UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-K/A
x☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31,
2019OR
☐2017
FOR THE TRANSITION PERIOD FROM TO .
Commission File Number 0-26068
____________________
(Exact name of registrant as specified in its charter)
| DELAWARE | 95-4405754 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation organization) | Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
(949) 480-8300Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
| Common Stock, $0.001 par value | ACTG | The NASDAQ Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act: None
____________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £☐ No ☒R
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesR☒ No£
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Accelerated filer ☒ | |||
Non-accelerated filer ☐ | Smaller reporting company | ||
Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £☐ No ☒R
The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant on June 30,
As of March 1, 2018, 50,637,88211, 2020, 50,385,341 shares of common stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
In accordance with General Instruction G(3) to Form 10-K, portions of the registrant’s Definitive Proxy Statement on Form 10-K/A (this “Amendment”) amendsSchedule 14A for its Annual Meeting of Stockholders to be filed with the Commission within 120 days after the close of the fiscal year covered by this Annual Report on Form 10-K for the fiscal year ended December 31, 2017 of Acacia Research Corporation (the “Company,” “Acacia,” “we,” “our,” and “us”), originally filed with the Securities and Exchange Commission (the “SEC”) on March 7, 2018, as amendedare incorporated by Amendment No. 1 filed with the SEC on April 2, 2018 (as so amended, the “Original Filing”). At the time that we filed the Original Filing, we intended to file a definitive proxy statement for our 2018 Annual Meeting of Stockholders within 120 days after the end of our fiscal year pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We are filing this Amendment to amend Part III (Items 10 through 14) of the Original Filing to include the information required by and not included inreference into Part III of this Annual Report on Form 10-K. Only those portions of the Original Filing because we now expect to file a definitive proxy statement for our 2018that are specifically incorporated by reference herein shall constitute a part of this Annual Meeting of Stockholders after such 120-day period. Part IV (Item 15) of the Original Filing is being amended solely to add as exhibits certain new certifications in accordance with Rule 13a-14 promulgated by the SEC under the Exchange Act.Report on Form 10-K.
ACACIA RESEARCH CORPORATION
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2019
| Page | |||
| PART I | |||
| Item 1. | Business | 1 | |
| Item 1A. | Risk Factors | 5 | |
| Item 1B. | Unresolved Staff Comments | 17 | |
| Item 2. | Properties | 17 | |
| Item 3. | Legal Proceedings | 17 | |
| Item 4. | Mine Safety Disclosures | 17 | |
| PART II | |||
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 18 | |
| Item 6. | Selected Financial Data | 18 | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 32 | |
| Item 8. | Financial Statements and Supplementary Data | 33 | |
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 33 | |
| Item 9A. | Controls and Procedures | 34 | |
| Item 9B. | Other Information | 34 | |
| PART III | |||
| Item 10. | 35 | ||
| Item 11. | 35 | ||
| Item 12. | 35 | ||
| Item 13. | 35 | ||
| Item 14. | 35 | ||
| PART IV | |||
| Item 15. | 36 | ||
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
As used in this Annual Report on Form 10-K, or the annual report, “we,” “us” and “our” refer to Acacia Research Corporation and/or its wholly and majority-owned operating subsidiaries. All patent portfolio investments, development, licensing and enforcement activities are conducted solely by certain of our wholly owned operating subsidiaries.
This annual report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which include, without limitation, statements about our future business operations and results, our strategies and competition, and other forward-looking statements included in this annual report. Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms or the negative of such terms. Such statements are based on management’s current expectations and are subject to a number of risks and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning earnings, capital expenditures, litigation, competition, regulatory matters, stock price volatility, liquidity and capital resources, accounting matters and investments. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, legislative, regulatory and competitive developments in markets in which we and our subsidiaries operate, and other circumstances affecting anticipated revenues and costs, as more fully disclosed in our discussion of “Risk Factors” in Item 1A of Part I of this annual report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Additional factors that could cause such results to differ materially from those described in the forward-looking statements are set forth in connection with the forward-looking statements.
General
We invest in intellectual property, or IP, and related absolute return assets and engage in the licensing and enforcement of patented technologies. We partner with inventors and patent owners, from small entities to large corporations, applying our legal and technology expertise to patent assets to unlock the financial value in their patented inventions. We are an intermediary in the patent marketplace, bridging the gap between invention and application, and facilitating efficiency in connection with the monetization of patent assets.
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. We assist patent owners with the prosecution and development of their patent portfolios, the protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of their patented technologies and, where necessary, with the enforcement against unauthorized users of their patented technologies through the filing of patent infringement litigation. 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 have established a proven track record of licensing and enforcement success with over 1,570 license agreements executed to date, across nearly 200 patent portfolio licensing and enforcement programs. To date, we have generated gross licensing revenue of approximately $1.6 billion, and have returned more than $776 million to our patent partners.
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Corporate Information
We were originally incorporated in California in January 1993 and reincorporated in Delaware in December 1999. Our website address iswww.acaciaresearch.com. Reference in this annual report to this website address does not constitute incorporation by reference of the information contained on or accessed through our website and references to our website address in this annual report are inactive textual references only. We make our filings with the Securities and Exchange Commission, or the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and amendments to the foregoing reports, available free of charge on or through our website as soon as reasonably practicable after we file these reports with, or furnish such reports to, the SEC. In addition, we post the following information on our website:
| • | our code of conduct for chief executive officer and other senior financial officers; |
| • | our code of conduct for employees and directors and our fraud policy; |
| our insider trading policy; and | |
| • | charters for our audit committee, nominating and corporate governance committee and compensation committee. |
Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC athttp://www.sec.gov.
Patent Licensing and Enforcement Business
Patents are an important asset class worldwide. Licensing and enforcing patents requires an experienced, well-capitalized, licensing partner. We have partnered with patent owners, including individual inventors, universities, small companies and large multi-national corporations in a variety of technology sectors. These patent owners may possess limited internal resources and/or expertise to effectively address the unauthorized use of their patented technologies, or may seek to effectively and efficiently monetize their portfolio of patented technologies on an outsourced basis.
Under U.S. law, a patent owner has the right to exclude others from making, selling or using their patented invention. A third-party infringes a patent by making, offering for sale, selling, or using a patented invention without a license from the patent owner. In the majority of cases, infringers are generally unwilling, at least initially, to negotiate or pay reasonable license fees for their unauthorized use of third-party patents and will typically indiscriminately challenge any allegations of patent infringement. Inventors and patent holders without sufficient legal, financial and expert technical resources to bring and continue the pursuit of costly and complex patent infringement actions are often effectively ignored.
As a result of the common reluctance of patent infringers to negotiate and ultimately enter into a patent license for the use of patented technologies without at least the threat of legal action, patent licensing and enforcement often begins with the filing of patent infringement litigation. However, in our experience, most patent infringement litigation settles out of court at amounts that are related to the strength of the patent portfolio and the value of the invention or inventions in the infringer’s products or services. We execute agreements that grant rights in our patents to users of our patented technologies. Our agreements can be negotiated without the filing of patent litigation, or negotiated within the context of ongoing patent litigation, depending on the specific facts and circumstances.
We are a principal in the licensing and enforcement effort, with our operating subsidiaries obtaining control of the rights in the patent portfolio, or control of the patent portfolio outright. Our relationship with patent owners drives our corporate strategy. We assume all responsibility for advancing operational expenses while pursuing a patent licensing and enforcement program, and then, when applicable, 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.
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Patent Licensing Business Model and Strategy - Overview
We have the flexibility to structure arrangements in a number of Directors
Generally, we maintain a 100% to 200% preferred rate of return until all deployed capital and advanced operational costs are recovered by us. After recovery of these costs, the net profit revenue share with patent partner commences, if applicable.
Key Elements of Business Strategy
Patent licensing and enforcement can be an effective and efficient way to maximize the profit potential of a patent, or patents, that are being practiced by third-parties without authorization. A patent license agreement grants a third-party user of an invention specific patent rights to the persons who currently servepatented invention in exchange for patent license fees. Our patent licensing business provides patent holders with an opportunity to generate income from their patented inventions being practiced by third-parties without authorization and from third-parties that desire to practice their patented inventions with authorization. Our patent licensing and enforcement business strategy includes three fundamental elements, as our directors.
| Name | Age | Director Since | Positions with the Company | |||
| William S. Anderson+^ | 59 | 2007 | Director | |||
| Fred A. de Boom*+^ | 82 | 1995 | Director | |||
G. Louis Graziadio, III@ | 68 | 2002 | Executive Chairman and Director | |||
Frank E. Walsh, III^@ | 51 | 2016 | Director | |||
James F. Sanders^@ | 61 | 2017 | Director | |||
| Joseph E. Davis*^ | 66 | 2018 | Director | |||
Paul Falzone*^+@ | 44 | 2018 | Director | |||
| • | Patent Discovery - Discover potentially valuable patents or patent portfolios. |
| • | Assessment of Economic Value - Work internally and with external experts to evaluate the |
| • | Licensing and Enforcement-License those users wanting to utilize the patented invention with authorization. For unauthorized users of the |
Patent Discovery.The patent process breeds, encourages and sustains innovation and invention by granting a limited monopoly to the inventor in exchange for sharing the invention with the public. Certain technologies become core technologies in the way products and services are manufactured, sold or delivered by companies across a wide array of industries. Patent discovery involves identifying core, patented technologies that have been or are anticipated to be widely adopted by third-parties in connection with the manufacture, sale or use of products and services.
Assessment of Economic Value.Subsequent to the patent discovery process, our executives work internally and/or with external industry experts in the specific technology field, to evaluate the patented invention and its adoption and implementation in the marketplace. There are a number of factors to consider when analyzing a patent and determining a patent’s value including, (i) infringement, (ii) validity, (iii) enforceability and (iv) extent of usage.
To determine infringement, we must first identify third-parties that are practicing the invention(s) covered by the patent without obtaining permission from the patent owner to do so. A key tool in determining whether or not a company is infringing a patent is a claim chart, which demonstrates how the manufacture, sale, or use of an existing product compares against the claims of the Audit Committee
The three main factors analyzed to determine validity are: (1) anticipation, which occurs when the claims of the Compensation Committeepatent are entirely revealed within a single piece of prior art, (2) obviousness which considers whether the differences between prior art and the patented invention are so slight that they would have been obvious at the time of invention to one who is skilled in the subject matter being patented, and (3) the existence of non-patentable subject matter, which considers whether the subject matter includes naturally occurring things, abstract concepts, or algorithms that perform an ordinary function.
To determine enforceability, a number of factors are analyzed, including whether or not there has been patent misuse, or whether or not there are antitrust violations associated with the patent. Due to the inherently complex nature of patent law, only a court or specific administrative body, such as the International Trade Commission, can make a decision whether a patent is infringed, valid and enforceable; however, we employ our wealth of expertise to make the best assessment possible given a specific fact pattern and set of circumstances.
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We estimate a patent’s economic value by evaluating the expected value of the Nominatinglicense revenue stream based on past, present and Governance Committee
Our business development efforts are geared toward maintaining those relationships and identifying and growing new relationships in order to generate new technology-based patent opportunities for sustainable revenue and /or revenue growth.
Legislative and legal changes have increased the complexity of patent enforcement actions. We believe that this provides Acacia a competitive advantage, as many patent monetization entities have either given up or failed. Furthermore, the challenging legislative environment has kept patent asset acquisition prices low.
In fiscal year 2018 and 2019, Acacia experienced a number of changes in the Company's outlook and leadership. With new management in place during the years, the focus was on capturing the value of remaining portfolio assets while starting to rebuild the new business pipeline. In addition, we began to pursue other business opportunities which complement our legacy licensing and enforcement business and leverage our IP expertise, as described below.
Licensing and Enforcement. The final step in the patent licensing and enforcement process is to seek to monetize the patent portfolio by securing license agreements based on the patents use in the marketplace and estimated value. While we prefer to convince unauthorized users of our patented inventions of the value of the patented invention and secure a license agreement in a non-litigious manner, many infringers refuse to take such licenses even when confronted with substantial and persuasive evidence of infringement, validity, enforceability and significant economic value. As a result, often we must resort to litigation to demonstrate and prove infringement and ultimately induce infringers to take a license from us. We often negotiate licenses concurrently with litigation due to the fact that litigation necessitates and facilitates an information regardingexchange that helps both sides assess the electionvalue of a patent and make informed decisions. Also, litigation eventually leads to a court’s judgment. When a court agrees with our assessment of a patent, this judgment stops recalcitrant infringers from utilizing the patented technology indefinitely, without appropriate authorization.
We engage highly competent and experienced patent lawyers to prosecute our patent portfolio litigation. It is imperative for us to be persistent and patient throughout the litigation process as it typically takes 18-36 months from the filing date of a directorlawsuit to yield a license agreement from a potential licensee. Often, it takes longer to secure a final court judgment.
Patent license negotiations and each other person whose termlitigation initiated by our operating subsidiaries usually lead to serious and thoughtful discussions with the unauthorized users of officethe patented inventions. The result can be quite favorable with the user being granted rights under the patents for the patented invention in its products and services in exchange for financial remuneration.
Recent Developments
In 2019, as a director will continue afterpart of its strategy to grow the Annual Meeting is set forth below.
Investments
In August 2016, we entered into an investment agreement with Veritone, Inc., or Veritone, in January 2001. Mr. Graziadio, and companiesconnection with which he is affiliated, are significant shareholderswe provided a total of $53.3 million in numerous privatefunding to Veritone. As of December 31, 2019, the Company's investment in Veritone, which includes shares of common stock and public companieswarrants to purchase common stock, totaled $1.5 million.
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In June 2017 and February 2018, we made equity investments totaling $8.25 million in Miso Robotics, Inc., or Miso Robotics. As of June 30, 2019, we recorded an impairment of $8.2 million for our investment in Miso Robotics. In September 2019, we received a cash payment of $2.0 million upon the sale of our entire investment, and therefore relinquished our ownership interest in Miso Robotics.
Patented Technologies
Currently, on a consolidated basis, our operating subsidiaries own or control the rights to patent portfolios covering technologies used in a number of different industries. Since 1978, Mr. Graziadio has been activeindustries, including: transportation and automotive, telecommunications, semiconductor, consumer electronics, energy efficiency, wireless, video/imaging and medical devices.
Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview” for a summary of patent portfolios generating revenues for the applicable periods presented.
Competition
We encounter competition in the restructuringsarea of both privatepatent portfolio investment opportunities and publicenforcement. Existing non-practicing entities compete in acquiring rights to IP assets, and more entities may enter or leave the market in future periods.
We also compete with financial firms, corporate buyers and others acquiring IP and investing in other technology opportunities. Many of these competitors may have more financial and human resources than us. We may find more companies entering the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we currently or in the future may rely upon to generate future revenue.
Companies or other entities may develop competing technologies that offer better or less expensive alternatives to our patented technologies or technology partnerships. Many potential competitors may have significantly greater resources than the resources that we or our operating subsidiaries possess. Such technological advances or entirely different approaches developed by one or more of our competitors could render certain of the technologies owned or controlled by us obsolete and/or uneconomical.
Employees
As of December 31, 2019, on a consolidated basis, we had 17 full-time employees. Neither we, nor any of our subsidiaries, are a party to any collective bargaining agreement. We believe we have good relations with our employees.
An investment in our common stock involves risks. You should carefully consider the risks described below, together with all of the other information included in this annual report, as well as corporate spin-offs and IPOs. Mr. Graziadioin our other filings with the SEC, in evaluating our business. The risks described below are not the only risks we face. Additional risks that we do not yet know of or that we currently believe are immaterial may also served as a director of True Religion Apparel, Inc., a publicly traded clothing company, until its sale in July 2013. Mr. Graziadio is also a memberimpair our business operations. If any of the Boardfollowing risks actually occur, our business, financial condition and results of Directors of World Point Terminals, Inc., which owns, operates, develops, and acquires terminal assets relating to the storage of light refined products and crude oil. Mr. Graziadio has also served on the Board of Directors of Veritone since August 2016. We believe that Mr. Graziadio’s qualifications to serve on the Board include his extensive business experience having held senior management positions at several different companies and his experience in serving on the boards of directors of public companies.
Risks Related to file withOur Business
We have a history of losses and may incur additional losses in the SEC initial reportsfuture.
We reported a net loss of ownership$17.1 million (includes $9.9 million of unrealized equity investment gains), and reportsa net loss of changes in ownership$105.0 million (including $59.1 million of our common stock. We believe that, based onunrealized equity investment losses) for the written representations of our directors and officers, and the copies of reports filed with the SEC during the fiscal yearyears ended December 31, 2017,2019 and 2018, respectively, and on a cumulative basis, we have sustained substantial losses since our directors, officersinception. As of December 31, 2019, our accumulated deficit was $439.7 million. As of December 31, 2019, we had approximately $168.3 million in cash and holderscash equivalents and trading securities and working capital of more than 10% of$160.1 million. Although we believe that our common stock compliedcurrent cash and cash equivalents and investments will be sufficient to finance our anticipated capital and operating requirements for at least the next twelve months, we expect to continue incurring significant legal, general and administrative expenses in connection with the requirements of Section 16(a).
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Recent U.S. tax legislation may adversely affect our financial condition, results of operations and cash flows, including the ability to ensure thatuse net operating losses and certain other tax attributes.
Our ability to use our executive officers focused on existing business executionfederal and business diversificationstate net operating losses to offset potential future taxable income and related income taxes that would leadotherwise be due is dependent upon our generation of future taxable income before the expiration dates of the net operating losses, and we cannot predict with certainty when, or whether, we will generate sufficient taxable income to improved financial results on a short-term and long-term basis.
If we encounter unforeseen difficulties with our business or operations in the future that require us to obtain additional working capital, and we cannot obtain additional working capital on favorable terms, or at all, our business may suffer.
Our consolidated cash and cash equivalents and trading securities totaled $168.3 million and $165.5 million at December 31, 2019 and 2018, respectively. To date, we have relied primarily upon net cash flows from our operations and from the public and private sale of equity securities to generate the working capital needed to finance our operations. We may encounter unforeseen difficulties with our business or operations in the future that may deplete our capital resources more rapidly than anticipated. As a result, we may be required to obtain additional working capital in the future through bank credit facilities, public or private debt or equity financings, or otherwise. If we are required to raise additional working capital in the future, such financing may be unavailable to us on favorable terms, if at all, or may be dilutive to our existing stockholders. If we fail to obtain additional working capital, as and when needed, such failure could have a material adverse impact on our business, results of operations and financial condition.
Failure to effectively manage our operational changes could strain our managerial, operational and financial resources and could adversely affect our business and operating results.
Operational changes primarily relate to changes in our board of directors and senior management. During 2018, we announced various changes to our board of directors and senior management, including a reconstituted board of directors and the terminations of our President, our Chief Financial Officer, Senior Vice President of Finance and Treasurer and our Executive Vice President, General Counsel and Secretary. We also announced in 2018 the appointment of our new Chief Intellectual Property Officer Marc W. Booth. In 2019 we appointed Clifford Press as our new Chief Executive Officer, and Alfred V. Tobia, Jr. as our new President and Chief Investment Officer. Changes in leadership and key management positions have inherent risks, and there are no assurances that any of our recent changes will not affect our financial condition.
If we fail to manage our operational changes effectively or to develop, expand or otherwise modify our managerial, operational and financial resources and systems, our business and financial results will be materially harmed.
Patent portfolio investments may present risks, and we may be unable to achieve the financial or other goals intended at the Compensation Committeetime of any potential investment.
Our licensing and enforcement business has depended, in part, on our ability to invest in patented technologies, patent portfolios, or companies holding such patented technologies and patent portfolios. Accordingly, historically we have engaged in patent portfolio investments in an effort to expand our patent portfolio assets. Such investments and potential investments are subject to numerous risks, including the following:
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| • | difficulty integrating the operations, technology and personnel of the acquired entity; |
| • | our inability to achieve the anticipated financial and other benefits of the specific patent portfolio investment; |
| • | our inability to retain key personnel from the acquired company, if necessary; |
| • | difficulty in maintaining controls, procedures and policies during the transition and integration process; |
| • | diversion of our management’s attention from other business concerns; and |
| • | failure of our due diligence process to identify significant issues, including issues with respect to patented technologies and patent portfolios, and other legal and financial contingencies. |
If we are unable to manage these risks effectively as part of any patent portfolio investment, our business could be adversely affected.
Our revenues are unpredictable, and this may harm our financial condition.
Due to the nature of our licensing business and uncertainties regarding the amount and timing of the receipt of license and other fees from potential infringers, stemming primarily from uncertainties regarding the outcome of enforcement actions, rates of adoption of our patented technologies, the growth rates of our existing licensees and certain other factors, our revenues may vary significantly from quarter to quarter and period to period, which could make our business difficult to manage, adversely affect our business and operating results, cause our quarterly and periodic results to fall below market expectations and adversely affect the market price of our common stock.
Our operating subsidiaries depend upon relationships with others to provide technology-based opportunities that can develop into profitable royalty-bearing licenses, and if they are unable to maintain and generate new relationships, then they may not adoptedbe able to sustain existing levels of revenue or increase revenue.
Neither we nor our operating subsidiaries invent new technologies or products; rather, we depend upon the identification and investment in patents, inventions and companies that own IP through our relationships with inventors, universities, research institutions, technology companies and others. If our operating subsidiaries are unable to maintain those relationships and identify and grow new relationships, then we may not be able to identify new technology-based patent opportunities for sustainable revenue and /or revenue growth.
Our current or future relationships may not provide the volume or quality of technologies necessary to sustain our licensing, enforcement and overall business. If we are unable to maintain current relationships and sources of technology or to secure new relationships and sources of technology, such inability may have a policy requiringmaterial adverse effect on our revenues, operating results, financial condition and ability to maintain our licensing and enforcement business.
The success of our operating subsidiaries depends in part upon their ability to retain the best legal counsel to represent them in patent enforcement litigation in order to achieve favorable outcomes from such litigation. The outcome of such litigation is uncertain, and any unfavorable outcomes may harm our financial condition.
The success of our licensing business depends upon our operating subsidiaries’ ability to retain the best legal counsel to prosecute patent infringement litigation. As our operations evolve and industry conditions increase in complexity, it will become more difficult to find the best legal counsel to handle all compensationof our cases. This is due in part to many of the best law firms having conflicts of interest that prevents their representation of our subsidiaries.
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We spend a significant amount of our financial and management resources to pursue our current litigation matters. We believe that these litigation matters and others that we may in the future determine to pursue could continue for years and continue to consume significant financial and management resources. The counterparties to our litigation are sometimes large, well-financed companies with substantially greater resources than us. We cannot assure you that any of our current or future litigation matters will result in a favorable outcome for us. In addition, in part due to the appeals process and other legal processes, even if we obtain favorable interim rulings or verdicts in particular litigation matters, they may not be deductible. Consequently,predictive of the ultimate resolution of the dispute. Also, we cannot assure you that we will not be ableexposed to deductclaims or sanctions against us which may be costly or impossible for us to defend. The inability to retain the best legal counsel to represent our operating subsidiaries in infringement actions may result in unfavorable or adverse outcomes, which may result in losses, exhaustion of financial resources or other adverse effects which could encumber our ability to effectively operate our business or execute our business strategy.
Our operating subsidiaries, in certain circumstances, rely on representations, warranties and opinions made by third-parties that, if determined to be false or inaccurate, may expose us and our operating subsidiaries to certain material liabilities.
From time to time, our operating subsidiaries may rely upon representations and warranties made by third-parties from whom our operating subsidiaries acquired patents or the exclusive rights to license and enforce patents. We also may rely upon the opinions of purported experts. In certain instances, we may not have the opportunity to independently investigate and verify the facts upon which such representations, warranties, and opinions are made. By relying on these representations, warranties and opinions, our operating subsidiaries may be exposed to liabilities in connection with the licensing and enforcement of certain patents and patent rights which could have a material adverse effect on our operating results and financial condition.
In connection with patent enforcement actions conducted by certain of our subsidiaries, a court may rule that we or our subsidiaries have violated certain statutory, regulatory, federal, income tax purposeslocal or governing rules or standards, which may expose us and our operating subsidiaries to certain compensation earnedmaterial liabilities.
In connection with any of our patent enforcement actions, it is possible that a defendant may request and/or a court may rule that we have 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 us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material, and if we or our operating subsidiaries are required to pay such monetary sanctions, attorneys’ fees and/or expenses, such payment could materially harm our operating results and our financial position.
In connection with patent enforcement actions conducted by certain of our named executive officers in 2017 in excesssubsidiaries, a court may find the patents invalid, not infringed or unenforceable and/or the U.S. Patent and Trademark Office, or the USPTO, or other relevant patent office, may either invalidate the patents or materially narrow the scope of $1.0 million each. Historically, there has been an exception to this $1.0 million limitation for performance-based compensation that meets certain requirements,their claims during the course of a reexamination, opposition or other such proceeding.
