ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our short-term investment activities is to preserve principal while concurrently maximizing the income we receive from our short-term investmentsequity securities without significantly increasing risk. Some of the securities that we invest in may be subject to interest rate risk and/or market risk. This means that a change in prevailing interest rates, with respect to interest rate risk, or a change in the value of the United States equity markets, with respect to market risk, may cause the principal amount or market value of the short-term investmentsequity securities to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the current value of the principal amount of our investment may decline. To minimize these risks in the future, we intend to maintain our portfolio of cash equivalents and short-term investmentsequity securities in a variety of securities, including commercial paper, money market funds, high-grade corporate bonds, government and non-government debtsecurities. Cash equivalents are comprised of investments in U.S. treasury securities and certificates of deposit.
We are exposed to investment risks related to changes in the underlying financial condition of certain of our partnerships with high-growth and potentially disruptive technology companies, and our related equity investments in thesetechnology companies. The fair value of these investments can be significantly impacted by the risk of adverse changes in securities markets generally, as well as risks related to the performance of the companies whose securities we have invested in, risks associated with specific industries, and other factors. These investments are subject to significant fluctuations in fair value due to the volatility of the securities markets and of the underlying businesses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related financial information required to be filed hereunder are indexed under Item 15 of this report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | | | |
| | | ACACIA RESEARCH CORPORATION | |
| | | | |
Dated: March 17, 2023 | March 7, 2018By: | By: | /s/ Robert Stewart | Martin D. McNulty Jr. |
| | | Robert Stewart | Martin D. McNulty Jr. |
| | | President
(AuthorizedInterim Chief Executive Officer (Principal Executive Officer and Duly Authorized Signatory)
| |
POWER OF ATTORNEY
We, the undersigned directors and officers of Acacia Research Corporation, do hereby constitute and appoint Robert StewartMartin D. McNulty Jr. and Clayton J. Haynes,Kirsten Hoover, and each of them, as our true and lawful attorneys-in-fact and agents with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney-in-fact and agent may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments hereto; and we do hereby ratify and confirm all that said attorney-in-fact and agent, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and the capacities and on the dates indicated.
|
| | | | | | | | | | | | | |
Signature | | Title | | Date |
| | | | | |
/s/ Martin D. McNulty Jr. | Robert Stewart | Interim Chief Executive Officer | President | | March 7, 201817, 2023 |
Martin D. McNulty Jr. | Robert Stewart | | (Principal Executive Officer) | | |
| | | | | |
/s/ Kirsten Hoover | Clayton J. Haynes | | Interim Chief Financial Officer and Treasurer | | March 7, 201817, 2023 |
Kirsten Hoover | Clayton J. Haynes | | (Principal Financial and Accounting Officer) | | |
| | | | | |
/s/ Gavin Molinelli | Fred A. de Boom | Director | Director | | March 7, 201817, 2023 |
Gavin Molinelli | Fred A. de Boom | | | | |
| | | | | |
/s/ Isaac Kohlberg | Edward W. Frykman | Director | Director | | March 7, 201817, 2023 |
Isaac Kohlberg | Edward W. Frykman | | | | |
| | | | | |
/s/ Maureen O'Connell | G. Louis Graziadio, III | Director | Executive Chairman and Director | | March 7, 201817, 2023 |
Maureen O'Connell | G. Louis Graziadio, III | | | | |
| | | | | |
/s/ Jonathan Sagal | William S. Anderson | Director | Director | | March 7, 201817, 2023 |
Jonathan Sagal | William S. Anderson | | | | |
| | | | | |
/s/ Katharine Wolanyk | Frank E. Walsh, III | Director | Director | | March 7, 201817, 2023 |
Katharine Wolanyk | Frank E. Walsh, III | | | | |
| | | | | |
/s/ | James F. Sanders | | Director | | March 7, 2018 |
| James F. Sanders | | | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Acacia Research Corporation
New York, NY
Opinion on the financial statements
Consolidated Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Acacia Research Corporation (the “Company”) as of December 31, 2017 and 2016,2021, the related consolidated statements of operations, comprehensive income (loss),series A redeemable convertible preferred stock and stockholders’ equity, and cash flows for each of the three years in the periodyear then ended December 31, 2017,2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as ofat December 31, 2017 and 2016,2022, and the results of its operations and its cash flows for each of the three years in the periodyear then ended December 31, 2017,2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 7, 2018 expressed an unqualified opinion.
Basis for opinion
Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.audit. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits includedaudit includes performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. Our auditsaudit also includedincludes evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Fair value measurement of the embedded derivative in the Series A Redeemable Convertible Preferred Stock
As described further in Notes 8 and 9 to the consolidated financial statements, on October 30, 2022, the Company entered into a Recapitalization Agreement with Starboard and the Investors, pursuant to which, among other things, the Company and Starboard agreed to enter into a series of transactions to restructure Starboard's existing investments in the Company in order to simplify the Company's capital structure. In connection with the Recapitalization Agreement, the Company changed its methodology to an as-converted value (Level 3), based on an expected Series A Convertible Preferred Stock conversion date on or prior to July 14, 2023.
We identified the fair value measurement of the embedded derivative in the Series A Redeemable Convertible Preferred Stock as a critical audit matter.
The principal consideration for our determination that the fair value measurement of the embedded derivative in the Series A Redeemable Convertible Preferred Stock is a critical audit matter are as follows. There is limited observable market data available for the embedded derivative as it is a complex financial instrument and, as such, the fair value measurement requires management to make complex judgments in order to identify and select the significant assumptions, which include the (i) coupon rate, (ii) conversion ratio, (iii) conversion date, and (iv) discount rate. In addition, the fair value measurement of the embedded derivative requires the use of complex financial models. As a result, obtaining sufficient appropriate audit evidence related to the fair value measurement requires significant auditor subjectivity.is management
Our audit procedures related to the fair value measurement of the embedded derivative included the following, among others.
•We obtained an understanding of the design and tested the implementation of relevant controls over estimating the fair value of the embedded derivative.
•With the assistance of our firm valuation specialists, we evaluated the reasonableness of the Company's valuation methodology and assumptions by: (1) comparing selected assumptions against available market data and historical amounts and (2) validating the mathematical accuracy of the model by developing an independent calculation and comparing to management's concluded valuations.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2007.2022.
Newport Beach, CaliforniaNew York, New York
March 7, 201817, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors and Stockholders
Acacia Research Corporation
New York, NY
Opinion on internal control over financial reporting
the Consolidated Financial Statements
We have audited the internal control over financial reportingaccompanying consolidated balance sheet of Acacia Research Corporation (the “Company”) as of December 31, 2017, based on criteria established in2021, the 2013 Internal Control-Integrated Framework issued byrelated consolidated statements of operations, series A redeemable convertible preferred stock and stockholders’ equity, and cash flows for the Committee of Sponsoring Organizations ofyear then ended, and the Treadway Commission (“COSO”related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the Company maintained,consolidated financial statements present fairly, in all material respects, effective internal control overthe financial reporting asposition of the Company at December 31, 2017, based on criteria established2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the 2013 Internal Control-Integrated Framework issued by COSO.United States of America.
Basis for Opinion
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), theThese consolidated financial statements are the responsibility of the Company as of and for the year ended December 31, 2017, and our report dated March 7, 2018 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (“Management’s Report”).management. Our responsibility is to express an opinion on the Company’s internal control overconsolidated financial reportingstatements based on our audit. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effectivethe consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting was maintained in all material respects. Ourreporting. As part of our audit included obtainingwe are required to obtain an understanding of internal control over financial reporting assessingbut not for the riskpurpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a material weakness exists, testingtest basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the designaccounting principles used and operating effectivenesssignificant estimates made by management, as well as evaluating the overall presentation of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTONBDO USA, LLP
We have served as the Company’s auditor from 2021 to 2022.
Newport Beach, CaliforniaNew York, NY
March 7, 2018
31, 2022
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, 2017 and 2016
(In thousands, except share and per share information)data)
|
| | | | | | | | |
| | 2017 | | 2016 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 136,604 |
| | $ | 127,540 |
|
Restricted cash | | — |
| | 11,512 |
|
Short-term investments | | — |
| | 19,443 |
|
Accounts receivable | | 153 |
| | 26,750 |
|
Prepaid expenses and other current assets | | 2,938 |
| | 3,245 |
|
Total current assets | | 139,695 |
| | 188,490 |
|
Investment at fair value(1) | | 104,754 |
| | — |
|
Investment - equity method(1) | | 2,195 |
| | — |
|
Loan receivable and accrued interest(1) | | — |
| | 18,616 |
|
Investment in warrants and shares(1) | | — |
| | 1,960 |
|
Patents, net of accumulated amortization | | 61,917 |
| | 86,319 |
|
Other non-current assets | | 207 |
| | 618 |
|
| | $ | 308,768 |
| | $ | 296,003 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| | |
|
Current liabilities: | | |
| | |
|
Accounts payable and accrued expenses | | $ | 7,956 |
| | $ | 14,283 |
|
Royalties and contingent legal fees payable | | 1,601 |
| | 13,908 |
|
Total current liabilities | | 9,557 |
| | 28,191 |
|
Other liabilities | | 3,552 |
| | 369 |
|
Total liabilities | | 13,109 |
| | 28,560 |
|
Commitments and contingencies (Note 11) | |
|
| |
|
|
Stockholders’ equity: | | |
| | |
|
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; no shares issued or outstanding | | — |
| | — |
|
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 50,639,926 shares issued and outstanding as of December 31, 2017 and 50,476,042 shares issued and outstanding as of December 31, 2016 | | 51 |
| | 50 |
|
Treasury stock, at cost, 1,729,408 shares as of December 31, 2017 and 2016 | | (34,640 | ) | | (34,640 | ) |
Additional paid-in capital | | 648,996 |
| | 642,453 |
|
Accumulated comprehensive loss | | (88 | ) | | (76 | ) |
Accumulated deficit | | (320,018 | ) | | (342,198 | ) |
Total Acacia Research Corporation stockholders’ equity | | 294,301 |
| | 265,589 |
|
Noncontrolling interests in operating subsidiaries | | 1,358 |
| | 1,854 |
|
Total stockholders’ equity | | 295,659 |
| | 267,443 |
|
| | $ | 308,768 |
| | $ | 296,003 |
|
(1) Refer to Note 7 for additional information.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 287,786 | | | $ | 308,943 | |
Equity securities | 61,608 | | | 361,778 | |
Equity securities without readily determinable fair value | 5,816 | | | 5,816 | |
Equity method investments | 30,934 | | | 30,934 | |
| | | |
Accounts receivable, net | 8,231 | | | 9,517 | |
Inventories | 14,222 | | | 8,930 | |
Prepaid expenses and other current assets | 19,388 | | | 4,764 | |
Total current assets | 427,985 | | | 730,682 | |
| | | |
Long-term restricted cash | — | | | 418 | |
Property, plant and equipment, net | 3,537 | | | 4,183 | |
Goodwill | 7,541 | | | 7,470 | |
| | | |
Other intangible assets, net | 36,658 | | | 48,793 | |
Leased right-of-use assets | 2,005 | | | 2,027 | |
| | | |
Other non-current assets | 5,202 | | | 5,283 | |
Total assets | $ | 482,928 | | | $ | 798,856 | |
| | | |
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 6,036 | | | $ | 5,440 | |
Accrued expenses and other current liabilities | 14,058 | | | 6,227 | |
Accrued compensation | 4,737 | | | 3,698 | |
Royalties and contingent legal fees payable | 699 | | | 2,463 | |
| | | |
Deferred revenue | 1,229 | | | 1,114 | |
Senior secured notes payable | 60,450 | | | 181,248 | |
Total current liabilities | 87,209 | | | 200,190 | |
| | | |
Deferred revenue, net of current portion | 568 | | | 581 | |
Series A warrant liabilities | — | | | 11,291 | |
Series A embedded derivative liabilities | 16,835 | | | 18,448 | |
Series B warrant liabilities | 84,780 | | | 96,378 | |
Long-term lease liabilities | 1,873 | | | 2,027 | |
Deferred income tax liabilities, net | 742 | | | 18,552 | |
Other long-term liabilities | 1,675 | | | 6,161 | |
Total liabilities | 193,682 | | | 353,628 | |
| | | |
Commitments and contingencies | | | |
| | | |
Series A redeemable convertible preferred stock, par value $0.001 per share; stated value $100 per share; 350,000 shares authorized, issued and outstanding as of December 31, 2022 and 2021; aggregate liquidation preference of $35,000 as of December 31, 2022 and 2021 | 19,924 | | | 14,753 | |
| | | |
Stockholders' equity: | | | |
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; no shares issued or outstanding | — | | | — | |
Common stock, par value $0.001 per share; 300,000,000 shares authorized; 43,484,867 and 48,807,748 shares issued and outstanding as of December 31, 2022 and 2021, respectively | 43 | | | 49 | |
Treasury stock, at cost, 16,183,703 and 5,388,469 shares as of December 31, 2022 and 2021, respectively | (98,258) | | | (47,281) | |
Additional paid-in capital | 663,284 | | | 648,389 | |
Accumulated deficit | (306,789) | | | (181,724) | |
Total Acacia Research Corporation stockholders' equity | 258,280 | | | 419,433 | |
| | | |
Noncontrolling interests | 11,042 | | | 11,042 | |
| | | |
Total stockholders' equity | 269,322 | | | 430,475 | |
| | | |
Total liabilities, redeemable convertible preferred stock, and stockholders' equity | $ | 482,928 | | | $ | 798,856 | |
The accompanying notes are an integral part of these consolidated financial statements.
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2017, 2016 and 2015
(In thousands, except share and per share information)data)
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
Revenues | | $ | 65,402 |
| | $ | 152,699 |
| | $ | 125,037 |
|
Operating costs and expenses: | | |
| | |
| | |
|
Cost of revenues: | | |
| | |
| | |
|
Inventor royalties | | 4,952 |
| | 22,730 |
| | 18,462 |
|
Contingent legal fees | | 16,682 |
| | 26,474 |
| | 16,169 |
|
Litigation and licensing expenses - patents | | 18,219 |
| | 27,858 |
| | 39,373 |
|
Amortization of patents | | 22,154 |
| | 34,208 |
| | 53,067 |
|
General and administrative expenses (including non-cash stock compensation expense of $8,885 in 2017, $9,062 in 2016 and $11,048 in 2015) | | 26,030 |
| | 32,919 |
| | 38,176 |
|
Other expenses - business development | | 1,189 |
| | 3,079 |
| | 3,391 |
|
Impairment of patent-related intangible assets | | 2,248 |
| | 42,340 |
| | 74,731 |
|
Impairment of goodwill | | — |
| | — |
| | 30,149 |
|
Other | | 1,200 |
| | 500 |
| | 4,141 |
|
Total operating costs and expenses | | 92,674 |
| | 190,108 |
| | 277,659 |
|
Operating loss | | (27,272 | ) | | (37,409 | ) | | (152,622 | ) |
Other income (expense): | | | | | | |
Gain on conversion of loans and accrued interest(1) | | 2,671 |
| | — |
| | — |
|
Gain on exercise of Primary Warrant(1) | | 4,616 |
| | — |
| | — |
|
Change in fair value of investment, net(1) | | 42,239 |
| | — |
| | — |
|
Equity in losses of investee(1) | | (220 | ) | | — |
| | — |
|
Other income | | 1,000 |
| | — |
| | — |
|
Interest income | | 1,605 |
| | 798 |
| | (56 | ) |
Total other income (expense) | | 51,911 |
| | 798 |
| | (56 | ) |
Income (loss) from operations before provision for income taxes | | 24,639 |
| | (36,611 | ) | | (152,678 | ) |
Provision for income taxes | | (2,955 | ) | | (18,188 | ) | | (4,800 | ) |
Net income (loss) including noncontrolling interests in subsidiaries | | 21,684 |
| | (54,799 | ) | | (157,478 | ) |
Net (income) loss attributable to noncontrolling interests in subsidiaries | | 496 |
| | 732 |
| | (2,558 | ) |
Net income (loss) attributable to Acacia Research Corporation | | $ | 22,180 |
| | $ | (54,067 | ) | | $ | (160,036 | ) |
Net income (loss) attributable to common stockholders - basic and diluted | | $ | 22,147 |
| | $ | (54,067 | ) | | $ | (160,730 | ) |
Basic and diluted income (loss) per common share | | $ | 0.44 |
| | $ | (1.08 | ) | | $ | (3.25 | ) |
Weighted-average number of shares outstanding, basic | | 50,495,119 |
| | 50,075,847 |
| | 49,505,817 |
|
Weighted-average number of shares outstanding, diluted | | 50,692,012 |
| | 50,075,847 |
| | 49,505,817 |
|
Cash dividends declared per common share | | $ | — |
| | $ | — |
| | $ | 0.50 |
|
(1) Refer to Note 7 for additional information.
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2022 | | 2021 |
| | | | | | | |
Revenues: | | | | | | | |
Intellectual property operations | | | | | $ | 19,508 | | | $ | 76,043 | |
Industrial operations | | | | | 39,715 | | | 12,004 | |
Total revenues | | | | | 59,223 | | | 88,047 | |
| | | | | | | |
Costs and expenses: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Cost of revenues - intellectual property operations | | | | | 18,029 | | | 28,691 | |
Cost of sales - industrial operations | | | | | 19,359 | | | 7,407 | |
Engineering and development expenses - industrial operations | | | | | 626 | | | 200 | |
Sales and marketing expenses - industrial operations | | | | | 8,621 | | | 1,538 | |
General and administrative expenses | | | | | 52,680 | | | 35,666 | |
Total costs and expenses | | | | | 99,315 | | | 73,502 | |
Operating (loss) income | | | | | (40,092) | | | 14,545 | |
| | | | | | | |
Other (expense) income: | | | | | | | |
Equity securities investments: | | | | | | | |
Change in fair value of equity securities | | | | | (263,695) | | | 87,527 | |
Gain on sale of equity securities | | | | | 125,318 | | | 116,129 | |
Earnings on equity investment in joint venture | | | | | 42,531 | | | 3,530 | |
Net realized and unrealized (loss) gain | | | | | (95,846) | | | 207,186 | |
| | | | | | | |
Change in fair value of investment | | | | | — | | | (2,752) | |
Gain on sale of investment | | | | | — | | | 3,591 | |
Change in fair value of the Series A and B warrants and embedded derivatives | | | | | 13,102 | | | (40,408) | |
Loss on foreign currency exchange | | | | | (3,324) | | | (89) | |
Interest expense on Senior Secured Notes | | | | | (6,432) | | | (7,922) | |
Interest income and other, net | | | | | 5,442 | | | 501 | |
Total other (expense) income | | | | | (87,058) | | | 160,107 | |
| | | | | | | |
(Loss) income before income taxes | | | | | (127,150) | | | 174,652 | |
| | | | | | | |
Income tax benefit (expense) | | | | | 16,211 | | | (24,287) | |
| | | | | | | |
Net (loss) income including noncontrolling interests in subsidiaries | | | | | (110,939) | | | 150,365 | |
| | | | | | | |
Net income attributable to noncontrolling interests in subsidiaries | | | | | (14,126) | | | (1,168) | |
| | | | | | | |
Net (loss) income attributable to Acacia Research Corporation | | | | | $ | (125,065) | | | $ | 149,197 | |
| | | | | | | |
(Loss) income per share: | | | | | | | |
Net (loss) income attributable to common stockholders - Basic | | | | | $ | (133,035) | | | $ | 118,804 | |
Weighted average number of shares outstanding - Basic | | | | | 42,460,504 | | | 48,797,290 | |
Basic net (loss) income per common share | | | | | $ | (3.13) | | | $ | 2.43 | |
Net (loss) income attributable to common stockholders - Diluted | | | | | $ | (133,035) | | | $ | 188,224 | |
Weighted average number of shares outstanding - Diluted | | | | | 42,460,504 | | | 98,470,870 | |
Diluted net (loss) income per common share | | | | | $ | (3.13) | | | $ | 1.91 | |
The accompanying notes are an integral part of these consolidated financial statements.
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2017, 2016 and 2015SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(In thousands)thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Series A Redeemable Convertible Preferred Stock | | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Noncontrolling Interests in Operating Subsidiaries | | Total Stockholders' Equity |
| Shares | | Amount | | | Shares | | Amount | | | | | |
Balance at December 31, 2021 | 350,000 | | | $ | 14,753 | | | | 48,807,748 | | | $ | 49 | | | $ | (47,281) | | | $ | 648,389 | | | $ | (181,724) | | | $ | 11,042 | | | $ | 430,475 | |
Net (loss) income including noncontrolling interests in subsidiaries | — | | | — | | | | — | | | — | | | — | | | — | | | (125,065) | | | 14,126 | | | (110,939) | |
Distributions to noncontrolling interests in subsidiaries | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | (14,126) | | | (14,126) | |
Accretion of Series A Redeemable Convertible Preferred Stock to redemption value | — | | | 5,171 | | | | — | | | — | | | — | | | (5,171) | | | — | | | — | | | (5,171) | |
Dividend on Series A Redeemable Convertible Preferred Stock | — | | | — | | | | — | | | — | | | — | | | (2,799) | | | — | | | — | | | (2,799) | |
Exercise of Series A warrants | — | | | — | | | | 5,000,000 | | | 5 | | | — | | | 20,645 | | | — | | | — | | | 20,650 | |
| | | | | | | | | | | | | | | | | | |
Issuance of common stock for vesting of restricted stock units | — | | | — | | | | 646,668 | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock for unvested restricted stock awards, net of forfeitures | — | | | — | | | | 197,999 | | | — | | | — | | | — | | | — | | | — | | | — | |
Shares withheld related to net share settlement of share-based awards | — | | | — | | | | (372,314) | | | — | | | — | | | (1,600) | | | — | | | — | | | (1,600) | |
Compensation expense for share-based awards | — | | | — | | | | — | | | — | | | — | | | 3,820 | | | — | | | — | | | 3,820 | |
Repurchase of common stock | — | | | — | | | | (10,795,234) | | | (11) | | | (50,977) | | | — | | | — | | | — | | | (50,988) | |
Balance at December 31, 2022 | 350,000 | | | $ | 19,924 | | | | 43,484,867 | | | $ | 43 | | | $ | (98,258) | | | $ | 663,284 | | | $ | (306,789) | | | $ | 11,042 | | | $ | 269,322 | |
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Net income (loss) including noncontrolling interests in subsidiaries | $ | 21,684 |
| | $ | (54,799 | ) | | $ | (157,478 | ) |
Other comprehensive income (loss): | | | | | |
Unrealized gain (loss) on short-term investments, net of tax of $0 | (40 | ) | | 40 |
| | (356 | ) |
Unrealized gain (loss) on foreign currency translation, net of tax of $0 | 58 |
| | 77 |
| | (123 | ) |
Add: reclassification adjustment for (gains) losses included in net income (loss) | (30 | ) | | 22 |
| | 617 |
|
Total other comprehensive income (loss) | 21,672 |
| | (54,660 | ) | | (157,340 | ) |
Comprehensive income (loss) attributable to noncontrolling interests | 496 |
| | 732 |
| | (2,558 | ) |
Comprehensive income (loss) attributable to Acacia Research Corporation | $ | 22,168 |
|
| $ | (53,928 | ) | | $ | (159,898 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Series A Redeemable Convertible Preferred Stock | | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Noncontrolling Interests in Operating Subsidiaries | | Total Stockholders' Equity |
| Shares | | Amount | | | Shares | | Amount | | | | | |
Balance at December 31, 2020 | 350,000 | | | $ | 10,924 | | | | 49,279,453 | | | $ | 49 | | | $ | (43,270) | | | $ | 651,416 | | | $ | (330,921) | | | $ | 11,042 | | | $ | 288,316 | |
Net income including noncontrolling interests in subsidiaries | — | | | — | | | | — | | | — | | | — | | | — | | | 149,197 | | | 1,168 | | | 150,365 | |
Distributions to noncontrolling interests in subsidiaries | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | (1,168) | | | (1,168) | |
Accretion of Series A Redeemable Convertible Preferred Stock to redemption value | — | | | 3,829 | | | | — | | | — | | | — | | | (3,829) | | | — | | | — | | | (3,829) | |
Dividend on Series A Redeemable Convertible Preferred Stock | — | | | — | | | | — | | | — | | | — | | | (1,452) | | | — | | | — | | | (1,452) | |
| | | | | | | | | | | | | | | | | | |
Stock options exercised | — | | | — | | | | 60,000 | | | 1 | | | — | | | 201 | | | — | | | — | | | 202 | |
Issuance of common stock for vesting of restricted stock units | — | | | — | | | | 28,834 | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock for unvested restricted stock awards, net of forfeitures | — | | | — | | | | 223,565 | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
Compensation expense for share-based awards | — | | | — | | | | — | | | — | | | — | | | 2,053 | | | — | | | — | | | 2,053 | |
Repurchase of common stock | — | | | — | | | | (784,104) | | | (1) | | | (4,011) | | | — | | | — | | | — | | | (4,012) | |
Balance at December 31, 2021 | 350,000 | | | $ | 14,753 | | | | 48,807,748 | | | $ | 49 | | | $ | (47,281) | | | $ | 648,389 | | | $ | (181,724) | | | $ | 11,042 | | | $ | 430,475 | |
The accompanying notes are an integral part of these consolidated financial statements.
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2017, 2016 and 2015CASH FLOWS
(In thousands, except share information)thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Shares | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Comprehensive Income (Loss) | | Accumulated Deficit | | Noncontrolling Interests in Operating Subsidiaries | | Total |
| | | | | | | | | | | | | | | | |
Balance at December 31, 2014 | | 50,065,382 |
| | $ | 50 |
| | $ | (34,640 | ) | | $ | 646,595 |
| | $ | (353 | ) | | $ | (128,095 | ) | | $ | 5,491 |
| | $ | 489,048 |
|
Net loss attributable to Acacia Research Corporation | | — |
| | — |
| | — |
| | — |
| | — |
| | (160,036 | ) | | — |
| | (160,036 | ) |
Dividends paid to stockholders | | — |
| | — |
| | — |
| | (25,434 | ) | | — |
| | — |
| | — |
| | (25,434 | ) |
Stock options exercised | | 135,000 |
| | — |
| | — |
| | 938 |
| | — |
| | — |
| | — |
| | 938 |
|
Compensation expense for share-based awards, net of forfeitures | | 450,857 |
| | 1 |
| | — |
| | 11,047 |
| | — |
| | — |
| | — |
| | 11,048 |
|
Net income attributable to noncontrolling interests in subsidiaries | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,558 |
| | 2,558 |
|
Distributions to noncontrolling interests in operating subsidiary | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,105 | ) | | (4,105 | ) |
Unrealized loss on foreign currency translation | | — |
| | — |
| | — |
| | — |
| | (123 | ) | | — |
| | — |
| | (123 | ) |
Unrealized gain on short-term investments | | — |
| | — |
| | — |
| | — |
| | 261 |
| | — |
| | — |
| | 261 |
|
Balance at December 31, 2015 | | 50,651,239 |
| | 51 |
| | (34,640 | ) | | 633,146 |
| | (215 | ) | | (288,131 | ) | | 3,944 |
| | 314,155 |
|
Net loss attributable to Acacia Research Corporation | | — |
| | — |
| | — |
| | — |
| | — |
| | (54,067 | ) | | — |
| | (54,067 | ) |
Stock options exercised | | 100,992 |
| | — |
| | — |
| | 326 |
| | — |
| | — |
| | — |
| | 326 |
|
Compensation expense for share-based awards, net of forfeitures | | (262,660 | ) | | (1 | ) | | — |
| | 9,063 |
| | — |
| | — |
| | — |
| | 9,062 |
|
Repurchase of restricted common stock | | (13,529 | ) | | — |
| | — |
| | (82 | ) | | — |
| | — |
| | — |
| | (82 | ) |
Net loss attributable to noncontrolling interests in subsidiaries | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (732 | ) | | (732 | ) |
Distributions to noncontrolling interests in operating subsidiary | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,358 | ) | | (1,358 | ) |
Unrealized gain on short-term investments | | — |
| | — |
| | — |
| | — |
| | 40 |
| | — |
| | — |
| | 40 |
|
Unrealized gain on foreign currency translation | | — |
| | — |
| | — |
| | — |
| | 99 |
| | — |
| | — |
| | 99 |
|
Balance at December 31, 2016 | | 50,476,042 |
| | 50 |
| | (34,640 | ) | | 642,453 |
| | (76 | ) | | (342,198 | ) | | 1,854 |
| | 267,443 |
|
Net income attributable to Acacia Research Corporation | | — |
| | — |
| | — |
| | — |
| | — |
| | 22,180 |
| | — |
| | 22,180 |
|
Stock options exercised | | 207,863 |
| | 1 |
| | — |
| | 744 |
| | — |
| | — |
| | — |
| | 745 |
|
Compensation expense for share-based awards, net of forfeitures | | (35,310 | ) | | — |
| | — |
| | 5,844 |
| | — |
| | — |
| | — |
| | 5,844 |
|
Repurchase of restricted common stock | | (8,669 | ) | | — |
| | — |
| | (45 | ) | | — |
| | — |
| | — |
| | (45 | ) |
Net loss attributable to noncontrolling interests in subsidiaries | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (496 | ) | | (496 | ) |
Unrealized gain on foreign currency translation | | — |
| | — |
| | — |
| | — |
| | 28 |
| | — |
| | — |
| | 28 |
|
Unrealized loss on short-term investments | | — |
| | — |
| | — |
| | — |
| | (40 | ) | | — |
| | — |
| | (40 | ) |
Balance at December 31, 2017 | | 50,639,926 |
| | $ | 51 |
| | $ | (34,640 | ) | | $ | 648,996 |
| | $ | (88 | ) | | $ | (320,018 | ) | | $ | 1,358 |
| | $ | 295,659 |
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| | | |
Cash flows from operating activities: | | | |
Net (loss) income including noncontrolling interests in subsidiaries | $ | (110,939) | | | $ | 150,365 | |
Adjustments to reconcile net (loss) income including noncontrolling interests in subsidiaries to net cash (used in) provided by operating activities: | | | |
Change in fair value of investment | — | | | 2,752 | |
Gain on sale of investment | — | | | (3,591) | |
Depreciation and amortization | 13,514 | | | 10,688 | |
Amortization of debt discount and issuance costs | 90 | | | 110 | |
| | | |
| | | |
| | | |
Change in fair value of Series A redeemable convertible preferred stock embedded derivatives | (1,613) | | | (8,280) | |
Change in fair value of Series A warrants | (1,895) | | | 4,651 | |
Change in fair value of Series B warrants | (11,598) | | | 44,037 | |
Loss on exercise of Series A warrants | 2,004 | | | — | |
Compensation expense for share-based awards | 3,820 | | | 2,053 | |
Loss on foreign currency exchange | 3,324 | | | 89 | |
Change in fair value of equity securities | 263,695 | | | (87,527) | |
Gain on sale of equity securities | (125,318) | | | (116,129) | |
| | | |
Earnings on equity investment in joint venture | (42,531) | | | (3,530) | |
Deferred income taxes | (17,810) | | | 15,742 | |
Changes in assets and liabilities: | | | |
Accounts receivable | 998 | | | (747) | |
Inventories | (5,291) | | | 1,906 | |
Prepaid expenses and other assets | (5,986) | | | (78) | |
Accounts payable and accrued expenses | (136) | | | 760 | |
Royalties and contingent legal fees payable | (1,764) | | | 301 | |
Deferred revenue | 100 | | | (246) | |
| | | |
Net cash (used in) provided by operating activities | (37,336) | | | 13,326 | |
| | | |
Cash flows from investing activities: | | | |
Acquisition, net of cash acquired | — | | | (33,250) | |
Patent acquisition | (5,000) | | | (21,000) | |
Sale of investment at fair value | — | | | 3,591 | |
Purchases of equity securities | (112,142) | | | (66,624) | |
Sales of equity securities | 273,934 | | | 154,784 | |
| | | |
Cash distributed for notes receivable | — | | | (4,021) | |
| | | |
Distributions received from equity investment in joint venture | 28,404 | | | 2,362 | |
| | | |
Purchases of property and equipment | (732) | | | (91) | |
| | | |
Net cash provided by investing activities | 184,464 | | | 35,751 | |
| | | |
Cash flows from financing activities: | | | |
Repurchase of common stock | (50,988) | | | (4,012) | |
Issuance of Senior Secured Notes, net of lender fee | — | | | 115,000 | |
Paydown of Senior Secured Notes | (120,000) | | | (50,000) | |
| | | |
Dividend on Series A Redeemable Convertible Preferred Stock | (2,799) | | | (1,452) | |
Taxes paid related to net share settlement of share-based awards | (1,600) | | | — | |
Proceeds from exercise of Series A warrants | 9,250 | | | — | |
Proceeds from exercise of stock options | — | | | 202 | |
Net cash (used in) provided by financing activities | (166,137) | | | 59,738 | |
| | | |
Effect of exchange rates on cash and cash equivalents | (2,566) | | | — | |
| | | |
(Decrease) increase in cash and cash equivalents and restricted cash | (21,575) | | | 108,815 | |
| | | |
Cash and cash equivalents and restricted cash, beginning | 309,361 | | | 200,546 | |
| | | |
Cash and cash equivalents and restricted cash, ending | $ | 287,786 | | | $ | 309,361 | |
| | | |
Supplemental schedule of cash flow information: | | | |
Interest paid | $ | 7,229 | | | $ | 7,336 | |
Income taxes paid | 384 | | | 25 | |
Noncash investing and financing activities: | | | |
| | | |
Patent acquisition in exchange of notes receivable | — | | | 4,000 | |
Accrued patent costs | 9,000 | | | 5,000 | |
Distribution to noncontrolling interests in subsidiaries | 14,126 | | | 1,168 | |
The accompanying notes are an integral part of these consolidated financial statements.
