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LF EQUITY INCOME FUND PORTFOLIO INVESTMENT | 6 Months Ended
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Jun. 30, 2021
Investments, Debt and Equity Securities [Abstract] |
LF EQUITY INCOME FUND PORTFOLIO INVESTMENT | 10. 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 agreed to purchase from Seller and Seller agreed to transfer to the Company the specified equity securities of all Portfolio Companies at set prices at various future dates. The transfer dates would 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. 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 three and six months ended June 30, 2021 and 2020, the accompanying consolidated statements of operations reflected the following:
Schedule of unrealized gains or losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
|  | (In thousands) |
Change in fair value of equity securities - LF Fund securities |  | $ | 11,097 |  |  | $ | (1,069 | ) |  | $ | 48,273 |  |  | $ | (1,069 | )
Change in fair value of equity securities derivative |  |  | – |  |  |  | 6,891 |  |  |  | – |  |  |  | 6,891 |
Change in fair value of equity securities forward contract |  |  | – |  |  |  | 74,662 |  |  |  | – |  |  |  | 74,662 |
Gain (loss) on sale of trading security - LF Fund securities |  |  | 15,055 |  |  |  | (6,110 | ) |  |  | 15,055 |  |  |  | (6,110 | )
Net realized and unrealized gain on investment in LF Fund securities |  | $ | 26,152 |  |  | $ | 74,374 |  |  | $ | 63,328 |  |  | $ | 74,374 |
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. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related notes included in Part I, Item1 of this Quarterly Report on Form10-Q for the six months ended June 30, 2021, or this Report. This discussion and analysis contains forward-looking statements that are based on our current expectations and reflect our plans, estimates and anticipated future financial performance. See the section of this Report entitled “Cautionary Statement Regarding Forward-Looking Statements” for additional information. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in “Risk Factors” in Part II, Item1A. of this Report. General Acacia Research Corporation (the “Company,” “we,” “us,” or “our”) acquires businesses and operating assets that we believe to be undervalued and where we believe we can leverage our resources and skill sets to realize and unlock value. We leverage our (i) access to flexible capital that can be deployed unconditionally, (ii) expertise in corporate governance and operational restructuring, (iii) willingness to invest in out of favor industries and businesses that suffer from a complexity discount and untangle complex, multi-factor situations, and (iv) expertise and relationships in certain sectors, to complete strategic acquisitions of businesses, divisions, and/or assets with a focus on mature technology, healthcare, industrial and certain financial segments. We seek to identify opportunities where we believe we are advantaged buyers, where we can avoid structured sale processes and create the opportunity to purchase businesses, divisions and/or assets of companies at an attractive price due to our unique capabilities, relationships, or expertise, or where we believe the target would be worth more to us than to other buyers. We operate our business based on three key principles of People, Process and Performance and have built a management team with identified expertise in Research, Execution and Operation of our targeted acquisitions. We utilized these skill sets and resources to acquire a portfolio of equity securities of public and private life science businesses, or the “Portfolio Companies”, in June 2020. As of June 30, 2021, we have monetized a portion of the portfolio while retaining an interest in a number of operating businesses, including a controlling interest in one of the companies in the portfolio. Further, some of the businesses in which we continue to hold an interest generate revenues through the receipt of royalties. We also operate our legacy business of investing in intellectual property, or IP, and related absolute return assets and engaging in the licensing and enforcement of patented technologies. We partner with inventors and patent owners, from small entities to large corporations, applying our legal and technology expertise to patent assets to unlock the financial value in their patented inventions. We are an intermediary in the patent marketplace, bridging the gap between invention and application, and facilitating efficiency in connection with the monetization of patent assets. We generate revenues and related cash flows from the granting of IP rights for the use of patented technologies that our operating subsidiaries control or own. We assist patent owners with the prosecution and development of their patent portfolios, the protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of their patented technologies and, where necessary, with the enforcement against unauthorized users of their patented technologies through the filing of patent infringement litigation. Currently, on a consolidated basis, our 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 variety of industries. We have established a proven track record of licensing and enforcement success with over 1,600 license agreements executed to date, across nearly 200 patent portfolio licensing and enforcement programs. To date, we have generated gross licensing revenue of approximately $1.7 billion, and have returned $822.4 million to our patent partners. Executive Summary Overview Our operating activities during the periods presented were focused on the continued operation of our patent licensing and enforcement business, including the continued pursuit of our ongoing patent licensing and enforcement programs. Patent Licensing and Enforcement
| - | Patent Litigation Trial Dates and Related Trials
As of the date of this report, our operating subsidiaries have one pending patent infringement case with a scheduled trial date in the next twelve months. Patent infringement trials are components of our overall patent licensing process and are one of many factors that contribute to possible future revenue generating opportunities for us. Scheduled trial dates, as promulgated by the respective court, merely provide an indication of when, in future periods, the trials may occur according to the court’s scheduling calendar at a specific point in time. A court may change previously scheduled trial dates. In fact, courts often reschedule trial dates for various reasons that are unrelated to the underlying patent assets and typically for reasons that are beyond our control. While scheduled trial dates provide an indication of the timing of possible future revenue generating opportunities for us, the trials themselves and the immediately preceding periods represent the possible future revenue generating opportunities. These future opportunities can result in varying outcomes. In fact, it is difficult to predict the outcome of patent enforcement litigation at the trial level and outcomes can be unfavorable. It can be difficult to understand complex patented technologies, and as a result, this may lead to a higher rate of unfavorable litigation outcomes. Moreover, in the event of a favorable outcome, there is, in our experience, a higher rate of successful appeals in patent enforcement litigation than more standard business litigation. Such appeals are expensive and time consuming, resulting in increased costs and a potential for delayed or foregone revenue opportunities in the event of modification or reversal of favorable outcomes. Although we diligently pursue enforcement litigation, we cannot predict with reliability the decisions made by juries and trial courts. Please refer to Item 1A. “Risk Factors” for additional information regarding trials, patent litigation and related risks.
| - | Litigation and Licensing Expense
We expect patent-related legal expenses to continue to fluctuate from period to period based on the factors summarized herein, in connection with future trial dates, international enforcement, strategic patent portfolio prosecution and our current and future patent portfolio investment, prosecution, licensing and enforcement activities. The pursuit of enforcement actions in connection with our licensing and enforcement programs can involve certain risks and uncertainties, including the following:
| · | Increases in patent-related legal expenses associated with patent infringement litigation, including, but not limited to, increases in costs billed by outside legal counsel for discovery, depositions, economic analyses, damages assessments, expert witnesses and other consultants, re-exam and inter partes review costs, case-related audio/video presentations and other litigation support and administrative costs, could increase our operating costs and decrease our profit generating opportunities;
| · | Our patented technologies and enforcement actions are complex and, as a result, we may be required to appeal adverse decisions by trial courts in order to successfully enforce our patents. Moreover, such appeals may not be successful;
| · | New legislation, regulations or rules related to enforcement actions, including any fee or cost shifting provisions, could significantly increase our operating costs and decrease our profit generating opportunities. Increased focus on the growing number of patent-related lawsuits may result in legislative changes which increase our costs and related risks of asserting patent enforcement actions;
| · | Courts may rule that our subsidiaries have violated certain statutory, regulatory, federal, local or governing rules or standards by pursuing such enforcement actions, which may expose us and our operating subsidiaries to material liabilities, which could harm our operating results and our financial position;
| · | The complexity of negotiations and potential magnitude of exposure for potential infringers associated with higher quality patent portfolios may lead to increased intervals of time between the filing of litigation and potential revenue events (i.e., markman dates, trial dates), which may lead to increased legal expenses, consistent with the higher revenue potential of such portfolios; and
| · | Fluctuations in overall patent portfolio related enforcement activities which are impacted by the portfolio intake challenges discussed above could harm our operating results and our financial position.