Patent litigation is inherently risky and the principaloutcome is uncertain. Some of the parties that we believe infringe on our patents are large and well-financed companies with substantially greater resources than ours. We believe that these parties would devote a substantial amount of resources in an attempt to avoid or limit a finding that they are liable for infringing on our patents or, in the event liability is found, to avoid or limit the amount of associated damages. In addition, there is a risk that these parties may file inter-partes reviews, reexaminations or other proceedings with the USPTO or other government agencies in the United States or abroad in an attempt to invalidate, narrow the scope or render unenforceable the patents we own or control. If this were to occur, it may have a material adverse effect on our operations.
In addition, it is difficult to predict the outcome of patent enforcement litigation at any level. In the United States, there is a higher rate of appeals in patent enforcement litigation than standard business litigation. The defendant to any case we bring, may file as many appeals as allowed by right, including to the first, second and/or final courts of appeal (in the United States those courts would be the Federal Circuit and Supreme Court, respectively). Such appeals are expensive and time-consuming, and the outcomes of such appeals are sometimes unpredictable, resulting in increased costs and reduced or delayed revenue which could have a material adverse effect on our operating results and financial officer has been excluded fromcondition.
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Our licensing cycle is lengthy and costly, and our legal and sales efforts may be unsuccessful.
We expect our operating subsidiaries to incur significant general and administrative and legal expenses prior to entering into license agreements and generating license revenues. We also spend considerable resources educating prospective licensees on the definitionbenefits of a covered employee. Effective January 1, 2018, underlicense arrangement with us. As such, we may incur significant losses in any particular period before any associated revenue stream begins.
If our efforts to educate prospective licensees on the recently enacted Tax Cutsbenefits of a license arrangement are unsuccessful, we may need to pursue litigation or other enforcement action to protect our patent rights. We may also need to litigate to enforce the terms of our existing license agreements, protect our trade secrets, or determine the validity and Jobs Act,scope of the exception for performance-based compensation has been eliminated,proprietary rights of others. Enforcement proceedings are typically protracted and compensation paid to the principal financial officer is now subject to the $1.0 million deduction limitation.complex. The amendments to Section 162(m) include a grandfather clause applicable to compensation paid pursuant to a written binding contract in effect on November 2, 2017 that is not materially modified after such date. The 2013 Plancosts are typically substantial, and the 2016 Plan contain certain provisions designedoutcomes are unpredictable. Enforcement actions will divert our managerial, technical, legal and financial resources from business operations and there are no assurances that such enforcement actions will result in favorable results for us.
Failure to facilitate the deductibility of performance-based compensationmaintain effective internal control over our financial reporting in accordance with Section 162(m).404 of the Sarbanes-Oxley Act could cause our financial reports to be inaccurate.
We are required pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, to maintain internal control over financial reporting and to assess and report on the effectiveness of those controls. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
Our management concluded that our internal control over financial reporting was effective as of December 31, 2019. However, there are inherent limitations on effectiveness of controls. Our management, including our Chief Executive Officer and Corporate Controller, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The Company generallydesign of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
If we are not able to maintain effective internal control over financial reporting, our financial statements, including related disclosures, may be inaccurate, which could have a material adverse effect on our business. Refer to Item 9A. “Controls and Procedures” for additional information related to the current period.
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Our equity investments are subject to risks and we may experience significant financial losses.
Our equity investments are subject to a high degree of risk and could diminish our financial condition. The overall sustained economic uncertainty, as well as financial, operational and other difficulties encountered by certain companies in which we have equity investments increases the risk that the actual amounts realized in the future on our debt and equity investments will differ significantly from the fair values currently assigned to them. In addition, the companies in which we have equity investments may not be able to compete effectively or there may be insufficient demand for the services and products offered by these companies. These investments could also expose us to significant financial losses and may limit alternative uses of our capital resources. If our investees suffer losses, our financial condition could be materially adversely affected. In addition, applicable securities law restrictions and other factors may result in an inability to liquidate any equity components of our equity investments.
Risks Related to Our Industry
Our exposure to uncontrollable outside influences, including new legislation, court rulings or actions by the USPTO, could adversely affect our licensing and enforcement business and results of operations.
Our licensing and enforcement business is subject to numerous risks from outside influences, including the following:
New legislation, regulations or rules related to obtaining patents or enforcing patents could significantly increase our operating costs and decrease our revenue.
Our operating subsidiaries invest in patents with enforcement opportunities and spend a significant amount of resources to enforce those patents. If new legislation, regulations or rules are implemented by Congress, the USPTO or the courts that impact the patent application process, the patent enforcement process or the rights of patent holders, such changes could negatively affect our business. United States patent laws were amended with the enactment of the Leahy-Smith America Invents Act, or the America Invents Act, which took effect on March 16, 2013. The America Invents Act includes a number of significant changes to U.S. patent law. In general, the legislation attempts to address issues surrounding the enforceability of patents and the increase in patent litigation by, among other things, establishing new procedures for patent litigation. For example, the America Invents Act changes the way that parties may be joined in patent infringement actions, increasing the likelihood that such actions will need to be brought against individual allegedly-infringing parties by their respective individual actions or activities. In addition, the America Invents Act enacted a new inter-partes review process, or IPR process, at the USPTO which can be, and often is, used by defendants, and other individuals and entities, to separately challenge the validity of any patent. The IPR process of the America Invents Act has in many instances increased costs for licensing and litigation and has resulted in the loss of certain portfolio patents which, in some cases, may have negatively impacted the value of those portfolios. The America Invents Act and its implementation has increased the uncertainties and costs surrounding the enforcement of our patented technologies, which in certain circumstances could have a material adverse effect on our business and financial condition.
Finally, new rules regarding the burden of proof in patent enforcement actions could significantly increase the cost of our enforcement actions, and new standards or limitations on liability for patent infringement could negatively impact our revenue derived from such enforcement actions. In addition, recent federal court decisions have lowered the threshold for obtaining attorneys’ fees in patent infringement cases and increased the level of deference given to a district court’s fee-shifting determination. These decisions may make it easier for district courts to shift a prevailing party’s attorneys’ fees to a non-prevailing party if the district court believes its stock optionthat the case was weak or conducted in an abusive manner. As a result, defendants in patent infringement actions brought by non-practicing entities may elect not to settle because these decisions make it much easier for defendants to get attorneys’ fees.
Changes in patent law could adversely impact our business.
Patent laws may continue to change, and performance-based restricted stock awards granted before November 2, 2017 have met those requirementsmay alter the historically consistent protections afforded to owners of patent rights. Such changes may not be advantageous for us and may make it more difficult to obtain adequate patent protection to enforce our patents against infringing parties. Increased focus on the growing number of patent-related lawsuits may result in legislative changes which increase our costs and related risks of asserting patent enforcement actions. For instance, the United States Congress has considered a bill that would require, among other things, non-practicing entities that bring patent infringement lawsuits to pay legal costs of the defendants, if the lawsuits are unsuccessful and certain standards are not met.
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Trial judges and juries often find it difficult to understand complex patent enforcement litigation, and as such,a result, we may need to appeal adverse decisions by lower courts in order to successfully enforce our patents.
It is difficult to predict the outcome of patent enforcement litigation at the trial level. It is often difficult for juries and trial judges to understand complex, patented technologies, and as a result, there is a higher rate of successful appeals in patent enforcement litigation than more standard business litigation. Such appeals are deductible. With respectexpensive and time consuming, resulting in increased costs and delayed revenue. Although we diligently pursue enforcement litigation, we cannot predict with significant reliability the decisions made by juries and trial courts.
More patent applications are filed each year resulting in longer delays in getting patents issued by the USPTO.
Certain of our operating subsidiaries hold and continue to compensation providedinvest in pending patents. We have identified a trend of increasing patent applications each year, which we believe is resulting in longer delays in obtaining approval of pending patent applications. The application delays could cause delays in recognizing revenue from these patents and could cause us to miss opportunities to license patents before other competing technologies are developed or introduced into the market.
Federal courts are becoming more crowded, and as a result, patent enforcement litigation is taking longer.
Our patent enforcement actions are almost exclusively prosecuted in federal court. Federal trial courts that hear our patent enforcement actions also hear criminal cases. Criminal cases always take priority over our actions. As a result, it is difficult to predict the length of time it will take to complete an enforcement action. Moreover, we believe there is a trend in increasing numbers of civil lawsuits and criminal proceedings before federal judges and, as a result, we believe that the risk of delays in our patent enforcement actions will have a greater negative effect on our business in the future unless this trend changes.
Any reductions in the funding of the USPTO could have an adverse impact on the cost of processing pending patent applications and after November 2, 2017 (including 2018 compensation), the Compensation Committeevalue of those pending patent applications.
The assets of our operating subsidiaries consist of patent portfolios, including pending patent applications before the USPTO. The value of our patent portfolios is dependent upon the issuance of patents in a timely manner, and any reductions in the funding of the USPTO could negatively impact the value of our assets. Further, reductions in funding from Congress could result in higher patent application filing and maintenance fees charged by the USPTO, causing an increase in our expenses.
Competition is intense in the industries in which our subsidiaries do business and as a result, we may not be able to grow or maintain our market share for our technologies and patents.
We expect to encounter competition in the area of patent portfolio investments and enforcement. This includes competitors seeking to invest in the same or similar patents and technologies that we may seek to invest in. As new technological advances occur, many of our patented technologies may become obsolete before they are completely monetized. If we are unable to replace obsolete technologies with more technologically advanced patented technologies, then this obsolescence could have a negative effect on our ability to generate future revenues.
Our licensing business also competes with venture capital firms and various industry leaders for patent licensing opportunities. Many of these competitors may have more financial and human resources than we do. As we become more successful, we may find more companies entering the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we currently rely upon to generate future revenue.
Our patented technologies face uncertain market value.
Our operating subsidiaries have invested in patents and technologies that may be in the early stages of adoption in the commercial and consumer markets. Demand for some of these technologies is untested and is subject to fluctuation based upon the rate at which our licensees will workadopt our patents and technologies in their products and services.
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Further, significant judgment is required in connection with Pearl Meyerestimates of the recoverability of the carrying value of our intangible patent assets, including estimates of market values, estimates of the amount and timing of future cash flows, and estimates of other factors that are used to assessdetermine the appropriate market supported response tofair value and recoverability of the change to Section 162(m).
| Name of Executive | Position | Base Salary | ||||
Robert B. Stewart, Jr.(2) | President | $ | 400,000 | |||
| Clayton J. Haynes | Chief Financial Officer, Senior Vice President of Finance and Treasurer | $ | 393,978 | |||
| Edward J. Treska | Senior Vice President, General Counsel and Secretary | $ | 420,000 | |||
Marvin Key (1) | Former Interim Chief Executive Officer | $ | 420,000 | |||
Patent litigation trials and scheduled trial dates are subject to routine delay, and any such delays could adversely impact our executive officers that would be closely aligned with company performance, adjusting the 2017 incentive award program for specific business, developments occurring in 2017. For the incentive award program, the Compensation Committee set a target award, unchanged from 2016 target awards, for each executive officer, which equaled a percentage of the executive’s base salary. Due to a reduction in our licensing activities, we have broadened our business activities outside of licensing by increasing our focus on opportunities to partner with high-growth and potentially disruptive technology companies. Given the additional business activities related to identifying and entering into partnerships with these technology companies, we expanded the metrics we review in measuring performance in 2017 to include:
Patent infringement trials are components of our overall patent licensing process and are one of many factors that contribute to the existence of possible future revenue opportunities for us. Patent litigation schedules in general, and in particular trial dates, are subject to routine adjustment, and in most cases delay, as courts adjust their calendars or respond to requests from one or more parties. Trial dates often are rescheduled by the court for various reasons that are often unrelated to the underlying patent assets and typically for reasons that are beyond our core licensingcontrol. As a result, to the extent such events are an indicator of possible future revenue opportunities for us, or other outcome determinative events, they may and often do change which can result in delay of the expected scheduled event. Any such delay could be significant and could affect the corresponding future revenue opportunities, thus adversely impacting our business, results of operations and financial condition.
The markets served by our operating subsidiaries are subject to rapid technological change, and if our operating subsidiaries are unable to develop and invest in new strategic investments during a period of business diversification. We also believe that these measures are closely aligned with the short-termtechnologies and long-term interests of stockholders,patents, our ability to generate revenues could be substantially impaired.
The markets served by our operating subsidiaries and their licensees frequently undergo transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis. Products for communications applications and high-speed computing applications, as well as overall stockholder value creation,other applications covered by our operating subsidiaries’ IP, are based on continually evolving industry standards. In addition, the communications industry is intensely competitive and has been impacted by price erosion, rapid technological change, short product life cycles, cyclical market patterns and increasing foreign and domestic competition. Our ability to compete in the future will depend on our ability to identify and ensure compliance with evolving industry standards. This will require our continued efforts and success in acquiring new patent portfolios with licensing and enforcement opportunities. If we are sufficiently correlatedunable to invest in new patented technologies and patent portfolios, or to identify and ensure compliance with evolving industry standards, our ability to generate revenues could be substantially impaired and our business strategy.
Uncertainty in global economic conditions could negatively affect our incentive award program,business, results of operations and financial condition.
Our revenue-generating opportunities depend on the use of our patented technologies by existing and prospective licensees, the overall demand for the products and services of our licensees, and on the overall economic and financial health of our licensees. If economic conditions do not continue to improve, or if they deteriorate, many of our licensees’ customers, which may rely on credit financing, may delay or reduce their purchases of our licensees’ products and services. In addition, the use or adoption of our patented technologies is often based on current and forecasted demand for our licensees’ products and services in the marketplace and may require companies to make significant initial commitments of capital and other resources. If negative conditions in the global credit markets delay or prevent our licensees’ and their customers’ access to credit, overall consumer spending on the products and services of our licensees may decrease and the adoption or use of our patented technologies may slow, respectively. Further, if the markets in which our licensees’ participate do not continue to improve, or deteriorate further, this could negatively impact our licensees’ long-term sales and revenue generation, margins and operating expenses, which could in turn have an executive officer meets 90%adverse effect on our business, results of operations and financial condition.
Public health threats such as COVID-19 could have a material adverse effect on our operations, the operations of our business partners, and the global economy as a whole.
Public health threats and other highly communicable diseases, outbreaks of which have already occurred in various parts of the target performance, the resulting payout will be only a 50% incentive payment. If an executive officer performs below 90% of the target performance, he or she will forfeit any award payment. If an executive officer reaches as much as 150% of the targeted performance, the award payment will typically be capped at 200%. The Board and Compensation Committee believe that this payout method motivatesworld, could adversely impact our executive officers to reach 100% of the target performance goals at a minimum, and provides them with appropriate incentive to exceed those goals.
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Risks Related to Our Common Stock
The availability of shares for sale in the future could reduce the market price of our common stock.
In the future, we may issue securities to raise cash for operations and patent portfolio investments. We may also pay for interests in additional subsidiary companies by using shares of our common stock or a combination of cash and shares of our common stock. We may also issue securities convertible into our common stock. Any of these events may dilute stockholders’ ownership interests in our company and have an adverse impact on the price of our common stock.
In addition, sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could reduce the market price of our common stock. This could also impair our ability to raise additional capital through the sale of our securities.
Delaware law and our charter documents contain provisions that could discourage or prevent a potential takeover of our company that might otherwise result in our stockholders receiving a premium over the market price of their shares.
Provisions of Delaware law and our certificate of incorporation and bylaws could make the acquisition of our company by means of a tender offer, proxy contest or otherwise, and the removal of incumbent officers and directors, more difficult. These provisions include:
| • | Section 203 of the Delaware General Corporation Law, which prohibits a merger with a 15%-or-greater stockholder, such as a party that has completed a successful tender offer, until three years after that party became a 15%-or-greater stockholder; |
| • | amendment of our bylaws by the stockholders requires a two-thirds approval of the outstanding shares; |
| • | the authorization in our certificate of incorporation of undesignated preferred stock, which could be issued without stockholder approval in a manner designed to prevent or discourage a takeover; and |
| • | the general restriction in our certificate of incorporation on any direct or indirect transfers of our common stock if the effect would be to (i) increase the direct or indirect ownership of our common stock by any person or group from less than 4.899% to 4.899% or more of our common stock; or (ii) increase the percentage of our common stock owned directly or indirectly by a person or group owning or deemed to own 4.899% or more of our common stock. |
Together, these provisions may make the removal of management more difficult and may discourage transactions that could otherwise involve payment of a premium over prevailing market prices for our common stock.
Our Tax Benefits Preservation Plan could inhibit a change in our control that may otherwise be favorable to our stockholders.
In March 2019, our board of directors approved the adoption of a Tax Benefits Preservation Plan in order to protect our ability to utilize potential tax assets, such as net operating loss carryforwards and tax credits, to offset potential future taxable income by discouraging investors from acquiring ownership of our common stock in a manner that could trigger an “ownership change” for purposes of Section 382 of the Code. Our stockholders ratified the adoption of the Tax Benefits Preservation Plan in July 2019.
Under the terms of the Tax Benefits Preservation Plan, in general, if a person or group acquires beneficial ownership of 4.9% or more of the outstanding shares of our Common Stock without prior approval of our board of directors or without meeting certain exceptions, the rights would become exercisable and our stockholders (other than the acquiring person) will have the right to purchase securities from us at a discount to such securities’ fair market value, thus causing substantial dilution to the acquiring person. As a result, the Tax Benefits Preservation Plan may have the effect of inhibiting or impeding a change in control not approved by our board of directors and, notwithstanding its purpose, could adversely affect our stockholders’ ability to realize a premium over the then-prevailing market price for our common stock in connection with such a transaction. In addition, because our board of directors may consent to certain transactions, the Tax Benefits Preservation Plan gives our board of directors significant discretion over whether a potential acquirer’s efforts to acquire a large interest in us will be successful. There can be no assurance that the Tax Benefits Preservation Plan will prevent an “ownership change” within the meaning of Section 382 of the Code, in which case we may lose all or most of the anticipated tax benefits associated with our prior losses.
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We may fail to meet market expectations because of fluctuations in quarterly operating results, which could cause the price of our common stock to decline.
Our reported revenues and operating results have fluctuated in the past and may continue to fluctuate significantly from quarter to quarter in the future. It is possible that in future periods, revenues could fall below the expectations of securities analysts or investors, which could cause the market price of our common stock to decline. The following are among the factors that could cause our operating results to fluctuate significantly from period to period:
Technology company stock prices are especially volatile, and this volatility may depress the price of our common stock.
The stock market has experienced significant price and volume fluctuations, and the market prices of technology companies have been highly volatile. We believe that various factors may cause the market price of our common stock to fluctuate, perhaps substantially, including, among others, the following:
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For example, the NASDAQ-100 Technology Sector Index (NDXT) had a range of $3,547.57 - $5,492.35 during the 52 weeks ended December 31, 2019 and the NASDAQ Composite Index (IXIC) had a range of $6,463.50- $9,022.39 over the same period. Over the same period, our common stock fluctuated within a range of $2.46 - $3.29.
As noted above, our stock price, like many others, has fluctuated significantly in recent periods and if investors have concerns that our business, diversification activities.
In addition, we believe that fluctuations in our stock price during applicable periods can also be impacted by court rulings and/or other developments in our patent licensing and strategic accomplishments established by the Compensation Committeeenforcement actions. Court rulings in patent enforcement actions are often difficult to determine the amount, if any, of awards payableunderstand, even when favorable or neutral to our named executive officers for 2017. In accordance with the criteria described above, the Compensation Committee assessed our financial, operational, and strategic performance for 2017. The Compensation Committee also accounted for additional performance objectives achieved by our named executive officers. In 2017, we achieved a significant trial win against Motorola from our St. Lawrence patent portfolio; finalized a major settlement following a successful trial verdict from the patent portfolio of our subsidiary Cellular Communications Equipment LLC; and saw the value of our investmentpatents and our overall business, and we believe that investors in Veritone grow by 94% asthe market may overreact, causing fluctuations in our stock prices that may not accurately reflect the impact of court rulings on our business operations and assets.
In the end of 2017, as Veritone completed its initial public offering. In addition,past, companies that have experienced volatility in 2017, we completed an investment in Miso Robotics, a company focused on developing robotic solutions based on artificial intelligence for the food service industry. Acacia entered into intellectual property consulting agreements with Veritone and Miso Robotics in connection with our respective partnerships. These 2017 activities occurred while we continued to significantly reduce operating expenses, reduce overhead, and eliminate liabilities. Since the beginning of 2016, we have reduced our fixed general and administrative related expense run rate by approximately 56%, reduced headcount by 70%, and reduced litigation expenses as a percentage of revenues by 33%. During the same two-year period we generated gross revenues of $218.1 million and operating income of approximately $34.4 million.
| Fiscal Year 2017 | |||||||||||
Target(1) | Maximum(1) | Actuals | |||||||||
| Named Executive Officer | %(1) | $ | |||||||||
Robert B. Stewart, Jr.(3) | 50% | 100% | 100 | % | $ | 400,000 | |||||
| Clayton J. Haynes | 55% | 110% | 68 | % | $ | 266,688 | |||||
Edward J. Treska(2) | 55% | 110% | 115 | % | $ | 481,000 | |||||
We do not currently intend to pay dividends on date of grant)our common stock in the foreseeable future, and 50% in fair market value stock options. The Compensation Committee believes that the grant of equity awards is essential to aligning the interests of our named executive officers with the interests of our stockholders in enhancing the value of our company. Additionally, the use of time-based vesting schedules in our equity awards helps us to retain our named executive officers.
On February 23, 2016, our board of directors eliminated our dividend policy that provided for the numberdiscretionary payment of equity grants approved by the Compensation Committee for eacha total annual cash dividend of $0.50 per share to holders of our named executive officers, other than Mr. Key who resignedcommon stock, payable in the amount of $0.125 per share per quarter, effective as of February 23, 2016. As a result, we do not anticipate paying any cash dividends to holders of our Interim Chief Executive Officer effective April 19, 2017, duringcommon stock in the 2017 fiscal year:
| Name | Number of Fair Market Priced Options(1) | Number of Premium Priced Options(2)(3) | ||||
| Robert B. Stewart, Jr. | 96,153 | 113,032 | ||||
| Clayton J. Haynes | 96,153 | 113,032 | ||||
| Edward J. Treska | 96,153 | 113,032 | ||||
The 2018 executive compensation plan (the “2018 Compensation Plan”) seeks to align more value on the equity component and corresponding long-term value creation, including performance based equity, and reduce the targeted annual incentive compensation. The purpose of a structure that deemphasizes short-term compensation in favor of long-term compensation is to support the long-term value creation from our business diversification initiatives and increase management’s alignment with the long-term stockholder. The 2018 Compensation Plan provides for a target pay mix (as a percentage of total compensation), on average for all the three named executive officers of 42% base salary, 4% annual short-term incentive, and 54% long-term incentive. To further enhance the 2018 Compensation Plan's performance-orientation, 100%issuance of the 2018 equity grant will beStarboard Securities to Starboard and its permitted transferees dilutes the ownership and relative voting power of holders of our common stock and may adversely affect the market price of our common stock.
Pursuant to the Securities Purchase Agreement, the Company sold to Starboard (i) 350,000 shares of our newly designated Series A Preferred Stock and Series A Warrants to purchase up to 5,000,000 shares of common stock in 2019, and (ii) Series B Warrants to purchase up to 100,000,000 shares of common stock in 2020.
As of December 31, 2019, the Series A Preferred Stock held by Starboard represents approximately 16% of our outstanding common stock on an as-converted. Because holders of our Series A Preferred Stock are entitled to vote, on an as-converted basis, together with holders of our common stock on all matters submitted to a vote of the holders of our common stock, the issuance of the Series A Preferred Stock to Starboard effectively reduces the relative voting power of the holders of our common stock.
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In addition, the conversion and/or exercise of the Starboard Securities into common stock would dilute the ownership interest of existing holders of our common stock. Furthermore, any sales in the form of premium-priced stock options - a shift from 2017's equity grant structure of 50% premium priced stock options and 50% fairpublic market priced stock options.
Our Series A Preferred Stock has rights, preferences and privileges that are not held by, and are preferential to, two times (2x) their annual base salary. Our current executive officersthe rights of, our common stockholders, which could adversely affect our liquidity and financial condition, result in the interests of holders of our Series A Preferred Stock differing from those of our common stockholders and delay or prevent an attempt to take over the Company.
Starboard and the other holders of our Series A Preferred Stock have five years from the adoption of these guidelines, and new executive officers have five years from the date of their appointment,a liquidation preference entitling them to reach the required common stock ownership levels, and our executive officers must hold fifty percent (50%) of the net shares until these guidelines have been met. For purposes of these stock ownership guidelines, “ownership”be paid, before any payment may be made to holders of our common stock shall include:in connection with a liquidation event, an amount per share of Series A Preferred Stock equal to the greater of (i) shares acquired pursuantthe stated value thereof plus accrued and unpaid dividends, and (ii) the amount that would have been received had such share of Series A Preferred Stock been converted into common stock immediately prior to open-market purchases; (ii) shares acquired uponsuch liquidation event.
