UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018MARCH 31, 2019
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                     TO                     
 
Commission File Number: 0-260681-37721

graphicactga02a15.jpg
(Exact name of registrant as specified in its charter)

 DELAWARE 95-4405754 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
520120 Newport Center Drive, 12th Floor, Newport Beach, California 92660
(Address of principal executive offices, Zip Code)
 
(949) 480-8300
(Registrant’s telephone number, including area code)


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.     x  Yes    o  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).     x  Yes    o  No
 
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:
Large accelerated filer  o
 
Accelerated filer  x
 
Non-accelerated filer  o (Do not check if a smaller reporting company)
 
Smaller reporting company  ox
 
  
Emerging growth company  o
 
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.  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o    No  x

Securities registered pursuant to Section 12(b) of the Act:


TItle of each classTrading Symbol(s)Name of each exchange on which registered
Common StockACTGThe Nasdaq Stock Market, LLC

As of August 7, 2018May 8, 2019, 49,495,06449,681,203 shares of the registrant’s common stock, $0.001 par value, were issued and outstanding.



ACACIA RESEARCH CORPORATION
Table Of Contents
    
Part I.Financial Information 
    
 Item 1.
    
  
    
  
    
  
    
  
    
  
    
    
    
 Item 2.
    
 Item 3.
    
 Item 4.
    
    
Part II.Other Information
Item 1.
    
 Item 6.
    
    
Signatures 
    
Exhibit Index 


i



PART I--FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

ACACIA RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
(Unaudited)

June 30,
2018
 December 31,
2017
March 31,
2019
 December 31,
2018
ASSETS      
Current assets:      
Cash and cash equivalents$100,150
 $136,604
$73,285
 $128,809
Short-term investments34,694
 
Trading securities - debt93,756
 33,642
Trading securities - equity831
 3,012
Accounts receivable5,629
 153
23,964
 32,884
Prepaid expenses and other current assets3,509
 2,938
3,686
 3,125
Total current assets143,982
 139,695
195,522
 201,472
      
Investment at fair value (Note 5)
75,004
 104,754
5,483
 7,459
Other investments (Note 5)
8,195
 2,195
8,195
 8,195
Patents, net of accumulated amortization23,099
 61,917
9,681
 6,587
Other assets187
 207
Other non-current assets216
 236
$250,467
 $308,768
$219,097
 $223,949
 
  
 
  
LIABILITIES AND STOCKHOLDERS’ EQUITY 
  
 
  
Current liabilities: 
  
 
  
Accounts payable and accrued expenses$8,855
 $7,956
$11,448
 $8,347
Accrued patent investment costs3,750
 
Royalties and contingent legal fees payable4,765
 1,601
16,149
 22,688
Total current liabilities13,620
 9,557
31,347
 31,035
Other liabilities2,471
 3,552
916
 1,674
Total liabilities16,091
 13,109
32,263
 32,709
Commitments and contingencies (Note 6)

 



 

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; 49,495,064 and 50,639,926 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively49
 51
Treasury stock, at cost, 2,919,828 and 1,729,408 shares as of June 30, 2018 and December 31, 2017, respectively(39,272) (34,640)
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 49,656,067 and 49,639,319 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively50
 50
Treasury stock, at cost, 2,919,828 shares as of March 31, 2019 and December 31, 2018(39,272) (39,272)
Additional paid-in capital650,265
 648,996
651,148
 651,156
Accumulated comprehensive loss(202) (88)
Accumulated deficit(377,977) (320,018)(426,925) (422,541)
Total Acacia Research Corporation stockholders’ equity232,863
 294,301
185,001
 189,393
Noncontrolling interests1,513
 1,358
1,833
 1,847
Total stockholders’ equity234,376
 295,659
186,834
 191,240
$250,467
 $308,768
$219,097
 $223,949





The accompanying notes are an integral part of these condensed consolidated financial statements.


ACACIA RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share information)
(Unaudited)

Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
March 31,
2018 2017 2018 20172019 2018
          
Revenues$6,485
 $16,457
 $68,578
 $25,311
$3,387
 $62,093
Operating costs and expenses: 
  
  
  
Cost of revenues: 
  
  
  
Portfolio operations: 
  
Inventor royalties1,241
 4,273
 22,985
 4,939
1,353
 21,744
Contingent legal fees1,037
 3,236
 16,796
 3,863
177
 15,759
Other
 
 4,000
 
Patent acquisition expenses
 4,000
Litigation and licensing expenses - patents2,130
 4,134
 4,875
 10,520
3,801
 2,989
Amortization of patents5,278
 5,571
 10,608
 11,086
656
 5,330
General and administrative expenses(1)
7,098
 6,734
 10,477
 13,650
Other expenses - business development327
 433
 493
 753
Impairment of patent-related intangible and other assets29,210
 
 29,210
 
Total operating costs and expenses46,321
 24,381
 99,444
 44,811
Operating loss(39,836) (7,924) (30,866) (19,500)
 
  
  
  
Other portfolio expenses650
 
Total portfolio operations6,637
 49,822
Net portfolio income (loss)(3,250) 12,271
General and administrative expenses(2)
3,695
 3,301
Operating income (loss)(6,945) 8,970
Other income (expense):          
Gain on conversion of loans and accrued interest (Note 5)

 2,671
 
 2,671
Gain on exercise of Primary Warrant (Note 5)

 4,616
 
 4,616
Change in fair value of investment, net (Note 5)
11,347
 (12,698) (29,750) (12,698)
Equity in losses of investee (Note 5)

 (14) 
 (14)
Change in fair value of investment, net(1)
6,908
 (41,097)
Loss on sale of investment (1)
(5,590) 
Interest income and other268
 563
 475
 1,259
1,543
 207
Total other income (expense)11,615
 (4,862) (29,275) (4,166)2,861
 (40,890)
Loss before provision for income taxes(28,221) (12,786) (60,141) (23,666)(4,084) (31,920)
Provision for income taxes(285) (1,478) (476) (2,719)(314) (191)
Net loss including noncontrolling interests in subsidiaries(28,506) (14,264) (60,617) (26,385)(4,398) (32,111)
Net loss attributable to noncontrolling interests in subsidiaries79
 12
 152
 303
14
 73
Net loss attributable to Acacia Research Corporation$(28,427) $(14,252) $(60,465) $(26,082)$(4,384) $(32,038)
 
  
  
  
 
  
Net loss attributable to common stockholders - basic and diluted$(28,427) $(14,252) $(60,465) $(26,082)$(4,384) $(32,038)
Basic and diluted net loss per common share$(0.57) $(0.28) $(1.20) $(0.52)$(0.09) $(0.63)
Weighted average number of shares outstanding - basic and diluted50,061,812
 50,499,248
 50,345,808
 50,416,611
49,655,881
 50,632,958
____________________________________________ 
(1) Refer to Note 5 for additional information.
(2) General and administrative expenses were comprised of the following:
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2018 2017 2018 2017
General and administrative expenses$5,892
 $5,247
 $10,295
 $10,035
Non-cash stock compensation expense - G&A521
 1,449
 1,225
 3,561
Non-cash stock compensation expense - Profits Interests (Note 7)685
 38
 (1,043) 54
Total general and administrative expenses$7,098
 $6,734
 $10,477
 $13,650



 Three Months Ended
March 31,
 2019 2018
General and administrative expenses$3,703
 $4,325
Non-cash stock compensation expense - G&A(8) 704
Non-cash stock compensation expense - Profits Interests (Note 9)
 (1,728)
Total general and administrative expenses$3,695
 $3,301

The accompanying notes are an integral part of these condensed consolidated financial statements.


ACACIA RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)

Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
March 31,
2018 2017 2018 20172019 2018
          
Net loss including noncontrolling interests$(28,506) $(14,264) $(60,617) $(26,385)$(4,398) $(32,111)
Other comprehensive income (loss): 
  
  
  
 
  
Unrealized gain (loss) on short-term investments, net of tax of $010
 (9) (10) 5
Unrealized gain on short-term investments, net of tax of $0
 (20)
Unrealized gain (loss) on foreign currency translation, net of tax of $0(87) (4) (104) 9

 (17)
Total other comprehensive loss(28,583) (14,277) (60,731) (26,371)(4,398) (32,148)
Comprehensive loss attributable to noncontrolling interests79
 12
 152
 303
14
 73
Comprehensive loss attributable to Acacia Research Corporation$(28,504) $(14,265) $(60,579) $(26,068)$(4,384) $(32,075)




































The accompanying notes are an integral part of these condensed consolidated financial statements.



ACACIA RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)


  Common Shares Common Stock Treasury Stock Additional Paid-in Capital Accumulated Comprehensive Income (Loss) Accumulated Deficit Noncontrolling Interests in Operating Subsidiaries Total
                 
Balance at December 31, 2017 50,639,926
 $51
 $(34,640) $648,996
 $(88) $(320,018) $1,358
 $295,659
Net loss attributable to Acacia Research Corporation 
 
 
 
 
 (32,038) 
 (32,038)
Cumulative effect of new accounting principle 
 
 
 
 
 2,506
 308
 2,814
Stock options exercised 10,000
 
 
 31
 
 
 
 31
Compensation expense for share-based awards, net of forfeitures 
   
 704
 
 
 
 704
Repurchase of restricted common stock (2,044) 
 
 (7) 
 
 
 (7)
Net income attributable to noncontrolling interests in subsidiaries 
 
 
 
 
 
 (73) (73)
Unrealized gain on foreign currency translation 
 
 
 
 (17) 
 
 (17)
Unrealized loss on short-term investments 
 
 
 
 (20) 
 
 (20)
Balance at March 31, 2018 50,647,882
 $51
 $(34,640) $649,724
 $(125) $(349,550) $1,593
 $267,053
                 
                 
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 
 
 
 
 
 (4,384) 
 (4,384)
Compensation expense for share-based awards, net of forfeitures 16,748
 
 
 (8) 
 
 
 (8)
Net income attributable to noncontrolling interests in subsidiaries 
 
 
 
 
 
 (14) (14)
Balance at March 31, 2019 49,656,067
 $50
 $(39,272) $651,148
 $
 $(426,925) $1,833
 $186,834
The accompanying notes are an integral part of these consolidated financial statements.



ACACIA RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
Three Months Ended
March 31,
2018 20172019 2018
Cash flows from operating activities:      
Net loss including noncontrolling interests in subsidiaries$(60,617) $(26,385)$(4,398) $(32,111)
Adjustments to reconcile net loss including noncontrolling interests in subsidiaries to net cash provided by (used in) operating activities: 
  
Gain on conversion of loans and accrued interest(1)

 (2,671)
Gain on exercise of Primary Warrant(1)

 (4,616)
Adjustments to reconcile net loss including noncontrolling interests in subsidiaries to net cash provided by operating activities: 
  
Change in fair value of investment, net(1)
29,750
 12,698
(6,908) 41,097
Loss on sale of investment(1)
5,590
 
Depreciation and amortization10,627
 11,134
660
 5,344
Non-cash stock compensation182
 3,615
(8) (1,024)
Impairment of patent-related intangible and other assets29,210
 
Income from trading securities(1,077) 
Purchases of trading securities(60,193) 
Maturities and sales of trading securities3,339
 
Other(313) (598)
 (87)
Changes in assets and liabilities:   
   
Accounts receivable(934) 12,505
8,920
 (59)
Prepaid expenses and other assets(571) (1,474)(541) (863)
Accounts payable and accrued expenses861
 (5,054)2,343
 1,065
Royalties and contingent legal fees payable1,436
 (4,481)(6,539) 36,608
Net cash provided by (used in) operating activities9,631
 (5,327)(58,812) 49,970
 
  
 
  
Cash flows from investing activities: 
  
 
  
Sale of investment (1)
3,294
 
Investments in Investees (1)
(7,000) (31,514)
 (7,000)
Advances to Investee (1)


(4,000)
Purchases of available-for-sale investments(49,895) (331,412)
 (33,309)
Maturities and sales of available-for-sale investments15,400
 295,807

 4,000
Net cash used in investing activities(41,495) (71,119)
Purchases of property and equipment(6) 
Net cash provided by (used in) investing activities3,288
 (36,309)
 
  
 
  
Cash flows from financing activities: 
  
 
  
Repurchase of common stock(4,634) 
Repurchased restricted common stock(7) (35)
 (7)
Proceeds from exercises of stock options51
 649

 31
Net cash (used in) provided by financing activities(4,590) 614
Net cash provided by financing activities
 24
 
  
 
  
Decrease in cash and cash equivalents(36,454) (75,832)
Increase (decrease) in cash and cash equivalents(55,524) 13,685
Cash and cash equivalents, beginning136,604
 139,052
128,809
 136,604
Cash and cash equivalents, ending$100,150
 $63,220
$73,285
 $150,289
   
Supplemental schedule of noncash investing activities:   
Patent acquisition costs included in accrued patent acquisition costs$3,750
 $

____________________________________________ 
(1) Refer to Note 5 for additional information.








The accompanying notes are an integral part of these condensed consolidated financial statements.
ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



1.  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business. As used herein, “Acacia” and the “Company” refer to Acacia Research Corporation and/or its wholly and majority-owned and controlled operating subsidiaries, and/or where applicable, its management.

