ACACIA RESEARCH CORP 10-K

ITEM 9A. CONTROLS AND PROCEDURES (a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rules 13a-15(e)and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that this information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. 38 (b) Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as defined in Rule 13a-15(f) under the Exchange Act. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the criteria set forth in the Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2020. (c) Exemption from Attestation Report of Independent Registered Public Accounting Firm This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only Management’s Report because we are a non-accelerated filer. (d) Changes in Internal Controls over Financial Reporting There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d)and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. 39 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Except as provided below, in accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2021 annual meeting of stockholders to be filed with the SEC no later than April 30, 2021. Code of Conduct. We have adopted a Code of Conduct that applies to all employees, including our Chief Executive Officer and Chief Financial Officer and any persons performing similar functions. Our Code of Conduct is provided on our internet website at www.acaciaresearch.com . ITEM 11. EXECUTIVE COMPENSATION In accordance with General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2021 annual meeting of stockholders to be filed with the SEC no later than April 30, 2021. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS In accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2021 annual meeting of stockholders to be filed with the SEC no later than April 30, 2021. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE In accordance with General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2021 annual meeting of stockholders to be filed with the SEC no later than April 30, 2021. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES In accordance with General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2021 annual meeting of stockholders to be filed with the SEC no later than April 30, 2021. 40 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report. (1) Financial Statements Page Acacia Research Corporation Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets as of December 31, 2020 and 2019 F-2 Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019 F-3 Consolidated Statements of Series A Redeemable Convertible Preferred Stock and Stockholders’ Equity for the Years Ended December 31, 2020 and 2019 F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 F-6 Notes to Consolidated Financial Statements F-7 (2) Financial Statement Schedules Financial statement schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the Notes thereto. (3) Exhibits Refer to Item 15(b) below. (b) Exhibits. The following exhibits are either filed herewith or incorporated herein by reference: Exhibit Number Description 2.1** Agreement and Plan of Merger, dated November 22, 2011, by and among Acacia Research Group LLC, Apollo Patent Corp., Adaptix, Inc., and Baker Communications Fund II (QP), L.P., solely in its capacity as representative for the shareholders of Adaptix, Inc. (incorporated by reference to the Current Report on Form 8-K/A filed on January 19, 2012) 2.2 Transaction Agreement, dated as of June 4, 2020, between LF Equity Income Fund and Acacia Research Corporation (incorporated by reference to the Current Report on Form 8-K filed on June 10, 2020) 3.1 Amended and Restated Certificate of Incorporation (as updated through February 18, 2020 and currently in effect) (incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2019, filed on March 16, 2020) 3.2 Amended and Restated Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, as filed with the Delaware Secretary of State on January 7, 2020 (incorporated by reference to Appendix B to the Definitive Proxy Statement on Schedule 14A filed on January 17, 2020) 3.3 Second Amended and Restated Bylaws (incorporated by reference to the Quarterly Report on Form 10-Q for the period ended June 30, 2020, filed on August 20, 2020) 4.1 Tax Benefits Preservation Plan, dated as of March 16, 2019, by and between Acacia Research Corporation and Computershare Inc., as Rights Agent, which includes the Form of Certificate of Designation, Preferences and Rights of Participating Preferred Stock as Exhibit A, the Form of Rights Certificate as Exhibit B and the Summary of Terms as Exhibit C (incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2018, filed on March 15, 2019) 4.2 Description of Acacia Research Corporation Capital Stock (incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2019, filed on March 16, 2020) 41 4.3 Form of Senior Secured Note (incorporated by reference to the Current Report on Form 8-K filed on July 7, 2020) 4.4 Form of Series A Warrant to Purchase Common Stock (incorporated by reference to Appendix C to the Definitive Proxy Statement on Schedule 14A filed on January 17, 2020) 4.5 Form of Series B Warrant to Purchase Common Stock (incorporated by reference to Appendix D to the Definitive Proxy Statement on Schedule 14A filed on January 17, 2020) 10.1 Form of Indemnification Agreement (incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2019, filed on March 16, 2020) 10.2* Acacia Research Corporation Amended and Restated Executive Severance Policy (incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009) 10.3 Form of Purchase Agreement (incorporated by reference to the Current Report on Form 8-K filed on February 16, 2012) 10.4* 2013 Acacia Research Corporation Stock Incentive Plan (incorporated by reference to Annex A to the Definitive Proxy Statement on Schedule 14A filed on April 24, 2013) 10.5* Form of Stock Issuance Agreement under the 2013 Acacia Research Corporation Stock Incentive Plan (incorporated by reference to the Current Report on Form 8-K on May 22, 2013) 10.6* 2016 Acacia Research Corporation Stock Incentive Plan (incorporated by reference to the Quarterly Report on Form 10-Q for the period ended June 30, 2016, filed on August 9, 2016) 10.7* Form of Stock Option Agreement under the 2016 Acacia Research Corporation Stock Incentive Plan (incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 10, 2017) 10.8* Form of Stock Issuance Agreement under the 2016 Acacia Research Corporation Stock Incentive Plan (incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 10, 2017) 10.9* Form of Profits Interest Agreement Under AIP Operation LLC Profits Interest Plan (incorporated by reference to the Quarterly Report on Form 10-Q for the period ended March 31, 2017, filed on May 10, 2017) 10.10 Investment Agreement dated August 15, 2016, by and between Acacia Research Corporation and Veritone, Inc. (incorporated by reference to the Current Report on Form 8-K filed on March 16, 2017) 10.11 Secured Promissory Note dated August 15, 2016, issued by Veritone, Inc. to Acacia Research Corporation (incorporated by reference to the Current Report on Form 8-K filed on March 16, 2017) 10.12 Primary Common Stock Purchase Warrant dated August 15, 2016, issued by Veritone, Inc. to Acacia Research Corporation, together with form of 10% Warrant to Purchase Common Stock (incorporated by reference to the Current Report on Form 8-K filed on March 16, 2017) 10.13 Common Stock Purchase Warrant dated August 15, 2016, issued by Veritone, Inc. to Acacia Research Corporation (incorporated by reference to the Current Report on Form 8-K filed on March 16, 2017) 10.14 Common Stock Purchase Warrant dated November 25, 2016, issued by Veritone, Inc. to Acacia Research Corporation (incorporated by reference to the Current Report on Form 8-K filed on March 16, 2017) 10.15 Common Stock Purchase Warrant dated November 25, 2016, issued by Veritone, Inc. to Acacia Research Corporation (incorporated by reference to the Current Report on Form 8-K filed on March 16, 2017) 10.16* Employment Agreement, dated June 19, 2020, by and between Acacia Research Group, LLC and Marc W. Booth (incorporated by reference to the Current Report on Form 8-K filed on June 25, 2020) 10.17* Separation Agreement and General Release of Claims, effective August 10, 2018, by and between Acacia Research Group, LLC and Clayton J. Haynes (incorporated by reference to the Current Report on Form 8-K filed on August 16, 2018) 10.18* Consulting Agreement, effective August 10, 2018, by and between Acacia Research Corporation and Clayton J. Haynes (incorporated by reference to the Current Report on Form 8-K filed on August 16, 2018) 10.19* Separation Agreement and General Release of Claims, effective August 10, 2018, by and between Acacia Research Group, LLC and Edward J. Treska (incorporated by reference to the Current Report on Form 8-K filed on August 16, 2018 ) 10.20* Consulting Agreement, effective August 10, 2018, by and between Acacia Research Corporation and Edward J. Treska (incorporated by reference to the Current Report on Form 8-K filed on August 16, 2018) 42 10.21* Separation Agreement and General Release of Claims, dated February 12, 2019, by and between Acacia Research Group, LLC and Kirsten Hoover (incorporated by reference to the Current Report on Form 8-K filed on February 13, 2019) 10.22* Employment Agreement, dated September 3, 2019, by and among Acacia Research Group LLC, Acacia Research Corporation and Clifford Press (incorporated by reference to the Quarterly Report on Form 10-Q for the period ended September 30, 2019, filed on November 12, 2019) 10.23* Employment Agreement, dated September 3, 2019, by and among Acacia Research Group LLC, Acacia Research Corporation and Alfred Tobia (incorporated by reference to the Quarterly Report on Form 10-Q for the period ended September 30, 2019, filed on November 12, 2019) 10.24* Employment Agreement, dated June 4, 2020, by and between Acacia Research Group, LLC and Richard Rosenstein (incorporated by reference to the Current Report on Form 8-K filed on June 4, 2020) 10.25* Employment Agreement, dated June 4, 2020, by and between Acacia Research Group, LLC and Meredith Simmons (incorporated by reference to the Current Report on Form 8-K filed on June 4, 2020) 10.26* Employment Agreement, effective March 16, 2021, by and between Acacia Research Group, LLC and Jason Soncini (incorporated by reference to the Current Report on Form 8-K filed on March 22, 2021) 10.27 Securities Purchase Agreement dated November 18, 2019, by and among Acacia Research Corporation, Starboard Value LP and the investors listed on the Schedule of Buyers attached thereto (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A filed on January 17, 2020) 10.28 Supplemental Agreement, dated as of June 4, 2020, between Starboard Value, L.P. and Acacia Research Corporation (incorporated by reference to the Current Report on Form 8-K filed on June 10, 2020) 10.29 Exchange Agreement, dated June 30, 2020, among Acacia Research Corporation, Merton Acquisition HoldCo LLC and Starboard Value LP (incorporated by reference to the Current Report on Form 8-K filed on July 7, 2020) 10.30 Stock Pledge Agreement, dated June 30, 2020, entered into by Acacia Research Group LLC, Advanced Skeletal Innovations LLC and Saint Lawrence Communications LLC in favor of Starboard Value Intermediate Fund LP, as collateral agent (incorporated by reference to the Current Report on Form 8-K filed on July 7, 2020) 10.31 Guaranty, dated June 30, 2020, entered into by the Guarantors (as defined therein) in favor of the Holders (as defined therein) (incorporated by reference to the Current Report on Form 8-K filed on July 7, 2020) 10.32 Release of Security Interests in Patents, dated June 30, 2020, between the Releasees (as defined therein) and Starboard Value Intermediate Fund LP, as collateral agent. (incorporated by reference to the Current Report on Form 8-K filed on July 7, 2020) 10.33 Registration Rights Agreement dated November 18, 2019, by and among Acacia Research Corporation and the investors listed on the Schedule of Buyers attached thereto (incorporated by reference to Appendix F to the Definitive Proxy Statement on Schedule 14A filed on January 17, 2020) 10.34 Governance Agreement dated November 18, 2019 and amended January 7, 2020 , by and among Acacia Research Corporation and the entities and natural persons set forth on the signature pages thereto (incorporated by reference to Appendix G to the Definitive Proxy Statement on Schedule 14A filed on January 17, 2020) 10.35 Lease Agreement dated June 7, 2019, by and between Acacia Research Corporation and Jamboree Center 4 LLC (incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2019, filed on March 16, 2020) 21.1 List of Subsidiaries 23.1 Consent of Independent Registered Public Accounting Firm 24.1 Power of Attorney (included in the signature page hereto). 31.1† Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 31.2† Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 32.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 32.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 101 Interactive Date Files Pursuant to Rule 405 of Regulation S-T. _________________________ * The referenced exhibit is a management contract, compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(c) of Form 10-K. ** Portions of this exhibit have been omitted pursuant to a request for confidential treatment under Rule 24-b-2 of the Securities Exchange Act of 1934, as amended. The omitted material has been separately filed with the Securities and Exchange Commission. † The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K are not deemed filed with the SEC and are not to be incorporated by reference into any filing of Acacia Research Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, regardless of any general incorporation language contained in any filing. 