| Summary of Significant Accounting Policies | 2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Accounting
Principles. Principles
of Consolidation. Noncontrolling
interests in Acacia’s majority-owned and controlled operating subsidiaries (“noncontrolling interests”) are
separately presented as a component of stockholders’ equity. Consolidated net income or (loss) is adjusted to include the
net (income) or loss attributed to noncontrolling interests in the consolidated statements of operations. Refer to the accompanying
consolidated statements of Series A redeemable convertible preferred stock and stockholders’ equity for total noncontrolling
interests. In 2020, in
connection with the transaction with Link Fund Solutions Limited, which is more fully described in Note 17, the Company acquired
equity securities of Malin J1 Limited (“MalinJ1”). MalinJ1 is included in the Company’s consolidated financial
statements because the Company, through its interest in the equity securities of MalinJ1, has the ability to control the operations
and activities of MalinJ1. Viamet HoldCo LLC, a Delaware limited liability company and wholly-owned subsidiary of Acacia (see
Note 17), is the majority shareholder of MalinJ1. A wholly owned
subsidiary of Acacia is the general partner of the Acacia Intellectual Property Fund, L.P. (the “Acacia IP Fund”),
which was formed in August 2010. The Acacia IP Fund is included in the Company’s consolidated financial statements since
2010, as Acacia’s wholly owned subsidiary, as the general partner, has the ability to control the operations and activities
of the Acacia IP Fund. The Acacia IP Fund was terminated as of December 31, 2017 and dissolved in 2020. Revenue Recognition.
For the periods
presented, revenue contracts executed by the Company primarily provided for the payment of contractually determined, one-time,
paid-up license fees in consideration for the grant of certain IP Rights for patented technologies owned or controlled by Acacia
(“Paid-up Revenue Agreements”). Revenues also included license fees from sales-based revenue contracts, the majority
of which were originally executed in prior periods, which provide for the payment of quarterly license fees based on quarterly
sales of applicable product units by licensees (“Recurring Revenue Agreements”). Revenues may also include court ordered
settlements or awards related to our patent portfolio ("Other Settlements") or sales of our patent portfolio ("Sales").
IP Rights granted included the following, as applicable: (i) the grant of a non-exclusive, retroactive and future license to manufacture
and/or sell products covered by patented technologies, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain
claims, and (iv) the dismissal of any pending litigation. The IP Rights granted were perpetual in nature, extending until the
legal expiration date of the related patents. The individual IP Rights are not accounted for as separate performance obligations,
as (i) the nature of the promise, within the context of the contract, is to transfer combined items to which the promised IP Rights
are inputs and (ii) the Company's promise to transfer each individual IP right described above to the customer is not separately
identifiable from other promises to transfer IP Rights in the contract. Since the promised
IP Rights are not individually distinct, the Company combined each individual IP right in the contract into a bundle of IP rights
that is distinct, and accounted for all of the IP Rights promised in the contract as a single performance obligation. The IP Rights
granted were “functional IP rights” that have significant standalone functionality. Acacia's subsequent activities
do not substantively change that functionality and do not significantly affect the utility of the IP to which the licensee has
rights. Acacia’s operating subsidiaries have no further obligation with respect to the grant of IP Rights, including no
express or implied obligation to maintain or upgrade the technology, or provide future support or services. The contracts provide
for the grant (i.e., transfer of control) of the licenses, covenants-not-to-sue, releases, and other significant deliverables
upon execution of the contract. Licensees legally obtain control of the IP Rights upon execution of the contract. As such, the
earnings process is complete and revenue is recognized upon the execution of the contract, when collectability is probable and
all other revenue recognition criteria have been met. Revenue contracts generally provide for payment of contractual amounts with
30-90 days of execution of the contract, or the end of the quarter in which the sale or usage occurs for Recurring Revenue Agreements.
