Acacia(ACTG) - 2021 Q1 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to significant risks and uncertainties, qualifying for safe harbor provisions - The report contains forward-looking statements subject to substantial risks and uncertainties, intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995[5] - These statements address future events and conditions concerning IP acquisition, licensing, enforcement, COVID-19 impact, capital expenditures, earnings, litigation, regulatory matters, markets, liquidity, and accounting[5] - Actual results could differ materially due to factors like the ability to invest in new technologies, global economic conditions, changes in demand, legislative/regulatory developments, and litigation outcomes[5][6] PART I. Financial Information This part presents Acacia Research Corporation's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Acacia Research Corporation, including the balance sheets, statements of operations, statements of stockholders' equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, and significant financial instruments and transactions for the periods ended March 31, 2021 and December 31, 2020 Unaudited Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity as of March 31, 2021, and December 31, 2020 Condensed Consolidated Balance Sheet Highlights (In thousands) | Metric | March 31, 2021 | December 31, 2020 | | :------------------------------------------ | :------------- | :---------------- | | ASSETS | | | | Total current assets | $482,810 | $457,669 | | Patents, net | $45,050 | $16,912 | | Total assets | $568,958 | $515,520 | | LIABILITIES & EQUITY | | | | Total current liabilities | $137,979 | $124,816 | | Total liabilities | $429,033 | $212,067 | | Total stockholders' equity | $128,148 | $292,529 | - Total assets increased by $53.4 million, primarily driven by an increase in equity securities at fair value and patents, net[13] - Total liabilities significantly increased by $216.9 million, mainly due to substantial increases in Series A and B warrant liabilities and Series A embedded derivative liabilities[14] - Total stockholders' equity decreased by $164.4 million, largely influenced by the increase in liabilities and accumulated deficit[11][15] Unaudited Condensed Consolidated Statements of Operations This section details the company's financial performance, including revenues, expenses, and net loss for the three months ended March 31, 2021 and 2020 Condensed Consolidated Statements of Operations Highlights (In thousands, except per share data) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Revenues | $5,803 | $3,815 | | Net patent portfolio income | $490 | $1,309 | | Operating loss | $(5,676) | $(3,569) | | Total other expense | $(158,032) | $(9,060) | | Loss before income taxes | $(163,708) | $(12,629) | | Net Loss attributable to Acacia Research Corporation | $(164,618) | $(11,291) | | Basic and diluted net loss per common share | $(2.81) | $(0.24) | - Revenues increased by $1.988 million (52%) year-over-year, primarily from new licensing agreements[17][176] - The company reported a significantly higher net loss attributable to Acacia Research Corporation of $(164.6) million in Q1 2021, compared to $(11.3) million in Q1 2020, largely due to a substantial increase in 'Change in fair value of the Series A and B warrants and embedded derivatives' which was $(198.9) million in Q1 2021[17][182] - Basic and diluted net loss per common share increased to $(2.81) in Q1 2021 from $(0.24) in Q1 2020[17] Unaudited Condensed Consolidated Statements of Series A Redeemable Convertible Preferred Stock and Stockholders' Equity This section outlines changes in Series A Redeemable Convertible Preferred Stock and total stockholders' equity, reflecting net loss and other equity transactions Changes in Stockholders' Equity (In thousands) | Metric | Balance at Dec 31, 2020 | Net Loss | Accretion of Series A Preferred Stock | Compensation Expense | Balance at Mar 31, 2021 | | :----------------------------------- | :---------------------- | :--------- | :------------------------------------ | :------------------- | :---------------------- | | Series A Redeemable Convertible Preferred Stock Amount | $10,924 | – | $853 | – | $11,777 | | Common Stock Amount | $49 | – | – | – | $49 | | Additional Paid-in Capital | $651,416 | – | $(853) | $450 | $650,753 | | Accumulated Deficit | $(326,708) | $(164,618) | – | – | $(491,326) | | Total Stockholders' Equity | $292,529 | $(163,718) | $(853) | $450 | $128,148 | - Total stockholders' equity decreased significantly from $292.5 million at December 31, 2020, to $128.1 million at March 31, 2021, primarily due to the net loss incurred during the period[20] - Accumulated deficit increased by $164.6 million, reflecting the net loss for the three months ended March 31, 2021[20] Unaudited Condensed Consolidated Statements of Cash Flows This section presents the cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2021 