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Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

  

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ______________

 

Commission file number: 1-37721

 

Acacia Research Corporation

(Name of registrant as specified in its charter)

 

delaware 95-4405754
(State or other jurisdiction of Incorporation or Organization) (I.R.S. Employer identification No.)

 

767 3RD AVENUE, SUITE 602, New York, NY 10017
(Address of principal executive offices) (Zip Code)

 

(949) 480-8300

(Registrant’s telephone number, including area code)

 

N/A

(Former name or former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class Trading Symbol Name of Each Exchange on Which Registered
Common Stock ACTG The Nasdaq Stock Market, LLC

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated Filer ☐ Accelerated Filer ☐
Non-accelerated Filer Smaller reporting company
Emerging Growth Company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No

 

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of August 9, 2021, was 49,607,435.

 

 

 

   

 

 

ACACIA RESEARCH CORPORATION

 

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

 

June 30, 2021

 

INDEX

 

    Page
     
  CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 3
     
PART I. FINANCIAL INFORMATION 4
     
Item 1. Financial Statements 4
     
  Unaudited Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020 4
     
  Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020 5
     
  Unaudited Condensed Consolidated Statements of Series A Redeemable Convertible Preferred Stock and Stockholders' Equity for the Three and Six Months Ended June 30, 2021 and 2020 6
     
  Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020 8
     
  Notes to Unaudited Condensed Consolidated Financial Statements 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 46
     
Item 4. Controls and Procedures 47
     
Part II. OTHER INFORMATION 48
     
Item 1. Legal Proceedings 48
     
Item 1A. Risk Factors 49
     
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 49
     
Item 3.  Defaults Upon Senior Securities 49
     
Item 4.  Mine Safety Disclosures 49
     
Item 5.  Other Information 49
     
Item 6. Exhibits 50

 

 

 

 2 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q for the three months ended June 30, 2021, or this Report, contains forward-looking statements within the meaning of the federal securities laws, which statements are subject to substantial risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Report, or incorporated by reference into this Report, are forward-looking statements. Throughout this Report, we have attempted to identify forward-looking statements by using words such as “may,” “believe,” “will,” “could,” “project,” “anticipate,” “expect,” “estimate,” “should,” “continue,” “potential,” “plan,” “forecasts,” “goal,” “seek,” “intend,” “predict,” other forms of these words or similar words or expressions or the negative thereof, although not all forward-looking statements contain these terms. Such statements address future events and conditions concerning, among other things, intellectual property, or IP, acquisition and development, licensing and enforcement activities, other related business activities, the impact of the COVID-19 pandemic, capital expenditures, earnings, litigation, regulatory matters, markets for our services, liquidity and capital resources and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as our ability to invest in new technologies and patents, future global economic conditions, changes in demand for our services, legislative, regulatory and competitive developments in markets in which we and our subsidiaries operate, results of litigation and other circumstances affecting anticipated revenues and costs.

 

We have based our forward-looking statements on management’s current expectations and projections about trends affecting our business and industry and other future events. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition, results of operations or performance to differ materially from our historical results or those expressed or implied in any forward-looking statement contained in this Report. Some of the risks and uncertainties that may cause actual results to differ from those expressed or implied in the forward-looking statements are described in “Risk Factors” included in Part II, Item1A of this Report, and in “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the Securities and Exchange Commission, or the Securities and Exchange Commission (“SEC”), on March 29, 2021, or our Annual Report, as well as in our other public filings with the SEC. In addition, actual results may differ as a result of additional risks and uncertainties of which we are currently unaware or which we do not currently view as material to our business.

 

The information contained in this Report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the SEC. You should read this Report in its entirety, together with the documents that we file as exhibits to this Report and the documents that we incorporate by reference into this Report, with the understanding that our future results may be materially different from what we currently expect. The forward-looking statements we make speak only as of the date on which they are made. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law or the rules of The Nasdaq Stock Market, LLC. If we do update or correct any forward-looking statements, investors should not conclude that we will make additional updates or corrections.

 

We qualify all of our forward-looking statements by these cautionary statements.

 

 

 

 3 

 

PART I--FINANCIAL INFORMATION

Item 1. Financial Statements

ACACIA RESEARCH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

         
   June 30,   December 31, 
   2021   2020 
         
ASSETS          
Current assets:          
           
Cash and cash equivalents  $185,710   $165,546 
Restricted cash   930     
Equity securities at fair value   134,938    109,103 
Equity securities without readily determinable fair value   176,010    143,257 
Investment securities - equity method investments   31,839    30,673 
Investment at fair value       2,752 
Accounts receivable   12,750    506 
Prepaid expenses and other current assets   2,283    5,832 
Total current assets   544,460    457,669 
           
Long-term restricted cash   35,422    35,000 
Patents, net of accumulated amortization   42,438    16,912 
Leased right-of-use assets   759    951 
Other non-current assets   4,653    4,988 
Total assets  $627,732   $515,520 
           
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable  $2,625   $1,019 
Accrued expenses and other current liabilities   4,817    3,707 
Accrued compensation   2,382    2,265 
Royalties and contingent legal fees payable   6,089    2,162 
Accrued patent investment costs   10,000     
Senior Secured Notes Payable - short-term   145,477    115,663 
Total current liabilities   171,390    124,816 
           
Series A warrant liabilities   18,464    6,640 
Series A embedded derivative liabilities   41,191    26,728 
Series B warrant liabilities   230,539    52,341 
Long-term lease liabilities   759    951 
Other long-term liabilities   5,591    591 
Total liabilities   467,934    212,067 
           
Commitments and contingencies        
           
Series A redeemable convertible preferred stock, par value $0.001 per share; stated value $100 per share; 350,000 shares authorized, issued and outstanding as of June 30, 2021 and December 31, 2020, respectively; aggregate liquidation preference of $35,000 as of June 30, 2021 and December 31, 2020, respectively   12,695    10,924 
           
Stockholders' equity:          
Common stock, par value $0.001 per share; 300,000,000 shares authorized; 49,616,602 and 49,279,453 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively   50    49 
Treasury stock, at cost, 4,604,365 shares as of June 30, 2021 and December 31, 2020   (43,270)   (43,270)
Additional paid-in capital   650,194    651,416 
Accumulated deficit   (471,819)   (326,708)
Total Acacia Research Corporation stockholders' equity   135,155    281,487 
           
Noncontrolling interests   11,948    11,042 
           
Total stockholders' equity   147,103    292,529 
           
Total liabilities, redeemable convertible preferred stock, and stockholders' equity  $627,732   $515,520 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 

 

 4 

 

ACACIA RESEARCH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

 

                     
   Three Months Ended   Six Months Ended  
   June 30,   June 30, 
   2021   2020   2021   2020 
                 
Revenues  $17,400   $2,118   $23,203   $5,933 
                     
Patent portfolio operations:                    
Inventor royalties   448    645    543    1,071 
Contingent legal fees   4,356    12    5,450    246 
Litigation and licensing expenses - patents   1,837    1,459    4,099    2,496 
Amortization of patents   2,612    1,305    4,474    2,348 
Other patent portfolio income       (74)       (308)
Patent portfolio expenses   9,253    3,347    14,566    5,853 
Net patent portfolio income (loss)   8,147    (1,229)   8,637    80 
General and administrative expenses   6,503    5,519    12,669    10,397 
Operating income (loss)   1,644    (6,748)   (4,032)   (10,317)
                     
