on
valuation approaches, which are appropriate under the circumstances and utilize Level 2 and Level 3 measurements as required.
8. COMMITMENTS AND CONTINGENCIES
Facility Leases
The Company primarily leases office facilities under operating lease
arrangements that will end in various years through July 2024.
On June 7, 2019, we entered into a building lease agreement (the “New
Lease”) with Jamboree Center 4 LLC (the “Landlord”). Pursuant to the New Lease, we have leased approximately 8,293 square
feet of office space in Irvine, California. The New Lease commenced on August 1, 2019. The term of the New Lease is 60 months from the
commencement date, provides for annual rent increases, and does not provide us the right to early terminate or extend our lease terms.
On January 7, 2020, we entered into a building lease agreement (the
“New York Office Lease”) with Sage Realty Corporation (the “New York Office Landlord”). Pursuant to the New York
Office Lease, we have leased approximately 4,000 square feet of office space for our corporate headquarters in New York, New York. The
New York Office Lease commenced on February 1, 2020. The term of the New York Office Lease is 24 months from the commencement date, provides
for annual rent increases, and does not provide us the right to early terminate or extend our lease terms. During August 2021, we entered
into a first amendment of the New York Office Lease, to commence for a period of three years upon landlords’ substantial completion
of adequate substitution space, as defined. To date, the substitution space is not ready for use, accordingly the term extension has not
begun.
Operating lease costs were $155,000 and $174,000 for the three months
ended September 30, 2021 and 2020, respectively, and $457,000 and $459,000 for the nine months ended September 30, 2021 and 2020, respectively.
The table below presents aggregate future minimum payments due under
the New Lease and the New York Office Lease discussed above, reconciled to long-term lease liabilities and short-term lease liabilities
(included in accrued expenses and other current liabilities) included in the consolidated balance sheet as of September 30, 2021:
|
Schedule
of future minimum operating lease payments
|
|
|
|
|
|
|
|
Operating
Leases
|
|
|
|
|
(In
thousands)
|
|
|
Remainder
of 2021
|
|
$
|
149
|
|
|
2022
|
|
|
370
|
|
|
2023
|
|
|
364
|
|
|
2024
|
|
|
218
|
|
|
Thereafter
|
|
|
–
|
|
|
Total minimum
payments
|
|
|
1,101
|
|
|
Less:
short-term lease liabilities
|
|
|
(430
|
)
|
|
Long-term
lease liabilities
|
|
$
|
671
|
|
Inventor Royalties and Contingent Legal Expenses
In connection with the investment in certain patents and patent rights,
certain of Acacia’s operating subsidiaries executed related agreements which grant to the former owners of the respective patents
or patent rights, the right to receive inventor royalties based on future net revenues (as defined in the respective agreements) generated
as a result of licensing and otherwise enforcing the respective patents or patent portfolios.
Acacia’s operating subsidiaries may retain the services of law
firms that specialize in patent licensing and enforcement and patent law in connection with their licensing and enforcement activities.
These law firms may be retained on a contingent fee basis whereby such law firms are paid on a scaled percentage of any negotiated fees,
settlements or judgments awarded based on how and when the fees, settlements or judgments are obtained.
Patent Enforcement
Certain of Acacia’s operating subsidiaries are often required
to engage in litigation to enforce their patents and patent rights. In connection with any of Acacia’s operating subsidiaries’
patent enforcement actions, it is possible that a defendant may request and/or a court may rule that an operating subsidiary has violated
statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural
aspects of such enforcement actions. In such event, a court may issue monetary sanctions against Acacia or its operating subsidiaries
or award attorney’s fees and/or expenses to a defendant(s), which could be material.
Acacia is subject to claims, counterclaims and legal actions that arise
in the ordinary course of business. Management believes that the ultimate liability with respect to these claims and legal actions, if
any, will not have a material effect on Acacia’s consolidated financial position, results of operations or cash flows.
In December 2017, the Federal Court of Canada allowed a counterclaim
for invalidity of a patent asserted by Rapid Completions LLC and awarded costs payable by Rapid Completions LLC in amounts that are included
in the 2021 and 2020 accrual balances discussed below. During the three months ended September 30, 2021, the Company made approximately
$1.0 million in settlement payments.
On September 6, 2019, Slingshot Technologies, LLC, or Slingshot, filed
a lawsuit in Delaware Chancery Court against the Company and Acacia Research Group, LLC, or collectively, the Acacia Entities, Monarch
Networking Solutions LLC (“Monarch”), Acacia board member Katharine Wolanyk, and Transpacific IP Group, Ltd., or Transpacific.
Slingshot alleges that the Acacia Entities and Monarch misappropriated its confidential and proprietary information, purportedly furnished
to the Acacia Entities and Monarch by Ms. Wolanyk, in acquiring a patent portfolio from Transpacific after Slingshot’s exclusive
option to purchase the same patent portfolio from Transpacific had already expired. Slingshot seeks monetary damages, as well as equitable
and injunctive relief related to its alleged right to own the portfolio. On March 15, 2021, the court issued orders granting Monarch’s
motion to dismiss for lack of personal jurisdiction and Ms. Wolanyk’s motion to dismiss for lack of subject matter jurisdiction.