and 2020 Condensed Consolidated Statements of Cash Flows Highlights (In thousands) | Cash Flow Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(6,120) | $(2,211) | | Net cash (used in) provided by investing activities | $(13,940) | $507 | | Net cash (used in) provided by financing activities | $(260) | $3,023 | | (Decrease) increase in cash and cash equivalents and restricted cash | $(20,320) | $1,319 | | Cash and cash equivalents and restricted cash, ending | $180,226 | $93,678 | - Net cash used in operating activities increased to $(6.1) million in Q1 2021 from $(2.2) million in Q1 2020, mainly due to timing of cash collections and increased operating costs[24][209] - Investing activities shifted from providing $0.5 million in Q1 2020 to using $(13.9) million in Q1 2021, primarily due to increased patent acquisitions and purchases of equity securities[24][211] - Financing activities used $(0.26) million in Q1 2021, a decrease from providing $3.0 million in Q1 2020, influenced by paydown and reissuance of Senior Secured Notes[24][214] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations of the company's business, significant accounting policies, and specific financial instruments and transactions 1. Description of Business and Basis of Presentation This note describes Acacia's business model, including its investment strategy in undervalued assets and its intellectual property licensing activities - Acacia acquires undervalued businesses and operating assets, leveraging flexible capital, corporate governance expertise, and relationships in mature technology, healthcare, industrial, and financial segments[28] - The company also continues its legacy business of investing in, licensing, and enforcing patented technologies, partnering with inventors to unlock financial value from IP rights[29][30] - During Q1 2021, Acacia obtained control of one new patent portfolio, and five in fiscal year 2020[33] - The COVID-19 pandemic has not had a material impact on the company's operations to date, and its business can operate remotely, but potential future risks are acknowledged[37] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and methods applied in preparing the financial statements, including revenue recognition and asset valuation - Revenue is recognized upon transfer of control of bundled IP Rights, primarily from one-time, paid-up license fees, with some recurring sales-based royalties[44][45][47] Revenue Breakdown (In thousands) | Revenue Type | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------- | :-------------------------------- | :-------------------------------- | | Paid-up Revenue Agreements | $5,410 | $3,300 | | Recurring Revenue Agreements | $393 | $515 | | Total Revenue | $5,803 | $3,815 | - Cost of revenues includes inventor royalties, contingent legal fees, other patent-related legal expenses, and amortization of patent-related investment costs[52] - Patents are amortized using the straight-line method over their remaining economic useful lives, ranging from 32 to 58 months, with a weighted-average of approximately four years[56][82] - The fair value of Series A and B Warrants and embedded derivatives are estimated using Black-Scholes or binomial models, with significant changes in fair value impacting the statements of operations[71][72][73][74] 3. Loss Per Share This note details the calculation of basic and diluted net loss per common share for the reporting periods Loss Per Share Calculation (In thousands, except share and per share data) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss attributable to Acacia Research Corporation | $(164,618) | $(11,291) | | Dividend on Series A redeemable convertible preferred stock | $(263) | $(263) | | Accretion of Series A redeemable convertible preferred stock | $(852) | $(631) | | Undistributed earnings allocated to participating securities | $29,068 | – | | Net loss attributable to common stockholders - basic and diluted | $(136,665) | $(12,185) | | Weighted-average shares outstanding - basic and diluted | 48,596,040 | 49,875,396 | | Basic and diluted net loss per common share | $(2.81) | $(0.24) | - The basic and diluted net loss per common share significantly increased to $(2.81) for Q1 2021, compared to $(0.24) for Q1 2020, reflecting the higher net loss attributable to common stockholders[80] 4. Patents, Net of Accumulated Amortization This note provides information on the company's patent assets, their accumulated amortization, and scheduled future amortization expenses - Acacia's patents and patent rights are its only identifiable intangible assets, with accumulated amortization totaling $321.8 million as of March 31, 2021[82] - The weighted-average remaining estimated economic useful life of patents is approximately four years[82] Scheduled Annual Aggregate Amortization Expense (In thousands) | Year Ending December 31, | Amortization Expense | | :----------------------- | :------------------- | | Remainder of 2021 | $7,836 | | 2022 | $10,448 | | 2023 | $10,381 | | 2024 | $9,005 | | 2025 | $6,630 | | Thereafter | $750 | | Total | $45,050 | - Acacia accrued $15 million in patent and patent rights acquisition costs during Q1 2021, with $10 million due by December 1, 2021, and $5 million by February 18, 2023[83] 5. Investment at Fair Value This note details the company's investments measured at fair value, including the divestiture of Veritone, Inc. and associated gains - Acacia fully divested its investment in Veritone, Inc. during Q1 2021, exercising all remaining 156,720 warrants and recording a realized gain of $839 thousand[84] Net Realized and Unrealized Gain (Loss) on Veritone Investment (In thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Change in fair value of investment, warrants | – | $630 | | Change in fair value of investment, common stock | – | $3,478 | | Gain on sale of investment, warrants | $839 | – | | Loss on sale of investment, common stock | – | $(3,316) | | Net realized and unrealized gain (loss) on investment at fair value | $839 | $792 | 6. Commitments and Contingencies This note outlines the company's legal commitments, including patent enforcement litigation and lease obligations - Acacia's operating subsidiaries are involved in patent enforcement litigation, which could result in monetary sanctions or attorney's fees if courts rule against them[88] - The company leases office facilities in Irvine, California (60-month term from August 2019) and New York, New York (24-month term from February 2020)[89][90] Future Minimum Lease Payments (In thousands) | Year | Operating Leases | | :--- | :--------------- | | 2021 | $444 | | 2022 | $370 | | 2023 | $364 | | 2024 | $218 | | Thereafter | – | | Total minimum payments | $1,396 | | Less: short-term lease liabilities | $(551) | | Long-term lease liabilities | $845 | - A lawsuit filed by Slingshot Technologies, LLC alleging misappropriation of confidential information in a patent portfolio acquisition is ongoing, with Monarch and Ms. Wolanyk's motions to dismiss granted[94] 7. Stockholders' Equity This note details changes in stockholders' equity, including stock repurchase programs and the Tax Benefits Preservation Plan - Acacia's Board of Directors approved a stock repurchase program in August 2019, authorizing up to $10.0 million in common stock repurchases through July 31, 2020[96] Common Stock Repurchases in 2020 | Period | Total Shares Purchased | Average Price per Share | Dollar Value Remaining under Program | | :-------------------------- | :--------------------- | :---------------------- | :----------------------------------- | | March 20, 2020 - March 31, 2020 | 576,898 | $2.28 | $8,686,000 | | April 1, 2020 - April 23, 2020 | 1,107,639 | $2.42 | $6,001,000 | | Totals for 2020 | 1,684,537 | $2.37 | | - The company adopted a Tax Benefits Preservation Plan in March 2019, ratified by stockholders in July 2019, to protect its ability to utilize tax assets by discouraging beneficial ownership of 4.9% or more of common stock[99][100] - Rights issued under the Tax Benefits Preservation Plan expired on March 15, 2021[101] 8. Recent Accounting Pronouncements This note discusses the adoption and evaluation of recent accounting standards and their impact on the financial statements - Acacia adopted ASU No. 2019-12, 'Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,' effective January 1, 2021, which did not materially impact its financial statements[103] - The company is currently evaluating the impact of ASU No. 2016-13, 'Financial Instruments—Credit Losses (Topic 326),' which will be effective for fiscal year 2023[104] 9. Fair Value Measurements This note explains the methodology for fair value measurements, categorizing financial instruments into a three-level hierarchy - Acacia categorizes fair value measurements into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (significant observable inputs), and Level 3 (significant unobservable inputs)[106][107] - Equity securities at fair value are primarily Level 1, while Series A Warrants, Series B Warrants, and embedded derivative liabilities are classified as Level 3 due to the use of unobservable inputs and changes in valuation methodology[108][109][110] Fair Value Measurements of Financial Instruments (In thousands) | Instrument | March 31, 2021 (Level 1) | March 31, 2021 (Level 2) | March 31, 2021 (Level 3) | | :----------------------------------- | :----------------------- | :----------------------- | :----------------------- | | Equity securities at fair value | $122,469 | $57,851 | – | | Series A warrants liability | – | – | $18,243 | | Series B warrants liability | – | – | $225,956 | | Embedded derivative liabilities | – | – | $40,419 | | Total Level 3 Liabilities | | | $284,618 | Changes in Level 3 Liabilities (In thousands) | Metric | Series A Warrants Liability | Preferred Stock Embedded Derivative Liability | Series B Warrants Liability | | :-------------------------------- | :-------------------------- | :-------------------------------------------- | :-------------------------- | | Opening balance as of January 1, 2021 | – | $26,728 | $52,341 | | Transfers into Level 3 | $6,640 | – | – | | Remeasurement to fair value | $11,603 | $13,691 | $173,615 | | Balance as of March 31, 2021 | $18,243 | $40,419 | $225,956 | 10. Starboard Investment This note details the investment by Starboard Value LP, including Series A Preferred Stock, Series A and B Warrants, and Senior Secured Notes - In November 2019, Acacia issued Series A Redeemable Convertible Preferred Stock ($35 million) and Series A Warrants to Starboard Value LP and its affiliates[116] - The Series A Preferred Stock is convertible into common stock, redeemable by holders or the company under specific conditions, and accrues cumulative dividends (initially 3.0%, increased to 8.0% upon approved investment, but maintained at 3.0% with $35 million in escrow)[117][118][119][121] - Certain features of the Series A Preferred Stock (put, conversion, call options, contingent dividend rate) are bifurcated and accounted for as a single, compound embedded derivative liability, valued at $40.4 million as of March 31, 2021[123][127][130] - Series A Warrants (5 million shares at $3.65/share) are classified as a liability due to net cash settlement upon change in control, with a fair value of $18.2 million as of March 31, 2021[131][132] - Series B Warrants (up to 100 million shares) were issued in February 2020 for $4.6 million, with exercise prices of $5.25 (cash) or $3.65 (Notes cancellation); terms were amended in June 2020 to allow cash payment for the lower exercise price for 31.5 million warrants; fair value was $226.0 million as of March 31, 2021[133][134] - Acacia issued $115 million in Senior Secured Notes to Starboard in June 2020, which were exchanged for New Notes issued by Merton Acquisition HoldCo LLC; the New Notes bear 6.00% interest and mature by July 15, 2021[136][138][139][141] 11. LF Equity Income Fund Portfolio Investment This note describes the acquisition of life sciences equity securities from LF Equity Income Fund and the associated financial impact - In April 2020, Acacia entered an Option Agreement to purchase life sciences equity securities from LF Equity Income Fund for £223.9 million (approx. $277.5 million)[144] - By December 31, 2020, all equity securities in the Portfolio Companies were transferred to Acacia, with the total purchase price held in an escrow account[145] - Acacia acquired a majority interest in MalinJ1, which was accounted for as an asset acquisition, with the cost basis allocated to an investment in Viamet Pharmaceuticals Holdings, LLC[146] Net Realized and Unrealized Gain on LF Fund Securities (In thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Change in fair value of equity securities - LF Fund securities | $37,176 | – | | Net realized and unrealized gain on investment in LF Fund securities | $37,176 | – | 12. Subsequent Events This note reports significant events that occurred after the balance sheet date but before the financial statements were issued - On May 4, 2021, Acacia made an additional $9.8 million investment in one of the Portfolio Companies[147] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Acacia's financial condition and operational results for the three months ended March 31, 2021, compared to the same period in 2020. It covers the company's business strategy, performance drivers, detailed analysis of revenues and expenses, and an overview of liquidity and capital resources, highlighting key changes and factors influencing financial outcomes General This section provides an overview of Acacia's business strategy, focusing on acquiring undervalued assets and intellectual property licensing - Acacia acquires undervalued businesses and operating assets, focusing on mature technology, healthcare, industrial, and financial segments, leveraging flexible capital, corporate governance, and expertise[150] - The company also maintains its legacy business of investing in intellectual property (IP) and related assets, engaging in licensing and enforcement of patented technologies[152] - Acacia has executed nearly 1,600 license agreements, generated over $1.7 billion in gross licensing revenue, and returned more than $812 million to patent partners[154] Executive Summary This section summarizes key operational and financial highlights, including patent licensing, strategic investments, and capital transactions - Operating activities focused on continued patent licensing and enforcement, with two pending patent infringement cases scheduled for trial in the next twelve months[156] - Patent-related legal expenses are expected to fluctuate due to trial dates, international enforcement, and strategic patent portfolio activities, with risks including increased costs, unsuccessful appeals, and