Contractual payments made by licensees are generally non-refundable. For sales-based
royalties, the Company includes in the transaction price some or all of an amount of estimated variable consideration to the extent
that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty
associated with the variable consideration is subsequently resolved. Notwithstanding, revenue is recognized for a sales-based
royalty promised in exchange for a license of IP Rights when the later of (i) the subsequent sale or usage occurs, or (ii) the
performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied. Estimates are generally
based on historical levels of activity, if available. Revenues from
contracts with significant financing components (either explicit or implicit) are recognized at an amount that reflects the price
that a licensee would have paid if the licensee had paid cash for the IP Rights when they transfer to the licensee. In determining
the transaction price, the Company adjusts the promised amount of consideration for the effects of the time value of money. As
a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing
component if the Company expects, at contract inception, that the period between when the entity transfers promised IP Rights
to a customer and when the customer pays for the IP Rights will be one year or less. In general,
the Company is required to make certain judgments and estimates in connection with the accounting for revenue contracts with customers.
Such areas may include identifying performance obligations in the contract, estimating the timing of satisfaction of performance
obligations, determining whether a promise to grant a license is distinct from other promised goods or services, evaluating whether
a license transfers to a customer at a point in time or over time, allocating the transaction price to separate performance obligations,
determining whether contracts contain a significant financing component, and estimating revenues recognized at a point in time
for sales-based royalties. Revenues were
comprised of the following for the periods presented:
2020 2019
(In thousands)
Paid-up Revenue Agreements $ 28,389 $ 6,343
Recurring Revenue Agreements 1,393 4,903
Total Revenue $ 29,782 $ 11,246 Refer to “Inventor
Royalties and Contingent Legal Expenses” below for information on related direct costs of revenues. Portfolio
Operations. Inventor
Royalties and Contingent Legal Expenses. Contingent legal
fees are expensed in the consolidated statements of operations in the period that the related revenues are recognized. In instances
where there are no recoveries from potential infringers, no contingent legal fees are paid; however, Acacia’s operating
subsidiaries may be liable for certain out of pocket legal costs incurred pursuant to the underlying legal services agreement. Fair Value Measurements. Cash and
Cash Equivalents Long Term
Restricted Cash Trading Securities- Debt. Trading Securities - Equity. Investment Securities
– Private Equity. Impairment of Investments. Concentration
of Credit Risks. Three licensees
individually accounted for 64%, 10% and 7%, respectively, of revenues recognized during the year ended December 31, 2020. Three
licensees individually accounted for 43%, 22% and 15%, respectively, of revenues recognized during the year ended December 31,
2019. Two licensees individually represented approximately 62% and 21%, respectively, of accounts receivable at December 31, 2020.
Two licensees individually represented approximately 70% and 17%, respectively, of accounts receivable at December 31, 2019. For 2020 and
2019, 8% and 39%, respectively, of revenues were attributable to licensees domiciled in foreign jurisdictions, based on the jurisdiction
of the entity obligated to satisfy payment obligations pursuant to the applicable revenue arrangement. The Company does not have
any material foreign operations. Acacia
performs credit evaluations of its licensees with significant receivable balances, if any, and has not experienced any
significant credit losses. Accounts receivable are recorded at the executed contract amount and generally do not bear
interest. Collateral is not required. An allowance for doubtful accounts may be established to reflect the Company’s
best estimate of probable losses inherent in the accounts receivable balance, and is reflected as a contra-asset account on
the balance sheet and a charge to operating expenses in the consolidated statements of operations for the applicable period.
The allowance is determined based on known troubled accounts, historical experience, and other currently available evidence.
There was no allowance for doubtful accounts established for the periods presented. Fair Value
of Financial Instruments. Property
and Equipment.
Furniture and
fixtures 3 to 5 years
Computer hardware and software 3 to 5 years
Leasehold improvements 2 to 5 years (Lesser of lease
term or useful life of improvement) Rental payments
on operating leases are charged to expense in the consolidated statements of operations on a straight-line basis over the lease
term. Patents.