The remaining parties then commenced discovery, and have since served initial written requests and responses, and notices of the depositions
of the parties’ corporate designees. The Acacia Entities maintain that Slingshot’s allegations are baseless, that the Acacia
Entities neither had access to nor used Slingshot’s information in acquiring the portfolio, that the Acacia Entities acquired the
portfolio as a result of the independent efforts of its IP licensing group, and that Slingshot suffered no damages given its exclusive
option to purchase the portfolio had already ended and it has proven itself incapable of closing on the portfolio purchase.
During the three months ended September 30, 2021 and 2020, there were
no operating expenses related to settlement and contingency accruals. During the nine months ended September 30, 2021, we incurred $338,000
in operating expenses for settlement and contingency accruals. During the nine months ended September 30, 2020, operating expenses included
a net income for settlement offset by contingency accruals totaling $308,000, net of prior accruals. At September 30, 2021 and December
31, 2020, our contingency accrual balance was $587,000 and $1.3 million, respectively.
9. STOCKHOLDERS’ EQUITY
Repurchases of Common Stock
On August 5, 2019, Acacia’s Board of Directors approved a stock
repurchase program, which authorized the purchase of up to $10.0
million of the Company’s common stock through open market purchases, through block trades, through 10b5-1 plans, or by means
of private purchases, from time to time, through July 31, 2020. Stock repurchases for the periods presented, all of which were purchased
as part of a publicly announced plan or program, were as follows:
|
Schedule
of repurchased shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Number
of Shares
Purchased
|
|
|
Average
Price
paid per
Share
|
|
|
Approximate
Dollar
Value of Shares
that
May Yet be
Purchased
under the
Program
|
|
|
Plan
Expiration Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
20, 2020 - March 31, 2020
|
|
|
576,898
|
|
|
$
|
2.28
|
|
|
$
|
8,686,000
|
|
|
July
31, 2020
|
|
April
1, 2020 - April 23, 2020
|
|
|
1,107,639
|
|
|
$
|
2.42
|
|
|
$
|
6,001,000
|
|
|
July
31, 2020
|
|
Total
repurchases in 2020
|
|
|
1,684,537
|
|
|
$
|
2.37
|
|
|
|
|
|
|
|
In determining whether or not to repurchase any shares of Acacia’s
common stock, Acacia’s Board of Directors consider such factors, among others, as the impact of the repurchase on Acacia’s
cash position, as well as Acacia’s capital needs and whether there is a better alternative use of Acacia’s capital. Acacia
has no obligation to repurchase any amount of its common stock under the Stock Repurchase Program. Repurchases to date were made in the
open market in compliance with applicable SEC rules. The authorization to repurchase shares presented an opportunity to reduce the outstanding
share count and enhance stockholder value.
Tax Benefits Preservation Plan
On March 12, 2019, Acacia’s Board of Directors announced that
it had unanimously approved the adoption of a Tax Benefits Preservation Plan (the “Plan”). Our stockholders ratified the adoption
of the Plan in July 2019. The purpose of the Plan is to protect the Company’s ability to utilize potential tax assets, such as net
operating loss carryforwards and tax credits to offset potential future taxable income.
The Plan is designed to reduce the likelihood that the Company will
experience an ownership change by discouraging (i) any person or group from acquiring beneficial ownership of 4.9% or more of the Company’s
outstanding common stock and (ii) any existing stockholders who, as of the time of the first public announcement of the adoption of the
Plan, beneficially own more than 4.9% of the Company’s then-outstanding shares of the Company’s common stock from acquiring
additional shares of the Company’s common stock (subject to certain exceptions). There is no guarantee, however, that the Plan will
prevent the Company from experiencing an ownership change.
In connection with the adoption of the Plan, Acacia’s Board of
Directors authorized and declared a dividend distribution of one right for each outstanding share of the Company’s common stock
to stockholders of record at the close of business on March 16, 2019. On or after the distribution date, each right would initially entitle
the holder to purchase one one-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock, $0.001 par
value for a purchase price of $12.00. On March 15, 2021 the rights expired pursuant to their terms.
The Company has a provision in its Amended and Restated Certificate
of Incorporation, as amended (the “Charter Provision”) which generally prohibits transfers of its common stock that could
result in an ownership change. Like the Plan, the purpose of the Charter Provision is to protect the Company’s ability to utilize
potential tax assets, such as net operating loss carryforwards and tax credits to offset potential future taxable income. The Charter
Provision was approved by the Company’s stockholders on July 15, 2019.
