| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Accounting Principles The consolidated financial statements and
accompanying notes are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the
United States of America ("U.S. GAAP"). Principles of Consolidation The accompanying unaudited
consolidated financial statements include the accounts of Acacia and its wholly and majority-owned and controlled subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation. Noncontrolling interests in Acacia’s
majority-owned and controlled operating subsidiaries (“noncontrolling interests”) are separately presented as a component
of stockholders’ equity. Consolidated net income or (loss) is adjusted to include the net (income) or loss attributed to noncontrolling
interests in the consolidated statements of operations. Refer to the accompanying consolidated statements of Series A Redeemable Convertible
Preferred Stock and stockholders’ equity for total noncontrolling interests. In 2020, in connection with the transaction
with Link Fund Solutions Limited, which is more fully described in Note 11, 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 11), 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 has been included in the Company’s consolidated financial statements since 2010, as Acacia’s wholly owned
subsidiary, the general partner of Acacia IP Fund, 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 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, 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 or sales of our patent portfolio. IP Rights
granted included the following, as applicable: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or
sell products covered by patented technologies, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and
(iv) the dismissal of any 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:
Three Months Ended
March 31,
2021 2020
Paid-up Revenue Agreements $ 5,410 $ 3,300
Recurring Revenue Agreements 393 515
Total Revenue $ 5,803 $ 3,815 Refer to “ Inventor Royalties and
Contingent Legal Expenses Patent Portfolio
Operations Cost of revenues
include the costs and expenses incurred in connection with Acacia’s patent licensing and enforcement activities, including
inventor royalties paid to original patent owners, contingent legal fees paid to external patent counsel, other patent-related legal
expenses paid to external patent counsel, licensing and enforcement related research, consulting and other expenses paid to
third-parties and the amortization of patent-related investment costs. These costs are included under the caption “Patent
Portfolio operations” in the accompanying 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 unaudited 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 unaudited condensed consolidated statements of operations. Contingent legal fees are expensed in the unaudited 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. Concentrations Financial instruments that potentially
subject Acacia to concentrations of credit risk are cash equivalents, equity securities and accounts receivable. Acacia places its cash
equivalents and equity 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. The Company does not have any material
foreign operations. 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, 2021 and 2020, 90% and 4%, respectively, of revenues were attributable to licensees
domiciled in foreign jurisdictions. Three
licensees individually represented approximately 68%, 11%, and 10% of accounts receivable at March 31, 2021. Two licensees individually
represented approximately 62% and 21% of accounts receivable at December 31, 2020. 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, equity
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
primarily to the proceeds received from the issuance of 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. 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. Refer to Note 9 to our notes to consolidated financial statements for more information
related to our fair value measurement. Equity Securities at Fair Value 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 unaudited condensed consolidated
statements of operations in other income (expense). Dividend income is included in the unaudited condensed consolidated statements of
operations in other income (expense). Equity securities at fair value for the
periods presented were comprised of the following:
Cost Gross Gross Fair Value
(In thousands)
Security Type
March 31, 2021:
Equity securities - LF equity - common stock $ 40,053 $ 138,241 $ (10,198 ) $ 168,096
Equity securities - other equity - common stock $ 11,676 $ 1,100 $ (552 ) $ 12,224
Equity securities at fair value - common stock $ 51,729 $ 139,341 $ (10,750 ) $ 180,320
December 31, 2020:
Equity securities - LF equity - common stock $ 32,765 $ 72,689 $ (583 ) $ 104,871
Equity securities - other equity - common stock $ 4,086 $ 1,410 $ (1,264 ) $ 4,232
Equity securities at fair value - common stock $ 36,851 $ 74,099 $ (1,847 ) $ 109,103 Equity securities without readily determinable fair value For equity securities that do not have readily determinable fair value,
the Company elected to report them under the measurement alternative. They are reported at cost minus impairment, if any, plus or minus
changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. The
fair values of the private company securities were estimated based on recent financing transactions and secondary market transactions
and factoring in any adjustments for illiquidity or preference of these securities. Changes in fair value are reported in the consolidated
statements of operations in other income (expense). 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). We elected the fair value method for our investment in Veritone, Inc. (“Veritone”) upon
acquisition of the investment. As of March 31, 2021, we have no more investment in Veritone stocks and warrants. 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”) were accounted for in accordance with Accounting Standards Codification (“ASC”) 718-10,
“Compensation - Stock Compensation.” The vesting conditions did not meet the definition of service, market or performance
conditions, as defined in ASC 718. As such, the Units were classified as liability awards. Compensation expense was adjusted for changes
in fair value prorated for the portion of the requisite service period rendered. Initially, compensation expense was recognized on a
straight-line basis over the employee’s requisite service period (generally the vesting period of the equity award) which was five
years. Upon full vesting of the award, which occurred during the three months ended September 30, 2017, previously unrecognized compensation
expense was immediately recognized in the period. The Company has a purchase option to purchase the vested 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. As of March 31, 2021, the Units totaled $591,000, which was their fair value as of December
31, 2018 after termination of service. Series A Warrants The fair value of 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, 2021 was estimated based on the following assumptions:
volatility of 30 percent, risk-free rate of 1.29 percent, term of 6.54 years and a dividend yield of 0 percent. Refer to Note 10 for
additional information. Series B Warrants The fair value of the Series B Warrants is estimated using a Black-Scholes
option-pricing model. In the quarter ended March 31, 2021, there was a change in methodology used to an acceptable Black-Scholes option-pricing
model from a Monte Carlo valuation technique used to value the Series B Warrants as of December 31, 2020. The fair value of the Series
B Warrants as of March 31, 2021 was estimated based on the following assumptions: (1) volatility of 30 percent, risk-free rate of 1.31
percent, term of 6.63 years, and a dividend yield of 0 percent, and (2) volatility of 25 percent, risk-free rate of 0.11 percent, term
of 1.4 years and a dividend yield of 0 percent. Refer to Note 10 for additional information. Embedded derivatives Embedded derivatives that are required
to be bifurcated from their host contract are valued separately from the host instrument. The binomial model determines the value of
a convertible bond instrument by valuing its two separate components (i.e., a cash only component which is subject to the selected risk-adjusted
discount rate and an equity component where settlement is subject to a risk-free rate) within a single lattice framework. 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 volatility of the Company’s common stock is estimated by
analyzing the Company’s historical volatility, implied volatility of publicly traded stock options, and the Company’s current
asset composition and financial leverage. The selected volatility, as described below, represents a haircut from the Company’s
actual realized historical volatility. A volatility haircut is a concept used to describe a commonly observed occurrence in which the
volatility implied by market prices involving options, warrants, and convertible debt is lower than historical actual realized volatility.
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, 2021
are as follows: volatility of 30 percent, risk-free rate of 1.3 percent, discount rate of 8.8 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. Refer to Note 10 for additional information. 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 (0%) and 11% for the
three ended March 31, 2021 and 2020, 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, 2021 and 2020. These
assets primarily consist of foreign tax credits, capital loss carryforwards and net operating loss carryforwards. |
