ACACIA RESEARCH CORP 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES General Our common stock trades on The NASDAQ Global Select Market under the symbol “ACTG.” Dividend Policy On April 23, 2013, we announced that our board of directors approved the adoption of a cash dividend policy that called for the payment of an expected total annual cash dividend of $0.50 per share to holders of our common stock, payable in the amount of $0.125 per share per quarter. On February 23, 2016, our board of directors terminated the company’s dividend policy due to a number of factors, including our financial performance, our available cash resources, our cash requirements and alternative uses of capital that our board of directors concluded would represent an opportunity to generate a greater return on investment for us and our stockholders. The current policy of our board of directors is to retain earnings, if any, to provide for our growth. Consequently, we do not expect to pay any cash dividends in the foreseeable future. Further, there can be no assurance that our proposed operations will generate revenues and cash flow needed to declare any future cash dividends or that we will have legally available funds to pay future dividends. Recent Sales of Unregistered Securities None. Stock Repurchase Program None. Holders of Common Stock On March 24, 2021, there were approximately 63 owners of record of our common stock. The majority of the outstanding shares of our common stock are held by a nominee holder on behalf of an indeterminable number of ultimate beneficial owners. ITEM 6. SELECTED FINANCIAL DATA Not required for "smaller reporting companies." ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including the risks we discuss in Item 1A, “Risk Factors,” and elsewhere herein. 20 General We acquire businesses and operating assets that we believe to be undervalued and where we believe we can leverage our resources and skill sets to realize and unlock value. We leverage our (i) access to flexible capital that can be deployed unconditionally, (ii) expertise in corporate governance and operational restructuring, (iii) willingness to invest in out of favor industries and businesses that suffer from a complexity discount and untangle complex, multi-factor situations, and (iv) expertise and relationships in certain sectors, to complete strategic acquisitions of businesses, divisions, and/or assets with a focus on mature technology, healthcare, industrial and certain financial segments. We seek to identify opportunities where we believe we are advantaged buyers, where we can avoid structured sale processes and create the opportunity to purchase a company at an attractive price due to our unique capabilities, relationships, or expertise, or where we believe the target would be worth more to us than to other buyers. We operate our business based on three key principles of People, Process and Performance and have built a management team with identified expertise in Research, Execution and Operation of our targeted acquisitions. We also operate our legacy business of investing in intellectual property, or IP, and related absolute return assets and engaging in the licensing and enforcement of patented technologies. We partner with inventors and patent owners, from small entities to large corporations, applying our legal and technology expertise to patent assets to unlock the financial value in their patented inventions. We are an intermediary in the patent marketplace, bridging the gap between invention and application, and facilitating efficiency in connection with the monetization of patent assets. Our IP business generates 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. Our business is described more fully in Item 1. “Business,” of this annual report. Executive Overview During 2020 and 2019, we focused on diversifying our business and leveraging our resources and skill sets to complete strategic acquisitions of businesses, divisions, and/or assets with a focus on mature technology, healthcare, industrial and certain financial segments intended to unlock and realize value. This led to our acquisition of a portfolio of equity securities of life science businesses (the “Portfolio Companies”) in June 2020. In connection with the purchase of the equity securities in these Portfolio Companies, we issued to certain funds and accounts, or the Buyers, affiliated with, or managed by, Starboard Value LP, or Starboard, $115 million principal amount of our senior secured notes, or Notes. As of December 31, 2020, we have monetized a portion of the portfolio while retaining an interest in a number of operating businesses, including a controlling interest in one of the Portfolio Companies. Further, some of the businesses in which we continue to hold an interest are businesses that generate revenues through the receipt of royalties. Refer to “Recent Business Matters – Starboard Securities” and “Recent Business Matters – LF Equity Income Fund Portfolio Investment” below, and Notes 16 and 17 to our notes to consolidated financial statements for more information related to the Notes and the Portfolio Companies. For the years ended December 31, 2020 and 2019, we reported revenues of $29.8 million and $11.2 million. Cash and cash equivalents and trading securities totaled $274.6 million as of December 31, 2020, as compared to $168.3 million as of December 31, 2019. 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. 