Acacia’s operating subsidiaries invest in, license and enforce patented technologies. Acacia’s operating subsidiaries partner with inventors and patent owners, applying their legal and technology expertise to patent assets to unlock the financial value in their patented inventions. In recent years, Acacia has also identifies opportunities to partner with high-growth and potentially disruptiveinvested in technology companies. These partnerships usually involve an equity or debt investment by Acacia, along with entering into intellectual property (“IP”) related agreements where Acacia provides IP and other patent related services to these companies. Acacia leverages its experience, expertise, data and relationships developed as a leader in the IPintellectual property ("IP") industry to pursue these opportunities. In some cases, these opportunities will complement, and/or supplement Acacia’s primary licensing and enforcement business.

Acacia’s operating subsidiaries generate revenues and related cash flows from the granting of IP rights for the use of patented technologies that its operating subsidiaries control or own. Acacia’s operating subsidiaries assist patent owners with the prosecution and development of their patent portfolios, the protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of their patented technologies and, where necessary, with the enforcement against unauthorized users of their patented technologies through the filing of patent infringement litigation.

Acacia’s operating subsidiaries are principals in the licensing and enforcement effort, obtaining control of the rights in the patent portfolio, or control of the patent portfolio outright. Acacia’s operating subsidiaries own or control the rights to multiple patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries.

Neither Acacia nor its operating subsidiaries invent new technologies or products; rather, Acacia depends upon the identification and investment in new patents, inventions and companies that own IP through its relationships with inventors, universities, research institutions, technology companies and others. If Acacia’s operating subsidiaries are unable to maintain those relationships and identify and grow new relationships, then they may not be able to identify new technology-based opportunities for sustainable revenue and/or revenue growth.    

During the sixthree months ended June 30,March 31, 2019, Acacia obtained control of two new patent portfolios. During fiscal year 2018 Acacia did not obtain control of any new patent portfolios. During fiscal year 2017 Acacia obtained control of one new patent portfolio. Inportfolio and in fiscal year 2016 Acacia obtained control of two new patent portfolios, compared to three new patent portfolios, and six new patent portfolios in fiscal years 2015 and 2014, respectively.portfolios.

Basis of Presentation.  The accompanying condensed consolidated financial statements include the accounts of Acacia and its wholly and majority-owned and controlled subsidiaries. Material intercompany transactions and balances have been eliminated in consolidation.
    
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“USU.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, certain information and footnotes required by U.S. GAAP in annual financial statements have been omitted or condensed in accordance with quarterly reporting requirements of the Securities and Exchange Commission (“SEC”).  These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2017,2018, as reported by Acacia in its Annual Report on Form 10-K filed on March 15, 2019 with the SEC.  The December 31, 20172018 condensed consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.

The condensed consolidated interim financial statements of Acacia include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of Acacia’s consolidated financial position as of June 30, 2018,March 31, 2019, and results of its operations and its cash flows for the interim periods presented.  The consolidated results of operations for the three and six months ended June 30, 2018March 31, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year.



2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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
ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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
ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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, that provide for the payment of quarterly license fees based on quarterly sales of applicable product units by licensees (“Recurring Revenue Agreements”). Revenues may also include court ordered settlements or awards related to our patent portfolio. IP Rights granted included the following, as applicable:  (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The IP Rights granted were perpetual in nature, extending until the legal expiration date of the related patents. The individual IP Rights are not accounted for as separate performance obligations, as (i) the nature of the promise, within the context of the contract, is to transfer combined items to which the promised IP Rights are inputs and (ii) the Company's promise to transfer each individual IP right described above to the customer is not separately identifiable from other promises to transfer IP Rights in the contract.

Since the promised IP Rights are not individually distinct, the Company 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 collectibility 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.









ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





Revenues were comprised of the following for the periods presented (in thousands):
Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
March 31,
2018 2017 2018 20172019 2018
Paid-up Revenue Agreements$3,183
 $14,964
 $63,246
 $22,160
$
 $60,063
Recurring Revenue Agreements3,302
 1,493
 5,332
 3,151
3,387
 2,030
$6,485
 $16,457
 $68,578
 $25,311
$3,387
 $62,093

Refer to “Inventor Royalties and Contingent Legal Expenses” below for information on related direct costs of revenues.
 
Cost of RevenuesPortfolio 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 “Cost of revenues”“Portfolio operations” in the accompanying condensed consolidated statements of operations. Cost of revenues for the six months ended June 30, 2018 included $4.0 million of costs to acquire certain rights related to revenues recognized in the period.  

Inventor Royalties and Contingent Legal Expenses. Inventor royalties are expensed in the condensed consolidated statements of operations in the period that the related revenues are recognized.  In certain instances, pursuant to the terms of the underlying inventor agreements, upfront advances paid to patent owners by Acacia’s operating subsidiaries are recoverable from future net revenues.  Patent costs that are recoverable from future net revenues are amortized over the estimated economic useful life of the related patents, or as the prepaid royalties are earned by the inventor, as appropriate, and the related expense is included in amortization expense in the condensed consolidated statements of operations.  Any unamortized upfront advances recovered from net revenues are expensed in the period recovered, and included in amortization expense in the condensed consolidated statements of operations. Cost of revenues for the three months ended March 31, 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 condensed consolidated statements of operations in the period that the related revenues are recognized. In instances where there are no recoveries from potential infringers, no contingent legal fees are paid; however, Acacia’s operating subsidiaries may be liable for certain out of pocket legal costs incurred pursuant to the underlying legal services agreement.

Inventor royalty and contingent legal agreements typically provide for payment by the Company of contractual amounts 30 days subsequent to the fiscal quarter end during which related license fee payments are received from licensees by the Company.

Use of Estimates.  The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Acacia believes that, of the significant accounting policies described herein, the accounting policies associated with revenue recognition, the valuation of equity instruments, stock-based compensation expense including the valuation of profits interests, 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.

Concentrations. Two licensees individually accounted for 48%70% and 42%21% of revenues recognized during the three months ended June 30, 2018, and one licensee accounted for 87% of revenues recognized during the six months ended June 30, 2018.March 31, 2019. One licensee accounted for 85%96% of revenues recognized during the three months ended June 30, 2017 and two licensees accounted for 55% and 26% of revenues recognized during the six months ended June 30, 2017.March 31, 2018. For the three and six months ended June 30, 2018, 43% and 6%, respectively,March 31, 2019, 75% of revenues were attributable to licensees domiciled in foreign jurisdictions, based on the jurisdiction of the entity obligated to satisfy payment obligations pursuant to the applicable revenue arrangement. For the three and six months ended June 30, 2017, 90% and 87%, respectively,March 31, 2018, 2% of revenues were attributable to licensees domiciled in foreign jurisdictions. The Company does not have any material foreign operations. TwoThree licensees individually represented approximately 47% and 43% of accounts receivable at June 30, 2018. One licensee individually represented approximately 100% of accounts receivable at December 31, 2017.
ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


approximately 52%, 25% and 10% of accounts receivable at March 31, 2019. Four licensees individually represented approximately 38%, 36%, 12% and 11% of accounts receivable at December 31, 2018.

Fair Value Measurements. U.S. GAAP defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date, and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three-level hierarchy of valuation techniques established to measure fair value is defined as follows:

(i)
Level 1 - Observable Inputs:  Quoted prices in active markets for identical investments;
(ii)
Level 2 - Pricing Models with Significant Observable Inputs:  Other significant observable inputs, including quoted prices for similar investments, interest rates, credit risk, etc.; and
(iii)
Level 3 - Unobservable Inputs:  Significant unobservable inputs, including the entity’s own assumptions in determining the fair value of investments.

Whenever possible, the Company is required to use observable market inputs (Level 1 - quoted market prices) when measuring fair value. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured. In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. Financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
 Level 1 Level 2 Level 3
Assets as of June 30, 2018:     
Short-term investments$34,694
 $
 $
Investment at fair value (Note 5)(1)


 
 75,004
Total recurring fair value measurements$34,694
 $
 $75,004
Assets as of December 31, 2017:     
Investment at fair value (Note 5)(1)
$
 $
 $104,754
____________________
(1)
As of December 31, 2017, the Veritone common shares were subject to a lock-up agreement that expired on February 15, 2018 and measured at fair value using level 3 inputs. As of March 31, 2018, the Veritone common shares were not subject to a lock-up agreement and measured at fair value using level 1 inputs. At June 30, 2018, the Veritone common shares are subject to a lock-up agreement that expires on August 15, 2018, subsequent to which the shares may be sold pursuant to Rule 144, subject to volume limitations and Rule 144 filing requirements, as well as other restrictions under applicable securities laws.

A reconciliation of the activity for fair value measurements categorized within Level 3 for the six months ended June 30, 2018 is as follows (in thousands):
 Investment at Fair Value
 Common Stock Warrants Total
Opening balance as of January 1, 2018$90,795
 $13,959
 $104,754
Total gains and losses included in earnings for the period(1)
     
Change in fair value of investment, net(24,968) (4,782) (29,750)
Total recurring fair value measurements(1)
$65,827
 $9,177
 $75,004
____________________
(1) All gains and losses included in earnings for the period presented relate to assets and liabilities held as of June 30, 2018.
 Level 1 Level 2 Level 3
Assets as of March 31, 2019:     
Trading securities - debt$
 $93,756
 $
Trading securities - equity831
 
 
Investment at fair value - warrants (Note 5)
 1,367
 
Investment at fair value - common stock (Note 5)4,116
 
 
Total recurring fair value measurements as of March 31, 2019$4,947
 $95,123
 $
      
Assets as of December 31, 2018:     
Trading securities - debt$
 $33,642
 $
Trading securities - equity3,012
 
 
Investment at fair value - warrants (Note 5)
 2,064
 
Investment at fair value - common stock (Note 5)5,395
 
 
Total recurring fair value measurements as of December 31, 2018$8,407
 $35,706
 $
      
Liabilities as of March 31, 2019:     
Profits interest units$
 $591
 $
Liabilities as of December 31, 2018:     
Profits interest units$
 $591
 $
      

Stock-Based Compensation. The compensation cost for all stock-based awards is measured at the grant date, based on the fair value of the award, and is recognized as an expense on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity award) which is generally two to four years. The fair value of restricted stock and restricted stock unit awards is determined by the product of the number of shares or units granted and the grant date market price of the underlying common stock. The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing model. Stock-based compensation expense for awards with service and/or performance conditions that affect vesting is recorded only for those awards expected to vest using an estimated forfeiture rate. The Company accounts for forfeitures of awards as they occur.

Profits Interest Units (“Units”) are accounted for in accordance with Accounting Standards Codification (“ASC”) 718-10, “Compensation - Stock Compensation.” The Units vest as described at Note 7, 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
ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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.
ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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 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 condensed consolidated statements of operations.

Treasury Stock. Repurchases of the Company’s outstanding common stock are accounted for using the cost method. The applicable par value is deducted from the appropriate capital stock account on the formal or constructive retirement of treasury stock. Any excess of the cost of treasury stock over its par value is charged to additional paid-in capital, and reflected as Treasury Stock on the condensed consolidated balance sheets.

Cash and Cash Equivalents.  Acacia considers all highly liquid, short-term investments with original maturities of three months or less when purchased to be cash equivalents. For the periods presented, Acacia’s cash equivalents are comprised of investments in AAA rated money market funds that invest in first-tier only securities, which primarily includes: domestic commercial paper, securities issued or guaranteed by the U.S. government or its agencies, U.S. bank obligations, and fully collateralized repurchase agreements. Acacia’s cash equivalents are measured at fair value using quoted prices that represent Level 1 inputs.
 
Short-term Investments.Trading Securities- Debt. Investments in debt securities with original maturities of greater than three months and less than one year and other investments representing amounts that are available for current operations are classified as short-term investments, unless there are indications that such investments may not be readily sold in the short-term. The fair values of these investments approximate their carrying values. For the applicable periods presented, all of Acacia’s short-term investments were classified as available-for-sale, which are reported at fair value on a recurring basis, using significant observable inputs (Level 1), with related realized and unrealized gains and losses in the value of such securities recorded as a separate component of other comprehensive income (loss) in stockholders’ equity until realized. Realized gains and losses are recorded in the statements of operations in other income (expense). Realized and unrealized gains and losses are recorded based on the specific identification method. Interest is included in other income (expense).

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).

Short-term marketable securitiesinvestments for the periods presented were comprised of the following (in thousands):
   Gross Unrealized  
Security TypeCost Gains Losses Fair Value
June 30, 2018:       
U.S. government fixed income securities (Maturity dates in 2018)$34,704
 $1
 $(11) $34,694
 Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
Security Type       
March 31, 2019:       
Trading securities - debt$93,464
 $294
 $(2) $93,756
Trading securities - equity829
 8
 (6) 831
 $94,293
 $302
 $(8) $94,587
December 31, 2018:       
Trading securities - debt$33,643
 $18
 $(19) $33,642
Trading securities - equity3,389
 27
 (404) 3,012
 $37,032
 $45
 $(423) $36,654

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 sixfive years.

Investments at Fair Value. On an individual investment basis, Acacia may elect to account for investments in companies where the Company has the ability to exercise significant influence over operating and financial policies of the investee, at fair value. If the fair value option is applied to an investment that would otherwise be accounted for under the equity method of accounting, it is applied to all of the financial interests in the same entity that are eligible items (i.e., common stock and warrants).
ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



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 condensed consolidated statements of operations.