Investments in Patent Portfolios With respect to our licensing, enforcement and overall business, neither we nor our operating subsidiaries invent new technologies or products; rather, we depend upon the identification and investment in patents, inventions and companies that own IP through our relationships with inventors, universities, research institutions, technology companies and others. If our operating subsidiaries are unable to maintain those relationships and identify and grow new relationships, then we may not be able to identify new technology-based patent opportunities for sustainable revenue and /or revenue growth. Our current or future relationships may not provide the volume or quality of technologies necessary to sustain our licensing, enforcement and overall business. In some cases, universities and other technology sources compete against us as they seek to develop and commercialize technologies. Universities may receive financing for basic research in exchange for the exclusive right to commercialize resulting inventions. These and other strategies employed by potential partners may reduce the number of technology sources and potential clients to whom we can market our solutions. If we are unable to maintain current relationships and sources of technology or to secure new relationships and sources of technology, such inability may have a material adverse effect on our revenues, operating results, financial condition and ability to maintain our licensing and enforcement business. Patent Portfolio Intake One of the significant challenges in our industry continues to be quality patent intake due to the challenges and complexity associated with the current patent environment. During the six months ended June 30, 2021, we acquired one new patent portfolio consisting of Wi-Fi 6 standard essential patents. The patents and patent rights acquired during the six months ended June 30, 2021 have estimated economic useful lives of approximately five years. In fiscal year 2020, we acquired five patent portfolios. Starboard Securities In 2019, as part of its strategy to grow, the Company began evaluating a wide range of strategic opportunities that culminated in the strategic investment in the Company by certain funds and accounts, or the Buyers, affiliated with, or managed by, Starboard Value LP, or Starboard. On November 18, 2019, the Company entered into a Securities Purchase Agreement with Starboard and the Buyers, or the Securities Purchase Agreement, pursuant to which the Buyers purchased (i) 350,000 shares of the Company’s newly designated Series A Convertible Preferred Stock, or Series A Preferred Stock, at an aggregate purchase price of $35 million, and warrants to purchase up to 5,000,000 shares of the Company’s common stock, or Series A Warrants. The Securities Purchase Agreements also established the terms of certain senior secured notes, or Notes, and additional warrants, or the Series B Warrants, which may be issued to the Buyers in the future. Refer to Notes 2 and 9 to the consolidated financial statements elsewhere herein for more information related to the Series A Preferred Stock, Series A Warrants and Series B Warrants. In connection with the Buyer’s investment, Starboard was granted certain corporate governance rights, including the right to appoint Jonathan Sagal, Managing Director of Starboard, as a director of the Company and recommend two additional directors for appointment to our Board of Directors. The investment by the Buyers is referred to herein as the “Starboard Investment,” and the Series A Preferred Stock, Series A Warrants and Series B Warrants are referred to herein as, collectively, the “Starboard Securities.” On February 14, 2020, the Company’s stockholders approved, for purposes of Nasdaq Rules 5635(b) and 5635(d), as applicable, (i) the voting of the Series A Preferred Stock on an as-converted basis and (ii) the issuance of the maximum number of shares of common stock issuable in connection with the potential future (A) conversion of the Series A Preferred Stock and (B) exercise of the Series A and Series B Warrants, in each case, without giving effect to the exchange cap set forth in the Series A Preferred Stock Certificate of Designations and in the Series A Warrants, issued pursuant to the Securities Purchase Agreement dated November 18, 2019. Refer to Note 9 to the consolidated financial statements elsewhere herein for additional information. The Company’s stockholders also approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the total number of authorized shares of common stock by 200,000,000 shares, from 100,000,000 shares to 300,000,000 shares. On February 25, 2020, pursuant to the terms of the Securities Purchase Agreement with Starboard and the Buyers, the Company issued Series B Warrants to purchase up to 100 million shares of the Company’s common stock at an exercise price of either (i) $5.25 per share, if exercising by cash payment, or (ii) $3.65 per share, if exercising by cancellation of a portion of Notes. The Company issued the Series B Warrants for an aggregate purchase price of $4.6 million. Refer to Note 9 to the consolidated financial statements elsewhere herein for additional information. Pursuant to the terms of the Securities Purchase Agreement with Starboard and the Buyers, on June 4, 2020, the Company issued $115 million in Notes to the Buyers. Also on June 4, 2020, in connection with the issuance of the Notes, the Company entered into a Supplemental Agreement with Starboard, or the Supplemental Agreement, through which, the Company agreed to redeem $80 million aggregate principal amount of the Notes by September 30, 2020, and $35 million aggregate principal amount of the Notes by December 31, 2020, resulting in the total principal outstanding being paid by December 31, 2020. Per the Supplemental Agreement, interest is payable semiannually at a rate of 6.00% per annum, and in an event of default, the interest rate is increased to 10% per annum. The Notes outlined certain financial and non-financial covenants. Additionally, all or any portion of the principal amount outstanding under the Notes may, at the election of the holders, be surrendered to the Company for cancellation in payment of the exercise price upon the exercise of the Series B Warrants. On June 30, 2020, the Company entered into an Exchange Agreement, or the Exchange Agreement, with Merton Acquisition HoldCo LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company, or Merton, and Starboard, on behalf of itself and on behalf of the Buyers, including the holders of the Notes. Pursuant to the Exchange Agreement, the holders of the Notes exchanged the entire outstanding principal amount of the Notes for new senior notes, or the New Notes, issued by Merton and having an aggregate outstanding original principal amount of $115 million. The New Notes bear interest at a rate of 6.00% per annum and will mature 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 agreed to redeem $80 million principal amount of the New Notes by September 30, 2020 and $35 million principal amount of the New Notes by December 31, 2020, and (iii) are deemed to be “Notes” for the purposes of the Series B Warrants, and therefore may be tendered pursuant to a Note Cancellation under the Series B Warrants on the terms set forth in the Series B Warrants and the New Notes. Delivery of notes in the form of the New Notes will 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 between the Company, Starboard and the Buyers. On January 29, 2021, the Company redeemed $50 million of the New Notes. On March 31, 2021, the Company reissued $50 million of the New Notes. On June 30, 2021, the Company issued $30 million of June 2021 Merton Notes, due October 15, 2021 and amended the maturity date of the New Notes to October 15, 2021. The June 2021 Merton Notes cannot be used to exercise Series B Warrants issued to Starboard Value. The total principal amount outstanding of New Notes, including the June 2021 Merton Notes, as of June 30, 2021 was $145 million. Refer to Note 9 to the