NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
As used herein, “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’s operating subsidiaries invest in, license and
enforce 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 six months ended June 30, 2019, Acacia obtained control
of three new patent portfolios. During fiscal year 2018 Acacia did not obtain control of any new patent portfolios. During
fiscal year 2017 Acacia obtained control of one new patent portfolio. In fiscal year 2016, Acacia obtained control of two 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. Material 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 footnotes 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 should be read in conjunction with the consolidated financial statements and notes thereto for
the year ended December 31, 2018, as reported by Acacia in its Annual Report on Form 10-K filed with the SEC on March 15, 2019,
as amended by Amendment No. 1 to Form 10-K on Form 10-K/A, filed with the SEC on April 30, 2019, as well as in our other public
filings with the SEC. The December 31, 2018 condensed consolidated balance sheet was derived from audited financial statements
but does not include all disclosures required by U.S. GAAP. 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 June 30, 2019, and results of its operations and its cash flows for the interim
periods presented. The consolidated results of operations for the three and six months ended June 30, 2019 are not necessarily
indicative of the results to be expected for the entire fiscal year.
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 condensed 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, valuation of debt and equity instruments, stock-based compensation expense including the valuation of
profits interests, impairment of patent-related intangible assets, impairment of other investment, 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.
Reclassifications
Certain reclassifications have been made to the prior fiscal
year financial information to conform with the current fiscal year presentation. Such reclassifications had no impact on net income
or cash flows.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized upon transfer of control 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, that 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. IP Rights granted included the following, as applicable: (i) the grant of a non-exclusive, retroactive and 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 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 transfer combined items to which the promised
IP Rights are inputs and (ii) the Company's promise to transfer each individual IP right described above to the customer is not
separately identifiable from other promises to transfer IP Rights in the contract.
Since the promised IP Rights are not individually distinct,
the Company combines each individual IP right in the contract into a bundle of IP rights that is distinct and accounts for all
of the IP Rights promised in the contract as a single performance obligation. The IP Rights granted generally are “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 (i.e., transfer of control)
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 30-90 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 transfer 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 transfers 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:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(In thousands)
|
|
|
Paid-up Revenue Agreements
|
|
$
|
4,864
|
|
|
$
|
3,183
|
|
|
$
|
4,864
|
|
|
$
|
63,246
|
|
|
Recurring Revenue Agreements
|
|
|
596
|
|
|
|
3,302
|
|
|
|
3,983
|
|
|
|
5,332
|
|
|
|
|
$
|
5,460
|
|
|
$
|
6,485
|
|
|
$
|
8,847
|
|
|
$
|
68,578
|
|
Refer to “
Inventor Royalties and Contingent Legal Expenses
”
below for information on related direct costs of revenues.
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 patent
owners, 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 “Portfolio operations” in the accompanying condensed consolidated
statements of operations. Cost of revenues for the six months ended June 30, 2018 included $4.0 million of costs to acquire certain
patent rights related to revenues recognized in the period.
Inventor Royalties and Contingent Legal Expenses
Inventor royalties are expensed in the condensed consolidated
statements of operations in the period that the related revenues are recognized. In certain instances, pursuant to the terms of
the underlying inventor agreements, upfront advances paid to patent owners by Acacia’s operating subsidiaries are recoverable
from future net revenues. Patent costs 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 condensed 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 condensed consolidated statements
of operations.
Contingent legal fees are expensed in the condensed 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 typically 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
One licensee individually accounted for 89% of revenues recognized
during the three months ended June 30, 2019, and two licensees accounted for 55% and 27% of revenues recognized during the six
months ended June 30, 2019. Two licensees accounted for 48% and 42% of revenues recognized during the three months ended June 30,
2018 and one licensee accounted for 87% of revenues recognized during the six months ended June 30, 2018.
The Company does not have any material foreign operations. For
the three and six months ended June 30, 2019, 3% and 32%, respectively, of revenues were attributable to licensees domiciled in
foreign jurisdictions, based on the jurisdiction of the entity obligated to satisfy payment obligations pursuant to the applicable
revenue arrangement. For the three and six months ended June 30, 2018, 43% and 6%, respectively, of revenues were attributable
to licensees domiciled in foreign jurisdictions.