Investments in preferred stock with substantive liquidation preferences are accounted for at cost, (subject to impairment considerations, as described below, if any), as adjusted for the impact of changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. In-substance common stock is an
ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


investment in an entity that has risk and reward characteristics that are substantially similar to that entity's common stock. An investment in preferred stock with substantive liquidation preferences over common stock, is not substantially similar to common stock, and therefore is not considered in-substance common stock. A liquidation preference is substantive if the investment has a stated liquidation preference that is significant, from a fair value perspective, in relation to the purchase price of the investment. A liquidation preference in an investee that has sufficient subordinated equity from a fair value perspective is substantive because, in the event of liquidation, the investment will not participate in substantially all of the investee's losses, if any.

The initial determination of whether an investment is substantially similar to common stock is made on the initial date of investment if the Company has the ability to exercise significant influence over the operating and financial policies of the investee. That determination is reconsidered if (i) contractual terms of the investment are changed, (ii) there is a significant change in the capital structure of the investee, including the investee's receipt of additional subordinated financing, or (iii) the Company obtains an additional interest in an investment, resulting in the method of accounting for the cumulative interest being based on the characteristics of the investment at the date at which the Company obtains the additional interest. Refer to Note 5 for additional information.

Impairment of Investments. Acacia reviews its investments quarterly for indicators of other-than-temporary impairment. This determination requires significant judgment. In making this judgment, Acacia considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, Acacia evaluates, among other factors, general market conditions and the duration and extent to which the fair value is less than cost. Acacia also considers specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in the condensed consolidated statements of operations and a new cost basis in the investment is established.

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 54 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.

Income Taxes.  Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in Acacia’s condensed consolidated financial statements or consolidated income tax returns. A valuation allowance is established to reduce
ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


deferred tax assets if all, or some portion, of such assets will more than likely not be realized, or if it is determined that there is uncertainty regarding future realization of such assets.

The provision for income taxes for interim periods is determined using an estimate of Acacia’s annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, Acacia updates the estimate of the annual effective tax rate, and if the estimated tax rate changes, a cumulative adjustment is recorded.  

The Company’s effective tax rates were (1%)8% and (1%)1% for the three and six months ended June 30,March 31, 2019 and 2018, respectively and (12%) and (11%) for the three and six months ended June 30, 2017, respectively. Tax expense for the periods presented
ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


primarily reflects the impact of state taxes and foreign withholding taxes incurred on revenue agreements executed with third-party licensees domiciled in foreign jurisdictions.

On December 22, 2017, new U.S. tax legislation was enacted that The Company has significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing the U.S. corporate income tax rate to 21%, revising the rules governing net operating losses and foreign tax credits, and introducing new anti-base erosion provisions. Many of the changes were effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and Internal Revenue Service (“IRS”), any of which could lessen or increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.
While our analysis and interpretation of this legislation is ongoing, based on our current evaluation, we reflected a write-down of our deferred income tax assets (including the value of our net operating loss carryforwards and our tax credit carryforwards) due the reduction of the U.S. corporate income tax rate. Based on currently available information, we recorded a reduction of approximately $25,261,000 in the fourth quarter of 2017 related to the revaluation of our deferred tax assets. Given the full valuation allowance provided foragainst our net deferred tax assets for the periods presented herein, the change inas of March 31, 2019 and 2018. These assets primarily consist of foreign tax law did not have a material impact on our condensed consolidated financial statements provided herein. There may be additional tax impacts identified in subsequent periods throughout 2018 in accordance with subsequent interpretive guidance issued by the SEC or the IRS. Further, there may be other material adverse effects resulting from the legislation that we have not yet identified. No estimated tax provision has been recorded for tax attributes that are incomplete or subject to change.credits, capital loss carryforwards and net operating loss carryforwards.


3.  LOSS PER SHARE

The Company computes net loss attributable to common stockholders using the two-class method required for capital structures that include participating securities. Under the two-class method, securities that participate in non-forfeitable dividends, such as the Company’s outstanding unvested restricted stock, are considered “participating securities.” The following table presents the weighted-average number of shares of common sharesstock outstanding used in the calculation of basic and diluted net lossincome (loss) per share:
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 Three Months Ended
March 31,
 2018 2017 2018 2017 2019 2018
Weighted-average shares used in computing net loss per share attributable to common stockholders – basic and diluted 50,061,812
 50,499,248
 50,345,808
 50,416,611
Weighted-average shares used in computing net loss per share attributable to common stockholders - basic and diluted 49,655,881
 50,632,958
Basic and diluted net loss per common share $(0.57) $(0.28) $(1.20) $(0.52) $(0.09) $(0.63)
Anti-dilutive equity-based incentive awards excluded from the computation of diluted loss per share 4,793,037
 4,598,443
 4,851,737
 4,598,443
 2,059,631
 5,898,369
Maximum price of awards excluded from the computation of diluted loss per share $6.75
 $6.75
 $6.75
 $6.75
 $6.75
 $6.75


4.  PATENTS

Acacia’s only identifiable intangible assets at June 30, 2018March 31, 2019 and December 31, 20172018 are patents and patent rights. Patent-related accumulated amortization totaled $421,038,000320,236,000 and $382,220,000319,580,000 as of June 30, 2018March 31, 2019 and December 31, 20172018, respectively. Acacia’s patents have remaining estimated economic useful lives ranging from one to sixfive years. The weighted-average remaining estimated economic useful life of Acacia’s patents is approximately twofour years.  

The following table presents the scheduled annual aggregate amortization expense as of March 31, 2019 (in thousands):
For the years ending December 31, 
Remainder of 2019$2,464
20202,421
20211,561
20221,561
20231,486
Thereafter188
 $9,681

For the three months ended March 31, 2019, Acacia accrued patent and patent rights acquisition costs totaling $3,750,000. The patents and patent rights acquired have estimated economic useful lives of approximately five years.






ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The following table presents the scheduled annual aggregate amortization expense as of June 30, 2018 (in thousands):
For the years ending December 31, 
Remainder of 2018$15,534
20193,508
20201,683
2021822
2022817
Thereafter735
 $23,099

During the three months ended June 30, 2018, Acacia recorded impairment of patent-related intangible asset charges of $28,210,000. The impairment charges were realized in the period due to a reduction in expected estimated future net cash flows for certain patents due to second quarter 2018 developments in the ongoing litigation. The impairment charges consisted of the excess of the asset’s carrying value over its estimated fair value as of June 30, 2018. Assumptions utilized in the cash flow analysis included margins on estimated net proceeds ranging from 53% to 86% and a discount for the time value of money of zero percent, due to the relatively short time-frame associated with estimated cash flows.


5. INVESTMENTS

Investment at Fair Value
Veritone Investment Agreement. On August 15, 2016, Acacia entered into an Investment Agreement with Veritone, Inc. (“Veritone”), pursuant to which provided for Acacia to invest up to $50 millionfunded in Veritone, consisting of both debt and equity components. Pursuant to the Investment Agreement, on August 15, 2016, Acacia entered into a secured convertible promissory note with Veritone (the “Veritone Loans”), which permitted Veritone to borrow up toaggregate $20 million through two $10 million advances, each bearing interest atof loans to Veritone which were converted into 1,523,746 shares of Veritone’s common stock upon the ratepublic offering of 6.0%Veritone common stock on May 17, 2017 (“IPO”), based on a conversion price of $13.61 per annum (included in Other Income (Expense) in the condensed consolidated statements of operations). On August 15, 2016, Acacia funded the initial $10 million loan (the “First Loan”). On November 25, 2016, Acacia funded the second $10 million loan (the “Second Loan”). The First Loan and the Second Loan were due and payable on November 25, 2017. In conjunction with the First Loan and Second Loan,share. Veritone also issued Acacia a total of three four-year $700,000154,312 warrants to purchase shares of Veritone’s common stock at an exercise price of $13.6088$13.61 per share. Upon Veritone’s consummation of its public offering of its common stock on May 17, 2017 (“IPO”), all outstanding principal and accrued interest under the Veritone Loans, totaling $20.7 million, automatically converted into 1,523,746 shares of Veritone’s common stock based on a conversion price of $13.6088 per share.share expiring in 2020.
In addition, in August 2016, Veritone issued Acacia a five-year Primary Warrantwarrant to purchase up to $50.0$50 million less all converted amounts or amounts repaid under the Veritone Loans, worth of shares of Veritone’s common stock at an exercise price of $13.6088$13.61 per share. Pursuantshare subject to an amendment to the Primary Warrant effective March 15, 2017, the Primary Warrant was exercised automatically uponcertain adjustments. Upon the consummation of Veritone’s IPO, resulting in theAcacia exercised its option to purchase by Acacia of an additional 2,150,335 shares of Veritone common stock, at an aggregate purchase price of $29.3 million. Immediately following Acacia’s exercise of the Primary Warrant in full, Veritone issued to Acacia then received an additional 10% Warrantwarrant that provides for the issuance of an additional 809,400 shares of Veritone common stock at an exercise price of $13.6088$13.61 per share with 50% of the shares underlying the 10% warrant vesting as of the issuance date of the 10% Warrant, and the remaining 50% of the shares underlying the 10% warrant vesting on the first anniversary of the issuance date of the 10% Warrant.expiring in 2022.
Veritone Bridge LoanLoan.. On March 14, 2017, Acacia entered into an additional secured convertible promissory note with Veritone (the “Veritone Bridge Loan”),pursuant to which permitted Veritone to borrow up to an additionalAcacia funded $4.0 million bearing interest at the rate of 8.0% per annum. On March 17, 2017, Acacia funded the initial $1.0 million advance (the “First Bridge Loan”). On April 14, 2017, Acacia funded the second $1.0 million advance (the “Second Bridge Loan”). All advances and accrued interest under the Veritone Bridge Loan were due and payable on November 25, 2017. In May 2017, pursuant to the terms of the Veritone Bridge Loan, Acacia elected to make an additional advance to Veritone totaling $2.0 million, representing all principal amounts not advanced upon Veritone’s consummation of its IPO. Upon consummation of Veritone’s IPO, the outstanding principal and accrued interest under the Veritone Bridge Loan of $4.0 million and $21,000, respectively, automaticallywhich was converted into 295,440445,440 shares of Veritone’s common stock at a conversion price of $13.6088$13.61 per share.
ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


In conjunction withshare in the Veritone Bridge Loan, Veritone issuedIPO. Acacia also received a 10-year warrant to Acacia (i) 60,000purchase up to 156,720 shares of Veritone common stock (“Upfront Shares”), (ii) 90,000at an exercise price of $13.61 per share expiring in 2027.
As a result of the foregoing transactions, Acacia received an aggregate total of 4,119,521 of Veritone shares and 1,120,432 of warrants in Veritone. On October 5, 2018, a registration statement on Form S-3 registering all of Acacia’s shares of Veritone common stock (the “Bridge Installment Shares”), and (iii) 10-year warrants to purchase up to 157,000was declared effective by the SEC. During the year ended December 31, 2018, Acacia sold 2,700,000 shares of Veritone common stock with other termsat prices ranging from $4.95 to $10.44 and conditions similar torecorded a realized loss of $19.1 million. During the warrants described above.

All share amounts above have been adjusted to reflect a 0.6-for-1 reverse stock split of Veritone’s common stock, which was effected by Veritone in April 2017. The Veritone commonthree months ended March 31, 2019, Acacia sold 628,048 shares and the common shares underlying the warrants are subject to a lock-up agreement that expires on August 15, 2018, subsequent to which the shares may be sold pursuant to Rule 144, subject to volume limitations and Rule 144 filing requirements, as well as other restrictions under applicable securities laws. All of the Veritone common stock held by Acacia was unregistered as of the issue date and are unregistered as of June 30, 2018.

Accounting Prior to Veritone IPO. Prior to conversion, Acacia’s Investment Agreement and the Veritone Bridge Loan represented variable interests in Veritone for which Acacia was not the primary beneficiary, primarily due to a lack of a controlling interest in Veritone. In addition, the Veritone Loans and Veritone Bridge Loan (the “Loans”) were not considered in-substance common stock, the common stock purchase warrants were unexercised, and the right to receive the Upfront Shares and the Bridge Installment shares (“Veritone Shares”) were considered in-substance common stock, however, application of the equity method was not material, therefore, the equity method of accounting was not applied prior to the IPO.

