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 have 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 three months ended March 31,
2021, Acacia obtained control of one new patent portfolio. During fiscal year 2020, Acacia obtained control of five 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 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, 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
March 31, 2021, and results of its operations and its cash flows for the interim periods presented. The consolidated results of operations
for the three months ended March 31, 2021 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 generally accepted accounting principles in the United States of America 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.
COVID-19 Pandemic and the CARES Act
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 in government
instruments and high-quality short-term bonds. 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.
In response to the COVID-19 pandemic, the
Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. The CARES Act, among
other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer's social security payments, net
operating loss utilization and carryback periods and modifications to the net interest deduction limitations. The CARES Act has not had
a material impact on the Company’s income tax provision.
On December 27, 2020, the President of
the United States signed the Consolidated Appropriations Act, 2021 (“Consolidated Appropriations Act”) into law. The Consolidated
Appropriations Act is intended to enhance and expand certain provisions of the CARES Act, allows for the deductions of expenses related
to the Payroll Protection Program funds received by companies, and provides an update to meals and entertainment expensing for 2021.
The Consolidated Appropriations Act did not have a material impact to the Company’s income tax provision for 2020. The Company
will continue to evaluate the impact of the Consolidated Appropriations Act on its financial position, results of operations and cash
flows, if any.
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 generally accepted accounting principles in the
United States of America ("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 11, 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 (see Note 11), 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.
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, 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, 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 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 (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 with 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
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Paid-up Revenue Agreements
|
|
$
|
5,410
|
|
|
$
|
3,300
|
|
Recurring Revenue Agreements
|
|
|
393
|
|
|
|
515
|
|
Total Revenue
|
|
$
|
5,803
|
|
|
$
|
3,815
|
|
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, 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 accompanying consolidated statements of operations.
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 unaudited 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 unaudited condensed consolidated statements of operations.
Contingent legal fees are expensed in the unaudited 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
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.
Five licensees individually
accounted for 61%, 9%, 8%, 8% and 8% of revenues recognized during the three months ended March 31, 2021, and three licensees accounted
for 52%, 33%, and 9% of revenues recognized during the three months ended March 31, 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 months ended March 31, 2021 and 2020, 90% and 4%, respectively, of revenues were attributable to licensees
domiciled in foreign jurisdictions.
Three
licensees individually represented approximately 68%, 11%, and 10% of accounts receivable at March 31, 2021. Two licensees individually
represented approximately 62% and 21% of accounts receivable at December 31, 2020.
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. Refer to Note 4 for additional
information regarding our patents.
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 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, 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, 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.
Long Term Restricted Cash
Long-term 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. 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.
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 9 to our notes to consolidated financial statements for more information
related to our fair value measurement.
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 unaudited condensed consolidated
statements of operations in other income (expense). Dividend income is included in the unaudited condensed consolidated statements of
operations in other income (expense).
Equity securities at fair value for the
periods presented were comprised of the following:
|
|
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Security Type
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities - LF equity - common stock
|
|
$
|
40,053
|
|
|
$
|
138,241
|
|
|
$
|
(10,198
|
)
|
|
$
|
168,096
|
|
Equity securities - other equity - common stock
|
|
$
|
11,676
|
|
|
$
|
1,100
|
|
|
$
|
(552
|
)
|
|
$
|
12,224
|
|
Equity securities at fair value - common stock
|
|
$
|
51,729
|
|
|
$
|
139,341
|
|
|
$
|
(10,750
|
)
|
|
$
|
180,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities - LF equity - common stock
|
|
$
|
32,765
|
|
|
$
|
72,689
|
|
|
$
|
(583
|
)
|
|
$
|
104,871
|
|
Equity securities - other equity - common stock
|
|
$
|
4,086
|
|
|
$
|
1,410
|
|
|
$
|
(1,264
|
)
|
|
$
|
4,232
|
|
Equity securities at fair value - common stock
|
|
$
|
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 (expense).
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). We elected the fair value method for our investment in Veritone, Inc. (“Veritone”) upon
acquisition of the investment. As of March 31, 2021, we have no more investment in Veritone stocks and warrants.