21 Patent Licensing and Enforcement Patent Litigation Trial Dates and Related Trials . As of the date of this report, our operating subsidiaries have three pending patent infringement cases with a scheduled trial date in the next twelve 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. Although we diligently pursue enforcement litigation, we cannot predict with reliability the decisions made by juries and trial courts. Please refer to Item 1A. “Risk Factors” for additional information regarding trials, patent litigation and related risks. Litigation and Licensing Expense . We expect patent-related legal expenses to continue to fluctuate from period to period based on the factors summarized herein, in connection with future trial dates, international enforcement, strategic patent portfolio prosecution and our current and future patent portfolio investment, prosecution, licensing and enforcement activities. Patent Portfolio Intake One of the significant challenges in our industry continues to be quality patent intake due to the challenges and complexity associated with the current patent environment. In fiscal year 2020, we acquired five new patent portfolios consisting of (i) flash memory technology, (ii) voice activation and control technology, (iii) wireless networks, (iv) internet search, advertising and cloud computing technology and (v) GPS navigation . The patents and patent rights acquired in 2020 have estimated economic useful lives of approximately five years. In fiscal year 2019, we acquired four patent portfolios. Recent Business Matters Starboard Securities. In 2019, as part of its strategy to grow, the Company began evaluating a wide range of strategic opportunities that culminated in the strategic investment in the Company by certain funds and accounts, or the Buyers, affiliated with, or managed by, Starboard Value LP, or Starboard. On November 18, 2019, the Company entered into a Securities Purchase agreement with Starboard and the Buyers, or the Securities Purchase Agreement, pursuant to which the Buyers purchased (i) 350,000 shares of the Company’s newly designated Series A Convertible Preferred Stock, or Series A Preferred Stock, at an aggregate purchase price of $35,000,000, and warrants to purchase up to 5,000,000 shares of the Company’s common stock, or Series A Warrants. The Securities Purchase Agreements also established the terms of certain senior secured notes, or Notes, and additional warrants, or the Series B Warrants, which may be issued to the Buyers in the future. Refer to Notes 2, 14 and 16 to the consolidated financial statements elsewhere herein for more information related to the Series A Preferred Stock, Series A Warrants and Series B Warrants. In connection with the Buyers’ investment, Starboard was granted certain corporate governance rights, including the right to appoint Jonathan Sagal, Managing Director of Starboard, as a director of the Company and recommend two additional directors for appointment to our Board of Directors. The investment by the Buyers is referred to herein as the “Starboard Investment,” and the Series A Preferred Stock, Series A Warrants and Series B Warrants are referred to herein as, collectively, the “Starboard Securities.” On February 14, 2020, the Company’s stockholders approved, for purposes of Nasdaq Rules 5635(b) and 5635(d), as applicable, (i) the voting of the Series A Preferred Stock on an as-converted basis and (ii) the issuance of the maximum number of shares of common stock issuable in connection with the potential future (A) conversion of the Series A Preferred Stock and (B) exercise of the Series A and Series B Warrants, in each case, without giving effect to the exchange cap set forth in the Series A Preferred Stock Certificate of Designations and in the Series A Warrants, issued pursuant to the Securities Purchase Agreement dated November 18, 2019. Refer to Notes 14 and 16 to the consolidated financial statements elsewhere herein for additional information. The Company’s stockholders also approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the total number of authorized shares of common stock by 200,000,000 shares, from 100,000,000 shares to 300,000,000 shares. 22 On February 25, 2020, pursuant to the terms of the Securities Purchase Agreement with Starboard and the Buyers, the Company issued Series B Warrants to purchase up to 100 million shares of the Company’s common stock at an exercise price of either (i) $5.25 per share, if exercising by cash payment, or (ii) $3.65 per share, if exercising by cancellation of a portion of Notes. The Company issued the Series B Warrants for an aggregate purchase price of $4.6 million. Refer to Note 16 to the consolidated financial statements elsewhere herein for additional information. Pursuant to the terms of the Securities Purchase Agreement with Starboard and the Buyers, on June 4, 2020, the Company issued $115 million in Notes to the Buyers. Also on June 4, 2020, in connection with the issuance of the Notes, the Company entered into a Supplemental Agreement with Starboard, or the Supplemental Agreement, through which, the Company agreed to redeem $80 million aggregate principal amount of the Notes by September 30, 2020, and $35 million aggregate principal amount of the Notes by December 31, 2020, resulting in the total principal outstanding being paid by December 31, 2020. Per the Supplemental Agreement, interest is payable semiannually at a rate of 6.00% per annum, and in an event of default, the interest rate is increased to 10% per annum. The Notes outlined certain financial and non-financial covenants. Additionally, all or any portion of the principal amount outstanding under the Notes may, at the election of the holders, be surrendered to the Company for cancellation in payment of the exercise price upon the exercise of the Series B Warrants. On June 30, 2020, the Company entered into an Exchange Agreement, or the Exchange Agreement, with Merton Acquisition HoldCo LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company, or Merton and Starboard, on behalf of itself and on behalf of the Buyers, including the holders of the Notes. Pursuant to the Exchange Agreement, the holders of the Notes exchanged the entire outstanding principal amount for new senior notes, or the New Notes, issued by Merton having an aggregate outstanding original principal amount of $115 million. The New Notes bear interest at a rate of 6.00% per annum and had a maturity date of December 31, 2020. The New Notes are fully guaranteed by the Company and are secured by an all-assets pledge of the Company and Merton and non-recourse equity pledges of each of the Company’s material subsidiaries. Pursuant to the Exchange Agreement, the New Notes (i) are deemed to be “Notes” for purposes of the Securities Purchase Agreement, (ii) are deemed to be “June 2020 Approved Investment Notes” for purposes of the Supplemental Agreement, and therefore the Company initially agreed to redeem $80 million principal amount of the New Notes by September 30, 