Other income (expense):                    
Change in fair value of investment, net       2,677        6,785 
Gain (loss) on sale of investment       554    839    (2,762)
Change in fair value of the Series A and B warrants and embedded derivatives   (5,576)   (62,902)   (204,485)   (67,284)
Change in fair value of equity securities   11,158    85,078    49,007    78,961 
Gain (loss) on sale of equity securities   14,617    (7,121)   15,436    (7,009)
Earnings on equity investment in joint venture   7        2,737     
Loss on foreign currency exchange   (152)   (4,890)   (176)   (4,890)
Interest expense on Senior Secured Notes   (1,760)   (768)   (3,070)   (768)
Interest income and other   85    266    59    801 
Total other income (expense)   18,379    12,894    (139,653)   3,834 
                     
Income (loss) before income taxes   20,023    6,146    (143,685)   (6,483)
                     
Income tax (expense) benefit   (510)   2    (520)   1,340 
                     
Net income (loss) including noncontrolling interests in subsidiaries   19,513    6,148    (144,205)   (5,143)
                     
Net income attributable to noncontrolling interests in subsidiaries   (6)       (906)    
                     
Net income (loss) attributable to Acacia Research Corporation  $19,507   $6,148   $(145,111)  $(5,143)
                     
Net income (loss) attributable to common stockholders - basic  $15,108   $4,201   $(147,405)  $(7,105)
Basic net income (loss) per common share  $0.31   $0.09   $(3.03)  $(0.14)
Weighted average number of shares outstanding - basic   48,729,020    48,457,620    48,662,897    49,166,508 
                     
Net income (loss) attributable to common stockholders - diluted  $18,792   $4,201   $(147,405)  $(7,105)
Diluted net income (loss) per common share  $0.23   $0.09   $(3.03)  $(0.14)
Weighted average number of shares outstanding - diluted   83,086,980    49,033,824    48,662,897    49,166,508 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 5 

 

 

ACACIA RESEARCH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

(In thousands, except share data)

 

                                                     
   For the Three Months Ended June 30, 2021  
    Series A Redeemable Convertible Preferred Stock    Common Stock    Treasury     Additional
Paid-in
    Accumulated
Comprehensive
Income
    Accumulated     Noncontrolling
Interests in
Operating
    

Total

Stockholders'

 
    Shares    Amount    Shares    Amount    Stock    Capital    (Loss)    Deficit    Subsidiaries      Equity  
Balance at March 31, 2021   350,000   $11,777    49,279,453   $49   $(43,270)  $650,753   $   $(491,326)  $11,942     $     128,148  
Net income including noncontrolling interests in subsidiaries                               19,507    6     19,513  
Accretion of Series A Redeemable Convertible Preferred Stock to redemption value       918                (918)                (918)  
Dividend on Series A Redeemable Convertible Preferred Stock                       (263)                (263)  
Stock options exercised           30,000    1        93                 94  
Compensation expense for share-based awards, net of forfeitures           307,149            529                 529  
Balance at June 30, 2021   350,000   $12,695    49,616,602   $50   $(43,270)  $650,194   $   $(471,819)  $11,948     $     147,103  

 

   For the Three Months Ended June 30, 2020  
    Series A Redeemable Convertible Preferred Stock    Common Stock    Treasury     Additional
Paid-in
    Accumulated
Comprehensive
Income
    Accumulated     Noncontrolling
Interests in
Operating
    

Total

Stockholders'

 
    Shares    Amount    Shares    Amount    Stock    Capital    (Loss)    Deficit    Subsidiaries      Equity  
Balance at March 31, 2020   350,000   $8,720    49,813,443   $50   $(40,586)  $651,441   $   $(450,947)  $1,833     $     161,791  
Net income attributable to Acacia Research Corporation                               6,148         6,148  
Accretion of Series A Redeemable Convertible Preferred Stock to redemption value       680                (680)                (680)  
Dividend on Series A Redeemable Convertible Preferred Stock                       (389)                (389)  
Stock options exercised                       48                 48  
Compensation expense for share-based awards, net of forfeitures           600,333            423                 423  
Repurchase of common stock           (1,107,639)   (1)   (2,684)                    (2,685)  
Balance at June 30, 2020   350,000   $9,400    49,306,137   $49   $(43,270)  $650,843   $   $(444,799)  $1,833     $     164,656  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 

 

 

 

 6 

 

 

ACACIA RESEARCH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

(In thousands, except share data)

 

   For the Six Months Ended June 30, 2021  
    Series A Redeemable Convertible Preferred Stock    Common Stock    Treasury     Additional
Paid-in
    Accumulated
Comprehensive
Income
    Accumulated     Noncontrolling
Interests in
Operating
    

Total

Stockholders'

 
    Shares    Amount    Shares    Amount    Stock    Capital    (Loss)    Deficit    Subsidiaries      Equity  
Balance at December 31, 2020   350,000   $10,924    49,279,453   $49   $(43,270)  $651,416   $   $(326,708)  $11,042   $292,529 
Net (loss) income including noncontrolling interests in subsidiaries                               (145,111)   906    (144,205)
Accretion of Series A Redeemable Convertible Preferred Stock to redemption value       1,771                (1,771)               (1,771)
Dividend on Series A Redeemable Convertible Preferred Stock                       (523)               (523)
Stock options exercised           30,000    1        93                94 
Compensation expense for share-based awards, net of forfeitures           307,149            979                979 
Balance at June 30, 2021   350,000   $12,695    49,616,602   $50   $(43,270)  $650,194   $   $(471,819)  $11,948   $147,103 

 

 

   For the Six Months Ended June 30, 2020  
    Series A Redeemable Convertible Preferred Stock    Common Stock    Treasury     Additional
Paid-in
    Accumulated
Comprehensive
Income
    Accumulated     Noncontrolling
Interests in
Operating
    

Total

Stockholders'

 
    Shares    Amount    Shares    Amount    Stock    Capital    (Loss)    Deficit    Subsidiaries      Equity  
Balance at December 31, 2019   350,000   $8,089    50,370,987   $50   $(39,272)  $652,003   $   $(439,656)  $1,833   $174,958 
Net loss attributable to Acacia Research Corporation                               (5,143)       (5,143)
Accretion of Series A Redeemable Convertible Preferred Stock to redemption value       1,311                (1,311)               (1,311)
Dividend on Series A Redeemable Convertible Preferred Stock                       (652)               (652)
Stock options exercised                       48                48 
Compensation expense for share-based awards, net of forfeitures           619,687            755                755 
Repurchase of common stock           (1,684,537)   (1)   (3,998)                   (3,999)
Balance at June 30, 2020   350,000   $9,400    49,306,137   $49   $(43,270)  $650,843   $   $(444,799)  $1,833   $164,656 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 

 

 

 

 7 

 

 

ACACIA RESEARCH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

           
   Six Months Ended 
   June 30, 
   2021   2020 
Cash flows from operating activities:          
Net loss including noncontrolling interests in subsidiaries  $(144,205)  $(5,143)
Adjustments to reconcile net loss including noncontrolling interests in subsidiaries to net cash used in operating activities:          
Change in fair value of investment, net       (6,785)
(Gain) loss on sale of investment   (839)   2,762 
Depreciation and amortization   4,547    2,404 
Amortization of debt discount and issuance costs   128    270 
Change in fair value of Series A redeemable convertible preferred stock embedded derivative   14,463    11,539 
Change in fair value of Series A warrants   11,824    3,384 
Change in fair value of Series B warrants   178,198    52,361 
Non-cash stock compensation   979    755 
Loss on foreign currency exchange   176    4,890 
Change in fair value of equity securities   (49,007)   (78,961)
(Gain) loss on sale of equity securities   (15,436)   7,009 
Earnings on equity investment in joint venture, net of distributions received   (907)    
           
