EQUITY-BASED INCENTIVE PLANS

3 Months Ended

Mar. 31, 2023

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. The 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.

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 one year after grant and expire ten years after grant. Stock options with time-based vesting generally vest over three to four years and restricted shares with time-based vesting generally vest in full after one to four 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:

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 RSAs 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 RSUs shall not have full stockholder rights until they vest.

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).

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 March 31, 2023, there were 244,364 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 2016 Plan. In May 2022, security holders approved an increase of 5,500,000 shares of common stock authorized to be issued pursuant to the 2016 Plan. At March 31, 2023, there were 5,775,756 shares available for grant under the 2016 Plan.

Upon the exercise of stock options, the granting of RSAs, or the delivery of shares pursuant to vested RSUs, it is Acacia’s policy to issue new shares of common stock. The Board may amend or modify the Plans at any time, subject to any required stockholder approval. As of March 31, 2023, there are 8,501,249 shares of common stock reserved for issuance under the Plans.

The following table summarizes stock option activity for the Plans:


	Options		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life
					(In thousands)




Outstanding at December 31, 2022	1,310,417		$	4.29	$	535	8.0 years
Granted	243,319		$	4.27	$	—
Exercised	—		$	—	$	—
Forfeited/Expired	(187,500)		$	4.94	$	49
Outstanding at March 31, 2023	1,366,236		$	4.20	$	199	7.3 years
Exercisable at March 31, 2023	403,749		$	4.54	$	67	4.6 years
Vested and expected to vest at March 31, 2023	1,366,236		$	4.20	$	199	7.3 years
Unrecognized stock-based compensation expense at March 31, 2023 (in thousands)	$	1,285
Weighted average remaining vesting period at March 31, 2023	2.5 years

Stock options granted in 2023 are time-based and will vest in full after three to four years. During the three months ended March 31, 2023, the Company granted 243,319 stock options at a weighted average grant-date fair value of $2.10 per share using the Black-Scholes option-pricing model. The fair value was estimated based on the following weighted average assumptions: volatility of 46 percent, risk-free interest rate of 3.67 percent, term of 6.00 years and a dividend yield of 0 percent as the Company does not pay common stock dividends. The volatility of the Company’s common stock is estimated by analyzing the Company’s historical volatility, implied volatility of publicly traded stock options, and the Company’s current asset composition and financial leverage (refer to Note 9 "Embedded derivative liabilities" for additional information). The risk-free rate is based on the term assumption and U.S. Treasury constant maturities as published by the Federal Reserve. The Company currently uses the "simplified" method for determining the term, due to the limited option grant history, which assumes that the exercise date of an option would be halfway between its vesting date and the expiration date. The aggregate fair value of options vested during the three months ended March 31, 2023 was $209,000.

The following table summarizes nonvested restricted stock activity for the Plans:


	RSAs				RSUs
	Shares		Weighted Average Grant Date Fair Value		Units		Weighted Average Grant Date Fair Value





Nonvested at December 31, 2022	406,001		$	4.02	842,302		$	4.42
Granted	—		$	—	509,798		$	4.27
Vested	(131,001)		$	4.18	(110,541)		$	3.90
Forfeited	(17,500)		$	5.14	(126,666)		$	4.59
Nonvested at March 31, 2023	257,500		$	3.85	1,114,893		$	4.39
Unrecognized stock-based compensation expense at March 31, 2023 (in thousands)	$	861			$	3,863
Weighted average remaining vesting period at March 31, 2023	1.6 years				2.4 years

RSUs granted in 2023 are time-based and will vest in full after one to four years. The aggregate fair value of RSAs vested during the three months ended March 31, 2023 was $548,000. The aggregate fair value of RSUs vested during the three months ended March 31, 2023 was $431,000. During the three months ended March 31, 2023, RSAs and RSUs totaling 241,542 shares were vested and 94,863 shares of common stock were withheld to pay applicable required employee statutory withholding taxes based on the market value of the shares on the vesting date.

Certain RSUs were granted in September 2019 with market-based vesting conditions that 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 expense 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, that resulted in a fair value of $1.42 per unit, included: 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. During the year ended December 31, 2021, 450,000 RSUs were forfeited, leaving 450,000 units with market-based vesting conditions outstanding and unvested at prior period end. The remaining units fully vested on September 3, 2022. Compensation expense for RSUs with market-based vesting conditions for the three months ended March 31, 2023 and 2022, was zero and $143,000, respectively.

Compensation expense for share-based awards recognized in general and administrative expenses was comprised of the following:


	Three Months Ended March 31,
		2023		2022
		(In thousands)
Options		$	28	$	132
RSAs		209		528
RSUs		240		514
Total compensation expense for share-based awards		$	477	$	1,174

Total unrecognized stock-based compensation expense as of March 31, 2023 was $6.0 million, which will be amortized over a weighted average remaining vesting period of 2.3 years.

Profits Interest Plan

Profits Interest Units (“PIUs”) were accounted for in accordance with ASC 718, “Compensation - Stock Compensation.” The vesting conditions did not meet the definition of service, market or performance conditions, as defined in ASC 718. As such, the PIUs were classified as liability awards. Compensation expense was adjusted for changes in fair value prorated

for the portion of the requisite service period rendered. Initially, compensation expense was recognized on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity award) which was five years. Upon full vesting of the award, which occurred during the three months ended September 30, 2017, previously unrecognized compensation expense was immediately recognized in the period. The Company has a purchase option to purchase the vested PIUs that are not otherwise forfeited after termination of continuous service. The exercise price of the purchase option is the fair market value of the PIUs on the date of termination of continuous service. The individuals holding PIUs are no longer employed by the Company. Included in other long-term liabilities in the consolidated balance sheets as of March 31, 2023 and December 31, 2022, the PIUs totaled $591,000, which was their fair value as of December 31, 2018 after termination of service.