consolidated financial statements elsewhere herein for additional information. LF Equity Income Fund Portfolio Investment On April 3, 2020, the Company entered into an Option Agreement with LF Equity Income Fund (“Seller”) to purchase equity securities in the Portfolio Companies, for an aggregate purchase price of £223.9 million, approximately $277.5 million at the exchange rate on April 3, 2020. On June 4, 2020, the Company executed the Transaction Agreement between Link Fund Solutions Limited, or Link, Seller, and the Company. Pursuant to the Transaction Agreement, the Company 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. In accordance with the Transaction Agreement, the Company transferred the total purchase price of £223.9 million into an escrow account. As each of the equity securities in the Portfolio are transferred to the Company, the associated funds will be released from the escrow account to Seller based on the consideration amount assigned to the equity securities in the Transaction Agreement. The Transaction Agreement includes an initial consideration amount for each of the equity securities as noted above, which represents the amount of cash that will be withdrawn from the escrow account upon the transfer of each security to the Company. Refer to Note 10 to the consolidated financial statements elsewhere herein for additional information. Operating Activities Our revenues historically have fluctuated quarterly, and can vary significantly, based on a number of factors including the following:
| · | the dollar amount of agreements executed each period, which can be driven by the nature and characteristics of the technology or technologies being licensed and the magnitude of infringement associated with a specific licensee;
| · | the specific terms and conditions of agreements executed each period including the nature and characteristics of rights granted, and the periods of infringement or term of use contemplated by the respective payments;
| · | fluctuations in the total number of agreements executed each period;
| · | the number of, timing, results and uncertainties associated with patent licensing negotiations, mediations, patent infringement actions, trial dates and other enforcement proceedings relating to our patent licensing and enforcement programs;
| · | the relative maturity of licensing programs during the applicable periods;
| · | other external factors, including the periodic status or results of ongoing negotiations, the status or results of ongoing litigations and appeals, actual or perceived shifts in the regulatory environment, impact of unrelated patent related judicial proceedings and other macroeconomic factors;
| · | the willingness of prospective licensees to settle significant patent infringement cases and pay reasonable license fees for the use of our patented technology, as such infringement cases approached a court determined trial date; and
| · | fluctuations in overall patent portfolio related enforcement activities which are impacted by the portfolio intake challenges discussed above.
Our management does not attempt to manage for smooth sequential periodic growth in revenues from period to period, and therefore, periodic results can be uneven. Unlike most operating businesses and industries, licensing revenues not generated in a current period are not necessarily foregone but, depending on whether negotiations, litigation or both continue into subsequent periods, and depending on a number of other factors, such potential revenues may be pushed into subsequent fiscal periods. Revenues for the six months ended June 30, 2021 and 2020 included fees from the following technology licensing and enforcement programs:
• | Bone Wedge technology(1)(2) |  | • | Wireless Mesh Networking technology(1)
• | Flash Memory technology(1) |  | • | MIPI DSI technology(2)
• | Internet search, advertising and cloud computing technology (1)(2) | • | Semiconductor and Memory-Related technology(2)
• | Speech codecs used in wireless and wireline systems technology(1)(2) | • | Super Resolutions Microscopy technology(2)
• | Wireless Infrastructure and User Equipment technology(1) |  | • | Video Conferencing technology(2)
• | Networking and Security technology(1) |  |  |
| __________________________ |  |  |
| (1) Licensing and enforcement program generating revenue in fiscal year 2021 |  |  |
| (2) Licensing and enforcement program generating revenue in fiscal year 2020 |  |  |
Consolidated Results of Operations Summary for the Three and Six Months Ended June 30, 2021 and 2020
|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2021 |  |  | 2020 |  |  | $ Change |  |  | % Change |  |  | 2021 |  |  | 2020 |  |  | $ Change |  |  | % Change |
|  | (In thousands, except percentage change values) |
Revenues |  | $ | 17,400 |  |  | $ | 2,118 |  |  | $ | 15,282 |  |  |  | 722% |  |  | $ | 23,203 |  |  | $ | 5,933 |  |  | $ | 17,270 |  |  |  | 291% |
Operating costs and expenses |  |  | 15,756 |  |  |  | 8,866 |  |  |  | 6,890 |  |  |  | 78% |  |  |  | 27,235 |  |  |  | 16,250 |  |  |  | 10,985 |  |  |  | 68% |
Operating income (loss) |  |  | 1,644 |  |  |  | (6,748 | ) |  |  | 8,392 |  |  |  | (124% | ) |  |  | (4,032 | ) |  |  | (10,317 | ) |  |  | 6,285 |  |  |  | (61% | )
Other income (expense)* |  |  | 18,379 |  |  |  | 12,894 |  |  |  | 5,485 |  |  |  | 43% |  |  |  | (139,653 | ) |  |  | 3,834 |  |  |  | (143,487 | ) |  |  | N/A |
Income (loss) before income taxes* |  |  | 20,023 |  |  |  | 6,146 |  |  |  | 13,877 |  |  |  | 226% |  |  |  | (143,685 | ) |  |  | (6,483 | ) |  |  | (137,202 | ) |  |  | N/A |
Income tax (expense) benefit* |  |  | (510 | ) |  |  | 2 |  |  |  | (512 | ) |  |  | N/A |  |  |  | (520 | ) |  |  | 1,340 |  |  |  | (1,860 | ) |  |  | (139% | )
Net income (loss) attributable to Acacia Research Corporation* |  |  | 19,507 |  |  |  | 6,148 |  |  |  | 13,359 |  |  |  | 217% |  |  |  | (145,111 | ) |  |  | (5,143 | ) |  |  | (139,968 | ) |  |  | N/A |
* Percent change not meaningful due to change. Results of Operations – Three months ended June 30, 2021 compared with the three months ended June 30, 2020 Revenues increased $15.3 million to $17.4 million for the three months ended June 30, 2021, as compared to $2.1 million in the comparable prior year quarter, primarily due to an increase in revenues from the new agreements executed during the quarter. Refer to “Investments in Patent Portfolios” above for additional information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues. Income before income taxes was $20.0 million for the three months ended June 30, 2021, and $6.1 million for the three months ended June 30, 2020. The net change was comprised of the change in revenues described above and other changes in operating expenses and other income and expenses as follows: · Paid-up revenue increased $14.8 million due to increase in revenue from newly executed licensing agreements during the quarter, supplemented by an increase of $0.5 million in recurring revenue that provides for quarterly sales-based license fees. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding certain sales-based revenue contracts that provide for the payment of quarterly license fees based on quarterly sales of applicable product units by licensees. · Inventor royalties and contingent legal fees, on a combined basis, increased $4.1 million, from $0.7 million to $4.8 million, primarily due to increase in revenues as describe above. · Litigation and licensing expenses - patents increased to $1.8 million, primarily due to a net increase in litigation support and third-party technical consulting expenses associated with ongoing litigation. · Amortization of patents expense increased to $2.6 million, due to an increase in scheduled amortization resulting from the new portfolios acquired in 2020 and 2021. · Other patent portfolio income decreased $0.1 million, due to reversal of expenses for settlement and contingency accruals recorded in the comparable prior year quarter. · General and administrative expenses, excluding non-cash stock compensation, increased $0.9 million, from $5.1 million to $6.0 million, primarily due to higher personnel cost and board fees, and to a lesser extent from corporate, general and administrative costs related to legal and other business development expenses. · Net non-cash stock compensation expense increased $0.1 million, from $0.4 million to $0.5 million, primarily due to stock grants issued to employees and the Board of Directors in 2021. · There was no unrealized gain or loss on our equity investment for the three months ended June 30, 2021, as compared to an unrealized gain of $2.7 million for the three months ended June 30, 2020. There was no realized gain or loss on our equity investment for the three months ended June 30, 2021, as compared to a realized gain of $0.6 million for the three months ended June 30, 2020. Refer to Note 5 to the consolidated financial statements elsewhere herein for additional information. · Unrealized gain from equity securities decreased to $11.2 million for the three months ended June 30, 2021, as compared to an unrealized gain of $85.1 million for the three months ended June 30, 2020. Refer to Notes 2 and 10 to the consolidated financial statements elsewhere herein for additional information. · Realized gain or loss from the sale of our equity securities increased from a loss of $7.1 million for the three months ended June 30, 2020 to a gain of $14.6 million for the three months ended June 30, 2021. Refer to Notes 2 and 10 to the consolidated financial statements elsewhere herein for additional information regarding our investment in equity securities. · Interest income and other decreased to $0.1 million for the three months ended June 30, 2021 from $0.3 million for the three months ended June 30, 2020, mainly due to a decrease in interest income from our investment in debt securities. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our investment in equity securities. · We incurred interest expense of $1.8 million during the three months ended June 30, 2021 from the Notes issued in June 2020, as compared to $0.8 million during the three months ended June 30, 2020. Refer to Note 9 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Senior Secured Notes. · We incurred losses on foreign currency exchange of $0.2 million and $4.9 million during the three months ended June 30, 2021 and 2020, respectively. · We incurred an unrealized net loss of $5.6 million from the fair value measurements of the Series A and Series B warrants and the embedded derivative for the three months ended June 30, 2021. Refer to Note 9 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Securities. Results of Operations – Six months ended June 30, 2021 compared with the six months ended June 30, 2020 Revenues increased $17.3 million to $23.2 million for the six months ended June 30, 2021, as compared to $5.9 million in the comparable prior year quarter, primarily due to an increase in revenues from the new agreements executed during the period. Refer to “Investments in Patent Portfolios” above for additional information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues. Loss before income taxes was $143.7 million for the six months ended June 30, 2021, and $6.5 million for the six months ended June 30, 2020. The net change was comprised of the change in revenues described above and other changes in operating expenses and other income and expenses as follows: · Paid-up revenue increased $16.9 million due to increase in revenue from newly executed licensing agreements during the six months ended June 30, 2021, supplemented by an increase of $0.4 million in recurring revenue that provides for quarterly sales-based license fees. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding certain sales-based revenue contracts that provide for the payment of quarterly license fees based on quarterly sales of applicable product units by licensees. · Inventor royalties and contingent legal fees, on a combined basis, increased $4.7 million, from $1.3 million to $6.0 million, primarily due to increase in revenues as describe above. · Litigation and licensing expenses - patents increased to $4.1 million, primarily due to a net increase in litigation support and third-party technical consulting expenses associated with ongoing litigation. · Amortization of patents expense increased to $4.5 million, due to an increase in scheduled amortization resulting from the new portfolios acquired in 2020 and 2021. · Other patent portfolio income decreased $0.3 million, due to reversal of expenses for settlement and contingency accruals recorded in the comparable prior year quarter. · General and administrative expenses, excluding non-cash stock compensation, increased $2.0 million, from $9.6 million to $11.7 million, primarily due to higher personnel cost and board fees, and to a lesser extent from corporate, general and administrative costs related to legal and other business development expenses and increased variable performance-based compensation costs. · Net non-cash stock compensation expense increased $0.2 million, from $0.8 million to $1.0 million, primarily due to stock grants issued to employees and the Board of Directors in 2021. · There was no unrealized gain or loss on our equity investment, for the six months ended June 30, 2021, as compared to an unrealized gain of $6.8 million for the six months ended June 30, 2020. There was a realized gain of $0.8 million on our equity investment for the six months ended June 30, 2021, as compared to a realized loss of $2.8 million for the six months ended June 30, 2020. Refer to Note 5 to the consolidated financial statements elsewhere herein for additional information. · Unrealized gain from equity securities decreased to $49.0 million for the six months ended June 30, 2021, as compared to an unrealized gain of $79.0 million for the six months ended June 30, 2020. Refer to Notes 2 and 10 to the consolidated financial statements elsewhere herein for additional information. · Realized gain or loss from the sale of our equity securities increased from a loss of $7.0 million for the six months ended June 30, 2020 to a gain of $15.4 million for the six months ended June 30, 2021. Refer to Notes 2 and 10 to the consolidated financial statements elsewhere herein for additional information regarding our investment in equity securities. · Interest income and other decreased to $0.1 million for the six months ended June 30, 2021 from $0.8 million for the six months ended June 30, 2020, mainly due to a decrease in interest income from our investment in debt securities. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our investment in equity securities. · We incurred interest expense of $3.1 million during the six months ended June 30, 2021 from the Notes issued in June 2020, as compared to $0.8 million during the six months ended June 30, 2020. Refer to Note 9 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Senior Secured Notes. · We incurred losses on foreign currency exchange of $0.2 million and $4.9 million during the six months ended June 30, 2021 and 2020, respectively. · We incurred an unrealized net loss of $204.5 million from the fair value measurements of the Series A and Series B warrants and the embedded derivative for the six months ended June 30, 2021. Refer to Note 9 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Securities. Revenues Revenue for the periods presented included the following:
|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2021 |  |  | 2020 |  |  | $ Change |  |  | % Change |  |  | 2021 |  |  | 2020 |  |  | $ Change |  |  | % Change |
Revenues (in thousands, except percentage change values) |  | $ | 17,400 |  |  | $ | 2,118 |  |  | $ | 15,282 |  |  |  | 722% |  |  | $ | 23,203 |  |  | $ | 5,933 |  |  | $ | 17,270 |  |  |  | 291% |
New agreements executed |  |  | 6 |  |  |  | 4 |  |  |  | 2 |  |  |  | 50% |  |  |  | 13 |  |  |  | 8 |  |  |  | 5 |  |  |  | 63% |
Licensing and enforcement programs generating revenues |  |  | 2 |  |  |  | 4 |  |  |  | (2 | ) |  |  | (50% | ) |  |  | 7 |  |  |  | 7 |  |  |  | – |  |  |  | – |
