Acacia Research
Annual Report 2016

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________________ FORM 10-K x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016 OR o TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . Commission File Number 0-26068 ____________________ (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation organization) 520 NEWPORT CENTER DRIVE, 12TH FLOOR NEWPORT BEACH, CA (Address of principal executive offices) 95-4405754 (I.R.S. Employer Identification No.) 92660 (Zip Code) Registrant’s telephone number, including area code: (949) 480-8300 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, $0.001 par value Name of Each Exchange on Which Registered The NASDAQ Stock Market, LLC Securities registered pursuant to Section 12(g) of the Act: None ____________________ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No R Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No R Indicate by check mark whether the registrant (1) has 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 filing requirements for the past 90 days. Yes R No £ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes R No £ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. R Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer £ Non-accelerated filer £ (Do not check if a smaller reporting company) Smaller reporting company £ Accelerated filer R Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £ No R The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant on June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, computed by reference to the last sale price of the registrant’s common stock as reported by The Nasdaq Global Select Market on such date, was approximately $216,379,000. This computation assumes that all executive officers and directors are affiliates of the registrant. Such assumption should not be deemed conclusive for any other purpose. As of March 6, 2017, 50,466,611 shares of common stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE In accordance with General Instruction G(3) to Form 10-K, portions of the registrant’s Definitive Proxy Statement on Schedule 14A for its Annual Meeting of Stockholders to be filed with the Commission within 120 days after the close of the fiscal year covered by this Annual Report on Form 10-K are incorporated by reference into Part III of this Annual Report on Form 10-K. Only those portions of the proxy statement that are specifically incorporated by reference herein shall constitute a part of this Annual Report on Form 10-K. ACACIA RESEARCH CORPORATION ANNUAL REPORT ON FORM 10-K FISCAL YEAR ENDED DECEMBER 31, 2016 TABLE OF CONTENTS PART I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Item 3. Item 4. Properties Legal Proceedings Mine Safety Disclosures PART II Item 5. Item 6. Item 7. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Item 9. Financial Statements and Supplementary Data Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Item 15. Exhibits, Financial Statement Schedules 2 Page 3 10 19 20 20 20 21 23 25 45 45 45 45 47 47 47 47 48 48 49 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS PART I As used in this Annual Report on Form 10-K, “we,” “us” and “our” refer to Acacia Research Corporation and/or its wholly and majority-owned operating subsidiaries. All patent portfolio investments, development, licensing and enforcement activities are conducted solely by certain of our wholly owned operating subsidiaries. This Annual Report on Form 10-K, or the annual report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which include, without limitation, statements about our future business operations and results, our strategies and competition, and other forward-looking statements included in this annual report. Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms or the negative of such terms. Such statements are based on management’s current expectations and are subject to a number of risks and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning earnings, capital expenditures, litigation, competition, regulatory matters, stock price volatility, 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 future economic conditions, legislative, regulatory and competitive developments in markets in which we and our subsidiaries operate, and other circumstances affecting anticipated revenues and costs, as more fully disclosed in our discussion of “Risk Factors” in Item 1A of Part I of this annual report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Additional factors that could cause such results to differ materially from those described in the forward- looking statements are set forth in connection with the forward-looking statements. ITEM 1. BUSINESS General Our operating subsidiaries partner with inventors and patent owners, applying our legal and technology expertise to patent assets to unlock the financial value in their patented inventions. We are an intermediary in the patent marketplace, bridging the gap between invention and application, and facilitating efficiency in connection with the monetization of patent assets. Our operating subsidiaries generate revenues and related cash flows from the granting of intellectual property rights for the use of patented technologies that our operating subsidiaries control or own. Our 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. Currently, on a consolidated basis, our operating subsidiaries own or control the rights to multiple patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries. We are a leader in licensing and enforcing patented technologies and have established a proven track record of licensing success with over 1,530 license agreements executed to date, across 192 patent portfolio licensing and enforcement programs. To date, we have generated gross licensing revenue of approximately $1.4 billion, and have returned more than $726 million to our patent partners. Corporate Information We were originally incorporated in California in January 1993 and reincorporated in Delaware in December 1999. Our website address is www.acaciaresearch.com. Reference in this annual report to this website address does not constitute incorporation by reference of the information contained on the website. We make our filings with the Securities and Exchange Commission, or the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and amendments to the foregoing reports, available free of charge on or through our website as soon as reasonably practicable after we file these reports with, or furnish such reports to, the SEC. In addition, we post the following information on our website: 3 • • • our corporate code of conduct, our code of conduct for our board of directors and our fraud policy; charters for our audit committee, nominating and corporate governance committee, disclosure committee and compensation committee; and applicable dividend related tax forms. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov. Patent Licensing and Enforcement Business Our operating subsidiaries invest in, license and enforce patented technologies. Our operating subsidiaries partner with inventors and patent owners, applying our legal and technology expertise to patent assets to unlock the financial value in their patented inventions. We are an intermediary in the patent marketplace, bridging the gap between invention and application, and facilitating efficiency in connection with the monetization of patent assets. Our operating subsidiaries generate revenues and related cash flows from the granting of intellectual property rights for the use of patented technologies that our operating subsidiaries control or own. Our 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. Refer to the section entitled “Patented Technologies” below for a partial summary of patent portfolios owned or controlled by certain of our operating subsidiaries. Patents are an important asset class worldwide. Due to legislative and regulatory changes, licensing and enforcing patents has become increasingly difficult for patent holders, necessitating an experienced, well-capitalized, licensing partner. We focus on the patent marketplace, and have emerged as a leading outsourced patent licensing and enforcement company for patent owners that have made the important choice to outsource their patent licensing and enforcement activities. We are a leader in patent licensing and enforcement and our operating subsidiaries have established a proven track record of licensing success with more than 1,530 license agreements executed to date. On a consolidated basis, to date, we have generated revenues from 192 patent portfolio licensing and enforcement programs. Our professional staff includes in-house patent attorneys, licensing, engineering and business development executives. We have partnered with patent owners, including individual inventors, universities, and large multi-national corporations in several technology sectors. These patent owners may have limited internal resources and/or expertise to effectively address the unauthorized use of their patented technologies, or may seek to effectively and efficiently monetize their portfolio of patented technologies on an outsourced basis. In a typical arrangement, our operating subsidiary will partner with a patent portfolio owner, acquiring rights in the patent portfolio or acquiring the patent portfolio outright, and in exchange, the original patent portfolio owner receives (i) a percentage of our operating subsidiary’s net recoveries from the licensing and enforcement of the patent portfolio, which we refer to as our Partnering Model, or (ii) an upfront payment for the purchase of the patent portfolio rights or the patent portfolio, which we refer to as our Purchasing Model, or (iii) a combination of the two, which we refer to as our Hybrid Partnering Model. Under U.S. law, a patent owner has the right to exclude others from making, selling or using their patented invention. A third-party infringes a patent by making, offering for sale, selling, or using a patented invention without a license from the patent owner. Unfortunately, in the majority of cases, infringers are generally unwilling, at least initially, to negotiate or pay reasonable license fees for their unauthorized use of third-party patents and will typically fight any allegations of patent infringement. Inventors and/or patent holders without sufficient legal, financial and/or expert technical resources to bring and continue the pursuit of costly and complex patent infringement actions are often blatantly ignored. As a result of the common reluctance of patent infringers to negotiate and ultimately take a patent license for the use of patented technologies without at least the threat of legal action, patent licensing and enforcement often begins with the filing of patent enforcement litigation. However, most patent infringement litigation settles out of court at amounts that are related to 4 the strength of the patent and the value of the invention in the infringer’s products or services. We execute agreements that grant rights in our patents to users of our patented technologies. Our agreements can be negotiated without the filing of patent litigation, or negotiated within the context of ongoing patent litigation, depending on the specific facts and circumstances. Patents and patent infringement are complex and highly technical subject areas. Our professionals seek to identify high-quality but undervalued patent portfolios in a variety of industries. We combine our legal expertise, technology expertise, and our extensive knowledge of, and experience in, the patent licensing ecosystem, seeking to uncover important patent assets and promote efficiency in the patent licensing and enforcement industry. Our relationship with patent owners is the cornerstone of our operating subsidiaries’ corporate strategy. We assume all responsibility for advancing operational expenses while pursuing a patent licensing and enforcement program, and then, when applicable, share net licensing revenue with our patent partners as that program matures, on a pre-arranged and negotiated basis. We may also provide upfront capital to the patent owner as an advance against future licensing revenue. We are a principal in the licensing and enforcement effort, with our operating subsidiaries obtaining control of the rights in the patent portfolio, or control of the patent portfolio outright. Business Model and Strategy - Overview We have the flexibility to structure arrangements in a number of ways to address the needs and specific sets of circumstances presented by each of our unique patent partners, examples of which include the following: Generally, we maintain a 100% preferred rate of return until all deployed capital and advanced operational costs are recovered by us. Upon recovery of these costs, the net profit revenue share with patent partner commences, if applicable. Key Elements of Business Strategy Patent licensing and enforcement can be an effective and efficient way to maximize the profit potential of a patent, or patents, that are being practiced by third-parties without authorization . A patent license agreement grants a third-party user of an invention specific patent rights to the patented invention in exchange for patent license fees. Patent licensing can be critical for patents that are owned by those that have not to date converted their patented invention into a profitable product or service, and therefore, are not generating revenues from their patented inventions. These include owners of the following categories of patented inventions: • • • Inventions that were ahead of the technology curve and hence, there is no existing ecosystem to support the patented products or services at the time they are introduced to market; Inventions that can only be deployed in very capital-intensive industries, such as semiconductor fabrication, energy, or medical sectors, but whose owners do not have sufficient amounts of capital to deploy; and Inventions that, for one reason or another, are no longer being practiced by the patent owner. Our patent licensing business provides patent holders with an opportunity to generate income from their patented inventions being practiced by third- parties without authorization and from third-parties that desire to practice their patented inventions with authorization. Our patent licensing and enforcement business strategy, conducted solely by our operating subsidiaries, includes three fundamental elements, as follows: 5 • Patent Discovery - Discover potentially valuable patents or patent portfolios. • Assessment of Economic Value - Work internally and with external experts to evaluate the use of the patented invention(s) in the relevant marketplace and assess a patents or patent portfolios’ expected economic value. • Licensing and Enforcement - License those users wanting to utilize the patented invention with authorization. For unauthorized users of the patented invention, enter into license negotiations and, if necessary, litigation to monetize the patent based on its assessed value. Patent Discovery. The patent process breeds, encourages and sustains innovation and invention by granting a limited monopoly to the inventor in exchange for sharing the invention with the public. Certain technologies, become core technologies in the way products and services are manufactured, sold or delivered by companies across a wide array of industries. Our operating subsidiaries seek to identify core, patented technologies that have been or are anticipated to be widely adopted by third-parties in connection with the manufacture, sale or use of products and services. Patent discovery occurs when we reach out to patent holders who may be disenfranchised, or when patent holders approach us seeking assistance with the monetization and enforcement of their patent portfolios. Assessment of Economic Value. Subsequent to the patent discovery process, our executives work internally and/or with external industry experts in the specific technology field, to evaluate the patented invention and its adoption and implementation in the marketplace. There are three key factors, among a number of factors, to consider when analyzing a patent and determining a patent’s value: (1) Infringement, (2) Validity and (3) Enforceability. • Infringement. To determine infringement, we must first identify third-parties that are practicing the invention(s) covered by the patent without obtaining permission from the patent owner to do so. A key tool in determining whether or not a company is infringing a patent is a claim chart. A claim chart demonstrates how the manufacture, sale, or use of an existing product compares against the claims of the patent. • Invalidity. The three main factors analyzed to determine invalidity are (1) anticipation, (2) obviousness, and (3) the existence of non-patentable subject matter. ◦ Anticipation occurs when the claims of the patent are entirely revealed within a single piece of prior art. “Prior art” is a technical term that generally refers to an invention that existed prior to the grant of the patent being analyzed. ◦ Even if the claims of the patent are not entirely revealed within a single piece of prior art, the patent may still be invalid if determined to be “obvious” under the law. “Obvious” essentially means that the differences between prior art and the patented invention are so slight such that they would have been obvious at the time of invention to one who is skilled in the subject matter being patented. ◦ Even if the patent lacks anticipation and obviousness, it may still be invalid if its subject matter is un-patentable by law. Un-patentable subject matter includes naturally occurring things, abstract concepts, or algorithms that perform an ordinary function. • Enforceability. A myriad of factors are analyzed to determine whether or not a patent is enforceable, including whether or not there has been patent misuse, or whether or not there are antitrust violations associated with the patent. Due to the inherently complex nature of patent law, only a court or specific administrative body, such as the International Trade Commission, can make a decision whether a patent is infringed, valid and enforceable; however, we employ our wealth of expertise to make the best assessment possible given a specific fact pattern and set of circumstances. We estimate a patent’s economic value by evaluating the expected value of the license revenue stream based on past, present and future revenue of infringing products or services, and the risk that a court will disagree with our infringement, validity or enforcement assessments of the patent. The processes and procedures employed in connection with the evaluation of a specific patent portfolio for future investment, licensing and enforcement are tailored and unique to each specific situation and can vary widely based on the specific facts and circumstances of a specific patent portfolio, such as the related technology, related industry and certain other factors. Some of the key components of our processes and procedures may include: 6 • Utilizing our staff of in-house patent attorneys, licensing, engineering and business development executives to conduct our tailored patent investment and evaluation processes and procedures. We may also leverage the expertise of external specialists and technology consultants. • • Identifying emerging growth areas where patented technologies will play a vital role in connection with the manufacture or sale of products and services. Identifying core, patented technologies that have been or are anticipated to be widely adopted by third-parties in connection with the manufacture or sale of products and services. • Considering the impact of subtleties in the language of a patent, recorded interactions with the patent office, evaluating prior art and literature and considering the impact on the potential licensing and enforcement revenue that can be derived from a patent or patent portfolio. • Evaluating the strength of a patent portfolio, including consideration of the types of claims and the number of claims potentially infringed by third-parties, and the results of any prior art searches or analysis, before the decision is made to allocate resources to a patent portfolio investment or an effective licensing and enforcement effort. • • Identifying and considering potential problem areas, if any, and determining whether potential problem areas can be overcome prior to acquiring a patent portfolio or launching an effective licensing program. Identifying potential infringers, industries within which the potential infringers exist, longevity of the patented technology, and a variety of other factors that directly impact the magnitude and potential success of a licensing and enforcement program. Licensing and Enforcement. The final step in the patent licensing and enforcement process is to seek to monetize the patent portfolio by securing license agreements based on the patents estimated value. While we prefer to convince unauthorized users of our patented inventions of the value of the patented invention and secure a license agreement in a non-litigious manner, many infringers refuse to take such licenses even when confronted with substantial and persuasive evidence of infringement, validity, enforceability and significant economic value. As a result, often we must resort to litigation to demonstrate and prove infringement and ultimately induce infringers to take a license. We have found it effective to negotiate licenses concurrently with litigation due to the fact that litigation necessitates and facilitates an information exchange that helps both sides assess the value of a patent and make informed decisions. Also, litigation eventually leads to a court’s judgment. When a court agrees with our assessment of a patent, this judgment stops recalcitrant infringers from utilizing our patented technology indefinitely, without appropriate authorization. Our operating subsidiaries engage highly competent and experienced patent lawyers to prosecute their patent portfolio litigation. It is imperative to be persistent and patient throughout the litigation process as it typically takes 18-36 months from the filing date of a lawsuit to yield a license agreement from a potential licensee. Often, it takes longer to secure a final court judgment. Patent license negotiations and litigation initiated by our operating subsidiaries usually lead to serious and thoughtful discussions with the unauthorized users of the patented inventions. The result can be quite favorable with the user being granted rights under the patents for the patented invention in its products and services in exchange for financial remuneration. This remuneration is typically shared between our operating subsidiary and the patent holder. Patent Prosecution. Concurrent with our patent litigation and licensing negotiation activities, we often assist patent holders with the acquisition of additional rights associated with their inventions both in the United States and across the globe. This is referred to as “continued prosecution,” and is done to further define the boundaries of an invention. It can also be effective to correct technical deficiencies discovered within a patent that may have been identified in the negotiation and litigation process. These deficiencies, if not appropriately addressed, can limit the value of patents that are otherwise infringed, valid, and enforceable. Investments in Patent Portfolios. Neither we nor our operating subsidiaries invent new technologies or products; rather, we depend upon the identification and investment in patents and inventions and companies that own intellectual property through our relationships with inventors, universities, research institutions, technology companies and others. If our operating subsidiaries are unable to maintain those relationships and to continue to identify and grow new relationships, then we may not be able to identify new technology-based opportunities for sustainable revenue and /or revenue growth. Our current or future relationships may not provide the volume or quality of technologies necessary to sustain our licensing and enforcement business. In some cases, universities and other technology sources compete against us as they seek to develop and commercialize technologies. Universities may receive financing for basic research in exchange for the exclusive right to commercialize resulting inventions. These and other strategies employed by potential partners may reduce the number 7 of technology sources and potential clients to whom we can market our solutions. If we are unable to maintain current relationships and sources of technology or to secure new relationships and sources of technology, such inability may have a material adverse effect on our revenues, operating results, financial condition and ability to maintain our licensing and enforcement business. For example, for the year ended December 31, 2016, we obtained control of only 2 new patent portfolios. Further, in fiscal year 2015, we obtained control of 3 new patent portfolios, compared to 6 new patent portfolios, and 25 new patent portfolios in fiscal years 2014 and 2013, respectively. This decrease in our patent portfolio intake reflects in part our strategic decision in 2013 to shift the focus of our operating business to serving a smaller number of customers, each having higher quality patent portfolios. As a result, our gross number of patent portfolio acquisitions has decreased significantly. This decrease in our patent portfolio intake also reflects in part industry trends impacting our ability to acquire patent portfolios. For example, legislative and legal changes have increased the complexity of patent enforcement actions and may significantly affect the market availability of suitable patent portfolios for acquisition. These industry trends have continued, and as a result, our recent and future patent portfolio intake has been and may continue to be negatively impacted, resulting in further decreases in future revenue generating opportunities, and continued negative adverse impacts on the sustainability of our licensing and enforcement business. We continue to experience significant adverse challenges with respect to our patent intake efforts, and if these adverse challenges continue, our revenues will decline and we will be unable to profitably sustain our licensing and enforcement business going forward. As a result of the foregoing, our operating subsidiaries may from time to time evaluate other business opportunities which compliment, or supplement, our primary licensing and enforcement business and leverage our intellectual property expertise. For example, in August 2016, we announced the formation of a strategic partnership with Veritone, Inc. (“Veritone”), a leading cloud-based Artificial Intelligence (“AI”) technology company that is pioneering next generation search and analytics through their proprietary Cognitive Media Platform™. Under the partnership, we expect to leverage our IP expertise to assist Veritone with building its patent portfolio and executing upon its overall intellectual property strategy. Refer to "Management's Discussion and Analysis" elsewhere herein for additional information. Patented Technologies Currently, on a consolidated basis, our operating subsidiaries own or control the rights to patent portfolios with future patent expiration dates ranging from 2017 to approximately 2033, covering technologies used in a variety of industries, a sample of which includes the following: Operating Subsidiary Industry Description American Vehicular Sciences, LLC Body Science, LLC Transportation And Automotive Peripheral Vascular Devices Cellular Communications Equipment, LLC Telecommunications / Smartphones Patents from Automotive Technologies International, or ATI and Intelligent Technologies International, or ITI, relating to numerous automotive safety, navigation and diagnostics technologies. Patents relating to apparatus for use in wireless physiological monitoring. Portfolio covers Wireless Infrastructure and User Equipment Technology relating to second (2G), third (3G) and fourth (4G) generation wireless technologies and to air interface technology used in 2G, 3G and 4G wireless networks. Endotach, LLC Peripheral Vascular Devices Patents relating to stent grafts. Innovative Display Technologies, LLC Telecommunications / Smartphones Portfolio generally relates to back-lighting for displays and the patented technology covers various improvements to LCD displays. Lambda Optical Solutions, LLC Communications Patents relating to Optical Switching Technology. LifePort Sciences, LLC LifeScreen Sciences, LLC LifeShield Sciences, LLC Peripheral Vascular Devices Peripheral Vascular Devices Peripheral Vascular Devices Multiple patents and applications relating to, among other things, stent grafts, stent graft delivery systems and stent placement procedures. Portfolio consists of multiple patents and applications relating to, among other things, vena cava filters, embolic protection and associated delivery systems. Portfolio consists of multiple patents and applications relating to stent grafts, and stent graft delivery systems. 8 Limestone Memory Systems LLC Memory This portfolio covers both DRAM and flash memory technologies used in virtually all electronic communications and computing devices. Nexus Display Technologies, LLC Consumer Electronics Patent portfolio relating to high speed digital display interface technology used in industry standards such as DisplayPort and DisplayPort-related technologies and also MIPI DSI. Telecommunications / Smartphones Portfolios relate to high speed circuit interconnect, display control technology and content security used in consumer electronics, PCs and mobile devices such as smartphones, tablets, and laptops. Optimum Content Protection, LLC and Super Interconnect Technologies, LLC Parthenon Unified Memory Architecture, LLC Power Optimized Memory Solutions LLC Semiconductor Memory Rapid Completions LLC Energy Efficiency Patents relate to the use of shared memory in multimedia processing systems such as mobile phones, tablets and other consumer electronic devices. This portfolio covers technologies and devices similar to those of the Limestone portfolio, as well as Solid State Drives (SSD’s). Patents related to multi-zonal completion of horizontal wells including ball-drop, sliding sleeve and packer technology for use in the hydraulic fracturing of both tight and conventional oil and gas reservoirs. This technology has been applied in oilfields across North America and worldwide and has contributed significantly to the growth in oil and gas production from unconventional shale formations. Roman Memory Solutions LLC Memory Patents covering circuits used in DRAM and Flash Memory. Saint Lawrence Communications, LLC Wireless Patents relating to Speech Codecs used in Wireless and Wireline Systems. Unified Messaging Solutions, LLC Communications Patent for Messaging Technology. Revenues for the periods presented include revenues generated from several of the portfolios summarized above and other technology patent portfolios owned or controlled by us. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview” for a summary of patent portfolios generating revenues for the applicable periods presented. Competition We expect to encounter increased competition in the area of patent portfolio investments and enforcement. This includes an increase in the number of competitors seeking to invest in the same or similar patents and technologies that we may seek to invest in. Non-practicing entities such as RPX, AST, Intellectual Ventures, Wi-LAN, Conversant, Round Rock Research LLC, IPvalue Management Inc., Vringo Inc., VirnetX and Pendrell Corporation compete in acquiring rights to patents, and we expect more entities to enter the market. We also compete with financial firms, corporate buyers and others acquiring IP. Many of these competitors may have more financial and human resources than our operating subsidiaries. We may find more companies entering the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we currently rely upon to generate future revenue. Companies or other entities may develop competing technologies that offer better or less expensive alternatives to our patented technologies that we may invest in and license. Many potential competitors may have significantly greater resources than the resources that our operating subsidiaries possess. Such technological advances or entirely different approaches developed by one or more of our competitors could render certain of the technologies owned or controlled by our operating subsidiaries obsolete and/or uneconomical. Employees As of December 31, 2016, on a consolidated basis, we had 27 full-time employees. Neither we, nor any of our subsidiaries, are a party to any collective bargaining agreement. We consider our employee relations to be good. 9 ITEM 1A. RISK FACTORS The following is a summary of certain risks we face in our business. They are not the only risks we face. Additional risks that we do not yet know of or that we currently believe are immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition and results of operations could be materially adversely affected, and the trading price of our common stock could decline significantly. All patent portfolio investments, development, licensing and enforcement activities are conducted solely by certain of our wholly and majority-owned operating subsidiaries. We have a history of losses and may incur additional losses in the future. Risks Related to Our Business We reported a net loss of $54.1 million (includes $42.3 million of noncash patent impairment charges), $160.0 million (includes $104.9 million of noncash goodwill and patent impairment charges) and $66.0 million (includes $3.5 million of noncash patent impairment charges) for the years ended December 31, 2016, 2015 and 2014, and on a cumulative basis, we have sustained substantial losses since our inception. As of December 31, 2016, our accumulated deficit was $342.2 million. As of December 31, 2016, we had approximately $158.5 million in cash and cash equivalents, restricted cash and short-term investments and working capital of $160.3 million. We expect to continue incurring significant legal, general and administrative expenses in connection with our operations. As a result, we anticipate that we may incur losses in the future. We believe, however, that our current cash and cash equivalents and investments will be sufficient to finance our anticipated capital and operating requirements for at least the next twelve months. Our ability to use net operating losses and certain other tax attributes is uncertain and may be limited. Our ability to use our federal and state net operating losses to offset potential future taxable income and related income taxes that would otherwise be due is dependent upon our generation of future taxable income before the expiration dates of the net operating losses, and we cannot predict with certainty when, or whether, we will generate sufficient taxable income to use all of our net operating losses. In addition, utilization of net operating losses to offset potential future taxable income and related income taxes that would otherwise be due is subject to annual limitations under the “ownership change” provisions of Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, and similar state provisions, which may result in the expiration of net operating losses before future utilization. In general, under the Code, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating losses and other pre-change tax attributes (such as research and development credit carryforwards) to offset its post-change taxable income or taxes may be limited. Changes in our stock ownership, some of which may be outside of our control, could in the future result in an ownership change. Although we have completed studies to provide reasonable assurance that an ownership change limitation would not apply, we cannot be certain that a taxing authority would reach the same conclusion. If, after a review or audit, an ownership change limitation were to apply, utilization of our domestic net operating losses and tax credit carryforwards could be limited in future periods and a portion of the carryforwards could expire before being available to reduce future income tax liabilities. If we encounter unforeseen difficulties with our business or operations in the future that require us to obtain additional working capital, and we cannot obtain additional working capital on favorable terms, or at all, our business may suffer. Our consolidated cash and cash equivalents, restricted cash and short-term investments totaled $158.5 million and $145.9 million at December 31, 2016 and 2015, respectively. To date, we have relied primarily upon net cash flows from our operations and from the public and private sale of equity securities to generate the working capital needed to finance our operations. We may encounter unforeseen difficulties with our business or operations in the future that may deplete our capital resources more rapidly than anticipated. As a result, we may be required to obtain additional working capital in the future through bank credit facilities, public or private debt or equity financings, or otherwise. If we are required to raise additional working capital in the future, such financing may be unavailable to us on favorable terms, if at all, or may be dilutive to our existing stockholders. If we fail to obtain additional working capital, as and when needed, such failure could have a material adverse impact on our business, results of operations and financial condition. 