2020, and $35 million principal amount of the New Notes by December 31, 2020, and (iii) are deemed to be “Notes” for the purposes of the Series B Warrants, and therefore may be tendered pursuant to a Note Cancellation under the Series B Warrants on the terms set forth in the Series B Warrants and the New Notes. Delivery of notes in the form of the New Notes will also satisfy the delivery of Exchange Notes pursuant to Section 16(i) of the Certificate of Designations of the Company’s Series A Convertible Preferred Stock, par value $0.001 per share. The New Notes will not, however, be deemed to be “Notes” for the purposes of the Registration Rights Agreement, dated as of November 18, 2019, by and between the Company, Starboard and the Buyers. On January 29, 2021, the Company redeemed $50 million of the New Notes, and the parties agreed that the Company will redeem the remaining $65 million of the principal amount of the New Notes on or before July 15, 2021. LF Equity Income Fund Portfolio Investment. On April 3, 2020, the Company entered into an Option Agreement with LF Equity Income Fund, or Seller, to purchase equity securities in a portfolio of public and private companies, or Portfolio Companies, for an aggregate purchase price of £223.9 million, approximately $277.5 million at the exchange rate on April 3, 2020. On June 4, 2020, the Company executed the Transaction Agreement between Link Fund Solutions Limited, or Link, Seller, and the Company. Pursuant to the Transaction Agreement, the Company agreed to purchase from Seller and Seller agreed to transfer to the Company the specified equity securities of all Portfolio Companies at set prices at various future dates. In accordance with the Transaction Agreement, the Company transferred the total purchase price of £223.9 million into an escrow account. Upon the transfer of equity securities in the Portfolio Companies to the Company, the associated funds were released from the escrow account to Seller based on the consideration amount assigned to the equity securities in the Transaction Agreement. As of December 31, 2020, all of the equity securities in the Portfolio Companies were transferred to the Company pursuant to the Transaction Agreement. The Company has sold a portion of the equity securities of such Portfolio Companies while retaining an interest in a number of operating businesses, including a controlling interest in one of the Portfolio Companies. Refer to Note 17 to the consolidated financial statements elsewhere herein for additional information. 23 Operating Activities Our revenues historically have fluctuated period to period, 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; · the willingness of prospective licensees to settle significant patent infringement cases and pay reasonable license fees for the use of our patented technology, as such infringement cases approached a court determined trial date; 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. Unlike most operating businesses and industries, licensing revenues not generated in a current period are not necessarily foregone but, depending on whether negotiations, litigation or both continue into subsequent periods, and depending on a number of other factors, such potential revenues may be pushed into subsequent fiscal periods. Revenues for the periods presented included fees from the following licensing and enforcement programs: · Bone Wedge technology (1)(2) · Semiconductor and Memory-Related technology (1)(2) · Computer-Aided Design technology (1) · Speech codecs used in wireless and wireline systems technology (1)(2) · GPS navigation technology (1) · Super Resolutions Microscopy technology (1)(2) · Internet radio ad insertion technology (1) · Video Conferencing technology (1)(2) · Internet search, advertising and cloud computing technology (1) · Wireless Infrastructure and User Equipment Technology (1) · MIPI DSI technology (1)(2) __________________________ (1) Licensing and enforcement program generating revenue in fiscal year 2020 (2) Licensing and enforcement program generating revenue in fiscal year 2019 Revenues from one or more of our patents or patent portfolios may be significant in a specific reporting period, and may be significant to our licensing and enforcement business as a whole. 24 Summary of Results of Operations - For Fiscal Years 2020 and 2019 2020 2019 $ Change % Change (In thousands, except percentage change values) Revenues $ 29,782 $ 11,246 $ 18,536 165% Operating costs and expenses 49,300 34,664 14,636 42% Operating loss (19,518 ) (23,418 ) 3,900 (17% ) Other income (expense), net 131,803 4,465 127,338 (2852% ) Income (loss) before provision for income taxes 112,285 (18,953 ) 131,238 692% Income tax benefit 1,159 1,824 (665 ) (36% ) Net income (loss) attributable to Acacia Research Corporation 113,444 (17,115 ) 130,559 763% Overview - Fiscal Year 2020 compared with Fiscal Year 2019 · Revenues increased $18.5 million, or 165% to $29.8 million, primarily due to an increase in revenues from the new agreements executed during the year. Refer to “ Investments in Patent Portfolios” below for additional information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues. · Income before provision for income taxes was $112.3 million for fiscal year 2020, as compared to a loss of $19.0 million for fiscal year 2019. The net change was primarily comprised of the change in revenues described above and other changes in operating expenses and other income and expenses as follows: · Inventor royalties and contingent legal fees, on a combined basis, increased $9.2 million, or 167%, to $14.8 million, primarily due to increase in revenues as describe above. · Litigation and licensing expenses-patents decreased $2.1 million, or 27%, to $5.7 million, due primarily to a net decrease in litigation support and third-party technical consulting expenses associated with ongoing litigation. · Amortization expense increased $1.5 million, or 47%, to $4.7 million, due to an increase in scheduled amortization resulting from the new portfolios acquired in 2019 and 2020. · General and administrative expenses, excluding non-cash stock compensation, increased $7.5 million, or 49%, to $22.8 million, primarily due to higher corporate, general and