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. Forfeitures are accounted for as they occur.
Restricted stock units 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 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.
Profits
Interest Units (“Units”) 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 Units 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 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. As of March 31, 2021, the Units totaled $591,000, which was their fair value as of December
31, 2018 after termination of service.
Series A Warrants
The fair value of the Series A Warrants is estimated using a Black-Scholes
option-pricing model. The fair value of the Series A Warrants as of March 31, 2021 was estimated based on the following assumptions:
volatility of 30 percent, risk-free rate of 1.29 percent, term of 6.54 years and a dividend yield of 0 percent. Refer to Note 10 for
additional information.
Series B Warrants
The fair value of the Series B Warrants is estimated using a Black-Scholes
option-pricing model. 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 March 31, 2021 was estimated based on the following assumptions: (1) volatility of 30 percent, risk-free rate of 1.31
percent, term of 6.63 years, and a dividend yield of 0 percent, and (2) volatility of 25 percent, risk-free rate of 0.11 percent, term
of 1.4 years and a dividend yield of 0 percent. Refer to Note 10 for additional information.
Embedded derivatives
Embedded derivatives that are required
to be bifurcated from their host contract are valued separately from the host instrument. The binomial model determines the value of
a convertible bond instrument by valuing its two separate components (i.e., a cash only component which is subject to the selected risk-adjusted
discount rate and an equity component where settlement is subject to a risk-free rate) within a single lattice framework. The binomial
model utilizes the Tsiveriotis and Fernandes implementation in which a convertible instrument is split into two separate components:
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 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 March 31, 2021
are as follows: volatility of 30 percent, risk-free rate of 1.3 percent, discount rate of 8.8 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. Refer to Note 10 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 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 11% for the
three ended March 31, 2021 and 2020, respectively. Tax benefit (expense) for the periods presented primarily reflects the impact of state
taxes and foreign taxes withholding or refund incurred on revenue agreements executed with third-party licensees domiciled in foreign
jurisdictions. The Company has recorded full valuation allowance against our net deferred tax assets as of March 31, 2021 and 2020. 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 shares
of common stock outstanding used in the calculation of basic and diluted net income (loss) per share:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands, except share and per share information)
|
|
Numerator:
|
|
|
|
|
|
|
Net loss attributable to Acacia Research Corporation
|
|
$
|
(164,618
|
)
|
|
$
|
(11,291
|
)
|
Dividend on Series A redeemable convertible preferred stock
|
|
|
(263
|
)
|
|
|
(263
|
)
|
Accretion of Series A redeemable convertible preferred stock
|
|
|
(852
|
)
|
|
|
(631
|
)
|
Undistributed earnings allocated to participating securities
|
|
|
29,068
|
|
|
|
–
|
|
Net loss attributable to common stockholders - basic and diluted
|
|
|
(136,665
|
)
|
|
|
(12,185
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing net loss per share attributable to common stockholders - basic and diluted
|
|
|
48,596,040
|
|
|
|
49,875,396
|
|
Basic and diluted net loss per common share
|
|
$
|
(2.81
|
)
|
|
$
|
(0.24
|
)
|
4. PATENTS, NET OF ACCUMULATED AMORTIZATION
Acacia’s
only identifiable intangible assets at March 31, 2021 and December 31, 2020 are patents and patent rights. Patent-related accumulated
amortization totaled $321,784,000 and $319,922,000 as of March 31, 2021 and December 31, 2020, respectively. Acacia’s patents have
remaining estimated economic useful lives ranging from thirty-two to fifty-eight 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 March 31, 2021:
For the years ending December 31,
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Remainder of 2021
|
|
|
$
|
7,836
|
|
2022
|
|
|
|
10,448
|
|
2023
|
|
|
|
10,381
|
|
2024
|
|
|
|
9,005
|
|
2025
|
|
|
|
6,630
|
|
Thereafter
|
|
|
|
750
|
|
|
|
|
$
|
45,050
|
|
For the three months ended March 31, 2021, Acacia accrued patent and
patent rights acquisition costs totaling $15 million, of which $10 million is due December 1, 2021, and $5 million is due February 18,
2023. They are included in Accrued patent investment costs and Other long-term liabilities in the accompanying consolidated balance sheets,
respectively.