Two licensees individually represented approximately 82% and
14% of accounts receivable at June 30, 2019. Four licensees individually represented approximately 38%, 36%, 12% and 11% of accounts
receivable at December 31, 2018.
Patents
Patents include the cost of patents or patent rights (hereinafter,
collectively “patents”) 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, ranging from
ten to sixty months.
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 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 4 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.
Cash and Cash Equivalents
Acacia considers all highly liquid, short-term investments 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, securities issued or guaranteed by the U.S. government or its agencies, U.S. bank obligations,
and fully collateralized repurchase agreements. Acacia’s cash equivalents are measured at fair value using quoted prices
that represent Level 1 inputs.
Trading Securities- Debt
Investments in debt securities are reported at fair
value on a recurring basis, with related realized and unrealized gains and losses recorded in the condensed consolidated
statement of operations in other income (expense). Realized and unrealized gains and losses are recorded based on the
specific identification method. Interest is included in other income (expense).
Trading Securities - Equity
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 condensed consolidated statement of operations in other income (expense). Dividend income is included in
other income (expense).
Short-term investments for the periods presented were comprised
of the following:
|
|
|
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair Value
|
|
|
|
|
(In thousands)
|
|
|
Security Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities - debt
|
|
$
|
90,061
|
|
|
$
|
425
|
|
|
$
|
(4
|
)
|
|
$
|
90,482
|
|
|
Trading securities - equity
|
|
|
10,977
|
|
|
|
99
|
|
|
|
(142
|
)
|
|
|
10,934
|
|
|
|
|
$
|
101,038
|
|
|
$
|
524
|
|
|
$
|
(146
|
)
|
|
$
|
101,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities - debt
|
|
$
|
33,643
|
|
|
$
|
18
|
|
|
$
|
(19
|
)
|
|
$
|
33,642
|
|
|
Trading securities - equity
|
|
|
3,389
|
|
|
|
27
|
|
|
|
(404
|
)
|
|
|
3,012
|
|
|
|
|
$
|
37,032
|
|
|
$
|
45
|
|
|
$
|
(423
|
)
|
|
$
|
36,654
|
|
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
: Significant unobservable inputs, including the entity’s own assumptions
in determining the fair value of 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 fall into different levels of the fair value hierarchy. Financial
assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
(In thousands)
|
|
|
Assets as of June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities - debt
|
|
$
|
–
|
|
|
$
|
90,482
|
|
|
$
|
–
|
|
|
Trading securities - equity
|
|
|
10,934
|
|
|
|
–
|
|
|
|
–
|
|
|
Investment at fair value - warrants (Note 5)
|
|
|
–
|
|
|
|
4,459
|
|
|
|
–
|
|
|
Investment at fair value - common stock (Note 5)
|
|
|
4,611
|
|
|
|
–
|
|
|
|
–
|
|
|
Total recurring fair value measurements as of June 30, 2019
|
|
$
|
15,545
|
|
|
$
|
94,941
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities - debt
|
|
$
|
–
|
|
|
$
|
33,642
|
|
|
$
|
–
|
|
|
Trading securities - equity
|
|
|
3,012
|
|
|
|
–
|
|
|
|
–
|
|
|
Investment at fair value - warrants (Note 5)
|
|
|
–
|
|
|
|
2,064
|
|
|
|
–
|
|
|
Investment at fair value - common stock (Note 5)
|
|
|
5,395
|
|
|
|
–
|
|
|
|
–
|
|
|
Total recurring fair value measurements as of December 31, 2018
|
|
$
|
8,407
|
|
|
$
|
35,706
|
|
|
$
|
–
|
|
Investments 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).
Other 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 equity in earnings (losses) of investees in the condensed consolidated
statements of operations.