administrative costs related to legal and other business development expenses, including $2.9 million in legal and advisory fees related to our LF Equity Income Fund Portfolio Investment. · General and administrative non-cash stock compensation expense increased $0.6 million, from $1.1 million to $1.7 million, primarily due to stock grants issued to employees and the Board of Directors in 2019 and 2020. · Unrealized gain or loss on our equity investment in Veritone, decreased from an unrealized gain of $9.9 million for the year ended December 31, 2019 to an unrealized gain of $5.5 million for the year ended December 31, 2020. Realized gain or loss on our equity investment in Veritone increased from a loss of $9.2 million for the year ended December 31, 2019 to a gain of $8.2 million for the year ended December 31, 2020. Refer to Note 6 to the consolidated financial statements elsewhere herein for additional information regarding our investment in Veritone. 25 · Unrealized gain or loss from trading securities increased from an unrealized loss of $0.1 million for the year ended December 31, 2019 to an unrealized gain of $0.3 million for the year ended December 31, 2020. · We incurred an unrealized gain of $175.9 million from investment in the equity securities of the Portfolio Companies for the year ended December 31, 2020. · Realized gain from sale of our trading securities increased $5.2 million from a gain of $2.2 million for the year ended December 31, 2019 to a gain of $7.4 million for the year ended December 31, 2020. We also recognized a net gain of $2.8 million related to returned prepaid investments and the sale of an equity security derivative. Refer to Notes 2 and 17 to the consolidated financial statements elsewhere herein for additional information regarding our investment in trading securities and LF Equity Income Fund Portfolio Investment. · Interest income and other decreased $2.6 million, from a net income of $3.4 million for the year ended December 31, 2019 to a net income of $0.8 million for the year ended December 31, 2020, mainly due to decrease in interest income from our investment in trading securities. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our investment in trading securities. · We incurred interest expense of $5.9 million for the year ended December 31, 2020 from the Notes issued in June 2020. Refer to Note 16 to the consolidated financial statements elsewhere herein for additional information regarding the Notes. · Loss on foreign currency exchange increased to $4.9 million for the year ended December 31, 2020, primarily from our transaction related to the LF Income Equity Fund securities. Refer to Note 17 to the consolidated financial statements elsewhere herein for additional information. · Unrealized net gain or loss of from the fair value measurements of the Series A and Series B warrants and the embedded derivative decreased from a gain of $4.5 million for the year ended December 31, 2019 to a loss of $58.2 million for the year ended December 31, 2020. Refer to Notes 16 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Securities. · Income tax benefit for fiscal years 2020 and 2019 primarily reflects the impact of foreign tax withholding refund incurred on revenue agreements executed with third-party licensees domiciled in foreign jurisdictions. Revenues and Pretax Net Loss Operating activities during the periods presented included the following: Change 2020 2019 $ Change % Change Revenues (in thousands, except percentage change values) $ 29,782 $ 11,246 $ 18,536 165% New agreements executed 17 7 10 143% Licensing and enforcement programs generating revenues 9 6 3 50% Licensing and enforcement programs with initial revenues 2 – 2 n/a New patent portfolios 4 5 (1 ) -20% 26 For the periods presented herein, the majority of the revenue agreements executed provided for the payment of one-time, paid-up license fees in consideration for the grant of certain IP rights for patented technology rights owned by our operating subsidiaries. These rights were primarily granted on a perpetual basis, extending until the expiration of the underlying patents. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our revenue concentrations for the periods presented herein. Refer to “ Investments in Patent Portfolios” above for information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues. Change 2020 2019 $ Change % Change (In thousands, except percentage change values) Income (loss) before provision for income taxes $ 112,285 $ (18,953 ) $ 131,238 692% Cost of Revenues Inventor Royalties, Contingent Legal Fees Expense and Other Patent Acquisition Costs. The economic terms of patent portfolio related partnering agreements and contingent legal fee arrangements, if any, including royalty obligations, if any, royalty rates, contingent fee rates and other terms and conditions, vary across the patent portfolios owned or controlled by our operating subsidiaries. In certain instances, we have invested in certain patent portfolios without future inventor royalty obligations. These costs fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of revenue agreements executed each period and the mix of specific patent portfolios with varying economic terms, conditions and obligations generating revenues each period. Change 2020 2019 $ Change % Change (In thousands, except percentage change values) Inventor royalties $ 7,349 $ 4,944 $ 2,405 49% Contingent legal fees 7,419 591 6,828 1155% Litigation and Licensing Expenses - Patents. Litigation and licensing expenses-patents include patent-related litigation, enforcement and prosecution costs incurred by external patent attorneys engaged on an hourly basis and the out-of-pocket expenses incurred by law firms engaged on a contingent fee basis. Litigation and licensing expenses-patents also includes third-party patent research, development, prosecution, re-exam and inter partes reviews, consulting, and other costs incurred in connection with the licensing and enforcement of patent portfolios. 