legislative changes[157] - Acacia acquired one new patent portfolio (Wi-Fi 6 standard essential patents) in Q1 2021 and five in fiscal year 2020, with an estimated economic useful life of approximately five years[161] - The Starboard Investment involved the issuance of Series A Preferred Stock ($35 million) and Series A Warrants in November 2019, and Series B Warrants ($4.6 million) in February 2020, along with $115 million in Senior Secured Notes in June 2020[162][164][165] - In April 2020, Acacia entered an agreement to purchase life sciences equity securities from LF Equity Income Fund for approximately $277.5 million, with all securities transferred by December 31, 2020[166][167] Operating Activities This section discusses the factors influencing the company's revenue generation from patent licensing and enforcement activities - Revenues historically fluctuate significantly based on agreement dollar amounts, specific terms, number of agreements, timing and results of patent licensing negotiations and litigation, and external factors[170] - Management does not aim for smooth sequential periodic revenue growth, and potential revenues may be pushed into subsequent fiscal periods[171] - Revenues for Q1 2021 included fees from Wi-Fi 6 standard essential patents technology, while Q1 2020 included various technologies like Bone Wedge, MIPI DSI, GPS Navigation, and Flash Memory[171][172] Summary of Consolidated Results of Operations - Overview This section provides a high-level summary of the company's consolidated financial performance, highlighting key revenue, expense, and net loss figures Consolidated Results of Operations Overview (In thousands, except percentage change) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | % Change | | :----------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Revenues | $5,803 | $3,815 | $1,988 | 52% | | Operating costs and expenses | $11,479 | $7,384 | $4,095 | 55% | | Operating loss | $(5,676) | $(3,569) | $(2,107) | 59% | | Other expense, net | $(158,032) | $(9,060) | $(148,972) | N/A | | Loss before provision for income taxes | $(163,708) | $(12,629) | $(151,079) | N/A | | Net income (loss) attributable to Acacia Research Corporation | $(164,618) | $(11,291) | $(153,327) | N/A | - Revenues increased by 52% to $5.8 million in Q1 2021, while operating costs and expenses increased by 55% to $11.5 million[175] - The company reported a significantly higher net loss of $(164.6) million in Q1 2021, primarily driven by a substantial increase in 'Other expense, net'[175] Results of Operations - Three months ended March 31, 2021 compared with the three months ended March 31, 2020 This section provides a detailed comparative analysis of the company's financial results for the three months ended March 31, 2021 and 2020 - Revenues increased by $2.0 million to $5.8 million in Q1 2021, mainly due to new licensing agreements[176] - Loss before income taxes was $(163.7) million in Q1 2021, a significant increase from $(12.6) million in Q1 2020[176] - Key changes contributing to the loss include a $2.1 million increase in paid-up revenue, a $0.5 million increase in inventor royalties and contingent legal fees, a $1.2 million increase in litigation and licensing expenses, and a $0.8 million increase in amortization expense[176][177] - General and administrative expenses (excluding non-cash stock compensation) increased by $1.2 million, and non-cash stock compensation expense increased by $0.2 million[179] - A significant unrealized net loss of $199.0 million was incurred from fair value measurements of Series A and B warrants and embedded derivatives in Q1 2021[182] Revenues and Pretax Net Loss This section analyzes the drivers of revenue and the factors contributing to the company's pretax net loss for the reporting periods Revenue and Pretax Net Loss Overview (In thousands, except percentage change) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | % Change | | :----------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Revenues | $5,803 | $3,815 | $1,988 | 52% | | New agreements executed | 7 | 4 | 3 | 75% | | Licensing and enforcement programs generating revenues | 5 | 6 | (1) | (17%) | | Licensing and enforcement programs with initial revenues | 1 | – | 1 | N/A | | New patent portfolios | 1 | 2 | (1) | (50%) | | Loss before provision for income taxes | $(163,708) | $(12,629) | $(151,079) | (1,196%) | - The majority of revenue agreements executed provided for one-time, paid-up license fees for IP rights, primarily granted on a perpetual basis[186] Cost of Revenues This section details the components of cost of revenues, including inventor royalties, legal fees, and amortization expenses - Inventor royalties and contingent legal fee expenses fluctuate based on recognized revenues, agreement terms, and the mix of patent portfolios generating revenue[188] Inventor Royalties and Contingent Legal Fees (In thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | % Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Inventor royalties | $95 | $426 | $(331) | (78%) | | Contingent legal fees | $1,094 | $234 | $860 | 368% | - Litigation and licensing expenses - patents increased by $1.2 million (118%) in Q1 2021, primarily due to increased litigation support and third-party technical consulting expenses[189][192] - Amortization expense increased by $0.8 million (79%) in Q1 2021, driven by new patents acquired in 2020 and 2021[190][192] Operating Expenses This section analyzes the company's operating expenses, particularly general and administrative costs and non-cash stock compensation General and Administrative Expenses (In thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | % Change | | :----------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | General and administrative expenses | $5,716 | $4,546 | $1,170 | 26% | | Non-cash stock compensation expense - G&A | $450 | $332 | $118 | 36% | | Total general and administrative expenses | $6,166 | $4,878 | $1,288 | 26% | - Total general and administrative expenses increased by $1.3 million (26%) in Q1 2021, primarily due to higher corporate, general, and administrative costs (legal and business development), and increased variable performance-based compensation[193][194] Other Operating Income (Expense) This section reports other income and expenses, including gains from investment sales and changes in fair value of equity securities - In Q1 2021, there was no unrealized gain or loss on the Veritone investment, but a realized gain of $839 thousand was recognized from its sale[196] - Acacia recognized a realized gain of $819 thousand and an unrealized gain of $37.8 million from equity securities investments in Q1 2021[197] Income Taxes This section discusses the company's income tax provision, effective tax rate, and the impact of tax legislation Income Tax (Expense) Benefit and Effective Tax Rate | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Income tax (expense) benefit | $(10) | $1,338 | | Effective tax rate | (0%) | 11% | - The effective tax rate for Q1 2021 was (0.04%), lower than the U.S. federal statutory rate, primarily due to changes in valuation allowance and state income taxes[198] - Acacia recorded a full valuation allowance against its deferred tax assets as of March 31, 2021, as they are not expected to be realized[199] - The CARES Act, Consolidated Appropriations Act, and American Rescue Plan Act of 2021 did not have a material impact on the company's income tax provision[200][201] Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations, detailing cash flows and working capital - Primary liquidity sources are cash and cash equivalents, which management believes are sufficient for at least the next twelve months[203] - Consolidated cash, cash equivalents, equity securities at fair value, and restricted cash totaled $360.5 million at March 31, 2021, up from $309.6 million at December 31, 2020[205] Net Change in Cash, Cash Equivalents and Restricted Cash (In thousands) | Cash Flow Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Operating activities | $(6,120) | $(2,211) | | Investing activities | $(13,940) | $507 | | Financing activities | $(260) | $3,023 | | Increase (decrease) in cash and cash equivalents and restricted cash | $(20,320) | $1,319 | - Cash receipts from licensees decreased to $1.9 million in Q1 2021 from $6.1 million in Q1 2020, mainly due to timing of collections[209] - Cash outflows from operations increased to $6.1 million in Q1 2021 from $2.2 million in Q1 2020, due to fluctuations in revenue-related expenses and payment timing[209] - Investing activities used $13.9 million in Q1 2021, compared to providing $0.5 million in Q1 2020, primarily due to increased patent acquisitions and equity security purchases[211] - Financing activities used $0.26 million in Q1 2021, a decrease from providing $3.0 million in Q1 2020, influenced by Senior Secured Notes paydown and reissuance[214] - Working capital increased to $344.8 million at March 31, 2021, from $332.9 million at December 31, 2020[220] Critical Accounting Estimates This section highlights accounting policies requiring significant management judgment and estimates, which could materially affect financial results - Preparation of financial statements requires significant management judgment and estimates, particularly for revenue recognition, valuation of equity instruments, Series A preferred stock, embedded derivatives, warrants, stock-based compensation, patent impairment, and income taxes[36][221][222] Recently Adopted Accounting Pronouncements This section outlines the impact of recently adopted accounting standards on the company's financial statements - Acacia adopted ASU No. 2019-12, 'Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,' effective January 1, 2021, with no material impact on financial statements[103][223] Off-Balance Sheet Arrangements This section