10 Failure to effectively manage our operational changes could strain our managerial, operational and financial resources and could adversely affect our business and operating results. Our recent operational changes have placed, and are expected to continue to place, a strain on our managerial, operational and financial resources and systems. Operational changes primarily relate to the resignation of Matthew Vella, our former Chief Executive Officer and President in December 2015, the appointment of Marvin Key, Chief Executive Officer of Acacia Research Group LLC, to Chief Executive Officer of Acacia Research Corporation in December 2015, and reductions in employee headcount across our licensing, business development and engineering functions in 2015 and 2016. Further, as our operating subsidiary companies’ businesses grow or change, we will be required to continue to manage multiple relationships. Any further growth or change by us or our subsidiary companies, or an increase in the number of our strategic relationships, may place additional strain on our managerial, operational and financial resources and systems. Although we may not grow, if we fail to manage our growth or other operational changes effectively or to develop, expand or otherwise modify our managerial, operational and financial resources and systems, our business and financial results will be materially harmed. Potential patent portfolio investments may present risks, and we may be unable to achieve the financial or other goals intended at the time of any potential investment. Our future growth depends, in part, on our ability to invest in patented technologies, patent portfolios, or companies holding such patented technologies and patent portfolios. Accordingly, we have engaged in patent portfolio investments to expand our patent portfolios and we intend to continue to explore such investments. Such investments are subject to numerous risks, including the following: • • • • • • • our inability to enter into a definitive agreement with respect to any potential patent portfolio investment, or if we are able to enter into such agreement, our inability to consummate the potential investment transaction; difficulty integrating the operations, technology and personnel of the acquired entity; our inability to achieve the anticipated financial and other benefits of the specific patent portfolio investment; our inability to retain key personnel from the acquired company, if necessary; difficulty in maintaining controls, procedures and policies during the transition and integration process; diversion of our management’s attention from other business concerns; and failure of our due diligence process to identify significant issues, including issues with respect to patented technologies and patent portfolios, and other legal and financial contingencies. If we are unable to manage these risks effectively as part of any patent portfolio investment, our business could be adversely affected. Our revenues are unpredictable, and this may harm our financial condition. We believe that our cash and cash equivalents and short-term investment balances, anticipated cash flow from operations, proceeds from prior offerings of our common stock (refer to “Liquidity and Capital Resources” below) and other external sources of available credit, will be sufficient to meet our cash requirements through at least March 2018 and for the foreseeable future. However, due to the nature of our licensing business and uncertainties regarding the amount and timing of the receipt of license and other fees from potential infringers, stemming primarily from uncertainties regarding the outcome of enforcement actions, rates of adoption of our patented technologies, the growth rates of our existing licensees and certain other factors, our revenues may vary significantly from quarter to quarter and period to period, which could make our business difficult to manage, adversely affect our business and operating results, cause our quarterly and periodic results to fall below market expectations and adversely affect the market price of our common stock. Our operating subsidiaries depend upon relationships with others to provide technology-based opportunities that can develop into profitable royalty- bearing licenses, and if they are unable to maintain and generate new relationships, then they may not be able to sustain existing levels of revenue or increase revenue. Neither we nor our operating subsidiaries invent new technologies or products; rather, we depend upon the identification and investment in patents and inventions and companies that own intellectual property through our relationships 11 with inventors, universities, research institutions, technology companies and others. If our operating subsidiaries are unable to maintain those relationships and to continue to identify and grow new relationships, then we may not be able to identify new technology-based opportunities for sustainable revenue and /or revenue growth. Our current or future relationships may not provide the volume or quality of technologies necessary to sustain our licensing and enforcement business. In some cases, universities and other technology sources compete against us as they seek to develop and commercialize technologies. Universities may receive financing for basic research in exchange for the exclusive right to commercialize resulting inventions. These and other strategies employed by potential partners may reduce the number of technology sources and potential clients to whom we can market our solutions. If we are unable to maintain current relationships and sources of technology or to secure new relationships and sources of technology, such inability may have a material adverse effect on our revenues, operating results, financial condition and ability to maintain our licensing and enforcement business. For example, for the year ended December 31, 2016, we obtained control of only 2 new patent portfolios. Further, in fiscal year 2015, we obtained control of 3 new patent portfolios, compared to 6 new patent portfolios, and 25 new patent portfolios in fiscal years 2014 and 2013, respectively. This decrease in our patent portfolio intake reflects in part our strategic decision in 2013 to shift the focus of our operating business to serving a smaller number of customers, each having higher quality patent portfolios. As a result, our gross number of patent portfolio acquisitions has decreased significantly. This decrease in our patent portfolio intake also reflects in part industry trends impacting our ability to acquire patent portfolios. For example, legislative and legal changes have increased the complexity of patent enforcement actions and may significantly affect the market availability of suitable patent portfolios for acquisition. These industry trends have continued, and as a result, our recent and future patent portfolio intake has been and may continue to be negatively impacted, resulting in further decreases in future revenue generating opportunities, and continued negative adverse impacts on the sustainability of our licensing and enforcement business. We continue to experience significant adverse challenges with respect to our patent intake efforts, and if these adverse challenges continue, our revenues will decline and we will be unable to profitably sustain our licensing and enforcement business going forward. As a result of the foregoing, our operating subsidiaries may from time to time evaluate other business opportunities which compliment, or supplement, our primary licensing and enforcement business and leverage our intellectual property expertise. The success of our operating subsidiaries depends in part upon their ability to retain the best legal counsel to represent them in patent enforcement litigation. The success of our licensing business depends upon our operating subsidiaries’ ability to retain the best legal counsel to prosecute patent infringement litigation. As our operating subsidiaries’ patent enforcement actions increase, it will become more difficult to find the best legal counsel to handle all of our cases because many of the best law firms may have a conflict of interest that prevents their representation of our subsidiaries. We spend a significant amount of our financial and management resources to pursue our current litigation matters. We believe that these litigation matters and others that we may in the future determine to pursue could continue for years and continue to consume significant financial and management resources. The counterparties to our litigation are sometimes large, well-financed companies with substantially greater resources than us. We cannot assure that any of our current or future litigation matters will result in a favorable outcome for us. In addition, in part due to the appeals process and other legal processes, even if we obtain favorable interim rulings or verdicts in particular litigation matters, they may not be predictive of the ultimate resolution of the dispute. Also, we cannot assure that we will not be exposed to claims or sanctions against us which may be costly or impossible for us to defend. Unfavorable or adverse outcomes may result in losses, exhaustion of financial resources or other adverse effects which could encumber our ability to develop and commercialize products. In connection with any of our patent enforcement actions, it is possible that a defendant may request and/or a court may rule that we have violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material, and if required to be paid by us or our operating subsidiaries, could materially harm our operating results and our financial position. 12 Our operating subsidiaries, in certain circumstances, rely on representations, warranties and opinions made by third-parties that, if determined to be false or inaccurate, may expose us and our operating subsidiaries to certain material liabilities. From time to time, our operating subsidiaries may rely upon representations and warranties made by third-parties from whom our operating subsidiaries acquired patents or the exclusive rights to license and enforce patents. We also may rely upon the opinions of purported experts. In certain instances, we may not have the opportunity to independently investigate and verify the facts upon which such representations, warranties, and opinions are made. By relying on these representations, warranties and opinions, our operating subsidiaries may be exposed to liabilities in connection with the licensing and enforcement of certain patents and patent rights which could have a material adverse effect on our operating results and financial condition. In connection with patent enforcement actions conducted by certain of our subsidiaries, a court may rule that we or our subsidiaries have violated certain statutory, regulatory, federal, local or governing rules or standards, which may expose us and our operating subsidiaries to certain material liabilities. In connection with any of our patent enforcement actions, it is possible that a defendant may request and/or a court may rule that we have violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material, and if we or our operating subsidiaries are required to pay such monetary sanctions, attorneys’ fees and/or expenses, such payment could materially harm our operating results and our financial position. In connection with patent enforcement actions conducted by certain of our subsidiaries, a court may find the patents invalid, not infringed or unenforceable and/or the U.S. Patent and Trademark Office, or the USPTO, or other relevant patent office, may either invalidate the patents or materially narrow the scope of their claims during the course of a reexamination, opposition or other such proceeding. Patent litigation is inherently risky and the outcome is uncertain. Some of the parties that we believe infringe on our patents are large and well- financed companies with substantially greater resources than ours. We believe that these parties would devote a substantial amount of resources in an attempt to avoid or limit a finding that they are liable for infringing on our patents or, in the event liability is found, to avoid or limit the amount of associated damages. In addition, there is a risk that these parties may file reexaminations or other proceedings with the USPTO or other government agencies in the United States or abroad in an attempt to invalidate, narrow the scope or render unenforceable the patents we own or control. If this were to occur, it may have a material adverse effect on the viability of our company and our operations. In addition, it is difficult to predict the outcome of patent enforcement litigation at any level. In the United States, there is a higher rate of appeals in patent enforcement litigation than standard business litigation. The defendant to any case we bring, may file as many appeals as allowed by right, including to the first, second and/or final courts of appeal (in the United States those courts would be the Federal Circuit and Supreme Court, respectively). Such appeals are expensive and time-consuming, and the outcomes of such appeals are sometimes unpredictable, resulting in increased costs and reduced or delayed revenue. Our licensing cycle is lengthy and costly, and our legal and sales efforts may be unsuccessful. We expect our operating subsidiaries to incur significant general and administrative, legal and sales expenses prior to entering into license agreements and generating license revenues. We will also spend considerable resources educating prospective licensees on the benefits of a license arrangement with us. As such, we may incur significant losses in any particular period before any associated revenue stream begins. If our efforts to educate prospective licensees on the benefits of a license arrangement are unsuccessful, we may need to pursue litigation or other enforcement action to protect our patent rights. We may also need to litigate to enforce the terms of our existing license agreements, protect our trade secrets, or determine the validity and scope of the proprietary rights of others. Enforcement proceedings are typically protracted and complex. The costs are typically substantial, and the outcomes are unpredictable. Enforcement actions will divert our managerial, technical, legal and financial resources from business operations. 13 Failure to maintain effective internal control over our financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could cause our financial reports to be inaccurate We are required pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, to maintain internal control over financial reporting and to assess and report on the effectiveness of those controls. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. As a result of a material weakness identified in our internal control over financial reporting relating to the accounting for infrequent, unusual, or complex accounting matters, our management assessed the effectiveness of our disclosure controls and procedures and determined that our disclosure controls and procedures were not effective as of September 30, 2016. We developed a plan to address the material weakness and enhance our control procedures related to infrequent, unusual, or complex accounting matters and implemented the revised procedures in the fourth quarter of 2016. However, due to the short period of time and limited use of this new control as contemplated by the applicable Public Company Accounting Oversight Board standards, we are unable to conclude in this report as to the operating effectiveness of our enhanced review procedures and documentation standards as of December 31, 2016. Our goal is to remediate this material weakness as contemplated by the standards by the end of the first quarter of 2017, subject to there being sufficient opportunities to conclude, through testing, that the enhanced control is operating effectively. While management believes the enhanced internal controls implemented will remediate the material weakness identified, there is no assurance that the changes will remediate the identified material weakness or that the controls will prevent or detect future material weaknesses. If we are not able to maintain effective internal control over financial reporting, our financial statements, including related disclosures, may be inaccurate, which could have a material adverse effect on our business. Risks Related to Our Industry Our exposure to uncontrollable outside influences, including new legislation, court rulings or actions by the USPTO, could adversely affect our licensing and enforcement business and results of operations. Our licensing and enforcement business is subject to numerous risks from outside influences, including the following: New legislation, regulations or rules related to obtaining patents or enforcing patents could significantly increase our operating costs and decrease our revenue. Our operating subsidiaries invest in patents with enforcement opportunities and spend a significant amount of resources to enforce those patents. If new legislation, regulations or rules are implemented by Congress, the USPTO or the courts that impact the patent application process, the patent enforcement process or the rights of patent holders, such changes could negatively affect our business. Recently, United States patent laws were amended with the enactment of the Leahy-Smith America Invents Act, or the America Invents Act, which took effect on March 16, 2013. The America Invents Act includes a number of significant changes to U.S. patent law. In general, the legislation attempts to address issues surrounding the enforceability of patents and the increase in patent litigation by, among other things, establishing new procedures for patent litigation. For example, the America Invents Act changes the way that parties may be joined in patent infringement actions, increasing the likelihood that such actions will need to be brought against individual allegedly- infringing parties by their respective individual actions or activities. In addition, the America Invents Act enacted a new inter-partes review process at the USPTO which can be, and often is, used by defendants, and other individuals and entities, to separately challenge the validity of any patent. The IPR process of the AIA has in many instances increased costs for licensing and litigation and has resulted in the loss of certain portfolio patents which in some cases may have negatively impacted the value of those portfolios. The America Invents Act and its implementation has increased the uncertainties and costs surrounding the enforcement of our patented technologies, which in certain circumstances could have a material adverse effect on our business and financial condition. The U.S. Department of Justice, or the DOJ, has conducted reviews of the patent system to evaluate the impact of patent assertion entities on industries in which those patents relate. It is possible that the findings and recommendations of the DOJ could impact the ability to effectively license and enforce standards-essential patents and could increase the uncertainties and costs surrounding the enforcement of any such patented technologies. Also, in 2014, the Federal Trade Commission, or FTC, initiated a study under Section 6(b) of the Federal Trade Commission Act to evaluate the patent assertion practice and market impact of Patent Assertion Entities, or PAEs. The FTC’s initial notice and request for public comment relating to the PAE study appeared in the Federal Register on October 3, 2013. We received and responded to a request for information as part of this FTC study. The FTC study entitled, "Patent Assertion Entity Activity" was released in October 2016. 14 Finally, new rules regarding the burden of proof in patent enforcement actions could significantly increase the cost of our enforcement actions, and new standards or limitations on liability for patent infringement could negatively impact our revenue derived from such enforcement actions. In addition, recent federal court decisions have lowered the threshold for obtaining attorneys’ fees in patent infringement cases and increased the level of deference given to a district court’s fee-shifting determination. These decisions may make it easier for district courts to shift a prevailing party’s attorneys' fees to a non- prevailing party if the district court believes that the case was weak or conducted in an abusive manner. As a result, defendants in patent infringement actions brought by non-practicing entities may elect not to settle because these decisions make it much easier for defendants to get attorneys’ fees. Changes in patent law could adversely impact our business. Patent laws may continue to change, and may alter the historically consistent protections afforded to owners of patent rights. Such changes may not be advantageous for us and may make it more difficult to obtain adequate patent protection to enforce our patents against infringing parties. Increased focus on the growing number of patent-related lawsuits may result in legislative changes which increase our costs and related risks of asserting patent enforcement actions. For instance, the United States Congress has considered a bill that would require, among other things, non-practicing entities that bring patent infringement lawsuits to pay legal costs of the defendants, if the lawsuits are unsuccessful and certain standards are not met. Trial judges and juries often find it difficult to understand complex patent enforcement litigation, and as a result, we may need to appeal adverse decisions by lower courts in order to successfully enforce our patents. It is difficult to predict the outcome of patent enforcement litigation at the trial level. It is often difficult for juries and trial judges to understand complex, patented technologies, and as a result, there is a higher rate of successful appeals in patent enforcement litigation than more standard business litigation. Such appeals are expensive and time consuming, resulting in increased costs and delayed revenue. Although we diligently pursue enforcement litigation, we cannot predict with significant reliability the decisions made by juries and trial courts. More patent applications are filed each year resulting in longer delays in getting patents issued by the USPTO. Certain of our operating subsidiaries hold and continue to invest in pending patents. We have identified a trend of increasing patent applications each year, which we believe is resulting in longer delays in obtaining approval of pending patent applications. The application delays could cause delays in recognizing revenue from these patents and could cause us to miss opportunities to license patents before other competing technologies are developed or introduced into the market. Federal courts are becoming more crowded, and as a result, patent enforcement litigation is taking longer. Our patent enforcement actions are almost exclusively prosecuted in federal court. Federal trial courts that hear our patent enforcement actions also hear criminal cases. Criminal cases always take priority over our actions. As a result, it is difficult to predict the length of time it will take to complete an enforcement action. Moreover, we believe there is a trend in increasing numbers of civil lawsuits and criminal proceedings before federal judges and, as a result, we believe that the risk of delays in our patent enforcement actions will have a greater effect on our business in the future unless this trend changes. Any reductions in the funding of the USPTO could have an adverse impact on the cost of processing pending patent applications and the value of those pending patent applications. The assets of our operating subsidiaries consist of patent portfolios, including pending patent applications before the USPTO. The value of our patent portfolios is dependent upon the issuance of patents in a timely manner, and any reductions in the funding of the USPTO could negatively impact the value of our assets. Further, reductions in funding from Congress could result in higher patent application filing and maintenance fees charged by the USPTO, causing an unexpected increase in our expenses. Competition is intense in the industries in which our subsidiaries do business and as a result, we may not be able to grow or maintain our market share for our technologies and patents. We expect to encounter competition in the area of patent portfolio investments and enforcement as the number of companies entering this market is increasing. This includes competitors seeking to invest in the same or similar patents and technologies that we may seek to invest in. Entities including RPX, AST, Intellectual Ventures, Wi-LAN, Conversant, Round Rock Research LLC, IPvalue Management Inc., Vringo Inc., VirnetX and Pendrell Corporation compete in acquiring rights to patents, and we expect more entities to enter the market. As new technological advances occur, many of our patented 15 technologies may become obsolete before they are completely monetized. If we are unable to replace obsolete technologies with more technologically advanced patented technologies, then this obsolescence could have a negative effect on our ability to generate future revenues. Our licensing business also competes with venture capital firms and various industry leaders for patent licensing opportunities. Many of these competitors may have more financial and human resources than we do. As we become more successful, we may find more companies entering the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we currently rely upon to generate future revenue. Our patented technologies face uncertain market value. Our operating subsidiaries have invested in patents and technologies that may be in the early stages of adoption in the commercial and consumer markets. Demand for some of these technologies is untested and is subject to fluctuation based upon the rate at which our licensees will adopt our patents and technologies in their products and services. Further, significant judgment is required in connection with estimates of the recoverability of the carrying value of our intangible patent assets, including estimates of market values, estimates of the amount and timing of future cash flows, and estimates of other factors that are used to determine the fair value and recoverability of the respective patent asset values. Developments with respect to ongoing patent litigation, patent challenges and re-exams, legislative and judicial decisions and other factors outside of our control, may unfavorably impact the validity, applicability, and enforceability of our patent assets, and therefore, negatively impact the future value of our patent portfolios. If certain of these unfavorable events occur, our estimates or related projections may change materially in future periods, and future intangible asset impairment tests may result in material charges to earnings. As patent enforcement litigation becomes more prevalent, it may become more difficult for us to voluntarily license our patents. We believe that the more prevalent patent enforcement actions become, the more difficult it will be for us to voluntarily license our patents. As a result, we may need to increase the number of our patent enforcement actions to cause infringing companies to license the patent or pay damages for lost royalties. This may increase the risks associated with an investment in our company. Patent litigation trials and scheduled trial dates are subject to routine delay, and any such delays could adversely impact our business, results of operations and financial condition. Patent infringement trials are components of our overall patent licensing process and are one of many factors that contribute to the existence of possible future revenue opportunities for us. Patent litigation schedules in general, and in particular trial dates, are subject to routine adjustment, and in most cases delay, as courts adjust their calendars or respond to requests from one or more parties. Trial dates often are rescheduled by the court for various reasons that are often unrelated to the underlying patent assets and typically for reasons that are beyond our control. As a result, to the extent such events are an indicator of possible future revenue opportunities for us, or other outcome determinative events, they may and often do change which can result in delay of the expected scheduled event. Any such delay could be significant and could affect the corresponding future revenue opportunities, thus adversely impacting our business, results of operations and financial condition. The markets served by our operating subsidiaries are subject to rapid technological change, and if our operating subsidiaries are unable to develop and invest in new technologies and patents, our ability to generate revenues could be substantially impaired. The markets served by our operating subsidiaries and their licensees frequently undergo transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis. Products for communications applications and high-speed computing applications, as well as other applications covered by our operating subsidiaries’ intellectual property, are based on continually evolving industry standards. In addition, the communications industry is intensely competitive and has been impacted by price erosion, rapid technological change, short product life cycles, cyclical market patterns and increasing foreign and domestic competition. Our ability to compete in the future will depend on our ability to identify and ensure compliance with evolving industry standards. This will require our continued efforts and success in acquiring new patent portfolios with licensing and enforcement opportunities. While we expect for the foreseeable future to have sufficient liquidity and capital resources to maintain the level of patent portfolio investments necessary to keep pace with these technological advances, various factors may require us to have greater liquidity and capital resources than we currently 16 expect. If we are unable to invest in new patented technologies and patent portfolios, or to identify and ensure compliance with evolving industry standards, our ability to generate revenues could be substantially impaired and our business and financial condition could be materially harmed. Uncertainty in global economic conditions could negatively affect our business, results of operations and financial condition. Our revenue-generating opportunities depend on the use of our patented technologies by existing and prospective licensees, the overall demand for the products and services of our licensees, and on the overall economic and financial health of our licensees. Although economic conditions appear to be improving, recent uncertainties in global economic conditions have resulted in the tightening of the credit markets, a low level of liquidity in many financial markets, and extreme volatility in the credit, equity and fixed income markets. If economic conditions do not continue to improve, or if they further deteriorate, many of our licensees’ customers, which may rely on credit financing, may delay or reduce their purchases of our licensees’ products and services. In addition, the use or adoption of our patented technologies is often based on current and forecasted demand for our licensees’ products and services in the marketplace and may require companies to make significant initial commitments of capital and other resources. If negative conditions in the global credit markets delay or prevent our licensees’ and their customers’ access to credit, overall consumer spending on the products and services of our licensees may decrease and the adoption or use of our patented technologies may slow, respectively. Further, if the markets in which our licensees’ participate do not continue to improve, or deteriorate further, this could negatively impact our licensees’ long-term sales and revenue generation, margins and operating expenses, which could in turn have an adverse effect on our business, results of operations and financial condition. In addition, we have significant patent-related intangible assets recorded on our consolidated balance sheets. We will continue to evaluate the recoverability of the carrying amount of our patent-related intangible assets on an ongoing basis, and we may incur substantial impairment charges, which would adversely affect our consolidated financial results. There can be no assurance that the outcome of such reviews in the future will not result in substantial impairment charges. Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions as to prices, costs, holding periods or other factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions we used in testing for impairment are reasonable, significant changes in any one of our assumptions could produce a significantly different result. The availability of shares for sale in the future could reduce the market price of our common stock. Risks Related to Our Common Stock In the future, we may issue securities to raise cash for operations and patent portfolio investments. We may also pay for interests in additional subsidiary companies by using shares of our common stock or a combination of cash and shares of our common stock. We may also issue securities convertible into our common stock. Any of these events may dilute stockholders’ ownership interests in our company and have an adverse impact on the price of our common stock. In addition, sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could reduce the market price of our common stock. This could also impair our ability to raise additional capital through the sale of our securities. Delaware law and our charter documents contain provisions that could discourage or prevent a potential takeover of our company that might otherwise result in our stockholders receiving a premium over the market price of their shares. Provisions of Delaware law and our certificate of incorporation and bylaws could make the acquisition of our company by means of a tender offer, proxy contest or otherwise, and the removal of incumbent officers and directors, more difficult. These provisions include: • • Section 203 of the Delaware General Corporation Law, which prohibits a merger with a 15%-or-greater stockholder, such as a party that has completed a successful tender offer, until three years after that party became a 15%-or-greater stockholder; amendment of our bylaws by the stockholders requires a two-thirds approval of the outstanding shares; 17 • • • the authorization in our certificate of incorporation of undesignated preferred stock, which could be issued without stockholder approval in a manner designed to prevent or discourage a takeover; provisions in our bylaws eliminating stockholders’ rights to call a special meeting of stockholders, which could make it more difficult for stockholders to wage a proxy contest for control of our board of directors or to vote to repeal any of the anti-takeover provisions contained in our certificate of incorporation and bylaws; and the division of our board of directors into three classes with staggered terms for each class, which could make it more difficult for an outsider to gain control of our board of directors. Together, these provisions may make the removal of management more difficult and may discourage transactions that could otherwise involve payment of a premium over prevailing market prices for our common stock. We may fail to meet market expectations because of fluctuations in quarterly operating results, which could cause the price of our common stock to decline. Our reported revenues and operating results have fluctuated in the past and may continue to fluctuate significantly from quarter to quarter in the future. It is possible that in future periods, revenues could fall below the expectations of securities analysts or investors, which could cause the market price of our common stock to decline. The following are among the factors that could cause our operating results to fluctuate significantly from period to period: • • • • • • • • • • the dollar amount of agreements executed in each period, which is primarily driven by the nature and characteristics of the technology being licensed and the magnitude of infringement associated with a specific licensee; the specific terms and conditions of agreements executed in each period and the periods of infringement contemplated by the respective payments; fluctuations in the total number of agreements executed; fluctuations in the sales results or other royalty-per-unit activities of our licensees that impact the calculation of license fees due; the timing of the receipt of periodic license fee payments and/or reports from licensees; fluctuations in the net number of active licensees period to period; costs related to investments, alliances, licenses and other efforts to expand our operations; the timing of payments under the terms of any customer or license agreements into which our operating subsidiaries may enter; expenses related to, and the timing and results of, patent filings and other enforcement proceedings relating to intellectual property rights, as more fully described in this section; and new litigation or developments in current litigation and the unpredictability of litigation results or settlements or appeals. Technology company stock prices are especially volatile, and this volatility may depress the price of our common stock. The stock market has experienced significant price and volume fluctuations, and the market prices of technology companies have been highly volatile. We believe that various factors may cause the market price of our common stock to fluctuate, perhaps substantially, including, among others, the following: • • • announcements of developments in our patent enforcement actions; developments or disputes concerning our patents; our or our competitors’ technological innovations; 18 • • • • • • • • • developments in relationships with licensees; variations in our quarterly operating results; our failure to meet or exceed securities analysts’ expectations of our financial results; a change in financial estimates or securities analysts’ recommendations; changes in management’s or securities analysts’ estimates of our financial performance; changes in market valuations of similar companies; concerns about sovereign debt of the United States and the European Union; announcements by us or our competitors of significant contracts, investments, strategic partnerships, joint ventures, capital commitments, new technologies, or patents; and failure to complete significant transactions. For example, the NASDAQ-100 Technology Sector Index (NDXT) had a range of $1,942.62 - $2,953.37 during the 52-weeks ended December 31, 2016 and the NASDAQ Composite Index (IXIC) had a range of $4,209.76 - $5,512.37 over the same period. Over the same period, our common stock fluctuated within a range of $2.82 - $7.68. The recent financial crisis affecting the banking system and financial markets and the uncertainty in global economic conditions have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in the credit, equity and fixed income markets. As noted above, our stock price, like many others, has fluctuated significantly in recent periods and if investors have concerns that our business, operating results and financial condition will be negatively impacted by global economic conditions, our stock price could continue to fluctuate significantly in future periods. In addition, we believe that fluctuations in our stock price during applicable periods can also be impacted by court rulings and/or other developments in our patent licensing and enforcement actions. Court rulings in patent enforcement actions are often difficult to understand, even when favorable or neutral to the value of our patents and our overall business, and we believe that investors in the market may overreact, causing fluctuations in our stock prices that may not accurately reflect the impact of court rulings on our business operations and assets. In the past, companies that have experienced volatility in the market price of their stock have been the objects of securities class action litigation. If our common stock was the object of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could materially harm our business and financial results. We do not currently intend to pay dividends on our common stock in the foreseeable future, and consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock. On February 23, 2016, our board of directors eliminated our dividend policy that provided for the discretionary payment of a total annual cash dividend of $0.50 per common share, payable in the amount of $0.125 per share per quarter, effective as of February 23, 2016. As a result, we do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares. ITEM 1B. UNRESOLVED STAFF COMMENTS None. 19 ITEM 2. PROPERTIES Our principal executive, corporate and administrative offices are located in Newport Beach, California, where we lease approximately 17,758 square feet of office space, under a lease agreement that expires in December 2019. Our primary operating subsidiary, Acacia Research Group, LLC, and its subsidiaries, are headquartered in Dallas, Texas, where we lease approximately 1,810 square feet of office space, under a lease agreement that expires in April 2017. Certain of our operating subsidiaries also maintain additional leased office space in Munich, Germany. We believe that our facilities are adequate, suitable and of sufficient capacity to support our immediate needs. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of business, we are the subject of, or party to, various pending or threatened legal actions, including various counterclaims in connection with our patent enforcement activities. We believe that any liability arising from these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. Our operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. Certain of our operating subsidiaries are parties to ongoing patent enforcement related litigation, alleging infringement by third-parties of certain of the patented technologies owned or controlled by our operating subsidiaries. In connection with any of our patent enforcement actions, it is possible that a defendant may claim and/or a court may rule that we have violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material, and if required to be paid by us or our operating subsidiaries, could materially harm our operating results and our financial position. We spend a significant amount of our financial and management resources to pursue our current litigation matters. We believe that these litigation matters and others that we may in the future determine to pursue could continue for years and continue to consume significant financial and management resources. The counterparties to our litigation are sometimes large, well-financed companies with substantially greater resources than us. We cannot assure that any of our current or future litigation matters will result in a favorable outcome for us. In addition, in part due to the appeals process and other legal processes, even if we obtain favorable interim rulings or verdicts in particular litigation matters, they may not be predictive of the ultimate resolution of the dispute. Also, we cannot assure that we will not be exposed to claims or sanctions against us which may be costly or impossible for us to defend. Unfavorable or adverse outcomes may result in losses, exhaustion of financial resources or other adverse effects which could encumber our ability to develop and commercialize products. ITEM 4. MINE SAFETY DISCLOSURES None. 20 ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF PART II EQUITY SECURITIES General Our common stock trades on The NASDAQ Global Select Market under the symbol “ACTG.” Price Range of Common Stock The high and low sales prices for our common stock as reported by The NASDAQ Global Select Market for the periods indicated are shown in the table below. Such prices are inter-dealer prices without retail markups, markdowns or commissions and may not necessarily represent actual transactions. 2016 2015 Fourth Quarter Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter High Low $7.68 $5.55 $7.25 $4.20 $5.64 $3.75 $4.30 $2.82 $9.97 $3.82 $10.63 $7.88 $12.51 $8.61 $17.22 $10.18 Dividend Policy On April 23, 2013, we announced that our Board of Directors approved the adoption of a cash dividend policy that called for the payment of an expected total annual cash dividend of $0.50 per common share, payable in the amount of $0.125 per share per quarter. Under the policy, we paid quarterly cash dividends totaling $25.4 million and $25.0 million during 2015 and 2014, respectively. On February 23, 2016, our Board of Directors terminated the company’s dividend policy effective immediately. Our Board of Directors terminated the dividend policy due to a number of factors, including our financial performance, our available cash resources, our cash requirements and alternative uses of capital that our Board of Directors concluded would represent an opportunity to generate a greater return on investment for us and our stockholders. The current policy of our Board of Directors is to retain earnings, if any, to provide for our growth and the growth of our operating subsidiaries. Consequently, we do not expect to pay any cash dividends in the foreseeable future. Further, there can be no assurance that our proposed operations will generate revenues and cash flow needed to declare any future cash dividends or that we will have legally available funds to pay future dividends. Holders of Common Stock On March 6, 2017, there were approximately 68 owners of record of our common stock. The majority of the outstanding shares of our common stock are held by a nominee holder on behalf of an indeterminable number of ultimate beneficial owners. Stock Price Performance Graph The following stock price performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act. 21 The Stock Performance Graph depicted below compares the yearly change in our cumulative total stockholder return for the last five fiscal years with the cumulative total return of The NASDAQ Stock Market (U.S.) Composite Index and the NASDAQ-100 Technology Sector Index. Acacia Research Corporation common stock Nasdaq Composite Index (IXIC) NASDAQ-100 Technology Sector Index (NDXT) 2012 2013 2014 2015 2016 $70 $116 $107 $40 $160 $147 $46 $182 $182 $12 $192 $178 $18 $207 $221 The graph covers the period from December 31, 2011 to December 31, 2016. Cumulative total returns are calculated assuming that $100 was invested on December 31, 2011, in our common stock, in the NASDAQ Composite Index, and in the NASDAQ-100 Technology Sector Index, and that all dividends, if any, were reinvested. Stockholder returns over the indicated period should not be considered indicative of future stock prices or stockholder returns. 22  ITEM 6. SELECTED FINANCIAL DATA The consolidated selected balance sheet data as of December 31, 2016 and 2015 and the consolidated selected statements of operations data for the years ended December 31, 2016, 2015 and 2014 set forth below have been derived from our audited consolidated financial statements included elsewhere herein, and should be read in conjunction with those financial statements (including notes thereto). The consolidated selected balance sheet data as of December 31, 2014, 2013 and 2012 and the consolidated selected statements of operations data for the years ended December 31, 2013 and 2012 have been derived from audited consolidated financial statements not included herein, but which were previously filed with the SEC. Consolidated Statements of Operations Data (In thousands, except share and per share data) For the Years Ended December 31, 2016 2015 2014 2013 2012 Revenues Inventor royalties and contingent legal fees expense Litigation and licensing expenses - patents Amortization of patents $ 152,699 $ 125,037 $ 130,876 $ 130,556 $ 250,727 49,204 27,858 34,208 34,631 39,373 53,067 44,233 37,614 53,745 54,508 39,335 49,039 50,679 21,591 39,019 General and administrative expenses (excluding non-cash stock compensation expense) Non-cash stock compensation expense (included in G&A in the statements of operations) Research, consulting and other expenses - business development Impairment of patent-related intangible assets Impairment of goodwill Other Operating income (loss) 23,857 27,128 30,439 31,335 28,426 9,062 3,079 42,340 — 500 11,048 3,391 74,731 30,149 4,141 18,115 27,894 3,840 3,497 — 1,548 3,251 4,619 — 3,506 25,657 4,943 — — — $ (37,409) $ (152,622) $ (62,155) $ (82,931) $ 80,412 Income (loss) from continuing operations before (provision for) benefit from income taxes $ (36,611) $ (152,678) $ (62,750) $ (80,800) $ (Provision for) benefit from income taxes (18,188) (4,800) (3,912) 21,958 81,349 (22,060) Net income (loss) from continuing operations including noncontrolling interests in operating subsidiaries Net income (loss) attributable to Acacia Research Corporation Diluted income (loss) per common share Cash dividends declared per common share Consolidated Balance Sheet Data (In thousands) $ $ $ $ (54,799) $ (157,478) $ (66,662) $ (58,842) $ 59,289 (54,067) $ (160,036) $ (66,029) $ (56,434) $ 59,453 (1.08) $ (3.25) $ (1.37) $ (1.18) $ 1.21 — $ 0.50 $ 0.50 $ 0.375 $ — 2016 2015 2014 2013 2012 At December 31, Cash and cash equivalents, restricted cash and investments $ 158,495 $ 145,948 $ 193,024 $ 256,702 $ Patents, net of accumulated amortization Total assets Total liabilities Noncontrolling interests in operating subsidiaries 86,319 296,003 28,560 1,854 162,642 347,901 33,746 3,944 286,636 536,348 47,300 5,491 288,432 593,393 31,195 6,488 Acacia Research Corporation stockholders’ equity 265,589 310,211 483,557 555,710 311,279 313,529 668,717 50,239 6,976 611,502 Factors Affecting Comparability: • Net deferred tax liabilities resulting from an acquisition in January 2012 created an additional source of income to utilize against the majority of our existing consolidated net deferred tax assets. In addition, we estimated that certain of our other 23 foreign tax credit and state tax related deferred tax assets were more likely than not realizable in future periods. Accordingly, the valuation allowance on the majority of our net deferred tax assets was released, resulting in a financial statement income tax benefit of $10.7 million during the year ended December 31, 2012. At December 31, 2013, we recorded a partial valuation allowance for certain tax attribute carryforwards and other deferred tax assets totaling $7.6 million, due to uncertainty regarding future realization. We recorded a full valuation allowance for net deferred tax assets generated during fiscal year 2016, 2015 and 2014, due to uncertainty regarding future realization. • • For the years ended December 31, 2016, 2015, 2014, 2013 and 2012, we paid patent related investment costs totaling $1.2 million, $19.5 million, $42.7 million, $25.1 million and $178.3 million (excluding business combinations of $150.0 million), respectively. Patent related investment costs are amortized using the straight-line method over the estimated economic useful life of the underlying patents. For the years ended December 31, 2016, 2015, 2014 and 2013 we recognized patent impairment charges totaling $42.3 million, $74.7 million, $3.5 million and $4.6 million, respectively. The impairment charges for the periods presented reflect the impact of reductions in expected estimated future net cash flows for certain portfolios due to adverse legal outcomes and certain patent portfolios that management determined it would no longer allocate resources to in future periods. The impairment charges consisted of the excess of the asset’s carrying value over its estimated fair value as of the applicable measurement date. • We conducted an annual goodwill impairment test as of December 31, 2015. Based upon the difference between the implied fair value of goodwill and the historical carrying value of goodwill, due primarily to the sustained decline in the Company's stock price and adverse litigation outcomes in the fourth quarter of 2015, we recognized a goodwill impairment charge totaling $30.1 million. 24 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including the risks we discuss in Item 1A, “Risk Factors,” and elsewhere herein. General Our operating subsidiaries invest in, license and enforce patented technologies. Our operating subsidiaries partner with inventors and patent owners, applying our legal and technology expertise to patent assets to unlock the financial value in their patented inventions. Our operating subsidiaries generate revenues and related cash flows from the granting of patent rights for the use of patented technologies that our operating subsidiaries control or own. Our 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. We are principals in the licensing and enforcement effort, obtaining control of the rights in the patent portfolio, or control of the patent portfolio outright. We are a leader in licensing patented technologies and have established a proven track record of licensing success with over 1,530 license agreements executed to date, across 192 patent portfolio licensing and enforcement programs. Currently, on a consolidated basis, our operating subsidiaries own or control the rights to multiple patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a variety of industries. To date, we have generated gross licensing revenue of approximately $1.4 billion, and have returned more than $726 million to our patent partners. The patent portfolio investment, development, licensing and enforcement business conducted by our operating subsidiaries is described more fully in Item 1. “Business,” of this annual report. Executive Overview Our operating activities during the periods presented have been principally focused on the continued operation of our patent licensing and enforcement business, including the continued pursuit of our ongoing patent licensing and enforcement programs. In addition, we and our operating subsidiaries may from time to time evaluate, leveraging our intellectual property expertise, other business opportunities. In some cases, these opportunities will compliment, and / or supplement our primary licensing and enforcement business. Neither we nor our operating subsidiaries invent new technologies or products; rather, we depend upon the identification and investment in patents and inventions and companies that own intellectual property through our relationships with inventors, universities, research institutions, technology companies and others. If our operating subsidiaries are unable to maintain those relationships and to continue to identify and grow new relationships, then we may not be able to identify new technology-based opportunities for sustainable revenue and /or revenue growth. Our current or future relationships may not provide the volume or quality of technologies necessary to sustain our licensing and enforcement business. In some cases, universities and other technology sources compete against us as they seek to develop and commercialize technologies. Universities may receive financing for basic research in exchange for the exclusive right to commercialize resulting inventions. These and other strategies employed by potential partners may reduce the number of technology sources and potential clients to whom we can market our solutions. If we are unable to maintain current relationships and sources of technology or to secure new relationships and sources of technology, such inability may have a material adverse effect on our revenues, operating results, financial condition and ability to maintain our licensing and enforcement business. For example, for the year ended December 31, 2016, we obtained control of only 2 new patent portfolios. Further, in fiscal year 2015, we obtained control of 3 new patent portfolios, compared to 6 new patent portfolios, and 25 new patent portfolios in fiscal years 2014 and 2013, respectively. This decrease in our patent portfolio intake reflects in part our strategic decision in 2013 to shift the focus of our operating business to serving a smaller number of customers, each having higher quality patent portfolios. As a result, our gross number of patent portfolio acquisitions has decreased significantly. This decrease in our patent portfolio intake also reflects in part industry trends impacting our ability to acquire patent portfolios. For example, legislative and legal changes have increased the complexity of patent enforcement actions and may significantly 25 affect the market availability of suitable patent portfolios for acquisition. These industry trends have continued, and as a result, our recent and future patent portfolio intake has been and may continue to be negatively impacted, resulting in further decreases in future revenue generating opportunities, and continued negative adverse impacts on the sustainability of our licensing and enforcement business. We continue to experience significant adverse challenges with respect to our patent intake efforts, and if these adverse challenges continue, our revenues will decline and we will be unable to profitably sustain our licensing and enforcement business going forward. As a result of the foregoing, our operating subsidiaries may from time to time evaluate other business opportunities which compliment, or supplement, our primary licensing and enforcement business and leverage our intellectual property expertise. For example, in August 2016, we announced the formation of a strategic partnership with Veritone, Inc. (“Veritone”), a leading cloud-based Artificial Intelligence (“AI”) technology company that is pioneering next generation search and analytics through their proprietary Cognitive Media Platform™. Under the partnership, we expect to leverage our intellectual property expertise to assist Veritone with building its patent portfolio and executing upon its overall intellectual property strategy. In order to enhance Veritone’s leadership position in the field of machine learning and AI, we provided $20 million in funding to Veritone in the form of two $10 million loans, each convertible upon the occurrence of certain events into Veritone equity. Additionally, upon the occurrence of certain events and the achievement of certain milestones by Veritone, we may invest up to an additional $30 million in Veritone, for a total investment of up to $50 million. Our Board of Directors unanimously approved the investment, and believes that this partnership with Veritone will be synergistic with our business strategies. Operating activities during the periods presented included the following: 2016 2015 2014 Revenues (in thousands) New agreements executed Licensing and enforcement programs generating revenues - during the respective period Licensing and enforcement programs with initial revenues New patent portfolios Year end cash, cash equivalents, short-term investments and restricted cash balance $ 152,699 $ 125,037 $ 130,876 39 28 7 2 63 30 4 3 88 46 15 6 $ 158,495 $ 145,948 $ 193,024 We measure and assess the performance and growth of the patent licensing and enforcement businesses conducted by our operating subsidiaries based on consolidated revenues (including other operating income) recognized across all of our patent licensing and enforcement programs on a trailing twelve-month basis. Trailing twelve-month revenues during the periods presented were as follows (in thousands, except percentage change values): As of Date: December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016 December 31, 2015 December 31, 2014 Trailing Twelve - Month Revenues % Change $ 152,699 168,227 116,563 115,548 125,037 130,876 (9)% 44 % 1 % (8)% (4)% — Our revenues historically have fluctuated period to period, and can vary significantly, based on a number of factors including the following: • • • the dollar amount of agreements executed each period, which can be driven by the nature and characteristics of the technology or technologies being licensed and the magnitude of infringement associated with a specific licensee; the specific terms and conditions of agreements executed each period including the nature and characteristics of rights granted, and the periods of infringement or term of use contemplated by the respective payments; fluctuations in the total number of agreements executed each period; 26 • • • • the number of, timing, results and uncertainties associated with patent licensing negotiations, mediations, patent infringement actions, trial dates and other enforcement proceedings relating to our patent licensing and enforcement programs; the relative maturity of licensing programs during the applicable periods; other external factors, including the periodic status or results of ongoing negotiations, the status or results of ongoing litigations and appeals, actual or perceived shifts in the regulatory environment, impact of unrelated patent related judicial proceedings and other macroeconomic factors; and historically, based on the merits and strength of our operating subsidiary’s patent infringement claims and other factors, many prospective licensees have elected to settle significant patent infringement cases and pay reasonable license fees for the use of our patented technology, as those patent infringement cases approached a court determined trial date. Our management does not attempt to manage for smooth sequential periodic growth in revenues period to period, and therefore, periodic results can be uneven. Unlike most operating businesses and industries, licensing revenues not generated in a current period are not necessarily foregone but, depending on whether negotiations, litigation or both continue into subsequent periods, and depending on a number of other factors, such potential revenues may be pushed into subsequent fiscal periods. Summary of Results of Operations - For Fiscal Years 2016, 2015 and 2014 (In thousands, except percentage change values) Revenues Inventor royalties and contingent legal fees Litigation and licensing expenses - patents Amortization expense Impairment of patent-related intangible assets Impairment of goodwill Other operating costs and expenses(1) Operating loss Provision for income taxes Net (income) loss attributable to noncontrolling interests(2) Net loss attributable to Acacia Research Corporation Fiscal Year % Change 2016 2015 2014 2016 vs. 2015 2015 vs. 2014 $ 152,699 $ 125,037 $ 130,876 49,204 27,858 34,208 34,631 39,373 53,067 44,233 37,614 53,745 22 % 42 % (29)% (36)% (4)% (22)% 5 % (1)% 42,340 74,731 3,497 (43)% * — 36,498 30,149 45,708 — 53,942 (37,409) (152,622) (62,155) (18,188) 732 (4,800) (2,558) (3,912) 633 (54,067) (160,036) (66,029) (100)% (20)% (75)% 279 % (129)% (66)% 100 % (15)% 146 % 23 % * 142 % ____________________________________ * Percentage change in excess of 300% (1) Includes non-cash stock compensation charges of $9.1 million, $11.0 million and $18.1 million in fiscal years 2016, 2015 and 2014, respectively, included in General and administrative expense in the consolidated statements of operations. (2) Refer to Note 1 to the notes to consolidated financial statements included elsewhere in this annual report for additional information. Overview - Fiscal year 2016 compared with Fiscal Year 2015 • • • Revenues increased $27.7 million, or 22% to $152.7 million for fiscal year 2016, as compared to fiscal year 2015, due to an increase in average revenue per agreement, which was partially offset by a decrease in the number of agreements executed. Inventor royalties and contingent legal fees, on a combined basis, increased $14.6 million, or 42%, due primarily to the 22% increase in revenues in fiscal year 2016, and a 4% increase in average contingent legal fee rates for the portfolios generating revenues in fiscal year 2016, as compared to the portfolios generating revenues in fiscal year 2015. Litigation and licensing expenses-patents decreased $11.5 million, or 29%, to $27.9 million, due primarily to a net decrease in litigation support and third-party technical consulting expenses associated with patent trials and ongoing licensing and enforcement programs. 27 • • • • • • Amortization expense decreased $18.9 million, or 36%, to $34.2 million, due to a decrease in scheduled amortization on existing patent portfolios resulting from various patent portfolio impairment charges previously recorded in the fourth quarter of 2015 and second quarter of 2016. Impairment of patent-related intangible asset charges decreased $32.4 million, or 43%, to $42.3 million. Impairment charges reflect the impact of reductions in expected estimated future net cash flows for certain patent portfolios and certain patent portfolios that management determined it would no longer allocate resources to in future periods. The impairment charges consisted of the excess of the asset’s carrying value over its estimated fair value as of the applicable measurement date. In the fourth quarter of fiscal 2015, we performed an impairment analysis of goodwill. Based upon the difference between the implied fair value of goodwill and the historical carrying value of goodwill, due primarily to the sustained decline in the Company's stock price and adverse litigation outcomes occurring in the fourth quarter of 2015, we recognized a goodwill impairment charge totaling $30.1 million in the fourth quarter of 2015. General and administrative expenses decreased $5.3 million, or 14%, to $32.9 million, due primarily to a net decrease in personnel costs in connection with the net reduction in headcount during 2016 and 2015 and a net decrease in non-cash stock compensation expense. Fiscal year 2016 and 2015 operating expenses included expenses for court ordered attorney fees totaling $500,000 and $4.1 million, respectively. Tax expense for the periods presented reflects foreign taxes withheld on revenue agreements with licensees in foreign jurisdictions and other state taxes, and the impact of full valuation allowances recorded for net operating loss (2015 only)and foreign tax credit related tax assets generated during the periods. As such, no tax benefit was recognized for net operating loss and foreign tax credit related tax benefits generated during the applicable periods presented. Overview - Fiscal year 2015 compared with Fiscal Year 2014 • • • • • • • • Revenues decreased $5.8 million, or 4% to $125.0 million for fiscal year 2015, as compared to fiscal year 2014. Inventor royalties and contingent legal fees, on a combined basis, decreased $9.6 million, or 22%, due primarily to certain patent portfolios generating revenue in 2015 with a higher amount of cost recoveries and lower contingent fee rates, as compared to the portfolios generating revenues in fiscal year 2014. Litigation and licensing expenses-patents increased $1.8 million, or 5%, to $39.4 million, due primarily to a net increase in litigation support and third- party technical consulting expenses associated with trials occurring in 2015 and scheduled to occur in 2016, and ongoing and new licensing and enforcement programs commenced during fiscal year 2015. Impairment of patent-related intangible asset charges increased $71.2 million, or +300%, to $74.7 million, reflecting the impact of reductions in expected estimated future net cash flows for certain patent portfolios and certain patent portfolios that management determined it would no longer allocate resources to in future periods. The impairment charges consisted of the excess of the asset’s carrying value over its estimated fair value as of the applicable measurement date. In the fourth quarter of fiscal 2015, we performed an impairment analysis of goodwill. Based upon the difference between the implied fair value of goodwill and the historical carrying value of goodwill, due primarily to the sustained decline in the Company's stock price and adverse litigation outcomes occurring in the fourth quarter of 2015, we recognized a goodwill impairment charge totaling $30.1 million in the fourth quarter of 2015. General and administrative expenses decreased $10.4 million, or 21%, to $38.2 million, due primarily to a net decrease in personnel costs in connection with the net reduction in headcount during 2014 and 2015, a decrease in variable performance-based compensation costs, and a net decrease in non- cash stock compensation expense. Fiscal year 2015 operating expenses included expenses for court ordered attorney fees totaling $4.1 million. Fiscal year 2014 operating expenses included an expense accrual for court ordered attorney fees related to matters initiated in 2010 and 2011 totaling $1.5 million. Tax expense for the periods presented reflects foreign taxes withheld on revenue agreements with licensees in foreign jurisdictions and other state taxes, and the impact of full valuation allowances recorded for net operating loss and foreign 28 tax credit related tax assets generated during the periods. As such, no tax benefit was recognized for net operating loss and foreign tax credit related tax benefits generated during the periods presented. Revenues for the periods presented included fees from the following licensing and enforcement programs: • 360 Degree View Technology(2) • 3G & 4G Cellular Air Interface and Infrastructure technology(2)(3) • 4G Wireless technology(1)(2)(3) • Audio Communications Fraud Detection technology(1)(2)(3) • Automotive Safety, Navigation and Diagnostics technology(2)(3) • Bone Wedge technology(1)(2) • Broadband Communications technology(1)(2)(3) • Cardiology and Vascular Device technology(1)(2)(3) • Computer Aided Design Tools technology(3) • Computer-Aided Design technology(3) • Core Fiber Optic Network Architectures technology(3) • Diamond and Gemstone Grading technology(1) • DisplayPort and MIPI DSI technology(1)(2) • Distributed Data Management & Synchronization technology(3) • DMT® technology(3) • DRAM and Flash Memory technology(1) • Electronic Access Control technology(2)(3) • Electronic spreadsheet, data analysis and software development technology(1) • Enhanced Mobile Communications technology(2)(3) • Flash Memory technology(1) • Gas Modulation Control Systems technology(1)(2)(3) • High Speed Circuit Interconnect and Display Control technology(1)(2)(3) • Improved Lighting technology(2)(3) • Innovative Display technology(2)(3) • Intercarrier SMS technology(2)(3) • Interstitial and Pop-Up Internet Advertising technology(1)(2)(3) • Knee Replacement technology(1) • Lighting Ballast technology(1) • Location Based Services technology(2)(3) • Messaging technology(2)(3) • Microprocessor and Memory technology(1)(2)(3) ______________________________________ (1) Licensing and enforcement program generating revenue in 