Holders of Series A Preferred Stock are entitled to a preferential cumulative dividend at the exerciserate of stock options; (iii) shares obtained upon3.0% per annum, payable quarterly in arrears. Upon the settlementconsummation of restricted stocka suitable investment or restricted stock units;acquisition by the Company, such investment to be identified and (iv) “in-the-money” vested stock options.
The holders of our Series A Preferred Stock also have certain redemption rights, including the right to require us to repurchase all or any portion of the Series A Preferred Stock during certain specified periods and subject to certain conditions set forth in AIP Operationthe Certificate of Designations, Preferences, and Rights of Series A Convertible Preferred Stock, or the Certificate of Designations. Holders of the Series A Preferred Stock also have the right, subject to certain exceptions, to require us to repurchase all or any portion of the Series A Preferred Stock upon certain change of control events.
These dividend and share repurchase obligations could impact our liquidity and reduce the amount of cash flows available for working capital, capital expenditures, growth opportunities, acquisitions, and other general corporate purposes. The preferential rights could also result in divergent interests between Starboard and holders of our common stock. Furthermore, a sale of our Company, as a change of control event, may require us to repurchase Series A Preferred Stock, which could have the effect of making an acquisition of the Company more expensive and potentially deterring proposed transactions that may otherwise be beneficial to our stockholders.
Starboard has certain rights, including the ability to designate up to three members of our board of directors.
The transaction documents entered into in connection with the Starboard Investment grant to Starboard consent rights with respect to certain actions by us, including:
| · | amending our organizational documents in a manner that would have an adverse effect on the Series A Preferred Stock; and |
| · | increasing the maximum number of directors on our board to more than seven persons, subject to the terms of the Governance Agreement entered into in connection with the Securities Purchase Agreement, or the Governance Agreement. |
The Securities Purchase Agreement also imposes a number of affirmative and negative covenants on us.
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In addition, the terms of the Governance Agreement grant Starboard certain rights to designate directors to be nominated for election by holders of our common stock. For so long as certain criteria set forth in the Governance Agreement are satisfied, including that Starboard beneficially own, in the aggregate, at least 4.0% of the Company’s then-outstanding common stock (on an as-converted basis, if applicable), Starboard has the right to designate up to three directors for election to our Board.
The directors designated by Starboard also are entitled to serve on committees of our Board, subject to applicable law and stock exchange rules.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Our principal executive, corporate and administrative offices are located in Irvine, California, where we lease approximately 8,293 square feet of office space, under a lease agreement that expires in 2024. Our primary operating subsidiary, Acacia Research Group, LLC, (“AIP”)and its subsidiaries, are headquartered in Frisco, Texas, where we lease office space under a lease agreement that expires in 2020. We believe that our facilities are adequate, suitable and of sufficient capacity to support our immediate needs.
In the ordinary course of business, we are the subject of, or party to, various pending or threatened legal actions, including various counterclaims in connection with our patent enforcement activities. We believe that any liability arising from these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Our operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. Certain of our operating subsidiaries are parties to ongoing patent enforcement related litigation, alleging infringement by third-parties of certain of the patented technologies owned or controlled by our operating subsidiaries.
In connection with any of our patent enforcement actions, it is possible that a defendant may claim and/or a court may rule that we have 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 us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which holdscould be material, and if required to be paid by us or our operating subsidiaries, could materially harm our operating results and our financial position.
We spend a significant amount of our financial and management resources to pursue our current litigation matters. We believe that these litigation matters and others that we may in the Common future determine to pursue could continue for years and continue to consume significant financial and management resources. The counterparties to our litigation are sometimes large, well-financed companies with substantially greater resources than us. We cannot assure you that any of our current or future litigation matters will result in a favorable outcome for us. In addition, in part due to the appeals process and other legal processes, even if we obtain favorable interim rulings or verdicts in particular litigation matters, they may not be predictive of the ultimate resolution of the dispute. Also, we cannot assure you that we will not be exposed to claims or sanctions against us which may be costly or impossible for us to defend. Unfavorable or adverse outcomes may result in losses, exhaustion of financial resources or other adverse effects which could encumber our ability to effectively and efficiently monetize our assets.
On June 17, 2015, Celltrace Communications Ltd., or Celltrace, filed a lawsuit against Acacia in U.S. District Court for the Southern District of New York, Case No. 1:15-cv-04746, alleging, among other things, significant damages for alleged breach of contract, unjust enrichment and fraud. Acacia disputes the allegations and does not believe that Celltrace is entitled to any damages. Acacia successfully moved to compel arbitration of the dispute, and the District Court stayed the litigation pending arbitration before the International Court of Arbitration for the International Chamber of Commerce, or the ICC. Celltrace appealed the decision to the U.S. Court of Appeals for the Second Circuit, which denied the appeal. Celltrace filed its request for arbitration of the claims with the ICC on November 28, 2016. Acacia filed an answer denying all allegations of wrongdoing and asserting affirmative defenses. A tribunal was appointed to preside over the arbitration and conducted its first case management conference on June 26, 2017. The parties conducted discovery and submitted their cases in chief to the tribunal in a series of written submissions per the tribunal’s orders between January 2018 and December 2018. The tribunal held an evidentiary hearing with live witness testimony in New York City between February 4, 2019 and February 13, 2019. At the end of the hearing, the tribunal set a schedule for post-hearing briefing by the parties, which concluded in April 2019. We are now waiting for the tribunal to issue its decision. Acacia continues to vigorously contest all allegations of wrongdoing.
ITEM 4. MINE SAFETY DISCLOSURES
None.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
General
Our common stock trades on The NASDAQ Global Select Market under the symbol “ACTG.”
Dividend Policy
On April 23, 2013, we announced that our board of directors approved the adoption of a cash dividend policy that called for the payment of an expected total annual cash dividend of $0.50 per share to holders of our common stock, payable in the amount of $0.125 per share per quarter. On February 23, 2016, our board of directors terminated the company’s dividend policy due to a number of factors, including our financial performance, our available cash resources, our cash requirements and alternative uses of capital that our board of directors concluded would represent an opportunity to generate a greater return on investment for us and our stockholders.
The current policy of our board of directors is to retain earnings, if any, to provide for our growth. Consequently, we do not expect to pay any cash dividends in the foreseeable future. Further, there can be no assurance that our proposed operations will generate revenues and cash flow needed to declare any future cash dividends or that we will have legally available funds to pay future dividends.
Recent Sales of Unregistered Securities
None.
Stock Purchase Warrant (the “Veritone 10% Warrant”)Repurchase Program
In February 2018, our board of directors authorized a stock repurchase program, or the Program, to purchase 809,400repurchase up to $20 million of our outstanding common stock in open market purchases or private purchases, from time to time, in amounts and at prices to be determined by the board of directors at its discretion. In determining whether or not to repurchase any shares of our common stock, our board of directors will consider such factors as the impact of the repurchase on our cash position, as well as our capital needs and whether there is a better alternative use of our capital. In fiscal year 2018, we repurchased 1,190,420 shares of common stock (as adjusted)at an average price of Veritone. Veritone is a leading cloud-based Artificial Intelligence technology company that is pioneering next generation search and analytics through their proprietary Cognitive Media Platform™. Veritone is a publicly traded company listed$3.89 for $4,634,000. All of these shares were repurchased during the second quarter of fiscal year 2018. The Program expired on the NASDAQ Global Market and is a separate organization from us. InFebruary 28, 2019.
On August 2016, we announced the formation of a partnership with Veritone, and provided a total of $53.3 million in funding to Veritone pursuant to an investment agreement executed in August 2016, as amended. In connection with our investment in Veritone, we entered into a Voting Agreement with Veritone and certain stockholders of Veritone pursuant to which, we have the right to appoint three of nine members of the5, 2019, Acacia’s board of directors approved a new stock repurchase program, which authorized the purchase of Veritone. As partup to $10.0 million of the Company's common stock through open market purchases, through block trades, through 10b5-1 plans, or by means of private purchases, from time to time, through July 31, 2020. No repurchases of shares of the Company’s common stock occurred during the three months ended December 31, 2019.
Holders of Common Stock
On March 11, 2020, there were approximately 67 owners of record of our partnershipcommon stock. The majority of the outstanding shares of our common stock are held by a nominee holder on behalf of an indeterminable number of ultimate beneficial owners.
ITEM 6. SELECTED FINANCIAL DATA
Not required for "smaller reporting companies."
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and investmentuncertainties. Our actual results could differ materially from those anticipated in Veritone,these forward-looking statements as a result of various factors including the risks we discuss in Item 1A, “Risk Factors,” and elsewhere herein.
General
We invest in IP and related absolute return assets and engage in the licensing and enforcement of patented technologies. We partner with inventors and patent owners, applying our legal and technology expertise to patent assets to unlock the financial value in their patented inventions. We generate revenues and related cash flows from the granting of patent rights for the use of patented technologies that our operating subsidiaries control or own. We assist patent owners with the prosecution and development of their patent portfolios, the protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of their patented technologies and, where necessary, with the enforcement against unauthorized users of their patented technologies through the filing of patent infringement litigation. We are principals in the licensing and enforcement effort, obtaining control of the rights in the patent portfolio, or control of the patent portfolio outright.
We have a proven track record of licensing and enforcement success with over 1,570 license agreements executed to date, across nearly 200 patent portfolio licensing and enforcement programs. 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. To date, we have generated gross licensing revenue of approximately $1.6 billion, and have returned more than $776 million to our patent partners.
Our business is described more fully in Item 1. “Business,” of this annual report.
Executive Overview
For the years ended December 31, 2019 and 2018, we reported revenues of $11.2 million and $131.5 million. Cash and trading securities totaled $168.3 million as of December 31, 2019, as compared to $165.5 million as of December 31, 2018. Our operating activities during the periods presented were issuedfocused on the Veritone 10% Warrant,continued operation of our patent licensing and enforcement business, including the continued pursuit of our ongoing patent licensing and enforcement programs. During 2019 and 2018, we also focused on cost reduction and optimization efforts, including renegotiation of certain existing arrangements, and reducing facilities costs.
Our team’s expertise in identifying and evaluating complex IP, and in developing and cultivating long-term business relationships, provides us a unique window into innovation and technological advancement. We are increasing our efforts to leverage our expertise and experience to create new avenues and monetize our existing IP assets, which we contributedbelieve will lead to AIP in exchange for units in AIP.increased stockholder value. We are the manager of AIP.
| Name | Number of AIP Profits Interest Units(1) | Percentage Interest(1) | ||
| Robert B. Stewart, Jr. | 110 | 11% | ||
| Edward J. Treska | 110 | 11% | ||
| Clayton J. Haynes | 70 | 7% | ||
Patent Licensing and we believe that it is important to leverage the experienceEnforcement
Patent Litigation Trial Dates and expertise of our own officers to support Veritone’s success.
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Litigation and Licensing Expense. We expect patent-related legal expenses to continue to fluctuate from period to period based on the factors summarized herein, in connection with the goalfuture trial dates, international enforcement, strategic patent portfolio prosecution and our current and future patent portfolio investment, prosecution, licensing and enforcement activities. The pursuit of creating value within Veritone, thereby creating value on our investmentenforcement actions in Veritone for the benefit of our stockholders. The incentive program is structured to provide alignmentconnection with our stockholderslicensing and have the appropriate governance controls,enforcement programs can involve certain risks and uncertainties, including the following features:following:
Enforcement Activities.As previously reported, in March 2017, our subsidiary, Saint Lawrence Communications, LLC, or Saint Lawrence, received a jury verdict in its case against Motorola, Inc. in the United States District Court for the Eastern District of Texas, or District Court. The jury returned a verdict that five U.S. patents were valid and infringed. The jury found that the infringement was willful and returned a damages award of nearly $9.2 million for past infringement. In addition, our German subsidiary, Saint Lawrence Communications GmbH, was granted injunctions by the German court in enforcement proceedings against Motorola, Inc. In the fourth quarter of 2018, Saint Lawrence and Saint Lawrence Communications GmbH entered into an agreement with Motorola, Inc. to resolve the patent litigation.
During the second quarter of 2017, Saint Lawrence resolved its enforcement actions against ZTE including the U.S. lawsuit. In February 2018, Saint Lawrence and Saint Lawrence Communications GmbH entered into an agreement with Apple Inc. to resolve all outstanding litigation.
As previously reported, in September 2016, our subsidiary Cellular Communications Equipment LLC, or CCE, received a jury verdict of infringement by Apple, Inc. In the third quarter of 2017, CCE entered into an agreement with Apple Inc. to resolve the patent litigation.
Investments in Patent Portfolios
One of the significant challenges in our industry continues to be quality patent intake due to the challenges and complexity associated with the current patent environment. In fiscal year 2019 we acquired five patent portfolios, compared to none during fiscal year 2018.
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With respect to our licensing, enforcement and overall business, neither we nor our operating subsidiaries invent new technologies or products; rather, we depend upon the identification and investment in patents, inventions and companies that own IP through our relationships with inventors, universities, research institutions, technology companies and others. If our operating subsidiaries are unable to maintain those relationships and identify and grow new relationships, then we may not be able to identify new technology-based patent opportunities for sustainable revenue and /or revenue growth.
Our current or future relationships may not provide the volume or quality of technologies necessary to sustain our licensing, enforcement and overall business. In some cases, universities and other technology sources compete against us as they seek to develop and commercialize technologies. Universities may receive financing for basic research in exchange for the exclusive right to commercialize resulting inventions. These and other strategies employed by potential acquirer.
Patent Portfolio Intake.One of the significant challenges in our industry continues to be quality patent intake due to the challenges and complexity associated with the current patent environment.In fiscal year 2019, we acquired five new patent portfolios covering (i) enterprise networking equipment and residential gateways technology, (ii) customization of ad insertion for Internet radio streaming technology, (iii) wireless communications and cloud computing, (iv) optical communications, and (v) commercial food processing. The patents and patent rights acquired in 2019 have estimated economic useful lives of approximately five years. In fiscal year 2018 we did not acquire any patent portfolios.
Recent Business Matters
In 2019, as our Interim Chief Executive Officer effective April 19, 2017. Mr. Key andpart of its strategy to grow the Company began evaluating a wide range of strategic opportunities that culminated in the strategic investment in the Company by Starboard. On November 18, 2019, the Company entered into a Separationthe Securities Purchase Agreement and General Release, dated as of April 19, 2017 (the “Separation Agreement”),with Starboard pursuant to which Mr. Key received,Starboard purchased (i) 350,000 shares of Series A Preferred Stock at an aggregate purchase price of $35,000,000, and Series A Warrants to purchase up to 5,000,000 shares of the Company’s common stock. The Securities Purchase Agreements also established the terms of certain senior secured notes and the Series B Warrants, which may be issued to Starboard in the future. Refer to Notes 16, 17 and 19 to our notes to consolidated financial statements for more information related to the Starboard Securities. In connection with Starboard’s investment, Starboard was granted certain corporate governance rights, including the right to appoint Jonathan Sagal, Managing Director of Starboard, as a lump sumdirector of the Company and recommend two additional directors for appointment to our board of directors.
Operating Activities.
Our revenues historically have fluctuated period to period, and can vary significantly, based on a number of factors including the following:
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Our management does not attempt to manage for smooth sequential periodic growth in revenues period to period, and therefore, periodic results can be uneven. Unlike most operating businesses and industries, licensing revenues not generated in a current period are not necessarily foregone but, depending on whether negotiations, litigation or both continue into subsequent periods, and depending on a number of other factors, such potential revenues may be pushed into subsequent fiscal periods.
Revenues for the periods presented included fees from the following licensing and enforcement programs:
| • | Bone Wedge technology(1)(2) | • | Semiconductor and Memory-Related technology(1) | |
| • | Cardiology and Vascular Device technology(2) | • | Speech codecs used in wireless and wireline systems technology(1)(2) | |
| • | MIPI DSI technology(1) | • | Super Resolutions Microscopy technology(1)(2) | |
| • | Online Auction Guarantee technology(2) | • | Video Conferencing technology(1)(2) | |
| • | Semiconductor Testing technology(2) | • | Wireless Infrastructure and User Equipment technology(2) |
| (1) | Licensing and enforcement program generating revenue in fiscal year 2019. |
| (2) | Licensing and enforcement program generating revenue in fiscal year 2018. |
Revenues from one or more of our patents or patent portfolios may be significant in a specific reporting period, and may be significant to our licensing and enforcement business as a whole.
Summary of Results of Operations - For Fiscal Years 2019 and 2018
| 2019 | 2018 | $ Change | % Change | |||||||||||||
| (In thousands, except percentage change values) | ||||||||||||||||
| Revenues | $ | 11,246 | $ | 131,506 | $ | (120,260 | ) | (91% | ) | |||||||
| Operating costs and expenses | 34,664 | 156,195 | (121,531 | ) | (78% | ) | ||||||||||
| Operating loss | (23,418 | ) | (24,689 | ) | 1,271 | (5% | ) | |||||||||
| Other income (expense), net | 4,465 | (78,980 | ) | 83,445 | (106% | ) | ||||||||||
| Loss before income taxes | (18,953 | ) | (103,669 | ) | 84,716 | (82% | ) | |||||||||
| Income tax (expense) benefit | 1,824 | (1,179 | ) | 3,003 | (255% | ) | ||||||||||
| Net loss attributable to Acacia Research Corporation | (17,115 | ) | (105,029 | ) | 87,914 | (84% | ) | |||||||||
Overview - Fiscal Year 2019 compared with Fiscal Year 2018
| · | Revenues decreased $120.3 million, or 91% to $11.2 million, primarily due to decrease in number of and in revenues from the new agreements executed during the year. Refer to “Investments in Patent Portfolios”below for additional information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues. |
| · | Loss before provision for income taxes was $19.0 million for fiscal year 2019, as compared to $103.7 million for fiscal year 2018. The net change was primarily comprised of the change in revenues described above and other changes in operating expenses and other income and expenses as follows: |
| · | Inventor royalties and contingent legal fees, on a combined basis, decreased $61.1 million, or 92%, to $5.5 million, primarily due to decrease in revenues as describe above. |
| · | Litigation and licensing expenses-patents decreased $1.1 million, or 12%, to $7.8 million, due primarily to a net decrease in litigation support and third-party technical consulting expenses associated with ongoing litigation. |
| · | Amortization expense decreased $23.9 million, or 88%, to $3.2 million, due to a decrease in scheduled amortization resulting from the $28.2 million patent portfolio impairment charges previously recorded in the second quarter of 2018, and accelerated amortization recorded in the third quarter of 2018. |
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| · | Impairment of patent-related intangible asset charges decreased $28.2 million. Impairment charges reflect the impact of reductions in expected estimated future net cash flows for certain patent portfolios and/or the impairment of certain portfolios that management determined it would no longer allocate resources to in future periods. |
| · | General and administrative expenses, excluding non-cash stock compensation, decreased $3.7 million, or 20%, to $15.3 million, primarily due to higher corporate, general and administrative costs related to the 2018 proxy contest and employee related severance costs in the prior year. |
| · | General and administrative non-cash stock compensation expense increased $1.4 million, primarily due to a $2.5 million reduction in non-cash stock compensation expense related to profits interests in 2018, offset by new restricted stock awards granted to our employees and board of directors in 2019, and certain restricted stock units granted in September 2019. |
| · | Impairment of other investment increased from $1.0 million to $8.2 million due to impairment of our investment in Miso Robotics in the second quarter of 2019. Gain on disposal of other investment increased from $0 to $2.0 million due to the sale of our other investment in Miso Robotics in the third quarter of 2019. Refer to Note 6 to the consolidated financial statements elsewhere herein for additional information regarding our investment in Miso Robotics. |
| · | Tax expense or benefits for fiscal years 2019 and 2018 primarily reflects the impact of state taxes and foreign withholding or refund incurred on revenue agreements executed with third-party licensees domiciled in foreign jurisdictions. |
Revenues and Pretax Net Loss
Operating activities during the periods presented included the following:
| 2019 | 2018 | |||||||
| Revenues (in thousands) | $ | 11,246 | $ | 131,506 | ||||
| New agreements executed | 7 | 12 | ||||||
| Licensing and enforcement programs generating revenues | 6 | 8 | ||||||
| New patent portfolios | 5 | – | ||||||
| Year-end cash, cash equivalents and trading securities (in thousands) | $ | 168,342 | $ | 165,463 | ||||
For the periods presented herein, the majority of the revenue agreements executed provided for the payment of one-time, paid-up license fees in consideration for the grant of certain IP rights for patented technology rights owned by our operating subsidiaries. These rights were primarily granted on a perpetual basis, extending until the expiration of the underlying patents.
Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our revenue concentrations for the periods presented herein.
Refer to “Investments in Patent Portfolios” above for information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues.
| Change | ||||||||||||||||
| 2019 | 2018 | $ Change | % Change | |||||||||||||
| (In thousands, except percentage change values) | ||||||||||||||||
| Loss before provision for income taxes | $ | (18,953 | ) | $ | (103,669 | ) | $ | 84,716 | (82% | ) | ||||||
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Cost of Revenues
Inventor Royalties, Contingent Legal Fees Expense and Other Patent Acquisition Costs. The economic terms of patent portfolio related partnering agreements and contingent legal fee arrangements, if any, including royalty obligations, if any, royalty rates, contingent fee rates and other terms and conditions, vary across the patent portfolios owned or controlled by our operating subsidiaries. In certain instances, we have invested in certain patent portfolios without future inventor royalty obligations. These costs fluctuate period to period, based on the amount of $420,000, representing 12 monthsrevenues recognized each period, the terms and conditions of his base salary, (ii) accruedrevenue agreements executed each period and the mix of specific patent portfolios with varying economic terms, conditions and obligations (i.e. accrued vacation paygenerating revenues each period.
| Change | ||||||||||||||||
| 2019 | 2018 | $ Change | % Change | |||||||||||||
| (In thousands, except percentage change values) | ||||||||||||||||
| Inventor royalties | $ | 4,944 | $ | 35,168 | $ | (30,224 | ) | (86% | ) | |||||||
| Contingent legal fees | 591 | 31,501 | (30,910 | ) | (98% | ) | ||||||||||
| Patent acquisition expenses | – | 4,000 | (4,000 | ) | (100% | ) | ||||||||||
Litigation and reimbursable expenses) totaling $51,692 (iii) $32,308, representingLicensing Expenses - Patents. Litigation and licensing expenses-patents include patent-related litigation, enforcement and prosecution costs incurred by external patent attorneys engaged on an hourly basis and the equivalentout-of-pocket expenses incurred by law firms engaged on a contingent fee basis. Litigation and licensing expenses-patents also includes third-party patent research, development, prosecution, re-exam and inter partes reviews, consulting, and other costs incurred in connection with the licensing and enforcement of Mr. Key’s one month salary in lieu of notice, (iv) earned performance payment for 2016 totaling $248,566patent portfolios.
Litigation and (iv) reimbursement for COBRA premiumslicensing expenses-patents decreased for the continuationperiods presented due to a net decrease in litigation support, patent prosecution and litigation expenses associated with ongoing licensing and enforcement programs and an overall decrease in portfolio related enforcement activities. We expect patent-related legal expenses to continue to decrease based upon the overall decrease in portfolio related enforcement activities as we continue monetizing our existing patent assets. Refer to “Investments in Patent Portfolios”above for additional information regarding the impact of Mr. Key’s medicalportfolio acquisition trends on licensing and dental coverageenforcement activities and current and future licensing and enforcement related revenues.
Amortization of Patents. For the year ended December 31, 2019, amortization expense decreased $23.9 million, or 88%, as compared to the year ended December 31, 2018. These decreases were due to a decrease in scheduled amortization resulting from the $28.2 million patent portfolio impairment charges previously recorded in the fiscal 2018, and accelerated amortization recorded in the third quarter of 2018.