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACACIA RESEARCH CORPORATION Dated: March 29, 2021 By: /s/ Clifford Press Clifford Press Chief Executive Officer (Authorized Signatory) POWER OF ATTORNEY We, the undersigned directors and officers of Acacia Research Corporation, do hereby constitute and appoint Clifford Press and Richard Rosenstein, and each of them, as our true and lawful attorneys-in-fact and agents with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney-in-fact and agent may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments hereto; and we do hereby ratify and confirm all that said attorney-in-fact and agent, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and the capacities and on the dates indicated. Signature Title Date /s/ Clifford Press Chief Executive Officer March 29, 2021 Clifford Press (Principal Executive Officer) /s/ Richard Rosenstein Chief Financial Officer March 29, 2021 Richard Rosenstein (Principal Financial Officer) /s/ Li Yu Corporate Controller March 29, 2021 Li Yu (Principal Accounting Officer) /s/ Isaac Kohlberg Director March 29, 2021 Isaac Kohlberg /s/ Maureen O'Connell Director March 29, 2021 Maureen O'Connell /s/ Jonathan Sagal Director March 29, 2021 Jonathan Sagal /s/ Alfred V. Tobia, Jr. Director March 29, 2021 Alfred V. Tobia, Jr. /s/ Katharine Wolanyk Director March 29, 2021 Katharine Wolanyk 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Acacia Research Corporation Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Acacia Research Corporation (and subsidiaries) (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, series A redeemable convertible preferred stock and stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Fair value measurements of the Series B Warrants and embedded derivative in the Series A Redeemable Convertible Preferred Stock. As described further in Note 16 to the consolidated financial statements, the Company entered into a Securities Purchase Agreement with Starboard Value LP, pursuant to which the Company issued (i) Series A Redeemable Convertible Preferred Stock and (ii) Series A Warrants. The Securities Purchase Agreement also established terms of certain additional warrants, referred to as the Series B Warrants. The Series A Redeemable Convertible Preferred Stock contained certain features that required to be bifurcated and accounted for as a compound embedded derivative. We identified the fair value measurements of the Series B Warrants and embedded derivatives in the Series A Redeemable Convertible Preferred Stock (together, “Series B Warrants and Series A Embedded Derivative Liabilities”) as a critical audit matter. The principal considerations for our determination that the fair value measurement of the Series B Warrants and Series A Embedded Derivative Liabilities was a critical audit matter are as follows. There is limited observable market data available for the Series B Warrants and Series A Embedded Derivative Liabilities as they are complex financial instruments and, as such, the fair value measurement requires management to make complex judgments in order to identify and select the significant assumptions, which include the volatility and credit spread. In addition, the fair value measurements of the Series B Warrants and Series A Embedded Derivative Liabilities require the use of complex financial models, including Monte Carlo valuation techniques and binomial lattice models. As a result, obtaining sufficient appropriate audit evidence related to the fair value measurements required significant auditor subjectivity. Our audit procedures related to the fair value measurements of the Series B Warrants and Series A Embedded Derivative Liabilities included the following among others. With the assistance of our firm valuation specialists, we evaluated the reasonableness of the Company’s valuation methodology and assumptions by: (1) comparing selected assumptions against available market data and historical amounts and (2) validating the mathematical accuracy of the models by developing an independent calculation and comparing to management’s concluded valuations. GRANT THORNTON LLP /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2007. Newport Beach, California March 29, 2021 F- 1 ACACIA RESEARCH CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share information) December 31, December 31, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 165,546 $ 57,359 Trading securities - debt – 93,843 Trading securities - equity 109,103 17,140 Investment securities - private equity 143,257 – Investment securities - equity method investments 30,673 – Investment at fair value (Note 6) 2,752 1,500 Accounts receivable 506 511 Prepaid expenses and other current assets 5,832 2,912 Total current assets 457,669 173,265 Long-term restricted cash 35,000 35,000 Patents, net of accumulated amortization 16,912 7,814 Leased right-of-use assets 951 1,264 Other non-current assets 4,988 818 Total assets $ 515,520 $ 218,161 LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,019 $ 1,765 Accrued expenses and other current liabilities 3,707 7,265 Accrued compensation 2,265 507 Royalties and contingent legal fees payable 2,162 2,178 Senior Secured Notes Payable - short-term 115,663 – Total current liabilities 124,816 11,715 Series A warrant liabilities 6,640 3,568 Series A embedded derivative liabilities 26,728 17,974 Series B warrant liabilities 52,341 – Long-term lease liabilities 951 1,264 Other long-term liabilities 591 593 Total liabilities 212,067 35,114 Commitments and contingencies (Note 10) Series A redeemable convertible preferred stock, par value $0.001 per share; stated value $100 per share; 350,000 shares authorized, issued and outstanding as of December 31, 2020 and December 31, 2019, respectively; aggregate liquidation preference of $35,000 as of December 31, 2020 and December 31, 2019, respectively 10,924 8,089 Stockholders' equity: Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; no shares issued or outstanding – – Common stock, par value $0.001 per share; 300,000,000 shares authorized; 49,279,453 and 50,370,987 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively 49 50 Treasury stock, at cost, 4,604,365 and 2,919,828 shares as of December 31, 2020 and December 31, 2019, respectively (43,270 ) (39,272 ) Additional paid-in capital 651,416 652,003 Accumulated deficit (326,708 ) (439,656 ) Total Acacia Research Corporation stockholders' equity 281,487 173,125 Noncontrolling interests 11,042 1,833 Total stockholders' equity 292,529 174,958 Total liabilities, redeemable convertible preferred stock, and stockholders' equity $ 515,520 $ 218,161 The accompanying notes are an integral part of these consolidated financial statements. F- 2 ACACIA RESEARCH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share information) Years Ended December 31, 2020 2019 Revenues $ 29,782 $ 11,246 Portfolio operations: Inventor royalties 7,349 4,944 Contingent legal fees 7,419 591 Litigation and licensing expenses - patents 5,683 7,803 Amortization of patents 4,681 3,194 Other portfolio expenses (income) (308 ) 1,756 Total portfolio operations 24,824 18,288 Net portfolio income (loss) 4,958 (7,042 ) General and administrative expenses (1) 24,476 16,376 Operating loss (19,518 ) (23,418 ) Other income (expense): Change in fair value of investment, net (Note 6) 5,474 9,899 Gain (loss) on sale of investment (Note 6) 8,187 (9,230 ) Impairment of other investment – (8,195 ) Gain on disposal of other investment – 2,000 Change in fair value of the Series A and B warrants and embedded derivatives (58,238 ) 4,518 Gain on sale of prepaid investment and derivative 2,845 – Change in fair value of trading securities and equity securities 176,173 (145 ) Gain on sale of trading securities 7,352 2,188 Loss on foreign currency exchange (4,905 ) (2 ) Interest expense on Senior Secured Notes (5,923 ) – Interest income and other 838 3,432 Total other income 131,803 4,465 Income (loss) before income taxes 112,285 (18,953 ) Income tax benefit 1,159 1,824 Net income (loss) including noncontrolling interests in subsidiaries 113,444 (17,129 ) Net loss attributable to noncontrolling interests in subsidiaries – 14 Net income (loss) attributable to Acacia Research Corporation $ 113,444 $ (17,115 ) Net income (loss) attributable to common stockholders - basic $ 90,330 $ (17,422 ) Basic net income (loss) per common share $ 1.85 $ (0.35 ) Weighted average number of shares outstanding - basic 48,840,829 49,764,002 Net income (loss) attributable to common stockholders - diluted $ 88,471 $ (20,373 ) Diluted net income (loss) per common share $ 1.54 $ (0.40 ) Weighted average number of shares outstanding - diluted 57,435,128 50,896,773 (1) General and administrative expenses were comprised of the following: Years Ended December 31, 2020 2019 General and administrative expenses $ 22,814 $ 15,301 Non-cash stock compensation expense - G&A 1,662 1,075 Total general and administrative expenses $ 24,476 $ 16,376 The accompanying notes are an integral part of these consolidated financial statements. F- 3 ACACIA RESEARCH CORPORATION CONSOLIDATED STATEMENTS OF SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (In thousands, except share information) For the Year Ended December 31, 2020 Series A Redeemable Convertible Preferred Stock Common Stock Treasury Additional Paid-in Accumulated Noncontrolling Interests in Operating Total Stockholders' Shares Amount Shares Amount Stock Capital Deficit Subsidiaries Equity Balance at December 31, 2019 350,000 $ 8,089 50,370,987 $ 50 $ (39,272 ) $ 652,003 $ (439,656 ) $ 1,833 $ 174,958 Net income attributable to Acacia Research Corporation – – – – – – 113,444 – 113,444 Accretion of Series A Redeemable Convertible Preferred Stock to redemption value – 2,835 – – – (2,835 ) – – (2,835 ) Dividend on Series A Redeemable Convertible Preferred Stock – – – – – (1,382 ) – – (1,382 ) Stock options exercised – – – – – 48 – – 48 Compensation expense for share-based awards, net of forfeitures – – 593,003 – – 1662 – – 1662 Repurchase of common stock – – (1,684,537 ) (1 ) (3,998 ) – – – (3,999 ) Dissolution of Acacia Intellectual Property Fund, L.P. – – – – – 1,920 (496 ) (1,424 ) – Distributions to noncontrolling interests in subsidiaries – – – – – – – (409 ) (409 ) Acquisition of MalinJ1 – – – – – – – 11,042 11,042 Balance at December 31, 2020 350,000 $ 10,924 49,279,453 $ 49 $ (43,270 ) $ 651,416 $ (326,708 ) $ 11,042 $ 292,529 F- 4 For the Year Ended December 31, 2019 Series A Redeemable Convertible Preferred Stock Common Stock Treasury Additional Paid-in Accumulated Noncontrolling Interests in Operating Total Stockholders' Shares Amount Shares Amount Stock Capital Deficit Subsidiaries Equity Balance at December 31, 2018 – $ – 49,639,319 $ 50 $ (39,272 ) $ 651,156 $ (422,541 ) $ 1,847 $ 191,240 Net loss attributable to Acacia Research Corporation – – – – – – (17,115 ) – (17,115 ) Issuance of Series A Redeemable Convertible Preferred Shares, net of embedded derivative, Series A Warrant, and issuance costs 350,000 7,782 – – – – – – – Accretion of Series A redeemable convertible preferred stock to redemption value – 307 – – – (307 ) – – (307 ) Stock options exercised – – 25,136 – – 79 – – 79 Compensation expense for share-based awards, net of forfeitures – – 706,532 – – 1,075 – – 1,075 Net loss attributable to noncontrolling interests in subsidiaries – – – – – – (14 ) (14 ) Balance at December 31, 2019 350,000 $ 8,089 50,370,987 $ 50 $ (39,272 ) $ 652,003 $ (439,656 ) $ 1,833 $ 174,958 The accompanying notes are an integral part of these consolidated financial statements. F- 5 ACACIA RESEARCH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) 2020 2019 Cash flows from operating activities: Net income (loss) including noncontrolling interests in subsidiaries $ 113,444 $ (17,129 ) Adjustments to reconcile net income (loss) including noncontrolling interests in subsidiaries to net cash provided by (used in) operating activities: Change in fair value of investment, net (Note 6) (5,474 ) (9,899 ) Loss (gain) on sale of investment (Note 6) (8,187 ) 9,230 Impairment of other investment – 8,195 Gain on disposal of other investment (Note 6) – (2,000 ) Depreciation and amortization 4,800 3,227 Amortization of debt discount and issuance costs 2,838 Change in fair value of Series A redeemable convertible preferred stock embedded derivative 8,754 (3,258 ) Change in fair value of Series A warrants 3,072 (1,260 ) Change in fair value of Series B warrants 46,412 – Non-cash stock compensation 1,662 1,075 Loss on foreign currency exchange 4,905 – Change in fair value of trading securities and equity securities - private (176,173 ) (2,241 ) Gain on sale of trading securities (7,352 ) – Gain on sale of prepaid investment and derivative (2,845 ) – Changes in assets and liabilities: Accounts receivable 5 32,373 Prepaid expenses and other assets (2,919 ) (220 ) Accounts payable and accrued expenses (2,546 ) 109 Royalties and contingent legal fees payable (16 ) (20,510 ) Net cash used in operating activities (19,620 ) (2,308 ) Cash flows from investing activities: Patent acquisition (13,780 ) (4,420 ) Sale of investment at fair value (Note 6) 12,409 6,628 Sale of other investments (Note 6) – 2,000 Purchases of trading securities (46,492 ) (147,178 ) Maturities and sales of trading securities 347,332 75,090 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 ) Cash flows from financing activities: Repurchase of common stock (3,998 ) – Issuance of Senior Secured Notes, net of lender fee 110,437 – Senior Secured Notes issuance costs paid to other parties (496 ) – Dividend on Series A Redeemable Convertible Preferred Stock (1,382 ) – 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 Increase (decrease) in cash and cash equivalents and restricted cash 108,187 (36,450 ) Cash and cash equivalents and restricted cash, beginning 92,359 128,809 Cash and cash equivalents and restricted cash, ending $ 200,546 $ 92,359 The accompanying notes are an integral part of these consolidated financial statements F- 6 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Description