| Summary of Significant Accounting Policies | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Revenue is recognized upon transfer of control of promised bundled
IP Rights and other contractual performance obligations to licensees in an amount that reflects the consideration we expect to
receive in exchange for those IP Rights. Revenue contracts that provide promises to grant the right to use IP Rights as they exist
at the point in time at which the IP Rights are granted, are accounted for as performance obligations satisfied at a point in time
and revenue is recognized at the point in time that the applicable performance obligations are satisfied and all other revenue
recognition criteria have been met. For the periods presented, revenue contracts executed by the
Company primarily provided for the payment of contractually determined, one-time, paid-up license fees in consideration for the
grant of certain IP Rights for patented technologies owned or controlled by Acacia. Revenues also included license fees from sales-based
revenue contracts, the majority of which were originally executed in prior periods, that provide for the payment of quarterly license
fees based on quarterly sales of applicable product units by licensees (“Recurring Revenue Agreements”). Revenues may
also include court ordered settlements or awards related to our patent portfolio. IP Rights granted included the following, as
applicable: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented
technologies, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any
pending litigation. The IP Rights granted were perpetual in nature, extending until the legal expiration date of the related patents.
The individual IP Rights are not accounted for as separate performance obligations, as (i) the nature of the promise, within the
context of the contract, is to transfer combined items to which the promised IP Rights are inputs and (ii) the Company's promise
to transfer each individual IP right described above to the customer is not separately identifiable from other promises to transfer
IP Rights in the contract. Since the promised IP Rights are not individually distinct,
the Company combines each individual IP right in the contract into a bundle of IP rights that is distinct and accounts for all
of the IP Rights promised in the contract as a single performance obligation. The IP Rights granted generally are “functional
IP rights” that have significant standalone functionality. Acacia's subsequent activities do not substantively change that
functionality and do not significantly affect the utility of the IP to which the licensee has rights. Acacia’s operating
subsidiaries have no further obligation with respect to the grant of IP Rights, including no express or implied obligation to maintain
or upgrade the technology, or provide future support or services. The contracts provide for the grant (i.e., transfer of control)
of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the contract. Licensees legally
obtain control of the IP Rights upon execution of the contract. As such, the earnings process is complete and revenue is recognized
upon the execution of the contract, when collectability is probable and all other revenue recognition criteria have been met. Revenue
contracts generally provide for payment of contractual amounts within 30-90 days of execution of the contract, or the end of the
quarter in which the sale or usage occurs for Recurring Revenue Agreements. Contractual payments made by licensees are generally
non-refundable. For sales-based royalties, the Company includes in the transaction
price some or all of an amount of estimated variable consideration to the extent that it is probable that a significant reversal
in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is
subsequently resolved. Notwithstanding, revenue is recognized for a sales-based royalty promised in exchange for a license of IP
Rights when the later of (i) the subsequent sale or usage occurs, or (ii) the performance obligation to which some or all
of the sales-based royalty has been allocated has been satisfied. Estimates are generally based on historical levels of activity,
if available. Revenues from contracts with significant financing components
(either explicit or implicit) are recognized at an amount that reflects the price that a licensee would have paid if the licensee
had paid cash for the IP Rights when they transfer to the licensee. In determining the transaction price, the Company adjusts the
promised amount of consideration for the effects of the time value of money. As a practical expedient, the Company does not adjust
the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception,
that the period between when the entity transfers promised IP Rights to a customer and when the customer pays for the IP Rights
will be one year or less. In general, the Company is required to make certain judgments
and estimates in connection with the accounting for revenue contracts with customers. Such areas may include identifying performance
obligations in the contract, estimating the timing of satisfaction of performance obligations, determining whether a promise to