Changes in assets and liabilities:          
Accounts receivable   (12,244)   (882)
Prepaid expenses and other assets   (627)   877 
Accounts payable and accrued expenses   2,826    (1,588)
Royalties and contingent legal fees payable   3,927    (35)
Net cash used in operating activities   (6,197)   (7,143)
           
Cash flows from investing activities:          
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:          
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 
           
Increase in cash and cash equivalents and restricted cash   21,516    71,921 
           
Cash and cash equivalents and restricted cash, beginning   200,546    92,359 
           
Cash and cash equivalents and restricted cash, ending  $222,062   $164,280 
           
Supplemental schedule of cash flow information:          
Interest paid   2,340     
Income taxes paid   9    164 
Noncash investing activities:          
Patent acquisition in exchange of notes receivable   4,000     
Patent acquisition accrued liability - short term   10,000     
Patent acquisition accrued liability - long term   5,000     
Acquisition of prepaid investment securities       183,587 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

 8 

 

 

ACACIA RESEARCH CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of Business

 

As used herein, “we,” “us,” “our,” “Acacia” and the “Company” refer to Acacia Research Corporation and/or its wholly and majority-owned and controlled operating subsidiaries, and/or where applicable, its management.

 

Acacia was incorporated on January 25, 1993 under the laws of the State of California. In December 1999, Acacia changed its state of incorporation from California to Delaware.

 

Acacia acquires businesses and operating assets that the Company believes to be undervalued and where the Company believes it can leverage its resources and skill sets to realize and unlock value. The Company intends to leverage its (i) access to flexible capital that can be deployed unconditionally, (ii) expertise in corporate governance and operational restructuring, (iii) willingness to invest in out of favor industries and businesses that suffer from a complexity discount and untangle complex, multi-factor situations, and (iv) expertise and relationships in certain sectors, to complete strategic acquisitions of businesses, divisions, and/or assets with a focus on mature technology, healthcare, industrial and certain financial segments. Acacia seeks to identify opportunities where the Company believes it is an advantaged buyer, where the Company can avoid structured sale processes and create the opportunity to purchase businesses, divisions and/or assets of companies at an attractive price due to the Company’s unique capabilities, relationships, or expertise, or where Acacia believes the target would be worth more to the Company than to other buyers.

 

Acacia operates its business based on three key principles of People, Process and Performance and have built a management team with identified expertise in Research, Execution and Operation of the Company’s targeted acquisitions.

 

Acacia, through its operating subsidiaries, also currently engages in its legacy business of investing in, licensing and enforcing patented technologies. Acacia’s operating subsidiaries partner with inventors and patent owners, applying their legal and technology expertise to patent assets to unlock the financial value in their patented inventions. In recent years, Acacia has also invested in technology companies. Acacia leverages its experience, expertise, data and relationships developed as a leader in the intellectual property (“IP”) industry to pursue these opportunities. In some cases, these opportunities will complement and/or supplement Acacia’s primary licensing and enforcement business.

 

Acacia’s operating subsidiaries generate revenues and related cash flows from the granting of IP rights (hereinafter, “IP Rights”) for the use of patented technologies that its operating subsidiaries control or own. Acacia’s operating subsidiaries assist patent owners with the prosecution and development of their patent portfolios, the protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of their patented technologies and, where necessary, with the enforcement against unauthorized users of their patented technologies through the filing of patent infringement litigation.

 

Acacia’s operating subsidiaries are principals in the licensing and enforcement effort, obtaining control of the rights in the patent portfolio, or control of the patent portfolio outright. Acacia’s operating subsidiaries own or control the rights to multiple patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries.

 

Neither Acacia nor its operating subsidiaries invent new technologies or products; rather, Acacia depends upon the identification and investment in new patents, inventions and companies that own IP through its relationships with inventors, universities, research institutions, technology companies and others. If Acacia’s operating subsidiaries are unable to maintain those relationships and identify and grow new relationships, then they may not be able to identify new technology-based opportunities for sustainable revenue and/or revenue growth.

 

During the six months ended June 30, 2021, Acacia obtained control of one new patent portfolio. During fiscal year 2020, Acacia obtained control of five new patent portfolios.

 

 

 

 9 

 

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Acacia and its wholly and majority-owned and controlled subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

  

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnotes required by U.S. GAAP in annual financial statements have been omitted or condensed in accordance with quarterly reporting requirements of the Securities and Exchange Commission (“SEC”). These interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2020, as reported by Acacia in its Annual Report on Form 10-K filed with the SEC on March 29, 2021, as well as in our other public filings with the SEC. The condensed consolidated interim financial statements of Acacia include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of Acacia’s consolidated financial position as of June 30, 2021, and results of its operations and its cash flows for the interim periods presented. The consolidated results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the entire fiscal year.

 

Reclassifications

 

Certain prior period amounts in the consolidated statements of operations and cash flows have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported consolidated results of operations.

  

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP require management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Acacia believes that, of the significant accounting policies described herein, the accounting policies associated with revenue recognition, the valuation of the equity instruments, the valuation of Series A redeemable convertible preferred stock (the “Series A Redeemable Convertible Preferred Stock”), embedded derivatives, Series A warrants (the “Series A Warrants”), Series B warrants (the “Series B Warrants”), stock-based compensation expense, impairment of patent-related intangible assets, the determination of the economic useful life of amortizable intangible assets, income taxes and valuation allowances against net deferred tax assets, require its most difficult, subjective or complex judgments.

 

COVID-19 Pandemic

 

The full impact of the COVID-19 pandemic continues to evolve as of the date of this report. While the Company does not expect the current situation to present direct risks to its business, and it has not had a material impact to date, the COVID-19 pandemic could adversely impact the Company’s operations, as well as the operations of its licensees and other business partners. 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. 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, results of operations and financial condition.

 

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer’s social security payments, net operating loss utilization and carryback periods and modifications to the net interest deduction limitations. The CARES Act has not had a material impact on the Company’s income tax provision.

 

 

 

 10 

 

 

On December 27, 2020, the President of the United States signed the Consolidated Appropriations Act, 2021 (“Consolidated Appropriations Act”) into law. The Consolidated Appropriations Act is intended to enhance and expand certain provisions of the CARES Act, allows for the deductions of expenses related to the Payroll Protection Program funds received by companies, and provides an update to meals and entertainment expensing for 2021. The Consolidated Appropriations Act did not have a material impact to the Company’s income tax provision for 2020. The Company will continue to evaluate the impact of the Consolidated Appropriations Act on its financial position, results of operations and cash flows, if any.

 

On March 11, 2021 the United States enacted the American Rescue Plan Act of 2021. This Act 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.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting Principles

 

The consolidated financial statements and accompanying notes are prepared on the accrual basis of accounting in accordance with U.S. GAAP.

 

Principles of Consolidation

 

The accompanying unaudited consolidated financial statements include the accounts of Acacia and its wholly and majority-owned and controlled subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

 

Noncontrolling interests in Acacia’s majority-owned and controlled operating subsidiaries (“noncontrolling interests”) are separately presented as a component of stockholders’ equity. Consolidated net income or (loss) is adjusted to include the net (income) or loss attributed to noncontrolling interests in the consolidated statements of operations. Refer to the accompanying Consolidated Statements of Series A Redeemable Convertible Preferred Stock and Stockholders’ Equity for total noncontrolling interests.