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2017, 2016 and 2015
(In thousands)statements
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
Cash flows from operating activities: | | | | | | |
Net income (loss) including noncontrolling interests in subsidiaries | | $ | 21,684 |
| | $ | (54,799 | ) | | $ | (157,478 | ) |
Adjustments to reconcile net income (loss) including noncontrolling interests in subsidiaries to net cash provided by (used in) operating activities: | | |
| | |
| | |
|
Gain on conversion of loans and accrued interest | | (2,671 | ) | | — |
| | — |
|
Gain on exercise of Primary Warrant | | (4,616 | ) | | — |
| | — |
|
Change in fair value of investment, net | | (42,239 | ) | | — |
| | — |
|
Depreciation and amortization | | 22,243 |
| | 34,355 |
| | 53,289 |
|
Non-cash stock compensation | | 8,885 |
| | 9,062 |
| | 11,048 |
|
Impairment of patent-related intangible assets | | 2,248 |
| | 42,340 |
| | 74,731 |
|
Impairment of goodwill | | — |
| | — |
| | 30,149 |
|
Other | | (374 | ) | | (477 | ) | | (109 | ) |
Changes in assets and liabilities: | | |
| | |
| | |
|
Restricted cash | | 11,512 |
| | (787 | ) | | (10,725 | ) |
Accounts receivable | | 26,597 |
| | 6,750 |
| | (13,332 | ) |
Prepaid expenses and other assets | | (135 | ) | | 1,593 |
| | (619 | ) |
Accounts payable and accrued expenses / patent costs | | (6,349 | ) | | (3,006 | ) | | 2,570 |
|
Royalties and contingent legal fees payable | | (12,307 | ) | | (970 | ) | | 527 |
|
Net cash provided by (used in) operating activities | | 24,478 |
| | 34,061 |
| | (9,949 | ) |
Cash flows from investing activities: | | |
| | |
| | |
|
Investment in Investees | | (31,514 | ) | | — |
| | — |
|
Advances to Investee (Note 7) | | (4,000 | ) | | (20,000 | ) | | — |
|
Purchases of property and equipment |
| (2 | ) |
| (4 | ) |
| (8 | ) |
Purchases of short-term investments |
| (448,388 | ) |
| (62,633 | ) |
| (23,296 | ) |
Sales and maturities of short-term investments |
| 467,790 |
|
| 43,232 |
|
| 82,115 |
|
Patent portfolio investment costs |
| — |
| | (1,225 | ) | | (19,504 | ) |
Net cash provided by (used in) investing activities |
| (16,114 | ) |
| (40,630 | ) |
| 39,307 |
|
Cash flows from financing activities: | | |
| | |
| | |
|
Dividends paid to stockholders | | — |
| | — |
| | (25,434 | ) |
Distributions to noncontrolling interests in operating subsidiary | | — |
|
| (1,358 | ) |
| (4,105 | ) |
Proceeds from the exercise of stock options | | 745 |
|
| 326 |
|
| 938 |
|
Repurchases of restricted common stock | | (45 | ) |
| (82 | ) |
| — |
|
Net cash provided by (used in) financing activities | | 700 |
| | (1,114 | ) | | (28,601 | ) |
Increase (decrease) in cash and cash equivalents | | 9,064 |
| | (7,683 | ) | | 757 |
|
Cash and cash equivalents, beginning | | 127,540 |
| | 135,223 |
| | 134,466 |
|
Cash and cash equivalents, ending | | $ | 136,604 |
| | $ | 127,540 |
| | $ | 135,223 |
|
Supplemental schedule of noncash investing activities: | | | | | | |
Patent portfolio investment costs included in accrued expenses / costs | | $ | — |
| | $ | — |
| | $ | 1,000 |
|
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Description of Business. As used herein, “Acacia” and the “Company” refer to Acacia Research Corporation and/(the “Company,” "Acacia," “we,” “us,” or its wholly"our") is an opportunistic capital platform that purchases businesses based on the differentials between public and majority-ownedprivate market valuations. We use a wide range of transactional 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 expertiseoperational capabilities to patent assets to unlockrealize the financialintrinsic value in their patented inventions. Acacia also identifies opportunities to partner with high-growth and potentially disruptive technology companies. These partnerships usually involve an equitythe businesses that we acquire. Our ideal transactions include the acquisition of public or debt investment by Acacia, along with entering into IP related agreements where Acacia provides IP andprivate companies, the acquisition of divisions of other patent related services to these companies. Acacia leverages its experience, expertise, data and relationships developed as a leadercompanies, or structured transactions that can result in the recapitalization or restructuring of the ownership of a business to enhance value.
Our focus is companies with market values in the sub-$2 billion range and particularly on businesses valued at $1 billion or less. We are, however, opportunistic, and may pursue acquisitions that are larger under the right circumstance.
We operate our business based on three key principles of People, Process and Performance and have built a management team with demonstrated expertise in Research, Transactions and Execution, and Operations and Management of our targeted acquisitions.
We utilized these skill sets and resources to acquire a portfolio of equity securities of public and private life science businesses, or the “Life Sciences Portfolio,” in June 2020. As of December 31, 2022, we have monetized a majority of the portfolio while retaining an interest in a number of operating businesses, including a controlling interest in one of the companies in the portfolio. Further, some of the businesses in which we continue to hold an interest generate revenues through the receipt of royalties. Refer to Note 3 for additional information.
Relationship with Starboard Value, LP
Our strategic relationship with Starboard Value, LP (“Starboard”) provides us access to industry expertise, and operating partners and industry experts to evaluate potential acquisition opportunities and enhance the oversight and value creation of such businesses once acquired. Starboard has provided, and we expect will continue to provide, ready access to its extensive network of industry executives and, as part of our relationship, Starboard has assisted, and we expect will continue to assist, with sourcing and evaluating appropriate acquisition opportunities. Refer to Note 8 for additional information.
Recapitalization
On October 30, 2022, the Company entered into a Recapitalization Agreement (the “Recapitalization Agreement”) with Starboard and certain funds and accounts affiliated with, or managed by, Starboard (collectively, the “Investors”), pursuant to which, among other things, the Company and Starboard agreed to enter into a series of transactions (the “Recapitalization”) to restructure Starboard’s existing investments in the Company in order to simplify the Company’s capital structure. Under the Recapitalization Agreement, the Company and Starboard agreed to take certain actions in connection with the Recapitalization. Refer to Note 8 for a detailed description of the Recapitalization and the actions taken and contemplated to be taken in connection therewith.
Intellectual Property Operations – Patent Licensing, Enforcement and Technologies Business
The Company invests in 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 intellectual property rights for the use of patented technologies that its operating subsidiaries control or own. Acacia’s operating subsidiaries assist patent owners with the prosecutionabsolute return assets 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 principalsengages in the licensing and enforcement effort,of patented technologies. Through our Patent Licensing, Enforcement and Technologies Business, operated under Acacia Research Group, LLC and its wholly-owned subsidiaries ("ARG"), we are a principal in the licensing and enforcement of patent portfolios, with our operating subsidiaries obtaining control of the rights in the patent portfolio or control ofpurchasing the patent portfolio outright. Acacia’sWhile we, from time to time, partner with inventors and patent owners, from small entities to large corporations, we assume all responsibility for advancing operational expenses while pursuing a patent licensing and enforcement program. When applicable, we share net licensing revenue with our patent partners as that program matures, on a pre-arranged and negotiated basis. We may also provide upfront capital to patent owners as an advance against future licensing revenue.
Currently, on a consolidated basis, our 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. ARG generates
Neither Acacia norrevenues and related cash flows from the granting of IP rights for the use of patented technologies that its operating subsidiaries invent new technologiescontrol or products; rather, Acaciaown.
Our Patent Licensing, Enforcement and Technologies Business depends upon the identification and investment in new patents, inventions and companies that own intellectual propertyIP through its relationships with inventors, universities, research institutions, technology companies and others. If Acacia’sARG’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 fiscalthe year 2017 Acaciaended December 31, 2022, ARG did not obtain control of any new patent portfolios. During the year ended December 31, 2021, ARG obtained control of one new patent portfolio. In fiscal year 2016, Acacia obtained control
Industrial Operations Acquisition
On October 7, 2021, we consummated our first operating company acquisition of two new patent portfolios, comparedPrintronix Holding Corporation and subsidiaries (“Printronix”). Printronix is a leading manufacturer and distributor of industrial impact printers, also known as line matrix printers, and related consumables and services. The Printronix business serves a diverse group of customers that operate across healthcare, food and beverage, manufacturing and logistics, and other sectors. This mature technology is known for its ability to three new patent portfolios,operate in hazardous environments. Printronix has a manufacturing site located in Malaysia and six new patent portfoliosthird-party configuration sites located in fiscal years 2015the United States, Singapore and 2014, respectively.Holland, along with sales and support locations around the world to support its global network of users, channel partners and strategic alliances. This acquisition was made at what we believe to be an attractive purchase price, and we are now supporting existing management in its execution of strategic partnerships to generate growth.
Acacia was incorporated on January 25, 1993 under the lawsWe acquired all of the Stateoutstanding stock of California. InPrintronix, for a cash purchase price of approximately $37.0 million, which included an initial $33.0 million cash payment and a $4.0 million working capital adjustment. The Company's consolidated financial statements include Printronix's consolidated operations from October 7, 2021 through December 1999, Acacia changed its state31, 2022. As of incorporation from California to Delaware.December 31, 2021, management finalized the valuations of all acquired assets and liabilities assumed in the acquisition and there was no contingent consideration.
2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles and Fiscal Year End.
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)("U.S. GAAP").
Reclassifications
Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported consolidated results of operations or cash flows.
Principles of Consolidation. Consolidation
The accompanying consolidated financial statements include the accounts of Acacia and its wholly and majority-owned and controlled subsidiaries. MaterialAll 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 statementsConsolidated Statements of stockholders’Series A Redeemable Convertible Preferred Stock and Stockholders’ Equity for noncontrolling interests activity.
In 2020, in connection with the transaction with Link Fund Solutions Limited, which is more fully described in Note 3, the Company acquired equity for total noncontrolling interests.
A wholly owned subsidiarysecurities of Acacia is the general partner of the Acacia Intellectual Property Fund, L.P. (the “Acacia IP Fund”Malin J1 Limited (“MalinJ1”), which was formed in August 2010. The Acacia IP Fund. MalinJ1 is included in the Company’s consolidated financial statements since 2010, as Acacia’s wholly owned subsidiary, asbecause the general partner,Company, through its interest in the equity securities of MalinJ1, has the ability to control
the operations and activities of theMalinJ1. Viamet HoldCo LLC, a Delaware limited liability company and wholly-owned subsidiary of Acacia, IP Fund.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been substantially performed pursuant to the terms of the arrangement, (iii) amounts are fixed or determinable, and (iv) the collectibility of amounts is reasonably assured.
In general, revenue arrangements provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by Acacia’s operating subsidiaries. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies owned or controlled by Acacia’s operating subsidiaries, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The intellectual property rights granted may be perpetual in nature, extending until the expiration of the related patents, or can be granted for a defined, relatively short period of time, with the licensee possessing the right to renew the agreement at the end of each contractual term for an additional minimum upfront payment. Pursuant to the terms of these agreements, Acacia’s operating subsidiaries have no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on Acacia’s operating subsidiaries’ part to maintain or upgrade the technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement, or upon receipt of the minimum upfront payment for term agreement renewals. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, when collectibility is reasonably assured, or upon receipt of the minimum upfront fee for term agreement renewals, and when all other revenue recognition criteria have been met.
For the periods presented herein, the majority shareholder of the revenue agreements executed by the Company provided for the payment of one-time, paid-up license fees in consideration for the grant of certain intellectual property rights for patented technology owned by Acacia’s operating subsidiaries. These rights were primarily granted on a perpetual basis, extending until the expiration of the underlying patents.MalinJ1.
Certain of the Company’s revenue arrangements provide for future royalties or additional required payments based on future licensee activities. Additional royalties are recognized in revenue upon resolution of the related contingency provided that all revenue recognition criteria, as described above, have been met. Amounts of additional royalties due under these license agreements, if any, cannot be reasonably estimated by management.
Certain of the Company’s revenue arrangements provide for the calculation of fees based on a licensee’s actual quarterly sales or actual per unit activity, applied to a contractual royalty rate. Licensees that pay fees on a quarterly basis generally report actual quarterly sales or actual per unit activity information and related quarterly fees due within 30 days to 45 days after the end of the quarter in which such sales or activity takes place. The amount of fees due under these revenue arrangements each quarter cannot be reasonably estimated by management. Consequently, Acacia’s operating subsidiaries recognize revenue from these revenue arrangements on a three-month lag basis, in the quarter following the quarter of sales or per unit activity, provided amounts are fixed or determinable and collectibility is reasonably assured. The lag method described above allows for the receipt of licensee royalty reports prior to the recognition of revenue.
Amounts related to revenue arrangements that do not meet the revenue recognition criteria described above are deferred until the revenue recognition criteria are met.
Acacia assesses the collectibility of fees receivable based on a number of factors, including past transaction history and credit-worthiness of licensees. If it is determined that collection is not reasonably assured, the fee is recognized when collectibility becomes reasonably assured, assuming all other revenue recognition criteria have been met, which is generally upon receipt of cash.
Cost of Revenues. 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 “Cost of revenues” in the accompanying consolidated statements of operations.
Inventor Royalties and Contingent Legal Expenses. Inventor royalties are expensed in the consolidated statements of operations in the period that the related revenues are recognized. 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
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the related patents, or as the prepaid royalties are earned by the inventor, as appropriate, and the related expense is included in amortization expense in the consolidated statements of operations. Any unamortized upfront advances recovered from net revenues are expensed in the period recovered, and included in amortization expense in the consolidated statements of operations.
Contingent legal fees are expensed in the consolidated statements of operations in the period that the related revenues are recognized. In instances where there are no recoveries from potential infringers, no contingent legal fees are paid; however, Acacia’s operating subsidiaries may be liable for certain out of pocket legal costs incurred pursuant to the underlying legal services agreement.
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. At December 31, 2017, all of the Company’s investments recorded at fair value were valued utilizing Level 3 - unobservable inputs. 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 (in thousands):
|
| | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 |
Assets as of December 31, 2017: | | | | | |
Investment at fair value (Note 7)(1) | $ | — |
| | $ | — |
| | $ | 104,754 |
|
| | | | | |
Assets as of December 31, 2016: | | | | | |
Short-term investments(1) | $ | 19,443 |
| | $ | — |
| | $ | — |
|
____________________
(1) There were no transfers between fair value hierarchy categories for the period presented.
A reconciliation of the activity for fair value measurements categorized within Level 3 for the year ended December 31, 2017 is as follows (in thousands): |
| | | | | | | | | | | |
| Investment at Fair Value |
| Common Stock | | Warrants | | Total |
Opening balance as of January 1, 2017 | $ | — |
| | $ | — |
| | $ | — |
|
Total gains and losses included in earnings for the period(1) | | | | | |
Gain on conversion of loans and accrued interest | 2,671 |
| | — |
| | 2,671 |
|
Gain on exercise of Primary Warrant | — |
| | 4,616 |
| | 4,616 |
|
Change in fair value of investment, net | 33,922 |
| | 8,317 |
| | 42,239 |
|
Purchases, issues, sales and settlements | |
| | |
| | |
Purchases and issues(2) | 54,202 |
| | 1,026 |
| | 55,228 |
|
Total recurring fair value measurements(1) | $ | 90,795 |
| | $ | 13,959 |
| | $ | 104,754 |
|
____________________
(1) All gains and losses included in earnings for the period presented relate to assets and liabilities held as of December 31, 2017.
(2) Refer to Note 7 for information regarding purchase and issues activity for the years ended December 31, 2017 and 2016.
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
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Short-term Investments. Investments in securities with original maturities of greater than three months and less than one year and other investments representing amounts that are available for current operations are classified as short-term investments, unless there are indications that such investments may not be readily sold in the short-term. The fair values of these investments approximate their carrying values. For the applicable periods presented, all of Acacia’s short-term investments were classified as available-for-sale, which are reported at fair value on a recurring basis using significant observable inputs (Level 1), with related unrealized gains and losses in the value of such securities recorded as a separate component of other comprehensive income (loss) in stockholders’ equity until realized. Realized gains and losses are recorded in the statements 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).
Impairment of Short-term Investments. Acacia evaluates its investments in marketable securities for potential impairment, employing a methodology on a quarterly basis that considers available quantitative and qualitative evidence. If the cost or carrying value of an investment exceeds its estimated fair value, the Company evaluates, among other factors, general market conditions, credit quality of instrument issuers, the duration and extent to which the fair value is less than cost, and the Company’s intent and ability to hold, or plans or ability to sell. Fair value is estimated based on publicly available market information or other estimates determined by management. Investments are considered to be impaired when a decline in fair value is estimated to be other-than-temporary. Acacia reviews impairments associated with its investments in marketable securities and determines the classification of any impairment as temporary or other-than-temporary. An impairment is deemed other-than-temporary unless (a) Acacia has the ability and intent to hold an investment for a period of time sufficient for recovery of its carrying amount and (b) positive evidence indicating that the investment’s carrying amount is recoverable within a reasonable period of time outweighs any evidence to the contrary. All available evidence, both positive and negative, is considered to determine whether, based on the weight of such evidence, the carrying amount of the investment is recoverable within a reasonable period of time. For investments classified as available-for-sale, unrealized losses that are other-than-temporary are recognized in the consolidated statements of operations.
Concentration of Credit Risks. Financial instruments that potentially subject Acacia to concentrations of credit risk are cash equivalents, short-term investments and accounts receivable. Acacia places its cash equivalents and short-term investments 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.
Three licensees individually accounted for 54%, 21% and 10%, respectively, of revenues recognized during the year ended December 31, 2017. Three licensees individually accounted for 26%, 23% and 11%, respectively, of revenues recognized during the year ended December 31, 2016. Three licensees individually accounted for 24%, 20% and 16%, respectively, of revenues recognized during the year ended December 31, 2015. One licensee individually represented 100% of accounts receivable at December 31, 2017. Four licensees individually represented approximately 39%, 22%, 16% and 15%, respectively, of accounts receivable at December 31, 2016.
For 2017, 2016 and 2015, 39%, 79% and 49%, 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. The Company does not have any material foreign operations.
Acacia performs credit evaluations of its licensees with significant receivable balances, if any, and has not experienced any significant credit losses. Accounts receivable are recorded at the executed contract amount and generally do not bear interest. Collateral is not required. An allowance for doubtful accounts may be established to reflect the Company’s best estimate of probable losses inherent in the accounts receivable balance, and is reflected as a contra-asset account on the balance sheet and a charge to operating expenses in the statements of operations for the applicable period. The allowance is determined based on known troubled accounts, historical experience, and other currently available evidence. There was no allowance for doubtful accounts established for the periods presented.
Fair Value of Financial Instruments. The carrying value of cash and cash equivalents, accounts receivables, and current liabilities approximates their fair values due to their short-term maturities.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment. Property and equipment are recorded at cost. Major additions and improvements that materially extend useful lives of property and equipment are capitalized. Maintenance and repairs are charged against the results of operations as incurred. When these assets are sold or otherwise disposed of, the asset and related depreciation are relieved, and any gain or loss is included in the consolidated statements of operations for the period of sale or disposal. Depreciation and amortization is computed on a straight-line basis over the following estimated useful lives of the assets:
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Furniture and fixtures | 3 to 5 years |
Computer hardware and software | 3 to 5 years |
Leasehold improvements | 2 to 5 years (Lesser of lease term or useful life of improvement) |
Rental payments on operating leases are charged to expense in the consolidated statements of operations on a straight-line basis over the lease term.
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 one to six years.
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 option 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).
Equity Method Investments. Equity investments 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, and classified within “Equity Method Investments” in the consolidated balance sheet. Acacia includes its proportionate share of earnings and/or losses of its equity method investees in equity in earnings (losses) of investee in the consolidated statements of operations.
Impairment of Investments. Acacia reviews its equity method investments quarterly for indicators of other-than-temporary impairment. This determination requires significant judgment. In making this judgment, Acacia considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, Acacia evaluates, among other factors, general market conditions and the duration and extent to which the fair value is less than cost. Acacia also considers specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in the consolidated statements of operations and a new cost basis in the investment is established.
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 5 for additional information.
Fair value is generally estimated using the “Income Approach,” focusing on the estimated future net income-producing capability of the patent portfolios over the 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
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Contingent Liabilities. The Company, from time to time, is involved in certain legal proceedings. Based upon consultation with outside counsel handling its defense in these matters and the Company’s analysis of potential outcomes, if the Company determines that a loss arising from such matters is probable and can be reasonably estimated, an estimate of the contingent liability is recorded in its consolidated financial statements. If only a range of estimated loss can be determined, an amount within the range that, based on estimates, assumptions and judgments, reflects the most likely outcome, is recorded as a contingent liability in the consolidated financial statements. In situations where none of the estimates within the estimated range is a better estimate of probable loss than any other amount, the Company records the low end of the range. Any such accrual would be charged to expense in the appropriate period. Litigation expenses for these types of contingencies are recognized in the period in which the litigation services were provided.
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, and if required to be paid by Acacia or its operating subsidiaries, could materially harm the Company’s operating results and financial position.
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.
Segment Reporting
The FASB issued a new standard, effective January 1, 2017, that allows entities to make a policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. Effective January 1, 2017, the Company elected to account for forfeitures of awards as they occur. The prior standard required the Company to estimate the number of awards for which the requisite service period is expected to be rendered and base the accruals of compensation cost on the estimated number of awards that will vest.
The fair values of stock options granted during the periods presented were estimated using the Black-Scholes option-pricing model, based on the following weighted-average assumptions:
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| | | |
| For the Years Ended |
| December 31, 2017 | | December 31, 2016 |
| | | |
Risk-free interest rate | 1.77% | | 1.1% |
Term | 4.37 | | 3.06 |
Volatility | 51% | | 53% |
Dividend yield | —% | | —% |
Due to a lack of sufficient historical stock option exercise experience, the Company utilized the simplified method for estimating the expected term for stock options granted during the periods presented. Expected volatility is based on the historical volatility of the Company’s stock for the length of time corresponding to the expected term of the option. The risk-free interest rate is based on the U.S. treasury yield curve on the grant date for the expected term of the option.
Restricted stock awards and stock option awards with performance-based vesting conditions generally vest based upon the Company achieving specified cash flow performance targets over a one and two-year period from the date of grant.
Performance-based stock options awards with market-based vesting conditions vest based upon the Company achieving specified stock price targets over a four-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 for an option with a market-based vesting condition provided that the requisite service is rendered, regardless of when, if ever, the market condition is satisfied. The service period for options with a market-based vesting condition is inferred from the
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
application of the Monte Carlo valuation technique. The derived service period represents the duration of the median of the distribution of share price paths on which the market condition is satisfied. The duration is the period of time from the service inception date to the expected date of satisfaction, as determined from the valuation technique. Assumptions utilized in connection with the Monte Carlo valuation technique included: estimated risk-free interest rate; expected volatility; and expected dividend yield. 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”) are accounted for in accordance with Accounting Standards Codification (“ASC”) 718-10, “Compensation - Stock Compensation.” The Units vest as described at Note 10, and therefore, 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. Non-cash stock compensation expense related to the Units is reflected in general and administrative expense in the accompanying consolidated statements of operations.
Income Taxes. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in Acacia’s consolidated financial statements or consolidated income tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more than likely not be realized, or if it is determined that there is uncertainty regarding future realization of such assets.
Under U.S. generally accepted accounting principles, a tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions are recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position will be sustained upon examination. Tax positions that meet the more likely than not threshold are measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement.
Segment Reporting. Acacia uses the management approach, which designates the internal organization that is used by management for making operating decisions and assessing performance as the basis of Acacia’sthe Company’s reportable segments. Acacia’s patent licensingRefer to Note 17 for additional information regarding our two reportable business segments: Intellectual Property Operations and enforcement business constitutes its single reportable segment.Industrial Operations.
Use of Estimates.
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of AmericaU.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Acacia believes that, of the significant accounting policies described herein, the accounting policies associated with revenue recognition, estimates of variable consideration for revenue, including sales returns, the valuation of equity securities without readily determinable fair value, the loandetermination of excess and equity instruments discussed at Note 7,obsolete inventories, bad debt allowances and product warranty liabilities, 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”) and Series B warrants (the “Series B Warrants”), stock-based compensation expense, including the valuation of profits interests, impairment of goodwill, patent-related and other intangible assets, the determination of the economic useful life of amortizable intangible assets, and income taxes and valuation allowances against net deferred tax assets, require its most difficult, subjective or complex judgments.
Revenue Recognition
Income (Loss) Per Share. The Company computes net income (loss) attributable to common stockholders using the two-class method required for capital structures that include participating securities. Under the two-class method, securities that participate in non-forfeitable dividends, such as the Company’s outstanding unvested restricted stock, are considered “participating securities.”Intellectual Property Operations
In applying the two-class method, (i) basic net income (loss) per shareARG's revenue is computed by dividing net income (loss) (less any dividends paid on participating securities)recognized upon transfer of control (i.e., by the weighted average numbergranting) of shares of common stockpromised bundled IP Rights and participating securities outstanding for the period and (ii) diluted earnings per share may include the additional effect of other securities, if dilutive, in which case the dilutive effect of such securities is calculated by applying the two-class method and the treasury stock methodcontractual performance obligations to the assumed exercise or vesting of potentially dilutive common shares. The method yielding the more dilutive result is ultimately reported for the applicable period. Potentially dilutive common stock equivalents primarily consist of
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
employee stock options, and restricted stock units for calculations utilizing the two-class method, and also include unvested restricted stock, when utilizing the treasury method.
The following table presents the weighted-average number of common shares outstanding used in the calculation of basic and diluted income per share:
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| | 2017 | | 2016 | | 2015 |
Numerator (in thousands): | | | | | | |
Basic and Diluted | | | | | | |
Net income (loss) attributable to Acacia Research Corporation | | $ | 22,180 |
| | $ | (54,067 | ) | | $ | (160,036 | ) |
Undistributed earnings allocated to participating securities | | (33 | ) | | — |
| | — |
|
Total dividends declared / paid | | — |
| | — |
| | (25,434 | ) |
Dividends attributable to common stockholders | | — |
| | — |
| | 24,740 |
|
Net income (loss) attributable to common stockholders – basic and diluted | | $ | 22,147 |
| | $ | (54,067 | ) | | $ | (160,730 | ) |
| | | | | | |
Denominator: | | | | | | |
Weighted-average shares used in computing net loss per share attributable to common stockholders – basic | | 50,495,119 |
| | 50,075,847 |
| | 49,505,817 |
|
Effect of potentially dilutive securities: | | | | | | |
Common stock options and restricted stock units | | 196,893 |
| | — |
| | — |
|
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders – diluted | | 50,692,012 |
| | 50,075,847 |
| | 49,505,817 |
|
Basic and diluted net loss per common share | | $ | 0.44 |
| | $ | (1.08 | ) | | $ | (3.25 | ) |
Anti-dilutive equity-based incentive awards excluded from the computation of diluted loss per share | | 4,425,187 |
| | 3,682,532 |
| | 71,468 |
|
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 consolidated balance sheets.
Recent Accounting Pronouncements - Not Yet Adopted.
In May 2014, the FASB issued a new accounting standards update addressing revenue from contracts with customers, which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under the standard, a company will recognize revenue when it transfers promised goods or services to customerslicensees in an amount that reflects the consideration we expect to which the company expects to be entitledreceive in exchange for those goodsIP 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 ARG 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 ARG. 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 License Revenue Agreements”). Revenues may also include court ordered settlements or awards related to our patent portfolio or sales of our patent portfolio. IP Rights granted included the following, as applicable: (i) the grant of a non-exclusive, future license to manufacture and/or sell products covered by patented technologies, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The IP Rights granted were generally perpetual in nature, extending until the legal expiration date of the related patents. The individual IP Rights are not accounted for as separate performance obligations, as (i) the nature of the promise, within the context of the contract, is to grant combined items to which the promised IP Rights are inputs and (ii) the Company's promise to grant each individual IP right described above to the customer is not separately identifiable from other promises to grant IP Rights in the contract.
Since the promised IP Rights are not individually distinct, ARG 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. ARG’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. ARG’s operating subsidiaries have no further obligation with respect to the grant of IP Rights, including no express or implied obligation to maintain or upgrade the technology, or provide future support or services. The contracts provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the contract. Licensees legally obtain control of the IP Rights upon execution of the
contract. As such, the earnings process is complete and revenue is recognized upon the execution of the contract, when collectability is probable and all other revenue recognition criteria have been met. Revenue contracts generally provide for payment of contractual amounts within 15-90 days of execution of the contract, or the end of the quarter in which the sale or usage occurs for Recurring License Revenue Agreements. Contractual payments made by licensees are generally non-refundable.
For sales-based royalties from Recurring License Revenue Agreements, ARG includes in the transaction price some or all of an amount of estimated variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Notwithstanding, revenue is recognized for a sales-based royalty promised in exchange for a license of IP Rights when the later of (i) the subsequent sale or usage occurs, or (ii) the performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied. Estimates are generally based on historical levels of activity, if available.