Prior to conversion, the Loans and the related common stock purchase warrants and Veritone Shares were accounted for as separate units of account based on the relative estimated fair values of the separate units as of the effective date of the respective transactions, with the face amount of the loans allocated to (1) the Loans, which were accounted for as long-term loan receivables and (2) the common stock purchase warrants and Veritone Shares. The estimated relative fair value allocation was determined using a Monte Carlo simulation model. Key inputs to the model included the estimated value of Veritone’s equity on the effective date of the transactions, related volatility of equity assumptions, discounts for lack of marketability, assumptions related to liquidity scenarios, and assumptions related to recovery scenarios on the Loans. Assumptions used in connection with estimating the relative fair values included: (1) volatilityat prices ranging from 40%$4.71 to 50%, (2) financing probabilities ranging from 25% to 75%, (3) marketability discount$7.13 and recorded a realized loss of 7% and (4) 100% investment recovery assumption. The loan discount, representing the difference between the face amount of the Loans and the relative fair value allocated to the Loans, was accreted over the expected life of the Loans, using the effective interest method, with the related interest amounts reflected in other income (expense) in the condensed consolidated statements of operations. Interest income for the six months ended June 30, 2017 was $1.1 million, including accretion of the loan discount of $630,000. The effective yield on the Loans for the six months ended June 30, 2017 ranged from 9% to 53%.
Accounting Subsequent to Veritone IPO. Upon Veritone’s consummation of its IPO on May 17, 2017, the Loans were converted into shares of Veritone common stock and the Primary Warrant was automatically exercised in full, as described above, resulting in a 20% ownership interest in Veritone (excluding warrants). Based on Acacia’s representation on the Veritone board of directors and Acacia’s 20% ownership interest in Veritone, Acacia management determined that the equity method of accounting was applicable. Upon becoming eligible for the equity method of accounting, Acacia elected to apply the fair value option to account for its equity investment in Veritone, including all of its investments in Veritone common stock and warrants, due to the availability of quoted prices in an active market for the Veritone common stock. As of June 30, 2018, Acacia’s ownership interest in Veritone, on a fully-diluted basis, was approximately 19%.
Acacia’s equity investment in Veritone common shares is recorded at fair value based on the quoted market price of Veritone’s common stock on The NASDAQ Global Market on the applicable valuation date, as adjusted for an estimated discount for lack of marketability (“DLOM”) associated with the restricted nature of the common shares acquired (Level 3 input). Acacia’s investment in Veritone warrants is recorded at fair value, as adjusted for an estimated DLOM, based on the Black-Scholes option-pricing model, utilizing the following assumptions at June 30, 2018: risk-free interest rates ranging from 2.52% to 2.81%; expected terms ranging from 2 years to 9 years; volatility of 60%; and a dividend yield of zero. The DLOM for the Veritone common stock and warrants was estimated utilizing a Finnerty model with the following results and assumptions:
  Veritone Common Stock Veritone Warrants  
  IPO Date December 31,
2017
 June 30,
2018
 IPO Date December 31,
2017
 June 30,
2018
Estimated DLOM applied 5.7% 5% 5% 5.7% 10% 10%-15%
Volatility assumptions 35% 37% 90% 35% 72%-87% 66%-110%
Term assumptions 6 months 2 months 2 months 6 months 5 months 5 months
ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


$5.6 million.
At June 30, 2018,March 31, 2019, the fair value of the 4,119,521791,473 shares of Veritone common stock owned by Acacia totaled $65,827,000.$4,116,000. At June 30, 2018,March 31, 2019, the fair value of the 1,120,432 common stock purchase warrants held by Acacia totaled $9,177,000. At June 30, 2018, the cumulative net unrealized gain (since the IPO) on our Veritone investment was $19,776,000. A 10% increase in the DLOM assumptions utilized at all applicable valuation dates would result in an approximate 11% decrease in the fair value of our investment in Veritone warrants at June 30, 2018, and a corresponding decrease in the net investment gain or loss reflected in the condensed consolidated statements of operations for the applicable period. $1,367,000.
Changes in the fair value of Acacia’s investment in Veritone are recorded as unrealized gains or losses in the condensed consolidated statements of operations.
Summarized financial information for Veritone, presented on a For the three month lag basis, is as followsmonths ended March 31, 2019 and 2018, the accompanying consolidated statements of operations reflected the following (in thousands, except per share amounts)thousands):
  Three Months Ended March 31, 2018
Revenues $4,388
Gross profit 3,824
Operating expenses 17,054
Other income (expense), net 183
Net loss attributable to common stockholders (13,049)
   
Net loss per share attributable to common stockholders - basic and diluted $(0.81)
  March 31,
2018
 December 31, 2017
Current assets $71,567
 $83,805
Noncurrent assets 6,161
 4,753
Total Assets $77,728
 $88,558
     
Current liabilities $26,582
 $27,256
Noncurrent liabilities 
 
Total liabilities 26,582
 27,256
Preferred stock 
 
Total stockholder's equity (deficit) 51,146
 61,302
Total liabilities, preferred stock and stockholders’ equity $77,728
 $88,558
  Three Months Ended March 31,
  2019 2018
Change in fair value of investment, warrants (697) (7,647)
Change in fair value of investment, common stock 7,605
 (33,450)
Loss on sale of investment, common stock (5,590) 
Net realized and unrealized gain (loss) on investment at fair value $1,318
 $(41,097)
OtherMiso 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. In addition, in June 2017, Acacia also entered into an IP services agreement with Miso Robotics to help Miso Robotics drive AI-based solutions for the restaurant industry. Miso Robotics will use the funding to deliver an adaptable AI-driven robotic kitchen assistant that will work alongside kitchen staff to improve operational efficiency for the restaurant industry.

As of February 2018, the preferred stock was not deemed to be in-substance common stock due to the substantive liquidation preference associated with the preferred stock. As such, as of February 2018, the cumulative investment in Miso Robotics is recorded at cost and assessed for any impairment at each balance sheet date. Prior to February 2018, the equity method of accounting was applied.




ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


6.  COMMITMENTS AND CONTINGENCIES
Patent Enforcement
    Certain of Acacia’s operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights.  In connection with any of Acacia’s operating subsidiaries’ patent enforcement actions, it is possible that a defendant may request and/or a court may rule that an operating subsidiary has violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions.  In such event, a court may issue monetary sanctions against Acacia or its operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material.

Leases

The Company primarily leases office facilities under operating lease arrangements that will end in January 2020 and July 2020.  The Company has elected to not apply any discount rate in our calculation given the short remaining lease term. Operating lease costs were $153,000 and $335,000 for the three months ended March 31, 2019 and 2018 respectively. The Company has subleased a facility that we ceased using in December 2018, and the sublease will go through the remaining term of the lease. The total sublease income received was $195,000 for the three months ended March 31, 2019.
Other

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. 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 condensed consolidated financial position, results of operations or cash flows. During the three months ended March 31, 2019, operating expenses included expenses for settlement and contingency accruals totaling $650,000.


7. STOCKHOLDERS’ EQUITY
    
Repurchases of Common Stock. In February 2018, Acacia’s Board of Directors authorized the repurchase of up to $20,000,000 of the Company’s outstanding common stock in open market purchases or private purchases, from time to time, in amounts and at prices to be determined by the Board of Directors at its discretion (the “Stock Repurchase Program”). In determining whether or not to repurchase any shares of Acacia’s common stock, Acacia’s Board of Directors consider such factors as the impact of the repurchase on Acacia’s cash position, as well as Acacia’s capital needs and whether there is a better alternative use of Acacia’s capital. Acacia has no obligation to repurchase any amount of its common stock under the Stock Repurchase Program. Repurchases to date were made in the open market in compliance with applicable SEC rules. The authorization to repurchase shares presented an opportunity to reduce the outstanding share count and enhance stockholder value. The repurchaserepurchased 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 PurchasedAverage Price paid per Share
Approximate Dollar Value of
Shares that May Yet be
Purchased under the Program
Plan Expiration
     
May 1, 2018- May 30, 20181,190,420
$3.89
$15,366,000
February 28, 2019
Totals for 20181,190,420
$3.89
  

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 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 reserved for the issuance of awards under the Plan. The Units entitle the holders to share in or be allocated certain AIP profits and losses and to receive or share in AIP distributions pursuant to the AIP Limited Liability Company Operating Agreement entered into as of February 16, 2017 (the “LLC Agreement”). In connection with the adoption of the Plan, a form of Profits Interest Agreement was approved pursuant to which Units may be granted from time to time. Units vest upon AIP’s achievement of certain performance milestones (one-third upon 150% appreciation, and the remaining two-thirds upon 300% appreciation in value of Acacia’s aggregate investment in Veritone), subject to the continued service of the recipient, and are subject to the terms and conditions of the Plan, the Profits Interest Agreement and the LLC Agreement. The Units were fully vested as of June 30, 2018.

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
ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


awarded as one-time, discretionary grants to recipients. As of June 30, 2018, AIP holds the Veritone 10% Warrant described at Note 5.

Profits interests totaling 400 Units, or 40% of the membership interests in AIP, were granted in February 2017 pursuant to the Plan, with an aggregate grant date fair value of $722,000. The fair value of the Units totaled $1,998,000 as of June 30, 2018. Upon full vesting of the units in September 2017, all previously unrecognized compensation expense was immediately recognized.
 Total Number of Shares PurchasedAverage Price paid per Share
Approximate Dollar Value of
Shares that May Yet be
Purchased under the Program
Plan Expiration
     
May 1, 2018- May 30, 20181,190,420
$3.89
$15,366,000
February 28, 2019
Totals for 20181,190,420
$3.89
  

Tax Benefits Preservation Plan. On March 12, 2019, Acacia’s Board of Directors announced that it unanimously approved the adoption of a Tax Benefits Preservation Plan (the “Plan”). The fair valuepurpose of the UnitsPlan is estimated utilizing a Geometric Brownian Motion modelto protect the Company’s ability to utilize potential tax assets, such as net operating loss carryforwards (“GBM”NOLs”) which considers probable vesting dates and values fortax credits to offset potential future taxable income.

The Plan is designed to reduce the applicable instruments (i.e.likelihood that the Company will experience an ownership change by discouraging any (i) person or group from acquiring beneficial ownership of 4.9% or more of the Company’s outstanding common stock and warrants related(ii) any existing shareholders who, as of the time of the first public announcement of the adoption of the Plan, beneficially own more than 4.9% of the Company’s then-outstanding shares of the Company’s common stock from acquiring additional shares of the Company’s common stock (subject to Acacia’s Veritone investment described at Note 5) underlying or associatedcertain exceptions). There is no guarantee, however, that the Plan will prevent the Company from experiencing an ownership change.
In connection with the Units. At the estimated endadoption of the termPlan, Acacia’s Board of Directors authorized and declared a dividend distribution of one right for each outstanding share of the underlying warrant (May 2022),Company’s common stock to shareholders of record at the model estimatesclose of business on March 16, 2019. On or after the total proceeds fromdistribution date, each right would initially entitle the hypothetical exerciseholder to purchase one one-thousandth of a share of the warrant and estimates theCompany’s Series B Junior Participating Preferred Stock, $0.001 par value of the Units by allocating the proceeds based on the waterfall described in the terms of the underlying agreement. The value of the Units onfor a marketable basis is the average allocation across all GBM simulation paths discounted to the applicable valuation date using the risk-free rate. This estimated value is adjusted for an estimate of a DLOM using the Finnerty model, based on a security specific volatility calculated by changing Veritone’s common stock price by 1% and measuring the corresponding change in the value of the Units. For the three months ended June 30, 2018, assumptions utilized in the GBM included a term of 3.9 years, stockpurchase price of $16.82, volatility of 60%, and risk free interest rates ranging from 2.33% to 2.85% for terms ranging from one to 10 years. The estimated DLOM utilized was 30%, based on assumptions including a term of approximately 3.9 years and a volatility of 90% for Veritone’s common stock. Volatility was estimated based on the historical volatilities of a set of comparable public companies, adjusted for leverage, over a term matching the term of the underlying warrant asset, which was approximately 3.9 years.$12.00. 


8.  RECENT ACCOUNTING PRONOUNCEMENTS
 
Recent Accounting Pronouncements - Recently Adopted.

In May 2014, theFebruary 2016, FASB issued ASU 2016-02, Leases ("ASC 842") which requires a new accounting standards update addressing revenue from contracts with customers, which clarifies existing accounting literature relatinglessee to howrecognize in the statement of financial position a liability to make lease payments (the lease liability) and when a company recognizes revenue. Under the standard, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. In doing so, the Company is required to use more judgment and make more estimates in connection with the accounting for revenue contracts with customers than under previous guidance, as described in Note 2. Under the standard, (i) an entity should account for a promise to provide a customer with a right to access the entity’s IP as a performance obligation satisfied over time because the customer will simultaneously receive and consume the benefit from the entity’s performance of providing access toright-of-use asset representing its IP as the performance occurs, and (ii) an entity’s promise to provide a customer with the right to use its IP is satisfiedthe 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 a pointthe effective date of adoption without adjusting the prior comparative periods presented. Further, in time. In addition, revenues from contracts with significant financing components should be recognized at an amount that reflects the price that a customer would have paid if the customer had paid cashJanuary 2019, FASB issued ASU 2019-01, Leases: Codification Improvements, which provides disclosure relief for the goods or servicesinterim periods when they transferadopting ASC 842. The primary impact of adopting ASC 842 for the Company was the recognition in the consolidated balance sheet of certain lease-related assets and liabilities for operating leases with terms longer than 12 months as of January 1, 2019. Such amounts were not previously accounted for in the Company's consolidated balance sheets. The Company has adopted ASC 842, electing the practical expedient approaches and has recognized approximately $628,000 of right-of-use assets and an increase of $1.2 million in lease-related liabilities as of March 31, 2019. The adoption of ASC 842 is expected to have no material impact on the Company's consolidated results of operations for the year ending December 31, 2019.

There have been no other material changes to the customer (i.e. adjustment forCompany's significant accounting policies during the timethree months ended March 31, 2019.


9. FAIR VALUE DISCLOSURES

Acacia holds the following types of financial instruments at March 31, 2019 and December 31, 2018.

Trading securities - debt. Debt securities includes corporate bonds with fair value that is determined by third party quotations from outside pricing services and/or computerized pricing models, which may be based on transactions, bids or estimates. Acacia classifies the fair value of money). For sales and usage based royalties,corporate bonds within Level 2 of the new standard requires that the Company include in the transaction price some or all of an amount of estimated variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

The Company used the modified retrospective method of adoption and recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings on January 1, 2018. Comparative prior year periods were not adjusted. The new accounting standard was applied to all contracts at the date of initial application. The cumulative effect of applying the new revenue standard, primarily relating to financing components of contracts executed in prior periods and estimates of variable consideration for sales and usage based royalty agreements executed in prior periods, was as follows (in thousands):valuation hierarchy.
ACACIA RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



  Balance at December 31, 2017 Adjustments Balance at January 1, 2018
Balance Sheets:      
Accounts receivable $153
 $4,542
 $4,695
Royalties and contingent legal fees payable 1,601
 1,728
 3,329
Accumulated deficit (320,018) 2,506
 (317,512)
Noncontrolling interests 1,358
 308
 1,666
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.

