17. LF Equity Income Fund Portfolio Investment

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

LF Equity Income Fund Portfolio Investment

17. LF EQUITY INCOME FUND PORTFOLIO INVESTMENT

On April 3, 2020, the Company entered into an Option Agreement with Seller, which included general terms through which the Company was provided the option to purchase life sciences equity securities in a portfolio of public and private companies (“Portfolio Companies”) for an aggregate purchase price of £223.9 million, approximately $277.5 million at the exchange rate on April 3, 2020.

On June 4, 2020, the Company executed the Transaction Agreement between Link Fund Solutions Limited, Seller, and the Company. Pursuant to the Transaction Agreement, the Company will purchase from Seller and Seller will transfer to the Company the specified equity securities of all Portfolio Companies at set prices at various future dates. The transfer dates will vary among the Portfolio Companies as the Transaction Agreement gives the Company the exclusive right to determine when to call for transfer of each security, and because each Portfolio Company (or its existing equity holders) may be required to approve the transfer due to rights of first refusals and other company-specific terms and conditions. Thus, the execution of the Transaction Agreement resulted in forward contracts for the Company to purchase equity securities in each public and private company at a specified price on a future date.

In accordance with the Transaction Agreement, the Company transferred the total purchase price of £223.9 million into an escrow account. Upon the transfer of equity securities in the Portfolio Companies to the Company, the associated funds were released from the escrow account to Seller based on the consideration amount assigned to the equity securities for such Portfolio Companies in the Transaction Agreement. As of December 31, 2020, all of the equity securities in the Portfolio Companies were transferred to the Company pursuant to the Transaction Agreement. The Company has sold a portion of the equity securities of such Portfolio Companies while retaining an interest in a number of operating businesses, including a controlling interest in one of the Portfolio Companies.

For accounting purposes, the total purchase price of the portfolio was allocated to the individual equity securities based on their individual fair values as of April 3, 2020, in order to establish an appropriate cost basis for each of the acquired securities. The fair values of the public company securities were based on their quoted market price. The fair values of the private company securities were estimated based on recent financing transactions and secondary market transactions and factoring in a discount for the illiquidity of these securities.

During the year ended December 31, 2020, Seller returned a total of £4.5 million of the Company’s prepaid investment upon the failure to obtain the approval of the existing equity holders, pursuant to their rights of first refusals, of one of the Portfolio Companies in connection with the transfer of its securities. In addition, due to an ownership restriction applicable to one of the Portfolio Companies, the Company sold a small portion of an equity securities derivative for £33,000 before the remaining shares of such Portfolio Company could be transferred to us. The Company recognized a net gain of $2.8 million related to the returned prepaid investments and sale of the derivative.

Changes in the fair value of Acacia’s investment in the Portfolio Companies are recorded as unrealized gains or losses in the consolidated statements of operations. For the year ended December 31, 2020, the accompanying consolidated statements of operations reflected the following:

	Years Ended
	December 31,
	2020			2019
	(In thousands)
Change in fair value of trading security - LF Fund public securities	$	72,104		$	–
Change in fair value of investment security - LF Fund private securities		103,751			–
Loss on sale of trading security - LF Fund public securities		(3,930	)		–
Gain on sale of prepaid investment and derivative		2,845			–
Net realized and unrealized gain on investment in LF Fund securities	$	174,770		$	–

As part of the Company’s acquisition of equity securities in the Portfolio Companies, the Company acquired a majority interest in the equity securities of MalinJ1, which were transferred to the Company on December 3, 2020. The acquisition of the MalinJ1 securities was accounted for as an asset acquisition as there was a change of control of MalinJ1 and substantially all of the fair value of the assets acquired was concentrated in a single identifiable asset, an investment in Viamet Pharmaceuticals Holdings, LLC (“Viamet”). As such the cost basis of the MalinJ1 securities was used to allocate to the Viamet investment, the single identifiable asset, and no goodwill was recognized. The Company through its consolidation of MalinJ1 accounts for the Viamet investment under the equity method as it owns 37.9% of outstanding shares of Viamet.