 

In 2020, in connection with the transaction with Link Fund Solutions Limited, which is more fully described in Note 10, the Company acquired equity securities of Malin J1 Limited (“MalinJ1”). MalinJ1 is included in the Company’s consolidated financial statements because the Company, through its interest in the equity securities of MalinJ1, has the ability to control the operations and activities of MalinJ1. Viamet HoldCo LLC, a Delaware limited liability company and wholly-owned subsidiary of Acacia (see Note 10), is the majority shareholder of MalinJ1.

 

A wholly-owned subsidiary of Acacia is the general partner of the Acacia Intellectual Property Fund, L.P. (the “Acacia IP Fund”), which was formed in August 2010. The Acacia IP Fund has been included in the Company’s consolidated financial statements since 2010, as Acacia’s wholly-owned subsidiary, the general partner of Acacia IP Fund, has the ability to control the operations and activities of the Acacia IP Fund. The Acacia IP Fund was terminated as of December 31, 2017 and dissolved in 2020.

 

Revenue Recognition

 

Revenue is recognized upon transfer of control (i.e., by the granting) of promised bundled IP Rights and other contractual performance obligations to licensees in an amount that reflects the consideration we expect to receive in exchange for those IP Rights. Revenue contracts that provide promises to grant the right to use IP Rights as they exist at the point in time at which the IP Rights are granted, are accounted for as performance obligations satisfied at a point in time and revenue is recognized at the point in time that the applicable performance obligations are satisfied and all other revenue recognition criteria have been met.

 

 

 

 11 

 

 

For the periods presented, revenue contracts executed by the Company primarily provided for the payment of contractually determined, one-time, paid-up license fees in consideration for the grant of certain IP Rights for patented technologies owned or controlled by Acacia. Revenues also included license fees from sales-based revenue contracts, the majority of which were originally executed in prior periods, which provide for the payment of quarterly license fees based on quarterly sales of applicable product units by licensees (“Recurring Revenue Agreements”). Revenues may also include court ordered settlements or awards related to our patent portfolio or sales of our patent portfolio. IP Rights granted included the following, as applicable: (i) the grant of a non-exclusive, future license to manufacture and/or sell products covered by patented technologies, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The IP Rights granted were generally perpetual in nature, extending until the legal expiration date of the related patents. The individual IP Rights are not accounted for as separate performance obligations, as (i) the nature of the promise, within the context of the contract, is to grant combined items to which the promised IP Rights are inputs and (ii) the Company's promise to grant each individual IP right described above to the customer is not separately identifiable from other promises to grant IP Rights in the contract.

 

Since the promised IP Rights are not individually distinct, the Company combined each individual IP Right in the contract into a bundle of IP Rights that is distinct, and accounted for all of the IP Rights promised in the contract as a single performance obligation. The IP Rights granted were “functional IP rights” that have significant standalone functionality. Acacia’s subsequent activities do not substantively change that functionality and do not significantly affect the utility of the IP to which the licensee has rights. Acacia’s operating subsidiaries have no further obligation with respect to the grant of IP Rights, including no express or implied obligation to maintain or upgrade the technology, or provide future support or services. The contracts provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the contract. Licensees legally obtain control of the IP Rights upon execution of the contract. As such, the earnings process is complete and revenue is recognized upon the execution of the contract, when collectability is probable and all other revenue recognition criteria have been met. Revenue contracts generally provide for payment of contractual amounts within 15-90 days of execution of the contract, or the end of the quarter in which the sale or usage occurs for Recurring Revenue Agreements. Contractual payments made by licensees are generally non-refundable.

 

For sales-based royalties, the Company includes in the transaction price some or all of an amount of estimated variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Notwithstanding, revenue is recognized for a sales-based royalty promised in exchange for a license of IP Rights when the later of (i) the subsequent sale or usage occurs, or (ii) the performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied. Estimates are generally based on historical levels of activity, if available.

 

Revenues from contracts with significant financing components (either explicit or implicit) are recognized at an amount that reflects the price that a licensee would have paid if the licensee had paid cash for the IP Rights when they are granted to the licensee. In determining the transaction price, the Company adjusts the promised amount of consideration for the effects of the time value of money. As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the entity grants promised IP Rights to a customer and when the customer pays for the IP Rights will be one year or less.

 

In general, the Company is required to make certain judgments and estimates in connection with the accounting for revenue contracts with customers. Such areas may include identifying performance obligations in the contract, estimating the timing of satisfaction of performance obligations, determining whether a promise to grant a license is distinct from other promised goods or services, evaluating whether a license transfers to a customer at a point in time or over time, allocating the transaction price to separate performance obligations, determining whether contracts contain a significant financing component, and estimating revenues recognized at a point in time for sales-based royalties.

 

 

 

 12 

 

 

Revenues were comprised of the following for the periods presented: 

                    
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2021   2020   2021   2020 
   (In thousands) 
Paid-up revenue agreements  $16,600   $1,792   $22,010   $5,092 
Recurring Revenue Agreements   800    326    1,193    841 
Total revenue  $17,400   $2,118   $23,203   $5,933 

 

Refer to “Inventor Royalties and Contingent Legal Expenses” below for information on related direct costs of revenues.

  

Patent Portfolio Operations

 

Cost of revenues include the costs and expenses incurred in connection with Acacia’s patent licensing and enforcement activities, including inventor royalties paid to original patent owners, patent maintenance and prosecution costs, contingent legal fees paid to external patent counsel, other patent-related legal expenses paid to external patent counsel, licensing and enforcement related research, consulting and other expenses paid to third-parties and the amortization of patent-related investment costs. These costs are included under the caption “Patent portfolio operations” in the accompanying consolidated statements of operations. 

 

Inventor Royalties and Contingent Legal Expenses

 

Inventor royalties are expensed in the consolidated statements of operations in the period that the related revenues are recognized. Patent costs, including any upfront advances paid to patent owners by Acacia’s operating subsidiaries, that are recoverable from future net revenues are amortized over the estimated economic useful life of the related patents, or as the prepaid royalties are earned by the inventor, as appropriate, and the related expense is included in amortization expense in the consolidated statements of operations. Any unamortized upfront advances recovered from net revenues are expensed in the period recovered and included in amortization expense in the consolidated statements of operations.

 

Contingent legal fees are expensed in the consolidated statements of operations in the period that the related revenues are recognized. In instances where there are no recoveries from potential infringers, no contingent legal fees are paid; however, Acacia’s operating subsidiaries may be liable for certain out of pocket legal costs incurred pursuant to the underlying legal services agreement.

 

Inventor royalty and contingent legal agreements generally provide for payment by the Company of contractual amounts 30 days subsequent to the fiscal quarter end during which related license fee payments are received from licensees by the Company.

 

 

 

 13 

 

 

Concentrations

 

Financial instruments that potentially subject Acacia to concentrations of credit risk are cash equivalents, equity securities and accounts receivable. Acacia places its cash equivalents and equity securities primarily in highly rated money market funds and investment grade marketable securities. Cash and cash equivalents are also invested in deposits with certain financial institutions and may, at times, exceed federally insured limits. Acacia has not experienced any significant losses on its deposits of cash and cash equivalents.

 

Two licensees individually accounted for 72% and 17% of revenues recognized during the three months ended June 30, 2021, and three licensees accounted for 46%, 38% and 12% of revenues recognized during the three months ended June 30, 2020. Three licensees individually accounted for 54%, 19% and 13% of revenues recognized during the six months ended June 30, 2021, and four licensees accounted for 35%, 34%, 17% and 10% of revenues recognized during the six months ended June 30, 2020.