Revenues from contracts with significant financing components (either explicit or implicit) are recognized at an amount that reflects the price that a licensee would have paid if the licensee had paid cash for the IP Rights when they are granted to the licensee. In doing so,determining the Company maytransaction price, ARG adjusts the promised amount of consideration for the effects of the time value of money. As a practical expedient, ARG does not adjust the promised amount of consideration for the effects of a significant financing component if ARG expects, at contract inception, that the period between when the entity grants promised IP Rights to a customer and when the customer pays for the IP Rights will be one year or less.
In general, ARG is required to use more judgmentmake certain judgments and make more estimates in connection with the accounting for revenue contracts with customers than under existing guidance.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 salessales-based royalties.
License revenues were comprised of the following for the periods presented:
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2022 | | 2021 |
| | | | | (In thousands) |
Paid-up license revenue agreements | | | | | $ | 17,788 | | | $ | 73,585 | |
Recurring License Revenue Agreements | | | | | 1,720 | | | 2,458 | |
Total | | | | | $ | 19,508 | | | $ | 76,043 | |
Industrial Operations
Printronix recognizes revenue to depict the transfer of goods or usage based royalties. Under the standard, (i) an entity should account forservices to a promise to provide a customer with a right to access the entity’s intellectual property as a performance obligation satisfied over time because the customer will simultaneously receive and consume the benefit from the entity’s performance of providing access to its intellectual property as the performance occurs, and (ii) an entity’s promise to provide a customer with the right to use its intellectual property is satisfied at a point in time. In addition, revenues from contracts with significant financing components should be recognized at an amount that reflects the consideration which it expects to receive for providing those goods or services. To determine the transaction price, that a customer would have paid ifPrintronix estimates the customer had paid cashamount of consideration to which it expects to be entitled in exchange for thetransferring promised goods or services when they transferto a customer. Elements of variable consideration are estimated at the time of sale which primarily include product rights of return, rebates, price protection and other incentives that occur under established sales programs. These estimates are developed using the expected value or the most likely amount method and are reviewed and updated, as necessary, at each reporting period. Revenues, inclusive of variable consideration, are recognized to the customer (i.e. adjustment for the time value of money). For sales and usage based royalties, the new standard requires that the Company include 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 in future periods. The provision for returns and sales allowances is determined by an analysis of the historical rate of returns and sales allowances over recent quarters, and adjusted to reflect management’s future expectations.
Printronix enters into contract arrangements that may include various combinations of tangible products (which include printers, consumables and parts) and services, which are generally capable of being distinct and accounted for as separate performance obligations. Printronix evaluates whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract has more than one performance obligation. This evaluation requires judgement, and the decision to combine a group of contracts or separate the combined or single contract into multiple distinct performance obligations may impact the amount of revenue recorded in a reporting period. Printronix deems performance obligations to be distinct if the customer can benefit from the product or service on its own or together
with readily available resources (i.e. capable of being distinct) and if the transfer of products or services is separately identifiable from other promises in the contract (i.e. distinct within the context of the contract).
For contract arrangements that include multiple performance obligations, Printronix allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices for each performance obligation. In general, standalone selling prices are observable for tangible products and standard software while standalone selling prices for repair and maintenance services are developed with an expected cost-plus margin or residual approach. Regional pricing, marketing strategies and business practices are evaluated to derive the estimated standalone selling price using a cost-plus margin methodology.
Printronix recognizes revenue for each performance obligation upon transfer of control of the promised goods or services. Control is deemed to have been transferred when the uncertainty associated withcustomer has the variable consideration is subsequently resolved.
The amendments for this new accounting standard update are effective for interimability to direct the use of and annual reporting periods beginning after December 15, 2017, and are to be applied retrospectively or via the cumulative effect ashas obtained substantially all of the dateremaining benefits from the goods and services. The determination of adoption,whether control transfers at a point in time or over time requires judgment and includes consideration of the following: (i) the customer simultaneously receives and consumes the benefits provided as Printronix performs its promises, (ii) the performance creates or enhances an asset that is under control of the customer, (iii) the performance does not create an asset with an alternative use to Printronix, and (iv) Printronix has an enforceable right to payment for its performance completed to date.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with early application not permitted. The Company expects to use the modified retrospective methodRevenues for products are generally recognized upon shipment, whereas revenues for services are generally recognized over time, assuming all other criteria for revenue recognition have been met. Incremental costs of adoption and will recognize the cumulative effect of initially applying the newobtaining a contract are expensed as incurred. Service revenue standard as an adjustmentcommissions are tied to the opening balancerevenue recognized during the current year of retained earnings inthe related sale.
Printronix offers printer-maintenance services through service agreements that customers may purchase separately from the printer. These agreements commence upon expiration of the standard warranty period. Printronix provides the point-of-customer-contact, dispatches calls and sells the parts used for printer repairs to service providers. Printronix contracts third parties to perform the on-site repair services at the time of sale which covers the period of initial application (first quarterservice at a set amount. The maintenance service agreements are separately priced at a stand-alone value. For those transactions in which maintenance service agreements are purchased concurrently with the purchase of 2018 for Acacia). Comparative prior year periods would not be adjusted. The preliminary estimate ofprinters, the cumulative effect of initially applying the new revenue standard is an decrease to beginning accumulated deficit of $3.0 million, primarily relating to financing components of contracts executed in prior periods and estimates of variable consideration for sales and usagedeferred based royalty agreements executed in prior periods. Management continues to assess the impact of this new standard on the Company’s consolidated financial statements and related disclosures, including ongoingselling price, which approximates the stand-alone value for separately sold maintenance services agreements. Revenue from maintenance service contracts are recognized on a straight-line basis over the period of each individual contract, reviews. Preliminary estimates ofwhich is consistent with the adjustment upon initial adoption may change in connection with completion of the Company’s adoption procedures in the first quarter of 2018.
In February 2016, the FASB issued an accounting standard update which requires lessees to recognize most leases on the balance sheet. This is expected to increase both reported assets and liabilities. The new lease standard does not substantially change lessor accounting. For public companies, the standard will be effective for the first interim reporting period within annual periods beginning after December 15, 2018, although early adoption is permitted. Lessees and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statementspattern in which they first apply the new guidance, using a modified retrospective transition method. The requirements of this standard include a significant increase in required disclosures. Managementbenefit is currently assessingconsumed by the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures.customer.
In May 2017, the FASB issued amended guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions or the classification of the award changes as a result of the change in terms or conditions. This amendment is effective prospectively for annual periods beginning on or after December 15, 2017, with early adoption
permitted. Management is currently assessing the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures.
Recently Adopted Accounting Pronouncements - Recently Adopted.
In March 2016, the FASB issued a new standard that changes the accounting for certain aspects of share-based payments to employees. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than previously allowed for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
3. SHORT-TERM INVESTMENTS
Short-term investments for the periods presentedPrintronix's net revenues were comprised of the following (in thousands):for the periods presented: |
| | | | | | | | | | | | | | | |
| December 31, 2016 |
Security Type | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
U.S. government fixed income securities | $ | 19,403 |
| | $ | 40 |
| | $ | — |
| | $ | 19,443 |
|
| | | | | | | | | | | | | | | |
| | | |
| | | | | Year Ended December 31, 2022 | | October 7, 2021 to December 31, 2021 |
| | | | | (In thousands) |
Printers, consumables and parts | | | | | $ | 35,432 | | | $ | 10,934 | |
Services | | | | | 4,283 | | | 1,070 | |
Total | | | | | $ | 39,715 | | | $ | 12,004 | |
There were no short-term investments atRefer to Note 17 for additional information regarding net sales to customers by geographic region.
Deferred revenue in the consolidated balance sheets represents a contract liability under Accounting Standards Codification (“ASC”) 606 and consists of payments and billings in advance of the performance. Printronix recognized approximately $3.8 million and $800,000 in revenue that was previously included in the beginning balance of deferred revenue during the year ended December 31, 2017. Short-term investments at2022 and the period from October 7, 2021 through December 31, 20162021, respectively.
Printronix's payment terms vary by the type and location of its customers and the products, solutions or services offered. The time between invoicing and when payment is due is not significant. In instances where the timing of revenue recognition differs from the timing of invoicing, Printronix has determined that its contracts do not include a significant financing component.
Printronix's remaining performance obligations, following the transfer of products to customers, primarily relate to repair and support services. The aggregated transaction price allocated to remaining performance obligations for arrangements
with an original term exceeding one year was $681,000 and $772,000, inclusive of deferred revenue, as of December 31, 2022 and 2021, respectively. On average, remaining performance obligations as of December 31, 2022 are expected to be recognized over a period of approximately two years.
Cost of Revenues
Intellectual Property Operations
Cost of revenues include the costs and expenses incurred in connection with ARG’s patent licensing and enforcement activities, including inventor royalties paid to patent owners, patent maintenance and prosecution costs, contingent legal fees paid to external patent counsel, other patent-related legal expenses paid to external patent counsel, licensing and enforcement related research, consulting and other expenses paid to third-parties and the amortization of patent-related investment costs. Cost of revenues were comprised of investments in highly liquid, AAA, U.S. government fixed income securities with maturity dates in 2017.
For the years ended December 31, 2017 and 2016, proceeds from the sale of short-term investments classified as available-for-sale were $467,790,000 and $43,232,000, respectively. Gross unrealized gains and losses were not materialfollowing for the years ended December 31, 2017periods presented:
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2022 | | 2021 |
| | | | | (In thousands) |
Inventor royalties | | | | | $ | 1,212 | | | $ | 1,142 | |
Contingent legal fees | | | | | 2,444 | | | 12,074 | |
Litigation and licensing expenses | | | | | 3,970 | | | 5,462 | |
Amortization of patents | | | | | 10,403 | | | 9,851 | |
Other patent portfolio expense | | | | | — | | | 162 | |
Total | | | | | $ | 18,029 | | | $ | 28,691 | |
Inventor Royalties and 2016. ForContingent Legal Expenses
Inventor royalties are expensed in the year ended December 31, 2015, proceedsconsolidated statements of operations in the period that the related revenues are recognized. Patent costs, including any upfront advances paid to patent owners by ARG’s operating subsidiaries, that are recoverable from the sale of short-term investments were $82,115,000 and gross realized losses were $617,000.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December 31, 2017 and 2016 (in thousands):
|
| | | | | | | | |
| | 2017 | | 2016 |
| | | | |
Payroll and other employee benefits | | $ | 465 |
| | $ | 1,593 |
|
Accrued vacation | | 294 |
| | 533 |
|
Accrued legal expenses - patent | | 5,479 |
| | 6,564 |
|
Foreign taxes payable | | 15 |
| | 3,150 |
|
Accrued consulting and other professional fees | | 1,364 |
| | 1,967 |
|
Other accrued liabilities | | 339 |
| | 476 |
|
| | $ | 7,956 |
| | $ | 14,283 |
|
5. PATENTS
Acacia’s only identifiable intangible assetsfuture net revenues are patents and patent rights, with estimated remaining economic useful lives ranging from one to six years. For all periods presented, all of Acacia’s identifiable intangible assets were subject to amortization. The gross carrying amounts and accumulated amortization related to investments in intangible assets as of December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | | |
| | 2017 | | 2016 |
| | | | |
Gross carrying amount - patents | | $ | 444,137 |
| | $ | 444,362 |
|
Accumulated amortization - patents(1) | | (382,220 | ) | | (358,043 | ) |
Patents, net | | $ | 61,917 |
| | $ | 86,319 |
|
(1) Includes patent impairment charges foramortized over the applicable periods.
The weighted-average remaining estimated economic useful life of Acacia’sthe related patents, or as the prepaid royalties are earned by the inventor, as appropriate, and patent rightsthe related expense is 4 years. Scheduled annual aggregateincluded in amortization expense is estimatedin the consolidated statements of operations. Any unamortized upfront advances recovered from net revenues are expensed in the period recovered and included in amortization expense in the consolidated statements of operations.
Contingent legal fees are expensed in the consolidated statements of operations in the period that the related revenues are recognized. In instances where there are no recoveries from potential infringers, no contingent legal fees are paid; however, ARG’s operating subsidiaries may be liable for certain out of pocket legal costs incurred pursuant to be $20,542,000 in 2018, $18,527,000 in 2019, $6,134,000 in 2020, $5,261,000 in 2021, $5,256,000 in 2022the underlying legal services agreement.
Inventor royalty and $6,197,000 thereafter.contingent legal agreements generally provide for payment by ARG of contractual amounts 30 days subsequent to the quarter end during which related license fee payments are received from licensees by ARG.
Litigation and Licensing Expenses
For the years ended December 31, 2017, 2016Litigation and 2015, Acacia paidlicensing expenses include patent-related litigation, enforcement and prosecution costs incurred by law firms and external patent investmentattorneys engaged on either an hourly basis or a contingent fee basis. Litigation and licensing expenses also includes third-party patent research, development, patent prosecution and maintenance fees, re-exam and inter partes reviews, consulting and other costs totaling $0, $1,225,000 and $19,504,000, respectively. The patents have initial estimated economic useful lives ranging from two to seven years.
Acacia recorded impairment of patent-related intangible asset charges totaling $2,248,000, $42,340,000 and $74,731,000 for the years ended December 31, 2017, 2016 and 2015, respectively. The impairment charges related to impairments of patent portfolios due to a reduction in expected estimated future net cash flows and certain patent portfolios that management determined it would no longer allocate future resources toincurred in connection with the licensing and enforcement of such portfolios, due primarilypatent portfolios.
Industrial Operations
Included in cost of sales are inventory costs (refer to adverse litigation outcomes, potential prior art related complexities and/or"Inventories" below), indirect labor, overhead and warranty costs. Printronix offers both assurance-type and service-type product warranties with varying terms depending on the overall determination that future resources would be allocatedproduct, region and customer contracts. Warranty periods range from three months to other licensingtwo years. The provision for warranty costs is determined by applying the historical claims experience and enforcement programs with higher potential return profiles. estimated repair costs to the outstanding units under warranty.
The impairment charges for the periods presented consistedfollowing is a summary of the excess of the asset’s carrying value over its estimated fair value.
In December 2015, Acacia’s subsidiary Adaptix, Inc. received a jury verdictaccrued warranty liabilities, which are included in its case against Alcatel Lucent USA, Inc.,accrued expenses and others. The jury returned a verdict that the asserted claims of the patent at issue were invalidother current liabilities, and non-infringed. The Adaptix trial loss resulted in a reduction in estimated cash flows for the Adaptix portfolio expected to be realized from future licensing and enforcement activities, leading to partial impairment charges on the portfolioother long-term liabilities in the fourth quarterconsolidated balance sheets:
| | | | | | | | | | | |
| |
| Year Ended December 31, 2022 | | October 7, 2021 to December 31, 2021 |
| (In thousands) |
Beginning balance | $ | 222 | | | $ | 260 | |
Estimated future warranty expense | 25 | | | 17 | |
Warranty claims settled | (116) | | | (55) | |
Ending balance | $ | 131 | | | $ | 222 | |
Concentrations
Financial instruments that potentially subject the Company to concentrations of 2015. Fiscal year 2016 patent impairment charges included the impairmentcredit risk are cash equivalents and accounts receivable. The Company places its cash equivalents primarily in highly rated money market funds, investments in U.S. treasury securities 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. The Company has not experienced any significant losses on its deposits of the remaining carrying valuecash and cash equivalents.
Intellectual Property Operations
Three licensees individually accounted for the Adapitx portfolio. In addition, for15%, 15% and 27% of revenues recognized during the year ended December 31, 2015 analysis, management considered2022. Two licensees individually accounted for 66% and 16% of revenues recognized during the impactyear ended December 31, 2021.
Historically, ARG has not had material foreign operations. Based on the jurisdiction of the fourth quarter 2015 adverse trial outcomes on its estimates of future cash flows that could be realized from future licensing and enforcement activitiesentity obligated to satisfy payment obligations pursuant to the applicable license revenue arrangement, for other patent portfolios. Estimates of future cash flows for these portfolios were reduced in part in connection with the Company’s assessment of probabilities of realization given the recent adverse trial outcomes. Additionally, patent impairment charges include the carrying value of other patent portfolios for which, in 2015, the Company experienced adverse litigation or trial outcomes, leading to a reduction in or elimination of expected future cash flows. In addition, headcount reductions and internal staff optimization efforts led to changes with respect to which patent portfolios the Company intends to allocate
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
licensing and enforcement resources to in future periods. As such, certain portfolio programs were selected for termination due to a decision to no longer pursue or allocate resources, resulting in a write-off any remaining carrying value in the fourth quarter of 2015.
6. GOODWILL IMPAIRMENT CHARGE (Fiscal Year 2015)
Goodwill Impairment Testing -years ended December 31, 2015. At December 31, 2015, prior2022 and 2021, 3% and 69%, respectively, of revenues were attributable to the completionlicensees domiciled in foreign jurisdictions. Refer to Note 17 for additional information regarding revenue from customers by geographic region.
Two licensees individually represented approximately 57% and 43% of the annual goodwill impairment test, the goodwill balance totaled $30.1 million. Goodwill is tested for impairment at the Company’s single reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Factors considered important, which could trigger an impairment review, include the following:
significant consistent gradual decline in the Company’s stock price for a sustained period;
significant underperformance relative to expected historical or projected future operating results;
significant changes in the manner of use of assets or the strategy for the Company’s overall business;
significant negative industry or economic trends; and
significant adverse changes in legal factors or in the business climate, including adverse regulatory actions or assessments.
In connection with Acacia’s annual goodwill impairment testing for 2015, the Company identified several qualitative factors triggering an impairment testaccounts receivable at December 31, 2015, as follows:2022. Two licensees individually represented approximately 59% and 41% of accounts receivable at December 31, 2021.
Industrial Operations
Adverse legal outcomesNo single Printronix customer accounted for more than 10% of revenue for the years ended December 31, 2022 and changes in legal factors. In December 2015, Acacia announced that its subsidiary Adaptix, Inc. received a jury verdict in its case against Alcatel Lucent USA, et al., deciding that the claims2021. Printronix has significant foreign operations, refer to Note 17 for additional information regarding net sales to customers by geographic region.
Two Printronix customers individually accounted for 15% and 11% of the applicable patents in suit were invalid and non-infringed. This adverse legal outcome and others in the fourth quarter of 2015 resulted in changes in estimates of realization related to litigation outcomes in future periods for certain patent portfolios.
Significant consistent gradual decline in the Company’s stock price. Historically, the Company’s stock price had been volatile, and the volatility continued during fiscal 2015, declining from $16.72 as of January 2, 2015, to $4.29accounts receivable as of December 31, 2015, a 74% decline. In addition, subsequent to December 31, 2015, the Company’s stock price volatility has continued, trending downward. In the fourth quarter2022, and one customer represented 11% of 2015, given the continued decline in stock price up through December 31, 2015, and the impact of the December 2015 adverse trial outcomes noted above, the gradual consistent decline in the Company’s stock price was deemed to be sustained, and hence indicative of a reduction in the estimated fair value of the Company, as reflected in its lower overall market capitalization.
Changes in Company Management and Resource Allocations. In connection with certain resource allocation changes within the organization given a change in management in the fourth quarter of 2015, headcount reductions and internal staff optimization efforts occurred, which led to changes with respect to estimates of which patent portfolios the Company intends to continue to allocate licensing and enforcement resources to in future periods. As such, certain patent portfolio programs were selected for termination due to a decision to no longer allocate resources. In addition, changes in estimates regarding the best and highest use of certain patent portfolios were made, resulting in reductions in estimated future cash flows.
At December 31, 2015, the Company utilized the following methods and assumptions in its annual goodwill impairment testing, which was prepared with the assistance of a third-party valuation specialist:
At December 31, 2015, the initial qualitative assessment included consideration of the factors described above, resulting in a conclusion thataccounts receivable as of December 31, 2015,2021. Exposure to credit risk is limited by the consistent gradual decline inlarge number of customers comprising the Company’s stock price was sustained. The Company also considered the impactremainder of the Printronix customer base and by periodic customer credit evaluations performed by Printronix.
No single Printronix vendor accounted for 10% or more of purchases for the years ended December 2015 adverse trial outcomes on the Company’s stock price31, 2022 and related estimates2021. Accounts payable to two vendors represented 21% and 13% of fair value for remaining portfolio opportunities. Based on the Company’s assessment of these factors, the Company determined that it was more likely than not that goodwill was impaired, constituting a triggering event requiring a goodwill impairment testaccounts payable as of December 31, 2015.
The Company conducted the first step2022, and one vendor represented 14% of the goodwill impairment test for its single reporting unitaccounts payable as of December 31, 2015. 2021.
Cash and Cash Equivalents
The Company utilizedconsiders all highly liquid 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 U.S. treasury securities and AAA rated money market capitalization plus cost synergies approach to estimatefunds that invest in first-tier only securities, which primarily include domestic commercial paper and securities issued or guaranteed by the U.S. government or its agencies.
Equity Securities
Investments in equity securities are reported at fair value on a recurring basis, with related realized and unrealized gains and losses in the value of such securities recorded in the consolidated statements of operations in other income or (expense). Dividend income is included in other income or (expense). Refer to Note 3 for additional information.
Equity Securities Without Readily Determinable Fair Value
For equity securities that do not have a 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 Company.same issuer. The fair values of the private company securities were estimated based on recent financing transactions and secondary market capitalization was determined by multiplyingtransactions and factoring in any adjustments for illiquidity or preference of these securities. Changes in fair value are reported in the Company’s stock price andconsolidated statements of operations in other income or (expense). To date, the common shares outstandingCompany has not recorded any impairments nor upward or downward adjustments on our equity securities without readily determinable fair values held as of December 31, 2015. Management also2022 and 2021. Refer to Note 3 for additional information.
Equity Method Investments
Equity investments in common stock and in-substance common stock without readily determinable fair values in companies over which the Company has the ability to exercise significant influence, are accounted for using the equity method of accounting. Acacia includes its proportionate share of earnings and/or losses of its equity method investees in earnings on equity investment in joint venture in the consolidated statements of operations. Refer to Note 3 for additional information.
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 control premium in its
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estimate ofstated 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 Company’s single reporting unit. The cost synergies were estimatedcumulative interest being based on the cost savingscharacteristics of the investment at the date at which could be achieved if the Company was acquired by a competitor inobtains the same operating business.additional interest.
Based on the analysis utilizing the market capitalization plus cost synergies approach, the estimated fair value of the reporting unit of $252 million was below its carrying value of $344.3 million as of December 31, 2015, and therefore, goodwill was determined to be more likely than not, impaired.
The purpose of step 2 of the analysis was to determine the estimated fair value of the assets and liabilities of the Company’s reporting unit, in order to determine the implied fair value of goodwill for the reporting unit. The excess, if any, of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. Based upon the analysis performed, the fair value of the Company’s single reporting unit did not exceed the amounts assigned to its reporting unit assets and liabilities, resulting in a difference between the implied fair value of goodwill of zero and the historical carrying value of goodwill. As a result, the Company recognized a goodwill impairment charge totaling $30.1 million in the fourth quarter of 2015.
7. INVESTMENTS
Investment at Fair Value
Veritone Investment Agreement. On August 15,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). As part of the Company’s equity securities in the Life Sciences Portfolio, the Company has elected to apply the fair value method to one investment, refer to Note 3 for additional information.
During 2016 and 2017, Acacia entered into an Investment Agreement withmade certain investments in Veritone, Inc. (“Veritone”), which provided. As a result of these transactions, Acacia received shares of Veritone common stock and warrants. We elected the fair value method for Acacia to invest up to $50 millionour investment in Veritone consistingupon acquisition. During 2018, Acacia began to divest its investments in Veritone. During 2020, Acacia sold its remaining shares of both debtcommon stock. During the quarter ended March 31, 2021, included in the consolidated statement of operations, Acacia recorded an unrealized loss of $2.8 million from our investment in warrants, as reflected in the change in fair value of investment, and equity components. PursuantAcacia exercised all remaining warrants and recorded a realized gain on sale of investment of $3.6 million. Since March 2021, the Company no longer has an investment in Veritone common stock and warrants.
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 Investment Agreement, on August 15, 2016, Acacia entered intofinancial 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 secured convertible promissory note with Veritone (the “Veritone Loans”), which permitted Veritonedecline in fair value is determined to borrow up to $20 million through two $10 million advances, each bearing interest at the rate of 6.0% per annum (included in Other Income (Expense)be other-than-temporary, an impairment charge is recorded in the consolidated statements of operations). On August 15, 2016, Acacia fundedoperations and a new cost basis in the investment is established.
Accounts Receivable and Allowance for Doubtful Accounts
Intellectual Property Operations
ARG performs credit evaluations of its licensees with significant receivable balances, if any, and has not experienced any significant credit losses. Accounts receivable are recorded at the executed contract amount and generally do not bear interest. Collateral is not required. An allowance for doubtful accounts may be established to reflect the Company’s best estimate of probable losses inherent in the accounts receivable balance, and is reflected as a contra-asset account on the balance sheets and a charge to general and administrative expenses in the consolidated statements of operations for the applicable period. The allowance is determined based on known troubled accounts, historical experience, and other currently available evidence. There was no allowance for doubtful accounts established as of December 31, 2022 and 2021.
Industrial Operations
Printronix's accounts receivable are recorded at the invoiced amount and do not bear interest. Printronix performs initial $10 million loan (the “First Loan”). On November 25, 2016, Acacia funded the second $10 million loan (the “Second Loan”). The First Loanand periodic credit evaluations on customers and adjusts credit limits based upon payment history and the Second Loancustomer’s current creditworthiness. The allowance for doubtful accounts is determined by evaluating individual customer receivables, based on contractual terms, reviewing the financial condition of customers, and from the historical experience of write-offs. Receivable losses are charged against the allowance when management believes the account has become uncollectible. Subsequent recoveries, if any, are credited to the allowance. As of December 31, 2022 and 2021, Printronix's combined allowance for doubtful accounts and allowance for sales returns was $22,000 and $78,000, respectively.
Inventories
Printronix's inventories, which include material, labor and overhead costs, are valued at the lower of cost or net realizable value. Cost is determined at standard cost adjusted on a first-in, first-out basis for variances. Cost includes shipping and handling fees and other costs, including freight insurance and customs duties for international shipments, which are subsequently expensed to cost of sales. Printronix evaluates and records a provision to reduce the carrying value of inventory for estimated excess and obsolete stocks based upon forecasted demand, planned obsolescence and market conditions. Refer to Note 4 for additional information.
Long-Term Notes Receivable
On October 13, 2021, Adaptix Limited issued £2.95 million, approximately $4.0 million at the exchange rate on October 13, 2021, in limited unsecured notes due in 2026 to Radcliffe 2 Ltd., a subsidiary of Merton Healthcare Holdco II LLC. The interest rate on the notes is 8.0% per year. During the years ended December 31, 2022 and 2021, we recorded $291,000 and $69,000, respectively, in interest income related to the notes. As of December 31, 2022 and 2021, the receivable including interest was $3.9 million and $4.0 million, respectively, and is included in other non-current assets in the consolidated balance sheets.
Long-Term Restricted Cash
Restricted cash related to a standby letter of credit, which expired and was cancelled in March 2022.
Property, Plant and Equipment
Property and equipment are recorded at cost. Major additions and improvements that materially extend useful lives of property and equipment are capitalized. Maintenance and repairs are charged against the results of operations as incurred. When these assets are sold or otherwise disposed of, the asset and related depreciation are relieved, and any gain or loss is included in the consolidated statements of operations for the period of sale or disposal. Refer to Note 5 for additional information. Depreciation and amortization is computed on a straight-line basis over the following estimated useful lives of the assets:
| | | | | |
Machinery and equipment | 2 to 10 years |
Furniture and fixtures | 3 to 5 years |
Computer hardware and software | 3 to 5 years |
Leasehold improvements | 2 to 5 years (Lesser of lease term or useful life of improvement) |
Goodwill and Other Intangible Assets
Goodwill represents the excess of the acquisition price of a business over the fair value of identified net assets of that business. We evaluate goodwill for impairment annually in the fourth quarter and on an interim basis if the facts and circumstances lead us to believe that more-likely-than-not there has been an impairment. When evaluating goodwill for impairment, we estimate the fair value of the reporting unit. Several methods may be used to estimate a reporting unit’s fair value, including, but not limited to, discounted projected future net earnings or net cash flows and multiples of earnings. If the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, then the excess is charged to earnings as an impairment loss. Refer to Note 6 for additional information.
ARG's patents include the cost of patents or patent rights acquired from third-parties or obtained in connection with business combinations. ARG's patent costs are amortized utilizing the straight-line method over their estimated useful lives, ranging from five to ten years. Refer to Note 6 for additional information.
Printronix's intangible assets consist of trade names and trademarks, patents and customer and distributor relationships. These definite-lived intangible assets, at the time of acquisition, are recorded at fair value and are stated net of accumulated amortization. Printronix currently amortizes the definite-lived intangible assets on a straight-line basis over their estimated useful lives of seven years. Refer to Note 6 for additional information.
Leases
The Company’s leases primarily consist of facility leases which are classified as operating leases. The Company assesses whether an arrangement contains a lease at inception. The Company recognizes a lease liability to make contractual payments under all leases with terms greater than twelve months and a corresponding right-of-use asset, representing its right to use the underlying asset for the lease term. Lease expense is recognized on a straight-line basis over the lease term. Refer to Note 11 for additional information.
Impairment of Long-lived Assets
The Company reviews long-lived assets, patents and other 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. 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. Refer to Note 6 for additional information.
Series A Warrants and Series B Warrants
The fair value of the Series A Warrants and the Series B Warrants were estimated using a Black-Scholes option-pricing model. Refer to Notes 8 and 9 for additional information related to the Series A Warrants and the Series B Warrants and their fair value measurements.
Embedded Derivatives
Embedded derivatives that are required to be bifurcated from their host contract are valued separately from the host instrument. Refer to Notes 8 and 9 for additional information related to the embedded derivatives and their fair value measurements.
Contingent Liabilities
The Company, from time to time, is involved in certain legal proceedings. Based upon consultation with outside counsel handling its defense in these matters and the Company’s analysis of potential outcomes, if the Company determines that a loss arising from such matters is probable and can be reasonably estimated, an estimate of the contingent liability is recorded in its consolidated financial statements. If only a range of estimated loss can be determined, an amount within the range that, based on estimates, assumptions and judgments, reflects the most likely outcome, is recorded as a contingent liability in the consolidated financial statements. In situations where none of the estimates within the estimated range is a better estimate of probable loss than any other amount, the Company records the low end of the range. Any such accrual would be charged to expense in the appropriate period. Litigation expenses for these types of contingencies are recognized in the period in which the litigation services were provided. Refer to Note 11 for additional information.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, restricted cash, accounts receivables and current liabilities approximates their fair values due to their short-term maturities. Refer to Note 9 for additional information.
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 payable on November 25, 2017. In conjunction withalso establishes a fair value hierarchy which requires an entity to maximize the First Loan and Second Loan, Veritone issued Acacia a totaluse of three four-year $700,000 warrantsobservable inputs, where available. Refer to purchase sharesNote 9 for additional information.
Treasury Stock
Repurchases of Veritone’sthe Company’s outstanding common stock are accounted for using the cost method. The applicable par value is deducted from the appropriate capital stock account on the formal or constructive retirement of treasury stock. Any excess of the cost of treasury stock over its par value is charged to additional paid-in capital and reflected as treasury stock in the consolidated balance sheets. Refer to Note 12 for additional information.