5. 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 three months ended March 31, 2020, Acacia sold all remaining 298,450
shares Veritone common stock and recorded a realized loss of $3.3 million.
During
the year ended December 31, 2020, Acacia exercised 963,712 Veritone warrants, and recorded a realized gain of $11.5 million. During
the three months ended March 31, 2021, Acacia exercised all remaining 156,720 warrants, and recorded a realized gain of $839,000. At
March 31, 2021, there are no remaining Veritone warrants held by Acacia.
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 months
ended March 31, 2021 and 2020, the accompanying condensed consolidated statements of operations reflected the following:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Change in fair value of investment, warrants
|
|
$
|
–
|
|
|
$
|
630
|
|
Change in fair value of investment, common stock
|
|
|
–
|
|
|
|
3,478
|
|
Gain on sale of investment, warrants
|
|
|
839
|
|
|
|
–
|
|
Loss on sale of investment, common stock
|
|
|
–
|
|
|
|
(3,316
|
)
|
Net realized and unrealized gain (loss) on investment at fair value
|
|
$
|
839
|
|
|
$
|
792
|
|
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
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.
Operating
lease costs were $150,000 and $121,000 for the three months ended March 31, 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 lease liabilities included in the
consolidated balance sheet as of March 31, 2021:
|
|
Operating Leases
|
|
|
|
(In thousands)
|
|
2021
|
|
$
|
444
|
|
2022
|
|
|
370
|
|
2023
|
|
|
364
|
|
2024
|
|
|
218
|
|
Thereafter
|
|
|
–
|
|
Total minimum payments
|
|
$
|
1,396
|
|
Less: short-term lease liabilities
|
|
|
(551
|
)
|
Long-term lease liabilities
|
|
$
|
845
|
|
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 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 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 March 31,
2021, we incurred no operating expenses for settlement and contingency accruals. During the three months ended March 31, 2020, operating
expenses included a net income for settlement offset by contingency accruals totaling $234,000, net of prior accruals. At March 31, 2021,
our contingency accruals are not material.
7. 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:
|
|
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
|
Totals for 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.
8. RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements –
Recently Adopted
In December of 2019, the Financial Accounting Standards Board
(“FASB”) issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes"
("ASU 2019-12"). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted
Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early
adoption permitted. The Company adopted ASU 2019-12 as of January 1, 2021. The adoption of ASU 2019-12 did not have a material
effect on the Company's current financial position, results of operations or financial statement disclosures.
Recent Accounting Pronouncements –
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 this update will be effective for the Company
in fiscal year 2023, with early adoption permitted. Management is currently evaluating the impact that the amendments in this update
may have on the Company’s condensed consolidated financial statements.
9. 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.
Acacia holds the following types of financial
instruments at March 31, 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.
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 (Level 1).
Investments at fair value - warrants.
Warrants are recorded at fair value, as based on the Black-Scholes option-pricing model (Level 2).
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.
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.
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).