27 Litigation and licensing expenses-patents decreased for the periods presented due to a net decrease in litigation support, patent prosecution and litigation expenses associated with ongoing licensing and enforcement programs and an overall decrease in portfolio related enforcement activities. We expect patent-related legal expenses to continue to decrease based upon the overall decrease in portfolio related enforcement activities as we continue monetizing our existing patent assets. Refer to “ Investments in Patent Portfolios” above for additional information regarding the impact of portfolio acquisition trends on licensing and enforcement activities and current and future licensing and enforcement related revenues. Amortization of Patents . For the year ended December 31, 2020, amortization expense increased $1.5 million, or 47%, as compared to the year ended December 31, 2019. These increases were due to our new patents acquired in 2019 and 2020. Change 2020 2019 $ Change % Change (In thousands, except percentage change values) Litigation and licensing expenses - patents $ 5,683 $ 7,803 $ (2,120 ) (27% ) Amortization of patents 4,681 3,194 1,487 47% Operating Expenses Change 2020 2019 $ % (In thousands, except percentage change values) General and administrative expenses $ 22,814 $ 15,301 $ 7,513 49% Non-cash stock compensation expense - G&A 1,662 1,075 587 55% Total general and administrative expenses $ 24,476 $ 16,376 $ 8,100 49% General and Administrative Expenses. General and administrative expenses include employee compensation and related personnel costs, including variable performance based compensation and non-cash stock compensation expenses, office and facilities costs, legal and accounting professional fees, public relations, marketing, stock administration, business development, state taxes based on gross receipts and other corporate costs. A summary of the main drivers of the change in general and administrative expenses for the periods presented is as follows: 2020 vs. 2019 (in thousands) Personnel costs and board fees $ (146 ) Variable performance-based compensation costs 2,461 Corporate, general and administrative costs 5,167 Non-cash stock compensation expense (1) 587 Non-recurring employee severance costs (127 ) Other expenses - impairment 158 Total change in general and administrative expenses $ 8,100 _________________________________________________________________ (1) - Refer to Note 9 in the accompany consolidated financial statements 28 Other Fiscal year 2020 and 2019 operating expenses included credits or expenses for court ordered attorney fees and settlement and contingency accruals ($0.3) million and $1.8 million, respectively. Other Income (Expense) Our equity investments in Veritone and the Portfolio Companies are recorded at fair value at each balance sheet date. Results for fiscal year 2020 included unrealized gain on our equity investment in Veritone totaling $5.5 million and realized gain of $8.2 million. Results for fiscal year 2019 included unrealized gain on our equity investment in Veritone totaling $9.9 million and realized loss of $9.2 million. For the year ended December 31, 2020, we recognized a realized loss of $3.9 million from our sales of public securities of the Portfolio Companies. We recognized a net gain of $2.8 million related to returned prepaid investments and the sale of an equity security derivative. We also recognized a foreign exchange loss of $4.8 million from our transaction related to the LF Income Equity Fund securities. For the year ended December 31, 2020, we recorded $175.9 million of unrealized gain related to the equity securities of the Portfolio Companies. Refer to Notes 2 and 17 to the consolidated financial statements elsewhere herein for additional information regarding our investment in trading securities and LF Equity Income Fund Portfolio Investment. Income Taxes 2020 2019 Income taxes (in thousands) $ 1,159 $ 1,824 Effective tax rate 1% (10% ) Our effective tax rates for fiscal year 2020 and 2019, were primarily comprised of foreign taxes withheld and refunded on revenue agreements with licensees in foreign jurisdictions, state taxes, and the impact of full valuation allowances recorded for net operating loss (2020 and 2019) and foreign tax credit related tax assets generated in those periods due to uncertainty regarding future realization. Foreign taxes withheld and refunded related to revenue agreements executed with third-party licensees domiciled in certain foreign jurisdictions for fiscal year 2020 and 2019 totaled ($1.4) million and ($1.9) million, respectively. Inflation Inflation has not had a significant impact on us or any of our subsidiaries in the current or prior periods. Liquidity and Capital Resources General Our primary sources of liquidity are cash and cash equivalents on hand generated from our operating activities. Our management believes that our cash and cash equivalent balances and anticipated cash flows from operations will be sufficient to meet our cash requirements through at least March 2022 and for the foreseeable future. We may, however, encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated, including those set forth under Item 1A, “Risk Factors”, above. Any efforts to seek additional funding could be made through issuances of equity or debt, or other external financing. However, additional funding may not be available on favorable terms, or at all. The capital and credit markets have experienced extreme volatility and disruption in recent years, and the volatility and impact of the disruption may continue. At times during this period, the volatility and disruption has reached unprecedented levels. In several cases, the markets have exerted downward pressure on stock prices and credit capacity for certain issuers, and the commercial paper markets may not be a reliable source of short-term financing for us. If we fail to obtain additional financing when needed, we may not be able to execute our business plans and our business, conducted by our operating subsidiaries, may suffer. 