Engineering and Development
Engineering and development costs are expensed as incurred and consist of labor, supplies, consulting and other costs related to developing and improving Printronix's products.
Advertising
Printronix expenses advertising costs, including promotional literature, brochures and trade shows, as incurred. Advertising expense was approximately $315,000 and $52,000 during the year ended December 31, 2022 and the period from October 7, 2021 through December 31, 2021, respectively, and is included in sales and marketing expenses in the consolidated statements of operations.
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 exerciseexpense on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity award) which is currently one to four years. The fair value of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) are determined by the product of the number of shares or units granted and the grant date market price of $13.6088the 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. Refer to Note 13 for additional information.
Foreign Currency Gains and Losses
In connection with our Printronix business, the U.S. dollar is the functional currency for all of the foreign subsidiaries. Transactions that are recorded in currencies other than the U.S. dollar may result in transaction gains or losses at the end of the reporting period and when trade receipts and payments occur. For these subsidiaries, the assets and liabilities have been re-measured at the end of the period for changes in exchange rates, except inventories and property, plant and equipment, which have been remeasured at historical average rates. The consolidated statements of operations have been reevaluated at average rates of exchange for the reporting period, except cost of sales and depreciation, which have been reevaluated at historical rates. Although Acacia historically has not had material foreign operations, Acacia is exposed to fluctuations in foreign currency exchange rates between the U.S. dollar, and the British Pound and Euro currency exchange rates, primarily related to foreign cash accounts, a note receivable and certain equity security investments. All foreign currency exchange activity is recorded in the consolidated statements of operations.
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in Acacia’s consolidated financial statements or consolidated income tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more than likely not be realized, or if it is determined that there is uncertainty regarding future realization of such assets. When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made.
Under U.S. GAAP, a tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions are recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position will be sustained upon examination. Tax positions that meet the more likely than not threshold are measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Refer to Note 15 for additional information.
Income/Loss Per Share
For periods in which the Company generates net income, the Company computes basic net income per share. Veritone’s initial public offering date was May 12, 2017. Upon Veritone’s consummationshare attributable to common stockholders using the two-class method required for capital structures that include participating securities. Under the two-class method, securities that participate in non-forfeitable dividends, such as the Company’s outstanding unvested restricted stock and Series A Redeemable Convertible Preferred Stock, are considered participating securities and are allocated a portion of its public offeringthe Company’s earnings. For periods in which the Company generates a net loss, net losses are not allocated to holders of itsthe Company’s participating securities as the security holders are not contractually obligated to share in the Company’s losses.
Basic net income/loss per share of common stock on May 17, 2017 (“IPO”), all outstanding principal and accrued interest underis computed by dividing net income/loss attributable to common stockholders by the Veritone Loans, totaling $20.7 million, automatically converted into 1,523,746 shares of Veritone’s common stock based on a conversion price of $13.6088 per share.
In addition, in August 2016, Veritone issued Acacia a five-year Primary Warrant to purchase up to $50 million, less all converted amounts or amounts repaid under the Veritone Loans, worthweighted average number of shares of Veritone’s common stock atoutstanding for the period. Diluted net income/loss per share of common stock is computed by dividing net income/loss attributable to common stockholders by the weighted average number of common and dilutive common equivalent shares outstanding for the period using the treasury
stock method or the as-converted method, or the two-class method for participating securities, whichever is more dilutive. Potentially dilutive common stock equivalents consist of stock options, restricted stock units, unvested restricted stock, Series A Redeemable Convertible Preferred Stock, Series A Warrants and Series B Warrants. Refer to Note 16 for additional information.
Recent Accounting Pronouncements
Recently Adopted
In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” The amendments in this update clarify that a contractual restriction on the sale of an exerciseequity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. As such, an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction (e.g. an entity cannot apply a discount to the price of $13.6088an equity security subject to a lock-up agreement). The amendments also require the following disclosures for equity securities subject to contractual sale restrictions: (i) the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet, (ii) the nature and remaining duration of the restriction(s), and (iii) the circumstances that could cause a lapse in the restriction(s). The amendments are to be applied prospectively and are effective on January 1, 2024 for public entities, with early adoption permitted. The Company adopted the update on June 30, 2022. The adoption of the update did not have an impact on the Company’s financial position, results of operations or financial statement disclosures.
Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” to replace the incurred loss methodology with an expected credit loss model that requires consideration of a broader range of information to estimate credit losses over the lifetime of the asset, including current conditions and reasonable and supportable forecasts in addition to historical loss information, to determine expected credit losses. Pooling of assets with similar risk characteristics and the use of a loss model are also required. Also, in April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” to clarify the inclusion of recoveries of trade receivables previously written off when estimating an allowance for credit losses. The amendments in these updates will be adopted by the Company on January 1, 2023. Management has completed its evaluation of the impact that the amendments in these updates will have on the Company’s consolidated financial statements and there are no significant implementation matters that still need to be addressed. Based on Management's evaluation of the new standard, the Company does not expect it to have a material effect on the Company’s consolidated financial statements or disclosures, accordingly, a cumulative-effect adjustment to the opening accumulated deficit as of January 1, 2023 is not expected.
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” to simplify the accounting for convertible instruments by eliminating large sections of the existing guidance in this area. It also eliminates several triggers for derivative accounting, including a requirement to settle certain contracts by delivering registered shares. This update reduces the number of accounting models for convertible instruments, revises the derivatives scope exception, and provides targeted improvements for earnings per share. PursuantUpon adoption, companies have the option to apply a modified or full retrospective transition approach. The amendments in this update will currently be effective for the Company on January 1, 2024, with early adoption permitted. Management is currently evaluating the impact that the amendments in this update may have on the Company’s consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” to require that an amendmentacquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with “Revenue from Contracts with Customers (Topic 606).” At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The amendments in this update will be applied prospectively and will be adopted by the Company on January 1, 2023. Management does not expect the adoption of this new standard to have a material effect on the Primary Warrant effective March 15, 2017,Company’s consolidated financial statements.
3. EQUITY SECURITIES
Equity securities for the Primary Warrantperiods presented were comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
Security Type | Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value |
| (In thousands) |
December 31, 2022: | | | | | | | |
Equity securities - Life Sciences Portfolio | $ | 28,498 | | | $ | 14,815 | | | $ | (617) | | | $ | 42,696 | |
Equity securities - other common stock | 34,885 | | | 4 | | | (15,977) | | | 18,912 | |
Total | $ | 63,383 | | | $ | 14,819 | | | $ | (16,594) | | | $ | 61,608 | |
| | | | | | | |
December 31, 2021: | | | | | | | |
Equity securities - Life Sciences Portfolio | $ | 56,037 | | | $ | 262,811 | | | $ | (1,488) | | | $ | 317,360 | |
Equity securities - other common stock | 43,822 | | | 2,068 | | | (1,472) | | | 44,418 | |
Total | $ | 99,859 | | | $ | 264,879 | | | $ | (2,960) | | | $ | 361,778 | |
Equity Securities Portfolio Investment
On April 3, 2020, the Company entered into an Option Agreement with LF Equity Income Fund, which included general terms through which the Company was exercised automatically uponprovided the consummation of Veritone’s IPO, resulting inoption to purchase the purchase by Acacia of an additional 2,150,335 shares of Veritone common stock, atLife Sciences Portfolio for an aggregate purchase price of $29.3 million. Immediately following Acacia’s exercise£223.9 million, approximately $277.5 million at the exchange rate on April 3, 2020.
For accounting purposes, the total purchase price of the Primary WarrantLife Sciences Portfolio was allocated to the individual equity securities based on their individual fair values as of April 3, 2020, in full, Veritoneorder 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. Included in our consolidated balance sheets as of December 31, 2022 and 2021, the total fair value of the remaining Life Sciences Portfolio investment was $68.4 million and $343.1 million, respectively.
As part of the Company’s acquisition of equity securities in the Life Sciences Portfolio, the Company acquired an equity interest in Arix Bioscience PLC (“Arix”), a public company listed on the London Stock Exchange. During the year ended December 31, 2022, the Company increased its investment in Arix amounting to approximately 26% as of December 31, 2022. In addition, two members of the Company's Board of Directors (the “Board”) have seats on the board of Arix, which is currently made up of five board members. Although the Company is presumed to have significant influence over operating and financial policies of Arix, we have elected to account for the investment under the fair value method. To date, the Company has not received any dividends from Arix. As of December 31, 2022, this investment did not meet the significance thresholds for additional summarized income statement disclosures, as defined by the SEC. As of December 31, 2022, the aggregate carrying amount of our Arix investment was $42.7 million, and is included in equity securities in the consolidated balance sheet.
The following unrealized and realized gains or losses from our investment in the Life Sciences Portfolio are recorded in the change in fair value of equity securities and gain or loss on sale of equity securities, respectively, in the consolidated statements of operations:
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2022 | | 2021 |
| | | | | (In thousands) |
Change in fair value of equity securities of public companies | | | | | $ | (247,126) | | | $ | 188,875 | |
| | | | | | | |
Conversion of equity securities without readily determinable fair value to equity securities of public companies | | | | | — | | | (102,067) | |
Gain on sale of equity securities of public companies | | | | | 111,717 | | | 115,172 | |
| | | | | | | |
| | | | | | | |
Net realized and unrealized (loss) gain | | | | | $ | (135,409) | | | $ | 201,980 | |
As part of the Company’s acquisition of equity securities in the Life Sciences Portfolio, the Company acquired a majority interest in the equity securities of MalinJ1 (63.9%), which were transferred to the Company on December 3, 2020. The acquisition of the MalinJ1 securities was accounted for as an asset acquisition as there was a change of control of MalinJ1 and substantially all of the fair value of the assets acquired was concentrated in a single identifiable asset, an investment in Viamet Pharmaceuticals Holdings, LLC (“Viamet”). As such, the cost basis of the MalinJ1 securities was used to allocate to the Viamet investment, the single identifiable asset, and no goodwill was recognized. The Company through its consolidation of MalinJ1 accounts for the Viamet investment under the equity method as MalinJ1 owns 41.0% of outstanding shares of Viamet. As of December 31, 2022 and 2021, this investment did not meet the significance thresholds for additional summarized income statement disclosures, as defined by the SEC. During the years ended December 31, 2022 and 2021, our consolidated earnings on equity investment was $42.5 million and $3.5 million, respectively, included in the consolidated statements of operations. During the year ended December 31, 2022, distributions received were $28.4 million to Acacia and $14.1 million to noncontrolling interests. During the year ended December 31, 2021, distributions received were $2.4 million to Acacia and $1.2 million to noncontrolling interests.
In April 2022, Viamet received a certain drug approval from the United States Food and Drug Administration ("FDA"). In connection with the FDA approval, MalinJ1 was due a milestone payment in the amount of $40.0 million. The Company's portion of that milestone payment was received in November 2022 in the amount of $27.2 million, including interest accrued at 8.5% per year. In June 2022, in connection with the submission to the European Medicines Agency, MalinJ1 was due an additional milestone payment in the amount of $1.8 million. The Company's portion of that milestone payment was received in July 2022 in the approximate amount of $1.2 million. During 2022, the Company has recorded consolidated earnings on equity investment of $42.5 million, including the two milestones and accrued interest.
4. INVENTORIES
Printronix's inventories consisted of the following:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In thousands) |
Raw materials | $ | 4,335 | | | $ | 3,207 | |
Subassemblies and work in process | 3,045 | | | 1,712 | |
Finished goods | 7,340 | | | 4,011 | |
| 14,720 | | | 8,930 | |
Inventory reserves | (498) | | | — | |
Total inventories | $ | 14,222 | | | $ | 8,930 | |
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In thousands) |
Machinery and equipment | $ | 3,057 | | | $ | 2,077 | |
Furniture and fixtures | 585 | | | 1,036 | |
Computer hardware and software | 660 | | | 614 | |
Leasehold improvements | 1,025 | | | 1,034 | |
| 5,327 | | | 4,761 | |
Accumulated depreciation and amortization | (1,790) | | | (578) | |
Property, plant and equipment, net | $ | 3,537 | | | $ | 4,183 | |
Total depreciation and amortization expense in the consolidated statements of operations was $1.4 million and $438,000 for the years ended December 31, 2022 and 2021, respectively. Our Intellectual Property Operations and parent company include depreciation and amortization in general and administrative expenses. For the year ended December 31, 2022, our Industrial Operations allocated depreciation and amortization, totaling $1.3 million, to all applicable operating expense categories, including cost of sales of $1.1 million. For the period from October 7, 2021 through December 31, 2021, our Industrial Operations allocated depreciation and amortization, totaling $684,000, to all applicable operating expense categories, including cost of sales of $257,000.
6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Changes in the carrying amount of goodwill consisted of the following:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| (In thousands) |
Beginning balance | $ | 7,470 | | | $ | — | |
Acquisition of business | — | | | 7,470 | |
Tax adjustment (Note 15) | 71 | | | — | |
Impairment losses | — | | | — | |
Ending balance | $ | 7,541 | | | $ | 7,470 | |
The ending balance of goodwill includes no accumulated impairment losses to date. All goodwill is allocated to our Industrial Operations segment, refer to Note 1 for additional information related to the Printronix acquisition.
Other intangible assets, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Weighted Average Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| | | (In thousands) |
Patents: | | | | | | | |
Intellectual property operations | 6 years | | $ | 331,403 | | | $ | (304,744) | | | $ | 26,659 | |
Industrial operations | 7 years | | 3,400 | | | (597) | | | 2,803 | |
Total patents | | | 334,803 | | | (305,341) | | | 29,462 | |
Customer relationships - industrial operations | 7 years | | 5,300 | | | (931) | | | 4,369 | |
Trade name and trademarks - industrial operations | 7 years | | 3,430 | | | (603) | | | 2,827 | |
Total | | | $ | 343,533 | | | $ | (306,875) | | | $ | 36,658 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Weighted Average Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| | | (In thousands) |
Patents: | | | | | | | |
Intellectual property operations | 6 years | | $ | 331,403 | | | $ | (294,341) | | | $ | 37,062 | |
Industrial operations | 7 years | | 3,400 | | | (112) | | | 3,288 | |
Total patents | | | 334,803 | | | (294,453) | | | 40,350 | |
Customer relationships - industrial operations | 7 years | | 5,300 | | | (174) | | | 5,126 | |
Trade name and trademarks - industrial operations | 7 years | | 3,430 | | | (113) | | | 3,317 | |
Total | | | $ | 343,533 | | | $ | (294,740) | | | $ | 48,793 | |
Total other intangible asset amortization expense in the consolidated statements of operations was $12.1 million and $10.3 million for the years ended December 31, 2022 and 2021, respectively. The Company did not record charges related to impairment of other intangible assets for the years ended December 31, 2022 and 2021. There was no accelerated amortization of other intangible assets for the years ended December 31, 2022 and 2021. During 2021, ARG reduced its gross patent costs and accumulated amortization by approximately $35.0 million for patents that were fully amortized. Intellectual Property Operations amortization of patents is expensed in cost of revenues and Industrial Operations amortization is expensed in general and administrative expenses.
The following table presents the scheduled annual aggregate amortization expense (in thousands):
| | | | | |
Years Ending December 31, | |
| |
2023 | $ | 12,068 | |
2024 | 10,693 | |
2025 | 8,347 | |
2026 | 2,483 | |
2027 | 1,733 | |
Thereafter | 1,334 | |
Total | $ | 36,658 | |
During the year ended December 31, 2022, ARG entered into an agreement granting ARG the exclusive option to acquire all rights to license and enforce a patent portfolio and all future patents and patent applications, and incurred $15.0 million of certain patent and patent rights costs, of which $6.0 million was paid in 2022 and $9.0 million is accrued and included in
accrued expenses and other current liabilities (see Note 7), and is due in three $3.0 million installments in February, April and June 2023. The patent costs are included in prepaid expenses and other current assets in the consolidated balance sheet as of December 31, 2022.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In thousands) |
| | | |
Accrued consulting and other professional fees | $ | 1,173 | | | $ | 438 | |
Customer deposit | — | | | 3,000 | |
Income taxes payable | 474 | | | 506 | |
Product warranty liability, current | 36 | | | 84 | |
Service contract costs, current | 280 | | | 307 | |
Short-term lease liability | 1,559 | | | 935 | |
Accrued patent cost (see Note 6) | 9,000 | | | — | |
Other accrued liabilities | 1,536 | | | 957 | |
Total | $ | 14,058 | | | $ | 6,227 | |
8. STARBOARD INVESTMENT
Recapitalization Agreement
On October 30, 2022 the Company entered into the Recapitalization Agreement with Starboard and the Investors, pursuant to which, among other things, the Company and Starboard agreed to enter into a series of transactions to restructure Starboard’s existing investments in the Company in order to simplify the Company’s capital structure. As applicable, the following discussion of Starboard’s investments in the Company reflect the transactions effected or to be effected pursuant to the Recapitalization Agreement.
Series A Redeemable Convertible Preferred Stock
On November 18, 2019, the Company entered into a Securities Purchase Agreement with the Investors 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 million shares of the Company’s common stock to the Investors. The Securities Purchase Agreement also established the terms of certain senior secured notes and additional Series B Warrants which may be issued to AcaciaStarboard 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 period of 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 Investors 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 certain triggering events, the dividend rate will increase to 7.0% if the triggering event occurs before an additional 10% Warrantapproved 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 Investors agreed that providesthe dividend rate on the Series A Redeemable Convertible Preferred Stock would accrue at 3.0% so long as no triggering event occurs and the Company maintains $35.0 million in escrow. Series A Redeemable Convertible Preferred Stock also participates on an as-converted basis in any regular or special dividends paid to common stockholders. During October 2021, the Company consummated a suitable acquisition, accordingly $35.0 million was released to the Company from escrow (refer to Note 1 for discussion related to the Printronix acquisition). Upon consummation of the approved acquisition in October 2021, the dividend rate increased to 8.0% on the stated value. There are no accrued and unpaid dividends as of December 31, 2022 and 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.
In connection with the issuance of an additional 809,400the Series A Redeemable Convertible Preferred Stock, the Company executed a Registration Rights Agreement with Starboard and the Investors 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 Veritone common stock at an exercise priceissued upon conversion.
In accordance with the Recapitalization Agreement, subject to the receipt of $13.6088 per share, with 50% of the shares underlying the 10% Warrant vesting as of the issuance date of the 10% Warrant, and the remaining 50% of the shares underlying the 10% warrant vesting on the first anniversary of the issuance date of the 10% Warrant.
Veritone Bridge Loan. On March 14, 2017, Acacia entered into an additional secured convertible promissory note with Veritone (the “Veritone Bridge Loan”), which permitted Veritone to borrow up to an additional $4.0 million, bearing intereststockholder approval at the rateCompany’s next annual meeting of 8.0% per annum. On March 17, 2017, Acacia fundedstockholders, (i) the initial $1.0 million advance (the “First Bridge Loan”). On AprilCompany will cause the Certificate of Designations to be amended and restated in the form attached to the Recapitalization Agreement in order to remove the “4.89% blocker” provision and (ii) on or prior to July 14, 2017, Acacia funded2023, the second $1.0 million advance (the “Second Bridge Loan”). All advances and accrued interest under the Veritone Bridge Loan were due and payable on November 25, 2017. In May 2017, pursuant toInvestors will convert an aggregate amount of 350,000 shares of Preferred Stock into common stock in accordance with the terms of the Veritone Bridge Loan, Acacia elected to make an additional advance to Veritone totaling $2.0 million, representing all principal amounts not advanced upon Veritone’s consummationCertificate of its IPO. Upon consummation of Veritone’s IPO, the outstanding principal and accrued interest under the Veritone Bridge Loan of $4.0 million and $21,000, respectively, automatically converted into 295,440 shares of Veritone’s common stock at a conversion price of $13.6088 per share.Designations.
In conjunction with the Veritone Bridge Loan, Veritone issued to Acacia (i) 60,000 shares of Veritone common stock (“Upfront Shares”), (ii) 90,000 shares of Veritone common stock (the “Bridge Installment Shares”), and (iii) 10-year warrants to purchase up to 157,000 shares of Veritone common stock with other terms and conditions similar to the warrants described above.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All share amounts above have been adjusted to reflect a 0.6-for-1 reverse stock split of Veritone’s common stock, which was effected by Veritone in April 2017. The Veritone common shares are subject to a lock-up agreementCompany determined that expires on February 15, 2018, subsequent to which the shares may be sold pursuant to Rule 144, subject to volume limitations and Rule 144 filing requirements, as well as other restrictions under applicable securities laws. Allcertain features of the Veritone common stock held by Acacia was unregistered as of the issue dateSeries A Redeemable Convertible Preferred Stock should be bifurcated and are unregistered as of December 31, 2017.
Accounting Prior to Veritone IPO. Prior to conversion, Acacia’s Investment Agreement and the Veritone Bridge Loan represented variable interests in Veritone for which Acacia was not the primary beneficiary, primarily due to a lack of a controlling interest in Veritone. In addition, the Veritone Loans and Veritone Bridge Loan (the “Loans”) were not considered in-substance common stock, the common stock purchase warrants were unexercised, and the right to receive the Upfront Shares and the Bridge Installment shares (“Veritone Shares”) were considered in-substance common stock, however, application of the equity method was not material, therefore, the equity method of accounting was not applied prior to the IPO.
Prior to conversion, the Loans and the related common stock purchase warrants and Veritone Shares were accounted for as separate unitsa derivative. Each of accountthese features are bundled together as a single, compound embedded derivative.
During 2019, total proceeds received and transaction costs incurred from the issuance of the Series A Redeemable Convertible Preferred Stock amounted to $35.0 million and $1.3 million, respectively. Proceeds received were allocated based on the relative estimated fair valuesvalue of the separate units asinstrument without the Series A Warrants and of the effective dateSeries A Warrants themselves at the time of the respective transactions, with the face amount of the loans allocated to (1) the Loans, which were accounted for as long-term loan receivables and (2) the common stock purchase warrants and Veritone Shares.issuance. The estimated relative fair value allocation was determined using a Monte Carlo simulation model. Key inputs to the model included the estimated value of Veritone’s equity on the effective date of the transactions, related volatility of equity assumptions, discounts for lack of marketability, assumptions related to liquidity scenarios, and assumptions related to recovery scenarios on the Loans. Assumptions used in connection with estimating the relative fair values included: (1) volatility ranging from 40% to 50%, (2) financing probabilities ranging from 25% to 75%, (3) marketability discount of 7% and (4) 100% investment recovery assumption. The loan discount, representing the difference between the face amount of the Loans and the relative fair valueproceeds allocated to the Loans, was accreted overSeries A Redeemable Convertible Preferred Stock were then further allocated between the expected lifehost 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 Loans,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 would 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 would 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. The Company determined that upon entering into the Recapitalization Agreement, the Series A Redeemable Convertible Preferred Stock was not modified related to the redemption, as such action is subject to the receipt of stockholder approval at the Company’s next annual meeting of stockholders. Accordingly, the Series A Redeemable Convertible Preferred Stock will continue to be classified as temporary equity and will continue to be accreted to its redemption value to the earliest redemption date of November 15, 2024. Accretion for the years ended December 31, 2022 and 2021 was $5.2 million and $3.8 million, respectively.
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 as other income or (expense) in the “Change in fair value of the Series A and B warrants and embedded derivatives” financial statement line item of the consolidated statements of operations. In connection with the Recapitalization Agreement, the Company determined that the embedded features will continue to be bifurcated from the host Series A Redeemable Convertible Preferred Stock and accounted for separately as a compound derivative. As of December 31, 2022 and 2021, the fair value of the Series A embedded derivative was $16.8 million and $18.4 million, respectively.
Series A Warrants
On November 18, 2019, in connection with the issuance of the Series A Redeemable Convertible Preferred Stock, the Company issued detachable Series A Warrants to acquire up to 5 million shares of common stock at a price of $3.65 per share (subject to certain anti-dilution adjustments) at any time during a period of eight years beginning on the instrument’s issuance date of the Series A Warrants. The fair value of the Series A Warrants was $4.8 million upon issuance. As of December 31, 2022, the Series A Warrants have been fully exercised, as described below.
In accordance with the terms of the Recapitalization Agreement, within five (5) business days following the date of the Recapitalization Agreement, the Investors were required to consummate the Series A Warrants Exercise, and the Company was to issue to the Investors shares of common stock in accordance with the terms of the Series A Warrants and to pay to Starboard an aggregate amount of $9.0 million representing a negotiated settlement of the foregone time value of the Series A Warrants (which amount was paid through a reduction in the exercise price of the Series A Warrants). Effective as of November 1, 2022, the Investors exercised the Series A Warrants in full and the Company issued an aggregate of
5,000,000 shares of the Company’s common stock to the Investors in consideration of their payment of the cash exercise price of $9.3 million, which amount represents a reduction in the exercise price to account for a negotiated settlement by the parties to account for the forgone time value of money of the Series A Warrants.
The Series A Warrants were classified as a liability in accordance with ASC 480, "Distinguishing Liabilities from Equity", as the agreement provided for net cash settlement upon a change in control, which is outside the control of the Company. As a result of the Series A Warrants exercise on November 1, 2022 and related interest amounts reflectedwarrant modification, the Company recognized the common stock issued at its fair value in equity and an approximate $2.0 million charge as a component of the change in fair value of the Series A Warrants in other expense.
The Series A Warrants were recognized at fair value at each reporting period until exercised, with changes in fair value recognized in other income or (expense) in the consolidated statements of operations. As of May 2017, the unamortized loan discount totaled $1.7 million. Interest income for the year ended December 31, 2017 was $1.1 million, including accretion of the loan discount of $630,000. The effective yield on the Loans for the year ended December 31, 2017 ranged from 9% to 53%.
Accounting Subsequent to Veritone IPO. Upon Veritone’s consummation of its IPO on May 17, 2017, the Loans were converted into shares of Veritone common stock2022 and the Primary Warrant was automatically exercised in full, as described above, resulting in a 20% ownership interest in Veritone (excluding warrants). Based on Acacia’s representation on the Veritone board of directors and Acacia’s 20% ownership interest in Veritone, Acacia management determined that the equity method of accounting was applicable. Upon becoming eligible for the equity method of accounting, Acacia elected to apply2021, the fair value optionof the Series A Warrants was zero and $11.3 million, respectively.
Series B Warrants
On February 25, 2020, pursuant to account for its equity investment in Veritone, including allthe terms of its investments in Veritonethe Securities Purchase Agreement with Starboard and the Investors, the Company issued Series B Warrants to purchase up to 100 million shares of the Company’s common stock and warrants, dueat 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 availabilityissuance date (i.e., August 25, 2022); or (ii) $3.65 per share, if exercising by cancellation of quoted prices ina portion of Notes. The Company issued the Series B Warrants for an active market foraggregate purchase price of $4.6 million. The Series B Warrants expire on November 15, 2027.
In connection with the Veritone common stock.issuance of the Notes on June 4, 2020, the terms of certain of the Series B Warrants were amended to permit the payment of the lower exercise price of $3.65 through the payment of cash, rather than only through the cancellation of Notes outstanding, at any time until the expiration date of November 15, 2027. 31,506,849 of the Series B Warrants are subject to this adjustment with the remaining balance of 68,493,151 Series B Warrants continuing under their original terms (the Series B Warrants not subject to such adjustment, the “Unadjusted Series B Warrants”). As of December 31, 2017, Acacia’s ownership2022, the Series B Warrants have not been exercised.
During the third quarter of 2022, the cash exercise feature of the Unadjusted Series B Warrants expiration date of August 25, 2022 was extended to October 28, 2022. On October 28, 2022, the cash exercise feature of the Unadjusted Series B Warrants expired, which resulted in a fair value of zero for the related 68,493,151 warrants.
In accordance with the terms of the Recapitalization Agreement, on or prior to July 14, 2023 (unless stockholder approval is required), the Company and Starboard will amend the Series B Warrant Agreement to remove the 4.89% blocker, and Starboard will irrevocably exercise 31,506,849 of the Series B Warrants (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction relating to the common stock occurring after the date of the Recapitalization Agreement), through the Series B Warrants Exercise. In March 2023, the remaining Series B Warrants were cancelled immediately following the completion of the Rights Offering (as described below).
At the closing of the Series B Warrants Exercise (the “Closing”), the Company will pay to Starboard an aggregate amount of $66.0 million (the “Recapitalization Payment”) representing a negotiated settlement of the foregone time value of the Series B Warrants and the Series A Redeemable Convertible Preferred Stock (which amount will be paid through a reduction in the exercise price of the Series B Warrants). As a result of the Recapitalization Agreement, the conversion of the Series A Redeemable Convertible Preferred Stock is probable (as discussed above), therefore, the Recapitalization Payment effectively modifies the exercise price of the Series B Warrants. Upon the Closing, the Investors will exercise the Series B Warrants at a reduced price and the Company will issue an aggregate of 31,506,849 shares of the Company’s common stock to the Investors in consideration of their cash payment and cancellation of any outstanding Notes. If stockholder approval for the amendment to the Certificate of Designations to remove the “4.89% blocker” provision is not obtained, the Recapitalization Payment will be reduced by $12.7 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. In connection with the Recapitalization Agreement and related warrant modification, the Company recognized the incremental fair value as a component of the change in fair value of the Series B Warrants in other expense as of December 31, 2022.
The Series B Warrants will be recognized at fair value at each reporting period until exercised or expiration, with changes in fair value recognized in other income or (expense) in the consolidated statements of operations. As of December 31, 2022 and 2021, the total fair value of the Series B Warrants was $84.8 million and $96.4 million, respectively.
Senior Secured Notes
On June 4, 2020, pursuant to the Securities Purchase Agreement dated November 18, 2019 with Starboard and the Investors, the Company issued $115.0 million in Notes to the Investors. 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”), as discussed further below.
On June 30, 2020, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with Merton Acquisition HoldCo LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company (“Merton”) and Starboard, on behalf of itself and on behalf of certain funds and accounts under its management, including the holders of the Notes. Pursuant to the Exchange Agreement, the holders of the Notes exchanged the entire outstanding principal amount for new senior notes (the “New Notes”) issued by Merton having an aggregate outstanding original principal amount of $115.0 million.
The New Notes bear interest at a rate of 6.00% per annum and had an initial maturity date of December 31, 2020. The New Notes are fully guaranteed by the Company and are secured by an all-assets pledge of the Company and Merton and non-recourse equity pledges of each of the Company’s material subsidiaries. Pursuant to the Exchange Agreement, the New Notes (i) are deemed to be “Notes” for purposes of the Securities Purchase Agreement, (ii) are deemed to be “June 2020 Approved Investment Notes” for purposes of the Supplemental Agreement, and with the Company agreeing to redeem $80.0 million principal amount of the New Notes by September 30, 2020 and $35.0 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 Veritone,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 “Certificate of Designations”). 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 Investors.
Because the New Notes are to be settled within twelve months pursuant to their terms, they are classified as current liabilities in the consolidated balance sheets. The Company capitalized $4.6 million in lender fees associated with the issuance of the Notes and amortized such fees over the approximate seven month period ended December 31, 2020, which was the initial redemption date of the Notes. There was $0.5 million and $1.3 million accrued and unpaid interest on the New Notes as of December 31, 2022 and 2021, respectively.