2016. (2) Licensing and enforcement program generating revenue in 2015. (3) Licensing and enforcement program generating revenue in 2014. • Mobile Computer Synchronization technology(2)(3) • Multi-Display Content Delivery and Data Aggregation technology(3) • Oil and Gas Drilling technology(1) • Oil and Gas Production technology (2)(3) • Online Auction Guarantee technology(1)(2)(3) • Online Gaming technology(3) • Optical Networking technology(1)(2)(3) • Optimized Microprocessor Operation technology(2)(3) • Radio Frequency Modulation technology(3) • Reflective and Radiant Barrier Insulation technology(1)(2)(3) • Semiconductor 3D Die Stacking technology(1) • Semiconductor Memory Circuit and Manufacturing Processes technology(1) • Semiconductor Packaging technology(3) • Semiconductor Testing technology(2) • Shared Memory for Multimedia Processing(1)(2) • Software Activation technology(3) • Software Technology(3) • Speech codes used in wireless and wireline systems technology(1)(2)(3) • Spinning and Jousting Toy Game technology (2)(3) • Super Resolutions Microscopy technology(1)(2)(3) • Surgical Access technology(2) • Suture Anchors technology(2)(3) • Telematics technology(1)(2)(3) • Unicondylar Knee Replacement technology(2) • Variable Data Printing technology(1) • Video Analytics for Security technology(2)(3) • Voice-Over-IP technology(2)(3) • Wireless Data Synchronization & Data Transfer technology(2)(3) • Wireless Infrastructure and User Equipment technology(1)(2)(3) • Wireless Location Based Services technology(2)(3) • Wireless Monitoring technology(2)(3) Revenues from one or more of our patents or patent portfolios may be significant in a specific reporting period, and may be significant to our licensing and enforcement business as a whole. Patent Licensing and Enforcement Patent Litigation Trial Dates and Related Trials. As of the date of this report, our operating subsidiaries have in excess of 6 pending patent infringement cases with a scheduled trial date in the next six months. Patent infringement trials are components of our overall patent licensing process and are one of many factors that contribute to possible future revenue generating opportunities for us. Scheduled trial dates, as promulgated by the respective court, merely provide an indication of when, in future periods, the trials may occur according to the court’s scheduling calendar at a specific point in time. A court may change previously scheduled trial dates. In fact, courts often reschedule trial dates for various reasons that are unrelated to the underlying patent assets and typically for reasons that are beyond our control. While scheduled trial dates provide an indication of the timing of possible future revenue generating opportunities for us, the trials themselves and the immediately 29 preceding periods represent the possible future revenue generating opportunities. These future opportunities can result in varying outcomes. In fact, it is difficult to predict the outcome of patent enforcement litigation at the trial level and outcomes can be unfavorable. It can be difficult to understand complex patented technologies, and as a result, this may lead to a higher rate of unfavorable litigation outcomes. For example, in the fourth quarter of 2015, we announced that our subsidiary Adaptix, Inc. received a jury verdict in its case against Alcatel Lucent USA, Inc., AT&T Mobility LLC, Cellco Partnership, and Sprint Spectrum L.P., lead case 6:12-cv-00022 pending in the Eastern District of Texas. The jury returned a verdict that the asserted claims of U.S. Patent No. 6,870,808 were invalid and non-infringed. Moreover, in the event of a favorable outcome, there is a higher rate of successful appeals in patent enforcement litigation than more standard business litigation. Such appeals are expensive and time consuming, resulting in increased costs and a potential for delayed or foregone revenue opportunities in the event of modification or reversal of favorable outcomes. Although we diligently pursue enforcement litigation, we cannot predict with reliability the decisions made by juries and trial courts. Please refer to Item 1A. "Risk Factors" for additional information regarding trials, patent litigation and related risks. Litigation and Licensing Expense. We expect patent-related legal expenses to continue to fluctuate from period to period based on the factors summarized herein, in connection with future trial dates, international enforcement, strategic patent portfolio prosecution and our current and future patent portfolio investment, prosecution, licensing and enforcement activities. The pursuit of enforcement actions in connection with our licensing and enforcement programs can involve certain risks and uncertainties, including the following: • • • • • Increases in patent-related legal expenses associated with patent infringement litigation, including, but not limited to, increases in costs billed by outside legal counsel for discovery, depositions, economic analyses, damages assessments, expert witnesses and other consultants, re-exam and inter partes review costs, case-related audio/video presentations and other litigation support and administrative costs could increase our operating costs and decrease our profit generating opportunities; Our patented technologies and enforcement actions are complex and, as a result, we may be required to appeal adverse decisions by trial courts in order to successfully enforce our patents. Moreover, such appeals may not be successful; New legislation, regulations or rules related to enforcement actions, including any fee or cost shifting provisions, could significantly increase our operating costs and decrease our profit generating opportunities. Increased focus on the growing number of patent-related lawsuits may result in legislative changes which increase our costs and related risks of asserting patent enforcement actions. For instance, the United States House of Representatives passed a bill that would require non-practicing entities that bring patent infringement lawsuits to pay legal costs of the defendants, if the lawsuits are unsuccessful and certain standards are not met; Courts may rule that our subsidiaries have violated certain statutory, regulatory, federal, local or governing rules or standards by pursuing such enforcement actions, which may expose us and our operating subsidiaries to material liabilities, which could harm our operating results and our financial position; and The complexity of negotiations and potential magnitude of exposure for potential infringers associated with higher quality patent portfolios may lead to increased intervals of time between the filing of litigation and potential revenue events (i.e. markman dates, trial dates), which may lead to increased legal expenses, consistent with the higher revenue potential of such portfolios. Investments in Patent Portfolios In fiscal year 2016 we acquired control of 2 additional patent portfolios, compared to 3 new patent portfolios, and 6 new patent portfolios in fiscal years 2015 and 2014, respectively. In fiscal year 2016, we acquired a portfolio from our patent partner Renesas Electronics of Japan, comprised of 24 U.S. and 12 foreign patents covering technologies such as semiconductor chips for power management, system-on-chip architecture in microprocessors and packaging technology in memory and semiconductors. In addition, we acquired a portfolio containing 29 U.S. and 31 foreign patents covering circuits used in DRAM and Flash Memory. Patent portfolio investment costs paid in fiscal year 2016 totaled $1.2 million, compared to $19.5 million and $42.7 million in fiscal years 2015 and 2014, respectively. Neither we nor our operating subsidiaries invent new technologies or products; rather, we depend upon the identification and investment in patents, inventions and companies that own intellectual property through our relationships with inventors, universities, research institutions, technology companies and others. If our operating subsidiaries are unable to 30 maintain those relationships and to continue to identify and grow new relationships, then we may not be able to identify new technology-based opportunities for sustainable revenue and / or revenue growth. Our current or future relationships may not provide the volume or quality of technologies necessary to sustain our licensing and enforcement business. In some cases, universities and other technology sources compete against us as they seek to develop and commercialize technologies. Universities may receive financing for basic research in exchange for the exclusive right to commercialize resulting inventions. These and other strategies employed by potential partners may reduce the number of technology sources and potential clients to whom we can market its solutions. If we are unable to maintain current relationships and sources of technology or to secure new relationships and sources of technology, such inability may have a material adverse effect on our revenues, operating results, financial condition and ability to maintain our licensing and enforcement business. For example, during fiscal year 2016 and 2015, we obtained control of only 2 and 3, respectively, new patent portfolios, compared to 6 new patent portfolios, and 25 new patent portfolios in fiscal years 2014 and 2013, respectively. This decrease in our patent portfolio intake reflects in part our strategic decision in 2013 to shift the focus of our operating business to serving a smaller number of customers, each having higher quality patent portfolios. As a result, our gross number of patent portfolio acquisitions has decreased significantly. This decrease in our patent portfolio intake also reflects in part industry trends impacting our ability to acquire patent portfolios. For example, legislative and legal changes have increased the complexity of patent enforcement actions and may significantly affect the market availability of suitable patent portfolios for acquisition. These industry trends have continued, and as a result, our recent and future patent portfolio intake has been and may continue to be negatively impacted, resulting in further decreases in future revenue generating opportunities, and continued negative adverse impacts on the sustainability of our licensing and enforcement business We continue to experience significant adverse challenges with respect to our patent intake efforts, and if these adverse challenges continue, our revenues will decline and we will be unable to profitably sustain our licensing and enforcement business going forward. Critical Accounting Policies Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing these financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that, of the significant accounting policies discussed in Note 2 to our notes to consolidated financial statements, the following accounting policies require our most difficult, subjective or complex judgments: • • • • revenue recognition; stock-based compensation expense; valuation of long-lived and intangible assets including goodwill; and accounting for income taxes. We discuss below the critical accounting assumptions, judgments and estimates associated with these policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our critical accounting policies, refer to Note 2 to the notes to consolidated financial statements included herein. Revenue Recognition As described below, significant management judgment must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue recognized or deferred for any period, if management made different judgments. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been performed pursuant to the terms of the agreement, (iii) amounts are fixed or determinable and (iv) collectibility of amounts is reasonably assured. We make estimates and judgments when determining whether the collectibility of fees receivable from licensees is reasonably assured. We assess the collectibility of fees receivable based on a number of factors, including past transaction 31 history and the credit-worthiness of licensees. If it is determined that collection is not reasonably assured, the fee is recognized when collectibility becomes reasonably assured, assuming all other revenue recognition criteria have been met, which is generally upon receipt of cash for transactions where collectibility may have been an issue. Management’s estimates regarding collectibility impact the actual revenues recognized each period and the timing of the recognition of revenues. Our assumptions and judgments regarding future collectibility could differ from actual events and thus materially impact our financial position and results of operations. In general, our revenue arrangements provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by our operating subsidiaries. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies owned or controlled by our operating subsidiaries, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The intellectual property rights granted may be perpetual in nature, extending until the expiration of the related patents, or can be granted for a defined, relatively short period of time, with the licensee possessing the right to renew the agreement at the end of each contractual term for an additional minimum upfront payment. Pursuant to the terms of these agreements, our operating subsidiaries have no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on our operating subsidiaries’ part to maintain or upgrade the technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement, or upon receipt of the minimum upfront payment for term agreement renewals. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, when collectibility is reasonably assured, or upon receipt of the minimum upfront fee for term agreement renewals, and when all other revenue recognition criteria have been met. Depending on the complexity of the underlying revenue arrangement and related terms and conditions, significant judgments, assumptions and estimates may be required to determine when substantial delivery of contract elements has occurred, whether any significant ongoing obligations exist subsequent to contract execution, whether amounts due are collectible and the appropriate period or periods in which, or during which, the completion of the earnings process occurs. Depending on the magnitude of specific revenue arrangements, if different judgments, assumptions and estimates are made regarding contracts executed in any specific period, our periodic financial results may be materially affected. Our operating subsidiaries are responsible for the licensing and enforcement of their respective patented technologies and pursue third-parties that are utilizing their intellectual property without a license or who have under-reported the amount of royalties owed under a license agreement. As a result of these activities, from time to time, our operating subsidiaries may recognize revenues in a current period that relate to infringements by licensees that occurred in prior periods. These recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. Differences between amounts initially recognized and amounts subsequently audited or reported as an adjustment to those amounts, are recognized in the period such adjustment is determined as a change in accounting estimate. The economic terms of the inventor agreements, operating agreements and contingent legal fee arrangements associated with the patent portfolios owned or controlled by our operating subsidiaries, if any, including royalty rates, contingent fee rates and other terms, vary across the patent portfolios owned or controlled by our operating subsidiaries. Inventor royalties, noncontrolling interests and contingent legal fees expenses fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of revenue agreements executed each period and the mix of specific patent portfolios with varying economic terms and obligations generating revenues each period. Inventor royalties, noncontrolling interests and contingent legal fees expenses will continue to fluctuate and may continue to vary significantly period to period, based primarily on these factors. For fiscal years 2016, 2015 and 2014, the majority of our revenue agreements provided for the payment to us of one-time, paid-up license fees in consideration for the grant of certain intellectual property rights for patented technology rights owned by our operating subsidiaries. These rights were primarily granted on a perpetual basis, extending until the expiration of the underlying patents. Pursuant to the terms of these agreements, our operating subsidiaries have no further obligation with respect to the grant of the non-exclusive licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on our operating subsidiaries’ part to maintain or upgrade the technology, or provide future support or services. The agreements provided for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement. As such, the earnings process was determined to be complete and revenue was recognized upon the execution of the agreements, when all other revenue recognition criteria were met. Historically, term license agreements have not been a material component of our operating revenues, with the majority of license agreements being paid-up, perpetual license agreements. 32 Stock-based Compensation Expense Stock-based compensation payments to employees and non-employee directors are recognized as expense in the statements of operations. The compensation cost for all stock-based awards is measured at the grant date, based on the fair value of the award (determined using a Black-Scholes option pricing model for stock options and intrinsic value on the date of grant for nonvested restricted stock), and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Determining the fair value of stock-based awards at the grant date requires significant estimates and judgments, including estimating the market price volatility of our common stock, future employee stock option exercise behavior and requisite service periods. Stock-based compensation expense for awards with service and / or performance conditions that affect vesting is recorded only for those awards expected to vest using an estimated pre-vesting forfeiture rate. As such, we are required to estimate pre-vesting option forfeitures at the time of grant and reflect the impact of estimated pre-vesting option forfeitures on compensation expense recognized. Estimates of pre-vesting forfeitures must be periodically revised in subsequent periods if actual forfeitures differ from those estimates. We consider several factors in connection with our estimate of pre-vesting forfeitures, including types of awards, employee class, performance criteria, historical pre-vesting forfeiture data and other considerations. The estimation of stock awards that will ultimately vest requires judgment, and to the extent that actual results differ from our estimates, such amounts will be recorded as cumulative adjustments in the period the estimates are revised. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted. Refer to Notes 2 and 11 to our notes to consolidated financial statements included elsewhere herein. During the year ended December 31, 2016, the Company granted 138,000 shares of restricted stock and 200,000 stock options (with weighted- average exercise price of $5.75 per share) with performance-based vesting conditions. The awards vest based upon the Company achieving specified cash flow performance targets over a one and two-year period from the date of grant. Under the terms of the award, the number of restricted shares or stock options that will actually vest is based on the extent to which the Company achieves the specified performance targets during the performance period. As of December 31, 2016, 138,000 shares of restricted stock and 200,000 stock options with performance-based vesting conditions remain unvested. As of December 31, 2016, recognized expense for awards with performance-based vesting conditions totaled $197,000 and unrecognized expense for awards with performance-based vesting conditions totaled $683,000. During the year ended December 31, 2016, the Company also granted 2,250,000 stock options with market-based vesting conditions, with a weighted-average exercise price of $5.75 per share. The options with market-based vesting conditions vest based upon the Company achieving specified stock price targets over a four-year period. Under the terms of the award, the number of stock options that will actually vest is based on the extent to which the Company achieves the specified performance targets during the four-year performance period. The stock options vest in equal installments of 25% upon the Company's achievement of 30-day average share prices ranging from $7.00 to $10.00. As of December 31, 2016 1,687,500 options with market-based vesting conditions remain unvested. As of December 31, 2016, unrecognized expense for options with market-based vesting conditions totaled $2.4 million which is expected to be recognized over an estimated 1 year period. The effect of a market-based vesting 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 for an option with a market-based vesting condition provided that the requisite service is rendered, regardless of when, if ever, the market condition is satisfied. The service period for options with a market-based vesting condition is inferred from the application of the Monte Carlo valuation technique. The derived service period represents the duration of the median of the distribution of share price paths on which the market condition is satisfied. The duration is the period of time from the service inception date to the expected date of satisfaction, as determined from the valuation technique. Assumptions utilized in connection with the Monte Carlo valuation technique included: estimated risk-free interest rate of .92%; expected volatility of 55%; and expected dividend yield of 0%. 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. Valuation of Long-lived and Intangible Assets Including Goodwill Patent Portfolio and Goodwill Impairment Testing. Pursuant to applicable accounting standards, if goodwill and another asset group of a reporting unit are tested for impairment at the same time, the other asset group, in our case our patent portfolios, are to be tested for impairment before goodwill. Patent Portfolio Impairment Testing. 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 33 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 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. We performed an impairment analysis for our patents as of December 31, 2015, utilizing the assistance of a third-party valuation specialist, resulting in $74.7 million of patent portfolio impairment charges, for the following reasons: • In December 2015, we announced that our subsidiary Adaptix, Inc. received a jury verdict in its case against Alcatel Lucent USA, Inc., and others. The jury returned a verdict that the asserted claims of the applicable patent at issue were invalid and non-infringed. The Adaptix trial loss resulted in a reduction in estimated cash flows for the Adaptix portfolio expected to be realized from future licensing and enforcement activities, leading to impairment charges on the portfolio in the fourth quarter of 2015. • Management considered the impact of the fourth quarter 2015 adverse trial outcomes on our estimates of future cash flows that could be realized from future licensing and enforcement activities for other patent portfolios. Estimates of future cash flows for certain portfolios were reduced in part, in connection with our assessment of probabilities of realization given the recent adverse trial outcomes. • Patent impairment charges include the carrying value of other patent portfolios for which, in the fourth quarter of 2015, we experienced adverse litigation or trial outcomes, leading to a reduction in or elimination of expected future cash flows. In addition, headcount reductions and internal staff optimization efforts led to changes with respect to which patent portfolios we intend to allocate licensing and enforcement resources to in future periods. As such, certain portfolio programs were selected for termination due to a decision to no longer pursue or allocate resources, resulting in a write-off of any remaining carrying value in the fourth quarter of 2015. Further, for the fiscal year ended December 31, 2016, we recorded $42.3 million of patent portfolio impairment charges, primarily comprised of the write-off of the remaining carrying value of our Adaptix portfolio. The impairment charges were recorded in the period due to adverse litigation outcomes, a reduction in expected estimated future net cash flows and certain patent portfolios that management determined it would no longer allocate future resources to in connection with the licensing and enforcement of such portfolios. The impairment charges consisted of the excess of the asset’s carrying value over its estimated fair value as of the applicable measurement date. Estimated fair value was determined based on estimates of future cash flows and estimates of probabilities of realization given adverse litigation outcomes and resource allocation decisions. Goodwill Impairment Testing - December 31, 2015. At December 31, 2015, prior to the completion of the annual goodwill impairment test, the goodwill balance totaled $30.1 million. Goodwill is tested for impairment at our single reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Factors considered important, which could trigger an impairment review, include the following: • • • • • significant consistent gradual decline in the Company's stock price for a sustained period; significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of assets or the strategy for the Company's overall business; significant negative industry or economic trends; and significant adverse changes in legal factors or in the business climate, including adverse regulatory actions or assessments. We consider our market capitalization and other valuation techniques, as applicable, when estimating fair value for goodwill impairment testing purposes. When conducting annual and interim goodwill impairment assessments, we initially perform a qualitative evaluation (considering factors described above as applicable) of whether it is more likely than not that goodwill is impaired. If it is determined by a qualitative evaluation that it is more likely than not that goodwill is impaired, we apply a two-step impairment. The two-step impairment test first compares the estimated fair value of our single reporting unit to its carrying or book value. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and there is no requirement to perform further testing. If the carrying value of the reporting unit exceeds its estimated fair value, we are required to perform step-two of the impairment analysis to determine the estimated implied fair value of the reporting unit’s goodwill, and if the carrying value of the reporting unit’s goodwill exceeds its estimated implied fair value, then an impairment loss equal to the difference is recorded in the consolidated statements of operations. 34 In connection with our annual goodwill impairment testing for 2015, we identified several qualitative factors triggering an impairment test at December 31, 2015, as follows; • Adverse legal outcomes and changes in legal factors. In December 2015, we announced that our subsidiary Adaptix, Inc. received a jury verdict in its case against Alcatel Lucent USA, et al., deciding that the claims of the applicable patent in suit were invalid and non-infringed. This adverse legal outcome and others in the fourth quarter of 2015 resulted in changes in estimates of realization related to litigation outcomes in future periods for certain patent portfolios. • Consistent gradual decline in the Company’s stock price: Historically, our stock price has been volatile, and the volatility continued during fiscal 2015, declining from $16.72 as of January 2, 2015, to $4.29 as of December 31, 2015, a 74% decline. In addition, subsequent to December 31, 2015, our stock price volatility has continued, trending downward to $3.16 as of February 29, 2016. In the fourth quarter of 2015, given the continued decline in stock price up through December 31, 2015, and the impact of the December 2015 adverse trial outcomes noted above, the gradual consistent decline in our stock price was deemed to be sustained, and hence indicative of a reduction in the estimated fair value of our company, as reflected in our lower overall market capitalization. • Changes in Company Management and Resource Allocations. In connection with certain resource allocation changes within the organization due to changes in our management in the fourth quarter of 2015, headcount reductions and internal staff optimization efforts occurred, which led to changes with respect to estimates of which patent portfolios we intend to continue to allocate licensing and enforcement resources to in future periods. As such, certain patent portfolio programs were selected for termination due to our decision to no longer allocate resources to those programs. In addition, we made changes in estimates regarding the best and highest use of certain patent portfolios, resulting in reductions in estimated future cash flows. At December 31, 2015, we utilized the following methods and assumptions in our annual goodwill impairment testing, which was prepared with the assistance of a third-party valuation specialist: • At December 31, 2015, the initial qualitative assessment included consideration of the factors described above, resulting in a conclusion that as of December 31, 2015, the consistent gradual decline in our stock price was sustained. We also considered the impact of the December 2015 adverse trial outcomes on our stock price and related estimates of fair value for remaining portfolio opportunities. Based on our assessment of these factors, we determined that it was more likely than not that goodwill was impaired, constituting a triggering event requiring a goodwill impairment test as of December 31, 2015. • We conducted the first step of the goodwill impairment test for our single reporting unit as of December 31, 2015. We utilized the market capitalization plus cost synergies approach to estimate the fair value of the Company. The estimated market capitalization was determined by multiplying our stock price and the common shares outstanding as of December 31, 2015. Management also considered a control premium in its estimate of fair value for our single reporting unit. The cost synergies were estimated based on the cost savings which could be achieved if the Company was acquired by a competitor in the same operating business. • Based on the analysis utilizing the market capitalization plus cost synergies approach, the estimated fair value of the reporting unit of $252 million was below its carrying value of $344.3 million as of December 31, 2015, and therefore, goodwill was determined to be more likely than not, impaired. • The purpose of step 2 of the analysis was to determine the estimated fair value of the assets and liabilities of our reporting unit, in order to determine the implied fair value of goodwill for the reporting unit. The excess, if any, of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. Based upon the analysis performed, the fair value of our reporting unit did not exceed the amounts assigned to our reporting unit assets and liabilities, resulting in a difference between the implied fair value of goodwill of zero and the historical carrying value of goodwill. As a result, we recognized a goodwill impairment charge totaling $30.1 million in the fourth quarter of 2015. Accounting for Income Taxes As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the estimating of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items. These differences result in deferred 35 tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statements of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and our valuation allowance. Due to uncertainties related to our ability to utilize certain deferred tax assets in future periods, we have recorded a full valuation allowance against our net deferred tax assets as of December 31, 2016 and 2015. These assets primarily consist of foreign tax credits, capital loss carryforwards and net operating loss carryforwards. In assessing the need for a valuation allowance, management has considered both the positive and negative evidence available, including but not limited to, estimates of future taxable income and related probabilities, estimates surrounding the character of future income and the timing of realization, consideration of the period over which our deferred tax assets may be recoverable, our recent history of net income and prior history of losses, projected future outcomes, industry and market trends and the nature of existing deferred tax assets. In management’s estimate, any positive indicators, including forecasts of potential future profitability of our businesses, are outweighed by the uncertainties surrounding our estimates and judgments of potential future taxable income, primarily due to uncertainties surrounding the timing of realization of future taxable income and the character of such income in particular future periods (i.e. foreign or domestic). In the event that actual results differ from these estimates or we adjust these estimates should we believe we would be able to realize these deferred tax assets in the future, an adjustment to the valuation allowance would increase income in the period such determination was made. For example, a similar analysis was performed in the first quarter of 2012, resulting in the release of the valuation allowance on the majority of our net deferred tax assets and a related tax benefit of $10.7 million recognized in the first quarter of 2012. In 2016, 2015 and 2014, based on management’s assessment, a full valuation allowance was recorded against the company’s net deferred tax assets generated during the periods and the balances as of the end of each of the periods, due to uncertainty regarding future realization of such tax assets pursuant to guidance set forth in ASC 740, “Income Taxes.” In future periods, if we determine that the company will more likely than not be able to realize certain of these amounts, the applicable portion of the benefit from the release of the valuation allowance will generally be recognized in the statement of operations in the period the determination is recorded. Any changes in the judgments, assumptions and estimates associated with our analysis of the need for a valuation allowance in any future periods could materially impact our financial position and results of operations in the periods in which those determinations are made. Consolidated Results of Operations Comparison of the Results of Operations for Fiscal Years 2016, 2015 and 2014 Revenues 2016 2015 2014 $ Change % Change $ Change % Change (in thousands, except percentage change values and number of agreements) 2016 vs. 2015 2015 vs. 2014 Revenues $ 152,699 $ 125,037 $ 130,876 $ 27,662 22% $ (5,839) (4)% New revenue agreements executed Average revenue per agreement 39 63 88 $ 3,915 $ 1,985 $ 1,487 A reconciliation of the change in revenues (based on average revenue per agreement) for the periods presented, in relation to the revenues reported for the comparable prior year period, is as follows: Decrease in number of agreements executed Increase in average revenue per agreement executed Total 2016 vs. 2015 2015 vs. 2014 (in thousands) (47,633) $ 75,295 27,662 $ (37,181) 31,342 (5,839) $ $ 36 Three licensees individually accounted for 26%, 23% and 11%, respectively, of revenues recognized during the year ended December 31, 2016. Three licensees individually accounted for 24%, 20% and 16%, respectively, of revenues recognized during the year ended December 31, 2015. Two licensees individually accounted for 22% and 22%, respectively, of revenues recognized during the year ended December 31, 2014. For the periods presented herein, the majority of the revenue agreements executed provided for the payment of one-time, paid-up license fees in consideration for the grant of certain intellectual property rights for patented technology rights owned by our operating subsidiaries. These rights were primarily granted on a perpetual basis, extending until the expiration of the underlying patents. Net Loss 2016 2015 2014 $ Change % Change $ Change % Change 2016 vs. 2015 2015 vs. 2014 (in thousands, except percentages) Net loss attributable to Acacia Research Corporation $ (54,067) $ (160,036) $ (66,029) $ 105,969 (66)% $ (94,007) 142% A reconciliation of the change in net loss for the periods presented is as follows: Increase (decrease) in revenues (Increase) decrease in inventor royalties and contingent legal fees combined Decrease in general and administrative expenses (Increase) decrease in litigation and licensing expenses Decrease in patent amortization expenses (Increase) decrease in impairment of patent-related intangible assets (Increase) decrease in impairment for goodwill Change in provision for income taxes Other Net change in net loss Cost of Revenues $ $ 2016 vs. 2015 % 2015 vs. 2014 % (in thousands, except percentage values) 27,662 26 % $ (5,839) 6 % (14,573) (14)% 5,257 11,515 18,859 32,391 30,149 (13,388) 8,097 5 % 11 % 18 % 31 % 28 % (13)% 8 % 9,602 10,378 (1,759) 678 (71,234) (30,149) (888) (4,796) (10)% (11)% 2 % (1)% 76 % 32 % 1 % 5 % 105,969 100 % $ (94,007) 100 % 2016 2015 2014 $ Change % Change $ Change % Change 2016 vs. 2015 2015 vs. 2014 (in thousands, except percentages) Inventor royalties Contingent legal fees Litigation and licensing expenses - patents Amortization of patents $ 22,730 $ 18,462 $ 20,670 $ 4,268 23 % $ 26,474 27,858 34,208 16,169 39,373 53,067 23,563 37,614 53,745 10,305 (11,515) (18,859) 64 % (29)% (36)% (2,208) (7,394) 1,759 (678) (11)% (31)% 5 % (1)% Inventor Royalties and Contingent Legal Fees Expense. The economic terms of patent partnering agreements, operating agreements and contingent legal fee arrangements, associated with the patent portfolios owned or controlled by our operating subsidiaries, if any, including royalty obligations, if any, royalty rates, contingent fee rates and other terms and conditions, vary across the patent portfolios owned or controlled by our operating subsidiaries. In certain instances, we have invested in certain patent portfolios without future inventor royalty obligations. These costs fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of revenue agreements executed each period and the mix of specific patent portfolios with varying economic terms, conditions and obligations generating revenues each period. 