of Business. As used herein, “we,” “us,” “our,” “Acacia” and the “Company” refer to Acacia Research Corporation and/or its wholly and majority-owned and controlled operating subsidiaries, and/or where applicable, its management. Acacia acquires businesses and operating assets that the Company believes to be undervalued and where the Company believes it can leverage its resources and skill sets to realize and unlock value. The Company intends to leverage its (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. Acacia seeks to identify opportunities where the Company believes it is an advantaged buyer, where the Company can avoid structured sale processes and create the opportunity to purchase businesses, divisions and/or assets of companies at an attractive price due to the Company’s unique capabilities, relationships, or expertise, or where Acacia believes the target would be worth more to the Company than to other buyers. Acacia operates its 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 the Company’s targeted acquisitions. Acacia, through its operating subsidiaries, also currently engages in its legacy business of investing in, licensing and enforcing patented technologies. Acacia’s operating subsidiaries partner with inventors and patent owners, applying their legal and technology expertise to patent assets to unlock the financial value in their patented inventions. In recent years, Acacia has also invested in technology companies. Acacia leverages its experience, expertise, data and relationships developed as a leader in the IP industry to pursue these opportunities. In some cases, these opportunities will complement and/or supplement Acacia’s primary licensing and enforcement business. Acacia’s operating subsidiaries generate revenues and related cash flows from the granting of IP rights for the use of patented technologies that its operating subsidiaries control or own. Acacia’s operating subsidiaries assist patent owners with the prosecution and development of their patent portfolios, the protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of their patented technologies and, where necessary, with the enforcement against unauthorized users of their patented technologies through the filing of patent infringement litigation. Acacia’s operating subsidiaries are principals in the licensing and enforcement effort, obtaining control of the rights in the patent portfolio, or control of the patent portfolio outright. Acacia’s operating subsidiaries own or control the rights to multiple patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries. Neither Acacia nor its operating subsidiaries invent new technologies or products; rather, Acacia depends upon the identification and investment in new patents, inventions and companies that own IP through its relationships with inventors, universities, research institutions, technology companies and others. If Acacia’s operating subsidiaries are unable to maintain those relationships and identify and grow new relationships, then they may not be able to identify new technology-based opportunities for sustainable revenue and/or revenue growth. During fiscal year 2020, Acacia obtained control of five new patent portfolios. During fiscal year 2019, Acacia obtained control of four new patent portfolios. Acacia was incorporated on January 25, 1993 under the laws of the State of California. In December 1999, Acacia changed its state of incorporation from California to Delaware. F- 7 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 consolidated financial statements include the accounts of Acacia and its wholly and majority-owned and controlled subsidiaries. Material intercompany transactions and balances have been eliminated in consolidation. 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. Revenue is recognized upon transfer of control of promised bundled IP rights (hereinafter “IP Rights”) and other contractual performance obligations to licensees in an amount that reflects the consideration we expect to 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 (“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. F- 8 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. 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 “Portfolio operations” in the accompanying consolidated statements of operations. Inventor Royalties and Contingent Legal Expenses. Inventor royalties are expensed in the 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 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 consolidated statements of operations. There were no patent acquisition expenses for the years ended December 31, 2020 and 2019. 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. F- 9 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 14 to our notes to consolidated financial statements for more information related to our fair value measurement. Cash and Cash Equivalents . Acacia considers all highly liquid, trading securities with original maturities of three months or less when purchased to be cash equivalents. For the periods presented, Acacia’s cash equivalents are comprised of investments in AAA rated money market funds that invest in first-tier only securities, which primarily includes: domestic commercial paper, securities issued or guaranteed by the U.S. government or its agencies, U.S. bank obligations, and fully collateralized repurchase agreements. Acacia’s cash equivalents are measured at fair value using quoted prices that represent Level 1 inputs. Long Term Restricted Cash . Long-term restricted cash relates to the proceeds received from the issuance of Series A redeemable convertible preferred stock (the “Series A Redeemable Convertible Preferred Stock”) which are held in an escrow account. The amounts are to be released to the Company upon, among other things, (i) the consummation of a suitable investment or acquisition by the Company or (ii) the conversion of Series A Redeemable Convertible Preferred Stock into common stock (see Note 16). Trading Securities- Debt. Investments in debt securities are reported at fair value on a recurring basis, with related realized and unrealized gains and losses recorded in the consolidated statements of operations in other income (expense). Realized and unrealized gains and losses are recorded based on the specific identification method. Interest is included in other income (expense). Trading Securities - Equity. Investments in equity securities are reported at fair value on a recurring basis, with related realized and unrealized gains and losses in the value of such securities recorded in the consolidated statements of operations in other income (expense). Dividend income is included in other income (expense). 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). Impairment of Investments. Acacia evaluates its investments in marketable and private equity securities for potential impairment, employing a methodology on a quarterly basis that considers available quantitative and qualitative evidence. If the cost or carrying value of an investment exceeds its estimated fair value, the Company evaluates, among other factors, general market conditions, credit quality of instrument issuers, the duration and extent to which the fair value is less than cost, and the Company’s intent and ability to hold, or plans or ability to sell. Fair value is estimated based on publicly available market information or other estimates determined by management. Investments are considered to be impaired when a decline in fair value is estimated to be other-than-temporary. Acacia reviews impairments associated with its investments in these securities and determines the classification of any impairment as temporary or other-than-temporary. An impairment is deemed other-than-temporary unless (a) Acacia has the ability and intent to hold an investment for a period of time sufficient for recovery of its carrying amount and (b) positive evidence indicating that the investment’s carrying amount is recoverable within a reasonable period of time outweighs any evidence to the contrary. All available evidence, both positive and negative, is considered to determine whether, based on the weight of such evidence, the carrying amount of the investment is recoverable within a reasonable period of time. For investments classified as available-for-sale, unrealized losses that are other-than-temporary are recognized in the consolidated statements of operations. F- 10 Concentration of Credit Risks. Financial instruments that potentially subject Acacia to concentrations of credit risk are cash equivalents, trading securities and accounts receivable. Acacia places its cash equivalents and trading securities primarily in highly rated money market funds and investment grade marketable securities. Cash and cash equivalents are also invested in deposits with certain financial institutions and may, at times, exceed federally insured limits. Acacia has not experienced any significant losses on its deposits of cash and cash equivalents. Three licensees individually accounted for 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. The carrying value of cash and cash equivalents, restricted cash, accounts receivables, and current liabilities approximates their fair values due to their short-term maturities. Property and Equipment. Property and equipment are recorded at cost. Major additions and improvements that materially extend useful lives of property and equipment are capitalized. Maintenance and repairs are charged against the results of operations as incurred. When these assets are sold or otherwise disposed of, the asset and related depreciation are relieved, and any gain or loss is included in the consolidated statements of operations for the period of sale or disposal. Depreciation and amortization is computed on a straight-line basis over the following estimated useful lives of the assets: 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. Patents include the cost of patents or patent rights (hereinafter, collectively “patents”) acquired from third-parties or obtained in connection with business combinations. Patent costs are amortized utilizing the straight-line method over their remaining economic useful lives, ranging from one to five years. F- 11 Leases. The Company adopted ASC 842 as of January 1, 2019, electing the practical expedient approaches. The primary impact of adopting ASC 842 for the Company was the recognition in the consolidated balance sheet of certain lease-related assets and liabilities for operating leases with terms longer than 12 months. Such amounts were not previously accounted for in the Company's consolidated balance sheets. The Company’s leases primarily consist of facility leases which are classified as operating leases. The Company assesses whether an arrangement contains a lease at inception. The Company recognizes a lease liability to make contractual payments under all leases with terms greater than twelve months and a corresponding right-of-use asset, representing its right to use the underlying asset for the lease term. Upon adoption of ASC 842 on January 1, 2019, the carrying value of certain lease related liabilities for its excess of lease payments over anticipated sublease income existing at that date, was offset against the related right-of-use assets. Lease expense is recognized on a straight-line basis over the lease term. Investments at Fair Value . On an individual investment basis, Acacia may elect to account for investments in companies where the Company has the ability to exercise significant influence over operating and financial policies of the investee, at fair value. If the fair value option is applied to an investment that would otherwise be accounted for under the equity method of accounting, it is applied to all of the financial interests in the same entity that are eligible items (i.e., common stock and warrants). Other Investments - equity method investments . Equity investments in common stock and in-substance common stock without readily determinable fair values in companies over which the Company has the ability to exercise significant influence, are accounted for using the equity method of accounting. Acacia includes its proportionate share of earnings and/or losses of its equity method investees in equity in earnings (losses) of investee in the consolidated statements of operations. Investments in preferred stock with substantive liquidation preferences are accounted for at cost, (subject to impairment considerations, as described below, if any), as adjusted for the impact of changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. In-substance common stock is an investment in an entity that has risk and reward characteristics that are substantially similar to that entity's common stock. An investment in preferred stock with substantive liquidation preferences over common stock, is not substantially similar to common stock, and therefore is not considered in-substance common stock. A liquidation preference is substantive if the investment has a stated liquidation preference that is significant, from a fair value perspective, in relation to the purchase price of the investment. A liquidation preference in an investee that has sufficient subordinated equity from a fair value perspective is substantive because, in the event of liquidation, the 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. F- 12 Impairment of Long-lived Assets. Acacia reviews long-lived assets and intangible assets for potential impairment annually (quarterly for patents) and when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss is recorded equal to the excess of the asset’s carrying value over its fair value. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. In the event that management decides to no longer allocate resources to a patent portfolio, an impairment loss equal to the remaining carrying value of the asset is recorded. Refer to Note 5 for additional information. Fair value is generally estimated using the “Income Approach,” focusing on the estimated future net income-producing capability of the patent portfolios over the estimated remaining economic useful life. Estimates of future after-tax cash flows are converted to present value through “discounting,” including an estimated rate of return that accounts for both the time value of money and investment risk factors. Estimated cash inflows are typically based on estimates of reasonable royalty rates for the applicable technology, applied to estimated market data. Estimated cash outflows are based on existing contractual obligations, such as contingent legal fee and inventor royalty obligations, applied to estimated license fee revenues, in addition to other estimates of out-of-pocket expenses associated with a specific patent portfolio’s licensing and enforcement program. The analysis also contemplates consideration of current information about the patent portfolio including, status and stage of litigation, periodic results of the litigation process, strength of the patent portfolio, technology coverage and other pertinent information that could impact future net cash flows. Contingent Liabilities. The Company, from time to time, is involved in certain legal proceedings. Based upon consultation with outside counsel handling its defense in these matters and the Company’s analysis of potential outcomes, if the Company determines that a loss arising from such matters is probable and can be reasonably estimated, an estimate of the contingent liability is recorded in its consolidated financial statements. If only a range of estimated loss can be determined, an amount within the range that, based on estimates, assumptions and judgments, reflects the most likely outcome, is recorded as a contingent liability in the consolidated financial statements. In situations where none of the estimates within the estimated range is a better estimate of probable loss than any other amount, the Company records the low end of the range. Any such accrual would be charged to expense in the appropriate period. Litigation expenses for these types of contingencies are recognized in the period in which the litigation services were provided. 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. 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). The fair value of restricted stock and restricted stock units 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. F- 13 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. 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. The fair value of the Series A Warrants as of December 31, 2019 was estimated based on the following assumptions: volatility of 30 percent, risk-free rate of 1.85 percent, term of 7.79 years and a dividend yield of 0 percent. Refer to Notes 16 for additional information. 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. Embedded derivatives . Embedded derivatives that are required to be bifurcated from their host contract are valued separately from host instrument. A binomial lattice framework is used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock. Refer to Notes 16 for additional information. 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. 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 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. F- 14 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. Acacia uses the management approach, which designates the internal organization that is used by management for making operating decisions and assessing performance as the basis of Acacia’s reportable segments. The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. Use of Estimates . The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Acacia believes that, of the significant accounting policies described herein, the accounting policies associated with revenue recognition, the valuation of the equity instruments discussed at Notes 6, 14 and 17, the valuation of Series A redeemable convertible preferred stock, Series A warrants, Series B warrants, and embedded derivatives, stock-based compensation expense, impairment of patent-related intangible assets, the determination of the economic useful life of amortizable intangible assets, income taxes and valuation allowances against net deferred tax assets, require its most difficult, subjective or complex judgments. Income Per Share. For periods in which the Company generates net income, the Company computes basic net income per share attributable to common stockholders using the two-class method required for capital structures that include participating securities. Under the two-class method, securities that participate in non-forfeitable dividends, such as the Company’s outstanding unvested restricted stock and Series A Redeemable Convertible Preferred Stock, are considered participating securities and are allocated a portion of the Company’s earnings. For periods in which the Company generates a net loss, net losses are not allocated to holders of the Company’s participating securities as the security holders are not contractually obligated to share in the Company’s losses. 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. F- 15 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 F- 16 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 consolidated balance sheets. 3. TRADING SECURITIES Trading securities for the periods presented were comprised of the following: Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value (In thousands) Security Type December 31, 2020: Trading securities - equity $ 36,851 $ 74,099 $ (1,847 ) $ 109,103 December 31, 2019: Trading securities - debt $ 93,712 $ 143 $ (12 ) $ 93,843 Trading securities - equity 17,674 211 (745 ) 17,140 $ 111,386 $ 354 $ (757 ) $ 110,983 Trading securities as of December 31, 2020 and 2019, were comprised of investments in equity securities of publicly held companies (equity securities) and investments in corporate bonds (debt securities). For the year ended December 31, 2020, proceeds from the sale and maturity of debt securities and equity securities were $118,459,000 and $46,383,000 , respectively. For the year ended December 31, 2019, proceeds from the sale and maturity of debt securities and equity securities were $49,751,000 and $25,339,000, respectively. 4. ACCRUED EXPENSES Accrued expenses consist of the following at December 31, 2020 and 2019: 2020 2019 (In thousands) Accrued legal expenses - patent $ 2,284 $ 6,181 Accrued consulting and other professional fees – 470 Short-term lease liability 589 435 Other accrued liabilities 834 179 $ 3,707 $ 7,265 F- 17 5. PATENTS Acacia’s only identifiable intangible assets are patents and patent rights, with estimated remaining economic useful lives ranging from one to five years. For all periods presented, all of Acacia’s identifiable intangible assets were subject to amortization. The gross carrying amounts and accumulated amortization related to investments in intangible assets as of December 31, 2020 and 2019 are as follows (in thousands): 2020 2019 Gross carrying amount - patents $ 336,834 $ 330,588 Accumulated amortization - patents (1) (319,922 ) (322,774 ) Patents, net $ 16,912 $ 7,814 _____________ (1) Includes patent impairment charges for the applicable periods. The weighted-average remaining estimated economic useful life of Acacia’s patents and patent rights is 4 years. Scheduled annual aggregate amortization expense is estimated to $4,450,000 in 2021, $4,451,000 in 2022, $4,376,000 in 2023, $3,005,000 in 2024, and $630,000 thereafter. Acacia did not record charges related to the impairment of patent-related intangible assets for the years ended December 31, 2020 and December 31, 2019. There is no accelerated amortization or sales for patent-related assets for the years ended December 31, 2020 and December 31, 2019. 6. INVESTMENT AT FAIR VALUE During 2016 and 2017, Acacia made certain investments in Veritone, Inc. (“Veritone”). As a result of these transactions, Acacia received an aggregate total of 4,119,521 shares of Veritone common stock and warrants to purchase a total of 1,120,432 shares of Veritone common stock at an exercise price of $13.61 per share expiring between 2020 and 2027. During the year ended December 31, 2020, Acacia exercised 963,712 warrants, and recorded a realized gain of $11.5 million. At December 31, 2020, the fair value of the 156,720 remaining warrants held by Acacia totaled $2,752,000. During the year ended December 31, 2019, Acacia sold 1,121,071 shares Veritone common stock and recorded a realized loss of $9.2 million. 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. F- 18 Changes in the fair value of Acacia’s investment in Veritone are recorded as unrealized gains or losses in the consolidated statements of operations. For the year ended December 31, 2020, and 2019, the accompanying consolidated statements of operations reflected the following: 2020 2019 (In thousands) Change in fair value of investment, warrants $ 1,996 $ (1,308 ) Change in fair value of investment, common stock 3,478 11,207 Gain on sale of investment, warrants 11,503 – Loss on sale of investment, common stock (3,316 ) (9,230 ) Net realized and unrealized gain on investment at fair value $ 13,661 $ 669 7. STOCKHOLDERS’ EQUITY Repurchases of Common Stock. In February 2018, Acacia’s Board of Directors authorized the repurchase of up to $20,000,000 of the Company’s outstanding common stock in open market purchases or private purchases, from time to time, in amounts and at prices to be determined by the Board of Directors at its discretion (the “Stock Repurchase Program”). On August 5, 2019, Acacia’s Board of Directors approved a new 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. Monthly stock repurchases for the periods presented, all of which were purchased as part of a publicly announced plan or program, were as follows: Total Number of Shares Purchased Average Price paid per Share Approximate Dollar Value of Shares that May Yet be Purchased under the Program Plan Expiration Date March 20, 2020 - March 31, 2020 576,898 $ 2.28 $ 8,686,000 July 31, 2020 April 1, 2020 - April 23, 2020 1,107,639 $ 2.42 $ 6,001,000 July 31, 2020 Totals for 2020 1,684,537 $ 2.37 Tax Benefits Preservation Plan . On March 12, 2019, Acacia’s Board of Directors announced that it had unanimously approved the adoption of a Tax Benefits Preservation Plan (the “Plan”). The purpose of the Plan is to protect the Company’s ability to utilize potential tax assets, such as net operating loss carryforwards and tax credits to offset potential future taxable income. F- 19 The Plan is designed to reduce the likelihood that the Company will experience an ownership change by discouraging (i) any person or group from acquiring beneficial ownership of 4.9% or more of the Company’s outstanding common stock and (ii) any existing stockholders who, as of the time of the first public announcement of the adoption of the Plan, beneficially own more than 4.9% of the Company’s then-outstanding shares of the Company’s common stock from acquiring additional shares of the Company’s common stock (subject to certain exceptions). There is no guarantee, however, that the Plan will prevent the Company from experiencing an ownership change. In connection with the adoption of the Plan, Acacia’s Board of Directors authorized and declared a dividend distribution of one right for each outstanding share of the Company’s common stock to stockholders of record at the close of business on March 16, 2019. On or after the distribution date, each right would initially entitle the holder to purchase one one-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock, $0.001 par value for a purchase price of $12.00. The Company also has a provision in its Amended and Restated Certificate of Incorporation, as amended (the “Charter Provision”) which generally prohibits transfers of its common stock that could result in an ownership change. Like the Plan, the purpose of the Charter Provision is to protect the Company’s ability to utilize potential tax assets, such as net operating loss carryforwards and tax credits to offset potential future taxable income. The Charter Provision was approved by the Company’s stockholders on July 15, 2019. 