On January 29, 2021, the Company redeemed $50.0 million of the New Notes and on March 31, 2021, the Company reissued $50.0 million of the New Notes. On June 30, 2021, the Company issued $30.0 million in additional New Notes (the “June 2021 Merton Notes”) and amended the maturity date of the New Notes to October 15, 2021. On September 30, 2021, the Company issued $35.0 million in additional New Notes (the “September 2021 Merton Notes”) and amended the maturity date of the New Notes to December 1, 2021. The June 2021 Merton Notes and the September 2021 Merton Notes cannot be used to exercise Series B Warrants issued to Starboard. On November 30, 2021, the Company amended the maturity date of the New Notes to January 31, 2022. On January 31, 2022, the Company amended the maturity date of the New Notes to April 15, 2022, and agreed to repay an aggregate of $15.0 million principal amount of the New Notes, resulting in a principal amount outstanding of $165.0 million. On April 14, 2022, the Company amended the New Notes to extend the maturity date to July 15, 2022, permit the investment in certain types of derivative instruments and permit certain guarantees in connection with such derivative instruments, each as defined therein, and agreed to repay an aggregate of $50.0 million principal amount of the New Notes, resulting in a principal amount outstanding of $115.0 million. On July 15, 2022, the Company amended the maturity date of the New Notes to July 14, 2023, and agreed to repay an aggregate of $55.0 million principal amount of the New Notes, resulting in a principal amount outstanding of $60.0 million. The total principal amount outstanding of New Notes as of December 31, 2022 and 2021 was $60.0 million and $180.0 million, respectively.
Modifications to Series A Redeemable Convertible Preferred Stock and Series B Warrants
The June 4, 2020 Supplemental Agreement also provided for (i) a waiver of increased dividends under the original terms of the Series A Redeemable Convertible Preferred Stock that would have otherwise accrued due to the Company’s use of the $35.0 million proceeds received from Starboard and the Investors upon the issuance of the Series A Redeemable Convertible Preferred Stock in November 2019, (ii) the replacement of original optional redemption rights for the Series A Redeemable Convertible Preferred Stock provided to both the Company and the holders that otherwise would have been nullified through the issuance of the Notes, and (iii) an amendment to the terms of the previously issued Series B Warrants to permit the payment of the lower exercise price of $3.65 through the payment of cash, rather than only through the cancellation of Notes outstanding, at any time until the expiration of the Series B Warrants on November 15, 2027. 31,506,849 of the Series B Warrants are subject to this adjustment with the remaining balance of 68,493,151 Series B Warrants continuing under their original terms.
We analyzed the amendments to the 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 fully-dilutedprospective basis.
The incremental fair value of the Series B Warrants associated with the modification of their terms in connection with the issuance of the Notes was $1.3 million and is recognized as a discount on the Notes and will be amortized to interest expense over the contractual life of the Notes. For the years ended December 31, 2022 and 2021, $90,000 and $103,000, respectively, was amortized to interest expense. The discount was fully amortized during the quarter ended September 30, 2022.
Rights Offering and Concurrent Private Rights Offering
On February 14, 2023, pursuant to the requirements of the Recapitalization Agreement and in accordance with the terms of the Series B Warrants, the Company commenced a rights offering (the “Rights Offering”). Under the terms of the Rights Offering, the Company distributed non-transferable subscription rights to record holders (“Eligible Securityholders”) of the Company’s common stock held as of 5 p.m. Eastern time on February 13, 2023, the record date for the Rights Offering. The subscription period for the Rights Offering terminated at 5 p.m. Eastern time on March 1, 2023 (the “Expiration Time”). Pursuant to the Rights Offering, Eligible Securityholders received one non-transferable subscription right (a “Subscription Right”) for every four shares of common stock owned by such Eligible Securityholders. Each Subscription Right entitles an Eligible Securityholder to purchase, at such Eligible Securityholder’s election, one share of common stock at a price of $5.25 per share (the “Subscription Price”).
The Investors received private subscription rights to purchase common stock at the Subscription Price pursuant to a concurrent private rights offering (the “Concurrent Private Rights Offering”) in connection with their ownership of common stock and, on an as-converted basis, the Company’s Series B Warrants and shares of the Company’s Series A Redeemable Convertible Preferred Stock. The private subscription rights provided to the Investors pursuant to the Concurrent Private Rights Offering were on substantially the same terms as the Subscription Rights, and were distributed substantially concurrently with the distribution of the Subscription Rights and expired at the Expiration Time.
The Company determined that upon entering into the Recapitalization Agreement on October 30, 2022, the Rights Offering and Concurrent Private Rights Offering and related commitment required no recognition in the Company's financial statements. The Company recognized the proceeds received from the sale of the shares in equity when the sale occurred.
The Company received aggregate gross proceeds of approximately $361,000 from the Rights Offering and aggregate gross proceeds of approximately $78.8 million from the Concurrent Private Rights Offering.
After giving effect to the issuance of 68,753 shares of common stock in the Rights Offering and 15,000,000 shares of Common Stock in the Concurrent Private Rights Offering, the Company has 58,543,312 shares of common stock issued and outstanding. Following the Closing, Starboard may be deemed the beneficial owner of 20,000,000 shares of common stock, representing approximately 34.2% of the issued and outstanding common stock as of March 6, 2023. The Rights Offering was approximately 23%.made pursuant to a prospectus supplement to the Company’s shelf registration statement on Form S-3 (No. 333-249984), filed with the SEC on February 14, 2023.
Acacia’s equity investmentOther Provisions of the Recapitalization Agreement
On February 14, 2023, Company entered into an amended and restated Registration Rights Agreement with Starboard as contemplated by the Recapitalization Agreement.
Pursuant to the amended Registration Rights Agreement, the Company has agreed to file a registration statement covering the resale of the shares of Common Stock, issuable or issued to Starboard pursuant to or in Veritoneaccordance with Section 1.1 of the Recapitalization Agreement, including the shares issued to Starboard in the Concurrent Private Rights Offering, within 90 days after a written request made prior to the first anniversary of the Closing Date (as defined in the Registration Rights Agreement). The Registration Rights Agreement also provides Starboard with additional rights to require that the Company file a registration statement in other circumstances. The Registration Rights Agreement includes other customary terms.
The Recapitalization Agreement includes a “fair price” provision requiring, in addition to any other stockholder vote required by the Company’s Certificate of Incorporation or Delaware law, the affirmative vote of the holders of a majority of the outstanding voting stock held by stockholders of the Company other than Starboard and its affiliates, by or with whom or on whose behalf, directly or indirectly, a business combination is proposed, in order to approve such a business combination; provided, that the additional majority voting requirement would not be applicable if either (x) the business combination is approved by the Board by the affirmative vote of at least a majority of the directors who are unaffiliated with Starboard or (y) (i) the consideration to be received by stockholders other than Starboard and its affiliates meets certain minimum price conditions, and (ii) the consideration to be received by stockholders other than Starboard and its affiliates is of the same form and kind as the consideration paid by Starboard and its affiliates.
The consummation of the Series B Warrant Exercise is subject to certain conditions, including: (i) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976; (ii) the absence of any law or order prohibiting the consummation of the Series B Warrant Exercise; (iii) the representations and warranties of the Company and Starboard being true and correct, subject to the materiality standards contained in the Recapitalization Agreement; and (iv) the Company and Starboard having complied in all material respects with their respective obligations under the Recapitalization Agreement.
The Recapitalization Agreement may be terminated by either party under certain circumstances, including if (i) the parties agree to terminate by mutual consent, (ii) a governmental entity issues an order permanently prohibiting the Recapitalization, (iii) there is an uncured breach of the Recapitalization Agreement by the other party that results in a condition to Closing not being capable of being satisfied, or (iv) the Closing does not occur on or before July 31, 2023.
The Recapitalization Agreement also provides that, effective as of the later of the Closing and the date on which no Notes remain outstanding, (i) the Securities Purchase Agreement and (ii) that certain Governance Agreement, dated as of November 18, 2019, as amended and restated on January 7, 2020, shall be automatically terminated and of no further force and effect without any further action by any party thereto.
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: Unobservable inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Management estimates include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs, including the entity’s own assumptions in determining the fair value of derivatives and certain investments.
Whenever possible, the Company is required to use observable market inputs (Level 1) when measuring fair value. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular input requires judgment and considers
factors specific to the asset or liability being measured. In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy.
The Company held the following types of financial instruments at fair value on a recurring basis as of December 31, 2022 and 2021:
Equity Securities. Equity securities includes investments in public company common shares isstock and are recorded at fair value based on the quoted market price of Veritone’s common stock on The NASDAQ Global Market (the “NASDAQ”)each share on the applicable valuation date, as adjusted for an estimated discount for lackdate. The fair value of marketability (“DLOM”) associated with the restricted naturethese securities are within Level 1 of the common shares acquired (Level 3 input). Acacia’s investment in Veritone warrants isvaluation 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. The Company has elected to apply the fair value method to one equity securities investment that would otherwise be accounted for under the equity method of accounting. As of December 31, 2022, the aggregate carrying amount of this investment was $42.7 million, and is included in equity securities, in the consolidated balance sheet (refer to Note 3 for additional information). At December 31, 2021, our Level 2 equity securities included an investment measured with an applied pricing model that included significant observable inputs to the public company common stock value. The fair value of this Level 2 equity security investment as adjustedof December 31, 2021 was estimated based on a discount of 3 percent determined using the following significant inputs to the pricing model: expected term of restriction of 3 months and volatility of approximately 45 percent.
Series A Warrants. Series A Warrants were recorded at fair value, using a Black-Scholes option-pricing model (Level 3). During 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 were measured as Level 3 as opposed to Level 2 as measured previously. On November 1, 2022, the Series A Warrants were exercised in full (refer to Note 8 for anadditional information). The fair value of the Series A Warrants as of December 31, 2021 was estimated DLOM, based on the Black-Scholes option-pricing model, utilizing the following assumptions at December 31, 2017:significant assumptions: volatility of 30 percent, risk-free interest rates ranging from 1.94% to 2.37%; expected terms ranging from three to nine years; volatilities ranging from 45% to 55%;rate of 1.33 percent, term of 5.79 years and a dividend yield of zero.0 percent. Refer to the "Embedded derivative liabilities" discussion below for additional information on assumptions.
Series B Warrants. Series B Warrants are recorded at fair value, using a Black-Scholes option-pricing model (Level 3). During 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. On October 28, 2022, the cash exercise feature of the Unadjusted Series B Warrants expired, which resulted in a fair value of zero for such warrants (refer to Note 8 for additional information). The DLOM forfair value of the Veritone common stock and warrantsremaining Series B Warrants as of December 31, 2022 was estimated utilizingbased on the following significant assumptions: volatility of 53 percent, risk-free rate of 4.76 percent, term of 0.54 years and a Finnerty modeldividend yield of 0 percent. The fair value of the two Series B Warrants as of December 31, 2021 was estimated based on the following significant assumptions: (1) volatility of 30 percent, risk-free rate of 1.34 percent, term of 5.88 years and a dividend yield of 0 percent, and (2) volatility of 25 percent, risk-free rate of 0.25 percent, term of 0.65 years and a dividend yield of 0 percent. Refer to the "Embedded derivative liabilities" discussion below for additional information on assumptions.
Embedded derivative liabilities. Embedded derivatives that are required to be bifurcated from their host contract are evaluated and valued separately from the host instrument. During the quarter ended December 31, 2022 in connection with the following results and assumptions: |
| | | | | | | | | | | |
| | Veritone Common Stock | | Veritone Warrants |
| | IPO Date | | December 31, 2017 | | IPO Date | | December 31, 2017 |
Estimated DLOM applied | | 5.7% | | 5% | | 5.7% | | 10% |
Volatility assumptions | | 35% | | 37% | | 35% | | 72 | % | - | 87% |
Term assumptions | | 6 months | | 2 months | | 6 months | | 5 months |
At December 31, 2017,Recapitalization Agreement, the Company changed its methodology to an as-converted value (Level 3), based on an expected Series A Convertible Preferred Stock conversion date on or prior to July 14, 2023 (refer to Note 8 for additional information). As of September 30, 2022, a binomial lattice framework was used to estimate the fair value of the 4,119,521 sharesembedded derivative in the Series A Convertible Preferred Stock (Level 3). The binomial model utilizes the Tsiveriotis and Fernandes implementation in which a convertible instrument is split into two separate components within a single lattice framework: a cash-only component which is subject to the selected risk-adjusted discount rate and an equity component which is subject only to the risk-free rate. The binomial model considers the (i) implied volatility of Veritonethe value of our common stock, owned(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 Acacia totaled $90,795,000. Atanalyzing the Company’s historical volatility, implied volatility of publicly traded stock options, and the Company’s current asset composition and financial leverage. Prior to December 31, 2017,2022, the selected volatility, as described herein, represented 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. Prior to December 31, 2022, the assumed base case term used in the valuation models was the period remaining
until November 15, 2027, the Series A Redeemable Convertible Preferred Stock maturity date. The risk-free interest rate was 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 as-converted valuation of the embedded derivative at December 31, 2022 were as follows: coupon rate of 8.00 percent, conversion ratio of 27.40, conversion date of July 14, 2023 and a discount rate of 16.30 percent. The significant assumptions utilized in the Company’s binomial model valuation of the embedded derivative at December 31, 2021 were as follows: volatility of 30 percent, risk-free rate of 1.30 percent, term of 5.87 years, a dividend yield of 0 percent and a discount rate of 9.60 percent. The fair value measurement of the embedded derivative is sensitive to these assumptions and changes in these assumptions could result in a materially different fair value measurement.
Financial assets and liabilities measured at fair value on a recurring basis were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In thousands) |
Assets | | | | | | | |
December 31, 2022: | | | | | | | |
Equity securities | $ | 61,608 | | | $ | — | | | $ | — | | | $ | 61,608 | |
| | | | | | | |
| | | | | | | |
December 31, 2021: | | | | | | | |
Equity securities | $ | 113,630 | | | $ | 248,148 | | | $ | — | | | $ | 361,778 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Liabilities | | | | | | | |
December 31, 2022: | | | | | | | |
| | | | | | | |
Series A embedded derivative liabilities | — | | | — | | | 16,835 | | | 16,835 | |
Series B warrants | — | | | — | | | 84,780 | | | 84,780 | |
Total | $ | — | | | $ | — | | | $ | 101,615 | | | $ | 101,615 | |
| | | | | | | |
December 31, 2021: | | | | | | | |
Series A warrants | $ | — | | | $ | — | | | $ | 11,291 | | | $ | 11,291 | |
Series A embedded derivative liabilities | — | | | — | | | 18,448 | | | 18,448 | |
Series B warrants | — | | | — | | | 96,378 | | | 96,378 | |
Total | $ | — | | | $ | — | | | $ | 126,117 | | | $ | 126,117 | |
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 as a on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| Series A Warrant Liabilities | | Series A Embedded Derivative Liabilities | | Series B Warrant Liabilities | | Total |
| (In thousands) |
Balance at December 31, 2020 | $ | — | | | $ | 26,728 | | | $ | 52,341 | | | $ | 79,069 | |
Transfer to Level 3 | 6,640 | | | — | | | — | | | 6,640 | |
Remeasurement to fair value | 4,651 | | | (8,280) | | | 44,037 | | | 40,408 | |
Balance at December 31, 2021 | 11,291 | | | 18,448 | | | 96,378 | | | 126,117 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Exercise of warrants | (9,396) | | | — | | | — | | | (9,396) | |
Remeasurement to fair value | (1,895) | | | (1,613) | | | (11,598) | | | (15,106) | |
Balance at December 31, 2022 | $ | — | | | $ | 16,835 | | | $ | 84,780 | | | $ | 101,615 | |
In accordance with U.S. GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. The Company reviews the carrying value of equity securities without readily determinable fair value, equity method investments and patents on a quarterly basis for indications of impairment, and other long-lived assets at least annually.
When indications of potential impairment are identified, the Company may be required to determine the fair value of those assets and record an adjustment for the 1,120,432 common stock purchase warrants held by Acacia totaled $13,959,000. A 10% increasecarrying amount in the DLOM assumptions utilized at all applicable valuation dates would result in an approximate 10% decrease inexcess of the fair value determined. Any fair value determination would be based on valuation approaches, which are appropriate under the circumstances and utilize Level 2 and Level 3 measurements as required.
10. RELATED PARTY TRANSACTIONS
During 2019, Acacia purchased shares of common stock of Drive Shack, Inc. (“Drive Shack”) for an aggregate purchase price of $2.4 million. At the time, Drive Shack and our former Chief Executive Officer were related parties as he was a board member of Drive Shack until June 2021. During the quarter ended September 30, 2021, Acacia sold its investment in Veritone atreceiving proceeds of $1.8 million and recognized a loss of $515,000.
The Company reimbursed an aggregate amount of $46,000 during the year ended December 31, 2017,2022 to a former executive officer in connection with legal fees incurred following such officer’s departure from the Company. The Company reimbursed an aggregate amount of $408,000 during the quarter ended December 31, 2021.
Refer to Note 8 for information about the Recapitalization Agreement with Starboard.
11. COMMITMENTS AND CONTINGENCIES
Facility Leases
Acacia primarily leases office facilities under operating lease arrangements that will end in various years through February 2025.
On June 7, 2019, Acacia entered into a building lease agreement with Jamboree Center 4 LLC. Pursuant to the lease, we have leased 8,293 square feet of office space in Irvine, California. The lease commenced on August 1, 2019. The term of the 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, Acacia entered into a corresponding decreasebuilding lease agreement with Sage Realty Corporation. Pursuant to the lease, as amended, we have leased approximately 8,600 square feet of office space for our corporate headquarters in New York, New York. The lease commenced on February 1, 2020. The term of the net investment gain reflectedinitial lease was 24 months from the commencement date, provides for annual rent increases, and does not provide us the right to early terminate or extend our lease terms. During August 2021, we entered into a first amendment of the New York office lease, to commence for a period of three years upon landlord's substantial completion of adequate substitution space. On January 25, 2022, the substitution space was substantially completed and the new expiration date is February 28, 2025. During July 2022, we entered into a second amendment of the New York office lease, to add space to the existing premises and increase the annual fixed rent through the existing expiration date. The new fixed rent commenced upon landlord's substantial completion of the additional space, which occurred on September 19, 2022.
Printronix conducts its foreign and domestic operations using leased facilities under non-cancelable operating leases that expire at various dates through February 2028. Printronix has leased 73,649 square feet of facilities space, of which the significant leases are as follows:
•On November 10, 2020, Printronix entered into a building lease agreement with PPC Irvine Center Investment, LLC for 8,662 square feet of office space in Irvine, California. The lease commenced on April 1, 2021. The term of the lease is 65 months from the commencement date, provides for annual rent increases and provides the right to early terminate the lease under certain circumstances, as well as extend the lease term.
•On September 30, 2019, Printronix entered into a building lease agreement with Dynamics Sing Sdn. Bhd for 52,000 square feet of warehouse/manufacturing space in Johor, Malaysia. The lease commenced on December 29, 2019. The term of the lease is 48 months from the commencement date, has no annual rent increases and provides the right to early terminate or extend our lease term. The Malaysia factory lease has two renewal options for an additional four years and one additional renewal option for two years.
•On June 2, 2022, Printronix entered into a building lease agreement with HSBC Institutional Trust Services (Singapore) Limited for 4,560 square feet of office space in Singapore. The lease commenced on June 13, 2022. The term of the lease is 36 months from the commencement date, has no annual rent increases and does not provide the right to early terminate or extend the lease term.
•On November 28, 2019, Printronix entered into a building lease agreement with PF Grand Paris for 3,045 square feet of office space in Paris, France. The lease commenced on March 1, 2019. The term of the lease is 109 months from the commencement date, has no annual rent increases and provides the right to early terminate the lease under certain circumstances, however does not provide for an extension of the lease term.
•On November 1, 2020, Printronix entered into a building lease agreement with Shanghai SongYun Enterprise Management Center for 2,422 square feet of office space in Shanghai, China. The lease commenced on November 1, 2020. The term of the lease is 48 months from the commencement date, has no annual rent increases and provides the right to early terminate or extend the lease term.
The Company's operating lease costs were $1.5 million, and $851,000 for the years ended December 31, 2022 and 2021, respectively.
The table below presents aggregate future minimum lease payments due under the Company's leases discussed above, reconciled to long-term lease liabilities and short-term lease liabilities (included in accrued expenses and other current liabilities) included in the consolidated statementsbalance sheet as of December 31, 2022 (in thousands):
| | | | | |
Years Ending December 31, | |
| |
2023 | $ | 1,539 | |
2024 | 1,137 | |
2025 | 453 | |
2026 | 238 | |
2027 | 65 | |
Thereafter | — | |
Total minimum payments | 3,432 | |
Less: short-term lease liabilities | (1,559) | |
Long-term lease liabilities | $ | 1,873 | |
Inventor Royalties and Contingent Legal Expenses
In connection with the investment in certain patents and patent rights, certain of Acacia’s operating subsidiaries executed related agreements which grant to the former owners of the respective patents or patent rights, the right to receive inventor royalties based on future net revenues (as defined in the respective agreements) generated as a result of licensing and otherwise enforcing the respective patents or patent portfolios.
Acacia’s operating subsidiaries may retain the services of law firms that specialize in patent licensing and enforcement and patent law in connection with their licensing and enforcement activities. These law firms may be retained on a contingent fee basis whereby such law firms are paid on a scaled percentage of any negotiated fees, settlements or judgments awarded based on how and when the fees, settlements or judgments are obtained.
Patent Enforcement and Legal Proceedings
The Company 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 the Company’s consolidated financial position, results of operations or cash flows.
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.
In December 2017, the Federal Court of Canada allowed a counterclaim for invalidity of a patent asserted by Rapid Completions LLC and awarded costs payable by Rapid Completions LLC. During the year ended December 31, 2017.2021, the Company made approximately $1.2 million in settlement payments. This settlement was fully paid as of December 31, 2021 and all claims were withdrawn.
ACACIA RESEARCH CORPORATIONOn September 6, 2019, Slingshot Technologies, LLC, or Slingshot, filed a lawsuit in Delaware Chancery Court against the Company and ARG, or collectively, the Acacia Entities, Monarch Networking Solutions LLC (“Monarch”), Acacia board member Katharine Wolanyk, and Transpacific IP Group, Ltd., or Transpacific. Slingshot alleges that the Acacia Entities and Monarch misappropriated its confidential and proprietary information, purportedly furnished to the Acacia Entities and Monarch by Ms. Wolanyk, in acquiring a patent portfolio from Transpacific after Slingshot’s exclusive option to purchase the same patent portfolio from Transpacific had already expired. Slingshot seeks monetary damages, as well as equitable and injunctive relief related to its alleged right to own the portfolio. On March 15, 2021, the court issued orders granting Monarch’s motion to dismiss for lack of personal jurisdiction and Ms. Wolanyk’s motion to dismiss for lack of subject matter jurisdiction. The remaining parties served written discovery requests and responses, exchanged their respective document productions, and completed depositions as of October 27, 2022. On November 18, 2022, the Acacia Entities and Transpacific filed motions for summary judgment on Slingshot’s claims. As the Acacia Entities argue in their motion, discovery has confirmed that Slingshot’s allegations are baseless, the Acacia Entities neither had access to nor used Slingshot’s information in acquiring the portfolio, and the Acacia Entities acquired the portfolio as a result of the independent efforts of their IP licensing group. Slingshot filed its opposition to the summary judgment motions on December 23, 2022, and the Acacia Entities and Transpacific filed their replies on January 10, 2023. The Chancery Court took off calendar the two-day trial on liability that had been scheduled for April 18–19, 2023, and instead set the hearing on the summary judgment motions for April 19, 2023.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company resolved a legal dispute with a third-party relating to an agreement entered into in connection with the Life Sciences Portfolio and paid $4.8 million in the fourth quarter of 2022 to the third-party.
Guarantees and Indemnifications
ChangesCertain of Acacia’s operating subsidiaries have made guarantees and indemnities under which they may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. In connection with certain facility leases, Acacia and certain of its operating subsidiaries have indemnified lessors for certain claims arising from the facilities or the leases. Acacia indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware. However, Acacia has a directors and officers insurance policy that may reduce its exposure in certain circumstances and may enable it to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to statute of limitations. The majority of guarantees and indemnities do not provide any limitations of the maximum potential future payments that Acacia could be obligated to make. To date, Acacia has made no payments related to these guarantees and indemnities. Acacia estimates the fair value of Acacia’s investment in Veritone areits indemnification obligations to be insignificant based on this history and therefore, have not recorded as unrealized gains or lossesany liability for these guarantees and indemnities in the consolidated statementsbalance sheets. Additionally, no events or transactions have occurred that would result in a material liability at December 31, 2022.
Printronix posted collateral in the form of operations. Fora surety bond or other similar instruments, which are issued by independent insurance carriers (the “Surety”), to cover the periodrisk of loss related to certain customs and employment activities. If any of the entities that hold such bonds should require payment from the IPO on May 17, 2017Surety, Printronix would be obligated to indemnify and reimburse the Surety for all costs incurred. As of December 31, 2017,2022 and 2021, Printronix had approximately $100,000 of these bonds outstanding.
Environmental Cleanup
Printronix maintained a manufacturing operation in a leased facility in Irvine, California from 1980 to 1994. The facility was used for similar manufacturing operations by another tenant from 1968 to 1977. The manufacturing operations employed by the
accompanying consolidated statementsprevious tenant are believed to have resulted in the contamination of
operations reflectedsoil and groundwater under the
following (in thousands): |
| | | | |
| | 2017 |
Gain on conversion of loans and accrued interest(1) | | $ | 2,671 |
|
Gain on exercise of warrant(2) | | 4,616 |
|
Change in fair value of investment, warrants | | 8,317 |
|
Change in fair value of investment, common stock | | 33,922 |
|
Net unrealized gain on investment at fair value | | $ | 49,526 |
|
__________________________facility which included chlorinated volatile organic compounds (“VOCs”). Evidence indicates that the VOCs requiring cleanup were used by the prior tenant and not by Printronix. Printronix worked with the prior tenant, which agreed to share (1) Pre-conversion difference between carrying value
the costs of the activities in an equal percentage with Printronix, and the estimated fair valuestate regulatory agencies, including the California Department of common stock discounted for lack of marketability.Toxic Substances Control, to investigate and cleanup the subsurface contamination. A significant soil cleanup project was completed in 2017.
(2) Pre-conversion difference between carrying value of Primary Warrant andIn 2020, Printronix executed an agreement with the estimated fair value of common stock and 10% Warrant discounted for lack of marketability.
Summarized financial information for Veritone, presented on a three month lag basis, is as follows (in thousands, except per share amounts): |
| | | | |
| | Nine Months Ended September 30, 2017 |
| | (Unaudited) |
Revenues | | $ | 10,914 |
|
Gross profit | | 10,090 |
|
Operating expenses | | 44,024 |
|
Other income (expense), net | | (12,872 | ) |
Net loss attributable to common stockholders | | (51,281 | ) |
Net loss per share attributable to common stockholders - basic and diluted | | $ | (5.94 | ) |
|
| | | | |
| | September 30, 2017 |
Current assets | | $ | 78,509 |
|
Noncurrent assets | | 1,173 |
|
Total Assets | | $ | 79,682 |
|
| | |
Current liabilities | | $ | 31,836 |
|
Noncurrent liabilities | | 14 |
|
Total liabilities | | 31,850 |
|
Preferred stock | | — |
|
Total stockholders’ equity (deficit) | | 47,832 |
|
Total liabilities, preferred stock and stockholders’ equity | | $ | 79,682 |
|
Equity Method Investment
In June 2017, Acacia made an investment in 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 Miso Robotics, and one board seat. Miso Robotics will useprior tenant whereby the funding to deliver an adaptable AI-driven robotic kitchen assistant that will work alongside kitchen staff to improve operational efficiencyprior tenant would take 100% responsibility for the restaurant industry. In addition, Acacia also entered into an intellectual property services agreementcosts and process of the cleanup going forward. Printronix is in process of filing for release of such responsibility from a governmental agency and so may currently be found to be secondarily liable if the prior tenant cannot fulfil their responsibilities under the agreement. Accordingly, Printronix no longer takes part in monitoring or paying for any future investigation or cleanup activity. Printronix expects to have no such further costs associated with Miso Roboticsthis facility. During 2020, Printronix was able to help Miso Robotics drive AI-based solutionsrecover $24,000 from the prior tenant. Since that date and for the entire restaurant industry. Based on Acacia’s representation on the Miso Robotics board of directors, and greater than 20% ownership interest in Miso Robotics, the equity method of accounting was applied. The fair value option was not elected for Acacia’s investment in
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Miso Robotics due to the lack of a readily determinable fair market value. For the year ended December 31, 2017, equity in losses of investee2022, Printronix has incurred no related to Miso Robotics totaled $220,000.legal fees.
8.12. STOCKHOLDERS’ EQUITY
Repurchases of Common Stock
Cash Dividends. On April 23, 2013, Acacia announced that itsDecember 6, 2021, the Board approved a stock repurchase program, which authorized the purchase of Directorsup to $15.0 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 December 6, 2022. During February 2022, we completed the December 2021 program with total common stock purchases of 3,125,819 shares for the aggregate amount of $15.0 million.
On March 31, 2022, the Board approved a stock repurchase program for up to $40.0 million of shares of common stock. The repurchase authorization had no time limit and did not require the adoptionrepurchase of a cash dividend policy that callsminimum number of shares. The common stock may be repurchased on the open market, in block trades, or in privately negotiated transactions, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Exchange Act. During July 2022, we completed the March 2022 program with total common stock purchases of 8,453,519 shares for the paymentaggregate amount of an expected total annual$40.0 million.
Stock repurchases, 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 |
| | | | | (In thousands) |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
December 1, 2021 - December 31, 2021 | 784,104 | | | $ | 5.12 | | | $ | 11,004 | |
| | | | | |
January 1, 2022 - January 31, 2022 | 1,588,820 | | | $ | 4.85 | | | $ | 3,286 | |
February 1, 2022 - February 28, 2022 | 752,895 | | | $ | 4.36 | | | $ | — | |
| | | | | |
Total repurchases in the quarter | 2,341,715 | | | $ | 4.69 | | | |
Total program repurchases | 3,125,819 | | | $ | 4.80 | | | |
| | | | | |
April 1, 2022 - April 30, 2022 | 692,538 | | | $ | 4.48 | | | $ | 36,901 | |
May 1, 2022 - May 31, 2022 | 2,192,238 | | | $ | 4.59 | | | $ | 26,832 | |
June 1, 2022 - June 30, 2022 | 3,262,043 | | | $ | 4.71 | | | $ | 11,480 | |
Total repurchases in the quarter | 6,146,819 | | | $ | 4.64 | | | |
July 1, 2022 - July 31, 2022 | 2,306,700 | | | $ | 4.98 | | | $ | — | |
Total program repurchases | 8,453,519 | | | $ | 4.73 | | | |
In determining whether or not to repurchase any shares of Acacia’s common stock, the Board considers such factors, among others, as the impact of the repurchase on Acacia’s cash dividendposition, as well as Acacia’s capital needs and whether there is a better alternative use of $0.50 perAcacia’s capital. Acacia has no obligation to repurchase any amount of its common share, payablestock under its Stock Repurchase Programs. Repurchases to date were made in the amount of $0.125 per share per quarter. Under the policy, the Company paid four quarterly cash dividends totaling $25,434,000open market in 2015. On February 25, 2016, Acacia announced that its Board of Directors terminated the company’s dividend policy effective February 23, 2016.compliance with applicable SEC rules. The Board of Directors terminated the dividend policy dueauthorizations to a number of factors, including the Company’s financial performance and its available cash resources, the Company’s cash requirements and alternative uses of capital that the Board of Directors concluded would representrepurchase shares presented an opportunity to generate a greater return on investment forreduce the Companyoutstanding share count and its stockholders.enhance stockholder value.