 

The Company does not have any material foreign operations. Based on the jurisdiction of the entity obligated to satisfy payment obligations pursuant to the applicable revenue arrangement, for the three and six months ended June 30, 2021, 17% and 16%, respectively, of revenues were attributable to licensees domiciled in foreign jurisdictions. For the three and six months ended June 30, 2020, 49% and 21%, respectively, of revenues were attributable to licensees domiciled in foreign jurisdictions.

 

One licensee individually represented approximately 98% of accounts receivable at June 30, 2021. Two licensees individually represented approximately 62% and 21% of accounts receivable at December 31, 2020.

  

Patents

 

Patents include the cost of patents or patent rights (hereinafter, collectively “patents”) acquired from third-parties or obtained in connection with business combinations. Patent costs are amortized utilizing the straight-line method over their remaining economic useful lives. Refer to Note 4 for additional information regarding our patents.

 

Impairment of Long-lived Assets

 

Acacia reviews long-lived assets and intangible assets for potential impairment annually (quarterly for patents) and when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss is recorded in an amount equal to the excess of the asset’s carrying value over its fair value. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. In the event that management decides to no longer allocate resources to a patent portfolio, an impairment loss equal to the remaining carrying value of the asset is recorded. Refer to Note 4 for additional information.

 

Fair value is generally estimated using the “Income Approach,” focusing on the estimated future net income-producing capability of the patent portfolios over their estimated remaining economic useful life. Estimates of future after-tax cash flows are converted to present value through “discounting,” including an estimated rate of return that accounts for both the time value of money and investment risk factors. Estimated cash inflows are typically based on estimates of reasonable royalty rates for the applicable technology, applied to estimated market data. Estimated cash outflows are based on existing contractual obligations, such as contingent legal fee and inventor royalty obligations, applied to estimated license fee revenues, in addition to other estimates of out-of-pocket expenses associated with a specific patent portfolio’s licensing and enforcement program. The analysis also contemplates consideration of current information about the patent portfolio including, status and stage of litigation, periodic results of the litigation process, strength of the patent portfolio, technology coverage and other pertinent information that could impact future net cash flows.

 

 

 

 14 

 

 

Cash and Cash Equivalents

 

Acacia considers all highly liquid, equity securities with original maturities of three months or less when purchased to be cash equivalents. For the periods presented, Acacia’s cash equivalents are comprised of investments in AAA rated money market funds that invest in first-tier only securities, which primarily includes: domestic commercial paper, securities issued or guaranteed by the U.S. government or its agencies, U.S. bank obligations, and fully collateralized repurchase agreements. Acacia’s cash equivalents are measured at fair value using quoted prices that represent Level 1 inputs.

 

Long-Term Restricted Cash

 

Restricted cash relates primarily to the proceeds received from the issuance of Series A Redeemable Convertible Preferred Stock which are held in an escrow account. The amounts are to be released to the Company upon, among other things, (i) the consummation of a suitable investment or acquisition by the Company or (ii) the conversion of Series A Redeemable Convertible Preferred Stock into common stock.

 

Fair Value Measurements

 

U.S. GAAP defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date, and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. Refer to Note 8 to our notes to consolidated financial statements for more information related to our fair value measurements.

 

Equity Securities at Fair Value

 

Investments in equity securities are reported at fair value on a recurring basis, with related realized and unrealized gains and losses in the value of such securities recorded in the consolidated statements of operations in other income (expense). Dividend income is included in the consolidated statements of operations in other income (expense).

 

Equity securities at fair value for the periods presented were comprised of the following: 

                    
   Cost   Gross
Unrealized
Gain
   Gross
Unrealized
Loss
   Fair Value 
   (In thousands) 
Security Type                
June 30, 2021:                    
Equity securities - LF equity  $31,665   $90,312   $(539)  $121,438 
Equity securities - other equity   12,891    819    (210)   13,500 
Equity securities at fair value  $44,556   $91,131   $(749)  $134,938 
                     
                     
December 31, 2020:                    
Equity securities - LF equity  $32,765   $72,689   $(583)  $104,871 
Equity securities - other equity   4,086    1,410    (1,264)   4,232 
Equity securities at fair value  $36,851   $74,099   $(1,847)  $109,103 

 

 

 

 

 15 

 

 

Equity securities without readily determinable fair value

 

For equity securities that do not have readily determinable fair value, the Company elected to report them under the measurement alternative. They are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. The fair values of the private company securities were estimated based on recent financing transactions and secondary market transactions and factoring in any adjustments for illiquidity or preference of these securities. Changes in fair value are reported in the consolidated statements of operations in other income (expense).

 

Other Investments - equity method investments

 

Equity investments in common stock and in-substance common stock without readily determinable fair values in companies over which the Company has the ability to exercise significant influence, are accounted for using the equity method of accounting. Acacia includes its proportionate share of earnings and/or losses of its equity method investees in earnings on equity investment in joint venture in the consolidated statements of operations.

 

Investment at Fair Value

 

On an individual investment basis, Acacia may elect to account for investments in companies where the Company has the ability to exercise significant influence over operating and financial policies of the investee, at fair value. If the fair value method is applied to an investment that would otherwise be accounted for under the equity method of accounting, it is applied to all of the financial interests in the same entity that are eligible items (i.e., common stock and warrants). We elected the fair value method for our investment in Veritone, Inc. (“Veritone”) upon acquisition of the investment. As of June 30, 2021, we have no more investment in Veritone stocks and warrants. Refer to Note 5 to our notes to consolidated financial statements for more information.

 

Stock-Based Compensation

 

The compensation cost for all stock-based awards is measured at the grant date, based on the fair value of the award, and is recognized as an expense on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity award) which is generally two to four years. The fair value of restricted stock and restricted stock unit awards is determined by the product of the number of shares or units granted and the grant date market price of the underlying common stock. The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing model. Forfeitures are accounted for as they occur.

 

Restricted stock units granted in September 2019 with market-based vesting conditions vest based upon the Company achieving specified stock price targets over a three-year period. The effect of a market condition is reflected in the estimate of the grant-date fair value of the options utilizing a Monte Carlo valuation technique. Compensation cost is recognized with a market-based vesting condition provided that the requisite service is rendered, regardless of when, if ever, the market condition is satisfied. Assumptions utilized in connection with the Monte Carlo valuation technique included: estimated risk-free interest rate of 1.38 percent; term of 3.00 years; expected volatility of 38 percent; and expected dividend yield of 0 percent. The risk-free interest rate was determined based on the yields available on U.S. Treasury zero-coupon issues. The expected stock price volatility was determined using historical volatility. The expected dividend yield was based on expectations regarding dividend payments.

 

Stock-based compensation is reported in the consolidated statements of operations in general and administrative expenses. Total stock-based compensation for the three and six months ended June 30, 2021 was $529,000 and $979,000, respectively. Total unrecognized stock-based compensation expense as of June 30, 2021 was $3,870,000, which will be amortized over a weighted-average remaining vesting period of 1.91 years. Total stock-based compensation for the three and six months ended June 30, 2020 was $423,000 and $755,000, respectively.

 

Profits Interest Units (“Units”) were accounted for in accordance with Accounting Standards Codification (“ASC”) 718-10, “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 Units 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 Units that are not otherwise forfeited after termination of continuous service. The exercise price of the purchase option is the fair market value of the Units on the date of termination of continuous service. As of June 30, 2021, the Units totaled $591,000, which was their fair value as of December 31, 2018 after termination of service.

 

 

 

 16 

 

 

Series A Warrants

 

The fair value of the Series A Warrants is estimated using a Black-Scholes option-pricing model. The fair value of the Series A Warrants as of June 30, 2021 was estimated based on the following assumptions: volatility of 30 percent, risk-free rate of 1.09 percent, term of 6.29 years and a dividend yield of 0 percent. Refer to Note 9 for additional information.