Impairment Charges. Impairment charges for fiscal year 2018 primarily reflect reductions in expected estimated future net cash flows for certain patent portfolios to which management determined it would no longer allocate resources in future periods. Impairment charges consisted of the excess of the asset’s carrying value over its estimated fair value as of the applicable measurement date.
| Change | ||||||||||||||||
| 2019 | 2018 | $ Change | % Change | |||||||||||||
| (In thousands, except percentage change values) | ||||||||||||||||
| Litigation and licensing expenses - patents | $ | 7,803 | $ | 8,866 | $ | (1,063 | ) | (12% | ) | |||||||
| Amortization of patents | 3,194 | 27,120 | (23,926 | ) | (88% | ) | ||||||||||
| Impairment of patent-related intangible assets | – | 28,210 | (28,210 | ) | (100% | ) | ||||||||||
��
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Operating Expenses
| Change | ||||||||||||||||
| 2019 | 2018 | $ | % | |||||||||||||
| (In thousands, except percentage change values) | ||||||||||||||||
| General and administrative expenses | $ | 15,301 | $ | 19,045 | $ | (3,744 | ) | (20% | ) | |||||||
| Non-cash stock compensation expense - G&A | 1,075 | 2,133 | (1,058 | ) | (50% | ) | ||||||||||
| Non-cash stock compensation expense - Profits Interests | – | (2,450 | ) | 2,450 | (100% | ) | ||||||||||
| Total general and administrative expenses | $ | 16,376 | $ | 18,728 | $ | (2,352 | ) | (13% | ) | |||||||
General and Administrative Expenses. General and administrative expenses include employee compensation and related personnel costs, including variable performance based compensation and non-cash stock compensation expenses, office and facilities costs, legal and accounting professional fees, public relations, marketing, stock administration, business development, state taxes based on gross receipts and other corporate costs. A summary of the main drivers of the change in general and administrative expenses for the periods presented is as follows:
| 2019 vs. 2018 | ||||
| (In thousands) | ||||
| Personnel costs and board fees | $ | (766 | ) | |
| Variable performance-based compensation costs | (373 | ) | ||
| Corporate, general and administrative costs | (734 | ) | ||
| Non-cash stock compensation expense(1) | 1,393 | |||
| Employee severance costs | (1,872 | ) | ||
| Total change in general and administrative expenses | $ | (2,352 | ) | |
_________________________________________________________________
(1) - Refer to Note 9 in the accompany consolidated financial statements
Profits interests are classified as liability awards, which 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 (included in “non-cash stock compensation expense - profits interests” above) is adjusted each reporting period for increases or decreases in the estimated fair value, which is primarily impacted by changes in the fair value of the underlying Veritone warrants related to the liability. Upon vesting of the units, which occurred in September 2017, any previously unrecognized compensation expense was immediately recognized for any changes in fair value. The fair value of the Veritone related profits interests Units totaled $591,000 as of December 31, 2019 and December 31, 2018. Refer to Note 9 in the consolidated financial statements elsewhere herein for additional information.
Other.Fiscal year 2019 and 2018 operating expenses included expenses for court ordered attorney fees and settlement and contingency accruals totaling $1.8 million and $2.6 million, respectively.
Other Income (Expense)
Change in Fair Value of Investment, net.Our equity investment in Veritone is recorded at fair value, and therefore, is marked to market at each balance sheet date. Results for fiscal year 2019 included a net unrealized gain on our equity investment in Veritone totaling $9.9 million and a realized loss of $9.2 million on the sale of 1,121,071 shares of Veritone common stock at a weighted average price of $5.91. Results for fiscal year 2018 included a net unrealized loss on our equity investment in Veritone totaling $59.1 million and a realized loss of $19.1 million on the sale of 2,700,000 shares of Veritone common stock at a weighted average price of $7.07.
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Income Taxes
| 2019 | 2018 | |||||||
| Income tax benefit (expense) (in thousands) | $ | 1,824 | $ | (1,179 | ) | |||
| Effective tax rate | (10)% | 1% | ||||||
Our effective tax rates for fiscal year 2019 and 2018, were primarily comprised of foreign taxes withheld and refunded on revenue agreements with licensees in foreign jurisdictions, state taxes, and the impact of full valuation allowances recorded for net operating loss (2019 and 2018) and foreign tax credit related tax assets generated in those periods due to uncertainty regarding future realization. Foreign taxes withheld and refunded related to revenue agreements executed with third-party licensees domiciled in certain foreign jurisdictions for fiscal year 2019 and 2018 totaled ($1.9) million and $1.1 million, respectively.
Inflation
Inflation has not had a significant impact on us or any of our subsidiaries in the current or prior periods.
Liquidity and Capital Resources
General
Our primary sources of liquidity are cash and cash equivalents on hand generated from our operating activities. Our management believes that our cash and cash equivalent balances and anticipated cash flows from operations will be sufficient to meet our cash requirements through at least March 2021 and for the foreseeable future. We may, however, encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated, including those set forth under Item 1A, “Risk Factors”, above. Any efforts to seek additional funding could be made through issuances of equity or debt, or other external financing. However, additional funding may not be available on favorable terms, or at all. The capital and credit markets have experienced extreme volatility and disruption in recent years, and the volatility and impact of the disruption may continue. At times during this period, the volatility and disruption has reached unprecedented levels. In several cases, the markets have exerted downward pressure on stock prices and credit capacity for certain issuers, and the commercial paper markets may not be a reliable source of 12 months after his resignationshort-term financing for us. If we fail to obtain additional financing when needed, we may not be able to execute our business plans and our business, conducted by our operating subsidiaries, may suffer.
Certain of our operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. In connection with any of our 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 us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material.
Cash, Cash Equivalents, Trading Securities, Restricted Cash and Investments
Our consolidated cash, cash equivalents, trading securities, and restricted cash totaled $203.3 million at December 31, 2019, compared to $165.5 million at December 31, 2018. The net change in cash, cash equivalents and restricted cash for the periods presented was comprised of the following:
| 2019 | 2018 | |||||||
| (In thousands) | ||||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | (2,308 | ) | $ | 20,877 | |||
| Investing activities | (68,063 | ) | (24,066 | ) | ||||
| Financing activities | 33,921 | (4,606 | ) | |||||
| $ | (36,450 | ) | $ | (7,795 | ) | |||
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Cash Flows from Operating Activities. Cash receipts from licensees totaled $44.0 million and $103.4 million in fiscal years 2019 and 2018, respectively. The fluctuations in cash receipts for the periods presented primarily reflects the corresponding fluctuations in revenues recognized during the same periods, as described above, and the related timing of payments received from licensees. Cash outflows from operations totaled $46.3 million and $82.5 million in fiscal years 2019 and 2018, respectively. The fluctuations in cash outflows for the periods presented reflects the fluctuations in revenue-related inventor royalties and contingent legal fees and other operating costs and expenses during the same periods, as discussed above, and the impact of the timing of payments to inventors, attorneys and other vendors.
Cash Flows from Investing Activities.Cash flows from investing activities and related changes were comprised of the following for the periods presented:
| 2019 | 2018 | |||||||
| (In thousands) | ||||||||
| Patent acquisition costs | $ | (4,420 | ) | $ | – | |||
| Sale of investment at fair value(1) | 6,628 | 19,097 | ||||||
| (Purchase) Sale of other investments(1) | 2,000 | (7,000 | ) | |||||
| Net purchase of trading securities | (72,088 | ) | (36,129 | ) | ||||
| Purchases of property and equipment | (183 | ) | (34 | ) | ||||
| Net cash used in investing activities | $ | (68,063 | ) | $ | (24,066 | ) | ||
| _________________ | ||||||||
| (1) Refer to Note 6 for additional information | ||||||||
Investment in Veritone. In fiscal year 2019, Acacia sold 1,121,071 shares of Veritone common stock at a weighted average price of $5.91 and recorded a realized loss of $9.2 million on the sale. In fiscal year 2018, Acacia sold 2,700,000 shares of Veritone common stock at a weighted average price of $7.07 and recorded a realized loss of $19.1 million on the sale. Refer to Note 6 to the consolidated financial statements elsewhere herein for additional information regarding our investment with Veritone.
Investment in Miso Robotics. In February 2018, we made a strategic equity investment totaling $32,550.$6.0 million in the Series B financing round for Miso Robotics. In September 2019, we sold our entire investment in Miso Robotics for proceeds of $2.0 million. Refer to Note 6 to the consolidated financial statements elsewhere herein for additional information regarding our investment in Miso.
Cash Flows from Financing Activities. Cash flows from financing activities and related changes included the following for the periods presented (in thousands):
| 2019 | 2018 | |||||||
| (In thousands) | ||||||||
| Repurchase of common stock | $ | – | $ | (4,634 | ) | |||
| Repurchase of restricted common stock | – | (229 | ) | |||||
| Issuance of Series A redeemable convertible preferred stock and Series A warrant, net of issuance costs (Note 16 and 17) | 33,842 | – | ||||||
| Proceeds from exercise of stock options | 79 | 257 | ||||||
| Net cash provided by (used in) financing activities | $ | 33,921 | $ | (4,606 | ) | |||
Stock Repurchase Program. In February 2018, our board of directors authorized the Program to repurchase up to $20 million of our outstanding common stock in open market purchases or private purchases, from time to time, in amounts and at prices to be determined by the board of directors at its discretion. In fiscal year 2018, we repurchased 1,190,420 shares at an average price of $3.89 for $4,634,000. The Program expired on February 28, 2019. On August 5, 2019, our board of directors approved a new stock repurchase program, which authorized the purchase of up to $10.0 million of the Company's common stock through open market purchases, through block trades, through 10b5-1 plans, or by means of private purchases, from time to time, through July 31, 2020. In determining whether or not to repurchase any shares of Acacia’s common stock, Acacia’s board of directors consider such factors as the impact of the repurchase on Acacia’s cash position, as well as Acacia’s capital needs and whether there is a better alternative use of Acacia’s capital. Acacia has no obligation to repurchase any amount of its common stock under the Stock Repurchase Program. Repurchases to date were made in the open market in compliance with applicable SEC rules. The authorization to repurchase shares presented an opportunity to reduce the outstanding share count and enhance stockholder value. The repurchased shares are expected to be retired.
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Starboard Investment. On November 18, 2019, the Company entered into employmentthe Securities Purchase Agreement with Starboard pursuant to which Starboard purchased (i) 350,000 shares of Series A Preferred Stock at an aggregate purchase price of $35,000,000, and Series A Warrants to purchase up to 5,000,000 shares of the Company’s common stock. Refer to Notes 16, 17 and 19 to our notes to consolidated financial statements for more information related to the Starboard Securities.
Working Capital
The primary components of working capital are cash and cash equivalents, trading securities, accounts receivable, prepaid expenses, accounts payable, accrued expenses, and royalties and contingent legal fees payable. Working capital at December 31, 2019 was $160.1 million, compared to $170.4 million at December 31, 2018.
Consolidated accounts receivable from licensees decreased to $0.5 million at December 31, 2019, compared to $32.9 million at December 31, 2018. Accounts receivable balances fluctuate based on the timing, magnitude and payment terms associated with revenue agreements with eachexecuted during the year, and the timing of our named executive officers. We restatedcash receipts on accounts receivable balances recorded in previous periods. Two licensees individually represented approximately 70% and 17%, respectively, of accounts receivable at December 31, 2019. Four licensees individually represented approximately 38%, 36%, 12% and 11%, respectively, of accounts receivable at December 31, 2018.
Accounts payable and accrued expenses increased to $9.5 million at December 31, 2019, from $8.3 million at December 31, 2018.
Consolidated royalties and contingent legal fees payable decreased to $2.2 million at December 31, 2019, compared to $22.7 million at December 31, 2018. Royalties and contingent legal fees payable balances fluctuate based on the employmentmagnitude and timing of the execution of related license agreements, with Messrs. Haynesthe timing of cash receipts for the related license agreements, and Treskathe timing of payment of current and prior period royalties and contingent legal fees payable to inventor and outside attorneys, respectively.
All of accounts receivable from licensees at December 31, 2019 are scheduled to be collected in September 2015the first and with Mr. Stewart on August 1, 2017. We do not have any employment agreements or other compensatory plans, contracts or arrangementssecond quarter of any kind2020, in accordance with our named executive officers which contain excise tax gross up provisions, guaranteed payment provisions, single trigger change of control provisions, guaranteed escalator provisions, or multi-year terms with auto renewal features. All employment agreements with our named executive officers may be terminated by either party for any reason upon thirty day's advance notice. Upon termination without cause, the named executive officer will be eligible for payment pursuant to the terms of the employment agreement. In addition,related underlying license agreements. The majority of royalties and contingent legal fees payable are scheduled to be paid through the named executive officer is eligible for an annual incentive award equal to a percentagethird quarter of his or her base salary, payable at the discretion of the Compensation Committee and2020 in accordance with the underlying contractual arrangements.
Critical Accounting Policies
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing these financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly.
We believe that, of the significant accounting policies discussed in Note 2 to our notes to consolidated financial statements, the following accounting policies require our most difficult, subjective or complex judgments:
We discuss below the critical accounting assumptions, judgments and estimates associated with these policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our critical accounting policies, refer to Note 2 to the notes to consolidated financial statements included herein.
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Revenue Recognition
As described herein. The awardbelow, significant management judgment must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue recognized or deferred for any period, if management made different judgments.
Revenue is basedrecognized upon personal performance, overall company performancetransfer of control of promised bundled IP rights and other factorscontractual performance obligations to licensees in an amount that reflects the consideration we expect to receive in exchange for those IP rights. Revenue contracts that provide promises to grant the right to use IP rights as detailed abovethey 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 Compensation Committee considers. Our employment agreementsapplicable performance obligations are satisfied and severance and changeall other revenue recognition criteria have been met.
For the periods presented, revenue contracts executed by the Company primarily provided for the payment of control arrangements do notcontractually determined, one-time, paid-up license fees in consideration for the grant of certain IP rights for patented technologies owned or controlled by Acacia. Revenues also included license fees from sales-based revenue contracts, or Recurring Revenue Agreement, 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. Revenues may also include court ordered settlements or awards related to our patent portfolio, or Other Settlements, or sales of our patent portfolio. IP rights granted included the following, as applicable: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any excise tax gross-up amounts.
Since the promised IP rights are not individually distinct, the Company combined each individual IP right in the contract into a bundle of IP rights that is distinct, and accounted for all of the IP rights promised in the contract as a single performance obligation. The IP rights granted were “functional IP rights” that have significant standalone functionality. Acacia's subsequent activities do not substantively change that functionality and do not significantly affect the utility of the IP to which the licensee has rights. Acacia’s operating subsidiaries have any agreementno further obligation with respect to the grant of IP rights, including no express or arrangement with any named executive officer relatingimplied obligation to a change inmaintain or upgrade the technology, or provide future support or services. The contracts provide for the grant (i.e., transfer of control) of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the contract. Licensees legally obtain control of our companythe 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 than any provisionsrevenue recognition criteria have been met. Revenue contracts generally provide for payment of contractual amounts with 30-90 days of execution of the accelerated vestingcontract, or the end of stock awardsthe quarter in their respective stock award agreements as set forthwhich the sale or usage occurs for Recurring Revenue Agreements. Contractual payments made by licensees are generally non-refundable.
For sales-based royalties, the Company includes in our employment agreements with the named executive officers. The agreements and arrangements are described in greater detail under the section “Potential Payments Upon Terminationtransaction price some or Change in Control” below.
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 for by us,if the licensee had paid cash for the medicalIP rights when they transfer to the licensee. In determining the transaction price, the Company adjusts the promised amount of consideration for the effects of the time value of money. As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the entity transfers promised IP rights to a customer and dental benefits selected by such named executive officerwhen the customer pays for the IP rights will be one year or less.
In general, the Company is required to make certain judgments and estimates in connection with the accounting for revenue contracts with customers. Such areas may include identifying performance obligations in the yearcontract, 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 whichtime or over time, allocating the termination occurstransaction price to separate performance obligations, determining whether contracts contain a significant financing component, and estimating revenues recognized at a point in time for sales-based royalties.
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For fiscal years 2019 and 2018, the majority of our revenue agreements provided for the 18 month period described above. The respective base salaries would have been $400,000payment to us of one-time, paid-up license fees in consideration for Mr. Stewart, $393,978the grant of certain IP rights for Mr. Haynes and $420,000 for Mr. Treska. There is no accelerationpatented technology rights owned by our operating subsidiaries. These rights were primarily granted on a perpetual basis, extending until the expiration of the vestingunderlying patents. Pursuant to the terms of any outstanding equity awards upon termination of employment that would be triggered by any agreement or in accordancethese agreements, our operating subsidiaries have no further obligation with anyrespect to the grant of the restated employmentnon-exclusive licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on our operating subsidiaries’ part to maintain or upgrade the technology, or provide future support or services. The agreements provided for the grant of the licenses, covenants-not-to-sue, releases, and other significant contractual performance obligations upon execution of the agreement. As such, the earnings process was determined to be complete and revenue was recognized upon the execution of the agreements. The named executive officers doHistorically, term license agreements have not receive severance or otherbeen a material component of our operating revenues, with the majority of license agreements being paid-up, perpetual license agreements.
Stock-based Compensation Expense
Equity Based Awards. Stock-based compensation payments in any other circumstances, including death or disability.
| Stock Option Awards | Restricted Stock Awards | ||||||||||||||||
| Name | Number of Shares (#) | Value ($)(1) | Number of Shares (#) | Value ($)(1) | Total Value ($)(1) | ||||||||||||
| Robert B. Stewart, Jr. | 870,461 | $ | 50,988 | 38,974 | $ | 157,845 | $ | 208,833 | |||||||||
| Edward J. Treska | 791,049 | $ | 33,992 | 33,974 | $ | 137,595 | $ | 171,587 | |||||||||
| Clayton J. Haynes | 353,549 | $ | 33,992 | 33,974 | $ | 137,595 | $ | 171,587 | |||||||||
During the Board currently consists of Messrs. Anderson, de Boom and Falzone. Mr. Walsh, who served on the Compensation Committee during the fiscal year ended December 31, 2017, stepped down from2019, the Compensation Committee on February 12, 2018. Mr. Frykman served as Vice Chairman ofCompany granted restricted stock units with market-based vesting conditions. The restricted stock units with market-based vesting conditions vest based upon the Compensation Committee until his death on April 14, 2018. Mr. Falzone was appointed to the Compensation Committee on March 30, 2018. During fiscal year 2017, no member of our Compensation Committee was an officer or employee, or a former employee, of our company. During fiscal year 2017, none of our executive officers (i) served as a member of the compensation committee of another entity, one of whose executive officers served on our Compensation Committee, (ii) served as a director of another entity, one of whose executive officers served on our Compensation Committee, or (iii) served as a member of the compensation committee of another entity, one of whose executive officers served as a director of ours.
| Name and Principal Position(s) | Year | Salary ($) | Bonus ($)(3) | Stock Awards ($)(1) | Option Awards ($)(1) | Non- Equity Incentive Plan Compen-sation (4) ($) | Non-qualified Deferred Comp-ensation Earnings ($) | All Other Comp- ensation ($)(5)(6) | Total ($) | ||||||||
Robert B. Stewart, Jr.(7) | 2017 | 400,000 | 7,692 | — | 446,235 | 400,000 | — | 79,420 | 1,333,347 | ||||||||
| President | 2016 | 364,406 | 7,692 | 105,999 | 2,164,009 | 489,939 | — | — | 3,132,045 | ||||||||
| 2015 | 331,944 | 6,147 | 388,880 | — | — | — | — | 726,971 | |||||||||
| Clayton J. Haynes | 2017 | 393,978 | 7,577 | — | 446,235 | 266,688 | — | 50,540 | 1,165,018 | ||||||||
| Chief Financial Officer, Sr., Vice President | 2016 | 393,978 | 7,577 | 105,999 | 929,502 | 483,258 | — | — | 1,920,314 | ||||||||
| of Finance and Treasurer | 2015 | 393,978 | 7,577 | 466,560 | — | 78,795 | — | — | 946,910 | ||||||||
| Edward J. Treska | 2017 | 420,000 | 8,077 | — | 446,235 | 481,000 | — | 79,420 | 1,434,732 | ||||||||
| Executive Vice President, General Counsel and | 2016 | 402,846 | 8,077 | 105,999 | 2,164,009 | 575,985 | — | — | 3,256,916 | ||||||||
| Secretary | 2015 | 387,681 | 7,455 | 466,560 | — | 129,062 | — | — | 990,758 | ||||||||
Marvin Key(2) | 2017 | 113,076 | — | — | — | — | — | 536,550 | 649,626 | ||||||||
| Interim Chief Executive Officer | 2016 | 417,534 | 8,077 | 113,000 | 948,604 | 528,669 | — | — | 2,015,884 | ||||||||
| 2015 | 391,317 | 7,525 | 388,800 | — | — | — | — | 787,642 | |||||||||
Valuation of Long-lived and Intangible Assets
Patent Portfolio Impairment Testing.We review long-lived assets and intangible assets for potential impairment annually (quarterly for patents) and when events or changes in circumstances indicate the price targets is August 1, 2020, four years from the grant date.carrying amount of an asset may not be recoverable. In the event that the stock price targets are not met over such four-year period,expected undiscounted future cash flows resulting from the stock options do not vest, and the recipient will not receive any value from those options granted. In general, all other stock option awards vest in equal installments over a three-year period.
| Estimated Future Payouts Under Non-Equity Incentive Plan Awards | Estimated Future Payouts Under Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) (2) | Exercise or Base Price of Option Awards ($ / Sh) | Grant Date Fair Value of Stock and Option Awards ($) (1) | |||||||||||||||||||||||
| Name | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | |||||||||||||||||||||
| Robert B. Stewart, Jr. | 3/15/2017 | — | — | — | — | — | — | — | 96,153 | 5.40 | $ | 223,585 | ||||||||||||||||
| 3/15/2017 | — | — | — | — | — | — | — | 113,032 | 6.75 | $ | 222,650 | |||||||||||||||||
| 2/16/2017 | — | — | — | — | — | — | — | — | — | $ | — | |||||||||||||||||
| Clayton J. Haynes | 3/15/2017 | — | — | — | — | — | — | — | 96,153 | 5.40 | $ | 223,585 | ||||||||||||||||
| 3/15/2017 | — | — | — | — | — | — | — | 113,032 | 6.75 | $ | 222,650 | |||||||||||||||||
| 2/16/2017 | — | — | — | — | — | — | — | — | — | $ | — | |||||||||||||||||
| Edward J. Treska | 3/15/2017 | — | — | — | — | — | — | — | 96,153 | 5.40 | $ | 223,585 | ||||||||||||||||
| 3/15/2017 | — | — | — | — | — | — | — | 113,032 | 6.75 | $ | 222,650 | |||||||||||||||||
| 2/16/2017 | — | — | — | — | — | — | — | — | — | $ | — | |||||||||||||||||
Marvin Key(3) | — | — | — | — | — | — | — | — | — | $ | — | |||||||||||||||||
| Option Awards | �� | Stock Awards | |||||||||||||||||||||||||||||
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expira-tion Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($)(2) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | Date | ||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Grant | Fully Vested(1) | |||||||||||||||||||||||||||
Robert B. Stewart, Jr.(3) | — | — | — | — | — | 5,000 | 20,250 | — | — | 2/10/2015 | 2/10/2018 | ||||||||||||||||||||
| 39,669 | 39,669 | — | 3.12 | 3/1/2023 | — | — | — | — | 3/1/2016 | 3/1/2019 | |||||||||||||||||||||
| 93,968 | 93,970 | — | 3.90 | 3/1/2023 | — | — | — | — | 3/1/2016 | 3/1/2019 | |||||||||||||||||||||
| 187,500 | 562,500 | — | 5.75 | 8/1/2023 | — | — | — | — | 8/1/2016 | N/A (3) | |||||||||||||||||||||
| 16,025 | 80,128 | — | 5.40 | 3/15/2024 | — | — | — | — | 3/15/2017 | 3/15/2020 | |||||||||||||||||||||
| 18,838 | 94,194 | — | 6.75 | 3/15/2024 | — | — | — | — | 3/15/2017 | 3/15/2020 | |||||||||||||||||||||
| Clayton J. Haynes | 52,892 | 26,446 | — | 3.12 | 3/1/2023 | — | — | — | — | 3/1/2016 | 11/20/2018 | ||||||||||||||||||||
| 125,292 | 62,646 | — | 3.90 | 3/1/2023 | — | — | — | — | 3/1/2016 | 11/20/2018 | |||||||||||||||||||||
| 125,000 | 125,000 | — | 5.75 | 8/1/2023 | — | — | — | — | 8/1/2016 | 5/20/2019 | |||||||||||||||||||||
| 32,051 | 64,102 | — | 5.40 | 3/15/2024 | — | — | — | — | 3/15/2017 | 11/20/2019 | |||||||||||||||||||||
| 37,677 | 75,355 | — | 6.75 | 3/15/2024 | — | — | — | — | 3/15/2017 | 11/20/2019 | |||||||||||||||||||||
Edward J. Treska(3) | 52,892 | 26,446 | — | 3.12 | 3/1/2023 | — | — | — | — | 3/1/2016 | 11/20/2018 | ||||||||||||||||||||
| 125,292 | 62,646 | — | 3.90 | 3/1/2023 | — | — | — | — | 3/1/2016 | 11/20/2018 | |||||||||||||||||||||
| 187,500 | 562,500 | — | 5.75 | 8/1/2023 | — | — | — | — | 8/1/2016 | N/A (3) | |||||||||||||||||||||
| 32,051 | 64,102 | — | 5.40 | 3/15/2024 | — | — | — | — | 3/15/2017 | 11/20/2019 | |||||||||||||||||||||
| 37,677 | 75,355 | — | 6.75 | 3/15/2024 | — | — | — | — | 3/15/2017 | 11/20/2019 | |||||||||||||||||||||
| Option Awards | Stock Awards | ||||||||||||||
| Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | |||||||||||
| Robert B. Stewart, Jr. | — | — | 14,500 | $ | 70,625 | ||||||||||
| Clayton J. Haynes | — | — | 12,000 | $ | 52,500 | ||||||||||
| Edward J. Treska | — | — | 12,000 | $ | 52,500 | ||||||||||
Marvin Key(1) | 94,367 | — | $ | 134,371 | — | $ | — | ||||||||
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) (1)(2)(3) | Non-Equity Incentive Plan Compen-sation ($) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($)(4) | Total ($) | |||||||
| William S. Anderson | 80,004 | — | 120,000 | — | — | — | 200,004 | |||||||
| Fred A. de Boom | 93,336 | — | 120,000 | — | — | — | 213,336 | |||||||
Edward W. Frykman(5) | 80,004 | — | 120,000 | — | — | — | 200,004 | |||||||
| G. Louis Graziadio, III | 80,004 | — | 120,000 | — | — | 329,420 | 529,424 | |||||||
| James F. Sanders | 36,346 | — | 120,000 | — | — | — | 156,346 | |||||||
| Frank E. Walsh, III | 80,004 | — | 209,625 | — | — | — | 289,629 | |||||||
We did not record any patent portfolio impairment charges for the fiscal year ended December 31, 2017 filed with the SEC on March 7, 2018.