The impact of the adoption of the new accounting standardInvestments at fair value - common stock. Acacia’s equity investment in Veritone common stock is recorded at fair value based on the consolidated balance sheet and statementquoted market price of operations was as follows (in thousands):
  Balance as Reported Balance at January 1, 2018 Prior to Adoption Effect of Change
Balance Sheets:      
Accounts receivable $5,629
 $3,599
 $2,030
Royalties and contingent legal fees payable 4,765
 3,953
 812
       
Statements of Operations:      
Revenues $68,578
 $66,548
 $2,030
Inventor royalties 22,985
 22,287
 698
Contingent legal fees 16,796
 16,682
 114
Veritone’s common stock on the applicable valuation date.

In May 2017,Investments at fair value - warrants. Warrants are recorded at fair value, as based on the FASB issued amended guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only ifBlack-Scholes option-pricing model (Level 2).

Profits interests. At March 31, 2019 and December 31, 2018, the fair value the vesting conditions or the classification of the award changes as a resultUnits was estimated at 40% of the change in terms or conditions. This amendment is effective prospectively for annual periods beginning on or after December 15, 2017. The adoptionfair value of this standard did not have a material impactthe 10% Warrant, based on the Company’s condensed consolidated financial statements.

Recent Accounting Pronouncements - Not Yet Adopted.

In February 2016, the FASB issued an accounting standard update which requires lessees to recognize most leases on the balance sheet. This is expected to increase both reported assets and liabilities. The new lease standard does not substantially change lessor accounting. For public companies, the standard will be effective for the first interim reporting period within annual periods beginning after December 15, 2018, although early adoption is permitted. Lessees and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new guidance, using a modified retrospective transition method. The requirements of this standard include a significant increase in required disclosures. Management is currently assessing the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures and expects to adopt the new standard effective January 1, 2018.


9. SUBSEQUENT EVENTS

Board CompositionBlack-Scholes option-pricing model (Level 2).. On August 8, 2018, the Company announced that Joseph E. Davis, Fred A. deBoom and James F. Sanders have resigned from the Board, effective immediately.

Personnel. On August 8, 2018, the Company announced that Robert B. Stewart Jr., President, Edward J. Treska, Executive Vice President, General Counsel and Clayton J. Haynes, Chief Financial Officer, SVP Finance, Treasurer, are transitioning out of their roles at Acacia effective August 10, 2018, pursuant to a board approved transition arrangement. Mr. Treska and Mr. Haynes have agreed to provide consulting services to the Company to aid in the transition of their duties subsequent to August 10, 2018. Severance payments related to the personnel changes described above total $2.5 million.




Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward Looking Statements

You should read the following discussion and analysis in conjunction with the condensed consolidated financial statements and related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the SEC on March 7, 2018,15, 2019, amended by Amendment No. 1 to our Annual Report on Form 10-K, filed with the SEC on April 2, 2018, and Amendment No. 2 to our Annual Report on Form 10-K, filed with the SEC on April 30, 2018.2019. Our Annual Report on Form 10-K, as amended, is referred to herein as our “Annual Report.”

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and which concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report on Form 10-Q. Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “could,” “expect,” “plan,” “believe,” “estimate,” “anticipate,” “intend,” “predict,” “potential,” “continue” or similar terms, variations of such terms or the negative of such terms, although not all forward-looking statements contain these terms. Such statements are based on management’s current expectations and are subject to a number of factors 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 intellectual property, or IP, acquisition and development, licensing and enforcement activities, other related business activities, capital expenditures, earnings, litigation, regulatory matters, markets for our services, liquidity and capital resources and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as our ability to invest in new technologies and patents, future global economic conditions, changes in demand for our services, legislative, regulatory and competitive developments in markets in which we and our subsidiaries operate, results of litigation and other circumstances affecting anticipated revenues and costs. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements contained herein to conform such statements to actual results or 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. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, including without limitation the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Financial Statements” in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and  “Financial Statements and Supplementary Data” included in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.

General

As used in this Quarterly Report on Form 10-Q, “we,” “us” “our” and “Company” refer to Acacia Research Corporation, a Delaware corporation, and/or its wholly and majority-owned and controlled operating subsidiaries, and/or where applicable, its management. All IP acquisition, development, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation’s wholly and majority-owned and controlled operating subsidiaries.
    
We invest in licenseIP and enforcerelated 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 1,560 license agreements executed to date, across 193nearly 200 patent portfolio licensing and enforcement programs. To date, we have generated gross licensing revenue of approximately $1.5$1.6 billion, and have returned more than $754$767 million to our patent partners.
We also identify opportunities to partner with high-growth and potentially disruptive technology companies. We leverage our 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 our primary licensing and enforcement business.

Executive Summary

Overview

For the three months ended March 31, 2019 and 2018, we reported revenues of $3.4 million and $62.1 million, respectively. Cash and short-term investments totaled $167.9 million as of March 31, 2019, as compared to $165.5 million as of December 31, 2018. Our operating activities during the periods presented were focused on the continued operation of our patent licensing and enforcement business, including the continued pursuit of our ongoing patent licensing and enforcement programs. We continue to experience challenges in the existing patent and licensing environment, including challenges

Our team’s expertise in identifying and acquiringevaluating 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 high-quality patent assets as discussed below. Despite these challenges, we intend to continue to invest inavenues and monetize our existing quality patent assets.IP assets, which we believe will lead to increased shareholder value. We will leverage our experience, expertise, data and relationships developed as a leader in the IP industry to pursue these opportunities.

Partnerships.Investment in Veritone. In connection with its previous investment in Veritone, Inc., or Veritone, in August 2016, Acacia received an aggregate total of 4,119,521 shares and 1,120,432 warrants of Veritone. 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. During the three months ended March 31, 2019, Acacia sold 628,048 shares of Veritone common stock at a weighted average price of $5.24 and recorded a realized loss of $5.6 million on the sale. Refer to Note 5 to the consolidated financial statements elsewhere herein for additional information regarding our investment in Veritone.

Investment in Miso Robotics. In June 2017, we partnered withAcacia made a $2.25 million equity investment in Miso Robotics, an innovative leader in robotics and AI solutions, which included an equity investment totaling $2.25 million,Inc., or Miso Robotics, as part of Miso Robotics’ closing of $3.1 million in Series A funding. In addition, in February 2018, we made an additional strategic equity investment totaling $6.0 million in the Series B financing round for Miso Robotics, increasing our fully diluted ownership interest to approximately 30% as of March 31, 2018. Miso Robotics will use the capital to expand its suite of collaborative, adaptable robotic kitchen assistants and to broaden applications for Miso AI, the company’s machine learning cloud platform. In addition, we also entered into an IP services agreement with Miso Robotics to help the company drive AI-based solutions for the entire restaurant industry. Our partnership with Miso Robotics represents our second partnership with companies seeking to transform the marketplace through AI.

In August 2016, we announced the formation of a partnership with Veritone, a cloud-based Artificial Intelligence technology company that is pioneering next generation search and analytics through their proprietary Cognitive Media Platform™. Upon Veritone’s consummation of its initial public offering in May 2017, or the IPO, our loans and accrued interest were automatically converted into 1,969,186 shares of Veritone common stock and we exercised certain warrants, acquiring 2,150,335 additional shares of Veritone common stock. At June 30, 2018, the cumulative net unrealized gain (since the IPO) on our Veritone investment was $19.8 million. Our Veritone common shares are subject to a lock-up agreement that expires on August 15, 2018, subsequent to which the shares may be sold pursuant to Rule 144, subject to volume limitations and Rule 144 filing requirements, as well as other restrictions under applicable securities laws.Robotics. Refer to Note 5 to the condensed consolidated financial statements elsewhere herein for additional information regarding our partnership with Veritone.investment in Miso Robotics.

Patent Portfolio Intake. One ofDuring the significant challenges in our industry continues to be quality patent intake due to the challenges and complexity of the current patent environment. 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 technology sources compete against us as they seek to develop and commercialize technologies. Strategies employed by potential partners may reduce the number of technology sources and potential clients to whom we can market our solutions. 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 material adverse effect on our revenues, operating results, financial condition and ability to maintain our licensing and enforcement business.

For example, during the sixthree months ended June 30, 2018, Acacia did not obtain control of any new patent portfolios. Further,March 31, 2019, we obtained control of only one,acquired two and three new patent portfolios during fiscal years 2017, 2016with enterprise networking equipment and 2015, respectively, compared to 6 new patent portfoliosresidential gateways technology and 25 new patent portfolios in fiscal years 2014 and 2013, respectively. This decrease in our patent portfolio intake reflects in part our strategic decision in 2013 to shift the focuscustomization of our operating business to serving a smaller number of customers, each having higher quality patent portfolios. As a result, our gross number of patent portfolio acquisitions has decreased significantly. This decrease in our patent portfolio intake also reflects in part industry trends impacting our ability to acquire patent portfolios. For example, legislative and legal changes have increased the


complexity of patent enforcement actions and may significantly affect the market availability of suitable patent portfoliosad insertion for acquisition. As a result of these continuing industry trends, our recent and future patent portfolio intake has been and may continue to be negatively impacted, resulting in further decreases in future revenue generating opportunities, and continued negative adverse impacts on the sustainability of our licensing and enforcement business. We continue to experience significant adverse challenges with respect to our patent intake efforts, and if these adverse challenges continue, our licensing and enforcement revenues will continue to decline and we will be unable to profitably sustain our licensing and enforcement business going forward.Internet radio streaming technology.

Operating Activities. Operating activities during the periods presented included the following:
Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
March 31,
2018 2017 2018 20172019 2018
          
Revenues (in thousands)$6,485
 $16,457
 $68,578
 $25,311
$3,387
 $62,093
New agreements executed2
 9
 6
 15

 4
Licensing and enforcement programs generating revenues5
 8
 6
 9
3
 4
New patent portfolios2
 

In addition to the portfolio intake trend described above, ourOur revenues historically have fluctuated quarterly, and can vary significantly, based on a number of factors including the following:

the dollar amount of agreements executed each period, which can be driven by the nature and characteristics of the technology or technologies being licensed and the magnitude of infringement associated with a specific licensee;
the specific terms and conditions of agreements executed each period including the nature and characteristics of rights granted, and the periods of infringement or term of use contemplated by the respective payments;
fluctuations in the total number of agreements executed each period;


the number of, timing, results and uncertainties associated with patent licensing negotiations, mediations, patent infringement actions, trial dates and other enforcement proceedings relating to our patent licensing and enforcement programs;
the relative maturity of licensing programs during the applicable periods;
other external factors, including the periodic status or results of ongoing negotiations, the status or results of ongoing litigations and appeals, actual or perceived shifts in the regulatory environment, impact of unrelated patent related judicial proceedings and other macroeconomic factors; and
fluctuations in overall patent portfolio related enforcement activities which are impacted by the portfolio intake challenges discussed above.
  
Our management does not attempt to manage for smooth sequential periodic growth in revenues period to period, and therefore, periodic results can be uneven. In some cases, with respect to our existing portfolios,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 sixthree months ended June 30,March 31, 2019 and 2018 and 2017 included fees from the following technology licensing and enforcement programs:
Bone Wedge technology(1)(2)
 
Optical NetworkingSuper Resolutions Microscopy technology(1)(2)
Cardiology and Vascular Device technology(2)
Speech codes used in wireless and wireline systems technology(1)(2)
DisplayPort and MIPI DSI technology(2)
Super Resolutions Microscopy technology(1)(2)
Electronic Access Control technology(2)
 
Video Conferencing technology(1)
Innovative Display technology(2)
Wireless Infrastructure and User Equipment technology(1)
Online Auction Guarantee technology(1)(2)
__________________________
(1) 20182019 period
(2) 20172018 period







Summary of Results of Operations - Overview
For the Three and Six Months Ended June 30, 2018March 31, 2019 and 20172018
(In thousands, except percentage change values)
Three Months Ended
June 30,
 % Six Months Ended
June 30,
 %Three Months Ended
March 31,
 %
2018 2017 Change 2018 2017 Change2019 2018 Change
                
Revenues$6,485
 $16,457
 (61)% $68,578
 $25,311
 171 %$3,387
 $62,093
 (95)%
Operating costs and expenses46,321
 24,381
 90 % 99,444
 44,811
 122 %10,332
 53,123
 (81)%
Operating loss(39,836) (7,924) *
 (30,866) (19,500) 58 %(6,945) 8,970
 (177)%
Other income (expense), net11,615
 (4,862) *
 (29,275) (4,166) *
2,861
 (40,890) (107)%
Loss before provision for income taxes(28,221) (12,786) 121 % (60,141) (23,666) 154 %(4,084) (31,920) (87)%
Provision for income taxes(285) (1,478) (81)% (476) (2,719) (82)%(314) (191) 64 %
Net loss attributable to Acacia Research Corporation(28,427) (14,252) 99 % (60,465) (26,082) 132 %(4,384) (32,038) (86)%
* Percentage change in excess of 200%

Overview - Three months ended June 30, 2018March 31, 2019 compared with the three months ended June 30, 2017March 31, 2018

Revenues decreased $10.0$58.7 million to $6.5$3.4 million for the three months ended June 30, 2018March 31, 2019, as compared to $16.5$62.1 million in the comparable prior year quarter, due primarily to a decrease in the number of new agreements executed during the quarter. 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 $28.2$4.1 million for the three months ended June 30, 2018,March 31, 2019, as compared to $12.8$31.9 million for the three months ended June 30, 2017.March 31, 2018. The net change was primarily comprised of the change in revenues described above, an $11.3a $6.9 million unrealized gain for the three months ended June 30, 2018March 31, 2019 as compared to a $12.7$41.1 million unrealized loss for the comparable prior year period on our equity investment in Veritone, and other changes in operating expenses as follows:

Inventor royalties and contingent legal fees, on a combined basis, decreased $5.2$36.0 million, primarily due to the decrease in related revenues for the periods.