8. INCOME TAXES Acacia’s income tax benefit (expense) for the fiscal periods presented consisted of the following: 2020 2019 (in thousands) Current: Federal $ – $ – State (66 ) (34 ) Foreign 1,225 1,858 Total current 1,159 1,824 Deferred: Federal – – State – – Total deferred – – Income tax benefit $ 1,159 $ 1,824 F- 20 The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following at December 31, 2020 and 2019: 2020 2019 (in thousands) Deferred tax assets: Net operating loss and capital loss carryforwards and credits $ 113,561 $ 112,280 Unrealized loss on investments held at fair value 0 538 Stock compensation 497 358 Fixed assets and intangibles 677 1,316 Basis of investments in affiliates 254 300 Accrued liabilities and other 762 631 State taxes 15 25 Total deferred tax assets 115,766 115,448 Valuation allowance (76,969 ) (115,077 ) Total deferred tax assets, net of valuation allowance 38,797 371 Deferred tax liabilities: ROU Asset (330 ) (347 ) Unrealized loss on investments held at fair value (38,374 ) – Other (93 ) (24 ) Total deferred tax liabilities (38,797 ) (371 ) Net deferred tax assets (liabilities) $ – $ – A reconciliation of the federal statutory income tax rate and the effective income tax rate is as follows: 2020 2019 Statutory federal tax rate - (benefit) expense 21% 21% State income and foreign taxes, net of federal tax effect (1)% 7% Foreign tax credit –% –% Noncontrolling interests in operating subsidiaries –% –% Nondeductible permanent items 11% 1% Change in tax rate –% –% Expired capitalized loss –% (2)% Valuation allowance (33)% (13)% Other 1% (4)% (1)% 10% F- 21 For the periods presented, the Company recorded full valuation allowances against its net deferred tax assets due to uncertainty regarding future realization pursuant to guidance set forth in ASC 740, “Income Taxes.” In future periods, if the Company determines it will more likely than not be able to realize certain of these amounts, the applicable portion of the benefit from the release of the valuation allowance will generally be recognized in the consolidated statements of operations in the period the determination is made. At December 31, 2020, Acacia had U.S. federal and state income tax net operating loss carryforwards (“NOLs”) totaling approximately $274,283,000 and $13,809,000, respectively. For federal income tax purposes, our NOL carryovers generated for tax years beginning before January 1, 2018 will begin to expire in 2026. Pursuant to the Tax Cuts and Jobs Act enacted by the U.S. federal government in December 2017, for federal income tax purposes, NOL carryovers generated for our tax years beginning January 1, 2018 can be carried forward indefinitely but will be subject to a taxable income limitation. Our capital loss carryovers totaled $11,155,000 at December 31, 2020, expiring in 2029. For state income tax purposes, our NOLs will expire between 2028 and 2040. As of December 31, 2020, Acacia had approximately $50,973,000 of foreign tax credits, expiring between 2021 and 2026. In general, foreign taxes withheld may be claimed as a deduction on future U.S. corporate income tax returns, or as a credit against future U.S. income tax liabilities, subject to certain limitations. Tax expense (benefit) for the periods presented primarily reflects foreign taxes withheld and refunded on revenue agreements executed with licensees in foreign jurisdictions and other state taxes. Excluding the impact of the change in valuation allowance, annual effective tax rates were 32% for fiscal year 2020 and 23% for fiscal year 2019. Results for fiscal year 2020 included an unrealized gain on our investment in Veritone which created a deferred tax liability totaling approximately $590,000, and an unrealized gain on our investment in the LF equity income fund portfolio which created a deferred tax liability totaling approximately $37,706,000. Results for fiscal year 2019 included an unrealized loss on Acacia’s investment in Veritone which created a deferred tax asset totaling approximately $538,000. Acacia is subject to taxation in the U.S. and in various state jurisdictions and incurs foreign tax withholdings on revenue agreements with licensees in certain foreign jurisdictions. With no material exceptions, Acacia is no longer subject to U.S. federal or state examinations by tax authorities for years before 2016. The California Franchise Tax Board audited the 2011 through 2016 California combined income tax returns. The California Franchise Tax Board has proposed adjustments for 2011 through 2016 that will result in a reduction in our net operating loss carryforward deferred tax asset of $571,000. As those NOL’s have been subject to a full valuation allowance, the impact of these adjustments has no impact to the consolidated statements of operations for the periods presented. At both December 31, 2020 and 2019, the Company had total unrecognized tax benefits of approximately $731,000. No interest and penalties have been recorded for the unrecognized tax benefits for the periods presented. At December 31, 2020, if recognized, approximately $731,000 of tax benefits, net of valuation allowance, would impact the Company’s effective tax rate. The Company does not expect that the liability for unrecognized tax benefits will change significantly within the next 12 months. Acacia recognizes interest and penalties with respect to unrecognized tax benefits in income tax expense (benefit). Acacia has identified no uncertain tax position for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within 12 months. 9. EQUITY-BASED INCENTIVE PLANS Stock-Based Incentive Plans The 2013 Acacia Research Corporation Stock Incentive Plan (“2013 Plan”) and the 2016 Acacia Research Corporation Stock Incentive Plan (“2016 Plan”) (collectively, the “Plans”) were approved by the stockholders of Acacia in May 2013 and June 2016, respectively. All Plans allow grants of stock options, stock awards and performance shares with respect to Acacia common stock to eligible individuals, which generally includes directors, officers, employees and consultants. Except as noted below, the terms and provisions of the Plans are identical in all material respects. F- 22 Acacia’s compensation committee administers the discretionary option grant and stock issuance programs. The compensation committee determines which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when the grants or issuances are to be made, the number of shares subject to each grant or issuance, the status of any granted option as either an incentive stock option or a non-statutory stock option under the federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The exercise price of options is generally equal to the fair market value of Acacia’s common stock on the date of grant. Options generally begin to be exercisable six months to one year after grant and generally expire seven to ten years after grant. Stock options with time-based vesting generally vest over two to three years and restricted shares with time based vesting generally vest in full after one to three years (generally representing the requisite service period). The Plans terminate no later than the tenth anniversary of the approval of the incentive plans by Acacia’s stockholders. The Plans provide for the following separate programs: · Discretionary Option Grant Program . Under the discretionary option grant program, Acacia’s compensation committee may grant (1) non-statutory options to purchase shares of common stock to eligible individuals in the employ or service of Acacia or its subsidiaries (including employees, non-employee board members and consultants) at an exercise price not less than 85% of the fair market value of those shares on the grant date, and (2) incentive stock options to purchase shares of common stock to eligible employees at an exercise price not less than 100% of the fair market value of those shares on the grant date (not less than 110% of fair market value if such employee actually or constructively owns more than 10% of Acacia’s voting stock or the voting stock of any of its subsidiaries). · Automatic Option Grant Program . Through fiscal year 2016, each non-employee director received restricted stock units or stock options for the number of shares determined by dividing the annual retainer by the grant date fair value of Acacia’s common stock on the grant date. In addition, each new non-employee director received restricted stock units or stock options for the number of shares determined by dividing the annual Board of Directors retainer by the grant date fair value of Acacia’s common stock on the commencement date. These restricted stock units and stock options vested in a series of twelve quarterly installments over the three year period following the grant date, subject to immediate acceleration upon a change in control. Acacia will deliver the unrestricted shares corresponding to the vested restricted stock units within thirty (30) days after the first to occur of the following events: (i) the fifth (5th) anniversary of the grant date; or (ii) termination of the non-employee director’s service as a member of the Company’s Board of Directors. The non-employee directors do not have any rights, benefits or entitlements with respect to any shares unless and until the shares have been delivered. · Stock Issuance Program . Under the stock issuance program, eligible individuals may be issued shares of common stock directly, upon the attainment of performance milestones or the completion of a specified period of service or as a bonus for past services. Under this program, the purchase price for the shares shall not be less than 100% of the fair market value of the shares on the date of issuance, and payment may be in the form of cash or past services rendered. The eligible individuals receiving restricted stock awards (“RSA”) shall have full stockholder rights with respect to any shares of Common Stock issued to them under the Stock Issuance Program, whether or not their interest in those shares is vested. Accordingly, the eligible individuals shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. The eligible individuals receiving restricted stock units (“RSU”) shall not have full stockholder rights until they vest. The number of shares of Common Stock initially reserved for issuance under the 2013 Plan was 4,750,000 shares. No new additional shares will be added to the 2013 Plan without security holder approval (except for shares subject to outstanding awards that are forfeited or otherwise returned to the 2013 Plan). The stock issuable under the 2013 Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the open market. In June 2016, 625,390 shares of common stock available for issuance under the 2013 Plan were transferred into the 2016 Plan. At December 31, 2020, there were 378,270 shares available for grant under the 2013 Plan. The number of shares of Common Stock initially reserved for issuance under the 2016 Plan was 4,500,000 shares plus 625,390 shares of common stock available for issuance under the 2013 Plan, as of the effective date of the Plan. At December 31, 2020, there were 4,068,308 shares available for grant under the 2016 Plan. F- 23 Upon the exercise of stock options, the granting of restricted stock, or the delivery of shares pursuant to vested restricted stock units, it is Acacia’s policy to issue new shares of common stock. Acacia’s Board of Directors may amend or modify the Plans at any time, subject to any required stockholder approval. As of December 31, 2020, there are 6,509,469 shares of common stock reserved for issuance under the Plans. Stock-based award grant activity for the periods presented was as follows: 2020 2019 Shares Aggregate fair value (in thousands) Shares Aggregate fair value (in thousands) Restricted stock awards with time-based service conditions 592,000 $ 2,087 777,000 $ 2,332 Restricted stock units with market-based service conditions – – 900,000 1,280 Restricted stock units with time-based service conditions 86,500 276 – – Total incentive awards granted 678,500 $ 2,363 1,677,000 $ 3,612 The following table summarizes stock option activity for the Plans for the year ended December 31, 2020: Weighted-Average Options Exercise Price Remaining Contractual Term Aggregate Intrinsic Value Outstanding at December 31, 2019 326,000 $ 4.38 Granted – $ – Exercised (14,000 ) $ 3.60 Expired/forfeited (2,000 ) $ 3.99 Outstanding at December 31, 2020 310,000 $ 4.41 2.2 years $ – Vested 298,000 $ 4.44 2.1 years $ – Exercisable at December 31, 2020 298,000 $ 4.44 2.1 years $ – The aggregate intrinsic value of options exercised during the years ended December 31, 2020 and 2019 was $7,000 and $4,000, respectively. The aggregate intrinsic value of options vested during the year ended December 31, 2020 was $8,000. No options were granted during the year ended December 31, 2020. The aggregate fair value of options vested during the years ended December 31, 2020 and 2019 was $54,000 and $294,000, respectively. As of December 31, 2020, the total unrecognized compensation expense related to non-vested stock option awards was $9,000, which is expected to be recognized over a weighted-average term of approximately 4 months. The following table summarizes non-vested restricted share activity for the year ended December 31, 2020: Nonvested Restricted Shares Weighted Average Grant Date Fair Value Nonvested restricted stock at December 31, 2019 476,000 $ – Granted 592,000 $ 3.52 Vested (353,000 ) $ 3.12 Canceled (31,000 ) $ 2.85 Nonvested restricted stock at December 31, 2020 684,000 $ 3.38 F- 24 The weighted-average grant date fair value of non-vested restricted stock granted during the years ended December 31, 2020 and 2019 was $3.38 and $2.98, respectively. The aggregate fair value of restricted stock that vested during the years ended December 31, 2020 and 2019 was $1,101,000 and $672,000, respectively. As of December 31, 2020, unrecognized compensation expense related to non-vested restricted stock awards was $2,023,000, which is expected to be recognized over a weighted-average term of approximately 2 years. The following table summarizes restricted stock units activity for the year ended December 31, 2020: Nonvested Restricted Shares Weighted Average Grant Date Fair Value Nonvested restricted stock units at December 31, 2019 900,000 $ 1.42 Granted 166,500 $ 3.19 Vested – $ – Canceled (80,000 ) $ 3.19 Nonvested restricted stock units at December 31, 2020 986,500 $ 1.58 Vested restricted stock units at December 31, 2020 14,000 $ 16.72 The weighted-average grant date fair value of restricted units granted during the years ended December 31, 2020 was $3.19. The aggregate fair value of restricted stock units granted during the year ended December 31, 2020 was $276,000. The aggregate fair value of restricted stock units granted during the year ended December 31, 2019 was $1,280,000. No restricted stock units were vested during the years ended December 31, 2020 and 2019. As of December 31, 2020, unrecognized compensation expense related to non-vested restricted stock units was $936,000, which is expected to be recognized over a weighted-average term of approximately 2 years. Profits Interest Plan On February 16, 2017, AIP Operation LLC, a Delaware limited liability company (“AIP”), and an indirect subsidiary of Acacia, adopted a Profits Interest Plan (the “Plan”) that provides for the grant of membership interests in AIP to certain members of management and the Board of Directors of Acacia as compensation for services rendered for or on behalf of AIP. Each profits interest unit granted pursuant to the Plan is intended to qualify as a “profits interest” for U.S. federal income tax purposes and will only have value to the extent the fair value of AIP increases beyond