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Valuation of Embedded Derivatives
Embedded derivatives that are required to be bifurcated from their host contract are evaluated and valued separately from host instrument. A binomial lattice framework is used to estimate the fair value of the profitsembedded derivative put option, conversion option, call option, and contingent dividend rate feature in the Series A Preferred Stock issued by the Company in 2019. The binomial model utilizes the Tsiveriotis and Fernandes (“TF”) implementation in which a convertible instrument is split into two separate components: a cash-only component which is subject to the selected risk-adjusted discount rate and an equity component which is subject only to the risk-free rate. The model considers the (i) implied volatility of the value of our common stock, (ii) appropriate risk-free interest units granted. Recipients can onlyrate, (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 implied volatility of the Company’s common stock is estimated based on a haircut applied to the historical volatility. A volatility haircut is a concept used to describe a commonly observed occurrence in which the volatility implied by market prices involving options, warrants, and convertible debt is lower than historical actual realized volatility. The assumed base case term used in the valuation model is the period remaining until November 15, 2027 (the maturity date). The risk-free interest rate is based on the yield on the U.S. Treasury with a remaining term equal to the expected term of the conversion and early redemption options. The significant assumptions utilized in the Company’s valuation of the embedded derivative at December 31, 2019 are as follows: volatility of 30 percent, risk-free rate of 1.86 percent, a credit spread of 25 percent and a dividend yield of 0 percent.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the estimating of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statements of operations.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and our valuation allowance. Due to uncertainties related to our ability to utilize certain deferred tax assets in future periods, we have recorded a full valuation allowance against our net deferred tax assets as of December 31, 2019 and 2018. These assets primarily consist of foreign tax credits, capital loss carryforwards and net operating loss carryforwards.
In assessing the need for a valuation allowance, management has considered both the positive and negative evidence available, including but not limited to, estimates of future taxable income and related probabilities, estimates surrounding the character of future income and the timing of realization, consideration of the period over which our deferred tax assets may be recoverable, our recent history of net income and prior history of losses, projected future outcomes, industry and market trends and the nature of existing deferred tax assets. In management’s estimate, any positive indicators, including forecasts of potential future profitability of our businesses, are outweighed by the uncertainties surrounding our estimates and judgments of potential future taxable income, primarily due to uncertainties surrounding the timing of realization of future taxable income and the character of such income in particular future periods (i.e. foreign or domestic). In the event that actual results differ from these estimates or we adjust these estimates should we believe we would be able to realize value fromthese deferred tax assets in the profitsfuture, an adjustment to the valuation allowance would increase income in the period such determination was made.
Any changes in the judgments, assumptions and estimates associated with our analysis of the need for a valuation allowance in any future periods could materially impact our financial position and results of operations in the periods in which those determinations are made.
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Recently Adopted Accounting Pronouncements
In February 2016, FASB issued ASU 2016-02,Leases, or ASC 842 which requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset. In July 2018, FASB issued ASU 2018-11, Leases, which provides an additional transition option for an entity to apply the provisions of ASC 842 by recognizing a cumulative effect adjustment at the effective date of adoption without adjusting the prior comparative periods presented. Further, in January 2019, FASB issued ASU 2019-01, Leases: Codification Improvements, which provides disclosure relief for the interim periods when adopting ASC 842. The primary impact of adopting ASC 842 for the Company was the recognition in the consolidated balance sheet of certain lease-related assets and liabilities for operating leases with terms longer than 12 months as of January 1, 2019. Such amounts were not previously accounted for in the Company's consolidated balance sheets. The Company adopted ASC 842 as of January 1, 2019, electing the practical expedient approaches. The adoption of ASC 842 did not have a material impact on the Company's consolidated results of operations for the year ending December 31, 2019.
Off-Balance Sheet Arrangements
We have not entered into off-balance sheet financing arrangements.
Uncertain Tax Positions. At December 31, 2019, we had total unrecognized tax benefits of approximately $731,000. A noncurrent liability of $85,000 related to unrecognized tax benefits primarily associated with state taxes was written off during 2019. No interest if, and only if,penalties have been recorded for the unrecognized tax benefits as of December 31, 2019. If recognized, approximately $731,000 would impact our effective tax rate. We do not expect that the liability for unrecognized tax benefits will change significantly within the next 12 months.
Recent Accounting Pronouncements
Refer to Note 2 to our notes to consolidated financial statements included elsewhere herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our trading securities activities is to preserve principal while concurrently maximizing the income we receive from our unreturned capital relatedtrading securities without significantly increasing risk. Some of the securities that we invest in may be subject to the contribution of certain assets and there isinterest rate risk and/or market risk. This means that a profit actually realized related to those assets, as described above beginning on page 11 of this Amendment.
At December 31, 2019 and December 31, 2018, our trading securities were comprised of AAA rated money market funds that invest in first-tier only securities, which primarily include domestic commercial paper, securities issued or guaranteed by the U.S. government or its agencies, U.S. bank obligations, and fully collateralized repurchase agreements (included in cash and cash equivalents in the accompanying consolidated balance sheets), and direct investments in short term, highly liquid, investment grade, U.S. government and corporate securities (included in trading securities in the accompanying consolidated balance sheets).
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In general, money market funds are not subject to market risk because the interest paid on such individualfunds fluctuates with the prevailing interest rate. Accordingly, a 100 basis point increase in interest rates or a 10% decline in the value of the United States equity markets would not be expected to have a material impact on the value of such money market funds. Investments in U.S. government fixed income securities are subject to interest rate risk and will decline in value if interest rates increase. However, due to the relatively short duration of our trading securities portfolio, an immediate 10% change in interest rates would have no material impact on our financial condition, results of operations or cash flows. Declines in interest rates over time will, however, reduce our interest income.
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.
| 33 |
ITEM 9A. CONTROLS AND PROCEDURES
(a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Corporate Controller, we conducted an evaluation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Corporate Controller concluded that, as of December 31, 2019, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Corporate Controller, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods prescribed by the SEC.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Corporate Controller, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2019.
Grant Thornton LLP, the independent registered public accounting firm who audited our consolidated financial statements included in this annual report, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2019, which is included herein.
Changes in Internal Controls. There were no changes in our internal control over financial reporting during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls.Our management, including our Chief Executive Officer and Corporate Controller, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
None.
| 34 |
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Except as provided below, in accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2020 annual meeting of stockholders to be entitledfiled with the SEC no later than April 30, 2020.
Code of Conduct.
We have adopted a Code of Conduct that applies to indemnificationall employees, including our Chief Executive Officer and Corporate Controller and any persons performing similar functions. Our Code of Conduct is provided on our internet website atwww.acaciaresearch.com.
ITEM 11. EXECUTIVE COMPENSATION
In accordance with General Instruction G(3) to Form 10-K, the information required by us.
In accordance with General Instruction G(3) to Form 10-K, certain information knownrequired by this Item is incorporated herein by reference to usour definitive proxy statement for our 2020 annual meeting of stockholders to be filed with respect to the beneficial ownership of our common stock as of March 23, 2018, by (i) all persons known to us to beneficially own five percent (5%) or more of our common stock, (ii) each of our directors, (iii) each of our named executive officers as identified in the “Executive Compensation” section of this Amendment, and (iv) all directors and executive officers as a group.
| Beneficial Owner | Common Stock, Restricted Stock and Restricted Stock Units | Shares of Common Stock Issuable Upon Exercise of Options(5) | Amount of Direct Beneficial Ownership of Common Stock | Amount of Indirect Beneficial Ownership of Common Stock | Percent of Class(1) | |||||||||||
Directors and Named Executive Officers(2): | ||||||||||||||||
Robert B. Stewart, Jr.(3) | 98,643 | 997,912 | $ | 1,096,555 | $ | — | 2.17% | |||||||||
Marvin E. Key(6) | 234,328 | 151,033 | 385,361 | — | * | |||||||||||
| Clayton J. Haynes | 94,667 | 493,988 | 588,655 | — | 1.16% | |||||||||||
Edward J. Treska(3) | 56,035 | 1,077,322 | 1,133,357 | — | 2.24% | |||||||||||
| William S. Anderson | 47,370 | 102,800 | 150,170 | — | * | |||||||||||
| Fred A. de Boom | 78,600 | 102,800 | 181,400 | — | * | |||||||||||
Edward W. Frykman(7) | 73,290 | 102,800 | 176,090 | — | * | |||||||||||
G. Louis Graziadio, III(4) | 605,051 | 802,800 | 1,407,851 | 436,500 | 2.78% | |||||||||||
| Frank E. Walsh, III | 395,726 | 54,864 | 450,590 | — | * | |||||||||||
| James F. Sanders | 3,000 | 11,695 | 14,695 | — | * | |||||||||||
| All Directors and Executive Officers as a Group (nine persons) | 1,686,710 | 3,898,014 | 5,584,724 | 436,500 | 11.03% | |||||||||||
Amount and Nature of Beneficial Ownership of Common Stock | Percent of Class(1) | |||||||||||||||||||
| Beneficial Owner | Sole Voting Power | Shared Voting Power | Sole Dispositive Power | Shared Dispositive Power | Aggregate Ownership | Total | ||||||||||||||
| 5% Stockholders: | ||||||||||||||||||||
BlackRock, Inc.(2) | 2,596,250 | — | 2,659,201 | — | 2,659,201 | 2,659,201 | 5.25% | |||||||||||||
Heartland Advisors, Inc. (3) | — | 4,453,545 | — | 4,590,880 | 4,590,880 | 4,590,880 | 9.06% | |||||||||||||
Ariel Investments, LLC (4) | 1,129,840 | — | 2,804,686 | — | 2,804,686 | 2,804,686 | 5.54% | |||||||||||||
Bank of Montreal (5) | 2,607,935 | 10,195 | 2,790,583 | 150,111 | 2,949,747 | 2,949,747 | 5.82% | |||||||||||||
Renaissance Technologies LLC(6) | 3,409,000 | — | 3,409,000 | — | 3,409,000 | 3,409,000 | 6.73% | |||||||||||||
Plan Category | (a) Number of securities to be issued upon exercise of outstanding options | (b) Weighted-average exercise price of outstanding options | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||
| Equity compensation plans approved by security holders | |||||||||
2013 Acacia Research Stock Incentive Plan(1) | 1,440,199 | 3.46 | 660,000 | ||||||
2016 Acacia Research Stock Incentive Plan(2) | 4,389,892 | 5.67 | 727,000 | ||||||
| Subtotal | 5,830,091 | 5.13 | 1,387,000 | ||||||
In accordance with General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to our definitive proxy statement for review, approval or ratificationour 2020 annual meeting of related party transactions requiredstockholders to be reported in this Amendment. However, we have adopted a corporate Code of Conduct which applies to all of our employees, officers, and directors and a Board of Directors Code of Conduct which applies only to our directors. Each Code of Conduct provides obligations and prohibitions on any related party transactions which cause our employees, officers or directors to face a choice between what is in their personal interest and what is in our interest. The corporate Code of Conduct requires conflicts of interest which result from investments in companies doing business with us or in one of our competitors to be disclosed to our General Counsel and approved by the Board. The corporate Code of Conduct requires employees, officers, and directors that are conducting our business with family members to disclose such transactions to our General Counsel. Such transactions are generally prohibited unless approved by the Board. The Board of Directors Code of Conduct provides further obligations for director conflicts of interest. The Board of Directors Code of Conduct requires directors to disclose material conflicts of interest to our General Counsel. Our General Counsel must notify the Board, and the disinterested Board members must determine whether the situation represents a material conflict of interest. If the Board determines there is a material conflict of interest, the Board must determine the appropriate manner to address the conflict and may prohibit the interested director from approving the transaction, have the transaction approved by our Audit Committee, or have the transaction approved by another disinterested body of the Board.
In accordance with General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to our independent registered public accounting firmdefinitive proxy statement for the years ended December 31, 2017 and 2016. Fees billed in connection with services rendered by Grant Thornton LLP were as set forth below (on a consolidated basis including Acacia Research Corporation and its subsidiaries).
| Period: | Audit Fees(1) | Audit Related Fees(2) | Tax Services Fees(3) | All Other Fees | ||||||||||||
| Fiscal Year Ended December 31, 2017 | $ | 605,000 | $ | 43,000 | $ | 175,000 | $ | — | ||||||||
| Fiscal Year Ended December 31, 2016 | $ | 696,000 | $ | 119,000 | $ | 271,000 | $ | — | ||||||||
| 35 |
| (a) | The following documents are filed as part of this report. |
| (1) Financial Statements | Page | |
| Acacia Research Corporation Consolidated Financial Statements | ||
| Reports of Independent Registered Public Accounting Firm | F-1 | |
| Consolidated Balance Sheets as of December 31, 2019 and 2018 | F-3 | |
| Consolidated Statements of Operations for the Years Ended December 31, 2019 and 2018 | F-4 | |
| Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2019 and 2018 | F-5 | |
| Consolidated Statements of Series A Redeemable Convertible Preferred Stock and Stockholders’ Equity for the Years Ended December 31, 2019 and 2018 | F-6 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2019 and 2018 | F-8 | |
| Notes to Consolidated Financial Statements | F-9 | |
| (2) Financial Statement Schedules | ||
| Financial statement schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the Notes thereto. | ||
| (3) Exhibits | ||
| Refer to Item 15(b) below. | ||
| (b) | Exhibits. The following exhibits are either filed herewith or incorporated herein by reference: |
| 36 |
Exhibit Number | |
| Description | |
| 2.1 | (3) |
| 3.1 | |
| 3.2 | |
| 3.3 | Second Amended and Restated Bylaws |
| 4.1 | |
| (15) | |
| (16) | |
| (17) | |
| (2) | |
| (4) | |
| (5) | |
| (6) | |
| (8) | |
| (9) | |
| (9) | |
| (10) | |
| (11) | |
| (11) | |
| (11) | |
| (11) | |
| (11) | |
| 10.16* | Employment Agreement, effective August 13, 2018, by and between Acacia Research Group, LLC and Marc Booth (12) |
| 10.17* | Separation Agreement and General Release of Claims, effective August 10, 2018, by and between Acacia Research Group, LLC and Clayton J. Haynes(12) |
| 10.18* | Consulting Agreement, effective August 10, 2018, by and between Acacia Research Corporation and Clayton J. Haynes(12) |
| 10.19* | Separation Agreement and General Release of Claims, effective August 10, 2018, by and between Acacia Research Group, LLC and Edward J. Treska (12) |
| 37 |
___________________________
| * | The referenced exhibit is a management contract, compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(c) of Form 10-K. |
| † | The certifications attached as Exhibits |
| (1) | Incorporated by reference to |
| Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009 (File No. 000-26068). |
| Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K/A filed on January 19, 2012 (File No. 000-26068). Portions of this exhibit have been omitted pursuant to a request for confidential treatment under Rule 24-b-2 of the Securities Exchange Act of 1934, as amended. The omitted material has been separately filed with the Securities and Exchange Commission. |
| Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on February 16, 2012 (File No. 000-26068). |
| Incorporated by reference to |
| Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K |
| 38 |
| Incorporated by reference to Acacia Research Corporation’s |
| Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q for the period ended June 30, 2016, filed on August 9, 2016 (File No. 001-37721). |
| Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 10, 2017 (File No. 001-37721). |
| Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q for the period ended March 31, 2017, filed on May 10, 2017 (File No. 001-37721). |
| Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on March 16, 2017 (File No. 001-37721). |
| (12) | Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on August 16, 2018 (File No. 001-37721). |
| Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on February 13, 2019 (File No. 001-37721). |
| (14) | Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-Q for the period ended September 30, 2019, filed on November 12, 2019 (File No. 001-37721). |
| (15) | Incorporated by reference to Appendix E to Acacia Research Corporation’s Definitive Proxy Statement on Schedule 14A filed on January 17, 2020 (File No. 001-37721). |
| (16) | Incorporated by reference to Appendix C to Acacia Research Corporation’s Definitive Proxy Statement on Schedule 14A filed on January 17, 2020 (File No. 001-37721). |
| (17) | Incorporated by reference to Appendix D to Acacia Research Corporation’s Definitive Proxy Statement on Schedule 14A filed on January 17, 2020 (File No. 001-37721). |
| (18) | Incorporated by reference to Appendix A to Acacia Research Corporation’s Definitive Proxy Statement on Schedule 14A filed on January 17, 2020 (File No. 001-37721). |
| (19) | Incorporated by reference to Appendix F to Acacia Research Corporation’s Definitive Proxy Statement on Schedule 14A filed on January 17, 2020 (File No. 001-37721). |
| (20) | Incorporated by reference to Appendix G to Acacia Research Corporation’s Definitive Proxy Statement on Schedule 14A filed on January 17, 2020 (File No. 001-37721); |
| (21) | Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018, filed on March |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Chief Executive Officer (Authorized Signatory) We, the undersigned directors and officers of Acacia Research Corporation, do hereby constitute and appoint Clifford Press and Li Yu, 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 SecuritiesSIGNATURES ACACIA RESEARCH CORPORATION Dated: April 30, 2018March 16, 2020By: /s/ Robert StewartClifford Press Robert StewartClifford Press President and 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 Signature Title Date /s/ Robert StewartClifford Press PresidentChief Executive Officer April 30, 2018March 16, 2020 Robert StewartClifford Press (Principal Executive Officer) /s/ Clayton J. HaynesLi Yu Chief Financial Officer and Treasurer Corporate Controller April 30, 2018March 16, 2020 Clayton J. Haynes Li Yu (Principal Financial and Accounting Officer) /s/ *Isaac Kohlberg Director April 30, 2018March 16, 2020 Fred A. de BoomIsaac Kohlberg /s/ *Maureen O'Connell Executive Chairman and Director April 30, 2018March 16, 2020 G. Louis Graziadio, IIIMaureen O'Connell /s/ *Jonathan Sagal Director April 30, 2018March 16, 2020 William S. AndersonJonathan Sagal /s/ *Alfred V. Tobia, Jr. Director April 30, 2018March 16, 2020 Frank E. Walsh, IIIAlfred V. Tobia, Jr. /s/ *Katharine Wolanyk Director April 30, 2018March 16, 2020 James F. Sanders/s/Paul FalzoneDirectorApril 30, 2018Paul Falzone/s/Joseph E. DavisDirectorApril 30, 2018Joseph E. DavisKatharine Wolanyk
| 40 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Acacia Research Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Acacia Research Corporation and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, changes in series A redeemable convertible preferred stock and stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, 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 of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, 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, 2019, based on criteria established in the 2013Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 16, 2020 expressed an unqualified opinion.
Basis for 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. We are a public accounting firm registered with the 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 audits 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. Our audits included 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 supporting the amounts and disclosures in the financial statements. Our audits also included 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 provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2007.