Leases. Investments
at Fair Value Other
Investments - equity method investments Investments
in preferred stock with substantive liquidation preferences are accounted for at cost, (subject to impairment considerations,
as described below, if any), as adjusted for the impact of changes resulting from observable price changes in orderly transactions
for identical or similar investments of the same issuer. In-substance common stock is an investment in an entity that has risk
and reward characteristics that are substantially similar to that entity's common stock. An investment in preferred stock with
substantive liquidation preferences over common stock, is not substantially similar to common stock, and therefore is not considered
in-substance common stock. A liquidation preference is substantive if the investment has a stated liquidation preference that
is significant, from a fair value perspective, in relation to the purchase price of the investment. A liquidation preference in
an investee that has sufficient subordinated equity from a fair value perspective is substantive because, in the event of liquidation,
the investment will not participate in substantially all of the investee's losses, if any. 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 Notes 6 and 17 for additional information. Impairment
of Long-lived Assets. Fair value is
generally estimated using the “Income Approach,” focusing on the estimated future net income-producing capability
of the patent portfolios over the estimated remaining economic useful life. Estimates of future after-tax cash flows are converted
to present value through “discounting,” including an estimated rate of return that accounts for both the time value
of money and investment risk factors. Estimated cash inflows are typically based on estimates of reasonable royalty rates for
the applicable technology, applied to estimated market data. Estimated cash outflows are based on existing contractual obligations,
such as contingent legal fee and inventor royalty obligations, applied to estimated license fee revenues, in addition to other
estimates of out-of-pocket expenses associated with a specific patent portfolio’s licensing and enforcement program. The
analysis also contemplates consideration of current information about the patent portfolio including, status and stage of litigation,
periodic results of the litigation process, strength of the patent portfolio, technology coverage and other pertinent information
that could impact future net cash flows. Contingent
Liabilities. Certain of Acacia’s
operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. In connection with
any of Acacia’s operating subsidiaries’ patent enforcement actions, it is possible that a defendant may request and/or
a court may rule that an operating subsidiary has violated statutory authority, regulatory authority, federal rules, local court
rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a
court may issue monetary sanctions against Acacia or its operating subsidiaries or award attorney’s fees and/or expenses
to a defendant(s), which could be material, and if required to be paid by Acacia or its operating subsidiaries, could materially
harm the Company’s operating results and financial position. Stock-Based
Compensation. 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 Units vest as described at Note 9, and therefore, the vesting conditions
do not meet the definition of service, market or performance conditions, as defined in ASC 718. As such, the Units are classified
as liability awards. Liability classified awards are measured at fair value on the grant date and re-measured each reporting period
at fair value until the award is settled. Compensation expense is adjusted each reporting period for changes in fair value prorated
for the portion of the requisite service period rendered. Initially, compensation expense was recognized on a straight-line basis
over the employee’s requisite service period (generally the vesting period of the equity award) which was five years. Upon
full vesting of the award, which occurred during the three months ended September 30, 2017, previously unrecognized compensation
expense was immediately recognized in the period, and will continue to be fully recognized for any changes in fair value, until
the Units are settled. The Company has a purchase option to purchase the vested Units that are not otherwise forfeited after termination
of continuous service. The exercise price of the purchase option is the fair market value of the Units on the date of termination
of continuous service. At each reporting date, the value of the Units that are subject to the purchase option will be the measured
at the fair value on the termination date. Non-cash stock compensation expense related to the Units is reflected in general and
administrative expense in the accompanying consolidated statements of operations. Series A Warrants. Series
B Warrants. Embedded
derivatives The binomial
model utilizes the Tsiveriotis and Fernandes (“TF”) implementation in which a convertible instrument is split into
two separate components: a cash-only component which is subject to the selected risk-adjusted discount rate and an equity component
which is subject only to the risk-free rate. The model considers the (i) implied volatility of the value of our common stock,
(ii) appropriate risk-free interest rate, (iii) credit spread, (iv) dividend yield, (v) dividend accrual (and a step-up in rates),
and (vi) event probabilities of the various conversion and redemption scenarios. The implied volatility of the Company’s common
stock is estimated based on a haircut applied to the historical volatility. A volatility haircut is a concept used to describe a commonly
observed occurrence in which the volatility implied by market prices involving options, warrants, and convertible debt is lower than historical
actual realized volatility. The assumed base case term used in the valuation model is the period remaining until November 15, 2027 (the
maturity date). The risk-free interest rate is based on the yield on the U.S. Treasury with a remaining term equal to the expected term
of the conversion and early redemption options. The significant assumptions utilized in the Company’s valuation of the embedded
derivative at December 31, 2020 are as follows: volatility of 29 percent, risk-free rate of 0.62 percent, a credit spread of 19 percent
and a dividend yield of 0 percent. The significant assumptions utilized in the Company’s valuation of the embedded derivative at
December 31, 2019 are as follows: volatility of 30 percent, risk-free rate of 1.86 percent, a credit spread of 25 percent and a dividend
yield of 0 percent. The fair value measurement of the embedded derivative is sensitive to these assumptions and changes in these assumptions
could result in a materially different fair value measurement. Income Taxes.