29 Certain of our operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. In connection with any of our operating subsidiaries’ patent enforcement actions, it is possible that a defendant may request and/or a court may rule that an operating subsidiary has violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material. Cash, Cash Equivalents, Trading Securities, Restricted Cash and Investments Our consolidated cash, cash equivalents, trading securities, and restricted cash totaled $309.6 million at December 31, 2020, compared to $203.3 million at December 31, 2019. The net change in cash, cash equivalents and restricted cash for the periods presented was comprised of the following: 2020 2019 (In thousands) Net cash provided by (used in): Operating activities $ (19,620 ) $ (2,308 ) Investing activities 18,598 (68,063 ) Financing activities 109,209 33,921 Increase (decrease) in cash and cash equivalents and restricted cash $ 108,187 $ (36,450 ) Cash Flows from Operating Activities. Cash receipts from licensees totaled $29.2 million and $44.0 million in fiscal years 2020 and 2019, respectively. The fluctuations in cash receipts for the periods presented primarily reflects the corresponding fluctuations in revenues recognized during the same periods, as described above, and the related timing of payments received from licensees. Cash outflows from operations totaled $48.8 million and $46.3 million in fiscal years 2020 and 2019, respectively. The fluctuations in cash outflows for the periods presented reflects the fluctuations in revenue-related inventor royalties and contingent legal fees and other operating costs and expenses during the same periods, as discussed above, and the impact of the timing of payments to inventors, attorneys and other vendors. Cash Flows from Investing Activities. Cash flows from investing activities and related changes were comprised of the following for the periods presented: 2020 2019 (In thousands) Patent acquisition $ (13,780 ) $ (4,420 ) Sale of investment at fair value (1) 12,409 6,628 (Purchase) Sale of other investments (1) – 2,000 Net sale (purchase) of trading securities 300,840 (72,088 ) Acquisition of LF Equity Income Fund equity securities (280,263 ) – Distributions to noncontrolling interests in operating subsidiary (409 ) – Purchases of property and equipment (199 ) (183 ) Net cash provided by (used in) investing activities $ 18,598 $ (68,063 ) (1) Refer to Note 6 to the consolidated financial statements elsewhere herein for additional information 30 Investment in Veritone. During the three months ended March 31, 2020, Acacia sold all remaining 298,450 shares Veritone common stock and recorded a realized loss of $3.3 million. In fiscal year 2019, Acacia sold 1,121,071 shares of Veritone common stock and recorded a realized loss of $9.2 million on the sale. During the year ended December 31, 2020, Acacia exercised 963,712 warrants, and recorded a realized gain of $11.5 million. Refer to Note 6 to the consolidated financial statements elsewhere herein for additional information regarding our investment with Veritone. Investment in the Portfolio Companies. For the year ended December 31, 2020, we recognized a realized loss of $3.9 million from our sales of public securities of the Portfolio Companies. We recognized a net gain of $2.8 million related to returned prepaid investments and the sale of an equity security derivative. We also recognized a foreign exchange loss of $4.8 million from our transaction related to the LF Income Equity Fund securities. For the year ended December 31, 2020, we recorded $175.9 million of unrealized gain related to the equity securities of the Portfolio Companies. Refer to Notes 2 and 17 to the consolidated financial statements elsewhere herein for additional information regarding our investment in trading securities and LF Equity Income Fund Portfolio Investment. Cash Flows from Financing Activities . Cash flows from financing activities and related changes included the following for the periods presented: 2020 2019 (In thousands) Repurchase of common stock $ (3,998 ) $ – Dividend on Series A Redeemable Convertible Preferred Stock (1,382 ) – Issuance of Senior Secured Notes, net of lender fee 110,437 – Senior Secured Notes issuance costs paid to other parties (496 ) – Issuance of Series A redeemable convertible preferred stock and Series A warrants, net of issuance costs – 33,842 Issuance of Series B warrants 4,600 – Proceeds from exercise of stock options 48 79 Net cash provided by financing activities $ 109,209 $ 33,921 Stock Repurchase Program. On August 5, 2019, our board of directors approved a stock repurchase program, which authorized the purchase of up to $10.0 million of the Company's common stock through open market purchases, through block trades, through 10b5-1 plans, or by means of private purchases, from time to time, through July 31, 2020. In determining whether or not to repurchase any shares of Acacia’s common stock, Acacia’s board of directors consider such factors as the impact of the repurchase on Acacia’s cash position, as well as Acacia’s capital needs and whether there is a better alternative use of Acacia’s capital. Acacia has no obligation to repurchase any amount of its common stock under the Stock Repurchase Program. Repurchases to date were made in the open market in compliance with applicable SEC rules. The authorization to repurchase shares presented an opportunity to reduce the outstanding share count and enhance stockholder value. The repurchased shares are expected to be retired. During the six months ended June 30, 2020, we repurchased 1,684,537 shares at an average price of $2.37 per share for $3,999,000. 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. Refer to Note 7 to the consolidated financial statements elsewhere herein for additional information regarding our stock repurchases in 2020. Starboard Investment. On November 18, 2019, the Company entered into the Securities Purchase Agreement with Starboard pursuant to which Starboard purchased (i) 350,000 shares of Series A Preferred Stock at an aggregate purchase price of $35,000,000, and Series A Warrants to purchase up to 5,000,000 shares of the Company’s common stock. 