Newport Beach, CA
March 16, 2020
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Acacia Research Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Acacia Research Corporation and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019, and our report dated March 16, 2020 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”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. 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 THORNTON LLP
Newport Beach, CA
March 16, 2020
| F-2 |
ACACIA RESEARCH CORPORATION
(In thousands, except share and per share information)
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 57,359 | $ | 128,809 | ||||
| Trading securities - debt | 93,843 | 33,642 | ||||||
| Trading securities - equity | 17,140 | 3,012 | ||||||
| Accounts receivable | 511 | 32,884 | ||||||
| Prepaid expenses and other current assets | 2,912 | 3,125 | ||||||
| Total current assets | 171,765 | 201,472 | ||||||
| Long-term restricted cash | 35,000 | – | ||||||
| Investment at fair value (Note 6) | 1,500 | 7,459 | ||||||
| Other investments (Note 6) | – | 8,195 | ||||||
| Patents, net of accumulated amortization | 7,814 | 6,587 | ||||||
| Leased right-of-use assets | 1,264 | – | ||||||
| Other non-current assets | 818 | 236 | ||||||
| Total assets | $ | 218,161 | $ | 223,949 | ||||
| LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,765 | $ | 3,698 | ||||
| Accrued expenses and other current liabilities | 7,265 | 4,299 | ||||||
| Accrued compensation | 507 | 350 | ||||||
| Royalties and contingent legal fees payable | 2,178 | 22,688 | ||||||
| Total current liabilities | 11,715 | 31,035 | ||||||
| Series A warrant liabilities | 3,568 | – | ||||||
| Series A embedded derivative liabilities | 17,974 | – | ||||||
| Long-term lease liabilities | 1,264 | – | ||||||
| Other long-term liabilities | 593 | 1,674 | ||||||
| Total liabilities | 35,114 | 32,709 | ||||||
| Commitments and contingencies (Note 10) | ||||||||
| 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, 2019; no shares authorized, issued or outstanding as of December 31, 2018; aggregate liquidation preference of $35,125 and $0 as of December 31, 2019 and December 31, 2018, respectively (Note 16) | 8,089 | – | ||||||
| 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; 50,370,987 and 49,639,319 shares issued and outstanding as of December 31, 2019 and December 31, 2018, respectively | 50 | 50 | ||||||
| Treasury stock, at cost, 2,919,828 shares as of December 31, 2019 and December 31, 2018 | (39,272 | ) | (39,272 | ) | ||||
| Additional paid-in capital | 652,003 | 651,156 | ||||||
| Accumulated deficit | (439,656 | ) | (422,541 | ) | ||||
| Total Acacia Research Corporation stockholders' equity | 173,125 | 189,393 | ||||||
| Noncontrolling interests | 1,833 | 1,847 | ||||||
| Total stockholders' equity | 174,958 | 191,240 | ||||||
| Total liabilities, redeemable convertible preferred stock, and stockholders' equity | $ | 218,161 | $ | 223,949 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share information)
| Years Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenues | $ | 11,246 | $ | 131,506 | ||||
| Portfolio operations: | ||||||||
| Inventor royalties | 4,944 | 35,168 | ||||||
| Contingent legal fees | 591 | 31,501 | ||||||
| Patent acquisition expenses | – | 4,000 | ||||||
| Litigation and licensing expenses - patents | 7,803 | 8,866 | ||||||
| Amortization of patents | 3,194 | 27,120 | ||||||
| Other portfolio expenses | 1,756 | 2,602 | ||||||
| Total portfolio operations | 18,288 | 109,257 | ||||||
| Net portfolio income (loss) | (7,042 | ) | 22,249 | |||||
| General and administrative expenses(1) | 16,376 | 18,728 | ||||||
| Impairment of patent-related intangible assets | – | 28,210 | ||||||
| Operating loss | (23,418 | ) | (24,689 | ) | ||||
| Other income (expense): | ||||||||
| Change in fair value of investment, net (Note 6) | 9,899 | (59,103 | ) | |||||
| Loss on sale of investment (Note 6) | (9,230 | ) | (19,095 | ) | ||||
| Impairment of other investment (Note 6) | (8,195 | ) | (1,000 | ) | ||||
| Gain on disposal of other investment (Note 6) | 2,000 | – | ||||||
| Change in fair value of the Series A warrants and embedded derivative | 4,518 | – | ||||||
| Interest income and other | 5,473 | 218 | ||||||
| Total other income (expense) | 4,465 | (78,980 | ) | |||||
| Loss before income taxes | (18,953 | ) | (103,669 | ) | ||||
| Income taxes (expense) benefit | 1,824 | (1,179 | ) | |||||
| Net loss including noncontrolling interests in subsidiaries | (17,129 | ) | (104,848 | ) | ||||
| Net (income) loss attributable to noncontrolling interests in subsidiaries | 14 | (181 | ) | |||||
| Net loss attributable to Acacia Research Corporation | (17,115 | ) | (105,029 | ) | ||||
| Less: Accretion of redeemable preferred stock | (307 | ) | – | |||||
| Net loss attributable to common stockholders - basic | $ | (17,422 | ) | $ | (105,029 | |||
| Basic net loss per share of common stock | $ | (0.35 | ) | $ | (2.10 | ) | ||
| Weighted average number of shares outstanding - basic | 49,764,002 | 49,969,062 | ||||||
| Add: Accretion of redeemable preferred stock | 307 | – | ||||||
| Less: Mark-to-market adjustment for preferred stock embedded derivative | (3,258 | ) | – | |||||
| Net loss attributable to common stockholders - diluted | $ | (20,373 | ) | $ | (105,029 | ) | ||
| Diluted net loss per share of common stock | $ | (0.40 | ) | $ | (2.10 | ) | ||
| Weighted average number of shares outstanding - diluted | 50,896,773 | 49,969,062 | ||||||
(1) General and administrative expenses were comprised of the following:
| Years Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| General and administrative expenses | $ | 15,301 | $ | 19,045 | ||||
| Non-cash stock compensation expense - G&A | 1,075 | 2,133 | ||||||
| Non-cash stock compensation expense - Profits Interests | – | (2,450 | ) | |||||
| Total general and administrative expenses | $ | 16,376 | $ | 18,728 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| Years Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net loss including noncontrolling interests | $ | (17,129 | ) | $ | (104,848 | ) | ||
| Other comprehensive income (loss): | ||||||||
| Unrealized loss on foreign currency translation, net of tax of $0. | – | 88 | ||||||
| Total other comprehensive loss | (17,129 | ) | (104,760 | ) | ||||
| Comprehensive (income) loss attributable to noncontrolling interests | 14 | (181 | ) | |||||
| Comprehensive loss attributable to Acacia Research Corporation | $ | (17,115 | ) | $ | (104,941 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(In thousands, except share information)
| For the Year Ended December 31, 2019 | ||||||||||||||||||||||||||||||
| Series A Redeemable Convertible Preferred Stock | Common Stock | Treasury | Additional Paid-in | Accumulated Comprehensive Income | Accumulated | Noncontrolling Interests in Operating | Total Stockholders' | |||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Stock | Capital | (loss) | Deficit | Subsidiaries | Equity | |||||||||||||||||||||
| Balance at December 31, 2018 | – | $ | – | 49,639,319 | $ | 50 | $ | (39,272 | ) | $ | 651,156 | $ | – | $ | (422,541 | ) | $ | 1,847 | $ | 191,240 | ||||||||||
| Net loss attributable to Acacia Research Corporation | – | – | – | – | – | – | – | (17,115 | ) | – | (17,115 | ) | ||||||||||||||||||
| Issuance of shares of Series A redeemable convertible preferred stock, net of embedded derivative, Series A warrants, and issuance costs | 350,000 | 7,782 | – | – | – | – | – | – | – | – | ||||||||||||||||||||
| Accretion of Series A redeemable convertible preferred stock to redemption value | – | 307 | – | – | – | (307 | ) | – | – | – | (307 | ) | ||||||||||||||||||
| Stock options exercised | – | – | 25,136 | – | – | 79 | – | – | – | 79 | ||||||||||||||||||||
| Compensation expense for share-based awards, net of forfeitures | – | – | 706,532 | – | – | 1,075 | – | – | – | 1,075 | ||||||||||||||||||||
| Net loss attributable to noncontrolling interests in subsidiaries | – | – | – | – | – | – | – | (14 | ) | (14 | ) | |||||||||||||||||||
| Balance at December 31, 2019 | 350,000 | $ | 8,089 | 50,370,987 | $ | 50 | $ | (39,272 | ) | $ | 652,003 | $ | – | $ | (439,656 | ) | $ | 1,833 | $ | 174,958 | ||||||||||
| F-6 |
| For the Year Ended December 31, 2018 | ||||||||||||||||||||||||||||||
| Series A Redeemable Convertible Preferred Stock | Common Stock | Treasury | Additional Paid-in | Accumulated Comprehensive Income | Accumulated | Noncontrolling Interests in Operating | Total Stockholders' | |||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Stock | Capital | (loss) | Deficit | Subsidiaries | Equity | |||||||||||||||||||||
| Balance at December 31, 2017 | – | $ | – | 50,639,926 | $ | 51 | $ | (34,640 | ) | $ | 648,996 | $ | (88 | ) | $ | (320,018 | ) | $ | 1,358 | $ | 295,659 | |||||||||
| Net loss attributable to Acacia Research Corporation | – | – | – | – | – | – | – | (105,029 | ) | – | (105,029 | ) | ||||||||||||||||||
| Cumulative effect of new accounting principle | – | – | – | – | – | – | – | 2,506 | 308 | 2,814 | ||||||||||||||||||||
| Stock options exercised | – | – | 82,615 | – | – | 257 | – | – | – | 257 | ||||||||||||||||||||
| Compensation expense for share-based awards, net of forfeitures | – | – | 166,998 | 1 | – | 2,132 | – | – | – | 2,133 | ||||||||||||||||||||
| Repurchase of restricted common stock | – | – | (59,800 | ) | – | – | (229 | ) | – | – | – | (229 | ) | |||||||||||||||||
| Repurchase of common stock | – | – | (1,190,420 | ) | (2 | ) | (4,632 | ) | – | – | – | – | (4,634 | ) | ||||||||||||||||
| Net income attributable to noncontrolling interests in subsidiaries | – | – | – | – | – | – | – | – | 181 | 181 | ||||||||||||||||||||
| Unrealized loss on foreign currency translation | – | – | – | – | – | – | 88 | – | – | 88 | ||||||||||||||||||||
| Balance at December 31, 2018 | – | $ | – | 49,639,319 | $ | 50 | $ | (39,272 | ) | $ | 651,156 | $ | – | $ | (422,541 | ) | $ | 1,847 | $ | 191,240 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-7 |
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Years Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss including noncontrolling interests in subsidiaries | $ | (17,129 | ) | $ | (104,848 | ) | ||
| Adjustments to reconcile net loss including noncontrolling interests in subsidiaries to net cash provided by (used in) operating activities: | ||||||||
| Change in fair value of investment, net (Note 6) | (9,899 | ) | 59,103 | |||||
| Loss on sale of investment (Note 6) | 9,230 | 19,095 | ||||||
| Impairment of other investment (Note 6) | 8,195 | 1,000 | ||||||
| Gain on disposal of other investment (Note 6) | (2,000 | ) | – | |||||
| Depreciation and amortization | 3,227 | 27,145 | ||||||
| Change in fair value of Series A redeemable convertible preferred stock embedded derivative | (3,258 | ) | – | |||||
| Change in fair value of Series A warrant | (1,260 | ) | – | |||||
| Non-cash stock compensation | 1,075 | (317 | ) | |||||
| Change in value of trading securities | (2,241 | ) | – | |||||
| Impairment of patent-related intangible assets | – | 28,210 | ||||||
| Other | – | (436 | ) | |||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 32,373 | (28,189 | ) | |||||
| Prepaid expenses and other assets | (220 | ) | (208 | ) | ||||
| Accounts payable and accrued expenses | 109 | 963 | ||||||
| Royalties and contingent legal fees payable | (20,510 | ) | 19,359 | |||||
| Net cash provided by (used in) operating activities | (2,308 | ) | 20,877 | |||||
| Cash flows from investing activities: | ||||||||
| Patent acquisition costs | (4,420 | ) | – | |||||
| Sale of investment at fair value (Note 6) | 6,628 | 19,097 | ||||||
| (Purchase) Sale of other investments (Note 6) | 2,000 | (7,000 | ) | |||||
| Purchases of trading securities | (147,178 | ) | (102,769 | ) | ||||
| Maturities and sales of trading securities | 75,090 | 66,640 | ||||||
| Purchases of property and equipment | (183 | ) | (34 | ) | ||||
| Net cash provided by (used in) investing activities | (68,063 | ) | (24,066 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repurchase of common stock | – | (4,634 | ) | |||||
| Repurchase of restricted common stock | – | (229 | ) | |||||
| Issuance of Series A redeemable convertible preferred stock and Series A warrants, net of issuance costs | 33,842 | – | ||||||
| Proceeds from exercise of stock options | 79 | 257 | ||||||
| Net cash provided by (used in) financing activities | 33,921 | (4,606 | ) | |||||
| Decrease in cash and cash equivalents and restricted cash | (36,450 | ) | (7,795 | ) | ||||
| Cash and cash equivalents and restricted cash, beginning | 128,809 | 136,604 | ||||||
| Cash and cash equivalents and restricted cash, ending | $ | 92,359 | $ | 128,809 | ||||
The accompanying notes are an integral part of these consolidated financial statements
| F-8 |
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Description of Business.As used herein, “we,” “us,” “our,” “Acacia” and the “Company” refer to Acacia Research Corporation and/or its wholly and majority-owned and controlled operating subsidiaries, and/or where applicable, its management.
Acacia’s operating subsidiaries invest in, license and enforce patented technologies. Acacia’s operating subsidiaries partner with inventors and patent owners, applying their legal and technology expertise to patent assets to unlock the financial value in their patented inventions. In recent years, Acacia has also invested in technology companies. Acacia leverages its experience, expertise, data and relationships developed as a leader in the IP industry to pursue these opportunities. In some cases, these opportunities will complement and/or supplement Acacia’s primary licensing and enforcement business.
Acacia’s operating subsidiaries generate revenues and related cash flows from the granting of IP rights for the use of patented technologies that its operating subsidiaries control or own. Acacia’s operating subsidiaries assist patent owners with the prosecution and development of their patent portfolios, the protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of their patented technologies and, where necessary, with the enforcement against unauthorized users of their patented technologies through the filing of patent infringement litigation.
Acacia’s operating subsidiaries are principals in the licensing and enforcement effort, obtaining control of the rights in the patent portfolio, or control of the patent portfolio outright. Acacia’s operating subsidiaries own or control the rights to multiple patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries.
Neither Acacia nor its operating subsidiaries invent new technologies or products; rather, Acacia depends upon the identification and investment in new patents, inventions and companies that own IP through its relationships with inventors, universities, research institutions, technology companies and others. If Acacia’s operating subsidiaries are unable to maintain those relationships and identify and grow new relationships, then they may not be able to identify new technology-based opportunities for sustainable revenue and/or revenue growth.
During fiscal year 2019, Acacia obtained control of five new patent portfolios. During fiscal year 2018, Acacia did not obtain control of any new patent portfolios.
Acacia was incorporated on January 25, 1993 under the laws of the State of California. In December 1999, Acacia changed its state of incorporation from California to Delaware.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles. The consolidated financial statements and accompanying notes are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP").
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Acacia and its wholly and majority-owned and controlled subsidiaries. Material intercompany transactions and balances have been eliminated in consolidation.
Noncontrolling interests in Acacia’s majority-owned and controlled operating subsidiaries (“noncontrolling interests”) are separately presented as a component of stockholders’ equity. Consolidated net income or (loss) is adjusted to include the net (income) or loss attributed to noncontrolling interests in the consolidated statements of operations. Refer to the accompanying consolidated statements of Series A redeemable convertible preferred stock and stockholders’ equity for total noncontrolling interests.
A wholly owned subsidiary of Acacia is the general partner of the Acacia Intellectual Property Fund, L.P. (the “Acacia IP Fund”), which was formed in August 2010. The Acacia IP Fund is included in the Company’s consolidated financial statements since 2010, as Acacia’s wholly owned subsidiary, as the general partner, has the ability to control the operations and activities of the Acacia IP Fund. The Acacia IP Fund was terminated as of December 31, 2017 and is in the process of being liquidated.
| F-9 |
Revenue Recognition. Revenue is recognized upon transfer of control of promised bundled IP rights (hereinafter “IP Rights”) and other contractual performance obligations to licensees in an amount that reflects the consideration we expect to receive in exchange for those IP Rights. Revenue contracts that provide promises to grant the right to use IP Rights as they exist at the point in time at which the IP Rights are granted, are accounted for as performance obligations satisfied at a point in time and revenue is recognized at the point in time that the applicable performance obligations are satisfied and all other revenue recognition criteria have been met.
For the periods presented, revenue contracts executed by the Company primarily provided for the payment of contractually determined, one-time, paid-up license fees in consideration for the grant of certain IP Rights for patented technologies owned or controlled by Acacia (“Paid-up Revenue Agreements”). Revenues also included license fees from sales-based revenue contracts, the majority of which were originally executed in prior periods, which provide for the payment of quarterly license fees based on quarterly sales of applicable product units by licensees (“Recurring Revenue Agreements”). Revenues may also include court ordered settlements or awards related to our patent portfolio ("Other Settlements") or sales of our patent portfolio ("Sales"). IP Rights granted included the following, as applicable: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The IP Rights granted were perpetual in nature, extending until the legal expiration date of the related patents. The individual IP Rights are not accounted for as separate performance obligations, as (i) the nature of the promise, within the context of the contract, is to transfer combined items to which the promised IP Rights are inputs and (ii) the Company's promise to transfer each individual IP right described above to the customer is not separately identifiable from other promises to transfer IP Rights in the contract.
Since the promised IP Rights are not individually distinct, the Company combined each individual IP right in the contract into a bundle of IP rights that is distinct, and accounted for all of the IP Rights promised in the contract as a single performance obligation. The IP Rights granted were “functional IP rights” that have significant standalone functionality. Acacia's subsequent activities do not substantively change that functionality and do not significantly affect the utility of the IP to which the licensee has rights. Acacia’s operating subsidiaries have no further obligation with respect to the grant of IP Rights, including no express or implied obligation to maintain or upgrade the technology, or provide future support or services. The contracts provide for the grant (i.e., transfer of control) of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the contract. Licensees legally obtain control of the IP Rights upon execution of the contract. As such, the earnings process is complete and revenue is recognized upon the execution of the contract, when collectability is probable and all other revenue recognition criteria have been met. Revenue contracts generally provide for payment of contractual amounts with 30-90 days of execution of the contract, or the end of the quarter in which the sale or usage occurs for Recurring Revenue Agreements. Contractual payments made by licensees are generally non-refundable.
For sales-based royalties, the Company includes in the transaction price some or all of an amount of estimated variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Notwithstanding, revenue is recognized for a sales-based royalty promised in exchange for a license of IP Rights when the later of (i) the subsequent sale or usage occurs, or (ii) the performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied. Estimates are generally based on historical levels of activity, if available.
Revenues from contracts with significant financing components (either explicit or implicit) are recognized at an amount that reflects the price that a licensee would have paid if the licensee had paid cash for the IP Rights when they transfer to the licensee. In determining the transaction price, the Company adjusts the promised amount of consideration for the effects of the time value of money. As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the entity transfers promised IP Rights to a customer and when the customer pays for the IP Rights will be one year or less.
In general, the Company is required to make certain judgments and estimates in connection with the accounting for revenue contracts with customers. Such areas may include identifying performance obligations in the contract, estimating the timing of satisfaction of performance obligations, determining whether a promise to grant a license is distinct from other promised goods or services, evaluating whether a license transfers to a customer at a point in time or over time, allocating the transaction price to separate performance obligations, determining whether contracts contain a significant financing component, and estimating revenues recognized at a point in time for sales-based royalties.
| F-10 |
Revenues were comprised of the following for the periods presented:
| 2019 | 2018 | |||||||
| (In thousands) | ||||||||
| Paid-up Revenue Agreements | $ | 6,343 | $ | 100,496 | ||||
| Recurring Revenue Agreements | 4,903 | 13,040 | ||||||
| Other Settlements | – | 3,470 | ||||||
| Sales | – | 14,500 | ||||||
| $ | 11,246 | $ | 131,506 | |||||
Refer to “Inventor Royalties and Contingent Legal Expenses” below for information on related direct costs of revenues.
Portfolio Operations. Cost of revenues include the costs and expenses incurred in connection with Acacia’s patent licensing and enforcement activities, including inventor royalties paid to 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 “Portfolio operations” 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 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. There were no patent acquisition expenses for fiscal year 2019. Cost of revenues for fiscal year 2018 included $4.0 million of costs to acquire certain patent rights related to revenues recognized in the period.
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. |
| F-11 |
Whenever possible, the Company is required to use observable market inputs (Level 1 - quoted market prices) when measuring fair value. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured. In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. Financial assets and liabilities measured at fair value on a recurring basis were as follows:
| Level 1 | Level 2 | Level 3 | ||||||||||
| (In thousands) | ||||||||||||
| Assets as of December 31, 2019: | ||||||||||||
| Trading securities - debt | $ | – | $ | 93,843 | $ | – | ||||||
| Trading securities - equity | 17,140 | – | – | |||||||||
| Investment at fair value - warrants (Note 6) | – | 757 | – | |||||||||
| Investment at fair value - common stock (Note 6) | 743 | – | – | |||||||||
| Total recurring fair value measurements as of December 31, 2019 | $ | 17,883 | $ | 94,600 | $ | – | ||||||
| Assets as of December 31, 2018: | ||||||||||||
| Trading securities - debt | $ | – | $ | 33,642 | $ | – | ||||||
| Trading securities - equity | 3,012 | – | – | |||||||||
| Investment at fair value - warrants (Note 6) | – | 2,064 | – | |||||||||
| Investment at fair value - common stock (Note 6) | 5,395 | – | – | |||||||||
| Total recurring fair value measurements as of December 31, 2018 | $ | 8,407 | $ | 35,706 | $ | – | ||||||
| Liabilities as of December 31, 2019: | ||||||||||||
| Profits interest units | $ | – | $ | 591 | $ | – | ||||||
| Series A warrants | – | 3,568 | – | |||||||||
| Embedded derivative liability | – | – | 17,974 | |||||||||
| Total liabilities as of December 31, 2019 | $ | – | $ | 4,159 | $ | 17,974 | ||||||
| Liabilities as of December 31, 2018: | ||||||||||||
| Profits interest units | $ | – | $ | 591 | $ | – | ||||||
| Total liabilities as of December 31, 2018 | $ | – | $ | 591 | $ | – | ||||||
| F-12 |
The following table sets forth a summary of the changes in the estimated fair value of the Company’s embedded derivative, which is measured at fair value as a Level 3 liability on a recurring basis:
| Embedded Derivative | ||||
| (In thousands) | ||||
| Opening balance as of January 1, 2019 | $ | – | ||
| Issuance of Series A redeemable convertible preferred stock with embedded derivative | 21,232 | |||
| Remeasurement of Series A redeemable convertible preferred stock embedded derivative to fair value | (3,258 | ) | ||
| Total Level 3 recurring fair value measurements as of December 31, 2019 | $ | 17,974 | ||
Cash and Cash Equivalents. Acacia considers all highly liquid, trading securities with original maturities of three months or less when purchased to be cash equivalents. For the periods presented, Acacia’s cash equivalents are comprised of investments in AAA rated money market funds that invest in first-tier only securities, which primarily includes: domestic commercial paper, securities issued or guaranteed by the U.S. government or its agencies, U.S. bank obligations, and fully collateralized repurchase agreements. Acacia’s cash equivalents are measured at fair value using quoted prices that represent Level 1 inputs.
Long Term Restricted Cash. Long-term restricted cash relates to the proceeds received from the issuance of Series A redeemable convertible preferred stock (the “Series A Redeemable Convertible Preferred Stock”) which are held in an escrow account. The amounts are to be released to the Company upon, among other things, (i) the consummation of a suitable investment or acquisition by the Company or (ii) the conversion of Series A Redeemable Convertible Preferred Stock into common stock (see Note 16).
Trading Securities- Debt. Investments in debt securities are reported at fair value on a recurring basis, with related realized and unrealized gains and losses recorded in the 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).
Trading Securities - Equity.Investments in equity securities are reported at fair value on a recurring basis, with related realized and unrealized gains and losses in the value of such securities recorded in the statements of operations in other income (expense). Dividend income is included in other income (expense).
Impairment of 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, trading securities and accounts receivable. Acacia places its cash equivalents and trading securities primarily in highly rated money market funds and investment grade marketable securities. Cash and cash equivalents are also invested in deposits with certain financial institutions and may, at times, exceed federally insured limits. Acacia has not experienced any significant losses on its deposits of cash and cash equivalents.
Three licensees individually accounted for 43%, 22% and 15%, respectively, of revenues recognized during the year ended December 31, 2019. Three licensees individually accounted for 45%, 17% and 17%, respectively, of revenues recognized during the year ended December 31, 2018. Two licensees individually represented approximately 70% and 17%, respectively, of accounts receivable at December 31, 2019. Four licensees individually represented approximately 38%, 36%, 12% and 11%, respectively, of accounts receivable at December 31, 2018.
| F-13 |
For 2019 and 2018, 39% and 26%, 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, restricted cash, accounts receivables, and current liabilities approximates their fair values due to their short-term maturities.
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:
| Furniture and fixtures | 3 to 5 years | ||||
| Computer hardware and software | 3 to 5 years | ||||
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 five years.
Leases.The Company adopted ASC 842 as of January 1, 2019, electing the practical expedient approaches. The primary impact of adopting ASC 842 for the Company was the recognition in the consolidated balance sheet of certain lease-related assets and liabilities for operating leases with terms longer than 12 months. Such amounts were not previously accounted for in the Company's consolidated balance sheets. 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. Upon adoption of ASC 842 on January 1, 2019, the carrying value of certain lease related liabilities for its excess of lease payments over anticipated sublease income existing at that date, was offset against the related right-of-use assets. Lease expense is recognized on a straight-line basis over the lease term.
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).
Other Investments. Equity investments in common stock and in-substance common stock without readily determinable fair values in companies over which the Company has the ability to exercise significant influence, are accounted for using the equity method of accounting. Acacia includes its proportionate share of earnings and/or losses of its equity method investees in equity in earnings (losses) of investee in the consolidated statements of operations.
Investments in preferred stock with substantive liquidation preferences are accounted for at cost, (subject to impairment considerations, as described below, if any), as adjusted for the impact of changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. In-substance common stock is an investment in an entity that has risk and reward characteristics that are substantially similar to that entity's common stock. An investment in preferred stock with substantive liquidation preferences over common stock, is not substantially similar to common stock, and therefore is not considered in-substance common stock. A liquidation preference is substantive if the investment has a stated liquidation preference that is significant, from a fair value perspective, in relation to the purchase price of the investment. A liquidation preference in an investee that has sufficient subordinated equity from a fair value perspective is substantive because, in the event of liquidation, the investment will not participate in substantially all of the investee's losses, if any.
| F-14 |
The initial determination of whether an investment is substantially similar to common stock is made on the initial date of investment if the Company has the ability to exercise significant influence over the operating and financial policies of the investee. That determination is reconsidered if (i) contractual terms of the investment are changed, (ii) there is a significant change in the capital structure of the investee, including the investee's receipt of additional subordinated financing, or (iii) the Company obtains an additional interest in an investment, resulting in the method of accounting for the cumulative interest being based on the characteristics of the investment at the date at which the Company obtains the additional interest. Refer to Note 6 for additional information.
Impairment of Other Investments.Acacia reviews its investments quarterly for indicators of other-than-temporary impairment. This determination requires significant judgment. In making this judgment, Acacia considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, Acacia evaluates, among other factors, general market conditions and the duration and extent to which the fair value is less than cost. Acacia also considers specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in the consolidated statements of operations and a new cost basis in the investment is established.
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 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.
| F-15 |
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). The fair value of restricted stock and restricted stock units awards is determined by the product of the number of shares or units granted and the grant date market price of the underlying common stock. The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing model. Forfeitures are accounted for as they occur.
No stock options were granted during the year ended December 31, 2019. The fair values of stock options granted during the year ended December 31, 2018 were estimated using the Black-Scholes option-pricing model, based on the following weighted-average assumptions:
| For the Year Ended December 31, 2018 | |||
| 2.26% | |||
| Term | 4.37 | ||
| Volatility | 51% | ||
| Dividend yield | –% |
Due to a lack of sufficient historical stock option exercise experience, the Company utilized the simplified method for estimating the expected term. 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 units awards with market-based vesting conditions vest based upon the Company achieving specified stock price targets over a three-year period. The effect of a market condition is reflected in the estimate of the grant-date fair value of the options utilizing a Monte Carlo valuation technique. Compensation cost is recognized with a market-based vesting condition provided that the requisite service is rendered, regardless of when, if ever, the market condition is satisfied. Assumptions utilized in connection with the Monte Carlo valuation technique included: estimated risk-free interest rate of 1.38 percent; term of 3.00 years; expected volatility of 38 percent; and expected dividend yield of 0 percent. The risk-free interest rate was determined based on the yields available on U.S. Treasury zero-coupon issues. The expected stock price volatility was determined using historical volatility. The expected dividend yield was based on expectations regarding dividend payments.