37 A summary of the main drivers of the change in inventor royalties expense and contingent legal fees expense, in relation to the change in total revenues, for the comparable periods presented, is as follows: 2016 vs. 2015 % of Prior Period Balance 2015 vs. 2014 % of Prior Period Balance Inventor Royalties: (in thousands, except percentage change values) Increase (decrease) in inventor royalty rates Increase (decrease) in total revenues Decrease (increase) in revenues without inventor royalty obligations Total change - inventor royalties expense $ $ 11,518 4,729 (11,979) 4,268 62 % $ 26 % (65)% 23 % $ (3,995) (1,214) 3,001 (2,208) (20)% (6)% 15 % (11)% 2016 vs. 2015 % of Prior Period Balance 2015 vs. 2014 % of Prior Period Balance Contingent Legal Fees: (in thousands, except percentage change values) Increase (decrease) in contingent legal fee rates $ Increase (decrease) in total revenues Decrease (increase) in revenues without contingent legal fee obligations Total change - contingent legal fees $ 6,850 3,719 (264) 10,305 43 % $ 23 % (2)% 64 % $ (6,400) (1,096) 102 (7,394) (27)% (4)% — % (31)% Litigation and Licensing Expenses - Patents. Litigation and licensing expenses-patents include patent-related litigation, enforcement and prosecution costs incurred by external patent attorneys engaged on an hourly basis and the out-of-pocket expenses incurred by law firms engaged on a contingent fee basis. Litigation and licensing expenses-patents also includes licensing and enforcement related third-party patent research, development, prosecution, re-exam and inter partes reviews, consulting, and other costs incurred in connection with the licensing and enforcement of patent portfolios. Litigation and licensing expenses-patents fluctuate from period to period based on patent enforcement and prosecution activity associated with ongoing licensing and enforcement programs and the timing of the commencement of new licensing and enforcement programs in each period. Fiscal year 2016 litigation and licensing expenses-patents decreased, as compared to fiscal year 2015, due primarily to a net decrease in litigation support and third-party technical consulting expenses associated with patent trials and ongoing licensing and enforcement programs. Fiscal year 2015 litigation and licensing expenses-patents increased, as compared to fiscal year 2014, due primarily to a net increase in litigation support and third-party technical consulting expenses associated with trials occurring in 2015 and scheduled to occur in 2016, and ongoing and new licensing and enforcement programs commenced during fiscal year 2015. We expect patent-related legal expenses to continue to fluctuate period to period as we incur increased costs related to upcoming scheduled and/or anticipated trial dates, international enforcement activities and strategic patent portfolio prosecution activities over the next several fiscal quarters, as we continue to focus on our investments in these areas. 38 Amortization of Patents. The change in amortization expense for the comparable periods presented was due to the following: Amortization of patent portfolio investments made since the end of the prior year, not partially or fully recovered Scheduled amortization related to patent portfolios owned or controlled as of the end of the prior year Accelerated amortization related to recovery of upfront advances Patent portfolio dispositions Total change in patent amortization expense Impairment Charges 2016 vs. 2015 2015 vs. 2014 (in thousands) $ $ — $ (18,704) 225 (380) (18,859) $ 402 2,489 (1,247) (2,322) (678) 2016 2015 2014 $ Change % Change $ Change % Change 2016 vs. 2015 2015 vs. 2014 (in thousands, except percentages) Impairment of patent-related intangible assets $ 42,340 $ 74,731 $ 3,497 $ (32,391) (43)% $ 71,234 Impairment of goodwill — 30,149 — (30,149) (100)% 30,149 2,037% 100% Patent Impairment Charges 2016 versus 2015. Patent portfolio impairment charges totaled $42.3 million and $74.7 million in fiscal years 2016 and 2015, respectively. The impairment charges for the periods presented reflect the impact of reductions in expected estimated future net cash flows for certain portfolios due to adverse litigation outcomes and certain patent portfolios that management determined it would no longer allocate licensing and enforcement resources to in future periods. The impairment charges consisted of the excess of the asset’s carrying value over its estimated fair value as of the applicable measurement date. 2015 versus 2014. Patent portfolio impairment charges totaled $74.7 million and $3.5 million in fiscal years 2015 and 2014, respectively. The impairment charges for the periods presented reflect the impact of reductions in expected estimated future net cash flows for certain portfolios due to adverse litigation outcomes and industry factors and certain patent portfolios that management determined it would no longer allocate licensing and enforcement resources to in future periods. The impairment charges consisted of the excess of the asset’s carrying value over its estimated fair value as of the applicable measurement date. Refer to Critical Accounting Policies elsewhere herein for additional information. Impairment of Goodwill We conducted an annual goodwill impairment test as of December 31, 2015. Based upon the difference between the implied fair value of goodwill and the historical carrying value of goodwill, due primarily to the sustained decline in our stock price and adverse litigation outcomes in the fourth quarter of 2015, we recognized a goodwill impairment charge totaling $30.1 million in the fourth quarter of 2015. Refer to Critical Accounting Policies elsewhere herein for additional information. Operating Expenses 2016 2015 2014 $ Change % Change $ Change % Change 2016 vs. 2015 2015 vs. 2014 (in thousands, except percentages) General and administrative Non-cash stock compensation $ 23,857 $ 27,128 $ 30,439 $ 9,062 11,048 18,115 (3,271) (1,986) (12)% $ (18)% (3,311) (7,067) Total general and administrative expenses $ 32,919 $ 38,176 $ 48,554 $ (5,257) (14)% $ (10,378) (11)% (39)% (21)% Research, consulting and other expenses - business development 3,079 3,391 3,840 (312) (9)% (449) (12)% 39 General and Administrative Expenses. General and administrative expenses include employee compensation and related personnel costs, including variable performance based compensation and non-cash stock compensation expenses, office and facilities costs, legal and accounting professional fees, public relations, marketing, stock administration, state taxes based on gross receipts and other corporate costs. A summary of the main drivers of the change in general and administrative expenses for the periods presented, is as follows (in thousands): Net change in personnel costs Variable performance-based compensation costs Corporate, general and administrative costs Non-cash stock compensation expense (1) Employee severance costs Total change in general and administrative expenses _________________________________________________________________ (1) - Refer to Note 11 in the accompany consolidated financial statements 2016 vs. 2015 2015 vs. 2014 (in thousands) (5,841) $ 1,839 1,594 (1,986) (863) (5,257) $ (1,264) (1,631) (985) (7,067) 569 (10,378) $ $ Non-cash stock compensation expense decreased due primarily to a decrease in the average grant date fair value for the shares expensed in the respective periods. The decrease was partially offset by an increase in fiscal year 2016 for non-cash stock compensation expense related to the grant of options with market-based vesting conditions with graded vesting features, resulting in higher non-cash stock compensation expense during the earlier stages of the applicable service period. Research, Consulting and Other Expenses - Business Development. Research, consulting and other expenses include third-party business development related research, development, consulting, and other costs incurred in connection with business development activities. These costs fluctuate period to period based on business development related activities in each period. Other Operating Expenses Fiscal year 2016, 2015 and 2014 operating expenses included expenses for court ordered attorney fees and settlement and contingency accruals totaling $500,000, $4.1 million and $1.5 million, respectively. Income Taxes Provision for income taxes (in thousands) $ (18,188) $ (4,800) $ Effective tax rate 50% 3% (3,912) 6% 2016 2015 2014 Our effective tax rates for fiscal year 2016, 2015 and 2014, were primarily comprised of foreign taxes withheld on revenue agreements with licensees in foreign jurisdictions and other state taxes, and the impact of full valuation allowances recorded for net operating loss (2015 and 2014) and foreign tax credit related tax assets generated in those periods due to uncertainty regarding future realization. Our effective tax rate for fiscal year 2014 also included the reversal of a net deferred tax liability at the beginning of the year totaling $1.7 million. Foreign taxes withheld related to revenue agreements executed with third-party licensees domiciled in certain foreign jurisdictions for fiscal year 2016, 2015 and 2014 totaled $17.9 million, $4.4 million and $5.2 million, respectively. Recent Developments On February 16, 2017, AIP Operation LLC, a Delaware limited liability company (“AIP”), and an indirect subsidiary of Acacia Research Corporation, adopted a Profits Interest Plan (the “Plan”) that provides for the grant of equity interests in AIP to certain members of management and our Board of Directors as compensation for services rendered for or on behalf of AIP. Each profits interest unit granted pursuant to the Plan is intended to qualify as a “profits interest” for U.S. federal income tax purposes and will only have value to the extent the equity value of AIP increases beyond the value at issuance. The equity interests are represented by units (the “Units”) reserved for the issuance of awards under the Plan. The Units entitle the holders to share in or be allocated certain AIP profits and losses and to receive or share in AIP distributions pursuant to the AIP Limited Liability Company Operating Agreement entered into as of February 16, 2017 (the “LLC Agreement”). In connection with the 40 adoption of the Plan, a form of Profits Interest Agreement was approved pursuant to which Units may be granted from time to time. Units vest upon AIP’s achievement of certain performance milestones, subject to the continued service of the recipient, and are subject to the terms and conditions of the Plan, the Profits Interest Agreement and the LLC Agreement. We own substantially all of the equity in AIP and at all times will control AIP. Although AIP currently holds no material assets, we from time to time may contribute to AIP certain assets or securities related to portfolio companies in which we hold an interest. Units may be awarded as one-time, discretionary grants to recipients. Inflation Inflation has not had a significant impact on us or any of our subsidiaries in the current or prior periods. Liquidity and Capital Resources General Our primary sources of liquidity are cash, cash equivalents and short-term investments on hand generated from our operating activities. Our management believes that our cash and cash equivalent balances, investments, and anticipated cash flow from operations will be sufficient to meet our cash requirements through at least March 2018 and for the foreseeable future. We may, however, encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated, including those set forth under Item 1A, “Risk Factors”, above. Any efforts to seek additional funding could be made through issuances of equity or debt, or other external financing. However, additional funding may not be available on favorable terms, if at all. The capital and credit markets have experienced extreme volatility and disruption since 2007 and the volatility and impact of the disruption has continued into 2016. At times during this period, the volatility and disruption has reached unprecedented levels. In several cases, the markets have exerted downward pressure on stock prices and credit capacity for certain issuers, and there can be no assurance that the commercial paper markets will be a reliable source of short-term financing for us. If we fail to obtain additional funding when needed, we may not be able to execute our business plans and our business, conducted by our operating subsidiaries, may suffer. Certain of our operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. In connection with any of our operating subsidiaries’ patent enforcement actions, it is possible that a defendant may request and/or a court may rule that an operating subsidiary has violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material. Cash, Cash Equivalents and Investments Our consolidated cash and cash equivalents and investments on hand, excluding restricted cash balances, totaled $147.0 million at December 31, 2016, compared to $135.2 million at December 31, 2015. The net change in cash and cash equivalents for the periods presented was comprised of the following (in thousands): Net cash provided by (used in): Operating activities Investing activities Financing activities 2016 2015 2014 $ 34,061 $ (9,949) $ (40,630) (1,114) 39,307 (28,601) $ (7,683) $ 757 $ 4,184 29,297 (25,700) 7,781 Cash Flows from Operating Activities. Cash receipts from licensees totaled $160.2 million, $111.0 million and $117.0 million in fiscal years 2016, 2015 and 2014, respectively. The fluctuations in cash receipts for the periods presented primarily reflects the corresponding fluctuations in revenues recognized during the same periods, as described above, and the related timing of payments received from licensees. Cash outflows from operations totaled $126.1 million, $120.9 million and $112.9 million in fiscal years 2016, 2015 and 2014, respectively. The fluctuations in cash outflows for the periods presented reflects 41 the fluctuations in revenue-related inventor royalties and contingent legal fees and other operating costs and expenses during the same periods, as discussed above, and the impact of the timing of payments to inventors, attorneys and other vendors. Restricted Cash. In March 2015, an operating subsidiary of ours entered into a Guarantee with a bank in connection with enforcing a ruling in a German patent court granting an injunction against the defendants in the related patent infringement case. The Guarantee is secured by a cash deposit (classified as restricted cash in the accompanying balances sheets) at the contracting bank, totaling $11.5 million and $10.7 million at December 31, 2016 and 2015, respectively. See below for additional information. Cash Flows from Investing Activities. Cash flows from investing activities and related changes were comprised of the following for the periods presented (in thousands): Patent portfolio investment costs Advances to Investee(1) Net sale (purchase) of available-for-sale investments Other Net cash provided by (used in) investing activities _________________________________________________________________ (1) - Refer to Note 8 in the accompany consolidated financial statements 2016 2015 2014 $ (1,225) $ (19,504) $ (42,746) (20,000) (19,401) (4) — 58,819 (8) $ (40,630) $ 39,307 $ — 72,152 (109) 29,297 Strategic Partnership. In August 2016, we formed a strategic partnership with Veritone pursuant to which we expect to leverage our expertise in intellectual property licensing and enforcement to assist Veritone with building its patent portfolio and execute upon its overall intellectual property strategy. As a part of this strategic partnership, we entered into an Investment Agreement with Veritone that provides for us to invest up to $50 million in Veritone, consisting of both debt and equity components. Pursuant to the Investment Agreement, on August 15, 2016, we entered into a secured convertible promissory note with Veritone (the “Veritone Loans”), which permits Veritone to borrow up to $20 million through two $10 million advances, each bearing interest at the rate of 6.0% per annum. On August 15, 2016, we funded the initial $10 million loan (the “First Loan”), which originally had a one-year term. On November 25, 2016, we funded the second $10 million loan (the “Second Loan”), which matures on November 25, 2017. In addition, upon the funding of the Second Loan, the maturity date of the First Loan was automatically extend to November 25, 2017. Veritone’s obligations under the Veritone Loans are secured by substantially all of Veritone’s assets pursuant to a security agreement that we entered into with Veritone dated August 15, 2016. In addition, commencing on the earlier of Veritone’s consummation of a private round of financing of at least $10 million (a “Next Equity Financing”) and the maturity date of the Veritone Loans, we have the right, under certain circumstances, to convert all or a portion of the principal and accrued interest of the Veritone Loans into shares of Veritone’s Series B Preferred Stock or, if Veritone consummates a Next Equity Financing, into shares of Veritone capital stock issued in such financing, at various conversion rates, with the exact conversion rate to depend upon (i) whether Veritone consummates a Next Equity Financing, (ii) the price per share in such Next Equity Financing and (iii) whether or not Acacia elects to convert all of the outstanding principal and accrued interest under the Veritone Loans. If Veritone consummates a qualified public offering of its common stock, any outstanding principal and accrued interest under the Veritone Loans will automatically convert into shares of Veritone common stock at the applicable conversion rate. In conjunction with the First Loan, Veritone issued us a four-year $700,000 warrant to purchase shares of Veritone’s common stock at various exercise prices, with the actual exercise price to be determined by the type and/or valuation of Veritone’s future equity financings, if any. The actual number of shares to be purchased upon exercise of the warrant is determined by dividing the warrant value by the applicable exercise price. In conjunction with the funding of the Second Loan, Veritone issued to us two additional four-year $700,000 warrants to purchase shares of Veritone’s common stock with similar terms. In addition, pursuant to the Investment Agreement, Veritone issued us a five-year Primary Warrant to purchase up to $50 million, less all converted amounts or payments under the Veritone Loans, worth of shares of Veritone’s common stock at various exercise prices, with the actual exercise price per share to be determined by the amount of principal and accrued interest under the Veritone Loans converted into shares of Veritone common stock. Acacia may exercise the Primary Warrant at any time during its five-year term after the earlier of August 15, 2017 or the completion of a public offering of common stock by Veritone with gross proceeds to Veritone of at least $15.0 million. Upon the consummation of a public offering as described 42 above, and subject to the satisfaction of certain other conditions, Veritone has the right to elect that we exercise the Primary Warrant, and upon such election, we agree to exercise the Primary Warrant in full. Immediately following our exercise of the Primary Warrant in full, Veritone has the obligation to issue to us an additional 10% Warrant that provides for the issuance of additional shares of Veritone common stock, with 50% of the shares underlying the 10% Warrant vesting as of the issuance date of the 10% Warrant, and the remaining 50% of shares vesting on the anniversary of the issuance date of the 10% Warrant. Cash Flows from Financing Activities. Cash flows from financing activities and related changes included the following for the periods presented (in thousands): Dividends paid to stockholders Distributions to noncontrolling interests - Acacia IP Fund Proceeds from the exercise of stock options Repurchases of common stock Net cash provided by financing activities 2016 2015 2014 $ — $ (25,434) $ (25,039) (1,358) (4,105) 326 (82) 938 — (867) 206 — $ (1,114) $ (28,601) $ (25,700) Dividends to Stockholders. In April 2013, our Board of Directors approved the adoption of a cash dividend policy that called for the payment of an expected total annual cash dividend of $0.50 per common share, payable in the amount of $0.125 per share per quarter. Under the policy, we paid quarterly cash dividends totaling $25.4 million and $25.0 million in 2015 and 2014, respectively. On February 23, 2016, we announced that our Board of Directors terminated the dividend policy effective immediately. Our Board of Directors terminated the dividend policy due to a number of factors, including our financial performance, our available cash resources, our cash requirements and alternative uses of capital that our Board of Directors concluded would represent an opportunity to generate a greater return on investment for us and our stockholders. Working Capital The primary components of working capital are cash and cash equivalents, restricted cash, short-term investments, accounts receivable, prepaid expenses, accounts payable, accrued expenses, and royalties and contingent legal fees payable. Working capital at December 31, 2016 was $160.3 million, compared to $150.7 million at December 31, 2015. Consolidated accounts receivable from licensees decreased to $26.8 million at December 31, 2016, compared to $33.5 million at December 31, 2015. Accounts receivable balances fluctuate based on the timing, magnitude and payment terms associated with revenue agreements executed during the year, and the timing of cash receipts on accounts receivable balances recorded in previous periods. Four licensees individually represented approximately 39%, 22%, 16% and 15%, respectively, of accounts receivable at December 31, 2016. Two licensees individually represented approximately 72% and 21%, respectively, of accounts receivable at December 31, 2015. Accounts payable and accrued expenses decreased to $14.3 million at December 31, 2016, from $17.3 million at December 31, 2015, due primarily to the related timing of payments to vendors in the ordinary course. Consolidated royalties and contingent legal fees payable decreased to $13.9 million at December 31, 2016, compared to $14.9 million at December 31, 2015. Royalties and contingent legal fees payable balances fluctuate based on the magnitude and timing of the execution of related license agreements, the timing of cash receipts for the related license agreements, and the timing of payment of current and prior period royalties and contingent legal fees payable to inventor and outside attorneys, respectively. The majority of accounts receivable from licensees at December 31, 2016 were collected or scheduled to be collected in the first quarter of 2017, in accordance with the terms of the related underlying license agreements. The majority of royalties and contingent legal fees payable are scheduled to be paid in the first and second quarter of 2017 in accordance with the underlying contractual arrangements. 43 Off-Balance Sheet Arrangements We have not entered into off-balance sheet financing arrangements, other than operating leases. Contractual Obligations We have no significant commitments for capital expenditures in 2017. Other than our restricted cash of $11.5 million as of December 31, 2016, we have no committed lines of credit or other committed funding or long-term debt. The following table lists our material known future cash commitments as of December 31, 2016, and any material known commitments arising from events subsequent to year end: Contractual Obligations Payments Due by Period (In thousands) Total Less than 1 year 1-3 years 3-5 years More than 5 years Operating leases, net of guaranteed sublease income $ 3,987 $ 1,279 $ 2,692 $ 16 $ Investment Agreement - Primary Warrant Put Right, contingent obligation (1) Total contractual obligations ___________________________________________________ (1) - Refer to description of Strategic Partnership - Veritone, above 30,000 — 30,000 $ 33,987 $ 1,279 $ 32,692 $ — 16 $ — — — Standby Letter of Credit and Guarantee Arrangement. In March 2015, an operating subsidiary of ours entered into a standby letter of credit and guarantee arrangement (“Guarantee”) with a bank for purposes of enforcing a court ruling in a German patent court granting an injunction against the defendants in the related patent infringement case. An injunction is an equitable remedy in the form of a court order that compels the defendant(s) to cease marketing, offering for sale or importing applicable infringing products into applicable jurisdiction(s). Under German law, in order to enforce the injunction granted by the court, a Guarantee is required to be furnished by our operating subsidiary, the plaintiff in the case, for potential payment to the defendants of any applicable claims which may be incurred by the defendants as a result of the enforcement of the injunction, only in the event that the aforementioned court ruling is subsequently successfully appealed by the defendants or otherwise amended. The Guarantee is required to be issued unlimited with respect to time, until appropriately extinguished in accordance with German law. The Guarantee will be extinguished when a relevant extinguishment order by the court having jurisdiction takes effect, typically occurring when the related infringement case has been settled or a final non-appealable decision has been issued by the court. The Guarantee is secured by a cash deposit at the contracting bank totaling $11.5 million and $10.7 million at December 31, 2016 and 2015, respectively, which is classified as restricted cash in the accompanying balance sheet. The Guarantee expires on April 10, 2016, however, it is automatically extended without amendment for a period of one (1) year from the present or any future expiration date, unless at least 30 days prior to any expiration date, the Guarantee is extinguished in accordance with German law. The Guarantee facility fee is 1.15% per year, and the related expense is included in the statement of operations. Uncertain Tax Positions. At December 31, 2016, we had total unrecognized tax benefits of approximately $1.7 million, including a recorded noncurrent liability of $85,000 related to unrecognized tax benefits primarily associated with state taxes. No interest and penalties have been recorded for the unrecognized tax benefits as of December 31, 2016 and 2015. If recognized, approximately $1.4 million would impact our effective tax rate. We do not expect that the liability for unrecognized tax benefits will change significantly within the next 12 months. The change in total unrecognized tax benefits as of December 31, 2016 was due to a lapse of the applicable statute of limitations related to an unrecognized benefit originating in a prior period. Recent Accounting Pronouncements Refer to Note 2 to our notes to consolidated financial statements included elsewhere herein. 44 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of our investment activities is to preserve principal while concurrently maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may be subject to interest rate risk and/or market risk. This means that a change in prevailing interest rates, with respect to interest rate risk, or a change in the value of the United States equity markets, with respect to market risk, may cause the principal amount or market value of the investments to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the current value of the principal amount of our investment may decline. To minimize these risks in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, high-grade corporate bonds, government and non-government debt securities and certificates of deposit. At December 31, 2016, our short-term investments were comprised of AAA rated money market funds that invest in first-tier only securities, which primarily include domestic commercial paper, securities issued or guaranteed by the U.S. government or its agencies, U.S. bank obligations, and fully collateralized repurchase agreements (included in cash and cash equivalents in the accompanying consolidated balance sheets), and direct investments in highly liquid, AAA, U.S. government securities (included in short term investments in the accompanying consolidated balance sheets). Short-term investment balances were zero at December 31, 2015. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. Accordingly, a 100 basis point increase in interest rates or a 10% decline in the value of the United States equity markets would not be expected to have a material impact on the value of such money market funds. Investments in U.S. government fixed income securities are subject to interest rate risk and will decline in value if interest rates increase. However, due to the relatively short duration of our investment portfolio, an immediate 10% change in interest rates would have no material impact on our financial condition, results of operations or cash flows. Declines in interest rates over time will, however, reduce our interest income. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and related financial information required to be filed hereunder are indexed under Item 15 of this report and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in the Rules 13a- 15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act) required by Exchange Act Rules 13a-15(b) or 15d-15(b), our principal executive officer and our principal financial officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were not effective as a result of the material weakness in our internal control over financial reporting discussed below. Changes in internal controls. There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described below. Material Weakness. As reported in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 filed with the SEC on November 14, 2016 (“Third Quarter 2016 10-Q”), we identified a material weakness in our internal control over financial reporting relating to the sufficiency of company resources with accounting technical knowledge and expertise related to the accounting and disclosure of infrequent, unusual, or complex accounting matters. Specifically, an internal control failure occurred that allowed for misapplication of Accounting Standards Codification (“ASC”) 718-10, 45 “Compensation - Stock Compensation,” in connection with the accounting for stock options with market-based vesting conditions, granted during the third quarter of 2016, which impacted stock based compensation expense recorded in the third quarter of 2016. We properly reflected the non-cash stock compensation expense in our consolidated financial statements included in our Third Quarter 2016 10-Q. We did not grant any equity-based awards with market-based vesting conditions prior to the third quarter of 2016. We were not required to restate or change our consolidated financial statements for any prior annual or interim period. Our management concluded that this deficiency constitutes a material weakness in our internal control over financial reporting. We developed a remediation plan for this material weakness, which we describe below. Inherent Limitations on Effectiveness of Controls. Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Management’s Annual Report on Internal Control Over Financial Reporting. Our management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation, our management has concluded that our internal control over financial reporting was not effective as of December 31, 2016, due to the material weakness in our internal control over financial reporting discussed herein. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Grant Thornton LLP, our independent registered public accounting firm, audited the effectiveness of our internal control over financial reporting as of December 31, 2016, as stated in their report which appears in Item 15(a) of this Annual Report on Form 10-K. Remediation Plan. In connection with our evaluation of disclosure controls and procedures in connection with the filing of our Third Quarter 2016 10-Q, we disclosed that we were developing a plan to address the material weakness and enhance our control procedures related to infrequent, unusual, or complex accounting matters, and anticipated implementation of this remediation plan in the fourth quarter of 2016. We developed and implemented the remediation plan to address the internal control deficiency that led to the material weakness in the fourth quarter of 2016. The remediation plan includes the following elements: • • The revised procedures apply to all material new, infrequent, unusual or complex transactions. Implemented specific revised review procedures for material new, infrequent, unusual or complex transactions, including the specific assessment of whether the accounting for material new, infrequent, unusual or complex transactions should be conducted internally or outsourced to technical subject matter specialists, and enhanced review procedures involving both our chief financial officer and corporate controller with respect to the review and assessment of such transactions, designed to enhance our overall assessment and controls; and • Strengthening our material new, infrequent, unusual or complex transaction controls with improved documentation standards and technical oversight. Our enhanced review procedures and documentation standards were in place and operating during the fourth quarter of 2016. However, due to the short period of time and limited use of this new control as contemplated by the applicable Public Company Accounting Oversight Board standards, we are unable to conclude in this report as to the operating effectiveness of our enhanced review procedures and documentation standards as of December 31, 2016. Our goal is to remediate this material weakness as contemplated by the standards by the end of the first quarter of 2017, subject to there being sufficient opportunities to conclude, through testing, that the enhanced control is operating effectively. 