31 On February 25, 2020, pursuant to the terms of the Securities Purchase Agreement with Starboard and the Buyers, the Company issued Series B Warrants to purchase up to 100 million shares of the Company’s common stock at an exercise price of either (i) $5.25 per share, if exercising by cash payment, or (ii) $3.65 per share, if exercising by cancellation of a portion of Notes. The Company issued the Series B Warrants for an aggregate purchase price of $4.6 million. On June 4, 2020, pursuant to the Securities Purchase Agreement signed in November 2019, the Company issued $115 million in Notes to the Buyers. Per the Supplemental Agreement, interest is payable semiannually at a rate of 6.00% per annum, and in an event of default, the interest rate is increased to 10% per annum. On June 30, 2020, the Company entered into the Exchange Agreement with Merton and Starboard, on behalf of itself and on behalf of certain funds and accounts under its management, including the holders of the Notes. Pursuant to the Exchange Agreement, the holders of the Notes exchanged the entire outstanding principal amount for New Notes issued by Merton having an aggregate outstanding original principal amount of $115 million. Refer to Notes 16, 17 and 19 to our notes to consolidated financial statements for more information related to the Starboard Securities. Working Capital The primary components of working capital are cash and cash equivalents, trading securities, accounts receivable, prepaid expenses, accounts payable, accrued expenses, and royalties and contingent legal fees payable. Working capital at December 31, 2020 was $332.9 million, compared to $160.1 million at December 31, 2019. Consolidated accounts receivable from licensees was $0.5 million at December 31, 2020 and December 31, 2019. Accounts receivable balances fluctuate based on the timing, magnitude and payment terms associated with revenue agreements executed during the year, and the timing of cash receipts on accounts receivable balances recorded in previous periods. 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. Accounts payable and accrued expenses decreased to $7.0 million at December 31, 2020, from $9.5 million at December 31, 2019. Consolidated royalties and contingent legal fees payable was $2.2 million at December 31, 2020 and December 31, 2019. Royalties and contingent legal fees payable balances fluctuate based on the magnitude and timing of the execution of related license agreements, the timing of cash receipts for the related license agreements, and the timing of payment of current and prior period royalties and contingent legal fees payable to inventor and outside attorneys, respectively. All of accounts receivable from licensees at December 31, 2020 are scheduled to be collected in the first and second quarter of 2021, in accordance with the terms of the related underlying license agreements. The majority of royalties and contingent legal fees payable are scheduled to be paid through the third quarter of 2021 in accordance with the underlying contractual arrangements. Critical Accounting Policies Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing these financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. 32 We believe that, of the significant accounting policies discussed in Note 2 to our notes to consolidated financial statements, the following accounting policies require our most difficult, subjective or complex judgments: · revenue recognition; · stock-based compensation expense; · valuation of long-lived and intangible assets; · valuation of Series A Warrants , Series B Warrants and embedded derivatives; · valuation of private equity investment securities; and · accounting for income taxes. We discuss below the critical accounting assumptions, judgments and estimates associated with these policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our critical accounting policies, refer to Note 2 to the notes to consolidated financial statements included herein. Revenue Recognition As described below, significant management judgment must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue recognized or deferred for any period, if management made different judgments. Revenue is 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, or Recurring Revenue Agreement, the majority of which were originally executed in prior periods, which provide for the payment of quarterly license fees based on quarterly sales of applicable product units by licensees. Revenues may also include court ordered settlements or awards related to our patent portfolio, or Other Settlements, or sales of our patent portfolio. IP rights granted included the following, as applicable: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any 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. 33 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. For fiscal years 2020 and 2019, the majority of our revenue agreements provided for the payment to us of one-time, paid-up license fees in consideration for the grant of certain IP rights for patented technology rights owned by our operating subsidiaries. These rights were primarily granted on a perpetual basis, extending until the expiration of the underlying patents. Pursuant to the terms of these agreements, our operating subsidiaries have no further obligation with respect to the grant of the non-exclusive licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on our operating subsidiaries’ part to maintain or upgrade the technology, or provide future support or services. The agreements provided for the grant of the licenses, covenants-not-to-sue, releases, and other significant contractual performance obligations upon execution of the agreement. As such, the earnings process was determined to be complete and revenue was recognized upon the execution of the agreements. Historically, term license agreements have not been a material component of our operating revenues, with the majority of license agreements being paid-up, perpetual license agreements. Stock-based Compensation Expense Equity Based Awards. Stock-based compensation payments to employees and non-employee directors are recognized as expense in the consolidated statements of operations. The compensation cost for all stock-based awards is measured at the grant date, based on the fair value of the award (determined using a Black-Scholes option pricing model for stock options and intrinsic value on the date of grant for non-vested restricted stock), and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Determining the fair value of stock-based awards at the grant date requires significant estimates and judgments, including estimating the market price volatility of our common stock, future employee stock option exercise behavior and requisite service periods. We account for forfeitures of awards as they occur. 