Tax Benefits Preservation Plan. On March 15, 2016, Acacia’s Board
The Company has a provision in its Amended and Restated Certificate of Directors announcedIncorporation, as amended (the “Charter Provision”) which generally prohibits transfers of its common stock that it unanimously approvedcould result in an ownership change. Like the adoption of a Tax Benefits Preservation Plan, (the “Plan”). Thethe purpose of the PlanCharter Provision is to protect the Company’s ability to utilize potential tax assets, such as net operating loss carryforwards (“NOLs”) and tax credits to offset potential future taxable income.
The Plan is designed to reduce the likelihood that the Company will experience an ownership changeCharter Provision was approved by discouraging any (i) person or group from acquiring beneficial ownership of 4.9% or more of the Company’s outstanding common stock and (ii) any existing shareholders 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.stockholders on July 15, 2019.
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 shareholders of record at the close of business on March 16, 2016. 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 A Junior Participating Preferred Stock, $0.001 par value for a purchase price of $15.00.
9. INCOME TAXES
Acacia’s provision for income taxes for the fiscal periods presented consisted of the following (in thousands):
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
Current: | | | | | | |
Federal | | $ | — |
| | $ | — |
| | $ | — |
|
State | | 90 |
| | 262 |
| | 379 |
|
Foreign | | 2,865 |
| | 17,926 |
| | 4,421 |
|
Total current | | 2,955 |
| | 18,188 |
| | 4,800 |
|
Deferred: | | | | | | |
Federal | | — |
| | — |
| | — |
|
State | | — |
| | — |
| | — |
|
Total deferred | | — |
| | — |
| | — |
|
Provision for income taxes | | $ | 2,955 |
| | $ | 18,188 |
| | $ | 4,800 |
|
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following at December 31, 2017 and 2016 (in thousands):
|
| | | | | | | | |
| | 2017 | | 2016 |
| | | | |
Deferred tax assets: | | | | |
Net operating loss and capital loss carryforwards and credits | | $ | 90,871 |
| | $ | 83,323 |
|
Stock compensation | | 2,635 |
| | 2,416 |
|
Fixed assets and intangibles | | 6,197 |
| | 14,343 |
|
Basis of investments in affiliates | | 984 |
| | 2,195 |
|
Accrued liabilities and other | | 167 |
| | 422 |
|
State taxes | | 35 |
| | 90 |
|
Total deferred tax assets | | 100,889 |
| | 102,789 |
|
Valuation allowance | | (90,278 | ) | | (102,627 | ) |
Total deferred tax assets, net of valuation allowance | | 10,611 |
| | 162 |
|
Deferred tax liabilities: | | | | |
Unrealized gain on investments held at fair value | | (10,587 | ) | | — |
|
Other | | (24 | ) | | (162 | ) |
Total deferred tax liabilities | | (10,611 | ) | | (162 | ) |
Net deferred tax assets (liabilities) | | $ | — |
| | $ | — |
|
A reconciliation of the federal statutory income tax rate and the effective income tax rate is as follows:
|
| | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
Statutory federal tax rate - (benefit) expense | | 35 | % | | (35 | )% | | (35 | )% |
State income and foreign taxes, net of federal tax effect | | 8 | % | | 50 | % | | 3 | % |
Foreign tax credit | | — | % | | (49 | )% | | (3 | )% |
Noncontrolling interests in operating subsidiaries | | 1 | % | | 1 | % | | (1 | )% |
Goodwill | | — | % | | — | % | | 7 | % |
Nondeductible permanent items | | 3 | % | | — | % | | — | % |
Expired capital loss carryforwards | | — | % | | — | % | | 1 | % |
Change in tax rate | | 102 | % | | — | % | | — | % |
Valuation allowance | | (137 | )% | | 83 | % | | 31 | % |
| | 12 | % | | 50 | % | | 3 | % |
For the periods presented, the Company recorded full valuation allowances against its net deferred tax assets due to uncertainty regarding future realization pursuant to guidance set forth in ASC 740, “Income Taxes.” In future periods, if the Company determines it will more likely than not be able to realize certain of these amounts, the applicable portion of the benefit from the release of the valuation allowance will generally be recognized in the statements of operations in the period the determination is made.
At December 31, 2017, Acacia had U.S. federal and state income tax net operating loss carryforwards (“NOLs”) totaling approximately $180,621,000 and $17,850,000, expiring between 2026 and 2037, and 2028 and 2037, respectively. Capital loss carryovers totaled $2,804,000 at December 31, 2017, expiring in 2019 and 2020.
At December 31, 2017, approximately $26,326,000 of the U.S. federal NOLs, acquired in connection with the acquisition of ADAPTIX, Inc. in 2012, are subject to an annual utilization limitation of approximately $14,100,000, pursuant to the “change in ownership” provisions under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”).
As of December 31, 2017, Acacia had approximately $51,126,000 of foreign tax credits, expiring between 2018 and 2026. In general, foreign taxes withheld may be claimed as a deduction on future U.S. corporate income tax returns, or as a credit against future U.S. income tax liabilities, subject to certain limitations.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax expense for the periods presented primarily reflects foreign taxes withheld on revenue agreements executed with licensees in foreign jurisdictions and other state taxes. Excluding the impact of the change in valuation allowance and the impact of the federal tax rate change under the change in tax law described below, annual effective tax rates were 47%, (33)% and (28)%, for fiscal years 2017, 2016 and 2015, respectively. Results for fiscal year 2017 included an unrealized gain on Acacia’s investment in Veritone which created a deferred tax liability totaling approximately $10,587,000. The future anticipated reversal of this deferred tax liability provides for a source of taxable income that allows for the realizability of existing deferred tax assets that have been reduced by a valuation allowance for the periods presented. The effective tax rate reflects both the recognition of the deferred tax liability and the reversal of valuation allowance
Effective January 1, 2017, the Company adopted a new standard that requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. The adoption of this standard resulted in the Company recognizing gross federal and state deferred tax assets of $21,350,000 and $1,559,000, respectively, related to the impact of share-based payments to employees in prior periods. These deferred tax assets are fully offset by a valuation allowance and were impacted by the change in tax rate described below.
Acacia is subject to taxation in the U.S. and in various state jurisdictions and incurs foreign tax withholdings on revenue agreements with licensees in certain foreign jurisdictions. With no material exceptions, Acacia is no longer subject to U.S. federal or state examinations by tax authorities for years before 2011. The California Franchise Tax Board is auditing the 2011 and 2012 California combined income tax returns. The audit is in process and no findings or adjustments have been proposed.
At December 31, 2017 and 2016, the Company had total unrecognized tax benefits of approximately $808,000. No interest and penalties have been recorded for the unrecognized tax benefits for the periods presented. At December 31, 2017, if recognized, approximately $808,000 of tax benefits, net of valuation allowance, would impact the Company’s effective tax rate. The Company does not expect that the liability for unrecognized tax benefits will change significantly within the next 12 months. The change in total unrecognized tax benefits as of December 31, 2017 was due to a lapse of the applicable statute of limitations related to an unrecognized benefit originating in a prior period.
Acacia recognizes interest and penalties with respect to unrecognized tax benefits in income tax expense. Acacia has identified no uncertain tax position for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within 12 months.
On December 22, 2017, new U.S. tax legislation was enacted that has significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing the U.S. corporate income tax rate to 21%, revising the rules governing net operating losses and foreign tax credits, and introducing new anti-base erosion provisions. Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and Internal Revenue Service (“IRS”), any of which could lessen or increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.
While our analysis and interpretation of this legislation is ongoing, based on our current evaluation, we have reflected a write-down of our deferred income tax assets (including the value of our net operating loss carryforwards and our tax credit carryforwards) due the reduction of the U.S. corporate income tax rate. Based on currently available information, we recorded a reduction of approximately $25,261,000 in the fourth quarter of 2017 related to the revaluation of our deferred tax assets. Given the full valuation allowance provided for net deferred tax assets as of December 31, 2017, the change in tax law did not have a material impact on our consolidated financial statements provided herein. There may be additional tax impacts identified in subsequent periods throughout 2018 in accordance with subsequent interpretive guidance issued by the SEC or the IRS. Further, there may be other material adverse effects resulting from the legislation that we have not yet identified. No estimated tax provision has been recorded for tax attributes that are incomplete or subject to change.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10.13. EQUITY-BASED INCENTIVE PLANS
Stock-Based Incentive Plans
The 2013 Acacia Research Corporation Stock Incentive Plan (“2013 Plan”) and the 2016 Acacia Research Corporation Stock Incentive Plan (“2016 Plan”) (collectively, the “Plans”) were approved by the stockholders of Acacia in May 2013 and June 2016, respectively. AllThe Plans allow grants of stock options, stock awards and performance shares with respect to Acacia common stock to eligible individuals, which generally includes directors, officers, employees and consultants. Except as noted below, the terms and provisions of the Plans are identical in all material respects.
Acacia’s compensation committee administers the discretionary option grant and stock issuance programs. The compensation committee determines which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when the grants or issuances are to be made, the number of shares subject to each grant or issuance, the status of any granted option as either an incentive stock option or a non-statutory stock option under the federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The exercise price of options is generally equal to the fair market value of Acacia’s common stock on the date of grant. Options generally begin to be exercisable six months to one year after grant and generally expire seven to ten years after grant. Stock options with time-based vesting generally vest over twothree to threefour years and restricted shares with time basedtime-based vesting generally vest in full after twoone to threefour years (generally representing the requisite service period). The Plans terminate no later than the tenth anniversary of the approval of the incentive plans by Acacia’s stockholders.
The Plans provide for the following separate programs:
Discretionary Option Grant Program. Under the discretionary option grant program, Acacia’s compensation committee may grant (1) non-statutory options to purchase shares of common stock to eligible individuals in the employ or service of Acacia or its subsidiaries (including employees, non-employee board members and consultants) at an exercise price not less than 85% of the fair market value of those shares on the grant date, and (2) incentive stock options to purchase shares of common stock to eligible employees at an exercise price not less than 100% of the fair market value of those shares on the grant date (not less than 110% of fair market value if such employee actually or constructively owns more than 10% of Acacia’s voting stock or the voting stock of any of its subsidiaries).
Stock Issuance Program. Under the stock issuance program, eligible individuals may be issued shares of common stock directly, upon the attainment of performance milestones or the completion of a specified period of service or as a bonus for past services. Under this program, the purchase price for the shares shall not be less than 100% of the fair market value of the shares on the date of issuance, and payment may be in the form of cash or past services rendered. The eligible individuals receiving RSAs shall have full stockholder rights with respect to any shares of Common Stockcommon stock issued to them under the Stock Issuance Program, whether or not their interest in those shares is vested. Accordingly, the eligible individuals shall have the right to vote such shares and to receive any regular cash dividends paid on such shares.
The eligible individuals receiving RSUs shall not have full stockholder rights until they vest.
AutomaticDiscretionary Option Grant Program. EachUnder the discretionary option grant program, Acacia’s compensation committee may grant (1) non-statutory options to purchase shares of common stock to eligible individuals in the employ or service of Acacia or its subsidiaries (including employees, non-employee director will receive restricted stock units or stock options forboard members and consultants) at an exercise price not less than 85% of the numberfair market value of those shares determined by dividing the annual retainer byon the grant date, and (2) incentive stock options to purchase shares of common stock to eligible employees at an exercise price not less than 100% of the fair market value of Acacia’s common stockthose shares on the grant date. In addition, each new non-employee director will receive restricted stock unitsdate (not less than 110% of fair market value if such employee actually or stock options for the number of shares determined by dividing the annual board of directors retainer by the grant date fair valueconstructively owns more than 10% of Acacia’s commonvoting stock onor the commencement date. Restrictedvoting stock units and stock options vest in a series of twelve quarterly installments over the three year period following the grant date, subject to immediate acceleration upon a change in control. Acacia will deliver the unrestricted shares corresponding to the vested restricted stock units within thirty (30) days after the first to occurany of the following events: (i) the fifth (5th) anniversary of the grant date; or (ii) termination of the non-employee director’s service as a member of the Company’s Board of Directors. The non-employee directors do not have any rights, benefits or entitlements with respect to any shares unless and until the shares have been delivered.
its subsidiaries).
The number of shares of Common Stockcommon stock initially reserved for issuance under the 2013 Plan was 4,750,000 shares. No new additional shares will be added to the 2013 Plan without security holder approval (except for shares subject to outstanding awards that are forfeited or otherwise returned to the 2013 Plan). The stock issuable under the 2013 Plan shall be shares of
authorized but unissued or reacquired Common Stock,common stock, including shares repurchased by the Company on the open market. In June 2016, 625,390 shares of common stock available for issuance under the 2013 Plan were transferred into the 2016 Plan. At December 31, 2017,2022, there were 660,000175,119 shares available for grant under the 2013 Plan.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The number of shares of Common Stockcommon stock initially reserved for issuance under the 2016 Plan was 4,500,000 shares plus 625,390 shares of common stock available for issuance under the 2013 Plan, as of the effective date of the 2016 Plan. In May 2022, security holders approved an increase of 5,500,000 shares of common stock authorized to be issued pursuant to the 2016 Plan. At December 31, 2017,2022, there were 727,0006,540,370 shares available for grant under the 2016 Plan.
Upon the exercise of stock options, the granting of restricted stock,RSAs, or the delivery of shares pursuant to vested restricted stock units,RSUs, it is Acacia’s policy to issue new shares of common stock. Acacia’s board of directorsThe Board may amend or modify the Plans at any time, subject to any required stockholder approval. As of December 31, 2017,2022, there are 7,279,0008,868,208 shares of common stock reserved for issuance under the Plans.
Stock-based award grant activity for the periods presented was as follows:
|
| | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Shares | | Aggregate fair value (in thousands) | | Shares | | Aggregate fair value (in thousands) |
Restricted stock awards with performance-based vesting conditions | | — |
| | $ | — |
| | 138,000 |
| | $ | 431 |
|
Stock options with time-based service vesting conditions | | 1,368,000 |
| | 2,930 |
| | 3,434,000 |
| | 5,704 |
|
Stock options with market-based vesting conditions | | — |
| | — |
| | 2,250,000 |
| | 5,530 |
|
Stock options with performance-based vesting conditions | | — |
| | — |
| | 200,000 |
| | 487 |
|
Total incentive awards granted | | 1,368,000 |
| | $ | 2,930 |
| | 6,022,000 |
| | $ | 12,152 |
|
During the year ended December 31, 2016 the Company granted restricted stock awards and stock options (with weighted-average exercise price of $5.75 per share) with performance-based vesting conditions. The awards vest based upon the Company achieving specified cash flow performance targets over a one and two-year period from the date of grant. Under the terms of the awards, the number of restricted shares or stock options that will actually vest is based on the extent to which the Company achieves the specified performance targets during the performance period. As of December 31, 2017, 102,000 (net of forfeitures) shares of restricted stock with performance-based vesting conditions were outstanding and unvested. During the year ended December 31, 2017, all stock options with performance-based vesting conditions expired unvested. As of December 31, 2017, there was no unrecognized expense for awards with performance-based vesting conditions.
During the year ended December 31, 2016, the Company granted stock options with market-based vesting conditions, with a weighted-average exercise price of $5.75 per share. The options with market-based vesting conditions vest based upon the Company achieving specified stock price targets over a four-year period. Under the terms of the awards, the number of stock options that will actually vest is based on the extent to which the Company achieves the specified market conditions during the four-year performance period. The stock options vest in equal installments of 25% upon the Company’s achievement of 30-day average share prices ranging from $7.00 to $10.00. As of December 31, 2017, 1,687,500 options with market-based vesting conditions remain unvested. As of December 31, 2017, there was no unrecognized expense for options with market-based vesting conditions.
The following table summarizes stock option activity for the Plans forPlans:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual Life |
| | | | | (In thousands) | | |
Outstanding at December 31, 2020 | 310,083 | | | $ | 4.41 | | | $ | 104 | | | 2.2 years |
Granted | 393,750 | | | $ | 5.84 | | | $ | — | | | |
Exercised | (60,000) | | | $ | 3.36 | | | $ | 177 | | | |
Forfeited/Expired | (88,416) | | | $ | 3.97 | | | $ | 103 | | | |
Outstanding at December 31, 2021 | 555,417 | | | $ | 5.61 | | | $ | 71 | | | 7.3 years |
Granted | 1,155,000 | | | $ | 3.61 | | | $ | — | | | |
Exercised | — | | | $ | — | | | $ | — | | | |
Forfeited/Expired | (400,000) | | | $ | 4.17 | | | $ | 148 | | | |
Outstanding at December 31, 2022 | 1,310,417 | | | $ | 4.29 | | | $ | 535 | | | 8.0 years |
Exercisable at December 31, 2022 | 262,917 | | | $ | 5.37 | | | $ | 33 | | | 3.7 years |
Vested and expected to vest at December 31, 2022 | 1,310,417 | | | $ | 4.29 | | | $ | 535 | | | 8.0 years |
Unrecognized stock-based compensation expense at December 31, 2022 (in thousands) | $ | 1,024 | | | | | | | |
Weighted average remaining vesting period at December 31, 2022 | 2.3 years | | | | | | |
Stock options granted in 2022 are time-based and will vest in full after three to four years. During the year ended December 31, 2017:
|
| | | | | | | | | | | | | |
| | | | Weighted-Average | | |
| | Options | | Exercise Price | | Remaining Contractual Term | | Aggregate Intrinsic Value |
Outstanding at December 31, 2016 | | 5,596,000 |
| | $ | 4.93 |
| | | | |
Granted | | 1,368,000 |
| | $ | 5.52 |
| | | | |
Exercised | | (208,000 | ) | | $ | 3.57 |
| | | | |
Expired/forfeited | | (926,000 | ) | | $ | 4.90 |
| | | | |
Outstanding at December 31, 2017 | | 5,830,000 |
| | $ | 5.13 |
| | 5.8 years | | $ | 856,000 |
|
Vested | | 1,959,000 |
| | $ | 4.84 |
| | 5.8 years | | $ | 434,000 |
|
Exercisable at December 31, 2017 | | 1,959,000 |
| | $ | 4.84 |
| | 5.8 years | | $ | 434,000 |
|
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate intrinsic value of2022, the Company granted 1,155,000 stock options exercised during the years ended December 31, 2017, 2016 and 2015 was $296,000, $344,000, and $751,000, respectively. The aggregate intrinsic value of options vested during the year ended December 31, 2017 was $351,000. The aggregateat a weighted average grant-date fair value of $1.19 per share using the Black-Scholes option-pricing model. The fair value was estimated based on the following weighted average assumptions: volatility of 30 percent, risk-free interest rate of 1.85 percent, term of 6.11 years and a dividend yield of 0 percent as the Company does not pay common stock dividends. The volatility of the Company’s common stock was estimated by analyzing the Company’s historical volatility, implied volatility of publicly traded stock options, granted duringand the year ended December 31, 2017Company’s current asset composition and financial leverage (refer to Note 9 "Embedded derivative liabilities" for additional information). The risk-free rate was $2,930,000.based on the term assumption and U.S. Treasury constant maturities as published by the Federal Reserve. The Company currently uses the "simplified" method for determining the term, due to the limited option grant history, which assumes that the exercise date of an option would be halfway between its vesting date and the expiration date. The aggregate fair value of options vested during the year ended December 31, 20172022 and 20162021 was $2,009,000$235,000 and $2,342,000, respectively. No options were$18,000.
The following table summarizes nonvested restricted stock activity for the Plans:
| | | | | | | | | | | | | | | | | | | | | | | |
| RSAs | | RSUs |
| Shares | | Weighted Average Grant Date Fair Value | | Units | | Weighted Average Grant Date Fair Value |
| | | | | | | |
Nonvested at December 31, 2020 | 684,006 | | | $ | 3.38 | | | 986,500 | | | $ | 1.58 | |
Granted | 324,401 | | | $ | 5.56 | | | 506,500 | | | $ | 5.84 | |
Vested | (394,169) | | | $ | 3.30 | | | (28,834) | | | $ | 3.19 | |
Forfeited | (96,669) | | | $ | 3.77 | | | (450,000) | | | $ | 1.42 | |
Nonvested at December 31, 2021 | 517,569 | | | $ | 4.74 | | | 1,014,166 | | | $ | 3.73 | |
Granted | 296,000 | | | $ | 3.62 | | | 709,804 | | | $ | 3.73 | |
Vested | (309,567) | | | $ | 4.57 | | | (646,668) | | | $ | 2.65 | |
Forfeited | (98,001) | | | $ | 4.87 | | | (235,000) | | | $ | 4.21 | |
Nonvested at December 31, 2022 | 406,001 | | | $ | 4.02 | | | 842,302 | | | $ | 4.42 | |
Unrecognized stock-based compensation expense at December 31, 2022 (in thousands) | $ | 1,160 | | | | | $ | 2,507 | | | |
Weighted average remaining vesting period at December 31, 2022 | 1.7 years | | | | 1.8 years | | |
RSAs and RSUs granted orin 2022 are time-based and will vest in full after one to four years. The aggregate fair value of RSAs vested during the year ended December 31, 2015. As of December 31, 2017, the total unrecognized compensation expense related to nonvested stock option awards2022 and 2021 was $3,654,000, which is expected to be recognized over a weighted-average term of approximately 2 years.
The following table summarizes nonvested restricted share activity for the year ended December 31, 2017:
|
| | | | | | | |
| | Nonvested Restricted Shares | | Weighted Average Grant Date Fair Value |
Nonvested restricted stock at December 31, 2016 | | 333,000 |
| | $ | 8.9 |
|
Granted | | — |
| | $ | — |
|
Vested | | (120,000 | ) | | $ | 12.95 |
|
Canceled | | (90,000 | ) | | $ | 9.10 |
|
Nonvested restricted stock at December 31, 2017 | | 123,000 |
| | $ | 4.77 |
|
The weighted-average grant date fair value of nonvested restricted stock granted during the years ended December 31, 2016$1.4 million and 2015 was $3.12 and $12.83, respectively.$1.3 million. The aggregate fair value of restricted stock thatRSUs vested during the years ended December 31, 2017, 2016 and 2015 was $1,560,000, $5,243,000 and $11,494,000, respectively. As of December 31, 2017, the total unrecognized compensation expense related to nonvested restricted stock awards was $53,000, which is expected to be recognized over a weighted-average period of approximately 2 months.
The following table summarizes restricted stock unit activity for the year ended December 31, 2017:
|
| | | | | | | |
| | Restricted Stock Units | | Weighted Average Grant Date Fair Value |
Nonvested restricted stock units outstanding at December 31, 2016 | | 14,000 |
| | $ | 16.27 |
|
Vested | | (12,000 | ) | | $ | 16.18 |
|
Nonvested restricted stock units outstanding at December 31, 2017 | | 2,000 |
| | $ | 16.72 |
|
Vested restricted stock units outstanding at December 31, 2017 | | 60,000 |
| | $ | 15.38 |
|
The weighted-average grant date fair value of restricted stock units granted during the year ended December 31, 20152022 and 2021 was $16.72. There$1.7 million and $92,000. During the year ended December 31, 2022, RSAs and RSUs totaling 956,235 shares were no restrictedvested and 372,314 shares of common stock were withheld to pay applicable required employee statutory withholding taxes based on the market value of the shares on the vesting date.
Certain RSUs were granted in September 2019 with market-based vesting conditions that 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 expense is recognized with a market-based vesting condition provided that the requisite service is rendered, regardless of when, if ever, the market condition is satisfied. Assumptions utilized in connection with the Monte Carlo valuation technique, that resulted in a fair value of $1.42 per unit, included: risk-free interest rate of 1.38 percent, term of 3.00 years, expected volatility of 38 percent and expected dividend yield of 0 percent. The risk-free interest rate was determined based on the yields available on U.S. Treasury zero-coupon issues. The expected stock price volatility was determined using historical volatility. The expected dividend yield was based on expectations regarding dividend payments. During the year ended December 31, 2021, 450,000 RSUs were forfeited, leaving 450,000 units granted duringwith market-based vesting conditions outstanding and unvested at prior period end. The remaining units fully vested on September 3, 2022. Compensation expense (credit) for RSUs with market-based vesting conditions for the years ended December 31, 20172022 and 2016. The aggregate fair value2021, was $143,000 and $(71,000), respectively.
Compensation expense (credit) for share-based awards recognized in general and administrative expenses was comprised of restricted stock units that vested during the years ended following:
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2022 | | 2021 |
| | | | | (In thousands) |
Options | | | | | $ | 488 | | | $ | 104 | |
RSAs | | | | | 1,360 | | | 1,521 | |
RSUs | | | | | 1,972 | | | 428 | |
Total compensation expense for share-based awards | | | | | $ | 3,820 | | | $ | 2,053 | |
Total unrecognized stock-based compensation expense as of December 31, 2017, 2016 and 20152022 was $200,000, $324,000 and $480,000, respectively. As of December 31, 2017, the total unrecognized compensation expense related to restricted stock unit awards was $1,000,$4.7 million, which is expected towill be recognizedamortized over a weighted-averageweighted average remaining vesting period of approximately 1 month.1.9 years.
Profits Interest PlanGuarantees and Indemnifications
On February 16, 2017, AIP Operation LLC, a Delaware limited liability company (“AIP”), and an indirect subsidiary of Acacia, adopted a Profits Interest Plan (the “Plan”) that provides for the grant of membership interests in AIP to certain members of management and the Board of Directors of Acacia as compensation for services rendered for or on behalf of AIP. Each profits interest unit granted pursuant to the Plan is intended to qualify as a “profits interest” for U.S. federal income tax purposes and will only have value to the extent the fair value of AIP increases beyond the fair value at the issuance date of the membership interests. The membership interests are represented by units (the “Units”) reserved for the issuance of awards under the Plan. The Units entitle the holders to share in or be allocated certain AIP profits and losses and to receive or share in AIP distributions pursuant to the AIP Limited Liability Company Operating Agreement entered into as of February 16, 2017 (the “LLC Agreement”). In connection with the adoption of the Plan, a form of Profits Interest Agreement was approved pursuant to which Units may be granted from time to time. Units vest upon AIP’s achievement of certain performance milestones (one-third upon 150% appreciation, and the remaining two-thirds upon 300% appreciation in value of Acacia’s aggregate investment in Veritone), subject to the continued service of the recipient, and are subject to the terms and conditions of the Plan, the Profits Interest Agreement and the LLC Agreement. The Units were fully vested as of December 31, 2017.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acacia owns 60% of the membership interests in AIP and at all times will control AIP. Acacia from time to time may contribute to AIP certain assets or securities related to portfolio companies in which Acacia holds an interest. Units may be awarded as one-time, discretionary grants to recipients. As of December 31, 2017, AIP holds the Veritone 10% Warrant described at Note 7.
Profits interests totaling 400 Units, or 40% of the membership interests in AIP, were granted in February 2017, with an aggregate grant date fair value of $722,000. The fair value of the Units totaled $3,041,000 as of December 31, 2017. Upon full vesting of the units in September 2017, all previously unrecognized compensation expense was immediately recognized.
The fair value of the Units is estimated utilizing a Geometric Brownian Motion model (“GBM”) which considers probable vesting dates and values for the applicable instruments (i.e. common stock and warrants related to Acacia’s Veritone investment described at Note 7) underlying or associated with the Units. At the estimated end of the term of the underlying warrant (May 2022), the model estimates the total proceeds from the hypothetical exercise of the warrant and estimates the value of the Units by allocating the proceeds based on the waterfall described in the terms of the underlying agreement. The value of the Units on a marketable basis is the average allocation across all GBM simulation paths discounted to the applicable valuation date using the risk-free rate. This estimated value is adjusted for an estimate of a DLOM using the Finnerty model, based on a security specific volatility calculated by changing Veritone’s common stock price by 1% and measuring the corresponding change in the value of the Units. For the year ended December 31, 2017, assumptions utilized in the GBM included a term of 4.4 years, stock price of $23.20, volatility of 50%, and risk free interest rates ranging from 1.76% to 2.40% for terms ranging from one to 10 years. The estimated DLOM utilized was 30%, based on assumptions including a term of approximately 4.4 years and a volatility of 85% for Veritone’s common stock. Volatility was estimated based on the historical volatilities of a set of comparable public companies, adjusted for leverage, over a term matching the term of the underlying warrant asset, which was approximately 4.4 years.
Compensation expense for the periods presented was comprised of the following:
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
Restricted stock awards with time-based service conditions | | $ | 1,025 |
| | $ | 4,071 |
| | $ | 10,575 |
|
Restricted stock unit awards with time-based service conditions | | 161 |
| | 320 |
| | 473 |
|
Restricted stock awards with performance-based vesting conditions | | 121 |
| | 197 |
| | — |
|
Stock options with time-based service vesting conditions | | 2,165 |
| | 1,316 |
| | — |
|
Stock options with market-based vesting conditions | | 2,372 |
| | 3,158 |
| | — |
|
Stock options with performance-based vesting conditions | | — |
| | — |
| | — |
|
Profits interests units | | 3,041 |
| | — |
| | — |
|
Total compensation expense | | $ | 8,885 |
| | $ | 9,062 |
| | $ | 11,048 |
|
11. COMMITMENTS AND CONTINGENCIES
Operating Leases
Acacia leases certain office space under various operating lease agreements expiring at various dates from 2019 through 2020. Minimum annual rental commitments for operating leases of continuing operations having initial or remaining noncancellable lease terms in excess of one year are as follows (in thousands):
|
| | | |
Years ending December 31, | |
2018 | $ | 1,213 |
|
2019 | 1,369 |
|
2020 | 16 |
|
Total minimum lease payments | $ | 2,598 |
|
Rent expense for the years ended December 31, 2017, 2016 and 2015 approximated $1,392,000, $1,795,000 and $1,926,000, respectively. Rental payments are expensed in the statements of operations in the period to which they relate. Scheduled rent increases are amortized on a straight-line basis over the lease term.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventor Royalties and Contingent Legal Expenses
In connection with the investment in certain patents and patent rights, certainCertain of Acacia’s operating subsidiaries executed related agreementshave made guarantees and indemnities under which grant to the former owners of the respective patents or patent rights, the right to receive inventor royalties based on future net revenues (as defined in the respective agreements) generated as a result of licensing and otherwise enforcing the respective patents or patent portfolios.
Acacia’s operating subsidiaries may retain the services of law firms that specialize in patent licensing and enforcement and patent law in connection with their licensing and enforcement activities. These law firmsthey may be retained onrequired to make payments to a contingent fee basis whereby such law firms are paid on a scaled percentage of any negotiated fees, settlementsguaranteed or judgments awarded based on how and when the fees, settlements or judgments are obtained.
Patent Enforcement and Other Litigation
Acacia is subjectindemnified party, in relation to claims, counterclaims and legal actions that arisecertain transactions, including revenue transactions in the ordinary course of business. Management believesIn connection with certain facility leases, Acacia and certain of its operating subsidiaries have indemnified lessors for certain claims arising from the facilities or the leases. Acacia indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware. However, Acacia has a directors and officers insurance policy that may reduce its exposure in certain circumstances and may enable it to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to statute of limitations. The majority of guarantees and indemnities do not provide any limitations of the maximum potential future payments that Acacia could be obligated to make. To date, Acacia has made no payments related to these guarantees and indemnities. Acacia estimates the fair value of its indemnification obligations to be insignificant based on this history and therefore, have not recorded any liability for these guarantees and indemnities in the consolidated balance sheets. Additionally, no events or transactions have occurred that would result in a material liability at December 31, 2022.