46 ITEM 9B. OTHER INFORMATION None ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE PART III Except as provided below, in accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2017 annual meeting of stockholders to be filed with the SEC no later than April 30, 2017. Code of Conduct. We have adopted a Code of Conduct that applies to all employees, including our chief executive officer, chief financial and accounting officer, president and any persons performing similar functions. Our Code of Conduct is provided on our internet website at www.acaciaresearch.com. ITEM 11. EXECUTIVE COMPENSATION In accordance with General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2017 annual meeting of stockholders to be filed with the SEC no later than April 30, 2017. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS In accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2017 annual meeting of stockholders to be filed with the SEC no later than April 30, 2017. 47 Equity Compensation Plan Information The following table provides information with respect to shares of our common stock issuable under our equity compensation plans as of December 31, 2016: Plan Category Equity compensation plans approved by security holders 2002 Acacia Technologies Stock Incentive Plan(1) 2013 Acacia Research Stock Incentive Plan(2) 2016 Acacia Research Stock Incentive Plan(3) ____________________ Subtotal (a) Number of securities to be issued upon exercise of outstanding options (b) Weighted-average exercise price of outstanding options (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) 15,000 $ 2,021,000 3,560,000 5,596,000 13.38 3.45 5.74 4.93 — — 1,754,000 1,754,000 (1) (2) (3) The 2002 Stock Plan expired in December 2012. Column (a) excludes 32,000 in nonvested restricted stock units outstanding at December 31, 2016. Refer to Note 11 to our notes to consolidated financial statements included elsewhere herein. The initial share reserve under the 2013 Acacia Research Stock Incentive Plan, or the 2013 Plan, was 4,750,000 shares of our common stock. Column (a) excludes 395,000 in nonvested restricted stock awards and restricted stock units outstanding at December 31, 2016. Refer to Note 11 to our notes to consolidated financial statements included elsewhere herein. In June 2016, 625,390 shares of common stock available for issuance under the 2013 Stock Plan were transferred into the 2016 Stock Plan. The initial share reserve under the 2016 Stock Plan was 4,500,000 shares plus 625,390 shares of common stock available for issuance under the 2013 Plan. No new additional shares will be added to the 2016 Plan without security holder approval (except for shares subject to outstanding awards that are forfeited or otherwise returned to the 2016 Plan). Refer to Note 11 to our notes to consolidated financial statements included elsewhere herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE In accordance with General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2017 annual meeting of stockholders to be filed with the SEC no later than April 30, 2017. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES In accordance with General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2017 annual meeting of stockholders to be filed with the SEC no later than April 30, 2017. 48  ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report. PART IV (1) Financial Statements Acacia Research Corporation Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2016 and 2015 Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016, 2015 and 2014 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016, 2015 and 2014 Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014 Notes to Consolidated Financial Statements (2) Financial Statement Schedules Page F- 1 F- 4 F- 5 F- 6 F- 7 F- 8 F- 9 Financial statement schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the Notes thereto. (3) Exhibits Refer to Item 15(b) below. (b) Exhibits. The following exhibits are either filed herewith or incorporated herein by reference: Exhibit Number Description 2.1 3.1 3.2 4.1 10.1* 10.2* 10.3* 10.4* 10.5* 10.6* Agreement and Plan of Merger, dated November 22, 2011, by and among Acacia Research Group LLC, Apollo Patent Corp., Adaptix, Inc., and Baker Communications Fund II (QP), L.P., solely in its capacity as representative for the shareholders of Adaptix, Inc.(15) Amended and Restated Certificate of Incorporation (1) Amended and Restated Bylaws (21) Tax Benefits Preservation Plan, dated as of March 16, 2016, by and between Acacia Research Corporation and Computershare Inc., as Rights Agent, which includes the form of Certificate of Designation of Series A Cumulative Participating Preferred Stock as Exhibit A, the Form of Right Certificate as Exhibit B and the Summary of Terms as Exhibit C (24) Acacia Research Corporation 1996 Stock Option Plan, as amended (2) Form of Option Agreement constituting the Acacia Research Corporation 1996 Executive Stock Bonus Plan (3) 2002 Acacia Technologies Stock Incentive Plan (4) 2007 Acacia Technologies Stock Incentive Plan (5) Form of Acacia Technologies Stock Option Agreement under the 2007 Acacia Technologies Stock Incentive Plan (6) Form of Acacia Technologies Stock Issuance Agreement under the 2002 Acacia Technologies Stock Incentive Plan (6) 49 10.7* 10.8 10.9 10.10 10.11* 10.12 10.13 10.15* 10.16* 10.17* 10.18 10.19 10.20* 10.21* 10.22* 10.23* 10.24* 10.25* 10.26* 18.1 21.1 23.1 24.1 31.1† 31.2† 32.1 32.2 Form of Acacia Technologies Stock Issuance Agreement under the 2007 Acacia Technologies Stock Incentive Plan (6) Office Space Lease dated January 28, 2002, between Acacia Research Corporation and The Irvine Company (7) Form of Indemnification Agreement (8) Third Amendment to Lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (9) Employment Agreement, dated September 22, 2015, by and between Acacia Research Group LLC and Edward Treska (20) Fourth Amendment to Lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (10) Fifth Amendment to Lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (10) Employment Agreement, dated September 22, 2015, by and between Acacia Research Group LLC and Robert L. Harris (20) Employment Agreement, dated September 22, 2015, by and between Acacia Research Group LLC and Clayton J. Haynes (20) Acacia Research Corporation Amended and Restated Executive Severance Policy (12) Sixth Amendment to Lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (14) Form of Purchase Agreement (16) 2013 Acacia Research Corporation Stock Incentive Plan (18) Form of Stock Issuance Agreement under the 2013 Acacia Research Corporation Stock Incentive Plan (19) Employment Agreement, dated September 22, 2015, by and between Acacia Research Group LLC and Matthew Vella (20) 2016 Acacia Research Corporation Stock Incentive Plan (22) Form of Stock Option Agreement under the 2016 Acacia Research Corporation Stock Incentive Plan Form of Stock Issuance Agreement under the 2016 Acacia Research Corporation Stock Incentive Plan Director Service Agreement, dated February 29, 2016, by and between Acacia Research Corporation and Robert L. Harris (23) Preferability Letter dated February 25, 2010 from Grant Thornton LLP, independent registered public accounting firm, regarding change in accounting principle (13) List of Subsidiaries Consent of Independent Registered Public Accounting Firm Power of Attorney (included in the signature page hereto). Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 Certification of Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 101 ___________________________ Interactive Date Files Pursuant to Rule 405 of Regulation S-T. * The referenced exhibit is a management contract, compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10- K pursuant to Item 15(c) of Form 10-K. † The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K are not deemed filed with the SEC and are not to be incorporated by reference into any filing of Acacia Research Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, regardless of any general incorporation language contained in any filing. 50 (1) (2) (3) (4) (5) (6) (7) (8) (9) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on June 5, 2008 (File No. 000-26068). Incorporated by reference to Appendix A to Acacia Research Corporation’s Definitive Proxy Statement on Schedule 14A filed on April 20, 2000 (File No. 000-26068). Incorporated by reference to Appendix A to Acacia Research Corporation’s Definitive Proxy Statement on Schedule 14A filed on April 26, 1996 (File No. 000-26068). Incorporated by reference to Annex E to the Proxy Statement/Prospectus which formed part of Acacia Research Corporation’s Registration Statement on Form S-4 (File No. 333-87654) which became effective on November 8, 2002. Incorporated by reference to Acacia Research Corporation’s Registration Statement on Form S-8 (File No. 333-144754) which became effective on July 20, 2007. Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 2007, filed on November 2, 2007 (File No. 000-26068). Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10‑K for the year ended December 31, 2001, filed on March 27, 2002 (File No. 000‑26068). Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q for the period ended June 30, 2012, filed on July 30, 2012 (File No. 000-26068). Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q for the period ended March 31, 2006, filed on May 10, 2006 (File No. 000‑26068). (10) Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on March 14, 2008 (File No. 000-26068). (11) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on April 2, 2008 (File No. 000-26068). (12) (13) (14) (15) Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009 (File No. 000-26068). Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009, filed on February 26, 2010, as amended on March 1, 2010 (File No. 000-26068) Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010, filed on February 28, 2011, as amended on March 24, 2011 (File No. 000-26068). Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K/A filed on January 19, 2012 (File No. 000-26068). Portions of this exhibit have been omitted pursuant to a request for confidential treatment under Rule 24-b-2 of the Securities Exchange Act of 1934, as amended. The omitted material has been separately filed with the Securities and Exchange Commission. (16) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on February 16, 2012 (File No. 000-26068). (17) (18) Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012, filed on February 28, 2013 (File No. 000-26068). Incorporated by reference to Appendix A to Acacia Research Corporation’s Definitive Proxy Statement on Schedule 14A filed on April 24, 2013 (File No. 000-26068). (19) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on May 22, 2013 (File No. 000-26068). 51 (20) Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q filed on November 9, 2015 (File No. 000-26068). (21) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on March 28, 2016 (File No. 000-37721). (22) Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q filed on August 9, 2016 (File No. 001-37721). (23) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on March 4, 2016 (File No. 000-26068). (24) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on March 21, 2016 (File No. 000-26068). 52 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES Dated: March 10, 2017 By: ACACIA RESEARCH CORPORATION /s/ Marvin Key Marvin Key Interim Chief Executive Officer (Authorized Signatory) POWER OF ATTORNEY We, the undersigned directors and officers of Acacia Research Corporation, do hereby constitute and appoint Marvin Key and Clayton J. Haynes, and each of them, as our true and lawful attorneys-in-fact and agents with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney- in-fact and agent may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments hereto; and we do hereby ratify and confirm all that said attorney-in-fact and agent, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and the capacities and on the dates indicated. Signature Title Date /s/ Marvin Key Marvin Key /s/ Clayton J. Haynes Clayton J. Haynes /s/ Fred A. de Boom Fred A. de Boom /s/ Edward W. Frykman Edward W. Frykman /s/ G. Louis Graziadio, III G. Louis Graziadio, III /s/ William S. Anderson William S. Anderson /s/ Frank E. Walsh, III Frank E. Walsh, III Interim Chief Executive Officer (Principal Executive Officer) March 10, 2017 Chief Financial Officer and Treasurer March 10, 2017 (Principal Financial and Accounting Officer) Director Director March 10, 2017 March 10, 2017 Executive Chairman and Director March 10, 2017 Director Director 53 March 10, 2017 March 10, 2017 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Acacia Research Corporation We have audited the accompanying consolidated balance sheets of Acacia Research Corporation (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Acacia Research Corporation as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2017, expressed an adverse opinion. /s/ GRANT THORNTON LLP Irvine, California March 10, 2017 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Acacia Research Corporation We have audited the internal control over financial reporting of Acacia Research Corporation (the “Company”) as of December 31, 2016, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. The matter involving internal controls and procedures that management considered to be a material weakness involves the sufficiency of company resources with accounting technical knowledge and expertise related to the accounting and disclosure of infrequent, unusual, or complex accounting matters. Specifically, a control failure occurred that allowed for misapplication of Accounting Standards Codification 718-10, “Compensation - Stock Compensation,” in connection with the accounting for stock options with market-based vesting conditions, granted during the third quarter of 2016, which impacted stock- based compensation expense for the third quarter of 2016. In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control- Integrated Framework issued by COSO. F- 2 We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2016. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2016 consolidated financial statements, and this report does not affect our report dated March 10, 2017, which expressed an unqualified opinion on those financial statements. /s/ GRANT THORNTON LLP Irvine, California March 10, 2017 F- 3 ACACIA RESEARCH CORPORATION CONSOLIDATED BALANCE SHEETS As of December 31, 2016 and 2015 (In thousands, except share and per share information) ASSETS 2016 2015 Current assets: Cash and cash equivalents Restricted cash Short-term investments Accounts receivable Deferred income tax Prepaid expenses and other current assets Total current assets Loan receivable and accrued interest (Note 8) Investment in warrants (Note 8) Property and equipment, net Patents, net of accumulated amortization Other assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses Accrued patent investment costs Royalties and contingent legal fees payable Total current liabilities Deferred income taxes Other liabilities Total liabilities Commitments and contingencies (Note 12) Stockholders’ equity: Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; no shares issued or outstanding Common stock, par value $0.001 per share; 100,000,000 shares authorized; 50,476,042 shares issued and outstanding as of December 31, 2016 and 50,651,239 shares issued and outstanding as of December 31, 2015 Treasury stock, at cost, 1,729,408 shares as of December 31, 2016 and 2015 Additional paid-in capital Accumulated comprehensive loss Accumulated deficit Total Acacia Research Corporation stockholders’ equity Noncontrolling interests in operating subsidiaries Total stockholders’ equity The accompanying notes are an integral part of these consolidated financial statements. F- 4 $ 296,003 $ $ 127,540 $ 11,512 19,443 26,750 — 3,245 188,490 18,616 1,960 127 86,319 491 $ 296,003 $ $ 14,283 $ — 13,908 28,191 — 369 28,560 — 50 (34,640) 642,453 (76) (342,198) 265,589 1,854 267,443 135,223 10,725 — 33,500 210 4,219 183,877 — — 272 162,642 1,110 347,901 17,347 1,000 14,878 33,225 210 311 33,746 — 51 (34,640) 633,146 (215) (288,131) 310,211 3,944 314,155 347,901 ACACIA RESEARCH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2016, 2015 and 2014 (In thousands, except share and per share information) Revenues Operating costs and expenses: Cost of revenues: Inventor royalties Contingent legal fees Litigation and licensing expenses - patents Amortization of patents General and administrative expenses (including non-cash stock compensation expense of $9,062 in 2016, $11,048 in 2015 and $18,115 in 2014) Research, consulting and other expenses - business development Impairment of patent-related intangible assets Impairment of goodwill Other 2016 2015 2014 $ 152,699 $ 125,037 $ 130,876 22,730 26,474 27,858 34,208 32,919 3,079 42,340 — 500 18,462 16,169 39,373 53,067 38,176 3,391 74,731 30,149 4,141 20,670 23,563 37,614 53,745 48,554 3,840 3,497 — 1,548 Total operating costs and expenses 190,108 277,659 193,031 Operating loss Total other income (expense) Loss from operations before provision for income taxes Provision for income taxes Net loss including noncontrolling interests in operating subsidiaries Net (income) loss attributable to noncontrolling interests in operating subsidiaries Net loss attributable to Acacia Research Corporation Net loss attributable to common stockholders - basic and diluted Basic and diluted loss per common share (37,409) (152,622) (62,155) 798 (56) (595) (36,611) (18,188) (54,799) 732 (152,678) (4,800) (157,478) (2,558) (62,750) (3,912) (66,662) 633 (54,067) $ (160,036) $ (66,029) (54,067) $ (160,730) $ (66,755) (1.08) $ (3.25) $ (1.37) $ $ $ Weighted-average number of shares outstanding, basic and diluted 50,075,847 49,505,817 48,658,088 Cash dividends declared per common share $ — $ 0.50 $ 0.50 The accompanying notes are an integral part of these consolidated financial statements. F- 5 ACACIA RESEARCH CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS For the Years Ended December 31, 2016, 2015 and 2014 (In thousands) Net loss including noncontrolling interests in operating subsidiaries Other comprehensive income (loss): Unrealized gain (loss) on short-term investments, net of tax of $0 Unrealized gain (loss) on foreign currency translation, net of tax of $0 Add: reclassification adjustment for losses included in net loss Total other comprehensive loss Comprehensive income (loss) attributable to noncontrolling interests Comprehensive loss attributable to Acacia Research Corporation $ $ 2016 2015 2014 (54,799) $ (157,478) $ (66,662) 40 77 22 (54,660) 732 (53,928) $ (356) (123) 617 (157,340) (2,558) (159,898) $ (1,488) (128) 2,210 (66,068) 633 (65,435) The accompanying notes are an integral part of these consolidated financial statements. F- 6 ACACIA RESEARCH CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Years Ended December 31, 2016, 2015 and 2014 (In thousands, except share information) Common Shares Common Stock Treasury Stock Additional Paid-in Capital Accumulated Comprehensive Loss Accumulated Deficit Noncontrolling Interests in Operating Subsidiaries Total Balance at December 31, 2013 49,385,057 $ 49 $(34,640) $ 653,314 $ (947) $ (62,066) $ 6,488 $562,198 Net loss attributable to Acacia Research Corporation Dividends paid to stockholders Stock options exercised Compensation expense for share-based awards, net of forfeitures Net loss attributable to noncontrolling interests in operating subsidiaries Distributions to noncontrolling interests in operating subsidiary Unrealized loss on foreign currency translation Unrealized gain on short-term investments — — 44,506 — — — — — — — (25,039) 206 635,819 1 — 18,114 — — — — — — — — — — — — — — — — — — — — — — (99) 693 (66,029) — — — — — — — — — — (66,029) (25,039) 206 — 18,115 (633) (633) (364) — — (364) (99) 693 Balance at December 31, 2014 50,065,382 50 (34,640) 646,595 (353) (128,095) 5,491 489,048 Net loss attributable to Acacia Research Corporation Dividends paid to stockholders Stock options exercised Compensation expense for share-based awards, net of forfeitures Net income attributable to noncontrolling interests in operating subsidiaries Distributions to noncontrolling interests in operating subsidiary Unrealized loss on foreign currency translation Unrealized gain on short-term investments — — 135,000 — — — — — — — (25,434) 938 450,857 1 — 11,047 — — — — — — — — — — — — — — — — — — — — — — (123) 261 (160,036) — — — — (160,036) — — (25,434) 938 — 11,048 — 2,558 2,558 — — — (4,105) (4,105) — — (123) 261 Balance at December 31, 2015 50,651,239 51 (34,640) 633,146 (215) (288,131) 3,944 314,155 Net loss attributable to Acacia Research Corporation Stock options exercised Compensation expense for share-based awards, net of forfeitures — 100,992 — — — — — 326 (262,660) (1) — 9,063 Repurchase of restricted common stock (13,529) Net loss attributable to noncontrolling interests in operating subsidiaries Distributions to noncontrolling interests in operating subsidiary Unrealized gain on foreign currency translation Unrealized gain on short-term investments — — — — — — — — — — — — (82) — — — — — — — — — 40 99 (54,067) — — — — — — — — (54,067) 326 — 9,062 (82) (732) (732) (1,358) (1,358) — — 40 99 Balance at December 31, 2016 50,476,042 $ 50 $(34,640) $ 642,453 $ (76) $ (342,198) $ 1,854 $267,443 The accompanying notes are an integral part of these consolidated financial statements. F- 7 ACACIA RESEARCH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2016, 2015 and 2014 (In thousands) Cash flows from operating activities: Net loss including noncontrolling interests in operating subsidiaries $ (54,799) $ (157,478) $ (66,662) Adjustments to reconcile net loss including noncontrolling interests in operating subsidiaries to net cash provided by (used in) operating activities: 2016 2015 2014 Depreciation and amortization Non-cash stock compensation Deferred income taxes Impairment of patent-related intangible assets Impairment of goodwill Other Changes in assets and liabilities: Restricted cash Accounts receivable Prepaid expenses and other assets Accounts payable and accrued expenses / patent costs Royalties and contingent legal fees payable 34,355 9,062 — 42,340 — (477) (787) 6,750 1,593 (3,006) (970) 53,289 11,048 — 74,731 30,149 (109) (10,725) (13,332) (619) 2,570 527 Net cash provided by (used in) operating activities 34,061 (9,949) 54,049 18,115 (1,736) 3,497 — (28) — (13,827) 3,154 3,718 3,904 4,184 Cash flows from investing activities: Patent portfolio investment costs Advances to Investee (Note 8) Purchases of property and equipment Purchases of short-term investments Sales and maturities of short-term investments (1,225) (20,000) (4) (62,633) 43,232 (19,504) (42,746) — (8) (23,296) 82,115 — (109) (109,963) 182,115 Net cash provided by (used in) investing activities (40,630) 39,307 29,297 Cash flows from financing activities: Dividends paid to stockholders Distributions to noncontrolling interests in operating subsidiary Proceeds from the exercise of stock options Repurchases of restricted common stock Net cash used in financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning Cash and cash equivalents, ending Supplemental schedule of noncash investing activities: Patent portfolio investment costs included in accrued expenses / costs — (1,358) 326 (82) (25,434) (4,105) 938 — (25,039) (867) 206 — (1,114) (28,601) (25,700) (7,683) 757 7,781 135,223 134,466 126,685 127,540 $ 135,223 $ 134,466 — $ 1,000 $ 16,700 $ $ The accompanying notes are an integral part of these consolidated financial statements. F- 8 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Description of Business. As used herein, “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. All patent investment, prosecution, licensing and enforcement activities are conducted solely by certain of Acacia’s wholly and majority-owned and controlled operating subsidiaries. Acacia’s operating subsidiaries invest in, license and enforce 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. Acacia’s operating subsidiaries generate revenues and related cash flows from the granting of intellectual property 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 intellectual property through our relationships with inventors, universities, research institutions, technology companies and others. If Acacia's operating subsidiaries are unable to maintain those relationships and to continue to 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 fiscal 2016 Acacia obtained control of 2 new patent portfolios. Further, in fiscal year 2015, Acacia obtained control of 3 new patent portfolios, compared to 6 new patent portfolios, and 25 new patent portfolios in fiscal years 2014 and 2013, respectively. 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting Principles and Fiscal Year End. The consolidated financial statements and accompanying notes are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America. Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Acacia and its wholly and majority-owned and controlled subsidiaries. Material 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 stockholders’ equity for total noncontrolling interests. 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 is included in the Company’s consolidated financial statements since 2010, as Acacia’s wholly owned subsidiary, as the general partner, has the ability to control the operations and activities of the Acacia IP Fund. Refer to Note 12 to these consolidated financial statements. F- 9 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Revenue Recognition. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been substantially performed pursuant to the terms of the arrangement, (iii) amounts are fixed or determinable, and (iv) the collectibility of amounts is reasonably assured. In general, revenue arrangements provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by Acacia’s operating subsidiaries. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies owned or controlled by Acacia’s operating subsidiaries, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The intellectual property rights granted may be perpetual in nature, extending until the expiration of the related patents, or can be granted for a defined, relatively short period of time, with the licensee possessing the right to renew the agreement at the end of each contractual term for an additional minimum upfront payment. Pursuant to the terms of these agreements, Acacia’s operating subsidiaries have no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on Acacia’s operating subsidiaries’ part to maintain or upgrade the technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement, or upon receipt of the minimum upfront payment for term agreement renewals. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, when collectibility is reasonably assured, or upon receipt of the minimum upfront fee for term agreement renewals, and when all other revenue recognition criteria have been met. For the periods presented herein, the majority of the revenue agreements executed by the Company provided for the payment of one-time, paid-up license fees in consideration for the grant of certain intellectual property rights for patented technology rights owned by our operating subsidiaries. These rights were primarily granted on a perpetual basis, extending until the expiration of the underlying patents. Certain of the Company’s revenue arrangements provide for future royalties or additional required payments based on future licensee activities. Additional royalties are recognized in revenue upon resolution of the related contingency provided that all revenue recognition criteria, as described above, have been met. Amounts of additional royalties due under these license agreements, if any, cannot be reasonably estimated by management. Certain of the Company’s revenue arrangements provide for the calculation of fees based on a licensee’s actual quarterly sales or actual per unit activity, applied to a contractual royalty rate. Licensees that pay fees on a quarterly basis generally report actual quarterly sales or actual per unit activity information and related quarterly fees due within 30 days to 45 days after the end of the quarter in which such sales or activity takes place. The amount of fees due under these revenue arrangements each quarter cannot be reasonably estimated by management. Consequently, Acacia’s operating subsidiaries recognize revenue from these revenue arrangements on a three-month lag basis, in the quarter following the quarter of sales or per unit activity, provided amounts are fixed or determinable and collectibility is reasonably assured. The lag method described above allows for the receipt of licensee royalty reports prior to the recognition of revenue. Amounts related to revenue arrangements that do not meet the revenue recognition criteria described above are deferred until the revenue recognition criteria are met. Acacia assesses the collectibility of fees receivable based on a number of factors, including past transaction history and credit-worthiness of licensees. If it is determined that collection is not reasonably assured, the fee is recognized when collectibility becomes reasonably assured, assuming all other revenue recognition criteria have been met, which is generally upon receipt of cash. Cost of Revenues. 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, 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 “Cost of revenues” 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. In certain instances, pursuant to the terms of the underlying inventor agreements, upfront advances paid to patent owners by Acacia’s operating subsidiaries are recoverable from future net revenues. Patent costs 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 F- 10 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS revenues are expensed in the period recovered, and included in amortization expense in the consolidated statements of operations. Refer to Note 12 for additional information. 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. Fair Value Measurements. U.S. generally accepted accounting principles define 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: ● ● ● Level 1 - Level 2 - Level 3 - Observable Inputs: Quoted prices in active markets for identical investments; Pricing Models with Significant Observable Inputs: Other significant observable inputs, including quoted prices for similar investments, interest rates, credit risk, etc.; and 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. Acacia has not elected the fair value option for recording non-financial assets and liabilities, and therefore no fair value measurements are performed on a recurring basis. Cash and Cash Equivalents. Acacia considers all highly liquid, short-term investments 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. Investments in Marketable Securities. Investments in securities with original maturities of greater than three months and less than one year and other investments representing amounts that are available for current operations are classified as short-term investments, unless there are indications that such investments may not be readily sold in the short term. The fair values of these investments approximate their carrying values. As of December 31, 2015, the balance of short term investments was zero. At December 31, 2016, all of Acacia’s short-term investments were classified as available-for-sale, which are reported at fair value on a recurring basis using significant observable inputs (Level 1), with related unrealized gains and losses in the value of such securities recorded as a separate component of other comprehensive income (loss) in stockholders’ equity until realized. Realized and unrealized gains and losses are recorded based on the specific identification method. Interest on all securities is included in total other income (expense). Impairment of Marketable Securities. Acacia evaluates its investments in marketable securities for potential impairment, employing a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence. If the cost or carrying value of an investment exceeds its estimated fair value, the Company evaluates, among other factors, general market conditions, credit quality of instrument issuers, the duration and extent to which the fair value is less than cost, and the Company’s intent and ability to hold, or plans or ability to sell. Fair value is estimated based on publicly available market information or other estimates determined by management. Investments are considered to be impaired when a decline in fair value is estimated to be other-than-temporary. Acacia reviews impairments associated with its investments in marketable securities and determines the classification of any impairment as temporary or other-than-temporary. An impairment is deemed other-than-temporary unless (a) Acacia has the ability and intent to hold an investment for a period of time sufficient for recovery of its carrying amount and (b) positive evidence indicating that the investment’s carrying amount is recoverable within a reasonable period of time outweighs any evidence to the contrary. All available evidence, both positive and negative, is considered to determine whether, based on the weight of such evidence, the carrying amount of the investment is recoverable within a reasonable period of time. For investments classified as available-for-sale, unrealized losses that are other-than-temporary are recognized in the consolidated statements of operations. Concentration of Credit Risks. Financial instruments that potentially subject Acacia to concentrations of credit risk are cash equivalents, investments and accounts receivable. Acacia places its cash equivalents and investments primarily in highly rated money market funds and investment grade marketable securities. Cash equivalents are also invested in deposits with F- 11 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Three licensees individually accounted for 26%, 23% and 11%, respectively, of revenues recognized during the year ended December 31, 2016. Three licensees individually accounted for 24%, 20% and 16%, respectively, of revenues recognized during the year ended December 31, 2015. Two licensees individually accounted for 22% and 22%, respectively, of revenues recognized during the year ended December 31, 2014. Four licensees individually represented approximately 39%, 22%, 16% and 15%, respectively, of accounts receivable at December 31, 2016. Two licensees individually represented approximately 72% and 21%, respectively, of accounts receivable at December 31, 2015. For 2016, 2015 and 2014, 79%, 49% and 43%, respectively, of revenues were attributable to licensees domiciled in foreign jurisdictions, based on the jurisdiction of the entity obligated to satisfy payment obligations pursuant to the applicable revenue arrangement. The Company does not have any material foreign operations. Acacia performs credit evaluations of its licensees with significant receivable balances, if any, and has not experienced any significant credit losses. Accounts receivable are recorded at the executed contract amount and generally do not bear interest. Collateral is not required. An allowance for doubtful accounts may be established to reflect the Company’s best estimate of probable losses inherent in the accounts receivable balance, and is reflected as a contra- asset account on the balance sheet and a charge to operating expenses in the statement of operations for the applicable period. The allowance is determined based on known troubled accounts, historical experience, and other currently available evidence. There was no allowance for doubtful accounts established for the periods presented. Property and Equipment. Property and equipment are recorded at cost. Major additions and improvements that materially extend useful lives of property and equipment are capitalized. Maintenance and repairs are charged against the results of operations as incurred. When these assets are sold or otherwise disposed of, the asset and related depreciation are relieved, and any gain or loss is included in the consolidated statements of operations for the period of sale or disposal. Depreciation and amortization is computed on a straight-line basis over the following estimated useful lives of the assets: Furniture and fixtures Computer hardware and software Leasehold improvements 3 to 5 years 3 to 5 years 2 to 5 years (Lesser of lease term or useful life of improvement) Rental payments on operating leases are charged to expense in the consolidated statements of operations on a straight-line basis over the lease term. 