Litigation and licensing expenses-patents decreased $2.0 million,increased $812,000, or 48%27%, to $2.1$3.8 million, due primarily to a net decreaseincrease in litigation support and third-party technical consulting expenses associated with ongoing licensing and enforcement programs andlitigation.

Amortization expense decreased $4.7 million, or 88%, due to a continued overall decrease in scheduled amortization resulting from patent portfolio related enforcement activities. Refer to “Investmentsimpairment charges previously recorded in Patent Portfolios” below for additional information regarding the impactsecond quarter of portfolio acquisition trends on licensing and enforcement activities and current and future licensing and enforcement related revenues.
2018.

General and administrative expenses, excluding non-cash stock compensation, increased $645,000decreased $622,000, or 12%14%, to $5.9$3.7 million, due primarily to an increasedecrease in corporate, general and administrative costs related to the 2018 proxy contest, which was partially offset by a reduction in employee related severanceperformance-based compensation costs.

Net non-cash stock compensation expense decreased $281,000,increased $1.0 million, or 19%99%, due primarily to second quarter 2017 non-cash stock compensation expense including amounts related to the August 2016 grantthree months ended March 31, 2018 including a $1.7 million credit for the decrease in fair value of optionsour Veritone related profits interest units, or Profits Interests, consistent with market-based vesting conditions with graded vesting features, resultingthe decrease in higher non-cashthe underlying Veritone stock compensationprice since December 31, 2017. In addition, the decrease was due to a decrease in expense during the earlier stages of the applicable service period. Excluding non-cash stock compensation related to the Profits Interest, non-cash stock compensation expense decreased $928,000, or 64%.for employees and board members that were terminated in 2018.

During the three months ended June 30, 2018, Acacia recorded impairment of patent-related intangible asset charges of $28.2 million. The impairment charges were realized in the period due to a reduction in expected estimated future net cash flows for certain patent portfolios. The impairment charges consisted of the excess of the asset’s carrying value over its estimated fair value as of June 30, 2018.






Overview - Six months ended June 30, 2018 compared with the six months ended June 30, 2017

Revenues increased $43.3 million to $68.6 million for the six months ended June 30, 2018, as compared to $25.3 million in the comparable prior year period, due primarily to an increase in the average revenue per agreement executed during the 2018 period. 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 $60.1 million for the six months ended June 30, 2018, as compared to $23.7 million for the six months ended June 30, 2017. The net change was primarily comprised of the change in revenues described above, a $17.1 million increase in the unrealized loss on our equity investment in Veritone and other changes inMarch 31, 2019, operating expenses as follows:

Inventor royalties, contingent legal feesincluded expenses for settlement and other costs of revenue, on a combined basis, increased $35.0 million primarily due to the increase in related revenues for the periods.

Litigation and licensing expenses-patents decreased $5.6 million, or 54%, to $4.9 million, due primarily to a net decrease in litigation support and third-party technical consulting expenses associated with ongoing licensing and enforcement programs and a continued overall decrease in portfolio related enforcement activities. Refer to “Investments in Patent Portfolios” below for additional information regarding the impact of portfolio acquisition trends on licensing and enforcement activities and current and future licensing and enforcement related revenues.

General and administrative expenses, excluding non-cash stock compensation, increased $260,000 or 3%, to $10.3 million due primarily to increase in corporate, general and administrative costs related to the 2018 proxy contest, which was partially offset by a reduction in employee related personnel and severance costs.

Net non-cash stock compensation expense decreased $3.4 million or 95%, primarily due to the first and second quarter 2017 non-cash stock compensation expense including amounts related to the August 2016 grant of options with market-based vesting conditions with graded vesting features, resulting in higher non-cash stock compensation expense during the earlier stages of the applicable service period. Excluding non-cash stock compensation related to the Profits Interest, non-cash stock compensation expense decreased $2.3 million, or 66%.

During the six months ended June 30, 2018, we recorded impairment of patent-related intangible asset charges of $28.2 million, as described above.

Investments in Patent Portfolios

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 to continue to identify and grow new relationships, then we may not be able to identify new technology-based 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,technology sources compete against us as they seek to develop and commercialize technologies. Strategies employed by potential partners may reduce the number of technology sources and potential clients to whom we can market our solutions. 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 material adverse effect on our revenues, operating results, financial condition and ability to maintain our licensing and enforcement business.

For example, during the six months ended June 30, 2018, we did not obtain control of any new patent portfolios. During fiscal year 2017, 2016 and 2015, we obtained control of only one, two and three, respectively, new patent portfolios, compared to six new patent portfolios, and 25 new patent portfolios in fiscal years 2014 and 2013, respectively. This decrease in our patent portfolio intake reflects in part our strategic decision in 2013 to shift the focus of our operating business to serving a smaller number of customers, each having higher quality patent portfolios. As a result, our gross number of patent portfolio acquisitions has decreased significantly. This decrease in our patent portfolio intake also reflects in part industry trends impacting our ability to acquire patent portfolios. For example, legislative and legal changes have increased the complexity of patent enforcement actions and may significantly affect the market availability of suitable patent portfolios for acquisition. These industry trends have continued, and as a result, our recent and future patent portfolio intake has been and may continue to be negatively impacted, resulting in further decreases in future revenue generating opportunities, and continued negative


adverse impacts on the sustainability of our licensing and enforcement business. We continue to experience significant adverse challenges with respect to our patent intake efforts, and if these adverse challenges continue, our licensing and enforcement revenues will continue to decline and we will be unable to profitably sustain our licensing and enforcement business going forward.contingency accruals totaling $650,000.

Patent Licensing and Enforcement

Patent Litigation Trial Dates and Related Trials.  As of the date of this report, our operating subsidiaries have threeno pending patent infringement case with a scheduled trial date in the next six months.  Patent infringement trials are components of our overall patent licensing process and are one of many factors that contribute to possible future revenue generating opportunities for us.  Scheduled trial dates, as promulgated by the respective court, merely provide an indication of when, in future periods, the trials may occur according to the court’s scheduling calendar at a specific point in time.  A court may change previously scheduled trial dates.  In fact, courts often reschedule trial dates for various reasons that are unrelated to the underlying patent assets and typically for reasons that are beyond our control.  While scheduled trial dates provide an indication of the timing of possible future revenue generating opportunities for us, the trials themselves represent the possible future revenue generating opportunities.  These future opportunities can result in varying outcomes.  In fact, it is difficult to predict the outcome of patent enforcement litigation at the trial level and outcomes can be unfavorable. It can be difficult to understand complex patented technologies, and as a result, this may lead to a higher rate of unfavorable litigation outcomes. Moreover, in the event of a favorable outcome, there is a higher rate of successful appeals in patent enforcement litigation than more standard business litigation. Such appeals are expensive and time consuming, resulting in increased costs and a potential for delayed or foregone revenue opportunities in the event of modification or reversal of favorable outcomes. Although we diligently pursue enforcement litigation, we cannot predict with reliability the decisions made by juries and trial courts. 

Litigation and Licensing Expense. We expect patent-related legal expenses to continue to fluctuate from period to period based on the factors summarized elsewhere herein, and in connection with future trial dates, international enforcement, strategic patent portfolio prosecution and enforcement activities. Refer to “Investments in Patent Portfolios” above for additional information regarding the impact ofour current and future patent portfolio acquisition trends oninvestment, prosecution, licensing and enforcement activities and current and future licensing and enforcement related revenues.activities. The pursuit of enforcement actions in connection with our licensing and enforcement programs can involve certain risks and uncertainties, including the following:

Increases in patent-related legal expenses associated with patent infringement litigation, including, but not limited to, increases in costs billed by outside legal counsel for discovery, depositions, economic analyses, damages assessments, expert witnesses and other consultants, re-exam and inter partes review costs, case-related audio/video presentations and other litigation support and administrative costs could increase our operating costs and decrease our profit generating opportunities;

Our patented technologies and enforcement actions are complex and, as a result, we may be required to appeal adverse decisions by trial courts in order to successfully enforce our patents. Moreover, such appeals may not be successful;

New legislation, regulations or rules related to enforcement actions, including any fee or cost shifting provisions, could significantly increase our operating costs and decrease our profit generating opportunities. 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 House of Representatives passed a bill that would require 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;



Courts may rule that our subsidiaries have violated certain statutory, regulatory, federal, local or governing rules or standards by pursuing such enforcement actions, which may expose us and our operating subsidiaries to material liabilities, which could harm our operating results and our financial position;

The complexity of negotiations and potential magnitude of exposure for potential infringers associated with higher quality patent portfolios may lead to increased intervals of time between the filing of litigation and potential revenue events (i.e. markman dates, trial dates), which may lead to increased legal expenses, consistent with the higher revenue potential of such portfolios; and

Fluctuations in overall patent portfolio related enforcement activities which are impacted by the portfolio intake challenges discussed above could harm our operating results and our financial position.

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. During the three months ended March 31, 2019, we acquired two new patent portfolios. In fiscal year 2018 we did not acquire any patent portfolios, compared to one portfolio during fiscal year 2017.
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 intellectual property 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 partners may reduce the number of technology sources and potential clients to whom we can market our solutions. 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 material adverse effect on our revenues, operating results, financial condition and ability to maintain our licensing and enforcement business.

Critical Accounting Estimates

Our unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these condensed consolidated statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these condensed consolidated financial statements. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in the audited consolidated financial statements and notes thereto and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 20172018. In addition, as set forth in Note 2 to the condensed consolidated financial statements included in this report, certain accounting policies were identified during the current period, based on activities occurring during the current period, as critical and requiring significant judgments and estimates.

Revenue RecognitionRecently Adopted Accounting Pronouncements

In May 2014, theFebruary 2016, FASB issued ASU 2016-02, Leases ("ASC 842") which requires a new accounting standards update addressing revenue from contracts with customers, which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under the standard, we are requiredlessee to recognize revenuein 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 we transfer promised IP rights to customersadopting ASC 842. The primary impact of adopting ASC 842 for the Company was the recognition in an amount that reflects the considerationconsolidated balance sheet of certain lease-


to which we expect to be entitled in exchangerelated assets and liabilities for those IP rights. In doing so, we are required to use more judgment and make more estimates in connectionoperating leases with the accountingterms longer than 12 months as of January 1, 2019. Such amounts were not previously accounted for revenue contracts with customers than under previous guidance, as described at Note 2 to the condensed consolidated financial statements contained elsewhere herein. Under the standard, (i) an entity should account for a promise to provide a customer with a “right to access” the entity’s IP as a performance obligation satisfied over time because the customer will simultaneously receive and consume the benefit from the entity’s performance of providing access to its IP as the performance occurs, and (ii) an entity’s promise to provide a customer with the “right to use” its IP is satisfied at a point in time. In addition, revenues from contracts with significant financing components should be recognized at an amount that reflects the price that a customer would have paid if the customer had paid cash for the IP rights when they transfer to the customer (i.e. adjustment for the time value of money). For sales and usage based royalties, the new standard requires us to include in the transaction price some or all of an amount of estimated variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

We elected to use the modified retrospective method of adoption and recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the openingCompany's consolidated balance of retained earnings on January 1, 2018. Comparative prior year periods were not be adjusted. The new accounting standard was applied to all contracts at the date of initial application. The cumulative effect of applying the new revenue standard, primarily relating to financing components of contracts executed in prior periods and estimates of variable consideration for sales and usage based royalty agreements executed in prior periods, was as follows (in thousands):
  Balance at December 31, 2017 Adjustments Due to ASC 606 Balance at January 1, 2018
Balance Sheets:      
Accounts receivable $153
 $4,542
 $4,695
Royalties and contingent legal fees payable 1,601
 1,728
 3,329
Accumulated deficit (320,018) 2,506
 (317,512)
Noncontrolling interests 1,358
 308
 1,666
sheets.

The impactCompany has adopted ASC 842, electing the practical expedient approaches, and has recognized approximately $628,000 of the adoptionright-of-use assets and an increase of the new accounting standard on the consolidated balance sheet and statement$1.2 million in lease-related liabilities as of operations was as follows (in thousands):March 31, 2019.
  Balance as Reported Balance Before ASC 606 Adoption Effect of Change
Balance Sheets:      
Accounts receivable $5,629
 $3,599
 $2,030
Royalties and contingent legal fees payable 4,765
 3,953
 812
       
Statements of Operations:      
Revenues $68,578
 $66,548
 $2,030
Inventor royalties 22,985
 22,287
 698
Contingent legal fees 16,796
 16,682
 114

Except as described above, the adoption of the new revenue recognitionlease accounting standard did not have a material impact on the condensed consolidated financial statements.