grant a license is distinct from other promised goods or services, evaluating whether a license transfers to a customer at a point
in time or over time, allocating the transaction price to separate performance obligations, determining whether contracts contain
a significant financing component, and estimating revenues recognized at a point in time for sales-based royalties. Revenues were comprised of the following for the periods presented:
Three Months Ended
March 31,
2020 2019
(In thousands)
Paid-up Revenue Agreements $ 3,300 $ –
Recurring Revenue Agreements 515 3,387
Total Revenue $ 3,815 $ 3,387 Refer to “ Inventor Royalties and Contingent Legal Expenses Portfolio Operations Cost of revenues include the costs and expenses incurred in
connection with Acacia’s patent licensing and enforcement activities, including inventor royalties paid to patent owners,
contingent legal fees paid to external patent counsel, other patent-related legal expenses paid to external patent counsel, licensing
and enforcement related research, consulting and other expenses paid to third-parties and the amortization of patent-related investment
costs. These costs are included under the caption “Portfolio operations” in the accompanying condensed consolidated
statements of operations. Inventor Royalties and Contingent Legal Expenses Inventor royalties are expensed in the condensed consolidated
statements of operations in the period that the related revenues are recognized. In certain instances, pursuant to the terms of
the underlying inventor agreements, upfront advances paid to patent owners by Acacia’s operating subsidiaries are recoverable
from future net revenues. Patent costs that are recoverable from future net revenues are amortized over the estimated economic
useful life of the related patents, or as the prepaid royalties are earned by the inventor, as appropriate, and the related expense
is included in amortization expense in the condensed consolidated statements of operations. Any unamortized upfront advances recovered
from net revenues are expensed in the period recovered and included in amortization expense in the condensed consolidated statements
of operations. Contingent legal fees are expensed in the condensed consolidated
statements of operations in the period that the related revenues are recognized. In instances where there are no recoveries from
potential infringers, no contingent legal fees are paid; however, Acacia’s operating subsidiaries may be liable for certain
out of pocket legal costs incurred pursuant to the underlying legal services agreement. Inventor royalty and contingent legal agreements typically provide
for payment by the Company of contractual amounts 30 days subsequent to the fiscal quarter end during which related license fee
payments are received from licensees by the Company. Concentration of credit risks Financial instruments that potentially subject Acacia to concentrations
of credit risk are cash equivalents, trading securities and accounts receivable. Acacia places its cash equivalents and trading
securities primarily in highly rated money market funds and investment grade marketable securities. Cash and cash equivalents
are also invested in deposits with certain financial institutions and may, at times, exceed federally insured limits. Acacia has
not experienced any significant losses on its deposits of cash and cash equivalents. Three licensees individually accounted for 52%, 33% and 9% of
revenues recognized during the three months ended March 31, 2020. Two licensees individually accounted for 70% and 21% of revenues
recognized during the three months ended March 31, 2019. For the three months ended March 31, 2020, 4% 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 months ended March 31, 2019, 75% of revenues were attributable
to licensees domiciled in foreign jurisdictions. Three licensees individually represented approximately 56%,
15%, and 14% of accounts receivable at March 31, 2020. Two licensees individually represented approximately 70% and 17% of accounts
receivable at December 31, 2019. Patents Patents include the cost of patents or patent rights (hereinafter,
collectively “patents”) acquired from third-parties or obtained in connection with business combinations. Patent costs
are amortized utilizing the straight-line method over their remaining economic useful lives. Refer to Note 4 for additional information
regarding our patents. Impairment of Long-lived Assets Acacia reviews long-lived assets and intangible assets for
potential impairment annually (quarterly for patents) and when events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. In the event the expected undiscounted future cash flows resulting from the use of the asset
is less than the carrying amount of the asset, an impairment loss is recorded in an amount equal to the excess of the asset’s
carrying value over its fair value. If an asset is determined to be impaired, the loss is measured based on quoted market prices
in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation
techniques, including a discounted value of estimated future cash flows. In the event that management decides to no longer allocate