Investments in preferred stock with substantive liquidation
preferences are accounted for at cost, (subject to impairment considerations, as described below, if any), as adjusted for the
impact of changes resulting from observable price changes in orderly transactions for identical or similar investments of the same
issuer. In-substance common stock is an investment in an entity that has risk and reward characteristics that are substantially
similar to that entity's common stock. An investment in preferred stock with substantive liquidation preferences over common stock,
is not substantially similar to common stock, and therefore is not considered in-substance common stock. A liquidation preference
is substantive if the investment has a stated liquidation preference that is significant, from a fair value perspective, in relation
to the purchase price of the investment. A liquidation preference in an investee that has sufficient subordinated equity from a
fair value perspective is substantive because, in the event of liquidation, the investment will not participate in substantially
all of the investee's losses, if any.
The initial determination of whether an investment is substantially
similar to common stock is made on the initial date of investment if the Company has the ability to exercise significant influence
over the operating and financial policies of the investee. That determination is reconsidered if:
|
|
(i)
|
contractual terms of the investment are changed,
|
|
|
(ii)
|
there is a significant change in the capital structure of the investee, including the investee's receipt of additional subordinated
financing, or
|
|
|
(iii)
|
the Company obtains an additional interest in an investment, resulting in the method of accounting for the cumulative interest
being based on the characteristics of the investment at the date at which the Company obtains the additional interest.
|
Refer to Note 5 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 two to four years. The fair value
of restricted stock and restricted stock unit awards is 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. Stock-based compensation expense for awards with service and/or performance conditions
that affect vesting is recorded only for those awards expected to vest using an estimated forfeiture rate. The Company accounts
for forfeitures of awards as they occur.
Profits Interest Units (“Units”) are accounted
for in accordance with Accounting Standards Codification (“ASC”) 718-10, “Compensation - Stock Compensation.”
The vesting conditions do not meet the definition of service, market or performance conditions, as defined in ASC 718. As such,
the Units are classified as liability awards. Liability classified awards are measured at fair value on the grant date and re-measured
each reporting period at fair value until the award is settled. Compensation expense is adjusted each reporting period 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 and will continue to be fully recognized for any changes
in fair value, until the Units are settled. The Company has a purchase option to purchase the vested Units that are not otherwise
forfeited after termination of continuous service. The exercise price of the purchase option is the fair market value of the Units
on the date of termination of continuous service, or December 31, 2018. Non-cash stock compensation expense related to the Units
is reflected in general and administrative expense in the accompanying condensed consolidated statements of operations.
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 on the condensed consolidated balance sheets.
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 condensed consolidated statements
of operations and a new cost basis in the investment is established.
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 condensed 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 (3%) for
the three and six months ended June 30, 2019, respectively and (1%) and (1%) for the three and six months ended June 30, 2018,
respectively. Tax expense for the periods presented primarily reflects the impact of state taxes and foreign withholding taxes
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 June 30, 2019 and 2018. These assets primarily consist of
foreign tax credits, capital loss carryforwards and net operating loss carryforwards.
3. LOSS PER SHARE
The following table presents the weighted-average number of
shares of common stock outstanding used in the calculation of basic and diluted net income (loss) per share:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing net loss per share attributable to common stockholders - basic and diluted
|
|
|
49,696,016
|
|
|
|
50,061,812
|
|
|
|
49,676,059
|
|
|
|
50,345,808
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(1.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive equity-based incentive awards excluded from the computation of diluted loss per share
|
|
|
1,766,191
|
|
|
|
4,793,037
|
|
|
|
1,766,191
|
|
|
|
4,851,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum price of awards excluded from the computation of diluted loss per share
|
|
$
|
6.75
|
|
|
$
|
6.75
|
|
|
$
|
6.75
|
|
|
$
|
6.75
|
|
4. PATENTS
Acacia’s only identifiable intangible assets at June
30, 2019 and December 31, 2018 are patents and patent rights. Patent-related accumulated amortization totaled $321,054,000 and
$319,580,000 as of June 30, 2019 and December 31, 2018, respectively. Acacia’s patents have remaining estimated economic
useful lives ranging from ten to sixty 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 June 30, 2019:
|
For the years ending December 31,
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Remainder of 2019
|
|
|
$
|
1,720
|
|
|
|
2020
|
|
|
|
2,555
|
|
|
|
2021
|
|
|
|
1,695
|
|
|
|
2022
|
|
|
|
1,695
|
|
|
|
2023
|
|
|
|
1,620
|
|
|
|
Thereafter
|
|
|
|
249
|
|
|
|
|
|
|
$
|
9,534
|
|
5. INVESTMENTS
Investment at Fair Value
Veritone Investment Agreement
On August 15, 2016, Acacia entered into an Investment Agreement
with Veritone, Inc. (“Veritone”) pursuant to which Acacia funded in an aggregate of $20 million of loans to Veritone,
which were converted into 1,523,746 shares of Veritone’s common stock upon the public offering of Veritone’s common
stock on May 17, 2017 (“IPO”), based on a conversion price of $13.61 per share. Veritone also issued Acacia warrants
to purchase up to a total of 154,312 shares of Veritone’s common stock at an exercise price of $13.61 per share expiring
in 2020.