the fair value at the issuance date of the membership interests. The membership interests are represented by units (the “Units”) reserved for the issuance of awards under the Plan. The Units entitle the holders to share in or be allocated certain AIP profits and losses and to receive or share in AIP distributions pursuant to the AIP Limited Liability Company Operating Agreement entered into as of February 16, 2017 (the “LLC Agreement”). In connection with the adoption of the Plan, a form of Profits Interest Agreement was approved pursuant to which Units may be granted from time to time. Units vest upon AIP’s achievement of certain performance milestones (one-third upon 150% appreciation, and the remaining two-thirds upon 300% appreciation in value of Acacia’s aggregate investment in Veritone), subject to the continued service of the recipient, and are subject to the terms and conditions of the Plan, the Profits Interest Agreement and the LLC Agreement. The Units were fully vested in September 2017. Acacia owns 60% of the membership interests in AIP and at all times will control AIP. Profits interests totaling 400 Units, or 40% of the membership interests in AIP, were granted in February 2017, with an aggregate grant date fair value of $722,000. The carrying value of the Units totaled $591,000 as of December 31, 2020, based on the fair value of the Units at the recipient’s service termination date. Upon full vesting of the units in September 2017, all previously unrecognized compensation expense was immediately recognized. As of December 31, 2020, AIP holds the Veritone warrants described at Note 6. F- 25 Stock compensation expense is recognized in general and administrative expenses. Compensation expense for the periods presented was comprised of the following: 2020 2019 (in thousands) Restricted stock awards with time-based service conditions $ 1,155 $ 907 Restricted stock units awards with time-based service conditions 43 – Restricted stock units with market-based vesting conditions 427 140 Stock options with time-based service vesting conditions 37 28 Total compensation expense $ 1,662 $ 1,075 10. COMMITMENTS AND CONTINGENCIES Facility Leases The Company primarily leases office facilities under operating lease arrangements that will end in various years through July 2024. On June 7, 2019, we entered into a building lease agreement (the “New Lease”) with Jamboree Center 4 LLC (the “Landlord”). Pursuant to the New Lease, we have leased approximately 8,293 square feet of office space in Irvine, California. The New Lease commenced on August 1, 2019. The term of the New Lease is 60 months from the commencement date, provides for annual rent increases, and does not provide us the right to early terminate or extend our lease terms. The Company leased a facility under an operating lease agreement (the “Old Lease”), the term of which ended on January 31, 2020. The Company ceased using the facility in December 2018 and the subleased the facility for the remainder of the Old Lease term. All sublease income under the Old Lease was received and recorded in 2019. No sublease income on the Old Lease was recognized in 2020. On January 7, 2020, we entered into a building lease agreement (the “New York Office Lease”) with Sage Realty Corporation (the “New York Office Landlord”). Pursuant to the New York Office Lease, we have leased approximately 4,000 square feet of office space in New York, New York. The New York Office Lease commenced on February 1, 2020. The term of the New York Office Lease is 24 months from the commencement date, provides for annual rent increases, and does not provide us the right to early terminate or extend our lease terms. Operating lease costs, net of sublease income, were $603,000, and $426,000 for the years ended December 31, 2020 and 2019, respectively. F- 26 The table below presents aggregate future minimum payments due under the New Lease and the Old Lease, reconciled to lease liabilities included in the consolidated balance sheet as of December 31, 2020: Operating Leases (In thousands) 2021 $ 588 2022 370 2023 364 2024 218 Thereafter – Total minimum payments 1,540 Less: short-term lease liabilities (589 ) Long-term lease liabilities $ 951 Inventor Royalties and Contingent Legal Expenses In connection with the investment in certain patents and patent rights, certain of Acacia’s operating subsidiaries executed related agreements which grant to the former owners of the respective patents or patent rights, the right to receive inventor royalties based on future net revenues (as defined in the respective agreements) generated as a result of licensing and otherwise enforcing the respective patents or patent portfolios. Acacia’s operating subsidiaries may retain the services of law firms that specialize in patent licensing and enforcement and patent law in connection with their licensing and enforcement activities. These law firms may be retained on a contingent fee basis whereby such law firms are paid on a scaled percentage of any negotiated fees, settlements or judgments awarded based on how and when the fees, settlements or judgments are obtained. Patent Enforcement Certain of Acacia’s operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. In connection with any of Acacia’s operating subsidiaries’ patent enforcement actions, it is possible that a defendant may request and/or a court may rule that an operating subsidiary has violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against Acacia or its operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material. Other Acacia is subject to claims, counterclaims and legal actions that arise in the ordinary course of business. On December 6, 2017, the Federal Court of Canada allowed a counterclaim for invalidity of a patent asserted by Rapid Completions LLC and awarded costs payable by Rapid Completions LLC in an amount to be determined. F- 27 On September 6, 2019, Slingshot Technologies, LLC (“Slingshot”) filed a lawsuit in Delaware Chancery Court against the Company and Acacia Research Group, LLC (collectively, the “Acacia Entities”) , Monarch Networking Solutions LLC (“Monarch”) , Acacia board member Katharine Wolanyk, and Transpacific IP Group, Ltd. (“Transpacific”). Slingshot alleges that the Acacia Entities and Monarch misappropriated its confidential and proprietary information, purportedly furnished to the Acacia Entities and Monarch by Ms. Wolanyk, in acquiring a patent portfolio from Transpacific after Slingshot’s exclusive option to purchase the same patent portfolio from Transpacific had already expired. Slingshot seeks monetary damages, as well as equitable and injunctive relief related to its alleged right to own the portfolio. On March 15, 2021, the court issued orders granting Monarch’s motion to dismiss for lack of personal jurisdiction and Ms. Wolanyk’s motion to dismiss for lack of subject matter jurisdiction. The Acacia Entities maintain that Slingshot’s allegations are baseless, that the Acacia Entities neither had access to nor used Slingshot’s information in acquiring the portfolio, that the Acacia Entities acquired the portfolio as a result of the independent efforts of its IP licensing group, and that Slingshot suffered no damages given its exclusive option to purchase the portfolio had already ended and it has proven itself incapable of closing on the portfolio purchase. Management believes that the ultimate liability with respect to these claims and legal actions, if any, will not have a material effect on Acacia’s consolidated financial position, results of operations or cash flows. Fiscal year 2020 operating expenses included a net income for settlement offset by contingency accruals totaling $308,000, net of prior accruals. Refer to Note 4 for information on accrued expenses. Guarantees and Indemnifications Certain of Acacia’s operating subsidiaries have made guarantees and indemnities under which they may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. In connection with certain facility leases, Acacia and certain of its operating subsidiaries have indemnified lessors for certain claims arising from the facilities or the leases. Acacia indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware. However, Acacia has a directors and officers insurance policy that may reduce its exposure in certain circumstances and may enable it to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to statute of limitations. The majority of guarantees and indemnities do not provide any limitations of the maximum potential future payments that Acacia could be obligated to make. To date, Acacia has made no payments related to these guarantees and indemnities. Acacia estimates the fair value of its indemnification obligations to be insignificant based on this history and therefore, have not recorded any liability for these guarantees and indemnities in the accompanying consolidated balance sheets. Additionally, no events or transactions have occurred that would result in a material liability at December 31, 2020. 11. RETIREMENT SAVINGS PLAN AND EXECUTIVE SEVERANCE POLICY Retirement Savings Plan. Acacia has an employee savings and retirement plan under section 401(k) of the Code (the “Plan”). The Plan is a defined contribution plan in which eligible employees may elect to have a percentage of their compensation contributed to the Plan, subject to certain guidelines issued by the Internal Revenue Service. Acacia may contribute to the Plan at the discretion of the Board of Directors. There were no contributions made by Acacia during the periods presented. F- 28 Executive Severance Policy. Under Acacia’s Amended Executive Severance Policy, full-time employees as of July 2017 and prior with the title of Senior Vice President and higher (“SVP and higher”) are entitled to receive certain benefits upon termination of employment. If employment of an SVP and higher employee is terminated for other than cause or other than on account of death or disability, Acacia will (i) promptly pay to the SVP and higher employee a lump sum amount equal to the aggregate of (a) accrued obligations (i.e., annual base salary through the date of termination to the extent not theretofore paid and any compensation previously deferred (together with any accrued interest or earnings thereon) and any accrued vacation pay, and reimbursable expenses, in each case to the extent not theretofore paid) and (b) three (3) months of base salary for each full year that the SVP and higher employee was employed by the Company (the “Severance Period”), up to a maximum of twelve (12) months (eighteen (18) months for executive officers of Acacia Research Corporation) of base salary, and (ii) provide to the SVP and higher employee, Acacia paid COBRA coverage for the medical and dental benefits selected in the year in which the termination occurs, for the duration of the Severance Period. Results for the year ended December 31, 2020 and 2019 include $304,000 and $420,000 of expenses incurred under the executive severance policy. 12. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for state income taxes totaled $118,000 and $85,000 for the years ended December 31, 2020 and 2019, respectively. Foreign taxes refunded totaled $3,600,000 and foreign taxes withheld totaled $249,000 for the years ended December 31, 2020 and 2019, respectively. 13. RECENT ACCOUNTING PRONOUNCEMENTS Recent Accounting Pronouncements - Not Yet Adopted. In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes, to remove certain exceptions and improve consistency of application, including, among other things, requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this update will be effective for the Company beginning with fiscal year 2021, with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. Management is currently evaluating the impact that the amendments in this update will have on the Company’s consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to replace the incurred loss methodology with an expected credit loss model that requires consideration of a broader range of information to estimate credit losses over the lifetime of the asset, including current conditions and reasonable and supportable forecasts in addition to historical loss information, to determine expected credit losses. Pooling of assets with similar risk characteristics and the use of a loss model are also required. Also, in April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, to clarify the inclusion of recoveries of trade receivables previously written off when estimating an allowance for credit losses. The amendments in this update will be effective for the Company in fiscal year 2023, with early adoption permitted. Management is currently evaluating the impact that the amendments in this update will have on the Company’s consolidated financial statements. F- 29 14. FAIR VALUE MEASUREMENTS U.S. GAAP defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date, and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three-level hierarchy of valuation techniques established to measure fair value is defined as follows: (i) Level 1 - Observable Inputs : Quoted prices in active markets for identical investments; (ii) Level 2 - Pricing Models with Significant Observable Inputs : Other significant observable inputs, including quoted prices for similar investments, interest rates, credit risk, etc.; and (iii) Level 3 - Unobservable Inputs : Significant unobservable inputs, including the entity’s own assumptions in determining the fair value of investments. Whenever possible, the Company is required to use observable market inputs (Level 1 - quoted market prices) when measuring fair value. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured. In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. Acacia holds the following types of financial instruments at December 31, 2020 and 2019. Trading securities - debt. Debt securities includes corporate bonds with fair value that is determined by third party quotations from outside pricing services and/or computerized pricing models, which may be based on transactions, bids or estimates. Acacia classifies the fair value of corporate bonds within Level 2 of the valuation hierarchy. Trading securities - equity. Equity securities includes investments in public companies common stock and are recorded at fair value based on the quoted market price of each share on the valuation date. The fair value of these securities are within Level 1 of the valuation hierarchy. Investments at fair value - common stock . Acacia’s equity investment in Veritone common stock is recorded at fair value based on the quoted market price of Veritone’s common stock on the applicable valuation date (Level 1). Investments at fair value - warrants. Warrants are recorded at fair value, as based on the Black-Scholes option-pricing model (Level 2). Series A Warrants. Series A Warrants are recorded at fair value, using Black-Scholes option-pricing model (Level 2). Series B Warrants. Series B Warrants are recorded at fair value, using Monte Carlo valuation technique (Level 3). Embedded derivative liability. Embedded derivatives that are required to be bifurcated from their host contract are evaluated and valued separately from the host instrument. A binomial lattice framework is used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock issued by the Company in 2019 (Level 3). F- 30 Financial assets and liabilities measured at fair value on a recurring basis were as follows: Level 1 Level 2 Level 3 (In thousands) Assets as of December 31, 2020: Trading securities - equity $ 109,103 $ – $ – Investment at fair value - warrants (Note 6) – 2,752 – Total recurring fair value measurements as of December 31, 2020 $ 109,103 $ 2,752 $ – Assets as of December 31, 2019: Trading securities - debt $ – $ 93,843 $ – Trading securities - equity 17,140 – – Investment at fair value - warrants (Note 6) – 757 – Investment at fair value - common stock (Note 6) 743 – – Total recurring fair value measurements as of December 31, 2019 $ 17,883 $ 94,600 $ – Liabilities as of December 31, 2020: Series A warrants $ – $ 6,640 $ – Series B warrants – – 52,341 Embedded derivative liability – – 26,728 Total liabilities as of December 31, 2020 $ – $ 6,640 $ 79,069 Liabilities as of December 31, 2019: Series A warrants $ – $ 3,568 $ – Embedded derivative liability – – 17,974 Total liabilities as of December 31, 2019 $ – $ 3,568 $ 17,974 The following table sets forth a summary of the changes in the estimated fair value of the Company’s Level 3 liabilities, which are measured at fair value as a on a recurring basis: Series A Preferred Stock Embedded Derivative Liability Series B Warrants Liability (In thousands) Opening balance as of January 1, 2019 Issuance of Series A warrants $ 21,232 $ – Remeasurement to fair value (3,258 ) – Balance as of December 31, 2019 $ 17,974 $ – Issuance of Series B warrants – 4,600 Remeasurement to fair value 8,754 47,741 Balance as of December 31, 2020 $ 26,728 $ 52,341 F- 31 15. RELATED PARTY TRANSACTIONS During the year ended December 31, 2019, the Company purchased shares of common stock of Drive Shack, Inc. (“Drive Shack”) for an aggregate purchase price of $2.4 million. Drive Shack and Clifford Press, Chief Executive Officer and director of Acacia, are related parties as Mr. Press is a board member of Drive Shack. The market value of the investment was $1.4 million and $2.1 million for the years ended December 31, 2020, and December 31, 2019, respectively. During the years ended December 31, 2020 and 2019, the Company recognized unrealized losses from the investment of $998,000 and $263,000, respectively. 16. STARBOARD INVESTMENT Series A Redeemable Convertible Preferred Stock. On November 18, 2019, the Company entered into a Securities Purchase Agreement with Starboard Value LP (“Starboard”) pursuant to which the Company issued (i) 350,000 shares of Series A Redeemable Convertible Preferred Stock with a par value of $0.001 per share and a stated value of $100 per share, and (ii) Series A Warrants to purchase up to 5,000,000 shares of the Company’s common stock to Starboard. The Securities Purchase Agreement also established the terms of certain senior secured notes and additional warrants (the “Series B Warrants”) which may be issued to Starboard in the future. On June 4, 2020, the Company entered into a Supplemental Agreement, as defined below under “Senior Secured Notes”, with certain contractual agreements affecting the Series A Redeemable Convertible Preferred Stock, reflected below. The Series A Redeemable Convertible Preferred Stock can be converted into a number of shares of common stock equal to (i) the stated value thereof plus accrued and unpaid dividends, divided by (ii) the conversion price of $3.65 (subject to certain anti-dilution adjustments). Holders may elect to convert the Series A Redeemable Convertible Preferred Stock into common stock at any time. The Company may elect to convert the Series A Redeemable Convertible Preferred Stock into shares of Common Stock any time on or after November 15, 2025, provided that the closing price of the Company’s common stock equals or exceeds 190% of the conversion price for 30 consecutive trading days and assuming certain other conditions of the common stock have been met. Holders have the option to redeem all or a portion of the Series A Redeemable Convertible Preferred Stock during the periods of May 15, 2021 through August 15, 2021 and May 15, 2022 through August 15, 2022, provided that there is not outstanding at least $50.0 million aggregate principal of senior secured notes to Starboard pursuant to the Securities Purchase Agreement at the time of the redemption. Holders also have the option to redeem all or a portion of the Series A Redeemable Convertible Preferred Stock during the period of November 15, 2024 through February 15, 2025. Additionally, holders have the option to redeem all or a portion of the Series A Redeemable Convertible Preferred Stock upon the occurrence of (i) a change of control or (ii) various other triggering events, such as the suspension from trading or delisting of the Company’s common stock. If the Series A Redeemable Convertible Preferred Stock is redeemed at the option of the holders, the redemption price may include a make-whole amount or a stated premium, depending on the redemption scenario. The Company may redeem all, and not less than all, of the Series A Redeemable Convertible Preferred Stock (i) upon a change of control or (ii) during the period of May 15, 2022 through August 15, 2022, provided that there is not outstanding at least $50.0 million aggregate principal of the senior secured notes at the time of the redemption, and assuming certain conditions of the common stock have been met. If the Series A Redeemable Convertible Preferred Stock is redeemed at the option of the Company, the redemption price would include a make-whole amount or a 15% premium depending on the circumstances. If any Series A Redeemable Convertible Preferred Stock remains outstanding on November 15, 2027, the Company shall redeem such Series A Redeemable Convertible Preferred Stock in cash. In all redemption scenarios, the redemption price for the Series A Redeemable Convertible Preferred Stock includes the stated value plus accrued and unpaid dividends. In addition, depending on the redemption scenario, the redemption price may also include a make-whole amount or stated premium as described above. When the Company issues Notes, the Holder may exchange the Series A Redeemable Convertible Preferred Stock for (i) Notes and (ii) Series B Warrants to purchase common stock. F- 32 The Series A Redeemable Convertible Preferred Stock accrues cumulative dividends quarterly at annual rate of 3.0% on the stated value. Upon consummation of the approved investment in June 2020, the dividend rate increased to 8.0% on the stated value. Upon certain triggering events, the dividend rate will increase to 7.0% if the triggering event occurs before an approved investment or 10.0% on the stated value if the triggering event occurs after an approved investment. In connection with the approved investment in June 2020, the Company and Starboard agreed that the dividend rate on the Series A Redeemable Convertible Preferred Stock would accrue at 3.0% so long as no triggering event occurs and the Company maintains $35 million in escrow. Series A Redeemable Convertible Preferred Stock also participates on an as-converted basis in any regular or special dividends paid to common stockholders. No accrued and unpaid dividends as of December 31, 2020. Holders of the Series A Redeemable Convertible Preferred Stock have the right to vote with common stockholders on an as-converted basis on all matters. Holders of Series A Redeemable Convertible Preferred Stock will also be entitled to a separate class vote with respect to amendments to the Company’s organizational documents that generally have an adverse effect on the Series A Redeemable Convertible Preferred Stock. Upon liquidation of the Company, holders of Series A Redeemable Convertible Preferred Stock have a liquidation preference over holders of our common stock and will be entitled to receive, prior to any distribution to holders of our common stock, an amount equal to the greater of (i) the stated value plus accrued and unpaid dividends or (ii) the amount that would have been received if the Series A Redeemable Convertible Preferred Stock had been converted into common stock immediately prior to the liquidation event at the then effective conversion price. The Company determined that certain features of the Series A Redeemable Convertible Preferred Stock should be bifurcated and accounted for as a derivative. Each of these features are bundled together as a single, compound embedded derivative. Total proceeds received and transaction costs incurred from the issuance of the Series A Redeemable Convertible Preferred Stock amounted to $35 million and $1.3 million, respectively. Proceeds received were allocated based on the fair value of the instrument without the Series A Warrants and of the Series A Warrants themselves at the time of issuance. The proceeds allocated to the Series A Redeemable Convertible Preferred Stock were then further allocated between the host preferred stock instrument and the embedded derivative, with the embedded derivative recorded at fair value and the Series A Redeemable Convertible Preferred Stock recorded at the residual amount. The portion of the proceeds allocated to the Series A Warrants, embedded derivative, and Series A Redeemable Convertible Preferred Stock was $4.8 million, $21.2 million, and $8.9 million, respectively. Transaction costs were also allocated between the Series A Redeemable Convertible Preferred Stock and the Series A Warrants on the same basis as the proceeds. The transaction costs allocated to the Series A Redeemable Convertible Preferred Stock were treated as a discount to the Series A Redeemable Convertible Preferred Stock. The transaction costs allocated to the Series A Warrants were expensed as incurred. The Company classifies the Series A Redeemable Convertible Preferred Stock as mezzanine equity as the instrument will become redeemable at the option of the holder in various scenarios or otherwise on November 15, 2027. As it is probable that the Series A Redeemable Convertible Preferred Stock will become redeemable, the Company accretes the instrument to its redemption value using the effective interest method and recognizes any changes against additional paid in capital in the absence of retained earnings. Accretion for the year ended December 31, 2020 was $2.8 million. In connection with the issuance of the Series A Redeemable Convertible Preferred Stock, the Company executed a Registration Rights Agreement and a Governance Agreement with Starboard. Under the Registration Rights Agreement, the Company agreed to provide certain registration rights with respect to the Series A Redeemable Convertible Preferred Stock and shares of Common Stock issued upon conversion. In accordance with the Governance Agreement, the Company agreed to (i) increase the size of the Board of Directors from six to seven members, (ii) appoint a director of the Company, (iii) grant Starboard the right to recommend two additional directors for appointment to the board, (iv) form a Strategic Committee of the Board tasked with sourcing and performing due diligence on potential acquisition targets, (v) appoint certain directors to the Strategic Committee, and (vi) appoint a director to the Nominating and Corporate Governance Committee. F- 33 The following features of the Series A Redeemable Convertible Preferred Stock are required to be bifurcated from the host preferred stock and accounted for separately as an embedded derivative: (i) the right of the holders to redeem the shares (the “put option”), (ii) the right of the holders to receive common stock upon conversion of the shares (the “conversion option”), (iii) the right of the Company to redeem the shares (the “call option”), and (iv) the change in dividend rate upon consummation of an approved investment or a triggering event (the “contingent dividend rate feature”). These features are required to be accounted for separately from the Series A Redeemable Convertible Preferred Stock because the features were determined to be not clearly and closely related to the debt-like host and also did not meet any other scope exceptions for derivative accounting. Therefore, these features are bundled together and are accounted for as a single, compound embedded derivative liability. Accordingly, we have recorded an embedded derivative liability representing the combined fair value of each of these features. The embedded derivative liability is adjusted to reflect fair value at each period end with changes in fair value recorded in the “Change in fair value of redeemable preferred stock embedded derivative” financial statement line item of the accompanying consolidated statements of operations. As of December 31, 2020, the fair value of the Series A embedded derivative was $26.7 million. Series A Warrants. On November 18, 2019, in connection with the issuance of the Series A Redeemable Convertible Preferred Stock, the Company issued a detachable Series A Warrants to acquire up to purchase 5,000,000 shares of common stock at a price of $3.65 per share (subject to certain anti-dilution adjustments) at any time during a period of eight years beginning on the instrument’s issuance date of the Series A Warrants. The fair value of the Series A Warrants was $4.8 million. The Series A Warrants will be recognized at fair value at each reporting period until exercised, with changes in fair value recognized in other income (expense) in the accompanying consolidated statements of operations. As of December 31, 2020, the fair value of the Series A Warrants was $6.6 million. As of December 31, 2020, the Series A Warrants have not been exercised. The Series A Warrants are classified as a liability in accordance with ASC 480, Distinguishing Liabilities from Equity, as the agreement provides for net cash settlement upon a change in control, which is outside the control of the Company. Series B Warrants. 