 

Series B Warrants

 

The fair value of the Series B Warrants is estimated using a Black-Scholes option-pricing model. In the quarter ended March 31, 2021, there was a change in methodology used to an acceptable Black-Scholes option-pricing model from a Monte Carlo valuation technique used to value the Series B Warrants as of December 31, 2020. The fair value of the Series B Warrants as of June 30, 2021 was estimated based on the following assumptions: (1) volatility of 30 percent, risk-free rate of 1.10 percent, term of 6.38 years, and a dividend yield of 0 percent, and (2) volatility of 25 percent, risk-free rate of 0.10 percent, term of 1.15 years and a dividend yield of 0 percent. Refer to Note 9 for additional information.

 

Embedded derivatives

 

Embedded derivatives that are required to be bifurcated from their host contract are valued separately from the host instrument. The binomial model determines the value of a convertible bond instrument by valuing its two separate components (i.e., a cash only component which is subject to the selected risk-adjusted discount rate and an equity component where settlement is subject to a risk-free rate) within a single lattice framework. The binomial model utilizes the Tsiveriotis and Fernandes implementation in which a convertible instrument is split into two separate components: a cash-only component which is subject to the selected risk-adjusted discount rate and an equity component which is subject only to the risk-free rate. The model considers the (i) implied volatility of the value of our common stock, (ii) appropriate risk-free interest rate, (iii) credit spread, (iv) dividend yield, (v) dividend accrual (and a step-up in rates), and (vi) event probabilities of the various conversion and redemption scenarios.

  

The 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. The selected volatility, as described below, represents a haircut from the Company’s actual realized historical volatility. A volatility haircut is a concept used to describe a commonly observed occurrence in which the volatility implied by market prices involving options, warrants, and convertible debt is lower than historical actual realized volatility. The assumed base case term used in the valuation model is the period remaining until November 15, 2027, the maturity date. The risk-free interest rate is based on the yield on the U.S. Treasury with a remaining term equal to the expected term of the conversion and early redemption options. The significant assumptions utilized in the Company’s valuation of the embedded derivative at June 30, 2021 are as follows: volatility of 30 percent, risk-free rate of 1.1 percent, discount rate of 9.0 percent, and a dividend yield of 0 percent. The fair value measurement of the embedded derivative is sensitive to these assumptions and changes in these assumptions could result in a materially different fair value measurement. Refer to Note 9 for additional information.

 

Treasury Stock

 

Repurchases of the Company’s outstanding common stock are accounted for using the cost method. The applicable par value is deducted from the appropriate capital stock account on the formal or constructive retirement of treasury stock. Any excess of the cost of treasury stock over its par value is charged to additional paid-in capital and reflected as treasury stock on the consolidated balance sheets.

 

Impairment of Investments

 

Acacia reviews its investments quarterly for indicators of other-than-temporary impairment. This determination requires significant judgment. In making this judgment, Acacia considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, Acacia evaluates, among other factors, general market conditions and the duration and extent to which the fair value is less than cost. Acacia also considers specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in the consolidated statements of operations and a new cost basis in the investment is established.

 

 

 

 17 

 

  

Income Taxes

 

Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in Acacia’s consolidated financial statements or consolidated income tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more than likely not be realized, or if it is determined that there is uncertainty regarding future realization of such assets.

 

The provision for income taxes for interim periods is determined using an estimate of Acacia’s annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, Acacia updates the estimate of the annual effective tax rate, and if the estimated tax rate changes, a cumulative adjustment is recorded.

 

The Company’s effective tax rates were (3%) and (0%) for the three and six months ended June 30, 2021, respectively, and 0% and 21% for the three and six months ended June 30, 2020, respectively. Tax (expense) benefit for the periods presented 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 has recorded full valuation allowance against our net deferred tax assets as of June 30, 2021 and December 31, 2020. These assets primarily consist of foreign tax credits, capital loss carryforwards and net operating loss carryforwards.

  

Recent Accounting Pronouncements

 

Recently Adopted

 

In December of 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU 2019-12 as of January 1, 2021. The adoption of ASU 2019-12 did not have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.

 

Not Yet Adopted

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to replace the incurred loss methodology with an expected credit loss model that requires consideration of a broader range of information to estimate credit losses over the lifetime of the asset, including current conditions and reasonable and supportable forecasts in addition to historical loss information, to determine expected credit losses. Pooling of assets with similar risk characteristics and the use of a loss model are also required. Also, in April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, to clarify the inclusion of recoveries of trade receivables previously written off when estimating an allowance for credit losses. The amendments in this update will be effective for the Company in fiscal year 2023, with early adoption permitted. Management is currently evaluating the impact that the amendments in this update may have on the Company’s consolidated financial statements.

 

 

 

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3. INCOME/LOSS PER SHARE

 

The following table presents the shares of common stock outstanding used in the calculation of basic and diluted net income (loss) per share: 

                    
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2021   2020   2021   2020 
   (In thousands, except share and per share information) 
Numerator:                
Net income (loss) attributable to Acacia Research Corporation  $19,507   $6,148   $(145,111)  $(5,143)
Dividend on Series A redeemable convertible preferred stock   (263)   (388)   (523)   (651)
Accretion of Series A redeemable convertible preferred stock   (918)   (680)   (1,771)   (1,311)
Undistributed earnings allocated to participating securities   (3,218)   (879)        
Net income (loss) attributable to common stockholders - basic   15,108    4,201    (147,405)   (7,105)
                     
Less: Change in fair value of Series A warrants   221             
Less: Change in fair value of dilutive Series B warrants   1,355             
Add: Interest expense associated with Starboard Notes, net of tax   1,238             
Add: Undistributed earnings allocated to participating securities   3,218             
Reallocation of undistributed earnings to participating securities   (2,348)            
Net income (loss) attributable to common stockholders - diluted  $18,792   $4,201   $(147,405)  $(7,105)
                     
Denominator:                    
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders - basic   48,729,020    48,457,620    48,662,897    49,166,508 
Potentially dilutive common shares:                    
Restricted stock units   869,763    576,204         
Employee stock options   46,858             
Series A Warrants   1,934,490              
Series B Warrants   31,506,849              
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders - diluted   83,086,980    49,033,824    48,662,897    49,166,508 
                     
Basic net income (loss) per common share  $0.31   $0.09   $(3.03)  $(0.14)
Diluted net income (loss) per common share  $0.23   $0.09   $(3.03)  $(0.14)
                     
Anti-dilutive potential common shares excluded from the computation of diluted net income (loss) per common share:                    
Equity-based incentive awards       476,583    1,208,687    2,321,016 
Series A warrants       5,000,000    5,000,000    5,000,000 
Series B warrants   68,493,151    100,000,000    100,000,000    100,000,000 
Total   68,493,151    105,476,583    106,208,687    107,321,016 

 

 

 

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4. PATENTS, NET OF ACCUMULATED AMORTIZATION

 

Acacia’s only identifiable intangible assets at June 30, 2021 and December 31, 2020 are patents and patent rights. Patent-related accumulated amortization totaled $288,964,000 and $319,922,000 as of June 30, 2021 and December 31, 2020, respectively. Acacia’s patents have remaining estimated economic useful lives ranging from twenty-nine to fifty-five months. The weighted-average remaining estimated economic useful life of Acacia’s patents is approximately four years.