Under U.S. generally
accepted accounting principles, a tax position is a position in a previously filed tax return or a position expected to be taken
in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions are
recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position
will be sustained upon examination. Tax positions that meet the more likely than not threshold are measured using a probability
weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Segment Reporting. Use of Estimates Income Per
Share. Basic net income
(loss) per share of common stock is computed by dividing net (income) loss attributable to common stockholders by the weighted
average number of shares of common stock outstanding for the period. Diluted net income (loss) per share of common stock is computed
by dividing net income (loss) attributable to common stockholders by the weighted average number of common and dilutive common
equivalent shares outstanding for the period using the treasury stock method or the as-converted method, or the two-class method
for participating securities, whichever is more dilutive. Potentially dilutive common stock equivalents consist of stock options,
restricted stock units, unvested restricted stock, Series A Redeemable Convertible Preferred Stock, Series A Warrants, and Series
B Warrants. The following
table presents the calculation of basic and diluted income per share of common stock:
Years Ended
December 31,
2020 2019
(In thousands, except share and per share information)
Numerator:
Net income (loss) attributable to Acacia Research Corporation $ 113,444 $ (17,115 )
Dividend on Series A redeemable convertible preferred stock (1,381 ) –
Accretion of Series A redeemable convertible preferred stock (2,835 ) (307 )
Undistributed earnings allocated to participating securities (18,898 ) –
Net income (loss) attributable to common stockholders - basic 90,330 (17,422 )
Add: Accretion of Series A redeemable convertible preferred stock – 307
Less: Change in fair value of Series A redeemable convertible preferred stock embedded derivative – (3,258 )
Less: Change in fair value of Series A warrants (1,348 ) –
Less: Change in fair value of dilutive Series B warrants (5,557 ) –
Add: Interest expense associated with Starboard Notes, net of tax 1,889 –
Add: Undistributed earnings allocated to participating securities 18,898 –
Reallocation of undistributed earnings to participating securities (15,740 ) –
Net income (loss) attributable to common stockholders - diluted $ 88,471 $ (20,373 )
Denominator:
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders - basic 48,840,829 49,764,002
Potentially dilutive common shares:
Series A Preferred Stock – 1,132,771
Restricted stock units 637,044 –
Employee stock options 2,952 –
Series A Warrants 77,592 –
Series B Warrants 7,876,712 –
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders - diluted 57,435,128 50,896,773
Basic net income (loss) per common share $ 1.85 $ (0.35 )
Diluted net income (loss) per common share $ 1.54 $ (0.40 )
Anti-dilutive potential common shares excluded from the computation of diluted net income (loss) per common share:
Equity-based incentive awards 206,916 1,783,254
Series A warrants – 5,000,000
Series B warrants 68,493,151 –
Total 68,700,067 6,783,254 Treasury
Stock |