In addition, in August 2016, Veritone issued Acacia a five-year
warrant to purchase up to $50 million worth of shares of Veritone’s common stock at an exercise price of $13.61 per share
subject to certain adjustments. Upon the consummation of Veritone’s IPO, Acacia exercised its option to purchase an additional
2,150,335 shares of Veritone common stock, at an aggregate purchase price of $29.3 million. Acacia then received an additional
warrant
(the “10% Warrant”)
that provides for the issuance of an additional 809,400
shares of Veritone common stock at an exercise price of $13.61 per share expiring in 2022.
Veritone Bridge Loan
On March 14, 2017, Acacia entered into an additional secured
convertible promissory note with Veritone pursuant to which Acacia funded $4.0 million which was converted into 445,440 shares
of Veritone’s common stock at a conversion price of $13.61 per share in the IPO. Acacia also received a 10-year warrant to
purchase up to 156,720 shares of Veritone common stock at an exercise price of $13.61 per share expiring in 2027.
As a result of the foregoing transactions, Acacia received
an aggregate total of 4,119,521 of Veritone shares of Veritone’s common stock and warrants to purchase up to 1,120,432 shares
of in Veritone common stock. On October 5, 2018, a registration statement on Form S-3 registering all of Acacia’s shares
of Veritone common stock was declared effective by the SEC. During the year ended December 31, 2018, Acacia sold 2,700,000 shares
of Veritone common stock at prices ranging from $4.95 to $10.44 and recorded a realized loss of $19.1 million. During the three
and six months ended June 30, 2019, Acacia sold 239,920 and 867,968 shares of Veritone common stock at prices ranging from $6.45
to $9.21 and from $4.77 to $9.21 for the three and six months ended June 30, 2019, respectively, and recorded a realized loss
of $1.6 million and $7.2 million for the three and six months ended June 30, 2019, respectively.
At June 30, 2019, the fair value of the 551,552 shares of Veritone
common stock owned by Acacia totaled $4,611,000. At June 30, 2019, the fair value of the 1,120,432 common stock purchase warrants
held by Acacia totaled $4,459,000.
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 six
months ended June 30, 2019 and 2018, the accompanying consolidated statements of operations reflected the following:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(In thousands)
|
|
|
Change in fair value of investment, warrants
|
|
$
|
3,091
|
|
|
$
|
2,865
|
|
|
$
|
2,394
|
|
|
$
|
(4,782
|
)
|
|
Change in fair value of investment, common stock
|
|
|
3,889
|
|
|
|
8,482
|
|
|
|
11,494
|
|
|
|
(24,968
|
)
|
|
Loss on sale of investment, common stock
|
|
|
(1,642
|
)
|
|
|
–
|
|
|
|
(7,232
|
)
|
|
|
–
|
|
|
Net realized and unrealized gain (loss) on investment at fair value
|
|
$
|
5,338
|
|
|
$
|
11,347
|
|
|
$
|
6,656
|
|
|
$
|
(29,750
|
)
|
Miso Robotics Investment
In June 2017, Acacia made an investment in the Series A Preferred
financing round for Miso Robotics, Inc. (“Miso Robotics”), an innovative leader in robotics and artificial intelligence
solutions, totaling $2,250,000, acquiring a 22.6% ownership interest in Series A preferred stock of Miso Robotics, and one board
seat. In February 2018, Acacia made an additional equity investment in the Series B Preferred financing round for Miso Robotics
totaling $6,000,000, increasing its ownership interest (Series B preferred stock) in Miso Robotics to approximately 30%, and acquiring
an additional board seat.