resources to a patent portfolio, an impairment loss equal to the remaining carrying value of the asset is recorded. Refer to Note
4 for additional information. Fair value is generally estimated using the “Income Approach,”
focusing on the estimated future net income-producing capability of the patent portfolios over their estimated remaining economic
useful life. Estimates of future after-tax cash flows are converted to present value through “discounting,” including
an estimated rate of return that accounts for both the time value of money and investment risk factors. Estimated cash inflows
are typically based on estimates of reasonable royalty rates for the applicable technology, applied to estimated market data. Estimated
cash outflows are based on existing contractual obligations, such as contingent legal fee and inventor royalty obligations, applied
to estimated license fee revenues, in addition to other estimates of out-of-pocket expenses associated with a specific patent portfolio’s
licensing and enforcement program. The analysis also contemplates consideration of current information about the patent portfolio
including, status and stage of litigation, periodic results of the litigation process, strength of the patent portfolio, technology
coverage and other pertinent information that could impact future net cash flows. Cash and Cash Equivalents Acacia considers all highly liquid, trading securities with
original maturities of three months or less when purchased to be cash equivalents. For the periods presented, Acacia’s cash
equivalents are comprised of investments in AAA rated money market funds that invest in first-tier only securities, which primarily
includes: domestic commercial paper, securities issued or guaranteed by the U.S. government or its agencies, U.S. bank obligations,
and fully collateralized repurchase agreements. Acacia’s cash equivalents are measured at fair value using quoted prices
that represent Level 1 inputs. Long Term Restricted Cash Long-term restricted cash relates to the proceeds received
from the issuance of Series A redeemable convertible preferred stock (the “Series A Redeemable Convertible Preferred Stock”)
which are held in an escrow account. The amounts are to be released to the Company upon, among other things, (i) the consummation
of a suitable investment or acquisition by the Company or (ii) the conversion of Series A Redeemable Convertible Preferred Stock
into common stock. Trading Securities- Debt Investments in debt securities are reported at fair value on
a recurring basis, with related realized and unrealized gains and losses recorded in the condensed consolidated 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). Accrued interest is included in the trading securities balance on the
condensed consolidated balance sheets. Trading Securities - Equity Investments in equity securities are reported at fair value
on a recurring basis, with related realized and unrealized gains and losses in the value of such securities recorded in the condensed
consolidated statements of operations in other income (expense). Dividend income is included in other income (expense). Trading securities for the periods presented were comprised
of the following:
Cost Gross Gross Fair Value
(In thousands)
Security Type
March 31, 2020:
Trading securities - debt $ 89,322 $ 24 $ (383 ) $ 88,963
Trading securities - equity 16,616 96 (6,242 ) 10,470
$ 105,938 $ 120 $ (6,625 ) $ 99,433
December 31, 2019:
Trading securities - debt $ 93,712 $ 143 $ (12 ) $ 93,843
Trading securities - equity 17,674 211 (745 ) 17,140
$ 111,386 $ 354 $ (757 ) $ 110,983 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 (ii) Level
2 Pricing Models with Significant Observable Inputs (iii) Level
3 Unobservable Inputs Whenever possible, the Company is required
to use observable market inputs (Level 1 – quoted market prices) when measuring fair value. In such cases, the level at which
the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.
The assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability
being measured. In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. Financial
assets and liabilities measured at fair value on a recurring basis were as follows:
Level 1 Level 2 Level 3
(In thousands)
Assets as of March 31, 2020:
Trading securities - debt $ – $ 88,963 $ –
Trading securities - equity 10,470 – –
Investment at fair value - warrants (Note 5) – 1,387 –
Total recurring fair value measurements as of March 31, 2020 $ 10,470 $ 90,350 $ –
Assets as of December 31, 2019:
Trading securities - debt $ – $ 93,843 $ –
Trading securities - equity 17,140 – –
Investment at fair value - warrants (Note 5) – 757 –
Investment at fair value - common stock (Note 5) 743 – –
Total recurring fair value measurements as of December 31, 2019 $ 17,883 $ 94,600 $ –
Liabilities as of March 31, 2020:
Profits interest units $ – $ 591 $ –
Series A warrants – 2,610 –
Series B warrants – – 6,231
Embedded derivative liability – – 21,682
Total liabilities as of March 31, 2020 $ – $ 3,201 $ 27,913
Liabilities as of December 31, 2019:
Profits interest units $ – $ 591 $ –
Series A warrants – 3,568 –
Embedded derivative liability – – 17,974
Total liabilities as of December 31, 2019 $ – $ 4,159 $ 17,974 The following table sets forth a summary of the changes in the