confirms the absence of any material off-balance sheet arrangements as of the reporting date - As of March 31, 2021, Acacia did not have any relationships with unconsolidated entities or financial partnerships that would constitute off-balance sheet arrangements[224] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses Acacia's exposure to market risks, primarily related to interest rate risk and investment risk in equity securities. The company aims to preserve principal while maximizing income from short-term investments and acknowledges the volatility and potential adverse impact on its equity investments - Acacia's short-term investment objective is to preserve principal and maximize income from equity securities at fair value without significantly increasing risk[226] - Investments are subject to interest rate risk and market risk, meaning changes in prevailing interest rates or equity market values can cause fluctuations in principal or market value[226] - An immediate 100 basis point increase in interest rates would not materially impact financial condition due to the short duration of the debt securities portfolio[226] - The carrying value of common stock and warrants in public and private companies was $330.9 million at March 31, 2021, and $285.8 million at December 31, 2020, exposing the company to significant investment risks[228] Item 4. Controls and Procedures This section details the evaluation of Acacia's disclosure controls and procedures, confirming their effectiveness as of March 31, 2021. It also states that there were no material changes in internal control over financial reporting during the quarter and acknowledges the inherent limitations of any control system - Acacia's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2021, ensuring timely and accurate information disclosure[229] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2021[231] - Management acknowledges the inherent limitations of control systems, which can provide only reasonable, not absolute, assurance against error or fraud[231] PART II. Other Information This part provides additional information on legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings This section outlines Acacia's involvement in various legal actions, primarily patent enforcement litigation. It highlights the potential for adverse rulings, sanctions, and significant resource consumption, while asserting that current liabilities are not expected to materially affect the company's financial position - Acacia is subject to various pending or threatened legal actions, including counterclaims in patent enforcement activities, but management believes ultimate liability will not materially affect financial position[233] - Patent enforcement actions carry risks of monetary sanctions or attorney's fees if courts rule against the company[234] - Litigation consumes significant financial and management resources, and favorable interim rulings may not predict ultimate resolution[235] - The lawsuit filed by Slingshot Technologies, LLC alleging misappropriation of confidential information is ongoing, with Monarch and Ms. Wolanyk's motions to dismiss granted[236] Item 1A. Risk Factors This section advises investors to carefully consider various risks associated with an investment in Acacia's common stock, including those detailed in the 10-Q and the Annual Report. It specifically addresses risks related to the COVID-19 pandemic and its potential impact on operations and the global economy - Investment in common stock involves risks, and investors should review all disclosures in the 10-Q and Annual Report[238] - Public health threats like COVID-19 could materially adversely affect operations, business partners, and the global economy[239] - While COVID-19 has not had a material direct impact to date and the business can operate remotely, the ongoing pandemic may present evolving risks that could adversely affect financial condition and results[240] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities or use of proceeds to report for the period Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company Item 5. Other Information This section states that there is no other information to report for the period Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including an employment agreement, certifications of principal executive and financial officers, and interactive data files - Exhibits include an Employment Agreement for Jason Soncini, certifications of Principal Executive Officer and Principal Financial Officer (pursuant to Rule 13a-14(a)/15d-14(a) and 18 U.S.C. Section 1350), and Interactive Data Files[241][242] Signatures This section confirms the official signing of the report by the Chief Executive Officer and Chief Financial Officer - The report was signed on May 17, 2021, by Clifford Press, Chief Executive Officer, and Richard Rosenstein, Chief Financial Officer, on behalf of Acacia Research Corporation[244]