 

The following table presents the scheduled annual aggregate amortization expense as of June 30, 2021: 

     
For the years ending December 31,    
(In thousands)   
Remainder of 2021  $5,224 
2022   10,448 
2023   10,381 
2024   9,005 
2025   6,630 
Thereafter   750 
Patents, net   $42,438 

 

For the six months ended June 30, 2021, Acacia accrued patent and patent rights acquisition costs totaling $15.0 million, of which $10.0 million is due December 1, 2021 and $5.0 million is due February 18, 2023. Such amounts are included in Accrued patent investment costs and Other long-term liabilities in the accompanying consolidated balance sheet as of June 30, 2021, respectively.

 

5. INVESTMENT AT FAIR VALUE

 

During 2016 and 2017, Acacia made certain investments in Veritone. As a result of these transactions, Acacia received an aggregate total of 4,119,521 shares of Veritone common stock and warrants to purchase a total of 1,120,432 shares of Veritone common stock at an exercise price of $13.61 per share expiring between 2020 and 2027. During the six months ended June 30, 2020, Acacia sold all remaining 298,450 shares Veritone common stock and recorded a realized loss of $3.3 million.

 

During the year ended December 31, 2020, Acacia exercised 963,712 Veritone warrants, and recorded a realized gain of $11.5 million. During the three months ended March 31, 2021, Acacia exercised all remaining 156,720 warrants, and recorded a realized gain of $839,000. At June 30, 2021, there are no remaining Veritone warrants held by Acacia.

 

Changes in the fair value of Acacia’s investment in Veritone are recorded as unrealized gains or losses in the consolidated statements of operations. For the three and six months ended June 30, 2021 and 2020, the accompanying consolidated statements of operations reflected the following: 

                    
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2021   2020   2021   2020 
   (In thousands) 
Change in fair value of investment, warrants  $   $2,677   $   $3,306 
Change in fair value of investment, common stock               3,479 
Gain on sale of investment, warrants       554    839    554 
Loss on sale of investment, common stock               (3,316)
Net realized and unrealized gain on investment at fair value  $   $3,231   $839   $4,023 

 

 

 

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6. COMMITMENTS AND CONTINGENCIES

 

Facility Leases

 

The Company primarily leases office facilities under operating lease arrangements that will end in various years through July 2024.

 

On June 7, 2019, we entered into a building lease agreement (the “New Lease”) with Jamboree Center 4 LLC (the “Landlord”). Pursuant to the New Lease, we have leased approximately 8,293 square feet of office space in Irvine, California. The New Lease commenced on August 1, 2019. The term of the New Lease is 60 months from the commencement date, provides for annual rent increases, and does not provide us the right to early terminate or extend our lease terms.

  

On January 7, 2020, we entered into a building lease agreement (the “New York Office Lease”) with Sage Realty Corporation (the “New York Office Landlord”). Pursuant to the New York Office Lease, we have leased approximately 4,000 square feet of office space for our corporate headquarters in New York, New York. The New York Office Lease commenced on February 1, 2020. The term of the New York Office Lease is 24 months from the commencement date, provides for annual rent increases, and does not provide us the right to early terminate or extend our lease terms.

 

Operating lease costs were $152,000 and $164,000 for the three months ended June 30, 2021 and 2020, respectively, and $302,000 and $285,000 for the six months ended June 30, 2021 and 2020, respectively.

 

The table below presents aggregate future minimum payments due under the New Lease and the New York Office Lease discussed above, reconciled to lease liabilities included in the consolidated balance sheet as of June 30, 2021: 

     
   Operating Leases 
    (In thousands) 
2021  $297 
2022   370 
2023   364 
2024   218 
Thereafter    
Total minimum payments  $1,249 
Less: short-term lease liabilities   (490)
Long-term lease liabilities  $759 

 

Inventor Royalties and Contingent Legal Expenses

 

In connection with the investment in certain patents and patent rights, certain of Acacia’s operating subsidiaries executed related agreements which grant to the former owners of the respective patents or patent rights, the right to receive inventor royalties based on future net revenues (as defined in the respective agreements) generated as a result of licensing and otherwise enforcing the respective patents or patent portfolios.

 

Acacia’s operating subsidiaries may retain the services of law firms that specialize in patent licensing and enforcement and patent law in connection with their licensing and enforcement activities. These law firms may be retained on a contingent fee basis whereby such law firms are paid on a scaled percentage of any negotiated fees, settlements or judgments awarded based on how and when the fees, settlements or judgments are obtained.

 

 

 

 21 

 

 

Patent Enforcement

 

Certain of Acacia’s operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. In connection with any of Acacia’s operating subsidiaries’ patent enforcement actions, it is possible that a defendant may request and/or a court may rule that an operating subsidiary has violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against Acacia or its operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material.

 

Acacia is subject to claims, counterclaims and legal actions that arise in the ordinary course of business. Management believes that the ultimate liability with respect to these claims and legal actions, if any, will not have a material effect on Acacia’s consolidated financial position, results of operations or cash flows.

 

In December 2017, the Federal Court of Canada allowed a counterclaim for invalidity of a patent asserted by Rapid Completions LLC and awarded costs payable by Rapid Completions LLC in amounts that are included in the 2021 and 2020 accrual balances discussed below.

 

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 $338,000 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 $308,000, 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.

  

7. STOCKHOLDERS’ EQUITY

 

Repurchases of Common Stock

 

On August 5, 2019, Acacia’s 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. Stock repurchases for the periods presented, all of which were purchased as part of a publicly announced plan or program, were as follows: 

                  
   Total Number
of Shares
Purchased
   Average
Price
paid per
Share
   Approximate Dollar
Value of Shares that
May Yet be Purchased
under the Program
   Plan Expiration Date
                
March 20, 2020 - March 31, 2020   576,898   $2.28   $8,686,000   July 31, 2020
April 1, 2020 - April 23, 2020   1,107,639   $2.42   $6,001,000   July 31, 2020
Totals for 2020   1,684,537   $2.37         

 

 

 

 22 

 

 

In determining whether or not to repurchase any shares of Acacia’s common stock, Acacia’s Board of Directors consider such factors, among others, as the impact of the repurchase on Acacia’s cash position, as well as Acacia’s capital needs and whether there is a better alternative use of Acacia’s capital. Acacia has no obligation to repurchase any amount of its common stock under the Stock Repurchase Program. Repurchases to date were made in the open market in compliance with applicable SEC rules. The authorization to repurchase shares presented an opportunity to reduce the outstanding share count and enhance stockholder value. 

 

Tax Benefits Preservation Plan

 

On March 12, 2019, Acacia’s Board of Directors announced that it had unanimously approved the adoption of a Tax Benefits Preservation Plan (the “Plan”). Our stockholders ratified the adoption of the Plan in July 2019. The purpose of the Plan is to protect the Company’s ability to utilize potential tax assets, such as net operating loss carryforwards and tax credits to offset potential future taxable income.

 

The Plan is designed to reduce the likelihood that the Company will experience an ownership change by discouraging (i) any person or group from acquiring beneficial ownership of 4.9% or more of the Company’s outstanding common stock and (ii) any existing stockholders who, as of the time of the first public announcement of the adoption of the Plan, beneficially own more than 4.9% of the Company’s then-outstanding shares of the Company’s common stock from acquiring additional shares of the Company’s common stock (subject to certain exceptions). There is no guarantee, however, that the Plan will prevent the Company from experiencing an ownership change.

 

In connection with the adoption of the Plan, Acacia’s Board of Directors authorized and declared a dividend distribution of one right for each outstanding share of the Company’s common stock to stockholders of record at the close of business on March 16, 2019. On or after the distribution date, each right would initially entitle the holder to purchase one one-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock, $0.001 par value for a purchase price of $12.00. On March 15, 2021 the rights expired pursuant to their terms.