estimated fair value of the Company’s Level 3 liabilities, which are measured at fair value as a on a recurring basis:
Series A Preferred Stock Embedded Derivative Liability Series B Warrants Liability
(In thousands)
Opening balance as of December 31, 2019 $ 17,974 $ –
Issuance of Series B warrants – 4,600
Remeasurement to fair value 3,708 1,631
Balance as of March 31, 2020 $ 21,682 $ 6,231 Investments at Fair Value On an individual investment basis, Acacia may elect to account
for investments in companies where the Company has the ability to exercise significant influence over operating and financial policies
of the investee, at fair value. If the fair value method is applied to an investment that would otherwise be accounted for under
the equity method of accounting, it is applied to all of the financial interests in the same entity that are eligible items (i.e.,
common stock and warrants). Other Investments Equity investments in common stock and in-substance common stock
without readily determinable fair values in companies over which the Company has the ability to exercise significant influence,
are accounted for using the equity method of accounting. Acacia includes its proportionate share of earnings and/or losses of its
equity method investees in equity in earnings (losses) of investees in the condensed consolidated statements of operations. Investments in preferred stock with substantive liquidation
preferences are accounted for at cost (subject to impairment considerations, as described below, if any), as adjusted for the
impact of changes resulting from observable price changes in orderly transactions for identical or similar investments of the
same issuer. In-substance common stock is an investment in an entity that has risk and reward characteristics that are substantially
similar to that entity's common stock. An investment in preferred stock with substantive liquidation preferences over common stock,
is not substantially similar to common stock, and therefore is not considered in-substance common stock. A liquidation preference
is substantive if the investment has a stated liquidation preference that is significant, from a fair value perspective, in relation
to the purchase price of the investment. A liquidation preference in an investee that has sufficient subordinated equity from
a fair value perspective is substantive because, in the event of liquidation, the investor will not participate in substantially
all of the investee's losses, if any. The initial determination of whether an investment is substantially
similar to common stock is made on the initial date of investment if the Company has the ability to exercise significant influence
over the operating and financial policies of the investee. That determination is reconsidered if:
(i) contractual terms of the investment are changed,
(ii) there is a significant change in the capital structure of the investee, including the investee's receipt of additional subordinated financing, or
(iii) the Company obtains an additional interest in an investment, resulting in the method of accounting for the cumulative interest being based on the characteristics of the investment at the date at which the Company obtains the additional interest. Refer to Note 5 for additional information. Stock-Based Compensation The compensation cost for all stock-based awards is measured
at the grant date, based on the fair value of the award, and is recognized as an expense on a straight-line basis over the employee’s
requisite service period (generally the vesting period of the equity award) which is generally two to four years. The fair value
of restricted stock and restricted stock unit awards is determined by the product of the number of shares or units granted and
the grant date market price of the underlying common stock. The fair value of each option award is estimated on the date of grant
using a Black-Scholes option-pricing model. Forfeitures are accounted for as they occur. Restricted stock units granted in September 2019 with market-based
vesting conditions vest based upon the Company achieving specified stock price targets over a three-year period. The effect of
a market condition is reflected in the estimate of the grant-date fair value of the options utilizing a Monte Carlo valuation technique.
Compensation cost is recognized with a market-based vesting condition provided that the requisite service is rendered, regardless
of when, if ever, the market condition is satisfied. Assumptions utilized in connection with the Monte Carlo valuation technique
included: estimated risk-free interest rate of 1.38 percent; term of 3.00 years; expected volatility of 38 percent; and expected
dividend yield of 0 percent. The risk-free interest rate was determined based on the yields available on U.S. Treasury zero-coupon
issues. The expected stock price volatility was determined using historical volatility. The expected dividend yield was based on
expectations regarding dividend payments. Profits Interest Units (“Units”) are accounted for
in accordance with Accounting Standards Codification (“ASC”) 718-10, “Compensation - Stock Compensation.”