Profits Interest Units (“Units”) are accounted for in accordance with Accounting Standards Codification (“ASC”) 718-10, “Compensation - Stock Compensation.” The Units vest as described at Note 9, 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. The Company has a purchase option to purchase the vested Units that are not otherwise forfeited after termination of continuous service. The exercise price of the purchase option is the fair market value of the Units on the date of termination of continuous service. At each reporting date, the value of the Units that are subject to the purchase option will be the measured at the fair value on the termination date. Non-cash stock compensation expense related to the Units is reflected in general and administrative expense in the accompanying consolidated statements of operations.
| F-16 |
Series A Warrants.The fair value of the Series A warrants (the “Series A Warrants”) is estimated using a Black-Scholes option-pricing model. The fair value of the Series A Warrants as of December 31, 2019 was estimated based on the following assumptions: volatility of 30 percent, risk-free rate of 1.85 percent, term of 7.79 years and a dividend yield of 0 percent.
Embedded derivatives.Embedded derivatives that are required to be bifurcated from their host contract are valued separately from host instrument. A binomial lattice framework is used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock (see Note 16). The binomial model utilizes the Tsiveriotis and Fernandes (“TF”) implementation in which a convertible instrument is split into two separate components: a cash-only component which is subject to the selected risk-adjusted discount rate and an equity component which is subject only to the risk-free rate. The model considers the (i) implied volatility of the value of our common stock, (ii) appropriate risk-free interest rate, (iii) credit spread, (iv) dividend yield, (v) dividend accrual (and a step-up in rates), and (vi) event probabilities of the various conversion and redemption scenarios.
The implied volatility of the Company’s common stock is estimated based on a haircut applied to the historical volatility. A volatility haircut is a concept used to describe a commonly observed occurrence in which the volatility implied by market prices involving options, warrants, and convertible debt is lower than historical actual realized volatility. The assumed base case term used in the valuation model is the period remaining until November 15, 2027 (the maturity date). The risk-free interest rate is based on the yield on the U.S. Treasury with a remaining term equal to the expected term of the conversion and early redemption options. The significant assumptions utilized in the Company’s valuation of the embedded derivative at December 31, 2019 are as follows: volatility of 30 percent, risk-free rate of 1.86 percent, a credit spread of 25 percent and a dividend yield of 0 percent. The fair value measurement of the embedded derivative is sensitive to these assumptions and changes in these assumptions could result in a materially different fair value measurement.
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’s reportable segments. Acacia’s patent licensing and enforcement business constitutes its single reportable segment.
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Acacia believes that, of the significant accounting policies described herein, the accounting policies associated with revenue recognition, the valuation of the equity instruments discussed at Note 6, the valuation of Series A redeemable convertible preferred stock, Series A warrants and embedded derivatives, stock-based compensation expense, impairment of patent-related intangible assets, the determination of the economic useful life of amortizable intangible assets, income taxes and valuation allowances against net deferred tax assets, require its most difficult, subjective or complex judgments.
Loss Per Share. For periods in which the Company generates net income, the Company computes earnings per share 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 the Company’s earnings. For periods in which the Company generates a net loss, net losses are not allocated to holders of the Company’s participating securities as the security holders are not contractually obligated to share in the Company’s losses.
For the periods presented, due to the Company’s net loss, the Company did not apply the two-class method to allocate earnings to the participating securities. Basic net loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net loss per share of common stock is computed by dividing net 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. Potentially dilutive common stock equivalents consist of stock options, restricted stock units, unvested restricted stock, Series A Redeemable Convertible Preferred Stock, and Series A Warrants.
| F-17 |
The following table presents the calculation of basic and diluted loss per share of common stock:
| 2019 | 2018 | |||||||
| (In thousands, except percentage change values) | ||||||||
| Basic | ||||||||
| Numerator: | ||||||||
| Net loss attributable to Acacia Research Corporation | (17,115 | ) | (105,029 | ) | ||||
| Accretion of Series A Redeemable Convertible Preferred Stock | (307 | ) | – | |||||
| Net loss attributable to common stockholders - basic | (17,422 | ) | (105,029 | ) | ||||
| Denominator: | ||||||||
| Weighted-average shares used in computing net loss per share attributable to common stockholders - basic | 49,764,002 | 49,969,062 | ||||||
| Basic net loss per share of common stock | $ | (0.35 | ) | $ | (2.10 | ) | ||
| Diluted | ||||||||
| Numerator: | ||||||||
| Net loss attributable to Acacia Research Corporation | (17,115 | ) | (105,029 | ) | ||||
| Mark-to-market adjustment for preferred stock embedded derivative | (3,258 | ) | – | |||||
| Net loss attributable to common stockholders - diluted | (20,373 | ) | (105,029 | ) | ||||
| Denominator: | ||||||||
| Weighted-average shares used in computing net loss per share attributable to common stockholders - basic | 49,764,002 | 49,969,062 | ||||||
| Effect of potentially dilutive securities: Series A preferred stock | 1,132,771 | – | ||||||
| Weighted-average shares used in computing net loss per share attributable to common stockholders - diluted | 50,896,773 | 49,969,062 | ||||||
| Diluted net loss per share of common stock | $ | (0.40 | ) | $ | (2.10 | ) | ||
As the Company reported a net loss for the years ended December 31, 2019 and 2018, all potentially dilutive shares of common stock other than those associated with the Series A Redeemable Convertible Preferred Stock have been excluded from the calculation of diluted net loss per share of common stock because including such instruments would be anti-dilutive.
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.
3. TRADING SECURITIES
Trading securities for the periods presented were comprised of the following:
| Cost | Gross Unrealized Gain | Gross Unrealized Loss | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Security Type | ||||||||||||||||
| December 31, 2019: | ||||||||||||||||
| Trading securities - debt | $ | 93,712 | $ | 143 | $ | (12 | ) | $ | 93,843 | |||||||
| Trading securities - equity | 17,674 | 211 | (745 | ) | 17,140 | |||||||||||
| $ | 111,386 | $ | 354 | $ | (757 | ) | $ | 110,983 | ||||||||
| December 31, 2018: | ||||||||||||||||
| Trading securities - debt | $ | 33,643 | $ | 18 | $ | (19 | ) | $ | 33,642 | |||||||
| Trading securities - equity | 3,389 | 27 | (404 | ) | 3,012 | |||||||||||
| $ | 37,032 | $ | 45 | $ | (423 | ) | $ | 36,654 | ||||||||
| F-18 |
Trading securities as of December 31, 2019 and 2018, were comprised of investments in corporate bonds (debt securities) and investments in equity securities of publicly held companies (equity securities). For the year ended December 31, 2019, proceeds from the sale and maturity of debt securities and equity securities were $49,751,000 and $25,339,000, respectively. For the year ended December 31, 2018, proceeds from the sale and maturity of debt securities and equity securities were $65,144,000 and $1,496,000, respectively.
4. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2019 and 2018:
| 2019 | 2018 | |||||||
| (In thousands) | ||||||||
| Accrued litigation liabilities | $ | 6,181 | $ | 3,803 | ||||
| Accrued consulting and other professional fees | 470 | – | ||||||
| Foreign taxes payable | – | 374 | ||||||
| State income taxes payable | 27 | – | ||||||
| Short-term lease liability | 435 | – | ||||||
| Other accrued liabilities | 152 | 122 | ||||||
| $ | 7,265 | $ | 4,299 | |||||
5. PATENTS
Acacia’s only identifiable intangible assets are patents and patent rights, with estimated remaining economic useful lives ranging from one to five 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, 2019 and 2018 are as follows (in thousands):
| 2019 | 2018 | |||||||
| Gross carrying amount - patents | $ | 330,588 | $ | 326,167 | ||||
| Accumulated amortization - patents(1) | (322,774 | ) | (319,580 | ) | ||||
| Patents, net | $ | 7,814 | $ | 6,587 | ||||
(1)Includes patent impairment charges for the applicable periods.
The weighted-average remaining estimated economic useful life of Acacia’s patents and patent rights is 4 years. Scheduled annual aggregate amortization expense is estimated to be $2,555,000 in 2020, $1,695,000 in 2021, $1,695,000 in 2022, $1,620,000 in 2023 and $249,000 in 2024.
Acacia did not record charges related to the impairment of patent-related intangible assets for the year ended December 31, 2019. Acacia recorded impairment of patent-related intangible asset charges totaling $28,210,000 for the year ended December 31, 2018. 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 to in connection with the licensing and enforcement of such portfolios, due primarily to adverse litigation outcomes, potential prior art related complexities and/or the overall determination that future resources would be allocated to other licensing and enforcement programs with higher potential return profiles. The impairment charges for the periods presented consisted of the excess of the asset’s carrying value over its estimated fair value.
For the year ended December 31, 2018, pursuant to the terms of the respective inventor agreements, certain Acacia operating subsidiaries elected to terminate or sell their rights to patent portfolios, resulting in the acceleration of amortization expense for the patent-related assets totaling $8,307,000. There is no accelerated amortization or sales for patent-related assets for the year ended December 31, 2019.
6. INVESTMENTS
Investment at Fair Value
During 2016 and 2017, Acacia made certain investments in Veritone, Inc. (“Veritone”). As a result of these transactions, Acacia received an aggregate total of 4,119,521 shares of Veritone common stock and warrants to purchase a total of 1,120,432 shares of Veritone common stock at an exercise price of $13.61 per share expiring between 2020 and 2027. During the year ended December 31, 2018, Acacia sold 2,700,000 shares Veritone common stock and recorded a realized loss of $19.1 million. During the year ended December 31, 2019, Acacia sold 1,121,071 shares Veritone common stock and recorded a realized loss of $9.2 million.
| F-19 |
At December 31, 2019, the fair value of the 298,449 shares of Veritone common stock owned by Acacia totaled $743,000. At December 31, 2019, the fair value of the 1,120,432 common stock purchase warrants held by Acacia totaled $757,000. At December 31, 2018, the fair value of the 1,419,521 shares of Veritone common stock owned by Acacia totaled $5,395,000. At December 31, 2018, the fair value of the 1,120,432 common stock purchase warrants held by Acacia totaled $2,064,000.
Changes in the fair value of Acacia’s investment in Veritone are recorded as unrealized gains or losses in the consolidated statements of operations. For the year ended December 31, 2019, and 2018, the accompanying consolidated statements of operations reflected the following:
| 2019 | 2018 | |||||||
| (In thousands) | ||||||||
| Change in fair value of investment, warrants | $ | (1,308 | ) | $ | (11,895 | ) | ||
| Change in fair value of investment, common stock | 11,207 | (47,208 | ) | |||||
| Loss on sale of investment, common stock | (9,230 | ) | (19,095 | ) | ||||
| Net realized and unrealized gain (loss) on investment at fair value | $ | 669 | $ | (78,198 | ) | |||
Miso Robotics Investment
In June 2017, Acacia made an investment in the Series A Preferred financing round for Miso Robotics, Inc. (“Miso Robotics”), an innovative leader in robotics and artificial intelligence solutions, totaling $2,250,000, acquiring a 22.6% ownership interest in Series A preferred stock of Miso Robotics, and one board seat. In February 2018, Acacia made an additional equity investment in the Series B Preferred financing round for Miso Robotics totaling $6,000,000, increasing its ownership interest (Series B preferred stock) in Miso Robotics to approximately 30%, and acquiring an additional board seat. As of June 30, 2019, Acacia recorded an impairment of $8.2 million for its investment in Miso Robotics. In September 2019, Acacia received a cash payment of $2.0 million upon the sale of its entire investment, and therefore relinquished its ownership interest in Miso Robotics.
7. STOCKHOLDERS’ EQUITY
Repurchases of Common Stock.In February 2018, Acacia’s Board of Directors authorized the repurchase of up to $20,000,000 of the Company’s outstanding common stock in open market purchases or private purchases, from time to time, in amounts and at prices to be determined by the Board of Directors at its discretion (the “Stock Repurchase Program”). On August 5, 2019, Acacia’s Board of Directors approved a new stock repurchase program, which authorized the purchase of up to $10.0 million of the Company's common stock through open market purchases, through block trades, through 10b5-1 plans, or by means of private purchases, from time to time, through July 31, 2020.
In determining whether or not to repurchase any shares of Acacia’s common stock, Acacia’s Board of Directors consider such factors as the impact of the repurchase on Acacia’s cash position, as well as Acacia’s capital needs and whether there is a better alternative use of Acacia’s capital. Acacia has no obligation to repurchase any amount of its common stock under the Stock Repurchase Program. Repurchases to date were made in the open market in compliance with applicable SEC rules. The authorization to repurchase shares presented an opportunity to reduce the outstanding share count and enhance stockholder value. The repurchased shares are expected to be retired. Monthly stock repurchases for the periods presented, all of which were purchased as part of a publicly announced plan or program, were as follows:
| Total Number of Shares Purchased | Average Price paid per Share | Approximate Dollar Value of Shares that May Yet be Purchased under the Program | Plan Expiration Date | |||||||||||
| May 1, 2018 - May 30, 2018 | 1,190,420 | $ | 3.89 | $ | 15,366,000 | February 28, 2019 | ||||||||
| Totals for 2018 | 1,190,420 | $ | 3.89 | |||||||||||
Tax Benefits Preservation Plan. On March 12, 2019, Acacia’s Board of Directors announced that it had unanimously approved the adoption of a Tax Benefits Preservation Plan (the “Plan”). The purpose of the Plan is to protect the Company’s ability to utilize potential tax assets, such as net operating loss carryforwards and tax credits to offset potential future taxable income.
| F-20 |
The Plan is designed to reduce the likelihood that the Company will experience an ownership change by discouraging (i) any person or group from acquiring beneficial ownership of 4.9% or more of the Company’s outstanding common stock and (ii) any existing stockholders who, as of the time of the first public announcement of the adoption of the Plan, beneficially own more than 4.9% of the Company’s then-outstanding shares of the Company’s common stock from acquiring additional shares of the Company’s common stock (subject to certain exceptions). There is no guarantee, however, that the Plan will prevent the Company from experiencing an ownership change.
In connection with the adoption of the Plan, Acacia’s Board of Directors authorized and declared a dividend distribution of one right for each outstanding share of the Company’s common stock to stockholders of record at the close of business on March 16, 2019. On or after the distribution date, each right would initially entitle the holder to purchase one one-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock, $0.001 par value for a purchase price of $12.00.
The Company also has a provision in its Amended and Restated Certificate of Incorporation, as amended (the “Charter Provision”) which generally prohibits transfers of its common stock that could result in an ownership change. Like the Plan, the purpose of the Charter Provision is to protect the Company’s ability to utilize potential tax assets, such as net operating loss carryforwards and tax credits to offset potential future taxable income. The Charter Provision was approved by the Company’s stockholders on July 15, 2019.
8. INCOME TAXES
Acacia’s income tax benefit (expense) for the fiscal periods presented consisted of the following:
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Current: | ||||||||
| Federal | $ | – | $ | – | ||||
| State | (34 | ) | (87 | ) | ||||
| Foreign | 1,858 | (1,092 | ) | |||||
| Total current | 1,824 | (1,179 | ) | |||||
| Deferred: | ||||||||
| Federal | – | – | ||||||
| State | – | – | ||||||
| Total deferred | – | – | ||||||
| Income tax benefit (expense) | $ | 1,824 | $ | (1,179 | ) | |||
The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following atDecember 31, 2019 and 2018:
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Deferred tax assets: | ||||||||
| Net operating loss and capital loss carryforwards and credits | $ | 112,280 | $ | 104,862 | ||||
| Unrealized loss on investments held at fair value | 538 | 2,455 | ||||||
| Stock compensation | 358 | 1,365 | ||||||
| Fixed assets and intangibles | 1,316 | 3,330 | ||||||
| Basis of investments in affiliates | 300 | 286 | ||||||
| Accrued liabilities and other | 631 | 208 | ||||||
| State taxes | 25 | 26 | ||||||
| Total deferred tax assets | 115,448 | 112,532 | ||||||
| Valuation allowance | (115,077 | ) | (112,514 | ) | ||||
| Total deferred tax assets, net of valuation allowance | 371 | 18 | ||||||
| Deferred tax liabilities: | ||||||||
| ROU Asset | (347 | ) | – | |||||
| Other | (24 | ) | (18 | ) | ||||
| Total deferred tax liabilities | (371 | ) | (18 | ) | ||||
| Net deferred tax assets (liabilities) | $ | – | $ | – | ||||
| F-21 |
A reconciliation of the federal statutory income tax rate and the effective income tax rate is as follows:
| 2019 | 2018 | |||||||
| Statutory federal tax rate - (benefit) expense | 21% | 21% | ||||||
| State income and foreign taxes, net of federal tax effect | 7% | (1)% | ||||||
| Foreign tax credit | –% | –% | ||||||
| Noncontrolling interests in operating subsidiaries | –% | –% | ||||||
| Nondeductible permanent items | 1% | (1)% | ||||||
| Change in tax rate | –% | –% | ||||||
| Expired capitalized loss | (2)% | –% | ||||||
| Valuation allowance | (13)% | (20)% | ||||||
| Other | (4)% | –% | ||||||
| 10% | (1)% | |||||||
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, 2019, Acacia had U.S. federal and state income tax net operating loss carryforwards (“NOLs”) totaling approximately $253,824,000 and $19,683,000, respectively. For federal income tax purposes, our NOL carryovers generated for tax years beginning before January 1, 2018 will begin to expire in 2026. Pursuant to the Tax Cuts and Jobs Act 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. For state income tax purposes, our NOLs will expire between 2028 and 2039. Our capital loss carryovers totaled $23,652,000 at December 31, 2019, expiring between 2025 and 2029.
As of December 31, 2019, Acacia had approximately $51,508,000 of foreign tax credits, expiring between 2020 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.
Tax expense (benefit) for the periods presented primarily reflects foreign taxes withheld and refunded on revenue agreements executed with licensees in foreign jurisdictions and other state taxes. Excluding the impact of the change in valuation allowance, annual effective tax rates were 23% for fiscal year 2019 and 19% for fiscal year 2018. Results for fiscal year 2019 included an unrealized loss on Acacia’s investment in Veritone which created a deferred tax asset totaling approximately $538,000. Results for fiscal year 2018 included an unrealized loss on Acacia’s investment in Veritone which created a deferred tax asset totaling approximately $2,455,000. The 2017 deferred tax liability was reversed in fiscal year 2018 as a result of the 2018 unrealized loss on Acacia’s investment in Veritone and the realized loss on the sale of Veritone common stock.
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 through 2016 California combined income tax returns. The California Franchise Tax Board has proposed adjustments for 2011 and 2012 that, if expensed, would not be material to the consolidated statements of operations for the periods presented. We have protested these adjustments.
At December 31, 2019 and 2018, the Company had total unrecognized tax benefits of approximately $731,000 and $816,000, respectively. No interest and penalties have been recorded for the unrecognized tax benefits for the periods presented. At December 31, 2019, if recognized, approximately $731,000 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.
Acacia recognizes interest and penalties with respect to unrecognized tax benefits in income tax expense (benefit). 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.
| F-22 |
9. 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. All 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 two to three years and restricted shares with time based vesting generally vest in full after one to three 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). |
| • | Automatic Option Grant Program. Through fiscal year 2016, each non-employee director received restricted stock units or stock options for the number of shares determined by dividing the annual retainer by the grant date fair value of Acacia’s common stock on the grant date. In addition, each new non-employee director received restricted stock units or stock options for the number of shares determined by dividing the annual Board of Directors retainer by the grant date fair value of Acacia’s common stock on the commencement date. These restricted stock units and stock options vested 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 occur 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. |
| • | 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 restricted stock awards (“RSA”) 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 restricted stock units (“RSU”) shall not have full stockholder rights until they vest. |
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, 2019, there were 1,024,419 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 Plan. At December 31, 2019, there were 4,067,891 shares available for grant under the 2016 Plan.
| F-23 |
Upon the exercise of stock options, the granting of restricted stock, or the delivery of shares pursuant to vested restricted stock units, it is Acacia’s policy to issue new shares of common stock. Acacia’s Board of Directors may amend or modify the Plans at any time, subject to any required stockholder approval. As of December 31, 2019, there are 6,875,564 shares of common stock reserved for issuance under the Plans.
Stock-based award grant activity for the periods presented was as follows:
| 2019 | 2018 | |||||||||||||||
| Shares | Aggregate fair value (in thousands) | Shares | Aggregate fair value (in thousands) | |||||||||||||
| Restricted stock awards with time-based service conditions | 777,000 | $ | 2,332 | 102,000 | $ | 386 | ||||||||||
| Restricted stock units with market-based service conditions | 900,000 | $ | 1,280 | – | – | |||||||||||
| Stock options with time-based service vesting conditions | – | – | 930,000 | 1,588 | ||||||||||||
| Total incentive awards granted | 1,677,000 | $ | 3,612 | 1,032,000 | $ | 1,974 | ||||||||||
The following table summarizes stock option activity for the Plans for the year ended December 31, 2019:
| Weighted-Average | ||||||||||||||
| Options | Exercise Price | Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||
| Outstanding at December 31, 2018 | 3,509,000 | $ | 4.96 | |||||||||||
| Granted | – | $ | – | |||||||||||
| Exercised | (25,000 | ) | $ | 3.12 | ||||||||||
| Expired/forfeited | (3,158,000 | ) | $ | 5.04 | ||||||||||
| Outstanding at December 31, 2019 | 326,000 | $ | 4.38 | 4.4 years | $ | – | ||||||||
| Vested | 281,000 | $ | 4.45 | 3.9 years | $ | – | ||||||||
| Exercisable at December 31, 2019 | 281,000 | $ | 4.45 | 3.9 years | $ | – | ||||||||
The aggregate intrinsic value of options exercised during the years ended December 31, 2019 and 2018 was $4,000 and $51,000, respectively. The aggregate intrinsic value of options vested during the year ended December 31, 2019 was $0. No options were granted during the year ended December 31, 2019. The aggregate fair value of options vested during the years ended December 31, 2019 and 2018 was $294,000 and $1,918,000, respectively. As of December 31, 2019, the total unrecognized compensation expense related to non-vested stock option awards was $1,074,000, which is expected to be recognized over a weighted-average term of approximately 2 year.
The following table summarizes non-vested restricted share activity for the year ended December 31, 2019:
| Non-vested Restricted Shares | Weighted Average Grant Date Fair Value | |||||||
| Non-vested restricted stock at December 31, 2018 | – | $ | – | |||||
| Granted | 777,000 | $ | 3.00 | |||||
| Vested | (214,000 | ) | $ | 3.14 | ||||
| Canceled | (87,000 | ) | $ | 2.81 | ||||
| Non-vested restricted stock at December 31, 2019 | 476,000 | $ | 2.98 | |||||
| F-24 |
The weighted-average grant date fair value of non-vested restricted stock granted during the years ended December 31, 2019 and 2018 was $2.98 and $3.79, respectively. The aggregate fair value of restricted stock that vested during the years ended December 31, 2019 and 2018 was $672,000 and $972,000, respectively. As of December 31, 2019, unrecognized compensation expense related to non-vested restricted stock awards was $1,321,000, which is expected to be recognized over a weighted-average term of approximately 2 year.
The following table summarizes restricted stock units activity for the year ended December 31, 2019:
| Non-vested Restricted Shares | Weighted Average Grant Date Fair Value | |||||||
| Non-vestedrestricted stock units at December 31, 2018 | – | $ | – | |||||
| Granted | 900,000 | $ | 1.42 | |||||
| Vested | – | $ | – | |||||
| Canceled | – | $ | – | |||||
| Non-vestedrestricted stock units at December 31, 2019 | 900,000 | $ | 1.42 | |||||
| Vestedrestricted stock units at December 31, 2019 | 14,000 | $ | 16.72 | |||||
The weighted-average grant date fair value of restricted units granted during the years ended December 31, 2019 was $1.42. There were no restricted units granted during the year ended December 31, 2018. The aggregate fair value of restricted stock units granted during the year ended December 31, 2019 was $1,280,000. The aggregate fair value of restricted stock units that vested during the years ended December 31, 2019 and 2018 was $240,000 and $40,000, respectively. As of December 31, 2019, unrecognized compensation expense related to non-vested restricted stock units was $1,140,000. Stock compensation expense is recognized in general and administrative expenses.
Profits Interest Plan
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 in September 2017.
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, 2019, AIP holds the Veritone Warrant described at Note 6.