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 March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities at fair value
|
|
$
|
122,469
|
|
|
$
|
57,851
|
|
|
$
|
–
|
|
Total recurring fair value measurements as of March 31, 2021
|
|
$
|
122,469
|
|
|
$
|
57,851
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities at fair value
|
|
$
|
109,103
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Investment at fair value - warrants
|
|
|
–
|
|
|
|
2,752
|
|
|
|
–
|
|
Total recurring fair value measurements as of December 31, 2020
|
|
$
|
109,103
|
|
|
$
|
2,752
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A warrants
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
18,243
|
|
Series B warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
225,956
|
|
Embedded derivative liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
40,419
|
|
Total liabilities as of March 31, 2021
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
284,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A warrants
|
|
$
|
–
|
|
|
$
|
6,640
|
|
|
$
|
–
|
|
Series B warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
52,341
|
|
Embedded derivative liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
26,728
|
|
Total liabilities as of December 31, 2020
|
|
$
|
–
|
|
|
$
|
6,640
|
|
|
$
|
79,069
|
|
The following table
sets 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:
|
|
Series A Warrants Liability
|
|
|
Series A Preferred Stock Embedded Derivative Liability
|
|
|
Series B Warrants Liability
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Opening balance as of January 1, 2021
|
|
$
|
–
|
|
|
$
|
26,728
|
|
|
$
|
52,341
|
|
Transfers into Level 3
|
|
|
6,640
|
|
|
|
–
|
|
|
|
–
|
|
Remeasurement to fair value
|
|
|
11,603
|
|
|
|
13,691
|
|
|
|
173,615
|
|
Balance as of March 31, 2021
|
|
$
|
18,243
|
|
|
$
|
40,419
|
|
|
$
|
225,956
|
|
10. 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 warrants (the “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 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 March 31, 2021.
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.
Total proceeds received
and transaction costs incurred from the issuance of the Series A Redeemable Convertible Preferred Stock amounted to $35 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 months ended March 31, 2021 was $853,000.
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 in the “Change in fair value of redeemable
preferred stock embedded derivative” financial statement line item of the accompanying consolidated statements of operations. As
of March 31, 2021, the fair value of the Series A embedded derivative was $40.4 million.
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 5,000,000 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.
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 (expense) in the accompanying consolidated statements of operations. As of March 31, 2021, the fair value of the Series
A Warrants was $18.2 million. As of March 31, 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. Only 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 March 31, 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 the consolidated statements of operations in other income (expense).
As of March 31, 2021, the fair value of the Series B Warrants was $226.0 million.
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
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 million aggregate
principal amount of the Notes by September 30, 2020, and $35 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% 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 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 therefore the Company has agreed 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 on the balance sheet. 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 cost 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 is $1.5 million accrued and unpaid interest on the New Note as of March
31, 2021.
On January 29, 2021, the Company redeemed $50 million of the New Notes.
On March 31, 2021, the Company reissued $50 million of the New Notes for a total principal amount outstanding of New Notes as of March
31, 2021 of $115 million and the parties agreed that the Company will redeem the remaining $115 million of the principal amount of the
New Notes on or before July 15, 2021.
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 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. Only 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 is $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 March 31, 2021, $1,133,000 was amortized to interest expense. As of March 31, 2021, $196,000 is remaining to be amortized
until the Final Redemption Date of July 15, 2021.
11. LF EQUITY INCOME FUND PORTFOLIO
INVESTMENT
On April 3, 2020, the Company
entered into an Option Agreement with 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 (“Portfolio Companies”) 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 Portfolio
Companies at set prices at various future dates. The transfer dates would vary among the 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 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 Portfolio Companies 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 Portfolio Companies in the Transaction Agreement. As of
December 31, 2020, all of the equity securities in the Portfolio Companies were transferred to the Company pursuant to the Transaction
Agreement. The Company has sold a portion of the equity securities of such Portfolio Companies while retaining an interest in a number
of operating businesses, including a controlling interest in one of the Portfolio Companies.
For accounting purposes,
the total purchase price of the 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.
Changes in the fair value of Acacia’s
investment in the Portfolio Companies are recorded as unrealized gains or losses in the condensed consolidated statements of operations.
For the three months ended March 31, 2021
and 2020, the accompanying condensed consolidated statements of operations reflected the following:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Change in fair value of equity securities - LF Fund securities
|
|
$
|
37,176
|
|
|
$
|
–
|
|
Net realized and unrealized gain on investment in LF Fund securities
|
|
$
|
37,176
|
|
|
$
|
–
|
|
As part of the
Company’s acquisition of equity securities in the Portfolio Companies, the Company acquired a majority interest in the equity securities
of MalinJ1, 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 it owns 37.9% of outstanding
shares of Viamet.
12. SUBSEQUENT EVENTS
On May 4, 2021, the Company made an additional $9.8 million investment
in one of the Portfolio Companies.