Printronix posted collateral in the form of a surety bond or other similar instruments, which are issued by independent insurance carriers (the “Surety”), to cover the risk of loss related to certain customs and employment activities. If any of the entities that hold such bonds should require payment from the Surety, Printronix would be obligated to indemnify and reimburse the Surety for all costs incurred. As of December 31, 2022 and 2021, Printronix had approximately $100,000 of these bonds outstanding.
Environmental Cleanup
Printronix maintained a manufacturing operation in a leased facility in Irvine, California from 1980 to 1994. The facility was used for similar manufacturing operations by another tenant from 1968 to 1977. The manufacturing operations employed by the previous tenant are believed to have resulted in the contamination of soil and groundwater under the facility which included chlorinated volatile organic compounds (“VOCs”). Evidence indicates that the ultimate liabilityVOCs requiring cleanup were used by the prior tenant and not by Printronix. Printronix worked with the prior tenant, which agreed to share
the costs of the activities in an equal percentage with Printronix, and the state regulatory agencies, including the California Department of Toxic Substances Control, to investigate and cleanup the subsurface contamination. A significant soil cleanup project was completed in 2017.
In 2020, Printronix executed an agreement with the prior tenant whereby the prior tenant would take 100% responsibility for the costs and process of the cleanup going forward. Printronix is in process of filing for release of such responsibility from a governmental agency and so may currently be found to be secondarily liable if the prior tenant cannot fulfil their responsibilities under the agreement. Accordingly, Printronix no longer takes part in monitoring or paying for any future investigation or cleanup activity. Printronix expects to have no such further costs associated with this facility. During 2020, Printronix was able to recover $24,000 from the prior tenant. Since that date and for the year ended December 31, 2022, Printronix has incurred no related legal fees.
12. STOCKHOLDERS’ EQUITY
Repurchases of Common Stock
On December 6, 2021, the Board approved a stock repurchase program, which authorized the purchase of up to $15.0 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 December 6, 2022. During February 2022, we completed the December 2021 program with total common stock purchases of 3,125,819 shares for the aggregate amount of $15.0 million.
On March 31, 2022, the Board approved a stock repurchase program for up to $40.0 million of shares of common stock. The repurchase authorization had no time limit and did not require the repurchase of a minimum number of shares. The common stock may be repurchased on the open market, in block trades, or in privately negotiated transactions, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Exchange Act. During July 2022, we completed the March 2022 program with total common stock purchases of 8,453,519 shares for the aggregate amount of $40.0 million.
Stock repurchases, 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 |
| | | | | (In thousands) |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
December 1, 2021 - December 31, 2021 | 784,104 | | | $ | 5.12 | | | $ | 11,004 | |
| | | | | |
January 1, 2022 - January 31, 2022 | 1,588,820 | | | $ | 4.85 | | | $ | 3,286 | |
February 1, 2022 - February 28, 2022 | 752,895 | | | $ | 4.36 | | | $ | — | |
| | | | | |
Total repurchases in the quarter | 2,341,715 | | | $ | 4.69 | | | |
Total program repurchases | 3,125,819 | | | $ | 4.80 | | | |
| | | | | |
April 1, 2022 - April 30, 2022 | 692,538 | | | $ | 4.48 | | | $ | 36,901 | |
May 1, 2022 - May 31, 2022 | 2,192,238 | | | $ | 4.59 | | | $ | 26,832 | |
June 1, 2022 - June 30, 2022 | 3,262,043 | | | $ | 4.71 | | | $ | 11,480 | |
Total repurchases in the quarter | 6,146,819 | | | $ | 4.64 | | | |
July 1, 2022 - July 31, 2022 | 2,306,700 | | | $ | 4.98 | | | $ | — | |
Total program repurchases | 8,453,519 | | | $ | 4.73 | | | |
In determining whether or not to repurchase any shares of Acacia’s common stock, the Board considers 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 its Stock Repurchase Programs. Repurchases to date were made in the open market in compliance with applicable SEC rules. The authorizations to repurchase shares presented an opportunity to reduce the outstanding share count and enhance stockholder value.
Tax Benefits Preservation Plan
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.
13. EQUITY-BASED INCENTIVE PLANS
Stock-Based Incentive Plans
The 2013 Acacia Research Corporation Stock Incentive Plan (“2013 Plan”) and the 2016 Acacia Research Corporation Stock Incentive Plan (“2016 Plan”) (collectively, the “Plans”) were approved by the stockholders of Acacia in May 2013 and June 2016, respectively. The Plans allow grants of stock options, stock awards and performance shares with respect to these claimsAcacia common stock to eligible individuals, which generally includes directors, officers, employees and legal actions, ifconsultants. Except as noted below, the terms and provisions of the Plans are identical in all material respects.
Acacia’s compensation committee administers the discretionary option grant and stock issuance programs. The compensation committee determines which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when the grants or issuances are to be made, the number of shares subject to each grant or issuance, the status of any willgranted option as either an incentive stock option or a non-statutory stock option under the federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The exercise price of options is generally equal to the fair market value of Acacia’s common stock on the date of grant. Options generally begin to be exercisable one year after grant and expire ten years after grant. Stock options with time-based vesting generally vest over three to four years and restricted shares with time-based vesting generally vest in full after one to four years (generally representing the requisite service period). The Plans terminate no later than the tenth anniversary of the approval of the incentive plans by Acacia’s stockholders.
The Plans provide for the following separate programs:
Stock Issuance Program. Under the stock issuance program, eligible individuals may be issued shares of common stock directly, upon the attainment of performance milestones or the completion of a specified period of service or as a bonus for past services. Under this program, the purchase price for the shares shall not be less than 100% of the fair market value of the shares on the date of issuance, and payment may be in the form of cash or past services rendered. The eligible individuals receiving RSAs shall have full stockholder rights with respect to any shares of common stock issued to them under the Stock Issuance Program, whether or not their interest in those shares is vested. Accordingly, the eligible individuals shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. The eligible individuals receiving RSUs shall not have full stockholder rights until they vest.
Discretionary Option Grant Program. Under the discretionary option grant program, Acacia’s compensation committee may grant (1) non-statutory options to purchase shares of common stock to eligible individuals in the employ or service of Acacia or its subsidiaries (including employees, non-employee board members and consultants) at an exercise price not less than 85% of the fair market value of those shares on the grant date, and (2) incentive stock options to purchase shares of common stock to eligible employees at an exercise price not less than 100% of the fair market value of those shares on the grant date (not less than 110% of fair market value if such employee actually or constructively owns more than 10% of Acacia’s voting stock or the voting stock of any of its subsidiaries).
The number of shares of common stock initially reserved for issuance under the 2013 Plan was 4,750,000 shares. No new additional shares will be added to the 2013 Plan without security holder approval (except for shares subject to outstanding awards that are forfeited or otherwise returned to the 2013 Plan). The stock issuable under the 2013 Plan shall be shares of
authorized but unissued or reacquired common stock, including shares repurchased by the Company on the open market. In June 2016, 625,390 shares of common stock available for issuance under the 2013 Plan were transferred into the 2016 Plan. At December 31, 2022, there were 175,119 shares available for grant under the 2013 Plan.
The number of shares of common stock initially reserved for issuance under the 2016 Plan was 4,500,000 shares plus 625,390 shares of common stock available for issuance under the 2013 Plan, as of the effective date of the 2016 Plan. In May 2022, security holders approved an increase of 5,500,000 shares of common stock authorized to be issued pursuant to the 2016 Plan. At December 31, 2022, there were 6,540,370 shares available for grant under the 2016 Plan.
Upon the exercise of stock options, the granting of RSAs, or the delivery of shares pursuant to vested RSUs, it is Acacia’s policy to issue new shares of common stock. The Board may amend or modify the Plans at any time, subject to any required stockholder approval. As of December 31, 2022, there are 8,868,208 shares of common stock reserved for issuance under the Plans.
The following table summarizes stock option activity for the Plans:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual Life |
| | | | | (In thousands) | | |
Outstanding at December 31, 2020 | 310,083 | | | $ | 4.41 | | | $ | 104 | | | 2.2 years |
Granted | 393,750 | | | $ | 5.84 | | | $ | — | | | |
Exercised | (60,000) | | | $ | 3.36 | | | $ | 177 | | | |
Forfeited/Expired | (88,416) | | | $ | 3.97 | | | $ | 103 | | | |
Outstanding at December 31, 2021 | 555,417 | | | $ | 5.61 | | | $ | 71 | | | 7.3 years |
Granted | 1,155,000 | | | $ | 3.61 | | | $ | — | | | |
Exercised | — | | | $ | — | | | $ | — | | | |
Forfeited/Expired | (400,000) | | | $ | 4.17 | | | $ | 148 | | | |
Outstanding at December 31, 2022 | 1,310,417 | | | $ | 4.29 | | | $ | 535 | | | 8.0 years |
Exercisable at December 31, 2022 | 262,917 | | | $ | 5.37 | | | $ | 33 | | | 3.7 years |
Vested and expected to vest at December 31, 2022 | 1,310,417 | | | $ | 4.29 | | | $ | 535 | | | 8.0 years |
Unrecognized stock-based compensation expense at December 31, 2022 (in thousands) | $ | 1,024 | | | | | | | |
Weighted average remaining vesting period at December 31, 2022 | 2.3 years | | | | | | |
Stock options granted in 2022 are time-based and will vest in full after three to four years. During the year ended December 31, 2022, the Company granted 1,155,000 stock options at a materialweighted average grant-date fair value of $1.19 per share using the Black-Scholes option-pricing model. The fair value was estimated based on the following weighted average assumptions: volatility of 30 percent, risk-free interest rate of 1.85 percent, term of 6.11 years and a dividend yield of 0 percent as the Company does not pay common stock dividends. The volatility of the Company’s common stock was 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 (refer to Note 9 "Embedded derivative liabilities" for additional information). The risk-free rate was based on the term assumption and U.S. Treasury constant maturities as published by the Federal Reserve. The Company currently uses the "simplified" method for determining the term, due to the limited option grant history, which assumes that the exercise date of an option would be halfway between its vesting date and the expiration date. The aggregate fair value of options vested during the year ended December 31, 2022 and 2021 was $235,000 and $18,000.
The following table summarizes nonvested restricted stock activity for the Plans:
| | | | | | | | | | | | | | | | | | | | | | | |
| RSAs | | RSUs |
| Shares | | Weighted Average Grant Date Fair Value | | Units | | Weighted Average Grant Date Fair Value |
| | | | | | | |
Nonvested at December 31, 2020 | 684,006 | | | $ | 3.38 | | | 986,500 | | | $ | 1.58 | |
Granted | 324,401 | | | $ | 5.56 | | | 506,500 | | | $ | 5.84 | |
Vested | (394,169) | | | $ | 3.30 | | | (28,834) | | | $ | 3.19 | |
Forfeited | (96,669) | | | $ | 3.77 | | | (450,000) | | | $ | 1.42 | |
Nonvested at December 31, 2021 | 517,569 | | | $ | 4.74 | | | 1,014,166 | | | $ | 3.73 | |
Granted | 296,000 | | | $ | 3.62 | | | 709,804 | | | $ | 3.73 | |
Vested | (309,567) | | | $ | 4.57 | | | (646,668) | | | $ | 2.65 | |
Forfeited | (98,001) | | | $ | 4.87 | | | (235,000) | | | $ | 4.21 | |
Nonvested at December 31, 2022 | 406,001 | | | $ | 4.02 | | | 842,302 | | | $ | 4.42 | |
Unrecognized stock-based compensation expense at December 31, 2022 (in thousands) | $ | 1,160 | | | | | $ | 2,507 | | | |
Weighted average remaining vesting period at December 31, 2022 | 1.7 years | | | | 1.8 years | | |
RSAs and RSUs granted in 2022 are time-based and will vest in full after one to four years. The aggregate fair value of RSAs vested during the year ended December 31, 2022 and 2021 was $1.4 million and $1.3 million. The aggregate fair value of RSUs vested during the year ended December 31, 2022 and 2021 was $1.7 million and $92,000. During the year ended December 31, 2022, RSAs and RSUs totaling 956,235 shares were vested and 372,314 shares of common stock were withheld to pay applicable required employee statutory withholding taxes based on the market value of the shares on the vesting date.
Certain RSUs were granted in September 2019 with market-based vesting conditions that 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 expense is recognized with a market-based vesting condition provided that the requisite service is rendered, regardless of when, if ever, the market condition is satisfied. Assumptions utilized in connection with the Monte Carlo valuation technique, that resulted in a fair value of $1.42 per unit, included: 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 Acacia’s consolidated financial position, resultsthe yields available on U.S. Treasury zero-coupon issues. The expected stock price volatility was determined using historical volatility. The expected dividend yield was based on expectations regarding dividend payments. During the year ended December 31, 2021, 450,000 RSUs were forfeited, leaving 450,000 units with market-based vesting conditions outstanding and unvested at prior period end. The remaining units fully vested on September 3, 2022. Compensation expense (credit) for RSUs with market-based vesting conditions for the years ended December 31, 2022 and 2021, was $143,000 and $(71,000), respectively.
Compensation expense (credit) for share-based awards recognized in general and administrative expenses was comprised of operations or cash flows. Fiscal year 2017 includes estimated contingency accruals totaling $1,200,000. The estimated rangethe following:
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2022 | | 2021 |
| | | | | (In thousands) |
Options | | | | | $ | 488 | | | $ | 104 | |
RSAs | | | | | 1,360 | | | 1,521 | |
RSUs | | | | | 1,972 | | | 428 | |
Total compensation expense for share-based awards | | | | | $ | 3,820 | | | $ | 2,053 | |
Total unrecognized stock-based compensation expense as of December 31, 2022 was $4.7 million, which will be amortized over a weighted average remaining vesting period of 1.9 years.
Guarantees and Indemnifications
Certain of Acacia’s operating subsidiaries have made guarantees and indemnities under which they may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. In connection with certain facility leases, Acacia and certain of its operating subsidiaries have indemnified lessors for certain claims arising from the facilities or the leases. Acacia indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware. However, Acacia has a directors and officers insurance policy that may reduce its exposure in certain circumstances and may enable it to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to statute of limitations. The majority of guarantees and indemnities do not provide any limitations of the maximum potential future payments that Acacia could be obligated to make. To date, Acacia has made no payments related to these guarantees and indemnities. Acacia estimates the fair value of its indemnification obligations to be insignificant based on this history and therefore, have not recorded any liability for these guarantees and indemnities in the accompanying consolidated balance sheets. Additionally, no events or transactions have occurred that would result in a material liability at December 31, 2017.2022.
Bank Guarantee
In March 2015, an operating subsidiary of Acacia entered into a standby letter of credit and guarantee arrangement (“Guarantee”) with a bank for purposes of enforcing a court ruling in a German patent court granting an injunction against the defendantsPrintronix posted collateral in the form of a surety bond or other similar instruments, which are issued by independent insurance carriers (the “Surety”), to cover the risk of loss related patent infringement case. The Guarantee was secured by a cash deposit at the contracting bank, which was classified as restricted cash in the accompanying December 31, 2016 consolidated balance sheets, totaling $11,512,000. Upon resolution of all related matters in June 2017, the Guarantee was extinguished resulting in releaseto certain customs and employment activities. If any of the cash collateral (and related restrictions onentities that hold such bonds should require payment from the cash balance) bySurety, Printronix would be obligated to indemnify and reimburse the contracting bank.Surety for all costs incurred. As a result, currently no amounts of Acacia’s cash and investments are restricted as to use.
Other
In August 2010, a wholly owned subsidiary of Acacia became the general partner of the Acacia IP Fund, which was formed in August 2010. The Acacia IP Fund invests in, licenses and enforces intellectual property consisting primarily of patents, patent rights, and patented technologies. The Acacia IP Fund was terminated as of December 31, 2017. At December 31, 20172022 and 2016, the Acacia IP Fund net assets and net income (loss) were primarily comprised2021, Printronix had approximately $100,000 of the following (in thousands):these bonds outstanding.
ACACIA RESEARCH CORPORATIONEnvironmental Cleanup
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | |
| | 2017 | | 2016 |
Cash and other assets | | $ | 986 |
| | $ | 1,118 |
|
Investments - noncurrent | | 1,905 |
| | 2,933 |
|
Total assets | | $ | 2,891 |
| | $ | 4,051 |
|
| | | | |
Accrued expenses and contributions | | $ | 2,567 |
| | $ | 2,394 |
|
Net assets | | $ | 324 |
| | $ | 1,657 |
|
|
| | | | | | | | |
| | 2017 | | 2016 |
Revenues | | $ | — |
| | $ | 16 |
|
Operating expenses | | 390 |
| | 572 |
|
Loss from operations | | (390 | ) | | (556 | ) |
Net loss in equity method investments | | (943 | ) | | (1,013 | ) |
Net loss | | $ | (1,333 | ) | | $ | (1,569 | ) |
12. RETIREMENT SAVINGS PLAN AND EXECUTIVE SEVERANCE POLICY
Retirement Savings Plan. Acacia has an employee savings and retirement plan under section 401(k) of the Code (the “Plan”).Printronix maintained a manufacturing operation in a leased facility in Irvine, California from 1980 to 1994. The Plan is a defined contribution plan in which eligible employees may electfacility was used for similar manufacturing operations by another tenant from 1968 to have a percentage of their compensation contributed to the Plan, subject to certain guidelines issued by the Internal Revenue Service. Acacia may contribute to the Plan at the discretion of the board of directors. There were no contributions made by Acacia during the periods presented.
Executive Severance Policy. Under Acacia’s Amended Executive Severance Policy, full-time employees as of July 2017 and prior with the title of Senior Vice President and higher (“SVP and higher”) are entitled to receive certain benefits upon termination of employment. If employment of an SVP and higher employee is terminated for other than cause or other than on account of death or disability, Acacia will (i) promptly pay to the SVP and higher employee a lump sum amount equal to the aggregate of (a) accrued obligations (i.e., annual base salary through the date of termination to the extent not theretofore paid and any compensation previously deferred (together with any accrued interest or earnings thereon) and any accrued vacation pay, and reimbursable expenses, in each case to the extent not theretofore paid) and (b) three (3) months of base salary for each full year that the SVP and higher employee was1977. The manufacturing operations employed by the Company (the “Severance Period”), upprevious tenant are believed to a maximumhave resulted in the contamination of twelve (12) months (eighteen (18) months for executive officerssoil and groundwater under the facility which included chlorinated volatile organic compounds (“VOCs”). Evidence indicates that the VOCs requiring cleanup were used by the prior tenant and not by Printronix. Printronix worked with the prior tenant, which agreed to share
the costs of base salary,the activities in an equal percentage with Printronix, and (ii) providethe state regulatory agencies, including the California Department of Toxic Substances Control, to investigate and cleanup the SVP and higher employee, Acacia paid COBRA coveragesubsurface contamination. A significant soil cleanup project was completed in 2017.
In 2020, Printronix executed an agreement with the prior tenant whereby the prior tenant would take 100% responsibility for the medicalcosts and dental benefits selectedprocess of the cleanup going forward. Printronix is in process of filing for release of such responsibility from a governmental agency and so may currently be found to be secondarily liable if the yearprior tenant cannot fulfil their responsibilities under the agreement. Accordingly, Printronix no longer takes part in whichmonitoring or paying for any future investigation or cleanup activity. Printronix expects to have no such further costs associated with this facility. During 2020, Printronix was able to recover $24,000 from the termination occurs,prior tenant. Since that date and for the duration of the Severance Period.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for state income taxes totaled $181,000, $223,000 and $211,000 for the yearsyear ended December 31, 2017, 2016 and 20152022, respectively. Foreign taxes withheld totaled $2,865,000, $14,776,000 and $4,421,000 forPrintronix has incurred no related legal fees.
12. STOCKHOLDERS’ EQUITY
Repurchases of Common Stock
On December 6, 2021, the years ended December 31, 2017, 2016 and 2015, respectively. Refer to Note 4 for accrued foreign taxes payable.
Refer to Note 5 for information regarding noncash investing activity related to the investment in patent portfolios for the periods presented. Refer to Note 7 for information regarding noncash investing activity related to the investment in Veritone for the periods presented.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. QUARTERLY FINANCIAL DATA (unaudited)
The following table sets forth unaudited consolidated statements of operations data for the eight quarters in the period ended December 31, 2017. This information has been derived from Acacia’s unaudited condensed consolidated financial statements that have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary forBoard approved a fair statement of the information when read in conjunction with the audited consolidated financial statements and related notes thereto. Acacia’s quarterly results have been, and may in the future be, subject to significant fluctuations. As a result, Acacia believes that results of operations for interim periods should not be relied upon as any indication of the results to be expected in any future periods.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended |
| | Mar. 31, | | Jun. 30, | | Sept. 30, | | Dec. 31, | | Mar. 31, | | Jun. 30, | | Sept. 30, | | Dec. 31, |
| | 2017 | | 2017 | | 2017 | | 2017 | | 2016 | | 2016 | | 2016 | | 2016 |
| | (Unaudited, in thousands, except share and per share information) |
Revenues | | $ | 8,854 |
| | $ | 16,457 |
| | $ | 36,633 |
| | $ | 3,458 |
| | $ | 24,721 |
| | $ | 41,351 |
| | $ | 64,658 |
| | $ | 21,969 |
|
Operating costs and expenses: | | |
| | |
| | | | | | |
| | |
| | |
| | |
Cost of revenues: | | |
| | |
| | | | | | |
| | |
| | |
| | |
Inventor royalties | | 666 |
| | 4,273 |
| | — |
| | 13 |
| | 1,573 |
| | — |
| | 17,844 |
| | 3,313 |
|
Contingent legal fees | | 627 |
| | 3,236 |
| | 12,173 |
| | 646 |
| | 4,109 |
| | 10,418 |
| | 7,709 |
| | 4,238 |
|
Litigation and licensing expenses - patents | | 6,386 |
| | 4,134 |
| | 4,073 |
| | 3,626 |
| | 7,723 |
| | 7,324 |
| | 7,348 |
| | 5,463 |
|
Amortization of patents | | 5,515 |
| | 5,571 |
| | 5,625 |
| | 5,443 |
| | 10,760 |
| | 10,759 |
| | 6,467 |
| | 6,222 |
|
General and administrative expenses (including non-cash stock compensation expense) | | 6,916 |
| | 6,734 |
| | 12,715 |
| | (335 | ) | | 7,994 |
| | 7,535 |
| | 8,334 |
| | 9,056 |
|
Other expenses - business development | | 320 |
| | 433 |
| | 241 |
| | 195 |
| | 522 |
| | 1,334 |
| | 666 |
| | 557 |
|
Impairment of patent-related intangible assets | | — |
| | — |
| | 2,248 |
| | — |
| | — |
| | 40,165 |
| | — |
| | 2,175 |
|
Other | | — |
| | — |
| | — |
| | 1,200 |
| | 1,742 |
| | (1,242 | ) | | — |
| | — |
|
Total operating costs and expenses | | 20,430 |
| | 24,381 |
| | 37,075 |
| | 10,788 |
| | 34,423 |
| | 76,293 |
| | 48,368 |
| | 31,024 |
|
Operating income (loss) | | (11,576 | ) | | (7,924 | ) | | (442 | ) | | (7,330 | ) | | (9,702 | ) | | (34,942 | ) | | 16,290 |
| | (9,055 | ) |
Total other income (expense) | | 696 |
| | (4,862 | ) | | 159,027 |
| | (102,950 | ) | | (3 | ) | | (52 | ) | | 261 |
| | 592 |
|
Income (loss) before (provision for) benefit from income taxes | | (10,880 | ) | | (12,786 | ) | | 158,585 |
| | (110,280 | ) | | (9,705 | ) | | (34,994 | ) | | 16,551 |
| | (8,463 | ) |
Provision for income taxes | | (1,241 | ) | | (1,478 | ) | | (216 | ) | | (20 | ) | | (192 | ) | | (5,927 | ) | | (9,655 | ) | | (2,414 | ) |
Net income (loss) including noncontrolling interests | | (12,121 | ) | | (14,264 | ) | | 158,369 |
| | (110,300 | ) | | (9,897 | ) | | (40,921 | ) | | 6,896 |
| | (10,877 | ) |
Net (income) loss attributable to noncontrolling interests in subsidiaries | | 291 |
| | 12 |
| | 96 |
| | 97 |
| | (68 | ) | | 348 |
| | 186 |
| | 266 |
|
Net income (loss) attributable to Acacia Research Corporation | | $ | (11,830 | ) | | $ | (14,252 | ) | | $ | 158,465 |
| | $ | (110,203 | ) | | $ | (9,965 | ) | | $ | (40,573 | ) | | $ | 7,082 |
| | $ | (10,611 | ) |
Net income (loss) per common share attributable to Acacia Research Corporation: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Basic and diluted income (loss) per share | | $ | (0.24 | ) | | $ | (0.28 | ) | | $ | 3.13 |
| | $ | (2.18 | ) | | $ | (0.20 | ) | | $ | (0.81 | ) | | $ | 0.14 |
| | $ | (0.21 | ) |
Weighted-average number of shares outstanding, basic | | 50,333,056 |
| | 50,499,948 |
| | 50,554,234 |
| | 50,590,460 |
| | 49,925,550 |
| | 50,015,869 |
| | 50,124,302 |
| | 50,237,784 |
|
Weighted-average number of shares outstanding, diluted | | 50,333,056 |
| | 50,499,948 |
| | 50,599,974 |
| | 50,590,460 |
| | 49,925,550 |
| | 50,015,869 |
| | 50,618,757 |
| | 50,237,784 |
|
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENTS
Investments
In January 2018, Acacia entered into a Joint Venture and Services Agreement (“Joint Venture Agreement”) with Bitzumi, Inc., a company developing macro opportunities in the cryptocurrency and blockchain industries, including a next generation decentralized exchange. Bitzumi recently filed a Regulation A Offering Statement with the Securities and Exchange Commission and a listing application with NASDAQ. Acacia made an initial $1,000,000 equity investment in Bitzumi in January 2018. Under the Joint Venture Agreement, Acacia will provide various patent-related services to Bitzumi and has the option to invest up to an additional $9,000,000 to acquire Bitzumi common stock. In connection with Acacia’s initial investment, Acacia received a short-term warrant to purchase $4,000,000 of Bitzumi common shares. Under the Joint Venture Agreement, Acacia has a right to acquire up to an aggregate of $10.0 million of Bitzumi common shares (inclusive of Acacia’s initial $1,000,000 equity investment and exercise of Acacia’s short-term warrant) at a price, except as paid by Acacia for the initial investment and the exercise price of Acacia’s short-term warrant, of $2.50 per share. Upon meeting certain conditions set forth in the Joint Venture Agreement, Bitzumi will also issue Acacia a warrant for 30,000,000 shares of Bitzumi’s common stock. Acacia’s investment in Bitzumi represents its first venture in the cryptocurrency and blockchain marketplaces.
In February 2018, Acacia made an additional equity investment in Miso Robotics totaling $6,000,000, increasing its ownership interest in Miso Robotics to approximately 30%. In addition, Acacia acquired an additional board seat.
Stock Repurchase Program.
In February 2018, Acacia’s Board of Directorsstock repurchase program, which authorized the repurchasepurchase of up to $20,000,000$15.0 million of the Company’s outstanding common stock inthrough open market purchases, through block trades, through 10b5-1 plans, or by means of private purchases, from time to time, in amounts and at prices to be determined bythrough December 6, 2022. During February 2022, we completed the December 2021 program with total common stock purchases of 3,125,819 shares for the aggregate amount of $15.0 million.
On March 31, 2022, the Board approved a stock repurchase program for up to $40.0 million of Directors at its discretion (the “Stock Repurchase Program”). shares of common stock. The repurchase authorization had no time limit and did not require the repurchase of a minimum number of shares. The common stock may be repurchased on the open market, in block trades, or in privately negotiated transactions, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Exchange Act. During July 2022, we completed the March 2022 program with total common stock purchases of 8,453,519 shares for the aggregate amount of $40.0 million.
Stock repurchases, 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 |
| | | | | (In thousands) |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
December 1, 2021 - December 31, 2021 | 784,104 | | | $ | 5.12 | | | $ | 11,004 | |
| | | | | |
January 1, 2022 - January 31, 2022 | 1,588,820 | | | $ | 4.85 | | | $ | 3,286 | |
February 1, 2022 - February 28, 2022 | 752,895 | | | $ | 4.36 | | | $ | — | |
| | | | | |
Total repurchases in the quarter | 2,341,715 | | | $ | 4.69 | | | |
Total program repurchases | 3,125,819 | | | $ | 4.80 | | | |
| | | | | |
April 1, 2022 - April 30, 2022 | 692,538 | | | $ | 4.48 | | | $ | 36,901 | |
May 1, 2022 - May 31, 2022 | 2,192,238 | | | $ | 4.59 | | | $ | 26,832 | |
June 1, 2022 - June 30, 2022 | 3,262,043 | | | $ | 4.71 | | | $ | 11,480 | |
Total repurchases in the quarter | 6,146,819 | | | $ | 4.64 | | | |
July 1, 2022 - July 31, 2022 | 2,306,700 | | | $ | 4.98 | | | $ | — | |
Total program repurchases | 8,453,519 | | | $ | 4.73 | | | |
In determining whether or not to repurchase any shares of Acacia’s common stock, Acacia’sthe Board of Directors will considerconsiders 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 its Stock Repurchase Programs. Repurchases to date were made in the open market in compliance with applicable SEC rules. The authorizations to repurchase shares presented an opportunity to reduce the outstanding share count and enhance stockholder value.
Tax Benefits Preservation Plan
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.
13. EQUITY-BASED INCENTIVE PLANS
Stock-Based Incentive Plans
The 2013 Acacia Research Corporation Stock Incentive Plan (“2013 Plan”) and the 2016 Acacia Research Corporation Stock Incentive Plan (“2016 Plan”) (collectively, the “Plans”) were approved by the stockholders of Acacia in May 2013 and June 2016, respectively. The Plans allow grants of stock options, stock awards and performance shares with respect to Acacia common stock to eligible individuals, which generally includes directors, officers, employees and consultants. Except as noted below, the terms and provisions of the Plans are identical in all material respects.
Acacia’s compensation committee administers the discretionary option grant and stock issuance programs. The compensation committee determines which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when the grants or issuances are to be made, the number of shares subject to each grant or issuance, the status of any granted option as either an incentive stock option or a non-statutory stock option under the federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The exercise price of options is generally equal to the fair market value of Acacia’s common stock on the date of grant. Options generally begin to be exercisable one year after grant and expire ten years after grant. Stock options with time-based vesting generally vest over three to four years and restricted shares with time-based vesting generally vest in full after one to four years (generally representing the requisite service period). The Plans terminate no later than the tenth anniversary of the approval of the incentive plans by Acacia’s stockholders.
The Plans provide for the following separate programs:
Stock Issuance Program. Under the stock issuance program, eligible individuals may be issued shares of common stock directly, upon the attainment of performance milestones or the completion of a specified period of service or as a bonus for past services. Under this program, the purchase price for the shares shall not be less than 100% of the fair market value of the shares on the date of issuance, and payment may be in the form of cash or past services rendered. The eligible individuals receiving RSAs shall have full stockholder rights with respect to any shares of common stock issued to them under the Stock Repurchase Program.Issuance Program, whether or not their interest in those shares is vested. Accordingly, the eligible individuals shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. The Stock Repurchaseeligible individuals receiving RSUs shall not have full stockholder rights until they vest.