As of February 2018, the preferred stock was not deemed to be
in-substance common stock due to the substantive liquidation preference associated with the preferred stock. As such, as of February
2018, the cumulative investment in Miso Robotics is recorded at cost and assessed for any impairment at each balance sheet date.
Prior to February 2018, the equity method of accounting was applied.
Acacia reviews its investments quarterly for indicators
of other-than-temporary impairment. In making this judgment, Acacia considers available quantitative and qualitative evidence
in evaluating potential impairment of its investments. As of June 30, 2019, Acacia recorded an impairment of $8.2 million for
its investment in Miso Robotics based on analyses including, but not limited to, operating results and trends, recent events and
changes in circumstances, which resulted in a determination that the carrying amount of the investment may not be recoverable
and thus a full impairment was warranted. This determination requires significant judgment, and valuations of private companies
are inherently more complex due to the lack of readily available market data. The future actual operational result of the investee
may differ significantly from our current conclusion. Refer to Note 2 “
Impairment of Investments
” for further
information.
6. COMMITMENTS AND CONTINGENCIES
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.
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 will lease
approximately 8,293 square feet of office space for our corporate headquarters in Irvine, California. The New Lease shall commence
on August 1, 2019. The term of the New Lease will be 60 months from the commencement date.
The Company has subleased a facility under another
operating lease agreement (the “Old Lease”) that we ceased using in December 2018, and the sublease will go
through the remaining term of the Old Lease, which ends on January 31, 2020. The total sublease income received was $195,000
for the three months ended June 30, 2019. The total sublease income received was $390,000 for the six months ended June
30, 2019.
Operating lease costs, net of sublease income, were $114,000
and $256,000 for the three months ended June 30, 2019 and 2018, respectively. Operating lease costs, net of sublease income, were
$205,000 and $502,000 for the six months ended June 30, 2019 and 2018, respectively.
The aggregate basic rent payable under the New Lease and the
Old Lease discussed above for the next five years is currently expected to be paid as follows:
|
Fiscal year ending December 31,
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2019
|
|
|
$
|
824
|
|
|
|
2020
|
|
|
|
435
|
|
|
|
2021
|
|
|
|
334
|
|
|
|
2022
|
|
|
|
349
|
|
|
|
2023
|
|
|
|
364
|
|
|
|
Thereafter
|
|
|
|
218
|
|
|
|
|
|
|
$
|
2,524
|
|
Effective January 1, 2019, the Company has adopted ASC
842, electing the practical expedient approaches and has recognized approximately $2.1 million of right-of-use assets and an
increase of $2.5 million in lease-related liabilities as of June 30, 2019. The adoption of ASC 842 is expected to have no
material impact on the Company's consolidated results of operations for the year ending December 31, 2019.
Other Matters
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 condensed consolidated financial position, results of
operations or cash flows.
On June 17, 2015, Celltrace Communications Ltd. (“Celltrace”),
filed a lawsuit against Acacia in U.S. District Court for the Southern District of New York, Case No. 1:15-cv-04746, alleging,
among other things, significant damages for alleged breach of contract, unjust enrichment and fraud. Acacia disputes the allegations
and does not believe that Celltrace is entitled to any damages. Acacia successfully moved to compel arbitration of the dispute,
and the District Court stayed the litigation pending arbitration before the International Court of Arbitration for the International
Chamber of Commerce (the “ICC”). Celltrace appealed the decision to the U.S. Court of Appeals for the Second Circuit,
which denied the appeal. Celltrace filed its request for arbitration of the claims with the ICC on November 28, 2016. Acacia filed
an answer denying all allegations of wrongdoing and asserting affirmative defenses. A tribunal was appointed to preside over the
arbitration and conducted its first case management conference on June 26, 2017. The parties conducted discovery and submitted
their cases in chief to the tribunal in a series of written submissions per the tribunal’s orders between January 2018 and
December 2018. The tribunal held an evidentiary hearing with live witness testimony in New York City between February 4, 2019 and
February 13, 2019. At the end of the hearing, the tribunal set a schedule for post-hearing briefing by the parties, which concluded
in April 2019. Acacia continues to vigorously contest all allegations of wrongdoing. On May 15, 2019, the tribunal gave notice
to the parties that it would render a final award by July 31, 2019. On July 22, 2019, the tribunal extended its deadline to render
a final award to August 30, 2019. As of the date of this report, the tribunal has not yet issued a final award.