Other Investments

Investment in Miso Robotics. In June 2017, we made an investment in the Series A Preferred financing round for Miso Robotics, an innovative leader in robotics and AI solutions, totaling $2,250,000, acquiring a 22.6% ownership interest in Series A preferred stock The adoption of Miso Robotics, and one board seat. In February 2018, we made an additional equity investment in the Series B Preferred financing round for Miso Robotics totaling $6,000,000, increasing our ownership interest (Series B preferred stock) in Miso RoboticsASC 842 is expected to approximately 30%, and acquiring an additional board seat. As of February 2018, the preferred stock was not deemed to be in-substance common stock due to the substantive liquidation preference associated with the preferred stock. As such, as of February 2018, our investment in Miso Robotics is recorded at cost and assessed for any impairment at each balance sheet date. Prior to February 2018, the equity method of accounting was applied.



Equity investments in common stock and in-substance common stock without readily determinable fair values in companies over which we have the ability to exercise significant influence, are accounted for using the equity method of accounting. 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, are not substantially similar to the common stock, and therefore is not considerer 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. Investments in preferred stock with substantive liquidation preferences, and therefore not deemed to be in-substance common stock, are accounted for at cost (subject to impairment considerations, 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.

Determination of whether an equity investment is in-substance common stock requires significant judgment, including an estimation of the fair value of the equity investments in relation to the fair value of subordinated equity of the investee, if any. A change in estimates or judgments resulting in the determination that an equity investment is or is not in-substance common stock would result in the application of either the equity method of accounting, or the cost method of accounting to the investment.
The fair value of subordinated equity (i.e. common stock) and preferred stock for purposes of determining whether a liquidation preference is substantive was determined utilizing an option pricing methodology, with assumptions including: volatility of 70%, risk free rate of return of 2.50% and a term of five years. A discount for lack of marketability was determined for the common stock using a Finnerty model, based on the security-specific volatilities ranging from 80% to 89%. A one percent change in the DLOM assumptions utilized to estimate the fair value of common stock would not have ano material impact on the analysis.
ValuationCompany's consolidated results of Long-lived and Intangible Assetsoperations for the year ending December 31, 2019.

We review 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.

For the three and six months ended June 30, 2018, we recorded $28.2 million of patent portfolio impairment charges. The impairment charges were recorded in the periods due to developments in the ongoing litigation. The impairment charges consisted of the excess of the asset’s carrying value over its estimated fair value as of the applicable measurement date. Estimated fair value was determined based on estimates of future cash flows and estimates of probabilities of realization given the ongoing litigation.

Consolidated Results of Operations
Comparison of the Results of Operations for the Three and Six Months Ended June 30, 2018March 31, 2019 and 20172018

Revenues and Pretax Net LossIncome (Loss)
 Three Months Ended
June 30,
 Change Six Months Ended
June 30,
 Change Three Months Ended
March 31,
 Change
 2018 2017 $ % 2018 2017 $ % 2019 2018 $ %
                        
Revenues (in thousands, except percentage change values) $6,485
 $16,457
 $(9,972) (61)% $68,578
 $25,311
 $43,267
 171% $3,387
 $62,093
 $(58,706) (95)%
New agreements executed 2
 9
     6
 15
     
 4
    


Two licensees individually accounted for 48%70% and 42%21% of revenues recognized during the three months ended June 30, 2018, and oneMarch 31, 2019. One licensee accounted for 87% of revenues recognized during the six months ended June 30, 2018. One


licensee accounted for 85%96% of revenues recognized during the three months ended June 30, 2017 and two licensees accounted for 55% and 26% of revenues recognized during the six months ended June 30, 2017.March 31, 2018.

For the periods presented herein, a portionthe majority of the revenue agreements executed provided for the payment of one-time,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 Investments“Investments in Patent Portfolios” above for information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues. We continue to experience significant adverse challenges with respect to our patent intake efforts, and if these adverse challenges continue, our licensing and enforcement revenues will continue to decline and we will be unable to profitably sustain our licensing and enforcement business going forward.

  Three Months Ended
June 30,
 Change Six Months Ended
June 30,
 Change
  2018 2017 $ % 2018 2017 $ %
  (in thousands, except percentage change values)
Loss before provision for income taxes $(28,221) $(12,786) $(15,435) 121% $(60,141) $(23,666) $(36,475) (154)%
  Three Months Ended
March 31,
 Change
  2019 2018 $ %
  (in thousands, except percentage change values)
Loss before provision for income taxes $(4,084) $(31,920) $27,836
 (87)%



A reconciliation of the change in pretax loss for the periods presented is as follows:
 Three Months Ended
June 30,
   Six Months Ended
June 30,
  
 2018 vs. 2017 % 2018 vs. 2017 %
 (in thousands, except percentage values)
Increase (decrease) in revenues$(9,972) 65 % $43,267
 (119)%
(Increase) decrease in inventor royalties, contingent legal fees and other5,231
 (34)% (34,979) 96 %
(Increase) decrease in general and administrative expenses(645) 4 % (260) 1 %
Decrease in non-cash stock compensation expenses281
 (2)% 3,433
 (9)%
Decrease in litigation and licensing expenses2,004
 (13)% 5,645
 (15)%
Decrease in patent amortization expenses293
 (2)% 478
 (1)%
Increase in patent-related impairment charges and other(29,210) 189 % (29,210) 80 %
Change in unrealized gain (loss) on investment16,758
 (108)% (24,339) 68 %
Other(175) 1 % (510) 1 %
Total change in loss before provision for income taxes$(15,435) 100 % $(36,475) 102 %
 Three Months Ended
March 31,
  
 2019 vs. 2018 %
 (in thousands, except percentage values)
Decrease in revenues$(58,706) (211)%
Decrease in inventor royalties, contingent legal fees and patent acquisition expenses39,973
 144 %
Decrease in general and administrative expenses, excluding non-cash stock compensation622
 2 %
Increase in non-cash stock compensation expenses(1,016) (4)%
Increase in litigation and licensing expenses(812) (3)%
Decrease in patent amortization expenses4,674
 17 %
Change in realized and unrealized gain (loss) on investment42,415
 152 %
Other686
 3 %
Total change in loss before provision for income taxes$27,836
 100 %


Cost of Revenues
  Three Months Ended
June 30,
 Change Six Months Ended
June 30,
 Change
  2018 2017 $ % 2018 2017 $ %
  (in thousands, except percentage change values)
Inventor royalties $1,241
 $4,273
 $(3,032) (71)% $22,985
 $4,939
 $18,046
 *
Contingent legal fees $1,037
 $3,236
 $(2,199) (68)% $16,796
 $3,863
 $12,933
 *
Other $
 $
 $
  % $4,000
 $
 $4,000
 *
* Percentage change in excess of 200%
  Three Months Ended
March 31,
 Change
  2019 2018 $ %
  (in thousands, except percentage change values)
Inventor royalties $1,353
 $21,744
 $(20,391) (94)%
Contingent legal fees $177
 $15,759
 $(15,582) (99)%
Patent acquisition expenses $
 $4,000
 $(4,000) (100)%

Inventor Royalties, Contingent Legal Fees Expense and Other.  Inventor royalties and contingent legal fee expenses fluctuate period to period based on the amount of revenues recognized each period, the terms and conditions of agreements executed each period and the mix of specific patent portfolios with varying economic terms and obligations generating revenues each period. Other operating expenses for the sixthree months ended June 30,March 31, 2018 also included $4.0 million in other direct cost of revenues related to patent rights acquired and licensed in the first quarter of 2018. A summary of the main drivers of the


change in inventor royalties expense and contingent legal fees expense for the comparable periods presented, using the current year period as the base period, is as follows (in thousands, except percentage values):
  Three Months Ended
June 30,
 % Six Months Ended
June 30,
 %
  2018 vs. 2017  2018 vs. 2017 
Inventor Royalties:  
(Decrease) increase in total revenues $(3,657) 121 % $15,188
 84%
Increase in inventor royalty rates 625
 (21)% 2,858
 16%
Total change in inventor royalties expense $(3,032) 100 % $18,046
 100%

  Three Months Ended
June 30,
 % Six Months Ended
June 30,
 %
  2018 vs. 2017  2018 vs. 2017 
Contingent Legal Fees:        
(Decrease) increase in total revenues $(1,688) 77% $10,712
 83%
(Decrease) increase in contingent legal fee rates (511) 23% 2,221
 17%
Total change in contingent legal fees expense $(2,199) 100% $12,933
 100%
  Three Months Ended
March 31,
 Change
  2019 2018 $ %
  
(in thousands, except percentage change values)

Litigation and licensing expenses - patents $3,801
 $2,989
 $812
 27 %
Amortization of patents $656
 $5,330
 $(4,674) (88)%

  Three Months Ended
June 30,
 Change Six Months Ended
June 30,
 Change
  2018 2017 $ % 2018 2017 $ %
  
(in thousands, except percentage change values)

Litigation and licensing expenses - patents $2,130
 $4,134
 $(2,004) (48)% $4,875
 $10,520
 $(5,645) (54)%
Amortization of patents $5,278
 $5,571
 $(293) (5)% $10,608
 $11,086
 $(478) (4)%
Impairment of patent-related intangible and other assets $29,210
 $
 $29,210
 100 % $29,210
 $
 $29,210
 100 %
* Percentage change in excess of 200%

Litigation and Licensing Expenses - Patents.  Litigation and licensing expenses-patents decreasedincreased for the periods presented due to a net decreaseincrease in litigation support patent prosecution and litigationthird-party technical consulting expenses associated with ongoing licensing and enforcement programs and a continued overall decrease in portfolio related enforcement activities. We expect patent-related legal expenses to continue to decrease in relation to the applicable comparable prior periods 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 portfolio acquisition trends on licensing and enforcement activities and current and future licensing and enforcement related revenues.litigation.

ImpairmentAmortization of Patent-Related Intangible AssetsPatents. . During the three months ended June 30, 2018, Acacia recorded impairment of patent-related intangible asset charges of $28.2 million. The impairment charges were realized in the periodAmortization expense decreased $4.7 million, or 88%, due to due to a reductiondecrease in expected estimated future net cash flows for certain patents due toscheduled amortization resulting from patent portfolio impairment charges previously recorded in the second quarter 2018 developments in the ongoing litigation. The impairment charges consisted of the excess of the asset’s carrying value over its estimated fair value as of June 30, 2018. Assumptions utilized in the cash flow analysis included margins on estimated net proceeds ranging from 53% to 86% and a discount for the time value of money of zero percent, due to the relatively short time-frame associated with estimated cash flows.












Operating Expenses (in thousands, except percentage change values)
 Three Months Ended
June 30,
 Change Six Months Ended
June 30,
 Change Three Months Ended
March 31,
 Change
 2018 2017 $ % 2018 2017 $ % 2019 2018 $ %
                    
General and administrative expenses $5,892
 $5,247
 $645
 12 % $10,295
 $10,035
 $260
 3 % $3,703
 $4,325
 $(622) (14)%
Non-cash stock compensation expense - G&A 521
 1,449
 (928) (64)% 1,225
 3,561
 (2,336) (66)% (8) 704
 (712) (101)%
Non-cash stock compensation expense - Profits Interests $685
 $38
 $647
 >100%
 $(1,043) $54
 $(1,097) >100%
 $
 $(1,728) $1,728
 (100)%
Total general and administrative expenses $7,098
 $6,734
 $364
 5 % $10,477
 $13,650
 $(3,173) (23)% $3,695
 $3,301
 $394
 12 %

General and Administrative Expenses.  A summary of the main drivers of the change in general and administrative expenses for the periods presented, is as follows (in thousands, except percentage values):
Three Months Ended
June 30,
   Six Months Ended
June 30,
  Three Months Ended
March 31,
  
2018 vs. 2017 % 2018 vs. 2017 %2019 vs. 2018 %
    
Personnel cost reductions due to headcount reductions$(135) (37)% $(719) 23 %
Personnel costs and board fees$267
 68 %
Variable performance-based compensation costs(129) (35)% 582
 (18)%(803) (204)%
Corporate, general and administrative costs1,967
 540 % 1,792
 (56)%(167) (42)%
Non-cash stock compensation expense(282) (77)% (3,434) 108 %1,016
 258 %
Non-recurring employee severance costs(1,057) (291)% (1,394) 43 %81
 20 %
Total change in general and administrative expenses$364
 100 % $(3,173) 100 %$394
 100 %

The decrease in non-cash stock compensation expense - G&Acredit recorded for the periods presented was primarily due to inclusion in the prior period of expenses related to the August 2016 grant of options with market-based vesting conditions with graded vesting features, resulting in higher non-cash stock compensation expense during the earlier stages of the applicable service period. The fluctuation inthree months ended March 31, 2018 for our Profits Interests related non-cash stock compensation expense was due to a fluctuationsdecrease in the estimated fair value of our Profits Interests, as a result of the changes in Veritone's stock price duringfrom December 31, 2017 to March 31, 2018. The decrease in non-cash stock compensation expense - G&A for the reporting periods. Profits Interests are classified as liability awards, which are measured at fair value on the grant dateperiods presented was primarily due to a decrease in expense for employees and re-measured each reporting period at fair value until the award is settled, with changesboard members that were terminated in fair value reflected in the statement of operations each period.2018.
    