Discretionary Option Grant Program is set. Under the discretionary option grant program, Acacia’s compensation committee may grant (1) non-statutory options to expirepurchase shares of common stock to eligible individuals in the employ or service of Acacia or its subsidiaries (including employees, non-employee board members and consultants) at an exercise price not less than 85% of the fair market value of those shares on February 28, 2019.the grant date, and (2) incentive stock options to purchase shares of common stock to eligible employees at an exercise price not less than 100% of the fair market value of those shares on the grant date (not less than 110% of fair market value if such employee actually or constructively owns more than 10% of Acacia’s voting stock or the voting stock of any of its subsidiaries).
The number of shares of common stock initially reserved for issuance under the 2013 Plan was 4,750,000 shares. No new additional shares will be added to the 2013 Plan without security holder approval (except for shares subject to outstanding awards that are forfeited or otherwise returned to the 2013 Plan). The stock issuable under the 2013 Plan shall be shares of
authorized but unissued or reacquired common stock, including shares repurchased by the Company on the open market. In June 2016, 625,390 shares of common stock available for issuance under the 2013 Plan were transferred into the 2016 Plan. At December 31, 2022, there were 175,119 shares available for grant under the 2013 Plan.
The number of shares of common stock initially reserved for issuance under the 2016 Plan was 4,500,000 shares plus 625,390 shares of common stock available for issuance under the 2013 Plan, as of the effective date of the 2016 Plan. In May 2022, security holders approved an increase of 5,500,000 shares of common stock authorized to be issued pursuant to the 2016 Plan. At December 31, 2022, there were 6,540,370 shares available for grant under the 2016 Plan.
Upon the exercise of stock options, the granting of RSAs, or the delivery of shares pursuant to vested RSUs, it is Acacia’s policy to issue new shares of common stock. The Board may amend or modify the Plans at any time, subject to any required stockholder approval. As of December 31, 2022, there are 8,868,208 shares of common stock reserved for issuance under the Plans.
The following table summarizes stock option activity for the Plans:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual Life |
| | | | | (In thousands) | | |
Outstanding at December 31, 2020 | 310,083 | | | $ | 4.41 | | | $ | 104 | | | 2.2 years |
Granted | 393,750 | | | $ | 5.84 | | | $ | — | | | |
Exercised | (60,000) | | | $ | 3.36 | | | $ | 177 | | | |
Forfeited/Expired | (88,416) | | | $ | 3.97 | | | $ | 103 | | | |
Outstanding at December 31, 2021 | 555,417 | | | $ | 5.61 | | | $ | 71 | | | 7.3 years |
Granted | 1,155,000 | | | $ | 3.61 | | | $ | — | | | |
Exercised | — | | | $ | — | | | $ | — | | | |
Forfeited/Expired | (400,000) | | | $ | 4.17 | | | $ | 148 | | | |
Outstanding at December 31, 2022 | 1,310,417 | | | $ | 4.29 | | | $ | 535 | | | 8.0 years |
Exercisable at December 31, 2022 | 262,917 | | | $ | 5.37 | | | $ | 33 | | | 3.7 years |
Vested and expected to vest at December 31, 2022 | 1,310,417 | | | $ | 4.29 | | | $ | 535 | | | 8.0 years |
Unrecognized stock-based compensation expense at December 31, 2022 (in thousands) | $ | 1,024 | | | | | | | |
Weighted average remaining vesting period at December 31, 2022 | 2.3 years | | | | | | |
Stock options granted in 2022 are time-based and will vest in full after three to four years. During the year ended December 31, 2022, the Company granted 1,155,000 stock options at a weighted average grant-date fair value of $1.19 per share using the Black-Scholes option-pricing model. The fair value was estimated based on the following weighted average assumptions: volatility of 30 percent, risk-free interest rate of 1.85 percent, term of 6.11 years and a dividend yield of 0 percent as the Company does not pay common stock dividends. The volatility of the Company’s common stock was 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 (refer to Note 9 "Embedded derivative liabilities" for additional information). The risk-free rate was based on the term assumption and U.S. Treasury constant maturities as published by the Federal Reserve. The Company currently uses the "simplified" method for determining the term, due to the limited option grant history, which assumes that the exercise date of an option would be halfway between its vesting date and the expiration date. The aggregate fair value of options vested during the year ended December 31, 2022 and 2021 was $235,000 and $18,000.
The following table summarizes nonvested restricted stock activity for the Plans:
| | | | | | | | | | | | | | | | | | | | | | | |
| RSAs | | RSUs |
| Shares | | Weighted Average Grant Date Fair Value | | Units | | Weighted Average Grant Date Fair Value |
| | | | | | | |
Nonvested at December 31, 2020 | 684,006 | | | $ | 3.38 | | | 986,500 | | | $ | 1.58 | |
Granted | 324,401 | | | $ | 5.56 | | | 506,500 | | | $ | 5.84 | |
Vested | (394,169) | | | $ | 3.30 | | | (28,834) | | | $ | 3.19 | |
Forfeited | (96,669) | | | $ | 3.77 | | | (450,000) | | | $ | 1.42 | |
Nonvested at December 31, 2021 | 517,569 | | | $ | 4.74 | | | 1,014,166 | | | $ | 3.73 | |
Granted | 296,000 | | | $ | 3.62 | | | 709,804 | | | $ | 3.73 | |
Vested | (309,567) | | | $ | 4.57 | | | (646,668) | | | $ | 2.65 | |
Forfeited | (98,001) | | | $ | 4.87 | | | (235,000) | | | $ | 4.21 | |
Nonvested at December 31, 2022 | 406,001 | | | $ | 4.02 | | | 842,302 | | | $ | 4.42 | |
Unrecognized stock-based compensation expense at December 31, 2022 (in thousands) | $ | 1,160 | | | | | $ | 2,507 | | | |
Weighted average remaining vesting period at December 31, 2022 | 1.7 years | | | | 1.8 years | | |
RSAs and RSUs granted in 2022 are time-based and will vest in full after one to four years. The aggregate fair value of RSAs vested during the year ended December 31, 2022 and 2021 was $1.4 million and $1.3 million. The aggregate fair value of RSUs vested during the year ended December 31, 2022 and 2021 was $1.7 million and $92,000. During the year ended December 31, 2022, RSAs and RSUs totaling 956,235 shares were vested and 372,314 shares of common stock were withheld to pay applicable required employee statutory withholding taxes based on the market value of the shares on the vesting date.
Certain RSUs were granted in September 2019 with market-based vesting conditions that 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 expense is recognized with a market-based vesting condition provided that the requisite service is rendered, regardless of when, if ever, the market condition is satisfied. Assumptions utilized in connection with the Monte Carlo valuation technique, that resulted in a fair value of $1.42 per unit, included: risk-free interest rate of 1.38 percent, term of 3.00 years, expected volatility of 38 percent and expected dividend yield of 0 percent. The risk-free interest rate was determined based on the yields available on U.S. Treasury zero-coupon issues. The expected stock price volatility was determined using historical volatility. The expected dividend yield was based on expectations regarding dividend payments. During the year ended December 31, 2021, 450,000 RSUs were forfeited, leaving 450,000 units with market-based vesting conditions outstanding and unvested at prior period end. The remaining units fully vested on September 3, 2022. Compensation expense (credit) for RSUs with market-based vesting conditions for the years ended December 31, 2022 and 2021, was $143,000 and $(71,000), respectively.
Compensation expense (credit) for share-based awards recognized in general and administrative expenses was comprised of the following:
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2022 | | 2021 |
| | | | | (In thousands) |
Options | | | | | $ | 488 | | | $ | 104 | |
RSAs | | | | | 1,360 | | | 1,521 | |
RSUs | | | | | 1,972 | | | 428 | |
Total compensation expense for share-based awards | | | | | $ | 3,820 | | | $ | 2,053 | |
Total unrecognized stock-based compensation expense as of December 31, 2022 was $4.7 million, which will be amortized over a weighted average remaining vesting period of 1.9 years.
Profits Interest Plan
Profits Interest Units (“PIUs”) were accounted for in accordance with ASC 718, “Compensation - Stock Compensation.” The vesting conditions did not meet the definition of service, market or performance conditions, as defined in ASC 718. As such, the PIUs were classified as liability awards. Compensation expense was adjusted for changes in fair value prorated for the portion of the requisite service period rendered. Initially, compensation expense was recognized on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity award) which was five years. Upon full vesting of the award, which occurred during the three months ended September 30, 2017, previously unrecognized compensation expense was immediately recognized in the period. The Company has a purchase option to purchase the vested PIUs that are not otherwise forfeited after termination of continuous service. The exercise price of the purchase option is the fair market value of the PIUs on the date of termination of continuous service. The individuals holding PIUs are no longer employed by the Company. Included in other long-term liabilities in the consolidated balance sheets as of December 31, 2022 and 2021, the PIUs totaled $591,000, which was their fair value as of December 31, 2018 after termination of service.
14. RETIREMENT SAVINGS PLANS AND SEVERANCE
Retirement Savings Plans
Acacia has an employee savings and retirement plan under Section 401(k) of the Internal Revenue Code. The plan is a defined contribution plan in which eligible employees may elect to have a percentage of their compensation contributed to the plan, subject to certain guidelines issued by the Internal Revenue Service. During the years ended December 31, 2022 and 2021, Acacia's total contribution to the plan was $173,000 and zero.
In the United States of America, Printronix has a 401(k) Savings and Investment Plan, for all eligible U.S. employees, which is designed to be tax deferred in accordance with the provisions of Section 401(k). Printronix matches employee contributions dollar-for-dollar up to the first 1 percent of compensation, and then an additional $0.50 to-the-dollar on the next 1 percent of employee compensation. Printronix's contributions have graded-vesting annually and become fully vested to the employee after four full years of employment. During the year ended December 31, 2022, Printronix's total contribution to the plan was $45,500. For the period from October 7, 2021 through December 31, 2021, Printronix's total contribution to the plan was $9,000.
Printronix has statutory obligations to contribute to overseas employee retirement funds or the local social security pension funds in China, Malaysia, Singapore, France, Netherlands and the United Kingdom. During the year ended December 31, 2022, Printronix's total contribution overseas was $711,000. For the period from October 7, 2021 through December 31, 2021, Printronix's total contribution overseas was $189,000.
Severance
During the years ended December 31, 2022 and 2021, Acacia entered into separation agreements related to the termination of certain employees. The separation agreements generally provide base salary continuation payments and payments of employee and employer portions of monthly COBRA for a specified period. During the years ended December 31, 2022 and 2021, Acacia's total severance expenses were $3.2 million and $473,000, respectively.
15. INCOME TAXES
The components of (loss) income before income taxes were as follows:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| (In thousands) |
Domestic | $ | (126,810) | | | $ | 175,635 | |
Foreign | (340) | | | (983) | |
Total | $ | (127,150) | | | $ | 174,652 | |
For purposes of reconciling the Company’s provision for income taxes at the statutory rate and the Company’s income tax expense (benefit) at the effective tax rate, a notional 21% tax rate was applied as follows:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
Statutory federal tax rate - expense (benefit) | (21) | % | | 21 | % |
| | | |
Foreign rate differential | — | % | | 5 | % |
Noncontrolling interests in operating subsidiaries | (2) | % | | — | % |
Nondeductible permanent items | — | % | | (1) | % |
| | | |
Expired tax attributes | 6 | % | | 4 | % |
Derivative fair value adjustment | (2) | % | | 5 | % |
Valuation allowance | 7 | % | | (21) | % |
Other | (1) | % | | 1 | % |
Effective income tax rate | (13) | % | | 14 | % |
Acacia’s income tax benefit (expense) for the periods presented consisted of the following:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| (In thousands) |
Current: | | | |
Federal | $ | (54) | | | $ | — | |
State | (482) | | | (15) | |
Foreign | (606) | | | (8,530) | |
Total current | (1,142) | | | (8,545) | |
Deferred: | | | |
Federal | 24,789 | | | (54,165) | |
State | 259 | | | 1,573 | |
Foreign | (28) | | | 332 | |
Total deferred | 25,020 | | | (52,260) | |
| | | |
Change in valuation allowance | (7,667) | | | 36,518 | |
Income tax benefit (expense) | $ | 16,211 | | | $ | (24,287) | |
The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consisted of the following:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In thousands) |
Deferred tax assets: | | | |
Net operating loss and capital loss carryforwards and credits | $ | 47,386 | | | $ | 78,428 | |
Unrealized gain on investments held at fair value | 35 | | | — | |
Compensation expense for share-based awards | 607 | | | 383 | |
Fixed assets and intangibles | — | | | — | |
Basis of investments in affiliates | — | | | 18 | |
Accrued liabilities and other | 1,551 | | | 1,495 | |
Lease liability | 784 | | | 726 | |
State taxes | 94 | | | — | |
Total deferred tax assets | 50,457 | | | 81,050 | |
Valuation allowance | (48,250) | | | (40,585) | |
Total deferred tax assets, net of valuation allowance | 2,207 | | | 40,465 | |
Deferred tax liabilities: | | | |
ROU Asset | (782) | | | (726) | |
Fixed assets and intangibles | (2,166) | | | (2,572) | |
Unrealized gain on investments held at fair value | — | | | (55,696) | |
Other | — | | | (23) | |
Total deferred tax liabilities | (2,948) | | | (59,017) | |
Net deferred tax liabilities | $ | (742) | | | $ | (18,552) | |
As of December 31, 2022 and 2021, management assessed the realizability of deferred tax assets and evaluated the need for a valuation allowance for deferred tax assets on a jurisdictional basis. This evaluation utilizes the framework contained in ASC 740, "Income Taxes," wherein management analyzes all positive and negative evidence available at the balance sheet date to determine whether all or some portion of the Company's deferred tax assets will not be realized. Under this guidance, a valuation allowance must be established for deferred tax assets when it is more-likely-than-not that the asset will not be realized. In assessing the realization of the Company's deferred tax assets, management considers all available evidence, both positive and negative.
Based upon available evidence, it was concluded on a more-likely-than-not basis that as of December 31, 2022 a valuation allowance of $48.3 million was needed for foreign tax credits and certain state tax attributes the Company estimates will expire prior to utilization. As of December 31, 2021, the Company recorded a full valuation allowance of $40.6 million. The valuation allowance increased by $7.7 million for the year ended December 31, 2022 as a result of the use of the NOLs against realized gains and unrealized losses. The valuation allowance decreased by $(36.4) million for the year ended December 31, 2021 as a result of the use of the NOLs and increase in unrealized gains.
At December 31, 2022, Acacia had U.S. federal and state income tax net operating loss carryforwards (“NOLs”) totaling approximately $63.8 million and $36.0 million, respectively. Pursuant to the Tax Cuts and Jobs Act ("TCJA") enacted by the U.S. federal government in December 2017, for federal income tax purposes, NOL carryovers generated for our tax years beginning January 1, 2018 can be carried forward indefinitely but will be subject to a taxable income limitation. All federal losses are post TCJA NOLs, which do not expire. The $36.0 million of state NOLs will expire in varying amounts through 2040.
As of December 31, 2022 Acacia had combined foreign NOLs available to reduce future taxable income of approximately $1.9 million. As of December 31, 2022 a valuation of $1.9 million had been recorded against the related deferred tax assets for those NOLs that are not more likely than not to be fully utilized in reducing future taxable income.
As of December 31, 2022, Acacia had approximately $31.2 million of foreign tax credits, expiring between 2023 and 2032. In general, foreign taxes withheld may be claimed as a deduction on future U.S. corporate income tax returns, or as a credit against future U.S. income tax liabilities, subject to certain limitations.
During the fourth quarter of 2022, the Company finalized Printronix's pre-acquisition income tax returns and recorded an adjustment to the assets acquired and liabilities assumed. As a result, the Company recognized an increase in goodwill of $71,000 from the initial assessment as of the acquisition date.
The following changes occurred in the amount of unrecognized tax benefits:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| (In thousands) |
Beginning balance | $ | 887 | | | $ | 731 | |
Additions for current year tax positions | — | | | 27 | |
Additions included in purchase accounting for prior year positions | — | | | 129 | |
Reductions for prior year tax positions | (127) | | | — | |
Ending Balance (excluding interest and penalties) | 760 | | | 887 | |
Interest and penalties | — | | | — | |
Total | $ | 760 | | | $ | 887 | |
At December 31, 2022 and 2021, the Company had total unrecognized tax benefits of approximately $760,000 and $887,000, respectively. At December 31, 2022 and 2021, $760,000 and $108,000, respectively, of unrecognized tax benefits are recorded in other long-term liabilities. At December 31, 2022, if recognized, $760,000 of tax benefits would impact the Company’s effective tax rate.
Acacia recognizes interest and penalties with respect to unrecognized tax benefits in income tax expense (benefit). No interest and penalties have been recorded for the unrecognized tax benefits for the periods presented. Acacia has identified no uncertain tax position for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within 12 months.
Acacia is subject to taxation in the U.S. and in various state/foreign jurisdictions and incurs foreign tax withholdings on revenue agreements with licensees in certain foreign jurisdictions. With no material exceptions, Acacia is no longer subject to U.S. federal or state examinations by tax authorities for years before 2018. The Company’s 2018 through 2022 tax years generally remain subject to examination by federal, state and foreign tax authorities. As the Company has incurred losses in most jurisdictions, the taxing authorities can generally challenge 2015 through 2021 either the amount of carryforward deduction reported in the open year or the amount of a net operating loss deduction that is absorbed in a closed year and supports the determination of the available net operating loss deduction for the open year under examination.
Deferred income taxes have not been provided for undistributed earnings of the Company’s consolidated foreign subsidiaries, as earnings are permanently reinvested, however, no deferred tax liability would be necessary as the parent entity would not be required to include the distribution into income as the amount would be tax free under current law.
TCJA subjects a US shareholder to tax on GILTI earned by certain foreign subsidiaries.The FASB Staff Q&A, Topic 740 No. 5. Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only.We have elected to account for GILTI in the year the tax is incurred.
On March 11, 2021 the United States enacted the American Rescue Plan Act of 2021. This Act includes various income and payroll tax measures. The Company does not expect a material impact from the American Rescue Plan on its consolidated financial statements and related disclosures.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which includes a 15% minimum tax on the adjusted financial statement income of corporations with a three taxable year average annual adjusted financial statement income in excess of $1 billion, a 1% excise tax on net stock repurchases made by publicly traded U.S. corporations and several tax incentives to promote clean energy. The alternative minimum tax and excise tax are effective in taxable years beginning after December 31, 2022. These tax law changes are not expected to significantly impact the Company’s consolidated financial statements. The Company will continue to evaluate its impact as further information becomes available.
16. INCOME/LOSS PER SHARE
The following table presents the calculation of basic and diluted income/loss per share of common stock:
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2022 | | 2021 |
| | | | | (In thousands, except share and per share data) |
Numerator: | | | | | | | |
Net (loss) income attributable to Acacia Research Corporation | | | | | $ | (125,065) | | | $ | 149,197 | |
Dividend on Series A redeemable convertible preferred stock | | | | | (2,799) | | | (1,452) | |
Accretion of Series A redeemable convertible preferred stock | | | | | (5,171) | | | (3,829) | |
Undistributed earnings allocated to participating securities | | | | | — | | | (25,112) | |
Net (loss) income attributable to common stockholders - Basic | | | | | (133,035) | | | 118,804 | |
| | | | | | | |
Add: Dividend on Series A redeemable convertible preferred stock | | | | | — | | | 1,452 | |
Add: Accretion of Series A redeemable convertible preferred stock | | | | | — | | | 3,829 | |
Less: Change in fair value of Series A redeemable convertible preferred stock embedded derivative | | | | | — | | | (8,280) | |
Less: Change in fair value of Series A warrants | | | | | — | | | — | |
Less: Change in fair value of dilutive Series B warrants | | | | | — | | | 44,037 | |
Add: Interest expense associated with Starboard Notes, net of tax | | | | | — | | | 4,658 | |
Add: Undistributed earnings allocated to participating securities | | | | | — | | | 25,112 | |
Reallocation of undistributed earnings to participating securities | | | | | — | | | (1,388) | |
Net (loss) income attributable to common stockholders - Diluted | | | | | $ | (133,035) | | | $ | 188,224 | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted average shares used in computing net (loss) income per share attributable to common stockholders - Basic | | | | | 42,460,504 | | | 48,797,290 | |
Potentially dilutive common shares: | | | | | | | |
Series A Preferred Stock | | | | | — | | | 9,589,041 | |
Restricted stock units | | | | | —�� | | | 758,682 | |
Stock options | | | | | — | | | 37,167 | |
Series A Warrants | | | | | — | | | — | |
Series B Warrants | | | | | — | | | 39,288,690 | |
Weighted average shares used in computing net (loss) income per share attributable to common stockholders - Diluted | | | | | 42,460,504 | | | 98,470,870 | |
| | | | | | | |
Basic net (loss) income per common share | | | | | $ | (3.13) | | | $ | 2.43 | |
Diluted net (loss) income per common share | | | | | $ | (3.13) | | | $ | 1.91 | |
| | | | | | | |
Anti-dilutive potential common shares excluded from the computation of diluted net income/loss per share: | | | | | | | |
Equity-based incentive awards | | | | | 2,558,720 | | | 393,750 | |
Series A warrants | | | | | — | | | 5,000,000 | |
Series B warrants | | | | | 100,000,000 | | | — | |
Total | | | | | 102,558,720 | | | 5,393,750 | |
17. SEGMENT REPORTING
As of December 31, 2022, the Company operates and reports its results in two reportable segments: Intellectual Property Operations and Industrial Operations. Historically, the Company has managed and reported under a single reporting segment. In October 2021, the Company acquired Printronix, which comprises all of the operations of the Company’s Industrial Operations reportable segment and led to the identification of the additional reporting segment.
The Company reports segment information based on the management approach and organizes its businesses based on products and services. The management approach designates the internal reporting used by the chief operating decision maker for decision making and performance assessment as the basis for determining the Company’s reportable segments. The performance measure of the Company’s reportable segments is primarily income or (loss) from operations. Income or (loss) from operations for each segment includes all revenues, cost of revenues, gross profit and other operating expenses directly attributable to the segment. Other than the Company's equity securities investments, specific asset information is not included in managements review at this time.
The Company’s Intellectual Property Operations segment invests in IP and related absolute return assets, and engages in the licensing and enforcement of patented technologies. Through our Patent Licensing, Enforcement and Technologies Business we are a principal in the licensing and enforcement of patent portfolios, with our operating subsidiaries obtaining the rights in the patent portfolio or purchasing the patent portfolio outright. While we, from time to time, partner with inventors and patent owners, from small entities to large corporations, we assume all responsibility for advancing operational expenses while pursuing a patent licensing and enforcement program. When applicable, we share net licensing revenue with our patent partners as that program matures, on a prearranged and negotiated basis. We may also provide upfront capital to patent owners as an advance against future licensing revenue. Currently, on a consolidated basis, our 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 variety of industries. We generate revenues and related cash flows from the granting of IP rights for the use of patented technologies that our operating subsidiaries control or own.
The Company’s Industrial Operations segment generates operating income by designing and manufacturing printers and consumable products for various industrial printing applications. Printers consist of hardware and embedded software and may be sold with maintenance service agreements. Consumable products include inked ribbons which are used in Printronix’s printers. Printronix’s products are primarily sold through channel partners, such as dealers and distributors, to end-users. The Industrial Operations reporting segment did not exist prior to the acquisition of Printronix in October 2021, accordingly, the periods presented below include Printronix's operations for the full year ended December 31, 2022 compared to an approximate three month period ended December 31, 2021.
The Company's segment information is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| Intellectual Property Operations | | Industrial Operations | | Total | | Intellectual Property Operations | | Industrial Operations | | Total |
| (In thousands) |
Revenues: | | | | | | | | | | | |
License fees | $ | 19,508 | | | $ | — | | | $ | 19,508 | | | $ | 76,043 | | | $ | — | | | $ | 76,043 | |
Printers and parts | — | | | 16,118 | | | 16,118 | | | — | | | 4,961 | | | 4,961 | |
Consumable products | — | | | 19,314 | | | 19,314 | | | — | | | 5,973 | | | 5,973 | |
Services | — | | | 4,283 | | | 4,283 | | | — | | | 1,070 | | | 1,070 | |
Total revenues | 19,508 | | | 39,715 | | | 59,223 | | | 76,043 | | | 12,004 | | | 88,047 | |
| | | | | | | | | | | |
Cost of revenues: | | | | | | | | | | | |
Inventor royalties | 1,212 | | | — | | | 1,212 | | | 1,142 | | | — | | | 1,142 | |
Contingent legal fees | 2,444 | | | — | | | 2,444 | | | 12,074 | | | — | | | 12,074 | |
Litigation and licensing expenses | 3,970 | | | — | | | 3,970 | | | 5,462 | | | — | | | 5,462 | |
Amortization of patents | 10,403 | | | — | | | 10,403 | | | 9,851 | | | — | | | 9,851 | |
Other patent portfolio expense | — | | | — | | | — | | | 162 | | | — | | | 162 | |
Cost of sales | — | | | 19,359 | | | 19,359 | | | — | | | 7,407 | | | 7,407 | |
Total cost of revenues | 18,029 | | | 19,359 | | | 37,388 | | | 28,691 | | | 7,407 | | | 36,098 | |
Segment gross profit | 1,479 | | | 20,356 | | | 21,835 | | | 47,352 | | | 4,597 | | | 51,949 | |
| | | | | | | | | | | |
Other operating expenses: | | | | | | | | | | | |
Engineering and development expenses | — | | | 626 | | | 626 | | | — | | | 200 | | | 200 | |
Sales and marketing expenses | — | | | 8,621 | | | 8,621 | | | — | | | 1,538 | | | 1,538 | |
Amortization of intangible assets | — | | | 1,732 | | | 1,732 | | | — | | | 399 | | | 399 | |
General and administrative expenses | 5,428 | | | 8,254 | | | 13,682 | | | 6,177 | | | 2,398 | | | 8,575 | |
Total other operating expenses | 5,428 | | | 19,233 | | | 24,661 | | | 6,177 | | | 4,535 | | | 10,712 | |
Segment operating (loss) income | $ | (3,949) | | | $ | 1,123 | | | (2,826) | | | $ | 41,175 | | | $ | 62 | | | 41,237 | |
| | | | | | | | | | | |
Parent general and administrative expenses | | | | | 37,266 | | | | | | | 26,692 | |
Operating (loss) income | | | | | (40,092) | | | | | | | 14,545 | |
Total other (expense) income | | | | | (87,058) | | | | | | | 160,107 | |
(Loss) income before income taxes | | | | | $ | (127,150) | | | | | | | $ | 174,652 | |
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In thousands) |
Equity securities investments: | | | |
Equity securities | $ | 61,608 | | | $ | 361,778 | |
Equity securities without readily determinable fair value | 5,816 | | | 5,816 | |
Equity method investments | 30,934 | | | 30,934 | |
| | | |
Total parent equity securities investments | 98,358 | | | 398,528 | |
| | | |
Other parent assets | 156,394 | | | 172,726 | |
| | | |
Segment total assets: | | | |
Intellectual property operations | 176,119 | | | 175,286 | |
Industrial operations | 52,057 | | | 52,316 | |
Total assets | $ | 482,928 | | | $ | 798,856 | |
The Company's revenues and long-lived tangible assets by geographic area are presented below. Intellectual Property Operations revenues are attributed to licensees domiciled in foreign jurisdictions. Printronix's net sales to external customers are attributed to geographic areas based upon the final destination of products shipped. The Company, primarily through its Printronix subsidiary, has identified three global regions for marketing its products and services: Americas, Europe, Middle East and Africa, and Asia-Pacific. Assets are summarized based on the location of held assets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| Intellectual Property Operations | | Industrial Operations | | Total | | Intellectual Property Operations | | Industrial Operations | | Total |
| (In thousands) |
Revenues by geographic area: | | | | | | | | | | | |
United States | $ | 18,882 | | | $ | 15,541 | | | $ | 34,423 | | | $ | 23,256 | | | $ | 4,937 | | | $ | 28,193 | |
Canada and Latin America | 11 | | | 2,145 | | | 2,156 | | | 402 | | | 251 | | | 653 | |
Total Americas | 18,893 | | | 17,686 | | | 36,579 | | | 23,658 | | | 5,188 | | | 28,846 | |
| | | | | | | | | | | |
Europe, Middle East and Africa | 589 | | | 9,298 | | | 9,887 | | | 1,841 | | | 2,589 | | | 4,430 | |
| | | | | | | | | | | |
China | — | | | 5,207 | | | 5,207 | | | — | | | 1,910 | | | 1,910 | |
India | — | | | 2,957 | | | 2,957 | | | — | | | 1,076 | | | 1,076 | |
Asia-Pacific, excluding China and India | 26 | | | 4,567 | | | 4,593 | | | 50,544 | | | 1,241 | | | 51,785 | |
Total Asia-Pacific | 26 | | | 12,731 | | | 12,757 | | | 50,544 | | | 4,227 | | | 54,771 | |
Total revenues | $ | 19,508 | | | $ | 39,715 | | | $ | 59,223 | | | $ | 76,043 | | | $ | 12,004 | | | $ | 88,047 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Intellectual Property Operations | | Industrial Operations | | Total |
| (In thousands) |
Long-lived tangible assets by geographic area: | | | | | |
United States | $ | 324 | | | $ | 302 | | | $ | 626 | |
Malaysia | — | | | 2,703 | | | 2,703 | |
Other foreign countries | — | | | 208 | | | 208 | |
Total | $ | 324 | | | $ | 3,213 | | | $ | 3,537 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Intellectual Property Operations | | Industrial Operations | | Total |
| (In thousands) |
Long-lived tangible assets by geographic area: | | | | | |
United States | $ | 204 | | | $ | 473 | | | $ | 677 | |
Malaysia | — | | | 3,203 | | | 3,203 | |
Other foreign countries | — | | | 303 | | | 303 | |
Total | $ | 204 | | | $ | 3,979 | | | $ | 4,183 | |
18. SUBSEQUENT EVENTS
Change of Chief Financial Officer
Effective January 27, 2023, Richard Rosenstein resigned as the Chief Financial Officer of the Company. Mr. Rosenstein’s departure is not the result of any dispute or disagreement with the Company, including with respect to matters related to the Company’s accounting practices, general policies or financial reporting. Acacia and Mr. Rosenstein entered into a consulting agreement upon his departure, in accordance with Mr. Rosenstein will serve as a consultant through April 30, 2023. Effective as of January 28, 2023, Kirsten Hoover, who currently serves as Acacia’s Corporate Controller and previously held other senior finance roles at the Company, assumed the role of interim Chief Financial Officer. The Board is currently searching for a permanent successor.
Rights Offering and Concurrent Private Rights Offering
On February 14, 2023, pursuant to the requirements of the Recapitalization Agreement and in accordance with the terms of the Series B Warrants, the Company commenced a Rights Offering and Concurrent Private Rights Offering, which were completed on March 1, 2023. The Company received aggregate gross proceeds of approximately $361,000 from the Rights Offering and aggregate gross proceeds of approximately $78.8 million from the Concurrent Private Rights Offering. Refer to Note 8for additional information.