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 $591,000 as of December 31, 2019. Upon full vesting of the units in September 2017, all previously unrecognized compensation expense was immediately recognized.
| F-25 |
Compensation expense for the periods presented was comprised of the following:
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Restricted stock awards with time-based service conditions | $ | 907 | $ | 460 | ||||
| Restricted stock units with time-based service conditions | – | 1 | ||||||
| Restricted stock units with performance-based vesting conditions | 140 | – | ||||||
| Stock options with time-based service vesting conditions | 28 | 1,672 | ||||||
| Profits interests units | – | (2,450 | ) | |||||
| Total compensation expense | $ | 1,075 | $ | (317 | ) | |||
10. COMMITMENTS AND CONTINGENCIES
Facility Leases
The Company primarily leases office facilities under operating lease arrangements that will end in various years through July 2024.
On June 7, 2019, we entered into a building lease agreement (the “New Lease”) with Jamboree Center 4 LLC (the “Landlord”). Pursuant to the New Lease, we have leased approximately 8,293 square feet of office space for our corporate headquarters in Irvine, California. The New Lease commenced on August 1, 2019. The term of the New Lease is 60 months from the commencement date, provides for annual rent increases, and does not provide us the right to early terminate or extend our lease terms.
The Company has subleased a facility under another operating lease agreement (the “Old Lease”) that we ceased using in December 2018, and the sublease will go through the remaining term of the Old Lease, which ended on January 31, 2020. During the year ended December 31, 2018, the Company recorded a one-time charge of $629,000 for the excess of lease payments over the anticipated sublease income through expiration of the lease.
Operating lease costs, net of sublease income of $780,000, were $426,000 for the year ended December 31, 2019. Operating lease costs, net of sublease income of $65,000, were $1,106,000 for the year ended December 31, 2018.
The table below presents aggregate future minimum payments due under the New Lease and the Old Lease, reconciled to lease liabilities included in the consolidated balance sheet as of December 31, 2019:
| Operating Leases | ||||||
| (In thousands) | ||||||
| 2020 | $ | 434 | ||||
| 2021 | 334 | |||||
| 2022 | 349 | |||||
| 2023 | 364 | |||||
| 2024 | 218 | |||||
| Total minimum payments | $ | 1,699 | ||||
| Less: short-term lease liabilities | (435 | ) | ||||
| Long-term lease liabilities | $ | 1,264 | ||||
| F-26 |
Inventor Royalties and Contingent Legal Expenses
In connection with the investment in certain patents and patent rights, certain of Acacia’s operating subsidiaries executed related agreements which grant to the former owners of the respective patents or patent rights, the right to receive inventor royalties based on future net revenues (as defined in the respective agreements) generated as a result of licensing and otherwise enforcing the respective patents or patent portfolios.
Acacia’s operating subsidiaries may retain the services of law firms that specialize in patent licensing and enforcement and patent law in connection with their licensing and enforcement activities. These law firms may be retained on a contingent fee basis whereby such law firms are paid on a scaled percentage of any negotiated fees, settlements or judgments awarded based on how and when the fees, settlements or judgments are obtained.
Patent Enforcement
Certain of Acacia’s operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. In connection with any of Acacia’s operating subsidiaries’ patent enforcement actions, it is possible that a defendant may request and/or a court may rule that an operating subsidiary has violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against Acacia or its operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material.
Other
On June 17, 2015, Celltrace Communications Ltd. (“Celltrace”) filed a lawsuit against Acacia in U.S. District Court for the Southern District of New York, Case No. 1:15-cv-04746, alleging, among other things, significant damages for alleged breach of contract, unjust enrichment and fraud. Acacia disputes the allegations and does not believe that Celltrace is entitled to any damages. Acacia successfully moved to compel arbitration of the dispute, and the District Court stayed the litigation pending arbitration before the International Court of Arbitration for the International Chamber of Commerce (the “ICC”). Celltrace appealed the decision to the U.S. Court of Appeals for the Second Circuit, which denied the appeal. Celltrace filed its request for arbitration of the claims with the ICC on November 28, 2016. Acacia filed an answer denying all allegations of wrongdoing and asserting affirmative defenses. A tribunal was appointed to preside over the arbitration and conducted its first case management conference on June 26, 2017. The parties conducted discovery and submitted their cases in chief to the tribunal in a series of written submissions per the tribunal’s orders between January 2018 and December 2018. The tribunal held an evidentiary hearing with live witness testimony in New York City between February 4, 2019 and February 13, 2019. At the end of the hearing, the tribunal set a schedule for post-hearing briefing by the parties, which concluded in April 2019. We are now waiting for the tribunal to issue its decision. Acacia continues to vigorously contest all allegations of wrongdoing.
In a separate case on December 6, 2017, the Federal Court of Canada allowed a counterclaim for invalidity of a patent asserted by Rapid Completions LLC and awarded costs payable by Rapid Completions LLC in an amount to be determined.
Acacia is subject to claims, counterclaims and legal actions that arise in the ordinary course of business. Management believes that the ultimate liability with respect to these claims and legal actions, if any, will not have a material effect on Acacia’s consolidated financial position, results of operations or cash flows. Fiscal year 2019 operating expenses included expenses for settlement and contingency accruals totaling $1,756,000, net of prior accruals. Refer to Note 4 for information on accrued expenses.
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, 2019.
| F-27 |
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 IP consisting primarily of patents, patent rights, and patented technologies. The Acacia IP Fund was terminated as of December 31, 2017. The final distribution to the partners of the Acacia IP Fund will be made in 2020.
11. 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”). 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. 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 was employed by the Company (the “Severance Period”), up to a maximum of twelve (12) months (eighteen (18) months for executive officers of Acacia Research Corporation) of base salary, and (ii) provide to the SVP and higher employee, Acacia paid COBRA coverage for the medical and dental benefits selected in the year in which the termination occurs, for the duration of the Severance Period. Results for the year ended December 31, 2019 and 2018 include $420,000 and $2,458,000 of expenses incurred under the executive severance policy.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for state income taxes totaled $85,000 and $140,000 for the years ended December 31, 2019 and 2018, respectively. Foreign taxes withheld totaled $249,000 and $1,093,000 for the years ended December 31, 2019 and 2018, respectively. Refer to Note 4 for accrued foreign taxes payable.
Refer to Note 6 for information regarding noncash investing activity related to the investment in Veritone for the periods presented.
13. RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements - Recently Adopted.
In February 2016, FASB issued ASU 2016-02,Leases, or ASC 842 which requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset. In July 2018, FASB issued ASU 2018-11, Leases, which provides an additional transition option for an entity to apply the provisions of ASC 842 by recognizing a cumulative effect adjustment at the effective date of adoption without adjusting the prior comparative periods presented. Further, in January 2019, FASB issued ASU 2019-01, Leases: Codification Improvements, which provides disclosure relief for the interim periods when adopting ASC 842. The primary impact of adopting ASC 842 for the Company was the recognition in the consolidated balance sheet of certain lease-related assets and liabilities for operating leases with terms longer than 12 months as of January 1, 2019. Such amounts were not previously accounted for in the Company's consolidated balance sheets. The Company adopted ASC 842 as of January 1, 2019, electing the practical expedient approaches. As a result, we recognized approximately $1.6 million of right-of-use assets and an increase of $1.7 million in lease-related liabilities as of December 31, 2019. The adoption of ASC 842 did not have a material impact on the Company's consolidated results of operations for the year ending December 31, 2019.
| F-28 |
Recent Accounting Pronouncements - Not Yet Adopted.
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes, to remove certain exceptions and improve consistency of application, including, among other things, requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this update will be effective for the Company beginning with fiscal year 2021, with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. Management is currently evaluating the impact that the amendments in this update will have on the Company’s consolidated financial statements.
14. FAIR VALUE DISCLOSURES
Acacia holds the following types of financial instruments at December 31, 2019 and 2018.
Trading securities - debt.Debt securities includes corporate bonds with fair value that is determined by third party quotations from outside pricing services and/or computerized pricing models, which may be based on transactions, bids or estimates. Acacia classifies the fair value of corporate bonds within Level 2 of the valuation hierarchy.
Trading securities - equity.Equity securities includes investments in public companies common stock and are recorded at fair value based on the quoted market price of each share on the valuation date. The fair value of these securities are within Level 1 of the valuation hierarchy.
Investments at fair value - common stock. Acacia’s equity investment in Veritone common stock is recorded at fair value based on the quoted market price of Veritone’s common stock on the applicable valuation date (Level 1).
Investments at fair value - warrants.Warrants are recorded at fair value, as based on the Black-Scholes option-pricing model (Level 2).
Profits interests.For the years ended December 31, 2019 and 2018, the fair value of the Units was estimated at 40% of the fair value of the 10% Warrant, based on the Black-Scholes option-pricing model (Level 2).
Series A Warrants.Series A Warrants are recorded at fair value, using Black-Scholes option-pricing model (Level 2).
Embedded derivative liability.Embedded derivatives that are required to be bifurcated from their host contract are evaluated and valued separately from the host instrument. A binomial lattice framework is used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock issued by the Company in 2019 (Level 3).
15. RELATED PARTY TRANSACTIONS
During the year ended December 31, 2019, the Company purchased shares of common stock of Drive Shack, Inc. (“Drive Shack”) for an aggregate purchase price of $2.4 million. Drive Shack and Clifford Press, Chief Executive Officer and director of Acacia, are related parties as Mr. Press is a board member of Drive Shack. During the year ended December 31, 2018, the Company paid $976,000 in expenses related to the reimbursement of costs incurred by Sidus Investment Management, LLC (“Sidus”) on behalf of the participants (together with Sidus, the “Participants”) named in the proxy statement filed on June 7, 2018 by the Participants, in connection with a contested proxy election. These expenses are included in general and administrative expenses on the consolidated statements of operations. Alfred V. Tobia, Jr. and Clifford Press are related parties as each of them are Participants and members of the Company’s Board of Directors. In addition, Sidus is a related party as Mr. Tobia is a Co-Founder and Managing Member at Sidus.
16. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
On November 18, 2019, the Company entered into a Securities Purchase Agreement with Starboard Value LP (“Starboard”) pursuant to which the Company issued (i) 350,000 shares of Series A Redeemable Convertible Preferred Stock with a par value of $0.001 per share and a stated value of $100 per share, and (ii) Series A Warrants to purchase up to 5,000,000 shares of the Company’s common stock (see Note 17) to Starboard. The Securities Purchase Agreement also established the terms of certain senior secured notes and additional warrants (the “Series B Warrants”) which may be issued to Starboard in the future.
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.
| F-29 |
Holders have the option to redeem all or a portion of the Series A Redeemable Convertible Preferred Stock during the periods of May 15, 2021 through August 15, 2021 and May 15, 2022 through August 15, 2022, provided that the Company has not issued at least $50.0 million aggregate principal of senior secured notes to Starboard pursuant to the Securities Purchase Agreement. 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 the Company has not issued at least $50.0 million aggregate principal of the senior secured notes, 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.
If the Company issues senior secured notes, the Holder may exchange the Series A Redeemable Convertible Preferred Stock for (i) senior secured notes and (ii) Series B Warrants to purchase common stock.
The Series A Redeemable Convertible Preferred Stock accrues cumulative dividends quarterly at annual rate of 3.0% on the stated value. Upon consummation of an approved investment (an investment to be identified and approved by each of the Company and Starboard), the dividend rate will increase to 8.0% on the stated value. Upon certain triggering events, the dividend rate will increase to 7.0% if the triggering event occurs before an approved investment or 10.0% on the stated value if the triggering event occurs after an approved investment. The Series A Redeemable Convertible Preferred Stock also participates on an as-converted basis in any regular or special dividends paid to common stockholders. Total accrued and unpaid dividends as of December 31, 2019 was $0.1 million.
Holders of the Series A Redeemable Convertible Preferred Stock have the right to vote with common stockholders on an as-converted basis on all matters. Holders of Series A Redeemable Convertible Preferred Stock will also be entitled to a separate class vote with respect to amendments to the Company’s organizational documents that generally have an adverse effect on the Series A Redeemable Convertible Preferred Stock.
Upon liquidation of the Company, holders of Series A Redeemable Convertible Preferred Stock have a liquidation preference over holders of our common stock and will be entitled to receive, prior to any distribution to holders of our common stock, an amount equal to the greater of (i) the stated value plus accrued and unpaid dividends or (ii) the amount that would have been received if the Series A Redeemable Convertible Preferred Stock had been converted into common stock immediately prior to the liquidation event at the then effective conversion price.
The Company determined that certain features of the Series A Redeemable Convertible Preferred Stock should be bifurcated and accounted for as a derivative. Each of these features are bundled together as a single, compound embedded derivative.
Total proceeds received and transaction costs incurred from the issuance of the Series A Redeemable Convertible Preferred Stock amounted to $35 million and $1.3 million, respectively. Proceeds received were allocated based on the fair value of the instrument without the Series A Warrants and of the Series A Warrants themselves at the time of issuance. The proceeds allocated to the Series A Redeemable Convertible Preferred Stock were then further allocated between the host preferred stock instrument and the embedded derivative, with the embedded derivative recorded at fair value and the Series A Redeemable Convertible Preferred Stock recorded at the residual amount. The portion of the proceeds allocated to the Series A Warrants, embedded derivative, and Series A Redeemable Convertible Preferred Stock was $4.8 million, $21.2 million, and $8.9 million, respectively. Transaction costs were also allocated between the Series A Redeemable Convertible Preferred Stock and the Series A Warrants on the same basis as the proceeds. The transaction costs allocated to the Series A Redeemable Convertible Preferred Stock were treated as a discount to the Series A Redeemable Convertible Preferred Stock. The transaction costs allocated to the Series A Warrants were expensed as incurred.
| F-30 |
The Company classifies the Series A Redeemable Convertible Preferred Stock as mezzanine equity as the instrument will become redeemable at the option of the holder in various scenarios or otherwise on November 15, 2027. As it is probable that the Series A Redeemable Convertible Preferred Stock will become redeemable, the Company accretes the instrument to its redemption value using the effective interest method and recognizes any changes against additional paid in capital in the absence of retained earnings. Accretion for the year ended December 31, 2019 was $0.3 million.
In connection with the issuance of the Series A Redeemable Convertible Preferred Stock, the Company executed a Registration Rights Agreement and a Governance Agreement with Starboard. Under the Registration Rights Agreement, the Company agreed to provide certain registration rights with respect to the Series A Redeemable Convertible Preferred Stock and shares of Common Stock issued upon conversion. In accordance with the Governance Agreement, the Company agreed to (i) increase the size of the Board of Directors from six to seven members, (ii) appoint a director of the Company, (iii) grant Starboard the right to recommend two additional directors for appointment to the board, (iv) form a Strategic Committee of the Board tasked with sourcing and performing due diligence on potential acquisition targets, (v) appoint certain directors to the Strategic Committee, and (vi) appoint a director to the Nominating and Corporate Governance Committee.
The following features of the Series A Redeemable Convertible Preferred Stock are required to be bifurcated from the host preferred stock and accounted for separately as an embedded derivative: (i) the right of the holders to redeem the shares (the “put option”), (ii) the right of the holders to receive common stock upon conversion of the shares (the “conversion option”), (iii) the right of the Company to redeem the shares (the “call option”), and (iv) the change in dividend rate upon consummation of an approved investment or a triggering event (the “contingent dividend rate feature”).
These features are required to be accounted for separately from the Series A Redeemable Convertible Preferred Stock because the features were determined to be not clearly and closely related to the debt-like host and also did not meet any other scope exceptions for derivative accounting. Therefore, these features are bundled together and are accounted for as a single, compound embedded derivative liability.
Accordingly, we have recorded an embedded derivative liability representing the combined fair value of each of these features. The embedded derivative liability is adjusted to reflect fair value at each period end with changes in fair value recorded in the “Change in fair value of redeemable preferred stock embedded derivative” financial statement line item of the accompanying consolidated statements of operations.
17. SERIES A WARRANTS
On November 18, 2019, in connection with the issuance of the Series A Redeemable Convertible Preferred Stock, the Company issued a detachable Series A Warrants to acquire up to purchase 5,000,000 shares of common stock at a price of $3.65 per share (subject to certain anti-dilution adjustments) at any time during a period of eight years beginning on the instrument’s issuance date of the Series A Warrants. The fair value of the Series A Warrants was $4.8 million. The Series A Warrants will be recognized at fair value at each reporting period until exercised, with changes in fair value recognized in other income (expense) in the accompanying consolidated statements of operations. As of December 31, 2019, the fair value of the Series A Warrants was $3.6 million. As of December 31, 2019, the Series A Warrants have not been exercised.
The Series A Warrants are classified as a liability in accordance with ASC 480, Distinguishing Liabilities from Equity, as the agreement provides for net cash settlement upon a change in control, which is outside the control of the Company.
| F-31 |
18. 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, 2019. 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 for 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 | ||||||||||||||||||||||||
| Dec. 31, | Sept. 30, | Jun. 30, | Mar. 31, | Dec. 31, | Sept. 30, | Jun. 30, | Mar. 31, | |||||||||||||||||
| 2019 | 2019 | 2019 | 2019 | 2018 | 2018 | 2018 | 2018 | |||||||||||||||||
| (Unaudited, in thousands, except share and per share information) | ||||||||||||||||||||||||
| Revenues | $ | 688 | $ | 1,711 | $ | 5,460 | $ | 3,387 | $ | 49,203 | $ | 13,725 | $ | 6,485 | $ | 62,093 | ||||||||
| Portfolio operations: | ||||||||||||||||||||||||
| Inventor royalties | 192 | 776 | 2,623 | 1,353 | 11,002 | 1,181 | 1,241 | 21,744 | ||||||||||||||||
| Contingent legal fees | 4 | 35 | 375 | 177 | 11,756 | 2,949 | 1,037 | 15,759 | ||||||||||||||||
| Patent acquisition expenses | – | – | – | – | – | – | – | 4,000 | ||||||||||||||||
| Litigation and licensing expenses - patents | 1,160 | 987 | 1,855 | 3,801 | 1,689 | 1,549 | 2,639 | 2,989 | ||||||||||||||||
| Amortization of patents | 857 | 863 | 818 | 656 | 11,560 | 4,952 | 5,278 | 5,330 | ||||||||||||||||
| Other portfolio expenses (income) | 1,581 | (475 | ) | – | 650 | 400 | 2,202 | – | – | |||||||||||||||
| Total portfolio operations | 3,794 | 2,186 | 5,671 | 6,637 | 36,407 | 12,833 | 10,195 | 49,822 | ||||||||||||||||
| Net portfolio income (loss) | (3,106 | ) | (475 | ) | (211 | ) | (3,250 | ) | 12,796 | 892 | (3,710 | ) | 12,271 | |||||||||||
| General and administrative expenses (including non-cash stock compensation expense) | 4,328 | 4,630 | 3,763 | 3,655 | 2,754 | 5,855 | 6,916 | 3,301 | ||||||||||||||||
| Impairment of patent-related intangible assets | – | – | – | – | – | – | 28,210 | – | ||||||||||||||||
| Operating income (loss) | (7,434 | ) | (5,105 | ) | (3,974 | ) | (6,905 | ) | 10,042 | (4,963 | ) | (38,836 | ) | 8,970 | ||||||||||
| Total other income (expense) | 5,921 | (2,503 | ) | (1,774 | ) | 2,821 | (21,012 | ) | (27,595 | ) | 10,615 | (40,890 | ) | |||||||||||
| Income (loss) before provision for income taxes | (1,513 | ) | (7,608 | ) | (5,748 | ) | (4,084 | ) | (10,970 | ) | (32,558 | ) | (28,221 | ) | (31,920 | ) | ||||||||
| Provision for income taxes | 2,147 | – | (9 | ) | (314 | ) | (397 | ) | (306 | ) | (285 | ) | (191 | ) | ||||||||||
| Net income (loss) including noncontrolling interests | 634 | (7,608 | ) | (5,757 | ) | (4,398 | ) | (11,367 | ) | (32,864 | ) | (28,506 | ) | (32,111 | ) | |||||||||
| Net (income) loss attributable to noncontrolling interests in subsidiaries | – | – | – | 14 | (2 | ) | (331 | ) | 79 | 73 | ||||||||||||||
| Net income (loss) attributable to Acacia Research Corporation | $ | 634 | $ | (7,608 | ) | $ | (5,757 | ) | $ | (4,384 | ) | $ | (11,369 | ) | $ | (33,195 | ) | $ | (28,427 | ) | $ | (32,038 | ) | |
| Less: Accretion of redeemable preferred stock | (307 | ) | – | – | – | – | – | – | – | |||||||||||||||
| Net income (loss) attributable to common shareholders – basic: | $ | 327 | $ | (7,608 | ) | $ | (5,757 | ) | $ | (4,384 | ) | $ | (11,369 | ) | $ | (33,195 | ) | $ | (28,427 | ) | $ | (32,038 | ) | |
| Basic income (loss) per share | $ | 0.01 | $ | (0.15 | ) | $ | (0.12 | ) | $ | (0.09 | ) | $ | (0.23 | ) | $ | (0.67 | ) | $ | (0.57 | ) | $ | (0.63 | ) | |
| Weighted-average number of shares outstanding, basic | 49,875,750 | 49,828,361 | 49,696,016 | 49,655,881 | 49,639,172 | 49,557,748 | 50,061,812 | 50,632,958 | ||||||||||||||||
| Add: Accretion of redeemable preferred stock | 307 | – | – | – | – | – | – | – | ||||||||||||||||
| Less: Mark-to-market adjustment for preferred stock embedded derivative | (3,258 | ) | – | – | – | – | – | – | – | |||||||||||||||
| Net loss attributable to common shareholders – diluted: | $ | (2,624 | ) | $ | (7,608 | ) | $ | (5,757 | ) | $ | (4,384 | ) | $ | (11,369 | ) | $ | (33,195 | ) | $ | (28,427 | ) | $ | (32,038 | ) |
| Diluted income (loss) per share | $ | (0.05 | ) | $ | (0.15 | ) | $ | (0.12 | ) | $ | (0.09 | ) | $ | (0.23 | ) | $ | (0.67 | ) | $ | (0.57 | ) | $ | (0.63 | ) |
| Weighted-average number of shares outstanding, diluted | 54,406,835 | 49,828,361 | 49,696,016 | 49,655,881 | 49,639,172 | 49,557,748 | 50,061,812 | 50,632,958 | ||||||||||||||||
| F-32 |
Restatement
Subsequent to the issuance of the interim reports for the periods ended March, June and September 2019, the Company identified balances that were presented incorrectly relating to the presentation of cash flows. The Company re-evaluated its determination of the classification of cash flows related to trading securities and determined the classification of such cash flows within investing activities to be more appropriate.
Included below is a summary of the previously reported amounts, the impact of these adjustments and the as-adjusted amounts for the interim periods ended March, June and September 2019.
| Three months ended | Three months ended | Three months ended | ||||||||||||||||||||||
| March 31, 2019 | June 30, 2019 | September 30, 2019 | ||||||||||||||||||||||
| As reported | As adjusted | As reported | As adjusted | As reported | As adjusted | |||||||||||||||||||
| Net cash provided by (used in) operating activities | (58,812 | ) | (1,958 | ) | (66,026 | ) | (2,268 | ) | (65,748 | ) | (846 | ) | ||||||||||||
| Net cash provided by (used in) investing activities | 3,288 | (53,566 | ) | 625 | (63,133 | ) | 3,721 | (61,181 | ) | |||||||||||||||
| Net cash provided by financing activities | – | – | 79 | 79 | 79 | 79 | ||||||||||||||||||
| Increase/(decrease) in cash and cash equivalent | (55,524 | ) | (55,524 | ) | (65,322 | ) | (65,322 | ) | (61,948 | ) | (61,948 | ) | ||||||||||||
19. SUBSEQUENT EVENTS
Stockholder approval. On February 14, 2020, the Company’s stockholders approved, for purposes of Nasdaq Rules 5635(b) and 5635(d), as applicable, (i) the voting of the Series A Convertible Preferred Stock on an as-converted basis and (ii) the issuance of the maximum number of shares of common stock issuable in connection with the potential future (A) conversion of the Series A Convertible Preferred Stock and (B) exercise of the Series A and Series B Warrants, in each case, without giving effect to the exchange cap set forth in the Series A Preferred Stock Certificate of Designations and in the Series A Warrants, issued pursuant to the Securities Purchase Agreement dated November 18, 2019 (see Note 16). The Company’s stockholders also approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the total number of authorized shares of common stock by 200,000,000 shares, from 100,000,000 shares to 300,000,000 shares.
Issuance of Series B Warrants to Starboard. On February 25, 2020, pursuant to the terms of the Securities Purchase Agreement with Starboard, the Company issued Series B Warrants to purchase up to 100 million shares of the Company’s common stock at an exercise price of either (i) $5.25 per share, if exercising by cash payment, or (ii) $3.65 per share, if exercising by cancellation of a portion of senior secured notes. The Company issued the Series B Warrants for an aggregate purchase price of $4.6 million.
| F-33 |