 

The Company has a provision in its Amended and Restated Certificate of Incorporation, as amended (the “Charter Provision”) which generally prohibits transfers of its common stock that could result in an ownership change. Like the Plan, the purpose of the Charter Provision is to protect the Company’s ability to utilize potential tax assets, such as net operating loss carryforwards and tax credits to offset potential future taxable income. The Charter Provision was approved by the Company’s stockholders on July 15, 2019.

  

8. FAIR VALUE MEASUREMENTS

 

U.S. GAAP defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date, and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three-level hierarchy of valuation techniques established to measure fair value is defined as follows:

 

(i) Level 1 - Observable Inputs:  Quoted prices in active markets for identical investments;

 

(ii) Level 2 - Pricing Models with Significant Observable Inputs:  Other significant observable inputs, including quoted prices for similar investments, interest rates, credit risk, etc.; and

 

(iii) Level 3 - Unobservable Inputs:  Significant unobservable inputs, including the entity’s own assumptions in determining the fair value of investments.

 

Whenever possible, the Company is required to use observable market inputs (Level 1 - quoted market prices) when measuring fair value. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured. In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy.

 

 

 

 23 

 

 

Acacia holds the following types of financial instruments at June 30, 2021 and December 31, 2020:

 

Equity securities at fair value. Equity securities includes investments in public company common stock and are recorded at fair value based on the quoted market price of each share on the valuation date. The fair value of these securities are within Level 1 of the valuation hierarchy. Equity investments that do not have regular market pricing, but for which fair value can be determined based on other data values or market prices, are recorded at fair value within Level 2 of the valuation hierarchy.

 

Investments at fair value - common stock. Acacia’s equity investment in Veritone common stock is recorded at fair value based on the quoted market price of Veritone’s common stock on the applicable valuation date (Level 1).

 

Investments at fair value - warrants. Warrants are recorded at fair value, as based on the Black-Scholes option-pricing model (Level 2).

 

Series A Warrants. Series A Warrants are recorded at fair value, using Black-Scholes option-pricing model (Level 3). In the quarter ended March 31, 2021, there was a change in estimate with regard to the calculation of the volatility assumption used in the Black Scholes option-pricing model. As a result, the Series A Warrants are now measured as Level 3 as opposed to Level 2 as measured previously.

 

Series B Warrants. Series B Warrants are recorded at fair value, using Black-Scholes option-pricing model (Level 3). In the quarter ended March 31, 2021, there was a change in methodology used to an acceptable Black-Scholes option-pricing model from a Monte Carlo valuation technique used to value the Series B Warrants as of December 31, 2020.

 

Embedded derivative liability. Embedded derivatives that are required to be bifurcated from their host contract are evaluated and valued separately from the host instrument. A binomial lattice framework is used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock issued by the Company in 2019 (Level 3).

 

Financial assets and liabilities measured at fair value on a recurring basis were as follows: 

                    
   Level 1   Level 2   Level 3   Total 
   (In thousands) 
Assets as of June 30, 2021:                
Equity securities at fair value  $80,195   $54,743   $   $134,938 
Total  $80,195   $54,743   $   $134,938 
                     
Assets as of December 31, 2020:                    
Equity securities at fair value  $109,103   $   $   $109,103 
Investment at fair value - warrants       2,752        2,752 
Total  $109,103   $2,752   $   $111,855 
                     
Liabilities as of June 30, 2021:                    
Series A warrants  $   $   $18,464   $18,464 
Series B warrants           230,539    230,539 
Series A embedded derivative liabilities           41,191    41,191 
Total  $   $   $290,194   $290,194 
                     
Liabilities as of December 31, 2020:                    
Series A warrants  $   $6,640   $   $6,640 
Series B warrants           52,341    52,341 
Series A embedded derivative liabilities           26,728    26,728 
Total  $   $6,640   $79,069   $85,709 

 

 

 

 24 

 

 

The following table sets forth a summary of the changes in the estimated fair value of the Company’s Level 3 liabilities, which are measured at fair value on a recurring basis: 

                    
   Series A Warrant Liability   Series A Embedded Derivative Liability   Series B Warrant Liability   Total 
   (In thousands)     
Opening balance as of January 1, 2021  $   $26,728   $52,341   $79,069 
Transfers to Level 3   6,640            6,640 
Remeasurement to fair value   11,824    14,463    178,198    204,485 
Balance as of June 30, 2021  $18,464   $41,191   $230,539   $290,194 

 

9. STARBOARD INVESTMENT

 

Series A Redeemable Convertible Preferred Stock 

 

On November 18, 2019, the Company entered into a Securities Purchase Agreement with Starboard Value LP (“Starboard”) and certain funds and accounts affiliated with, or managed by, Starboard (collectively, the “Buyers”) pursuant to which the Company issued (i) 350,000 shares of Series A Redeemable Convertible Preferred Stock with a par value of $0.001 per share and a stated value of $100 per share, and (ii) Series A Warrants to purchase up to 5,000,000 shares of the Company’s common stock to the Buyers. The Securities Purchase Agreement also established the terms of certain senior secured notes and additional warrants (the “Series B Warrants”) which may be issued to Starboard in the future. On June 4, 2020, the Company entered into a Supplemental Agreement, as defined below under “Senior Secured Notes”, with certain contractual agreements affecting the Series A Redeemable Convertible Preferred Stock, reflected below.

 

The Series A Redeemable Convertible Preferred Stock can be converted into a number of shares of common stock equal to (i) the stated value thereof plus accrued and unpaid dividends, divided by (ii) the conversion price of $3.65 (subject to certain anti-dilution adjustments). Holders may elect to convert the Series A Redeemable Convertible Preferred Stock into common stock at any time. The Company may elect to convert the Series A Redeemable Convertible Preferred Stock into shares of Common Stock any time on or after November 15, 2025, provided that the closing price of the Company’s common stock equals or exceeds 190% of the conversion price for 30 consecutive trading days and assuming certain other conditions of the common stock have been met.

 

Holders have the option to redeem all or a portion of the Series A Redeemable Convertible Preferred Stock during the periods of May 15, 2021 through August 15, 2021 and May 15, 2022 through August 15, 2022, provided that there is not outstanding at least $50.0 million aggregate principal of senior secured notes to the Buyers pursuant to the Securities Purchase Agreement at the time of the redemption. Holders also have the option to redeem all or a portion of the Series A Redeemable Convertible Preferred Stock during the period of November 15, 2024 through February 15, 2025. Additionally, holders have the option to redeem all or a portion of the Series A Redeemable Convertible Preferred Stock upon the occurrence of (i) a change of control or (ii) various other triggering events, such as the suspension from trading or delisting of the Company’s common stock. If the Series A Redeemable Convertible Preferred Stock is redeemed at the option of the holders, the redemption price may include a make-whole amount or a stated premium, depending on the redemption scenario.

 

The Company may redeem all, and not less than all, of the Series A Redeemable Convertible Preferred Stock (i) upon a change of control or (ii) during the period of May 15, 2022 through August 15, 2022, provided that there is not outstanding at least $50.0 million aggregate principal of the senior secured notes at the time of the redemption, and assuming certain conditions of the common stock have been met. If the Series A Redeemable Convertible Preferred Stock is redeemed at the option of the Company, the redemption price would include a make-whole amount or a 15% premium depending on the circumstances.

 

If any Series A Redeemable Convertible Preferred Stock remains outstanding on November 15, 2027, the Company shall redeem such Series A Redeemable Convertible Preferred Stock in cash.

 

 

 

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