Licensing and enforcement programs with initial revenues |  |  | 2 |  |  |  | 1 |  |  |  | 1 |  |  |  | 100% |  |  |  | 3 |  |  |  | 1 |  |  |  | 2 |  |  |  | 200% |
New patent portfolios |  |  | – |  |  |  | 2 |  |  |  | (2 | ) |  |  | (100% | ) |  |  | 1 |  |  |  | 4 |  |  |  | (3 | ) |  |  | (75% | )
For the periods presented herein, the majority of the revenue agreements executed provided for the payment of one-time, paid-up license fees in consideration for the grant of certain IP Rights for patented technology rights owned by our operating subsidiaries. These rights were primarily granted on a perpetual basis, extending until the expiration of the underlying patents. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our revenue concentrations for the periods presented herein. Refer to “Investments in Patent Portfolios” above for information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues. Cost of Revenues Inventor Royalties and Contingent Legal Fees Expense Inventor royalties and contingent legal fee expenses fluctuate from period to period based on the amount of revenues recognized each period, the terms and conditions of agreements executed each period and the mix of specific patent portfolios, with varying economic terms and obligations, generating revenues each period.
|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2021 |  |  | 2020 |  |  | $ Change |  |  | % Change |  |  | 2021 |  |  | 2020 |  |  | $ Change |  |  | % Change |
|  | (In thousands, except percentage change values) |
Inventor royalties |  | $ | 448 |  |  | $ | 645 |  |  | $ | (197 | ) |  |  | (31% | ) |  | $ | 543 |  |  | $ | 1,071 |  |  | $ | (528 | ) |  |  | (49% | )
Contingent legal fees |  |  | 4,356 |  |  |  | 12 |  |  |  | 4,344 |  |  |  | N/A |  |  |  | 5,450 |  |  |  | 246 |  |  |  | 5,204 |  |  |  | N/A |
Total |  | $ | 4,804 |  |  | $ | 657 |  |  | $ | 4,147 |  |  |  | 631% |  |  | $ | 5,993 |  |  | $ | 1,317 |  |  | $ | 4,676 |  |  |  | 355% |
Litigation and Licensing Expenses - Patents For the three months ended June 30, 2021, litigation and licensing expenses-patents increased $0.4 million, or 26%. For the six months ended June 30, 2021, litigation and licensing expenses-patents increased $1.6 million, or 64%. The increase for the three and six month periods was due to a net increase in litigation support and third-party technical consulting expenses, as compared to the same periods in the prior year. Amortization of Patents For the three months ended June 30, 2021, amortization expense increased $1.3 million, or 100%, as compared to the three months ended June 30, 2020. For the six months ended June 30, 2021, amortization expense increased $2.1 million, or 91%, as compared to the six months ended June 30, 2020. These increases were due to our new patents acquired in 2020 and 2021.
|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2021 |  |  | 2020 |  |  | $ Change |  |  | % Change |  |  | 2021 |  |  | 2020 |  |  | $ Change |  |  | % Change |
|  | (In thousands, except percentage change values) |
Litigation and licensing expenses - patents |  | $ | 1,837 |  |  | $ | 1,459 |  |  | $ | 378 |  |  |  | 26% |  |  | $ | 4,099 |  |  | $ | 2,496 |  |  | $ | 1,603 |  |  |  | 64% |
Amortization of patents |  |  | 2,612 |  |  |  | 1,305 |  |  |  | 1,307 |  |  |  | 100% |  |  |  | 4,474 |  |  |  | 2,348 |  |  |  | 2,126 |  |  |  | 91% |
Operating Expenses General and Administrative Expenses
|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2021 |  |  | 2020 |  |  | $ Change |  |  | % Change |  |  | 2021 |  |  | 2020 |  |  | $ Change |  |  | % Change |
|  | (In thousands, except percentage change values) |
General and administrative expenses |  | $ | 5,974 |  |  | $ | 5,096 |  |  | $ | 878 |  |  |  | 17% |  |  | $ | 11,690 |  |  | $ | 9,642 |  |  | $ | 2,048 |  |  |  | 21% |
Non-cash stock compensation expense |  |  | 529 |  |  |  | 423 |  |  |  | 106 |  |  |  | 25% |  |  |  | 979 |  |  |  | 755 |  |  |  | 224 |  |  |  | 30% |
Total general and administrative expenses |  | $ | 6,503 |  |  | $ | 5,519 |  |  | $ | 984 |  |  |  | 18% |  |  | $ | 12,669 |  |  | $ | 10,397 |  |  | $ | 2,272 |  |  |  | 22% |
A summary of the main drivers of the change in general and administrative expenses for the periods presented, is as follows:
|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2021 vs. 2020 |  |  | 2021 vs. 2020 |
|  | (In thousands) |
Personnel costs and board fees |  | $ | 657 |  |  | $ | 1,148 |
Variable performance-based compensation costs |  |  | (37 | ) |  |  | 440 |
Corporate, general and administrative costs |  |  | 358 |  |  |  | 862 |
Non-cash stock compensation expense |  |  | 106 |  |  |  | 224 |
Non-recurring employee severance costs |  |  | (100 | ) |  |  | (402 | )
Total change in general and administrative expenses |  | $ | 984 |  |  | $ | 2,272 |
The increases in personnel cost and board fees were primarily due to higher payroll and related costs. The increases in corporate, general and administrative costs were primarily due to higher legal and business development related expenses. The increase in variable performance-based compensation costs for the six months ended June 30, 2021 was primarily due to higher performance-based compensation accruals. The increases in non-cash stock compensation expense were primarily due to stock grants issued to employees and the Board of Directors in 2021. Other Operating Income (Expense) Our equity investments in Veritone, the Portfolio Companies and other equity securities are recorded at fair value at each balance sheet date. Results for the three and six months ended June 30, 2021 included no unrealized gain or loss and realized gains of zero and $0.8 million, respectively, on our investment in Veritone. Results for the three and six months ended June 30, 2020 included an unrealized gain of $2.7 million and $6.8 million, respectively, and a realized gain of $0.6 million and a realized loss of $2.8 million, respectively, on our investment in Veritone. Refer to Note 5 to the consolidated financial statements elsewhere herein for additional information regarding our investment in Veritone. For the three and six months ended June 30, 2021, we recognized unrealized gains of $11.2 million and $49.0 million, respectively, from our investment in equity securities. For the three and six months ended June 30, 2021, we recorded realized gains of $14.6 million and $15.4 million, respectively, from our investment in equity securities. For the three and six months ended June 30, 2020, we recognized unrealized gains of $85.1 million and $79.0 million, respectively, from our investment in equity securities. For the three and six months ended June 30, 2020, we recorded realized losses of $7.1 million and $7.0 million, respectively, from our investment in equity securities. Refer to Notes 2 and 10 to the consolidated financial statements elsewhere herein for additional information regarding our investment in LF Fund and other equity securities. Income Taxes
|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2021 |  |  | 2020 |  |  | $ Change |  |  | % Change |  |  | 2021 |  |  | 2020 |  |  | $ Change |  |  | % Change |
|  | (In thousands, except percentage values) |
Income tax (expense) benefit |  | $ | (510 | ) |  | $ | 2 |  |  | $ | (512 | ) |  |  | N/A |  |  | $ | (520 | ) |  | $ | 1,340 |  |  | $ | (1,860 | ) |  |  | (139% | )
Effective tax rate |  |  | 3% |  |  |  | 0% |  |  |  | – |  |  |  | 3% |  |  |  | 0% |  |  |  | 21% |  |  |  | – |  |  |  | (21% | )