In a separate case on December 6, 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 an amount to be determined.
For the six months ended June 30, 2019, settlement and loss
contingency related operating expenses were $650,000. The Company had no settlement and loss contingency related operating expenses
in the six months ended June 30, 2018.
7. STOCKHOLDERS’ EQUITY
Repurchases of Common Stock.
In February 2018, Acacia’s Board of Directors authorized
the repurchase of up to $20,000,000 of the Company’s outstanding common stock in open market purchases or private purchases,
from time to time, in amounts and at prices to be determined by the Board of Directors at its discretion (the “Stock Repurchase
Program”). In determining whether or not to repurchase any shares of Acacia’s common stock, Acacia’s Board of
Directors consider such factors 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. The repurchased shares are expected to be retired. Monthly stock repurchases for the periods presented, all of which were
purchased as part of a publicly announced plan or program, were as follows:
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
May 1, 2018 - May 30, 2018
|
|
1,190,420
|
|
$3.89
|
|
$15,366,000
|
|
February 28, 2019
|
|
Totals for 2018
|
|
1,190,420
|
|
$3.89
|
|
|
|
|
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”). 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.
8. RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements - Recently Adopted.
In February 2016, FASB issued ASU 2016-02, Leases, or
ASC 842 which requires a lessee to recognize in the statement of financial position a liability to make lease
payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset. In July 2018,
FASB issued ASU 2018-11, Leases, which provides an additional transition option for an entity to apply the provisions of ASC
842 by recognizing a cumulative effect adjustment at the effective date of adoption without adjusting the prior comparative
periods presented. Further, in January 2019, FASB issued ASU 2019-01, Leases: Codification Improvements, which provides
disclosure relief for the interim periods when adopting ASC 842. The primary impact of adopting ASC 842 for the Company was
the recognition in the consolidated balance sheet of certain lease-related assets and liabilities for operating leases with
terms longer than 12 months as of January 1, 2019. Such amounts were not previously accounted for in the Company's
consolidated balance sheets. The Company has adopted ASC 842, electing the practical expedient approaches and has recognized
approximately $2.1 million of right-of-use assets and an increase of $2.5 million in lease-related liabilities as of June 30,
2019. The adoption of ASC 842 is expected to have no material impact on the Company's consolidated results of operations for
the year ending December 31, 2019.
There have been no other material changes to the Company's significant
accounting policies during the three and six months ended June 30, 2019.
9. FAIR VALUE DISCLOSURES
Acacia holds the following types of financial instruments at
June 30, 2019 and December 31, 2018.
Trading securities - debt
Debt securities includes corporate bonds with fair value that
is determined by third party quotations from outside pricing services and/or computerized pricing models, which may be based on
transactions, bids or estimates. Acacia classifies the fair value of corporate bonds within Level 2 of the valuation hierarchy.
Trading securities – equity
Equity securities includes investments in public companies’
common stock and are recorded at fair value based on the quoted market price of each share on the valuation date. The fair values
of these securities are within Level 1 of the valuation hierarchy.
Investments at fair value - common stock
Acacia’s equity investment in Veritone common stock is
recorded at fair value based on the quoted market price of Veritone’s common stock on the applicable valuation date. The
fair values of these securities are within Level 1 of the valuation hierarchy.
Investments at fair value - warrants.
Warrants are recorded at fair value, as based on the Black-Scholes
option-pricing model (Level 2).
10.
SUBSEQUENT EVENTS
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.