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 (subject to certain price-based anti-dilution adjustments) of either (i) $5.25 per share, if exercising by cash payment, within 30 months from the issuance date (i.e., August 25, 2022); 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. The Series B Warrants expire on November 15, 2027. In connection with the issuance of the Notes on June 4, 2020, the terms of certain of the Series B Warrants were amended to permit the payment of the lower exercise price of $3.65 through the payment of cash, rather than only through the cancellation of Notes outstanding, at any time until the expiration date of November 15, 2027. Only 31,506,849 of the Series B Warrants are subject to this adjustment with the remaining balance of 68,493,151 Series B Warrants continuing under their original terms. As of December 31, 2020, the Series B Warrants have not been exercised. The Series B Warrants will be recognized at fair value at each reporting period until exercised, with changes in fair value recognized in the consolidated statements of operations in other income (expense). As of December 31, 2020, the fair value of the Series B Warrants was $52.3 million. The Series B Warrants are classified as a liability in accordance with ASC 480, Distinguishing Liabilities from Equity, as the agreement provides for net cash settlement upon a change in control, which is outside the control of the Company. F- 34 Senior Secured Notes. Pursuant to the Securities Purchase Agreement dated November 18, 2019 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 (the “Supplemental Agreement”), pursuant to 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 include certain financial and non-financial covenants. Additionally, all or any portion of the principal amount outstanding under the Notes may, at the election of Starboard, be surrendered to the Company for cancellation in payment of the exercise price upon the exercise of Series B Warrants. On June 30, 2020, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with Merton Acquisition HoldCo LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company (“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 senior notes (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 has agreed to redeem $80 million principal amount of the New Notes by September 30, 2020 (the “Initial Redemption Date”) and $35 million principal amount of the New Notes by December 31, 2020 (the “Final Redemption Date”), 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 be deemed to be “Notes” for the purposes of the Registration Rights Agreement, dated as of November 18, 2019, by and among the Company, Starboard and the Buyers. Because the New Notes will be settled within twelve months pursuant to their terms, they are classified as current liabilities on the balance sheet. The Company capitalized $4.6 million in lender fees and $0.5 million in other issuance costs associated with the issuance of the Notes. The $4.6 million of lender fees are recognized as long term deferred debt issuance cost and will be amortized to interest expense until November 15, 2027, the maturity date of Series A Redeemable Convertible Preferred Stock. The $0.5 million issuance costs are recognized as a discount on the Notes and will be amortized to interest expense over the contractual life of the Notes. There is $0.9 million accrued and unpaid interest on the New Note as of December 31, 2020. 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. Modifications to Series A Redeemable Convertible Preferred Stock and Series B Warrants. The June 4, 2020 Supplemental Agreement also provided for (i) a waiver of increased dividends under the original terms of the Series A Preferred Stock that would have otherwise accrued due to the Company’s use of the $35 million proceeds received from Starboard and the Buyers upon the issuance of the Series A Redeemable Convertible Preferred Stock in November 2019, (ii) the replacement of original optional redemption rights for the Series A Redeemable Convertible Preferred Stock provided to both the Company and the holders that otherwise would have been nullified through the issuance of the Notes, and (iii) an amendment to the terms of the previously issued Series B Warrants to permit the payment of the lower exercise price of $3.65 through the payment of cash, rather than only through the cancellation of Notes outstanding, at any time until the expiration of the Series B Warrants on November 15, 2027. Only 31,506,849 of the Series B Warrants are subject to this adjustment with the remaining balance of 68,493,151 Series B Warrants continuing under their original terms. F- 35 We analyzed the amendments to the Series A Redeemable Convertible Preferred Stock and determined that the amendments were not significant. Therefore, the amendments are accounted for as a modification on a prospective basis. The incremental fair value of the Series B Warrants associated with their modification in connection with the issuance of the Notes is $1.3 million and is recognized as a discount on the Notes and will be amortized to interest expense over the contractual life of the Notes. For the year ended December 31, 2020, $1,158,000 was amortized to interest expense. As of December 31, 2020, $171,000 is remaining to be amortized until the Final Redemption Date of July 15, 2021. 17. LF EQUITY INCOME FUND PORTFOLIO INVESTMENT On April 3, 2020, the Company entered into an Option Agreement with Seller, which included general terms through which the Company was provided the option to purchase life sciences equity securities in a portfolio of public and private companies (“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, Seller, and the Company. Pursuant to the Transaction Agreement, the Company will purchase from Seller and Seller will transfer to the Company the specified equity securities of all Portfolio Companies at set prices at various future dates. The transfer dates will vary among the Portfolio Companies as the Transaction Agreement gives the Company the exclusive right to determine when to call for transfer of each security, and because each Portfolio Company (or its existing equity holders) may be required to approve the transfer due to rights of first refusals and other company-specific terms and conditions. Thus, the execution of the Transaction Agreement resulted in forward contracts for the Company to purchase equity securities in each public and private company at a specified price on a future date. 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 for such Portfolio Companies 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. For accounting purposes, the total purchase price of the portfolio was allocated to the individual equity securities based on their individual fair values as of April 3, 2020, in order to establish an appropriate cost basis for each of the acquired securities. The fair values of the public company securities were based on their quoted market price. The fair values of the private company securities were estimated based on recent financing transactions and secondary market transactions and factoring in a discount for the illiquidity of these securities. During the year ended December 31, 2020, Seller returned a total of £4.5 million of the Company’s prepaid investment upon the failure to obtain the approval of the existing equity holders, pursuant to their rights of first refusals, of one of the Portfolio Companies in connection with the transfer of its securities. In addition, due to an ownership restriction applicable to one of the Portfolio Companies, the Company sold a small portion of an equity securities derivative for £33,000 before the remaining shares of such Portfolio Company could be transferred to us. The Company recognized a net gain of $2.8 million related to the returned prepaid investments and sale of the derivative. F- 36 Changes in the fair value of Acacia’s investment in the Portfolio Companies are recorded as unrealized gains or losses in the consolidated statements of operations. For the year ended December 31, 2020, the accompanying consolidated statements of operations reflected the following: Years Ended December 31, 2020 2019 (In thousands) Change in fair value of trading security - LF Fund public securities $ 72,104 $ – Change in fair value of investment security - LF Fund private securities 103,751 – Loss on sale of trading security - LF Fund public securities (3,930 ) – Gain on sale of prepaid investment and derivative 2,845 – Net realized and unrealized gain on investment in LF Fund securities $ 174,770 $ – As part of the Company’s acquisition of equity securities in the Portfolio Companies, the Company acquired a majority interest in the equity securities of MalinJ1, which were transferred to the Company on December 3, 2020. The acquisition of the MalinJ1 securities was accounted for as an asset acquisition as there was a change of control of MalinJ1 and substantially all of the fair value of the assets acquired was concentrated in a single identifiable asset, an investment in Viamet Pharmaceuticals Holdings, LLC (“Viamet”). As such the cost basis of the MalinJ1 securities was used to allocate to the Viamet investment, the single identifiable asset, and no goodwill was recognized. The Company through its consolidation of MalinJ1 accounts for the Viamet investment under the equity method as it owns 37.9% of outstanding shares of Viamet. 18. QUARTERLY FINANCIAL DATA (unaudited) The following table sets forth unaudited consolidated statements of operations data for the eight quarters in the period ended December 31, 2020. This information has been derived from Acacia’s unaudited condensed consolidated financial statements that have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the information when read in conjunction with the audited consolidated financial statements and related notes thereto. Acacia’s quarterly results have been, and may in the future be, subject to significant fluctuations. As a result, Acacia believes that results of operations for interim periods should not be relied upon as any indication of the results to be expected in any future periods. F- 37 Quarter Ended Dec. 31, Sept. 30, Jun. 30, Mar. 31, Dec. 31, Sept. 30, Jun. 30, Mar. 31, 2020 2020 2020 2020 2019 2019 2019 2019 (Unaudited, in thousands, except share and per share information) Revenues $ 4,383 $ 19,466 $ 2,118 $ 3,815 $ 688 $ 1,711 $ 5,460 $ 3,387 Portfolio operations: Inventor royalties 506 5,772 645 426 192 776 2,623 1,353 Contingent legal fees 564 6,609 12 234 4 35 375 177 Patent acquisition expenses – – – – – – – – Litigation and licensing expenses - patents 2,186 1,001 1,459 1,037 1,160 987 1,855 3,801 Amortization of patents 1,159 1,174 1,305 1,043 857 863 818 656 Other portfolio expenses – – (74 ) (234 ) 1,581 (475 ) – 650 Total portfolio operations 4,415 14,556 3,347 2,506 3,794 2,186 5,671 6,637 Net portfolio income (loss) (32 ) 4,910 (1,229 ) 1,309 (3,106 ) (475 ) (211 ) (3,250 ) General and administrative expenses (including non-cash stock compensation expense) 6,387 7,692 5,519 4,878 4,328 4,630 3,763 3,655 Impairment of patent-related intangible assets – – – – – – – – Operating income (loss) (6,419 ) (2,782 ) (6,748 ) (3,569 ) (7,434 ) (5,105 ) (3,974 ) (6,905 ) Total other income (expense) 86,756 41,213 12,894 (9,060 ) 5,921 (2,503 ) (1,774 ) 2,821 Income (loss) before provision for income taxes 80,337 38,431 6,146 (12,629 ) (1,513 ) (7,608 ) (5,748 ) (4,084 ) Provision for income taxes (98 ) (83 ) 2 1,338 2,147 – (9 ) (314 ) Net income (loss) including noncontrolling interests 80,239 38,348 6,148 (11,291 ) 634 (7,608 ) (5,757 ) (4,398 ) Net (income) loss attributable to noncontrolling interests in subsidiaries – – – – – – – 14 Net income (loss) attributable to Acacia Research Corporation $ 80,239 $ 38,348 $ 6,148 ($ 11,291 ) $ 634 ($ 7,608 ) ($ 5,757 ) ($ 4,384 ) Net income (loss) attributable to common shareholders - basic $ 65,180 $ 30,529 $ 4,201 $ (12,185 ) $ 327 $ (7,608 ) $ (5,757 ) $ (4,384 ) Basic income (loss) per share $ 1.34 $ 0.63 $ 0.09 ($ 0.24 ) $ 0.01 ($ 0.15 ) ($ 0.12 ) ($ 0.09 ) Weighted-average number of shares outstanding, basic 48,508,903 48,467,885 48,457,620 49,875,396 49,875,750 49,828,361 49,696,016 49,655,881 Net loss attributable to common stockholders - diluted $ 65,352 $ 29,204 $ 4,201 $ (12,185 ) $ (2,624 ) $ (7,608 ) $ (5,757 ) $ (4,384 ) Diluted net income (loss) per common share $ 1.33 $ 0.32 $ 0.09 ($ 0.24 ) ($ 0.05 ) ($ 0.15 ) ($ 0.12 ) ($ 0.09 ) Weighted average number of shares outstanding - diluted 49,244,141 90,624,702 49,033,824 49,875,396 54,406,835 49,828,361 49,696,016 49,655,881 19. SUBSEQUENT EVENTS 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. F- 38