The provision for income taxes is determined using an effective tax rate. For the three and six months ended June 30, 2021, the Company’s estimated annual effective tax rates were lower than the U.S. federal statutory rate primarily due to the change in valuation allowance, as well as state income taxes. The effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions used to estimate the effective tax rate, including factors such as expected utilization of net operating loss carryforwards, changes in or the interpretation of tax laws in jurisdictions where the Company conducts business, the Company’s expansion into new states or foreign countries, and the amount of valuation allowances against deferred tax assets. For the three and six month periods ended June 30, 2020, the Company recorded a benefit for income taxes of which primarily reflects the impact of state taxes and foreign tax withholding or refund incurred on revenue agreements executed with third-party licensees domiciled in foreign jurisdictions. The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities along with net operating loss and tax credit carryforwards. The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. For the six months ended June 30, 2021, the Company has recorded a full valuation allowance against its deferred tax assets as they are not expected to be realized. On March 27, 2020, the United States enacted the CARES Act which provides certain income tax benefits including the ability to carryback federal NOLs generated in 2018 through 2020 for an extended five year period and increased the limitation for the deduction of interest expense from 30 percent to 50 percent of modified taxable income. The CARES Act also provides other economic benefits such as allowing employers to defer payment of the employer’s portion of payroll taxes for 2020 and a refundable employee retention credit of up to $5,000 per eligible employee wages. The Company did not realize benefits from the provisions of the CARES Act including the extended NOL carryback period, the payroll tax deferral, and the employee retention credit. On December 27, 2020, the United States enacted the Consolidated Appropriations Act which extended many of the benefits of the CARES Act that were scheduled to expire. The Company does not expect a material impact of Consolidated Appropriations Act on its consolidated financial statements and related disclosures. On March 11, 2021 the United States enacted the American Rescue Plan Act of 2021. These Acts includes various income and payroll tax measures. The Company does not expect a material impact of the American Rescue Plan on its consolidated financial statements and related disclosures. On June 29, 2020, the state of California passed Assembly Bill 85 which suspends the California net operating loss deduction for the 2020-2022 tax years and the R&D credit usage for the same period (for credit usages in excess of $5.0 million). The Company anticipates a California income tax liability for 2021, however it is not expected to materially impact the consolidated financial statements. Liquidity and Capital Resources General Our primary sources of liquidity are cash and cash equivalents on hand generated from our operating activities. Our management believes that our cash and cash equivalent balances and anticipated cash flows from operations will be sufficient to meet our cash requirements through at least twelve months from the date of this report and for the foreseeable future. We may, however, encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated, including those set forth under Part II, Item 1A, “Risk Factors”. Any efforts to seek additional funding could be made through issuances of equity or debt, or other external financing. However, additional funding may not be available to us on favorable terms, or at all. The capital and credit markets have experienced extreme volatility and disruption in recent years, and the volatility and impact of the disruption may continue. At times during this period, the volatility and disruption has reached unprecedented levels. In several cases, the markets have exerted downward pressure on stock prices and credit capacity for certain issuers, and the commercial paper markets may not be a reliable source of short-term financing for us. If we fail to obtain additional financing when needed, we may not be able to execute our business plans and our business, conducted by our operating subsidiaries, may suffer. Certain of our operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. In connection with any of our operating subsidiaries’ patent enforcement actions, it is possible that a defendant may request and/or a court may rule that an operating subsidiary has violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material. Cash, Cash Equivalents and Investments Our consolidated cash, cash equivalents, equity securities at fair value, and long-term restricted cash totaled $356.1 million at June 30, 2021, compared to $309.6 million at December 31, 2020. The net change in cash, cash equivalents and restricted cash for the periods presented was comprised of the following:
|  | Six Months Ended |
|  | June 30, |
|  | 2021 |  |  | 2020 |
|  | (In thousands) |
Net cash (used in) provided by: |  |  |  |  |  |  |  |
Operating activities |  | $ | (6,197 | ) |  | $ | (7,143 | )
Investing activities |  |  | (1,858 | ) |  |  | (30,874 | )
Financing activities |  |  | 29,571 |  |  |  | 109,938 |
Increase in cash and cash equivalents and restricted cash |  | $ | 21,516 |  |  | $ | 71,921 |
Cash Flows from Operating Activities Cash receipts from licensees for the six months ended June 30, 2021 increased to $10.1 million, as compared to $5.0 million in the comparable 2020 period, mainly due to the timing on cash collected from accounts receivables in prior year. During the six months ended June 30, 2021, our cash flows from operations improved by $0.9 million compared to the same period in the prior year, primarily due to an improvement in our operating income (loss), attributable to an increase in revenues from the new agreements executed during the period and decreases in relative patent portfolio and general and administrative expenses. Cash outflows from operations for the six months ended June 30, 2021 decreased to $6.2 million, as compared to a $7.1 million cash outflow in the comparable 2020 period, primarily due to fluctuations in the change in fair value of Series A and B warrants and embedded derivatives and the change in fair value of equity securities, offset by our higher net loss and to a lesser extent the changes in working capital cash flows. Refer to “Working Capital” below for additional information. Cash Flows from Investing Activities Cash flows from investing activities and related changes were comprised of the following for the periods presented:
|  | Six Months Ended |
|  | June 30, |
|  | 2021 |  |  | 2020 |
|  | (In thousands) |
Patent acquisition |  | $ | (11,000 | ) |  | $ | (13,780 | )
Sale of investment at fair value |  |  | 3,591 |  |  |  | 1,460 |
Purchases of equity securities |  |  | (27,871 | ) |  |  | (31,317 | )
Maturities and sales of equity securities |  |  | 33,467 |  |  |  | 299,227 |
Purchases of prepaid investment |  |  | – |  |  |  | (282,327 | )
Equity securities derivative and forward contract acquisition cost |  |  | – |  |  |  | (3,989 | )
Purchases of property and equipment |  |  | (45 | ) |  |  | (148 | )
Net cash used in investing activities |  | $ | (1,858 | ) |  | $ | (30,874 | )
Cash Flows from Financing Activities Cash flows from financing activities and related changes were comprised of the following for the periods presented:
|  | Six Months Ended |
|  | June 30, |
|  | 2021 |  |  | 2020 |
|  | (In thousands) |
Repurchase of common stock |  | $ | – |  |  | $ | (3,998 | )
Issuance of Senior Secured Notes, net of lender fee |  |  | 30,000 |  |  |  | 110,437 |
Senior Secured Notes issuance costs paid to other parties |  |  | – |  |  |  | (496 | )
Dividend on Series A Redeemable Convertible Preferred Stock |  |  | (523 | ) |  |  | (653 | )
Issuance of Series B warrants |  |  | – |  |  |  | 4,600 |
Proceeds from exercise of stock options |  |  | 94 |  |  |  | 48 |
Paydown of Senior Secured Notes - short term |  |  | (50,000 | ) |  |  | – |
Reissuance of Senior Secured Notes - short term |  |  | 50,000 |  |  |  | – |
Net cash provided by financing activities |  | $ | 29,571 |  |  | $ | 109,938 |