34 During the year ended December 31, 2019, the Company granted restricted stock units with market-based vesting conditions. The restricted stock units 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-based vesting condition is reflected in the estimate of the grant-date fair value of the options utilizing a Monte Carlo valuation technique. Refer to Notes 9 to our notes to consolidated financial statements for more information related to restricted stock units granted. Valuation of Long-lived and Intangible Assets Patent Portfolio Impairment Testing. We review long-lived assets and intangible assets for potential impairment annually (quarterly for patents) and when events or changes in circumstances indicate the 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. We did not record any patent portfolio impairment charges for the fiscal years ended December 31, 2020 and December 31, 2019. Valuation of Series A Warrants The fair value of the Series A warrants (the “Series A Warrants”) is estimated using a Black-Scholes option-pricing model. The fair value of the Series A Warrants as of December 31, 2020 was estimated based on the following assumptions: volatility of 29 percent, risk-free rate of 0.62 percent, term of 6.79 years and a dividend yield of 0 percent. Refer to Notes 16 for additional information. Valuation of Series B Warrants The fair value of the Series B Warrants is estimated using Monte Carlo valuation technique. The fair value of the Series B Warrants as of December 31, 2020 was estimated based on event probabilities of future exercise scenarios and the following weighted-average assumptions: (1) volatility of 29 percent, risk-free rate of 0.63 percent, term of 6.87 years, a dividend yield of 0 percent, and a discount for lack of marketability of 10 percent, and (2) volatility of 50 percent, risk-free rate of 0.12 percent, term of 1.65 years and a dividend yield of 0 percent, and a discount for lack of marketability of 10 percent. Refer to Notes 16 for additional information. Valuation of Embedded Derivatives Embedded derivatives that are required to be bifurcated from their host contract are evaluated and valued separately from host instrument. A binomial lattice framework is used to estimate the fair value of the embedded derivative put option, conversion option, call option, and contingent dividend rate feature in the Series A Preferred Stock issued by the Company in 2019. The binomial model utilizes the Tsiveriotis and Fernandes (“TF”) implementation in which a convertible instrument is split into two separate components: a cash-only component which is subject to the selected risk-adjusted discount rate and an equity component which is subject only to the risk-free rate. The model considers the (i) implied volatility of the value of our common stock, (ii) appropriate risk-free interest 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. 35 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. Refer to Notes 16 for additional information. Valuation of Investment Securities – Private Equity As the private company equity securities do not have readily determinable fair value, we have 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). Accounting for Income Taxes As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the estimating of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statements of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and our valuation allowance. Due to uncertainties related to our ability to utilize certain deferred tax assets in future periods, we have recorded a full valuation allowance against our net deferred tax assets as of December 31, 2020 and 2019. These assets primarily consist of foreign tax credits, capital loss carryforwards and net operating loss carryforwards. In assessing the need for a valuation allowance, management has considered both the positive and negative evidence available, including but not limited to, estimates of future taxable income and related probabilities, estimates surrounding the character of future income and the timing of realization, consideration of the period over which our deferred tax assets may be recoverable, our recent history of net income and prior history of losses, projected future outcomes, industry and market trends and the nature of existing deferred tax assets. In management’s estimate, any positive indicators, including forecasts of potential future profitability of our businesses, are outweighed by the uncertainties surrounding our estimates and judgments of potential future taxable income, primarily due to uncertainties surrounding the timing of realization of future taxable income and the character of such income in particular future periods (i.e. foreign or domestic). In the event that actual results differ from these estimates or we adjust these estimates should we believe we would be able to realize these deferred tax assets in the future, an adjustment to the valuation allowance would increase income in the period such determination was made. Any changes in the judgments, assumptions and estimates associated with our analysis of the need for a valuation allowance in any future periods could materially impact our financial position and results of operations in the periods in which those determinations are made. 36 Off-Balance Sheet Arrangements We have not entered into off-balance sheet financing arrangements. Uncertain Tax Positions . At December 31, 2020, we had total unrecognized tax benefits of approximately $731,000. A noncurrent liability of $85,000 related to unrecognized tax benefits primarily associated with state taxes was written off during 2020. No interest and penalties have been recorded for the unrecognized tax benefits as of December 31, 2020. If recognized, approximately $731,000 would impact our effective tax rate. We do not expect that the liability for unrecognized tax benefits will change significantly within the next 12 months. Recent Accounting Pronouncements Refer to Note 13 to our notes to consolidated financial statements included elsewhere herein.