The vesting conditions do not meet the definition of service, market or performance conditions, as defined in ASC 718. As such,
the Units are classified as liability awards. Liability classified awards are measured at fair value on the grant date and re-measured
each reporting period at fair value until the award is settled. Compensation expense is adjusted each reporting period for changes
in fair value prorated for the portion of the requisite service period rendered. Initially, compensation expense was recognized
on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity award)
which was five years. Upon full vesting of the award, which occurred during the three months ended September 30, 2017, previously
unrecognized compensation expense was immediately recognized in the period and will continue to be fully recognized for any changes
in fair value, until the Units are settled. The Company has a purchase option to purchase the vested Units that are not otherwise
forfeited after termination of continuous service. The exercise price of the purchase option is the fair market value of the Units
on the date of termination of continuous service. Series A Warrants The fair value of the Series A warrants (the “Series
A Warrants”) is estimated using a Black-Scholes option-pricing model. The fair value of the Series A Warrants as of March
31, 2020 was estimated based on the following assumptions: volatility of 35 percent, risk-free rate of 0.58 percent, term of 7.54
years and a dividend yield of 0 percent. Refer to Notes 10 and 11 for additional information. Series B Warrants The fair value of the Series B warrants (the “Series
B Warrants”) is estimated using Monte Carlo valuation technique. The fair value of the Series B Warrants as of March 31,
2020 was estimated based on event probabilities of future exercise scenarios and the following weighted-average assumptions: volatility
of 45 percent, risk-free rate of 0.58 percent, term of 2.40 years, dividend yield of 0 percent, and a discount for lack of marketability
of 10 percent. Refer to Notes 10 and 12 for additional information. Embedded derivatives Embedded derivatives that are required to be bifurcated from
their host contract are valued separately from host instrument. A binomial lattice framework is used to estimate the fair value
of the embedded derivative in the Series A Redeemable Convertible Preferred Stock. Refer to Note 10 for additional information.
The binomial model utilizes the Tsiveriotis and Fernandes implementation in which a convertible instrument is split into two separate
components: a cash-only component which is subject to the selected risk-adjusted discount rate and an equity component which is
subject only to the risk-free rate. The model considers the (i) implied volatility of the value of our common stock, (ii) appropriate
risk-free interest rate, (iii) credit spread, (iv) dividend yield, (v) dividend accrual (and a step-up in rates), and (vi) event
probabilities of the various conversion and redemption scenarios. The implied volatility of the Company’s common stock
is estimated based on a haircut applied to the historical volatility. A volatility haircut is a concept used to describe a commonly
observed occurrence in which the volatility implied by market prices involving options, warrants, and convertible debt is lower
than historical actual realized volatility. The assumed base case term used in the valuation model is the period remaining until
November 15, 2027 (the maturity date). The risk-free interest rate is based on the yield on the U.S. Treasury with a remaining
term equal to the expected term of the conversion and early redemption options. The significant assumptions utilized in the Company’s
valuation of the embedded derivative at March 31, 2020 are as follows: volatility of 35 percent, risk-free rate of 0.58 percent,
a credit spread of 35 percent and a dividend yield of 0 percent. The fair value measurement of the embedded derivative is sensitive
to these assumptions and changes in these assumptions could result in a materially different fair value measurement. Treasury Stock Repurchases of the Company’s outstanding common stock
are accounted for using the cost method. The applicable par value is deducted from the appropriate capital stock account on the
formal or constructive retirement of treasury stock. Any excess of the cost of treasury stock over its par value is charged to
additional paid-in capital, and reflected as Treasury Stock on the condensed consolidated balance sheets. Impairment of Investments Acacia reviews its investments quarterly for indicators of other-than-temporary
impairment. This determination requires significant judgment. In making this judgment, Acacia considers available quantitative
and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value,
Acacia evaluates, among other factors, general market conditions and the duration and extent to which the fair value is less than
cost. Acacia also considers specific adverse conditions related to the financial health of and business outlook for the investee,
including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline
in fair value is determined to be other-than-temporary, an impairment charge is recorded in the condensed consolidated statements
of operations and a new cost basis in the investment is established. Income Taxes Income taxes are accounted for using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events
that have been recognized in Acacia’s condensed consolidated financial statements or consolidated income tax returns. A valuation
allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more than likely not be realized,
or if it is determined that there is uncertainty regarding future realization of such assets. The provision for income taxes for interim periods is determined
using an estimate of Acacia’s annual effective tax rate, adjusted for discrete items, if any, that are taken into account
in the relevant period. Each quarter, Acacia updates the estimate of the annual effective tax rate, and if the estimated tax rate
changes, a cumulative adjustment is recorded. The Company’s effective tax rates were 11% and (8%) for
the three months ended March 31, 2020 and 2019, respectively. Tax benefit (expense) for the periods presented primarily reflects
the impact of state taxes and foreign taxes withholding or refund incurred on revenue agreements executed with third-party licensees
domiciled in foreign jurisdictions. The Company has recorded full valuation allowance against our net deferred tax assets as of
March 31, 2020 and 2019. These assets primarily consist of foreign tax credits, capital loss carryforwards and net operating loss
carryforwards. |