Stock Repurchase Program On August 5, 2019, our Board of Directors approved a stock repurchase program, which authorized the purchase of up to $10.0 million of the Company’s common stock through open market purchases, through block trades, through 10b5-1 plans, or by means of private purchases, from time to time, through July 31, 2020. In determining whether or not to repurchase any shares of Acacia’s common stock, Acacia’s Board of Directors consider such factors as the impact of the repurchase on Acacia’s cash position, as well as Acacia’s capital needs and whether there is a better alternative use of Acacia’s capital. Acacia has no obligation to repurchase any amount of its common stock under the Stock Repurchase Program. During the six months ended June 30, 2020, we repurchased 1,684,537 shares at an average price of $2.37 per share for $4.0 million. Repurchases to date were made in the open market in compliance with applicable SEC rules. The authorization to repurchase shares presented an opportunity to reduce the outstanding share count and enhance stockholder value. Refer to Note 7 to the consolidated financial statements elsewhere herein for additional information regarding our stock repurchases in 2020. Starboard Investment On November 18, 2019, the Company entered into the Securities Purchase Agreement with Starboard and the Buyers pursuant to which the Buyers purchased (i) 350,000 shares of Series A Preferred Stock at an aggregate purchase price of $35.0 million, and Series A Warrants to purchase up to 5,000,000 shares of the Company’s common stock. On February 25, 2020, pursuant to the terms of the Securities Purchase Agreement with Starboard and the Buyers, the Company issued Series B Warrants to purchase up to 100 million shares of the Company’s common stock at an exercise price of either (i) $5.25 per share, if exercising by cash payment, or (ii) $3.65 per share, if exercising by cancellation of a portion of Notes. The Company issued the Series B Warrants for an aggregate purchase price of $4.6 million. On June 4, 2020, pursuant to the Securities Purchase Agreement dated November 2019, the Company issued $115 million in Notes to the Buyer. 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. In connection with the issuance of the Notes, 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. 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. On June 30, 2020, the Company entered into the Exchange Agreement with Merton and Starboard, on behalf of itself and on behalf of certain funds and accounts under its management, including the holders of the Notes. Pursuant to the Exchange Agreement, the holders of the Notes exchanged the entire outstanding principal amount for New Notes issued by Merton having an aggregate outstanding original principal amount of $115 million. On January 29, 2021, the Company redeemed $50 million of the New Notes. On March 31, 2021, the Company reissued $50 million of the New Notes. On June 30, 2021, the Company issued $30 million of June 2021 Merton Notes, due October 15, 2021 and amended the maturity date of the New Notes to October 15, 2021. The June 2021 Merton Notes cannot be used to exercise Series B Warrants issued to Starboard Value. The total principal amount outstanding of New Notes, including the June 2021 Merton Notes, as of June 30, 2021 was $145 million. Refer to Notes 2 and 9 to the consolidated financial statements and elsewhere herein for more information related to the Starboard Securities. Working Capital Working capital at June 30, 2021 increased to $373.1 million, as compared to $332.9 million at December 31, 2020. Consolidated accounts receivable from licensees increased to $12.8 million at June 30, 2021, compared to $0.5 million at December 31, 2020. Accounts payable, accrued expenses and accrued compensation increased to $9.8 million at June 30, 2021, from $7.0 million at December 31, 2020. Consolidated royalties and contingent legal fees payable increased to $6.1 million at June 30, 2021, from $2.2 million at December 31, 2020. The royalties and contingent legal fees payable are generally scheduled to be paid in the subsequent quarter upon our receipt of the related fee payments from licensees, in accordance with the underlying contractual arrangements. Critical Accounting Estimates Our unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these condensed consolidated statements requires management to make assumptions, judgments and estimates that can have a significant impact on amounts reported in these condensed consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in the audited consolidated financial statements and notes thereto and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” included in our Annual Report. In addition, as set forth in Note 2 to the consolidated financial statements included in this report, certain accounting policies were identified during the current period, based on activities occurring during the current period, as critical and requiring significant judgments and estimates. Recently Adopted Accounting Pronouncements Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our recently adopted accounting pronouncements for the periods presented herein. Off-Balance Sheet Arrangements As of June 30, 2021, we did not have any relationships with any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established to facilitate any off-balance sheet arrangements or for any other contractually specified purposes. Item 3. Quantitative and Qualitative Disclosures about Market Risk The primary objective of our short-term investment activities is to preserve principal while concurrently maximizing the income we receive from our equity securities at fair value without significantly increasing risk. Some of the securities that we invest in may be subject to interest rate risk and/or market risk. This means that a change in prevailing interest rates, with respect to interest rate risk, or a change in the value of the United States equity markets, with respect to market risk, may cause the principal amount or market value of the equity securities at fair value to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the current value of the principal amount of our investment may decline. To minimize these risks in the future, we intend to maintain our portfolio of cash equivalents and equity securities at fair value securities in a variety of securities, including commercial paper, money market funds, high-grade corporate bonds, government and non-government debt securities and certificates of deposit. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. Accordingly, a 100 basis point increase in interest rates or a 10% decline in the value of the United States equity markets would not be expected to have a material impact on the value of such money market funds. Investments in U.S. government and corporate fixed income securities are subject to interest rate risk and will decline in value if interest rates increase. However, due to the relatively short duration of our debt securities portfolio, an immediate 100 basis point increase in interest rates would have no material impact on our financial condition, results of operations or cash flows. Declines in interest rates over time will, however, reduce our interest income. During the quarter ended June 30, 2020, we sold all of our investment in debt securities, comprised of AAA rated money market funds that invest in first-tier only securities, which primarily include domestic commercial paper, securities issued or guaranteed by the U.S. government or its agencies, U.S. bank obligations, and fully collateralized repurchase agreements (included in cash and cash equivalents in the accompanying consolidated balance sheets), and direct investments in short term, highly liquid, investment grade, U.S. government and corporate securities (included in “Equity securities at fair value” in the accompanying consolidated balance sheets). Investment Risk We are exposed to investment risks related to changes in the underlying financial condition of certain of our equity investments in these technology companies. The fair value of these investments can be significantly impacted by the risk of adverse changes in securities markets generally, as well as risks related to the performance of the companies whose securities we have invested in, risks associated with specific industries, and other factors. These investments are subject to significant fluctuations in fair value due to the volatility of the securities markets and of the underlying businesses. As of June 30, 2021 and December 31, 2020, the carrying value of our common stock and warrants in public and private companies was $342.8 million and $285.8 million, respectively. Item 4. Controls and Procedures (i). Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2021, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods prescribed by the SEC. (ii). Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter (the quarter ended June 30, 2021) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. (iii). Inherent Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. PART II--OTHER INFORMATION Item 1. Legal Proceedings In the ordinary course of business, we are the subject of, or party to, various pending or threatened legal actions, including various counterclaims in connection with our patent enforcement activities. We believe that any liability arising from these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. Our operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. Certain of our operating subsidiaries are parties to ongoing patent enforcement related litigation, alleging infringement by third-parties of certain of the patented technologies owned or controlled by our operating subsidiaries. In connection with any of our patent enforcement actions, it is possible that a defendant may claim and/or a court may rule that we have violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material, and if required to be paid by us or our operating subsidiaries, could materially harm our operating results and our financial position. We spend a significant amount of our financial and management resources to pursue our current litigation matters. We believe that these litigation matters and others that we may in the future determine to pursue could continue for years and continue to consume significant financial and management resources. The counterparties to our litigation are sometimes large, well-financed companies with substantially greater resources than us. We cannot assure you that any of our current or future litigation matters will result in a favorable outcome for us. In addition, in part due to the appeals process and other legal processes, even if we obtain favorable interim rulings or verdicts in particular litigation matters, they may not be predictive of the ultimate resolution of the dispute. Also, we cannot assure you that we will not be exposed to claims or sanctions against us which may be costly or impossible for us to defend. Unfavorable or adverse outcomes may result in losses, exhaustion of financial resources or other adverse effects which could encumber our ability to effectively and efficiently monetize our assets. On September 6, 2019, Slingshot Technologies, LLC, or Slingshot, filed a lawsuit in Delaware Chancery Court against the Company and Acacia Research Group, LLC, or collectively, the Acacia Entities, Monarch Networking Solutions LLC (“Monarch”), Acacia board member Katharine Wolanyk, and Transpacific IP Group, Ltd., or 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. During the six months ended June 30, 2021, we incurred $0.3 million operating expenses for settlement and contingency accruals. During the six months ended June 30, 2020, operating expenses included a net income for settlement offset by contingency accruals totaling $0.3 million, net of prior accruals. At June 30, 2021 and December 31, 2020, our contingency accrual balance was $1.6 million and $1.3 million, respectively. Item 1A. Risk Factors An investment in our common stock involves risks. Before making an investment decision, you should carefully consider all of the information in this Quarterly Report on Form 10-Q, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 1A in this Quarterly Report on Form 10-Q, as well as our consolidated financial statements and the accompanying notes thereto. In addition, you should carefully consider the risks and uncertainties described below, and in the section entitled “Risk Factors” in Part I, Item 1A of our Annual Report, as well as in our other public filings with the SEC. If any of the identified risks are realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that case, the trading price of our common stock may decline, and you could lose all or part of your investment. In addition, other risks of which we are currently unaware, or which we do not currently view as material, could have a material adverse effect on our business, financial condition, operating results and prospects. Risks related to COVID-19 The COVID-19 pandemic could have a material adverse effect on our operations, the operations of our business partners, and the global economy as a whole. The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on recent global economic and market conditions, including significant disruption of, and volatility in, financial markets, global supply chain, and the institution of social distancing and shelter-in-place requirements that have resulted in temporary closures of many businesses, lost revenues, and increased unemployment. These conditions could adversely impact our operations, as well as the operations of our licensees and other business partners. With regard to the COVID-19 pandemic, we do not expect the current situation to present direct risks to our business. Our cash is held in major financial institutions in government instruments and high-quality short-term bonds. Our business is fully able to operate in a socially distanced and/or remote capacity and in accordance with applicable laws, policies, and best practices. Our workforce is provided ample paid sick leave, and we have in place robust disaster recovery and business continuity policies that have been revised to account for a long-term remote work contingency such as this. While governmental authorities have taken measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth, the ultimate success of these measures is unknown and they may not be sufficient to mitigate fully the negative impact of the ongoing pandemic. However, the ongoing pandemic may present risks that we do not currently consider material or risks that may evolve quickly that could have a materially adverse effect on our business, financial condition, operating results, and/or prospects. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information None. Item 6. Exhibits
EXHIBIT NUMBER | EXHIBIT
3.1# | Certificate of Amendment of Amended and Restated Certificate of Incorporation of Acacia Research Corporation (as updated through May 18, 2021 and currently in effect)
31.1# | Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
31.2# | Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
32.1*# | Certification of Principal 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 Principal 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# | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Series A Redeemable Convertible Preferred Stock and Stockholders' Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
104# | Cover Page Interactive Data File (formatted in iXBRL and included in Exhibit 101).
___________________________
# | Filed herewith.
* | The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any of the Registrant’s filings under the Securities Act or the Exchange Act, irrespective of any general incorporation language contained in any such filing.
SIGNATURES Pursuant to the requirements 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
Date: August 16, 2021 | /s/ Clifford Press
| By: Clifford Press
| Chief Executive Officer
| (Principal Executive Officer and Duly Authorized Signatory)
Date: August 16, 2021 | /s/ Richard Rosenstein
| By: Richard Rosenstein
| Chief Financial Officer
| (Principal Financial Officer)

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