10. INCOME/LOSS PER SHARE
The following table presents the shares of common stock outstanding
used in the calculation of basic and diluted net income (loss) per share:
|
Calculation
of basic and diluted net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(In
thousands, except share and per share information)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to Acacia Research Corporation
|
|
$
|
89,604
|
|
|
$
|
38,348
|
|
|
$
|
(55,507
|
)
|
|
$
|
33,205
|
|
|
Dividend
on Series A redeemable convertible preferred stock
|
|
|
(262
|
)
|
|
|
(467
|
)
|
|
|
(785
|
)
|
|
|
(1,118
|
)
|
|
Accretion
of Series A redeemable convertible preferred stock
|
|
|
(991
|
)
|
|
|
(733
|
)
|
|
|
(2,762
|
)
|
|
|
(2,045
|
)
|
|
Undistributed
earnings allocated to participating securities
|
|
|
(15,367
|
)
|
|
|
(6,619
|
)
|
|
|
–
|
|
|
|
(5,204
|
)
|
|
Net
income (loss) attributable to common stockholders - Basic
|
|
|
72,984
|
|
|
|
30,529
|
|
|
|
(59,054
|
)
|
|
|
24,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Dividend on Series A redeemable convertible preferred stock
|
|
|
–
|
|
|
|
467
|
|
|
|
–
|
|
|
|
–
|
|
|
Add:
Accretion of Series A redeemable convertible preferred stock
|
|
|
–
|
|
|
|
733
|
|
|
|
–
|
|
|
|
–
|
|
|
Less:
Change in fair value of Series A redeemable convertible preferred stock embedded derivative
|
|
|
–
|
|
|
|
(3,831
|
)
|
|
|
–
|
|
|
|
–
|
|
|
Less:
Change in fair value of Series A warrants
|
|
|
63
|
|
|
|
(1,348
|
)
|
|
|
–
|
|
|
|
(1,348
|
)
|
|
Less:
Change in fair value of dilutive Series B warrants
|
|
|
(902
|
)
|
|
|
(5,557
|
)
|
|
|
–
|
|
|
|
(5,557
|
)
|
|
Add:
Interest expense associated with Starboard Notes, net of tax
|
|
|
1,536
|
|
|
|
1,889
|
|
|
|
–
|
|
|
|
1,889
|
|
|
Add:
Undistributed earnings allocated to participating securities
|
|
|
15,367
|
|
|
|
6,619
|
|
|
|
–
|
|
|
|
5,204
|
|
|
Reallocation
of undistributed earnings to participating securities
|
|
|
(8,877
|
)
|
|
|
(296
|
)
|
|
|
–
|
|
|
|
(3,645
|
)
|
|
Net
income (loss) attributable to common stockholders - Diluted
|
|
$
|
80,171
|
|
|
$
|
29,205
|
|
|
$
|
(59,054
|
)
|
|
$
|
21,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares used in computing net income (loss) per share attributable to common stockholders - Basic
|
|
|
48,949,504
|
|
|
|
48,467,885
|
|
|
|
48,759,873
|
|
|
|
48,949,706
|
|
|
Potentially
dilutive common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock
|
|
|
–
|
|
|
|
9,589,041
|
|
|
|
–
|
|
|
|
–
|
|
|
Restricted
stock
|
|
|
798,356
|
|
|
|
728,936
|
|
|
|
–
|
|
|
|
598,328
|
|
|
Stock
options
|
|
|
35,815
|
|
|
|
21,624
|
|
|
|
–
|
|
|
|
–
|
|
|
Series
A Warrants
|
|
|
2,019,724
|
|
|
|
310,367
|
|
|
|
–
|
|
|
|
103,456
|
|
|
Series
B Warrants
|
|
|
41,278,103
|
|
|
|
31,506,849
|
|
|
|
–
|
|
|
|
10,502,283
|
|
|
Weighted-average
shares used in computing net income (loss) per share attributable to common stockholders - Diluted
|
|
|
93,081,502
|
|
|
|
90,624,702
|
|
|
|
48,759,873
|
|
|
|
60,153,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per common share
|
|
$
|
1.49
|
|
|
$
|
0.63
|
|
|
$
|
(1.21
|
)
|
|
$
|
0.51
|
|
|
Diluted
net income (loss) per common share
|
|
$
|
0.86
|
|
|
$
|
0.32
|
|
|
$
|
(1.21
|
)
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
potential common shares excluded from the computation of diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based
incentive awards
|
|
|
398,168
|
|
|
|
191,312
|
|
|
|
2,230,624
|
|
|
|
310,083
|
|
|
Series
A warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
5,000,000
|
|
|
|
–
|
|
|
Series
B warrants
|
|
|
–
|
|
|
|
68,493,151
|
|
|
|
100,000,000
|
|
|
|
68,493,151
|
|
|
Total
|
|
|
398,168
|
|
|
|
68,684,463
|
|
|
|
107,230,624
|
|
|
|
68,803,234
|
|
11. SUBSEQUENT EVENT
On October 8, 2021, the Company acquired all of the outstanding stock
of a leading printing technology company, for a cash purchase price of $37.0 million, which includes an initial $33.0 million cash payment
and a $4.0 million working capital adjustment. The business services a diverse group of customers that operate across healthcare, food
and beverage, manufacturing and logistics, and other sectors. The acquisition triggered the release of $35.0 million held in escrow (refer
to Note 2 “Long-Term Restricted Cash” for additional information).