Other Operating Income (Expense)

Change in Fair Value of Investment, net. Acacia’s investment in Veritone is recorded at fair value, and marked to market at each balance sheet date, with changes in fair value, primarily based on changes in Veritone's stock price, reflected in the statement of operations each period. Results for the three months ended June 30, 2018March 31, 2019 included an unrealized gain on our investment in Veritone totaling $11.3$6.9 million. Results for the sixthree months ended June 30,March 31, 2018 included an unrealized loss on our investment in Veritone totaling $29.8$41.1 million.

Results for the The three and six months ended June 30, 2017 includedMarch 31, 2019 include a net unrealizedrealized loss totaling $5.4of $5.6 million comprisedfrom the sale of an unrealized gain on conversion628,048 shares at a weighted average price of our Veritone loans to equity of $2.7 million, an unrealized gain on the exercise of our Primary Warrant of $4.6 million and an unrealized loss related to the application of the fair value method of accounting as of June 30, 2017 of $12.7 million. At June 30, 2018, the cumulative net unrealized gain (since the IPO) on our Veritone investment was $19.8 million.







$5.24 per share.

Income Taxes
Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
March 31,
2018 2017 2018 20172019 2018
          
Provision for income taxes (in thousands)$(285) $(1,478) $(476) $(2,719)$(314) $(191)
Effective tax rate(1)% (12)% (1)% (11)%8% 1%
    
Tax expense for the periods presented primarily reflects the impact of state taxes and foreign withholding taxes incurred on revenue agreements executed with third-party licensees domiciled in foreign jurisdictions.


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 August 2019May 2020 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 in our Annual Report on Form 10-K for the year ended December 31, 2017.2018. 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 periodically and such volatility and disruption may occur in the future. 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 and Investments

Our consolidated cash and cash equivalents and investments on hand totaled $134.8$167.9 million at June 30, 2018,March 31, 2019, compared to $136.6$165.5 million at December 31, 2017.2018.  The net change in cash and cash equivalents for the periods presented was comprised of the following (in thousands):
Six Months Ended
June 30,
Three Months Ended
March 31,
2018 20172019 2018
      
Net cash provided by (used in):      
Operating activities$9,631
 $(5,327)$(58,812) $49,970
Investing activities(41,495) (71,119)3,288
 (36,309)
Financing activities(4,590) 614

 24

Cash Flows from Operating Activities.  Cash receipts from licensees for the sixthree months ended June 30, 2018 increased 83%March 31, 2019 decreased 80% to $67.8$12.3 million, as compared to $37.1$62.1 million in the comparable 20172018 period, due to an increase in revenues and the net impact of the timing of cash receipts from licensees. Cash outflows from operations, excluding the impact of purchases and maturities of trading securities, for the sixthree months ended June 30, 2018March 31, 2019 increased 37%18% to $58.1$14.3 million, as compared to $42.4$12.1 million in the comparable 20172018 period, primarily due to the net impact of the timing of related payments of inventor royalties and contingent legal fees and the timing of payments to other third-parties in the ordinary course, for the same periods. Refer to “Working Capital” below for additional information.



Cash Flows from Investing Activities. Cash flows from investing activities and related changes were comprised of the following for the periods presented (in thousands):
 Six Months Ended
June 30,
 2018 2017
    
Investments in Investees$(7,000) $(31,514)
Advances to Investee
 (4,000)
Available-for-sale investments, net (cash management activities)(34,495) (35,605)
Net cash used in investing activities$(41,495) $(71,119)
 Three Months Ended
March 31,
 2019 2018
    
Sale of investment(1)
$3,294
 $
Investments in Investees
 (7,000)
Net sale of short-term investments
 (29,309)
Purchases of property and equipment(6) 
    Partnership with Miso Robotics, Inc. In June 2017, we partnered with Miso Robotics, an innovative leader in robotics and AI solutions, which included an equity investment totaling $2.25 million, as part of Miso Robotics’ closing of $3.1 million in Series A funding. In addition, in February 2018, we made an additional strategic equity investment totaling $6.0 million in the Series B financing round for Miso Robotics, increasing our fully diluted ownership interest to approximately 30% as of June 30, 2018.
    Investment in Veritone. On March 14, 2017, we entered into an additional secured convertible promissory note with Veritone, or the Veritone Bridge Loan, which permitted Veritone to borrow up to an additional $4.0 million, bearing interest at the rate of 8.0% per annum. On March 17, 2017, we funded the initial $1.0 million advance, or the First Bridge Loan. On April 14, 2017, we funded the second $1.0 million advance, or the Second Bridge Loan. All advances and accrued interest under the Veritone Bridge Loan were due and payable on November 25, 2017. In May 2017, pursuant to the terms of the Veritone Bridge Loan, we elected to make an additional advance to Veritone totaling $2.0 million, representing all principal amounts not advanced upon Veritone’s consummation of its IPO. Upon consummation of Veritone’s IPO, the outstanding principal balance and accrued interest under the Veritone Bridge Loan, totaling $4.0 million, automatically converted into 295,440 shares of Veritone’s common stock based on a conversion price of $13.6088 per share.

_____________________
Cash Flows from Financing Activities - Repurchases of Common Stock. (1) In February 2018, our Board of Directors authorized the repurchase of upRefer to $20,000,000 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 our Board of Directors at its discretion (the “Stock Repurchase Program”). In determining whether or not to repurchase any shares of our common stock, our Board of Directors considers 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. We have no obligation to repurchase any amount of our common stock under the Stock Repurchase Program. Repurchases to date were made in the open market in compliance with applicable Securities and Exchange Commission rules. The authorization to repurchase shares presented an opportunity to reduce the outstanding share count and enhance stockholder value. Monthly stock repurchasesNote 5 for the periods presented, all of which were purchased as part of a publicly announced plan or program, were as follows:additional information
 Total Number of Shares PurchasedAverage Price paid per Share
Approximate Dollar Value of
Shares that May Yet be
Purchased under the Program
Plan Expiration
     
May 1, 2018- May 30, 20181,190,420
$3.89
$15,366,000
February 28, 2019
Totals for 20181,190,420
$3.89
  

Working Capital

Working capital at June 30, 2018 increasedMarch 31, 2019 decreased to $130.4$164.2 million, compared to $130.1$170.4 million at December 31, 2017.2018. Consolidated accounts receivable from licensees decreased to $24.0 million at March 31, 2019, compared to $32.9 million at


December 31, 2018. Accrued patent investment costs increased to $5.6$3.8 million at June 30, 2018, compared to $153,000 at DecemberMarch 31, 2017.2019. Consolidated royalties and contingent legal fees payable increaseddecreased to $4.8$16.1 million at June 30, 2018,March 31, 2019, compared to $1.6$22.7 million at December 31, 2017.  


2018.  

The majority of royalties and contingent legal fees payable are scheduled to be paid inthrough the third and fourth quarter of 2018,2019, subsequent to receipt by us of the related fee payments from licensees, in accordance with the underlying contractual arrangements.


Off-Balance Sheet Arrangements

ExceptAs of March 31, 2019, we did not have any relationships with any unconsolidated entities or financial partnerships, such as set forth below, weentities often referred to as structured finance or special purpose entities, which would have not entered intobeen established to facilitate any off-balance sheet financing arrangements.  We have no long-term debt. The following table lists our known contractual obligations and future cash commitments as of June 30, 2018 (in thousands): 
 Payments Due by Period (In thousands)
Contractual ObligationsTotal Less than 1 year 1-3 years 3-5 years
        
Operating leases, net of guaranteed sublease income$1,936
 $552
 $1,384
 $
Severance related payments$2,211
 $2,211
 $
 $
Total$4,147
 $2,763
 $1,384
 $
arrangements or for any other contractually specified purposes.


Recent Accounting Pronouncements

Refer to Note 8 to the condensed consolidated financial statements included in this report.


Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our short-term investment activities is to preserve principal while concurrently maximizing the income we receive from our short-term investments without significantly increasing risk. Some of the securities that we invest in may be subject to interest rate risk and/or market risk. This means that a change in prevailing interest rates, with respect to interest rate risk, or a change in the value of the United States equity markets, with respect to market risk, may cause the principal amount or market value of the short-term investments to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the current value of the principal amount of our investment may decline. To minimize these risks in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, high-grade corporate bonds, government and non-government debt securities and certificates of deposit.

During the applicable periods presented,At March 31, 2019 and December 31, 2018, our short-term investments 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, AAA,investment grade, U.S. government and corporate securities (included in short-term investments in the accompanying consolidated balance sheets).

In general, money market funds are not subject to market risk because the interest paid on such funds 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 short-term investment 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.

Investment Risk. We are exposed to investment risks related to changes in the underlying financial condition of certain of our partnerships with high-growth and potentially disruptive technology companies, and our related equity investments in these technology companies. The fair value of these investments can be significantly impacted by the risk of adverse changes in securities markets generally, as well as risks related to the performance of the companies whose securities we have invested in, risks associated with specific industries, and other factors. These investments are subject to significant fluctuations in fair value due to the volatility of the securities markets and of the underlying businesses. As of June 30,March 31, 2019 and December 31, 2018, the carrying value of our common stock and warrants in public and private companies was $83.2 million.$14.5 million and $18.7 million, respectively. We record our common stock and warrant investments in publicly traded companies at fair value, which is subject to market price volatility, and represents $75.0$6.3 million


and $10.5 million of our non-current investmentsassets as of June 30, 2018. AMarch 31, 2019 and December 31, 2018, respectively. As of December 31, 2018, a hypothetical 10% adverse change in the market price of Veritone's publicly traded common stock would have resulted in a decrease of approximately $7.9 million$540,000 in the fair value of our equity and equity warrant investments in Veritone.Veritone and a decrease of approximately $301,000 in our other equity investments. As of March 31, 2019, a hypothetical 10% adverse change in the market price of Veritone's publicly traded common stock would have resulted in a decrease of approximately $658,000 in the fair value of our equity and equity warrant investments in Veritone and a decrease of approximately $83,000 in our other equity investments. We evaluate our equity and equity warrant investments in private companies for impairment when events and circumstances indicate that the decline in fair value of such assets below the carrying value is other-than temporary. Our analysis includes a review of recent operating results and trends, recent sales/acquisitions of the investee securities, and other publicly available data. The current global economic


climate provides additional uncertainty. Valuations of private companies are inherently more complex due to the lack of readily available market data. As such, we believe that market sensitivities are not practicable for our private company equity investments.


Item 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Our management,Under the supervision and with the participation and under the supervision of our presidentmanagement, including our Chief Intellectual Property Officer and chief financial officer, has evaluated the effectivenessCorporate Controller, we conducted an evaluation of our disclosure controls and procedures, (asas defined in RuleRules 13a-15(e) promulgatedand 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this quarterly report.Act.
Based on thatthis evaluation, our presidentChief Intellectual Property Officer and our chief financial officer haveCorporate Controller concluded that, as of March 31, 2019, our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report 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 officerChief Intellectual Property Officer and chief financial officer,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 specified inprescribed by the SEC’s rules and forms.SEC.
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter (the quarter ended June 30, 2018)March 31, 2019) 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 principal executive officerChief Intellectual Property Officer and principal financial officer,Corporate Controller, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error 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.



PART II--OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

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. Acacia continues to vigorously contest all allegations of wrongdoing.


Item 1A.  RISK FACTORS

An investment in our common stock involves risks. Before making an investment decision, you should carefully consider all of the information in this Quarterly Report on Form 10-Q, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 in this Quarterly Report on Form 10-Q, as well as our condensed consolidated financial statements and the accompanying notes thereto. In addition, you should carefully consider the risks and uncertainties described below and in the section entitled “Risk Factors” in Part I, Item 1A of our Annual Report, as well as in our other public filings with the SEC. If any of the identified risks are realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that case, the trading price of our common stock may decline, and you could lose all or part of your investment. In addition, other risks of which we are currently unaware, or which we do not currently view as material, could have a material adverse effect on our business, financial condition, operating results and prospects.



Item 6.  EXHIBITS
      
EXHIBIT
NUMBER
EXHIBIT
10.1
31.1#
31.2#
32.1**#
32.2**#
101#
___________________________
#Filed herewith.
**The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any of the Registrant’s filings under the Securities Act or the Exchange Act, irrespective of any general incorporation language contained in any such filing.


filings under the Securities Act or the Exchange Act, irrespective of any general incorporation language contained in any such filing.



SIGNATURES


Pursuant to the requirements 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.


 ACACIA RESEARCH CORPORATION
  
 /s/  Robert StewartMarc Booth
 By: Robert StewartMarc W. Booth
 President
Chief Intellectual Property Officer

 (Principal Executive Officer and Duly Authorized Signatory)
  
 /s/  Clayton J. Haynes  Li Yu
 By: Clayton J. HaynesLi Yu
 Chief Financial Officer and TreasurerCorporate Controller
 (Principal Financial and Accounting Officer)
 

Date:     August 9, 2018Mary 10, 2019



EXHIBIT INDEX
                   
EXHIBIT
NUMBER
EXHIBIT
10.1Separation Agreement and General Release of Claims, dated February 12, 2019, by and between Acacia Research Group, LLC and Kirsten Hoover (incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on February 13, 2019 (File No. 001-37721)
31.1#Certification of ChiefPrincipal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
31.2#Certification of ChiefPrincipal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
32.1**#Certification of ChiefPrincipal Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350
32.2**#Certification of ChiefPrincipal Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350
101#Interactive Data Files Pursuant to Rule 405 of Regulation S-T.
___________________________
#Filed herewith.
**The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any of the Registrant’s filings under the Securities Act or the Exchange Act, irrespective of any general incorporation language contained in any such filing.




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