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, ranging from one to ten years. Certain patent application and prosecution costs incurred to secure additional patent claims, that based on management’s estimates are deemed to be recoverable, are capitalized and amortized over the remaining estimated economic useful life of the related patent portfolio. Goodwill. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (December 31) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Acacia considers its market capitalization and the carrying value of its assets and liabilities, including goodwill, when performing its goodwill impairment test. When conducting its annual goodwill impairment assessment, the Company initially performs a qualitative evaluation of whether it is more likely than not that goodwill is impaired. If it is determined by a qualitative evaluation that it is more likely than not that goodwill is impaired, the Company then applies a two-step impairment test. The two-step impairment test first compares the fair value of the Company’s reporting unit to its carrying or book value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the reporting unit exceeds its fair value, the Company determines the implied fair value of the reporting unit’s goodwill and if the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the difference is recorded in the consolidated statement of operations. Acacia's goodwill balance of $30.1 million was fully written-off as of December 31, 2015. Refer to Note 7 for additional information. 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 F- 12 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. Refer to Note 7 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 the 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 share 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. Fair Value of Financial Instruments. The carrying value of cash and cash equivalents, investments, accounts receivables, and accounts payable approximates their fair values due to their short-term maturities. Contingent Liabilities. The Company, from time to time, is involved in certain legal proceedings. Based upon consultation with outside counsel handling its defense in these matters and the Company’s analysis of potential outcomes, if the Company determines that a loss arising from such matters is probable and can be reasonably estimated, an estimate of the contingent liability is recorded in its consolidated financial statements. If only a range of estimated loss can be determined, an amount within the range that, based on estimates, assumptions and judgments, reflects the most likely outcome, is recorded as a contingent liability in the consolidated financial statements. In situations where none of the estimates within the estimated range is a better estimate of probable loss than any other amount, the Company records the low end of the range. Any such accrual would be charged to expense in the appropriate period. Litigation expenses for these types of contingencies are recognized in the period in which the litigation services were provided. 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. Stock-based compensation expense for awards with service and / or performance conditions that affect vesting is recorded only for those awards expected to vest using an estimated forfeiture rate. Refer to Note 11 to these notes to consolidated financial statements for information on stock-based awards granted for the periods presented. The fair value of stock options granted during the year ended December 31, 2016 was estimated using the Black-Scholes option-pricing model, based on the following weighted-average assumptions: Risk-free interest rate Term Volatility Dividend yield Weighted-Average Assumptions 1.1% 3.06 53% —% Due to a lack of sufficient historical stock option exercise experience, the Company utilized the simplified method for estimating the expected term for stock options granted during the year ended December 31, 2016. Expected volatility is based on the historical volatility of the Company’s stock for the length of time corresponding to the expected term of the option. The risk-free interest rate is based on the U.S. treasury yield curve on the grant date for the expected term of the option. Restricted stock awards and stock option awards with performance-based vesting conditions generally vest based upon the Company achieving specified cash flow performance targets over a one and two-year period from the date of grant. F- 13 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Performance-based stock options awards with market-based vesting conditions vest based upon the Company achieving specified stock price targets over a four-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 for an option with a market-based vesting condition provided that the requisite service is rendered, regardless of when, if ever, the market condition is satisfied. The service period for options with a market-based vesting condition is inferred from the application of the Monte Carlo valuation technique. The derived service period represents the duration of the median of the distribution of share price paths on which the market condition is satisfied. The duration is the period of time from the service inception date to the expected date of satisfaction, as determined from the valuation technique. Assumptions utilized in connection with the Monte Carlo valuation technique included: estimated risk-free interest rate; expected volatility; and expected dividend yield. 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. 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. Under U.S. generally accepted accounting principles, a tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions are recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position will be sustained upon examination. Tax positions that meet the more likely than not threshold are measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. If a deduction reported on a tax return for an equity-based incentive award exceeds the cumulative compensation cost for those instruments recognized for financial reporting purposes, any resulting realized tax benefit that exceeds the previously calculated deferred tax asset for those instruments is considered an excess tax benefit, and is recognized as additional paid-in capital. If the tax deduction is less than the cumulative book compensation cost, the tax effect of the resulting difference is charged first to APIC, to the extent of the available pool of windfall tax benefits, with any remainder recognized in income tax expense. Segment Reporting. Acacia uses the management approach, which designates the internal organization that is used by management for making operating decisions and assessing performance as the basis of Acacia’s reportable segments. Acacia’s patent licensing and enforcement business constitutes its single reportable segment. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires 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, stock-based compensation expense, impairment of marketable securities and intangible assets, the determination of the economic useful life of amortizable intangible assets, income taxes and valuation allowances against net deferred tax assets, the allocation of loans to investees between the loans receivable and common stock purchase warrants received, and the application of the acquisition method of accounting for business combinations, require its most difficult, subjective or complex judgments. Income (Loss) Per Share. The Company computes net income (loss) attributable to common stockholders using the two-class method required for capital structures that include participating securities. Under the two-class method, securities that participate in non-forfeitable dividends, such as the Company’s outstanding unvested restricted stock, are considered “participating securities.” In applying the two-class method, (i) basic net income (loss) per share is computed by dividing net income (loss) (less any dividends paid on participating securities) by the weighted average number of shares of common stock and participating securities outstanding for the period and (ii) diluted earnings per share may include the additional effect of other securities, if dilutive, in which case the dilutive effect of such securities is calculated by applying the two-class method and the treasury stock method to the assumed exercise or vesting of potentially dilutive common shares. The method yielding the more dilutive result is ultimately reported for the applicable period. Potentially dilutive common stock equivalents primarily consist of F- 14 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS employee stock options, and restricted stock units for calculations utilizing the two-class method, and also include unvested restricted stock, when utilizing the treasury method. The following table presents the weighted-average number of common shares outstanding used in the calculation of basic and diluted income per share: Numerator (in thousands): Basic and Diluted Net loss Total dividends declared / paid Dividends attributable to common stockholders 2016 2015 2014 $ (54,067) $ (160,036) $ — — (25,434) 24,740 (66,029) (25,039) 24,313 (66,755) Net loss attributable to common stockholders – basic and diluted $ (54,067) $ (160,730) $ Denominator: Weighted-average shares used in computing net loss per share attributable to common stockholders – basic and diluted 50,075,847 49,505,817 48,658,088 Basic and diluted net loss per common share $ (1.08) $ (3.25) $ (1.37) Anti-dilutive equity-based incentive awards excluded from the computation of diluted loss per share 3,682,532 71,468 27,760 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. Recent Accounting Pronouncements - Not Yet Adopted. In May 2014, the FASB issued a new accounting standards update addressing revenue from contracts with customers, which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under the standard, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. The amendments for this standard update are effective for interim and annual reporting periods beginning after December 15, 2016, and are to be applied retrospectively or the cumulative effect as of the date of adoption, with early application not permitted. The Company is currently evaluating the impact and method of adoption the pronouncement will have on its consolidated financial statements and related disclosures. In November 2015, the FASB issued an accounting standard update to simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. This update is effective for annual reporting periods beginning after December 31, 2016, including interim periods within those annual periods, and early adoption is permitted. Management is currently assessing the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures. In February 2016, the FASB issued an accounting standard update which requires lessees to recognize most leases on the balance sheet. This is expected to increase both reported assets and liabilities. The new lease standard does not substantially change lessor accounting. For public companies, the standard will be effective for the first interim reporting period within annual periods beginning after December 15, 2018, although early adoption is permitted. Lessees and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new guidance, using a modified retrospective transition method. The requirements of this standard include a significant increase in required disclosures. Management is currently assessing the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures. In March 2016, the FASB issued a new standard that changes the accounting for certain aspects of share-based payments to employees. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. Management is currently assessing the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures. F- 15 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In June 2016, the FASB issued guidance on the measurement and recognition of credit losses on most financial assets. For trade receivables, loans, and held-to-maturity debt securities, the current probable loss recognition methodology is being replaced by an expected credit loss model. For available-for- sale debt securities, the recognition model on credit losses is generally unchanged, except the losses will be presented as an adjustable allowance. The guidance will be applied retrospectively with the cumulative effect recognized as of the date of adoption. The guidance will become effective at the beginning of our first quarter of fiscal 2021 but can be adopted as early as the beginning of our first quarter of fiscal 2020. Management is currently assessing the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures. Recently Adopted Accounting Pronouncements - Recently Adopted. In August 2014, the FASB issued a new accounting standard which requires management to assess an entity’s ability to continue as a going concern every reporting period including interim periods, and to provide related footnote disclosure in certain circumstances. Adoption of this standard is required for annual periods beginning after December 15, 2016 and are to be applied retrospectively or the cumulative effect as of the date of adoption. Early adoption is permitted. The adoption of this standard effective December 31, 2016 did not have a material impact on the Company's consolidated financial statements and related disclosures. In June 2014, the FASB issued a new accounting standard which requires that a performance target that affects vesting and could be achieved after the requisite service period shall be treated as a performance condition. Adoption of this standard is required for annual periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard effective January 2016 did not have a material impact on the Company's consolidated financial statements and related disclosures. In August 2016, the FASB issued amended guidance to clarify guidance on the classification of certain cash receipts and cash payments. Additionally, the guidance requires that the statement of cash flows reflect changes in restricted cash in addition to cash and cash equivalents. Amended guidance includes clarification on debt prepayment and extinguishment costs, contingent consideration in business combinations, proceeds from insurance claims, and premium payments on company-owned life insurance. Refer to the consolidated statement of cash flows elsewhere herein for separate presentation of changes in restricted cash. 3. SHORT-TERM INVESTMENTS Short-term marketable securities for the periods presented were comprised of the following (in thousands): Security Type December 31, 2016 Gross Unrealized Gains Cost Gross Unrealized Losses Fair Value U.S. government fixed income securities $ 19,403 $ 40 $ — $ 19,443 Short-term investments at December 31, 2016 were comprised of investments in highly liquid, AAA, U.S. government fixed income securities with maturity dates in 2017. There were no short-term investments at December 31, 2015. U.S. government fixed income securities. The Company has the ability to hold these securities until maturity, currently has no intent to sell, there is no requirement to sell and the Company believes that it can recover the amortized cost of these investments. The Company has found no evidence of impairment due to credit losses in its portfolio. However, the Company cannot provide any assurance that its portfolio of short-term marketable securities will not be impacted by adverse conditions in the financial markets, which may require the Company in the future to record an impairment charge for credit losses which could adversely impact its financial results. For the year ended December 31, 2016, proceeds from the sale of short-term marketable securities classified as available-for-sale were $43,232,000 and gross realized gains were $1,000. For the year ended December 31, 2015, proceeds from the sale of short-term marketable securities were $82,115,000 and gross realized losses were $617,000. For the year ended December 31, 2014, proceeds from the sale of short-term marketable securities were $182,115,000 and gross realized losses were $2,188,000. Gross realized gains are recorded in the statements of operations in other income (expense). F- 16 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 2016 and 2015 (in thousands): Furniture and fixtures Computer hardware and software Leasehold improvements Less: accumulated depreciation and amortization 2016 2015 $ 733 $ 603 131 1,467 (1,340) $ 127 $ 739 649 145 1,533 (1,261) 272 Depreciation expense was $147,000, $222,000 and $304,000 for the years ended December 31, 2016, 2015 and 2014, respectively. In 2016 and 2015, the Company retired $68,000 and $30,000, respectively, of items held in furniture and equipment and recorded a $3,000 and $14,000, respectively, loss on disposal. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following at December 31, 2016 and 2015 (in thousands): Payroll and other employee benefits Accrued vacation Accrued legal expenses - patent Foreign taxes payable (1) Accrued consulting and other professional fees Other accrued liabilities 2016 2015 $ 1,593 $ 533 6,564 3,150 1,967 476 $ 14,283 $ 576 701 10,135 3,960 1,592 383 17,347 (1) - Included in "Accounts payable and accrued expenses / patent costs" line item on the consolidated statement of cash flows included elsewhere herein. 6. PATENTS Acacia’s only identifiable intangible assets are patents and patent rights, with estimated remaining economic useful lives ranging from one to seven years. For all periods presented, all of Acacia’s identifiable intangible assets were subject to amortization. The gross carrying amounts and accumulated amortization related to investments in intangible assets as of December 31, 2016 and 2015 are as follows (in thousands): Gross carrying amount - patents Accumulated amortization - patents(1) Patents, net (1) Includes patent impairment charges for the applicable periods. 2016 2015 $ $ 444,362 $ (358,043) 86,319 $ 444,137 (281,495) 162,642 The weighted-average remaining estimated economic useful life of Acacia’s patents and patent rights is 5 years. Scheduled annual aggregate amortization expense is estimated to be $22,333,000 in 2017, $21,256,000 in 2018, $19,150,000 in 2019, $6,707,000 in 2020, $5,421,000 in 2021 and $11,452,000 thereafter. For the years ended December 31, 2016, 2015 and 2014, Acacia paid patent investment costs totaling $1,225,000, $19,504,000 and $42,746,000, respectively. The patents have initial estimated economic useful lives ranging from two to ten years. Included in net additions to capitalized patent costs during the year ended December 31, 2015 and 2014 are accrued F- 17 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS patent investment costs totaling $1,000,000 and $16,700,000, respectively, which are amortized over the estimated economic useful life of the related patents. During the periods presented, certain operating subsidiaries recovered up-front patent portfolio advances from applicable net licensing proceeds prior to the scheduled amortization of such up-front patent portfolio advances, resulting in the acceleration of amortization expense for the applicable patent-related assets. For the years ended December 31, 2016 and 2014, accelerated amortization expense related to the recovery of up-front patent portfolio advances totaled $225,000 and $1,247,000, respectively. For the year ended December 31, 2015, there was no accelerated amortization expense. For the years ended December 31, 2015 and 2014, pursuant to the terms of the respective inventor agreements, certain Acacia operating subsidiaries elected to terminate or sell their rights to patent portfolios, resulting in the acceleration of amortization expense for the patent-related assets totaling $380,000 and $2,702,000, respectively. For the year ended December 31, 2016, there were no terminations or sales of patent portfolios. Acacia recorded impairment of patent-related intangible asset charges totaling $42,340,000, $74,731,000 and $3,497,000 for the years ended December 31, 2016, 2015 and 2014, respectively. The impairment charges related to impairments of patent portfolios due to a reduction in expected estimated future net cash flows and certain patent portfolios that management determined it would no longer allocate future resources to in connection with the licensing and enforcement of such portfolios, due primarily to adverse litigation outcomes, potential prior art related complexities and/or the overall determination that future resources would be allocated to other licensing and enforcement programs with higher potential return profiles. In December 2015, Acacia's subsidiary Adaptix, Inc. received a jury verdict in its case against Alcatel Lucent USA, Inc., and others. The jury returned a verdict that the asserted claims of the patent at issue were invalid and non-infringed. The Adaptix trial loss resulted in a reduction in estimated cash flows for the Adaptix portfolio expected to be realized from future licensing and enforcement activities, leading to partial impairment charges on the portfolio in the fourth quarter of 2015. Patent impairment charges included the impairment of the remaining carrying value for the Adapitx portfolio in the second quarter of 2016. In addition, for the year ended December 31, 2015 analysis, management considered the impact of the fourth quarter 2015 adverse trial outcomes on its estimates of future cash flows that could be realized from future licensing and enforcement activities for other patent portfolios. Estimates of future cash flows for these portfolios were reduced in part in connection with the Company's assessment of probabilities of realization given the recent adverse trial outcomes. Additionally, patent impairment charges include the carrying value of other patent portfolios for which, in 2015, the Company experienced adverse litigation or trial outcomes, leading to a reduction in or elimination of expected future cash flows. In addition, headcount reductions and internal staff optimization efforts led to changes with respect to which patent portfolios the Company intends to allocate licensing and enforcement resources to in future periods. As such, certain portfolio programs were selected for termination due to a decision to no longer pursue or allocate resources, resulting in a write-off any remaining carrying value in the fourth quarter of 2015. The impairment charges for the periods presented consisted of the excess of the asset’s carrying value over its estimated fair value. For the years ended December 31, 2016, 2015 and 2014, capitalized patent costs, accumulated amortization, and sales proceeds related to patent- related sales and disposals are as follows (in thousands): Capitalized patent costs Accumulated amortization Sales proceeds 7. GOODWILL IMPAIRMENT CHARGES 2016 2015 2014 $ — $ — — 500 $ 120 750 3,000 298 3,500 Pursuant to applicable accounting standards, if goodwill and another asset group of a reporting unit are tested for impairment at the same time, the other asset group, the Company's patent portfolios, are to be tested for impairment before goodwill. Refer to Note 6 for additional information regarding patent impairment charges for the year ended December 31, 2015. F- 18 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Goodwill Impairment Testing - December 31, 2015. At December 31, 2015, prior to the completion of the annual goodwill impairment test, the goodwill balance totaled $30.1 million. Goodwill is tested for impairment at the Company's single reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Factors considered important, which could trigger an impairment review, include the following: • significant consistent gradual decline in the Company's stock price for a sustained period; • significant underperformance relative to expected historical or projected future operating results; • significant changes in the manner of use of assets or the strategy for the Company's overall business; • significant negative industry or economic trends; and • significant adverse changes in legal factors or in the business climate, including adverse regulatory actions or assessments. In connection with Acacia's annual goodwill impairment testing for 2015, the Company identified several qualitative factors triggering an impairment test at December 31, 2015, as follows: • Adverse legal outcomes and changes in legal factors. In December 2015, Acacia announced that its subsidiary Adaptix, Inc. received a jury verdict in its case against Alcatel Lucent USA, et al., deciding that the claims of the applicable patents in suit were invalid and non-infringed. This adverse legal outcome and others in the fourth quarter of 2015 resulted in changes in estimates of realization related to litigation outcomes in future periods for certain patent portfolios. • Significant consistent gradual decline in the Company’s stock price: Historically, the Company's stock price has been volatile, and the volatility continued during fiscal 2015, declining from $16.72 as of January 2, 2015, to $4.29 as of December 31, 2015, a 74% decline. In addition, subsequent to December 31, 2015, the Company's stock price volatility has continued, trending downward to $3.16 as of February 29, 2016. In the fourth quarter of 2015, given the continued decline in stock price up through December 31, 2015, and the impact of the December 2015 adverse trial outcomes noted above, the gradual consistent decline in the Company's stock price was deemed to be sustained, and hence indicative of a reduction in the estimated fair value of the Company, as reflected in its lower overall market capitalization. • Changes in Company Management and Resource Allocations. In connection with certain resource allocation changes within the organization given a change in management in the fourth quarter of 2015, headcount reductions and internal staff optimization efforts occurred, which led to changes with respect to estimates of which patent portfolios the Company intends to continue to allocate licensing and enforcement resources to in future periods. As such, certain patent portfolio programs were selected for termination due to a decision to no longer allocate resources. In addition, changes in estimates regarding the best and highest use of certain patent portfolios were made, resulting in reductions in estimated future cash flows. At December 31, 2015, the Company utilized the following methods and assumptions in its annual goodwill impairment testing, which was prepared with the assistance of a third-party valuation specialist: • At December 31, 2015, the initial qualitative assessment included consideration of the factors described above, resulting in a conclusion that as of December 31, 2015, the consistent gradual decline in the Company’s stock price was sustained. The Company also considered the impact of the December 2015 adverse trial outcomes on the Company's stock price and related estimates of fair value for remaining portfolio opportunities. Based on the Company's assessment of these factors, the Company determined that it was more likely than not that goodwill was impaired, constituting a triggering event requiring a goodwill impairment test as of December 31, 2015. • The Company conducted the first step of the goodwill impairment test for its single reporting unit as of December 31, 2015. The Company utilized the market capitalization plus cost synergies approach to estimate the fair value of the Company. The estimated market capitalization was determined by multiplying the Company's stock price and the common shares outstanding as of December 31, 2015. Management also considered a control premium in its estimate of fair value for the Company's single reporting unit. The cost synergies were estimated based on the cost savings which could be achieved if the Company was acquired by a competitor in the same operating business. • Based on the analysis utilizing the market capitalization plus cost synergies approach, the estimated fair value of the reporting unit of $252 million was below its carrying value of $344.3 million as of December 31, 2015, and therefore, goodwill was determined to be more likely than not, impaired. F- 19 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS • The purpose of step 2 of the analysis was to determine the estimated fair value of the assets and liabilities of the Company's reporting unit, in order to determine the implied fair value of goodwill for the reporting unit. The excess, if any, of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. Based upon the analysis performed, the fair value of the Company's single reporting unit did not exceed the amounts assigned to its reporting unit assets and liabilities, resulting in a difference between the implied fair value of goodwill of zero and the historical carrying value of goodwill. As a result, the Company recognized a goodwill impairment charge totaling $30.1 million in the fourth quarter of 2015. 8. LOAN RECEIVABLE AND INVESTMENT IN WARRANTS On August 15, 2016, Acacia entered into an Investment Agreement with Veritone, Inc. (“Veritone”), which provides for Acacia to invest up to $50 million in Veritone, consisting of both debt and equity components. Pursuant to the Investment Agreement, on August 15, 2016, Acacia entered into a secured convertible promissory note with Veritone (the “Veritone Loans”), which permits Veritone to borrow up to $20 million through two $10 million advances, each bearing interest at the rate of 6.0% per annum (included in Other Income (Expense) in the consolidated statement of operations). On August 15, 2016, Acacia funded the initial $10 million loan (the “First Loan”), which initially had a one-year term. On November 25, 2016, Acacia funded the second $10 million loan (the “Second Loan”), which has a one-year term. In addition, upon the funding of the Second Loan, the maturity date of the First Loan was automatically extend to the maturity date of the Second Loan. As a result, both the First Loan and the Second Loan are due and payable on November 25, 2017. Veritone’s obligations under the Veritone Loans are secured by substantially all of Veritone’s assets pursuant to a security agreement that Acacia entered into with Veritone dated August 15, 2016. In addition, commencing on the earlier of Veritone’s consummation of a private round of financing of at least $10 million (a “Next Equity Financing”) and the maturity date of the Veritone Loans, Acacia has the right, under certain circumstances, to convert all or a portion of the principal and accrued interest of the Veritone Loans into shares of Veritone’s Series B Preferred Stock or, if Veritone consummates a Next Equity Financing, into shares of Veritone capital stock issued in such financing, at various conversion rates, with the exact conversion rate to depend upon (i) whether Veritone consummates a Next Equity Financing, (ii) the price per share in such Next Equity Financing and (iii) whether or not Acacia elects to convert all of the outstanding principal and accrued interest under the Veritone Loans. If Veritone consummates a qualified public offering of its common stock, any outstanding principal and accrued interest under the Veritone Loans will automatically convert into shares of Veritone’s common stock at the applicable conversion rate. In conjunction with the First Loan, Veritone issued Acacia a four-year $700,000 warrant to purchase shares of Veritone’s common stock at various exercise prices, with the actual exercise price to be determined by the type and/or valuation of Veritone’s future equity financings, if any. The actual number of shares to be purchased upon exercise of the warrant is determined by dividing the warrant value by the applicable exercise price. Upon funding of the Second Loan, Veritone issued to Acacia two additional four-year $700,000 warrants to purchase shares of Veritone’s common stock with similar terms. In addition, pursuant to the Investment Agreement, Veritone issued Acacia a five-year Primary Warrant to purchase up to $50 million, less all converted amounts or amounts repaid under the Veritone Loans, worth of shares of Veritone’s common stock at various exercise prices, with the actual exercise price per share to be determined by the amount of principal and accrued interest under the Veritone Loans converted into shares of Veritone common stock. Acacia may exercise the Primary Warrant at any time during its five year term after the earlier of August 15, 2017 or the completion of a public offering with gross proceeds to Veritone of at least $15.0 million. Immediately subsequent to such a public offering, Veritone has the right to elect that Acacia exercise the Primary Warrant, and upon such election, Acacia agrees to exercise the Primary Warrant in full, provided that the then current fair market value of Veritone common stock is equal to or greater than the exercise price per share of the Primary Warrant. Immediately following Acacia’s exercise of the Primary Warrant in full, Veritone has the obligation to issue to Acacia an additional 10% Warrant that provides for the issuance of additional shares of Veritone common stock, with 50% of the shares underlying the 10% Warrant vesting as of the issuance date of the 10% Warrant, and the remaining 50% of shares vesting on the anniversary of the issuance date of the 10% Warrant. Our Investment Agreement, as described above, represents a variable interest in Veritone for which Acacia is not the primary beneficiary, primarily due to a lack of a controlling interest in Veritone. As of December 31, 2016, the Veritone Loans are not considered in-substance common stock and the common stock purchase warrants are unexercised, and therefore, the equity method of accounting is not applied. In addition, the Veritone Loans do not meet the criteria for classification as a debt security. As such, the Veritone Loans and the related common stock purchase warrants described above are accounted for as separate units of account based on the relative estimated fair values of the separate units as of the effective date of the F- 20 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS transaction, with the $20 million amount of the Veritone Loans allocated to (1) the Veritone Loans, which are accounted for as long-term loan receivables and (2) the common stock purchase warrants. The estimated relative fair value allocation of the $20 million investment to the Veritone Loans and the related common stock purchase warrants was determined using a Monte Carlo simulation model. Key inputs to the model included the estimated value of Veritone's equity on the effective date of the transactions, related volatility of equity assumptions, discounts for lack of marketability, assumptions related to liquidity scenarios, and assumptions related to recovery scenarios on the Veritone Loans. A summary of assumptions used in connection with estimating the relative fair values were as follows: Valuation Technique Significant Unobservable Inputs Monte Carlo simulation model Volatility Marketability discount Funding scenario probabilities Recovery Range of Inputs 40% - 50% 7% 25% - 75% 100% The Veritone Loans and warrants are reflected in the accompanying consolidated financial statements as follows (in thousands): Face value of loan receivable Unamortized loan discount Carrying value of loan receivable Investment in warrants (initial loan discount) Total Interest receivable Accretion of loan discount Interest income As of and For the Year Ended December 31, 2016 $ $ $ $ 20,000 (1,384) 18,616 1,960 20,576 286 576 862 The loan discount, representing the difference between the face amount of the Veritone Loans and the relative fair value allocated to the Veritone Loans, is accreted over the expected life of the loans, using the effective interest method, with the related interest amounts reflected in Other Income in the consolidated statement of operations. Acacia will re-evaluate its variable interest in Veritone and related accounting conclusions and disclosure requirements each reporting period. The effective yield for the First Loan and Second Loan was 20% and 9%, respectively. Management performs a review of the Veritone Loans on a quarterly basis to assess the need for allowances for uncollectibility, based on current trends and other factors affecting collectibility, and to determine if any impairment has occurred. A loan receivable is considered impaired when it is probable that amounts related to the loan receivable will not be collected according to the contractual terms of the agreement. As of December 31, 2016, no allowances for uncollectibility have been recorded. An allowance for uncollectibility would be reflected as a charge to earnings in the consolidated statement of operations. Acacia reflects its investment in warrants at relative value, which now represents cost, on a nonrecurring basis when they are deemed to be other- than-temporarily impaired. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary. For the year ended December 31, 2016, no impairment charges have been recorded. F- 21 9. STOCKHOLDERS’ EQUITY Cash Dividends. On April 23, 2013, Acacia announced that its Board of Directors approved the adoption of a cash dividend policy that calls for the payment of an expected total annual cash dividend of $0.50 per common share, payable in the amount of $0.125 per share per quarter. Under the policy, the Company paid four quarterly cash dividends totaling $25,434,000 and $25,039,000 in 2015 and 2014, respectively. On February 25, 2016, Acacia announced that its Board of Directors terminated the company’s dividend policy effective February 23, 2016. The Board of Directors terminated the dividend policy due to a number of factors, including the Company’s financial performance and its available cash resources, the Company’s cash requirements and alternative uses of capital that the Board of Directors concluded would represent an opportunity to generate a greater return on investment for the Company and its stockholders. Tax Benefits Preservation Plan. On March 15, 2016, Acacia's Board of Directors announced that it unanimously approved the adoption of a Tax Benefits Preservation Plan (the “Plan"). The purpose of the Plan is to protect the Company's ability to utilize potential tax assets, such as net operating loss carryforwards (“NOLs") 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 any (i) person or group from acquiring beneficial ownership of 4.9% or more of the Company's outstanding common stock and (ii) any existing shareholders 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 shareholders of record at the close of business on March 16, 2016. Approval of 2016 Acacia Research Corporation Stock Incentive Plan. On April 26, 2016, Acacia’s Board of Directors adopted the 2016 Acacia Research Corporation Stock Incentive Plan, or the Plan, which was approved by the stockholders in June 2016. The Plan will expire on the 10th anniversary of the date of its approval by shareholders, except with respect to awards then outstanding, and no further awards may be granted thereafter. Summary of the Plan • Shares Available. The number of shares of our common stock initially reserved for issuance under the Plan shall be 4,500,000 shares plus any shares remaining available for issuance under our 2013 Acacia Research Corporation Stock Incentive Plan, or the 2013 Plan, as of the effective date of the Plan. As of the approval date of the Plan, 625,390 shares of our common stock were available for grant under the 2013 Plan. • Eligibility. Options, restricted stock units and direct stock awards may be granted under the Plan. Options may be either “incentive stock options,” as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or the Code, or non-qualified stock options. Awards may be granted under the Plan to any employee, non-employee member of the Board of Directors, consultant or advisor who provides services to us or our subsidiaries, except for incentive stock options which may be granted only to our employees. • Administration. Generally, the Plan will be administered by either the entire Acacia Board of Directors or a committee of the Board of Directors, which shall consist of at least two members of the Board, each of whom must qualify as a “non-employee director” under Rule 16b-3 under the Exchange Act, an “outside director” under Section 162(m) of the Code and an “independent director” under the Nasdaq Listing Rules. • Discretionary Option Awards. The Plan administrator may grant either non-qualified stock options or incentive stock options. A stock option entitles the recipient to purchase a specified number of shares of our common stock at a fixed price subject to terms and conditions set by the Plan administrator, including conditions for exercise that must be satisfied, which typically will be based on continued provision of services. The exercise price of stock options granted under the Plan cannot be less than 100% of the fair market value of our common stock on the date the option is granted. F- 22 • Direct Stock Awards. Direct stock awards may be issued under the Stock Issuance Program (as defined in the Plan) either alone or in addition to other awards granted under the Plan. The Plan administrator determines the terms and conditions of direct stock awards, including the number of shares of common stock granted, and the conditions for vesting that must be satisfied, if any, which typically will be based on continued provision of services but may include a performance-based component. Unless otherwise provided in the award agreement, the holder of a restricted direct stock award will have the rights of a stockholder from the date of grant of the award, including the right to vote the shares of common stock and the right to receive distributions on the shares. • Discretionary Restricted Stock Unit Awards. The Plan provides that the Plan administrator may grant restricted stock units to Plan participants. A restricted stock unit entitles the recipient to receive upon settlement thereof a specified number of shares of our common stock subject to terms and conditions set by the Plan administrator. The restricted stock units will vest as prescribed by the Plan administrator. The Plan permits payment of the purchase price of restricted stock units, if any, to be made by cash or cash equivalents, shares of our common stock previously acquired by the underlying optionee, cancellation of indebtedness, waiver of compensation due for services rendered or to be rendered, any other form of legal consideration determined by the Plan administrator, or any combination of the foregoing. • Termination of Employment. The Plan administrator will determine and set forth in the award agreement whether any awards will continue to be exercisable, and the terms of such exercise, on and after the date the participant ceases to be employed by, or to otherwise provide services to, us, whether by reason of death, disability, voluntary or involuntary termination of employment or service, or otherwise, but in no event shall any unvested awards vest after the date the participant ceases to be employed by, or otherwise provide services to, us. 10. INCOME TAXES Acacia’s provision for income taxes for the fiscal periods presented consisted of the following (in thousands): Current: Federal State taxes Foreign taxes Total current Deferred: Federal State taxes Total deferred Provision for income taxes 2016 2015 2014 $ — $ 262 17,926 18,188 — — — — $ 379 4,421 4,800 — — — $ 18,188 $ 4,800 $ — 289 5,359 5,648 (1,867) 131 (1,736) 3,912 F- 23 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following at December 31, 2016 and 2015 (in thousands): 2016 2015 Deferred tax assets: Net operating loss and capital loss carryforwards and credits $ 83,323 $ Stock compensation Fixed assets and intangibles Basis of investments in affiliates Accrued liabilities and other State taxes Total deferred tax assets Valuation allowance Total deferred tax assets, net of valuation allowance Deferred tax liabilities: Fixed assets and intangibles Other Total deferred tax liabilities Net deferred tax assets (liabilities) 2,416 14,343 2,195 422 90 102,789 (102,627) 162 — (162) (162) $ — $ 71,494 1,385 1,359 499 442 81 75,260 (75,179) 81 — (81) (81) — A reconciliation of the federal statutory income tax rate and the effective income tax rate is as follows: Statutory federal tax rate - (benefit) expense State income and foreign taxes, net of federal tax effect Foreign tax credit Noncontrolling interests in operating subsidiaries Goodwill Nondeductible permanent items Expired capital loss carryforwards Valuation allowance 2016 2015 2014 (35)% 50 % (49)% 1 % — % — % — % 83 % 50 % (35)% (35)% 3 % (3)% (1)% 7 % — % 1 % 31 % 3 % 9 % (8)% — % — % 1 % — % 39 % 6 % For the fiscal years ended December 31, 2016 and 2015, the Company recorded full valuation allowances against its net deferred tax assets due to uncertainty regarding future realization pursuant to guidance set forth in ASC 740, “Income Taxes.” In future periods, if the Company determines it will more likely than not be able to realize certain of these amounts, the applicable portion of the benefit from the release of the valuation allowance will generally be recognized in the statement of operations in the period the determination is made. At December 31, 2016, Acacia had U.S. federal and state income tax net operating loss carryforwards (“NOLs”) totaling approximately $147,770,000 and $32,821,000, expiring between 2025 and 2035, and 2017 and 2036, respectively, for which $0 and $441,000 of federal and state net operating losses are included as a deferred tax asset related to the tax benefits of stock option deductions and which will be credited to additional paid-in capital when realized as a reduction of taxes payable on Acacia’s tax return. In addition, $1,928,000 and $37,771,000 of federal and state net operating losses are not included as a deferred tax asset and will be credited to additional paid-in capital when realized as a reduction of taxes payable on Acacia’s tax return as they relate to unrecognized excess tax benefits (see additional information regarding the ordering of windfall tax benefits and use of the “with-and- without” approach below). Capital loss carryovers totaled $3,423,000 at December 31, 2015, expiring between 2017 and 2020. F- 24 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2016, approximately $29,318,000 of the U.S. federal NOLs, acquired in connection with the acquisition of ADAPTIX, Inc. in 2012, are subject to an annual utilization limitation of approximately $14,100,000, pursuant to the “change in ownership” provisions under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). As of December 31, 2016, Acacia had approximately $52,224,000 of foreign tax credits, expiring between 2017 and 2026, of which $20,313,000 has been utilized for financial statement purposes. Future realization of the credits as a reduction of taxes payable on Acacia’s tax return will result in an income tax benefit recognizable through additional paid in capital since the entire amount of the credits have been utilized for financial statement purposes under the “with-and-without approach.” In general, foreign taxes withheld may be claimed as a deduction on future U.S. corporate income tax returns, or as a credit against future U.S. income tax liabilities, subject to certain limitations. Tax expense for the periods presented, primarily reflects foreign taxes withheld on revenue agreements with licensees in foreign jurisdictions, a benefit totaling $1,735,000 from the reversal of the net deferred tax liability that existed at the beginning of the year (2014 only) and other state taxes. Excluding the impact of the change in valuation allowance, annual effective tax rates were (33)%, (28)% and (33)%, for fiscal years 2016, 2015 and 2014, respectively. The Company has elected to utilize the “with-and-without approach” regarding ordering of windfall tax benefits to determine whether the windfall tax benefit has reduced taxes payable. Under this approach, the windfall tax benefits would be recognized in additional paid in capital only if an incremental tax benefit is realized after considering all other tax benefits presently available to the Company. The deductions related to the exercise and vesting of equity- based incentive awards during the periods presented are, in general, available to offset taxable income on Acacia’s consolidated tax returns. Accordingly, the excess tax benefit related to the exercise and vesting of equity-based incentive awards for the periods presented was credited to additional paid-in capital, not taxes payable. For the years ended December 31, 2016, 2015 and 2014, the Company incurred approximately $1,319,000, $1,917,000 and $2,713,000, respectively, of net short falls from the exercise and vesting of equity-based incentive awards, of which $1,319,000, $1,917,000 and $2,713,000, respectively, was recorded against its additional paid-in capital, subject to a full valuation allowance, with no impact to the income statement. Acacia is subject to taxation in the U.S. and in various state jurisdictions and incurs foreign tax withholdings on revenue agreements with licensees in certain foreign jurisdictions. With no material exceptions, Acacia is no longer subject to U.S. federal or state examinations by tax authorities for years before 2001. The California Franchise Tax Board is auditing the 2011 and 2012 California combined income tax returns. The audit is in process and no findings or adjustments have been proposed. At December 31, 2016 and 2015, the Company had total unrecognized tax benefits of approximately $1,355,000 and $2,127,000, including a recorded noncurrent liability of $85,000, related to unrecognized tax benefits primarily associated with state taxes. No interest and penalties have been recorded for the unrecognized tax benefits as of December 31, 2016. At December 31, 2016, if recognized, approximately $1,355,000, net of valuation analysis, would impact the Company’s effective tax rate. The Company does not expect that the liability for unrecognized tax benefits will change significantly within the next 12 months. The change in total unrecognized tax benefits as of December 31, 2016 was due to a lapse of the applicable statute of limitations related to an unrecognized benefit originating in a prior period. Acacia recognizes interest and penalties with respect to unrecognized tax benefits in income tax expense. Acacia has identified no uncertain tax position for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within 12 months. 11. STOCK-BASED INCENTIVE PLANS The 2002 Acacia Technologies Stock Incentive Plan (“2002 Plan”), the 2013 Acacia Research Corporation Stock Incentive Plan (“2013 Plan”) and the 2016 Acacia Research Corporation Stock Incentive Plan (“2016 Plan”) (collectively, the “Plans”) were approved by the stockholders of Acacia in December 2002, May 2013 and June 2016, respectively. All Plans allow grants of stock options, stock awards and performance shares with respect to Acacia common stock to eligible individuals, which generally includes directors, officers, employees and consultants. Except as noted below, the terms and provisions of the Plans are identical in all material respects. Acacia’s compensation committee administers the discretionary option grant and stock issuance programs. The compensation committee determines which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when the grants or issuances are to be made, the number of shares subject to each grant or issuance, the status of any granted option as either an incentive stock option or a non-statutory stock option under the federal tax laws, F- 25 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The exercise price of options is generally equal to the fair market value of Acacia’s common stock on the date of grant. Options generally begin to be exercisable six months to one year after grant and generally expire seven to ten years after grant. Stock options with time-based vesting generally vest over two to three years and restricted shares with time based vesting generally vest in full after two to three years (generally representing the requisite service period). The Plans terminate no later than the tenth anniversary of the approval of the incentive plans by Acacia’s stockholders. The Plans provide for the following separate programs: • Discretionary Option Grant Program. Under the discretionary option grant program, Acacia’s compensation committee may grant (1) non- statutory options to purchase shares of common stock to eligible individuals in the employ or service of Acacia or its subsidiaries (including employees, non-employee board members and consultants) at an exercise price not less than 85% of the fair market value of those shares on the grant date, and (2) incentive stock options to purchase shares of common stock to eligible employees at an exercise price not less than 100% of the fair market value of those shares on the grant date (not less than 110% of fair market value if such employee actually or constructively owns more than 10% of Acacia’s voting stock or the voting stock of any of its subsidiaries). • Stock Issuance Program. Under the stock issuance program, eligible individuals may be issued shares of common stock directly, upon the attainment of performance milestones or the completion of a specified period of service or as a bonus for past services. Under this program, the purchase price for the shares shall not be less than 100% of the fair market value of the shares on the date of issuance, and payment may be in the form of cash or past services rendered. The eligible individuals shall have full stockholder rights with respect to any shares of Common Stock issued to them under the Stock Issuance Program, whether or not their interest in those shares is vested. Accordingly, the eligible individuals shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. • Automatic Option Grant Program. Each non-employee director will receive restricted stock units or stock options for the number of shares determined by dividing the annual retainer by the grant date fair value of Acacia’s common stock on the grant date, provided that such individual has served as a non-employee director for at least 6 months. In addition, each new non-employee director will receive restricted stock units or stock options for the number of shares determined by dividing the annual board of directors retainer by the grant date fair value of Acacia’s common stock on the commencement date. Restricted stock units and stock options vest in a series of twelve quarterly installments over the three year period following the grant date, subject to immediate acceleration upon a change in control. Acacia will deliver the restricted shares corresponding to the vested restricted stock units within thirty (30) days after the first to occur of the following events: (i) the fifth (5th) anniversary of the grant date; or (ii) termination of the non-employee director’s service as a member of the Company’s Board of Directors. The non-employee directors do not have any rights, benefits or entitlements with respect to any shares unless and until the shares have been delivered. The number of shares of common stock available for issuance under the 2002 Plan automatically increased on the first trading day of January each calendar year during the term of the Plan by an amount equal to three percent (3%) of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year, not to exceed 500,000 shares. The aggregate number of shares of common stock available for issuance under the 2002 Plan could not exceed 20,000,000 shares. At December 31, 2016, there were no shares available for grant under the 2002 Plan. The number of shares of Common Stock initially reserved for issuance under the 2013 Plan was 4,750,000 shares. No new additional shares will be added to the 2013 Plan without security holder approval (except for shares subject to outstanding awards that are forfeited or otherwise returned to the 2013 Plan). The stock issuable under the 2013 Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the open market. In June 2016, 625,390 shares of common stock available for issuance under the 2013 Plan were transferred into the 2016 Plan. On April 26, 2016, Acacia’s Board of Directors adopted the 2016 Plan which was approved by the stockholders in June 2016. The number of shares of Common Stock initially reserved for issuance under the 2016 Plan was 4,500,000 shares plus 625,390 shares of common stock available for issuance under the 2013 Plan, as of the effective date of the Plan. At December 31, 2016, there were 1,754,000 shares available for grant under the 2016 Plan. F- 26 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Upon the exercise of stock options, the granting of restricted stock, or the delivery of shares pursuant to vested restricted stock units, it is Acacia’s policy to issue new shares of common stock. Acacia’s board of directors may amend or modify the Plans at any time, subject to any required stockholder approval. The following table summarizes stock-based award grant activity for the Plans for the years ended December 31, 2016 and 2015: Restricted stock awards with time-based service conditions Restricted stock unit awards with time-based service conditions Restricted stock awards with performance-based vesting conditions Stock options with time-based service vesting conditions Stock options with market-based vesting conditions Stock options with performance-based vesting conditions 2016 2015 Aggregate fair value (in thousands) Shares Aggregate fair value (in thousands) — — 431 5,704 5,530 487 894,000 $ 28,000 11,470 468 — — — — — — — — Shares — $ — 138,000 3,434,000 2,250,000 200,000 Total incentive awards granted 6,022,000 $ 12,152 922,000 $ 11,938 During the year ended December 31, 2016, the Company granted restricted stock awards and stock options (with weighted-average exercise price of $5.75 per share) with performance-based vesting conditions. The awards vest based upon the Company achieving specified cash flow performance targets over a one and two-year period from the date of grant. Under the terms of the awards, the number of restricted shares or stock options that will actually vest is based on the extent to which the Company achieves the specified performance targets during the performance period. As of December 31, 2016, 138,000 shares of restricted stock and 200,000 stock options with performance-based vesting conditions remain unvested. As of December 31, 2016, unrecognized expense for awards with performance-based vesting conditions totaled $683,000. During the year ended December 31, 2016, the Company granted stock options with market-based vesting conditions, with a weighted-average exercise price of $5.75 per share. The options with market-based vesting conditions vest based upon the Company achieving specified stock price targets over a four-year period. Under the terms of the awards, the number of stock options that will actually vest is based on the extent to which the Company achieves the specified market conditions during the four-year performance period. The stock options vest in equal installments of 25% upon the Company's achievement of 30-day average share prices ranging from $7.00 to $10.00. As of December 31, 2016, 1,687,500 options with market-based vesting conditions remain unvested. As of December 31, 2016, unrecognized expense for options with market-based vesting conditions totaled $2.4 million which is expected to be recognized over an estimated 1 year period. The following table summarizes stock option activity for the Plans for the year ended December 31, 2016: Outstanding at December 31, 2015 Granted Exercised Expired/forfeited Outstanding at December 31, 2016 Vested Exercisable at December 31, 2016 Weighted-Average Options Exercise Price Remaining Contractual Term Aggregate Intrinsic Value 15,000 $ 13.38 5,884,000 $ (101,000) $ (202,000) $ 5,596,000 $ 1,113,000 $ 1,113,000 $ 4.82 3.22 3.12 4.93 5.03 5.03 6.7 years $ 8,865,000 6.5 years $ 1,743,000 6.5 years $ 1,743,000 The aggregate intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $344,000, $751,000, and $518,000, respectively. The aggregate intrinsic value of options vested during the year ended December 31, 2016 was $2,074,000. The aggregate fair value of options granted during the year ended December 31, 2016 was F- 27 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $11,721,000.The aggregate fair value of options vested during the year ended December 31, 2016 was $2,342,000. No options were granted or vested during the years ended December 31, 2015 and 2014. As of December 31, 2016, the total unrecognized compensation expense related to nonvested stock option awards was $6,842,000, which is expected to be recognized over a weighted-average term of approximately 2 years. The following table summarizes nonvested restricted share activity for the year ended December 31, 2016: Nonvested restricted stock at December 31, 2015 Granted Vested Canceled Nonvested restricted stock at December 31, 2016 Nonvested Restricted Shares Weighted Average Grant Date Fair Value 829,000 $ 138,000 $ (342,000) $ (292,000) $ 333,000 $ 14.41 3.12 15.33 14.28 8.90 The weighted-average grant date fair value of nonvested restricted stock granted during the years ended December 31, 2016, 2015 and 2014 was $3.12, $12.83, and $14.41, respectively. The aggregate fair value of restricted stock that vested during the years ended December 31, 2016, 2015 and 2014 was $5,243,000, $11,494,000 and $21,490,000, respectively. As of December 31, 2016, the total unrecognized compensation expense related to nonvested restricted stock awards was $1,873,000, which is expected to be recognized over a weighted-average period of approximately 1 year. The following table summarizes restricted stock unit activity for the year ended December 31, 2016: Nonvested restricted stock units outstanding at December 31, 2015 Vested Nonvested restricted stock units outstanding at December 31, 2016 Vested restricted stock units outstanding at December 31, 2016 Restricted Stock Units Weighted Average Grant Date Fair Value 35,000 $ (21,000) $ 14,000 $ 80,000 $ 15.78 15.43 16.27 20.99 The weighted-average grant date fair value of restricted stock units granted during the years ended December 31, 2015 and 2014 was $16.72 and $14.33, respectively. There were no restricted units granted during the year ended December 31, 2016. The aggregate fair value of restricted stock units that vested during the years ended December 31, 2016, 2015 and 2014 was $324,000, $480,000 and $460,000, respectively. As of December 31, 2016, the total unrecognized compensation expense related to restricted stock unit awards was $162,000, which is expected to be recognized over a weighted-average period of approximately 1 year. Compensation expense for the periods presented was comprised of the following: 2016 2015 2014 Restricted stock awards with time-based service conditions $ — $ 10,575 $ Restricted stock unit awards with time-based service conditions Restricted stock awards with performance-based vesting conditions Stock options with time-based service vesting conditions Stock options with market-based vesting conditions Stock options with performance-based vesting conditions 4,391 197 1,316 3,158 — 473 — — — — 17,631 484 — — — — Total compensation expense $ 9,062 $ 11,048 $ 18,115 As of December 31, 2016, there are 7,445,000 shares of common stock reserved for issuance under the Plans. F- 28 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. COMMITMENTS AND CONTINGENCIES Operating Leases Acacia leases certain office space under various operating lease agreements expiring at various dates from 2017 through 2020. Minimum annual rental commitments for operating leases of continuing operations having initial or remaining noncancellable lease terms in excess of one year are as follows (in thousands): Years ending December 31, 2017 2018 2019 2020 Total minimum lease payments $ $ 1,279 1,323 1,369 16 3,987 Rent expense for the years ended December 31, 2016, 2015 and 2014 approximated $1,795,000, $1,926,000 and $1,523,000, respectively. Rental payments are expensed in the statements of operations in the period to which they relate. Scheduled rent increases are amortized on a straight-line basis over the lease term. 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. The economic terms of the inventor agreements, operating agreements and contingent legal fee arrangements associated with the patent portfolios owned or controlled by Acacia’s operating subsidiaries, if any, including royalty rates, contingent fee rates and other terms, vary across the patent portfolios owned or controlled by such operating subsidiaries. Inventor royalties, payments to noncontrolling interests and contingent legal fees expenses fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of revenue agreements executed each period and the mix of specific patent portfolios with varying economic terms and obligations generating revenues each period. Inventor royalties and contingent legal fees expenses will continue to fluctuate and may continue to vary significantly period to period, based primarily on these factors. Patent Enforcement and Other Litigation 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. 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, and if required to be paid by Acacia or its operating subsidiaries, could materially harm the Company’s operating results and financial position. Fiscal year 2016, 2015 and 2014 operating expenses included expenses for court ordered attorney fees and settlement and contingency accruals totaling $500,000, $4,141,000 and $1,548,000, respectively. F- 29 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Guarantees and Indemnifications Certain of Acacia’s operating subsidiaries have made guarantees and indemnities under which they may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. In connection with certain facility leases, Acacia and certain of its operating subsidiaries have indemnified lessors for certain claims arising from the facilities or the leases. Acacia indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware. However, Acacia has a directors and officers insurance policy that may reduce its exposure in certain circumstances and may enable it to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to statute of limitations. The majority of guarantees and indemnities do not provide any limitations of the maximum potential future payments that Acacia could be obligated to make. To date, Acacia has made no payments related to these guarantees and indemnities. Acacia estimates the fair value of its indemnification obligations to be insignificant based on this history and therefore, have not recorded any liability for these guarantees and indemnities in the accompanying consolidated balance sheets. Additionally, no events or transactions have occurred that would result in a material liability at December 31, 2016. Bank Guarantee In March 2015, an operating subsidiary of Acacia entered into a standby letter of credit and guarantee arrangement (“Guarantee”) with a bank for purposes of enforcing a court ruling in a German patent court granting an injunction against the defendants in the related patent infringement case. An injunction is an equitable remedy in the form of a court order that compels the defendant(s) to cease marketing, offering for sale or importing applicable infringing products into applicable jurisdiction(s). Under German law, in order to enforce the injunction granted by the court, a Guarantee is required to be furnished by the operating subsidiary, the plaintiff in the case, for potential payment to the defendants of any applicable claims which may be incurred by the defendants as a result of the enforcement of the injunction, only in the event that the aforementioned court ruling is subsequently successfully appealed by the defendants or otherwise amended. The Guarantee is required to be issued unlimited with respect to time, until appropriately extinguished in accordance with German law. The Guarantee will be extinguished when a relevant extinguishment order by the court having jurisdiction takes effect, typically occurring when the related infringement case has been settled or a final non-appealable decision has been issued by the court. The Guarantee is secured by a cash deposit at the contracting bank, which is classified as restricted cash in the accompanying balance sheets, totaling $11,512,000 and $10,725,000 of December 31, 2016 and 2015, respectively. Changes in the balance are primarily a result of additional court rulings granting injunctions with respect to additional defendants, and foreign currency exchange rate fluctuations and the related impact on the underlying collateral, which is denominated in U.S. dollars. The Guarantee expires on April 10, 2017, however, it is automatically extended without amendment for a period of one (1) year from the present or any future expiration date, unless at least 30 days prior to any expiration date, the Guarantee is extinguished in accordance with German law. The Guarantee facility fee is 1.15% per year, and the related expense is included in the consolidated statement of operations. F- 30 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other In August 2010, a wholly owned subsidiary of Acacia became the general partner of the Acacia IP Fund, which was formed in August 2010. The Acacia IP Fund is authorized to raise up to $250,000,000. The Acacia IP Fund invests in, licenses and enforces intellectual property consisting primarily of patents, patent rights, and patented technologies. Refer to Note 2 to these notes to consolidated financial statements for information regarding the consolidation of majority-owned subsidiaries and the presentation of related noncontrolling interests. At December 31, 2016 and 2015, the Acacia IP Fund net assets and net income (loss) were primarily comprised of the following (in thousands): Cash and other assets Patents, net of accumulated amortization Investments - noncurrent Total assets Accrued expenses and contributions Net assets Revenues Operating expenses Loss from operations Net gain (loss) in equity method investments Net income (loss) $ $ $ $ $ $ 2016 2015 1,118 $ — 2,933 4,051 $ 2,394 $ 1,657 $ 2016 2015 16 $ 572 (556) (1,013) (1,569) $ 7,740 147 5,829 13,716 7,436 6,280 18 1,617 (1,599) 6,922 5,323 13. RETIREMENT SAVINGS PLAN AND EXECUTIVE SEVERANCE POLICY Retirement Savings Plan. Acacia has an employee savings and retirement plan under section 401(k) of the Code (the “Plan”). The Plan is a defined contribution plan in which eligible employees may elect to have a percentage of their compensation contributed to the Plan, subject to certain guidelines issued by the Internal Revenue Service. Acacia may contribute to the Plan at the discretion of the board of directors. There were no contributions made by Acacia during the periods presented. Executive Severance Policy. Under Acacia’s Amended Executive Severance Policy, full-time employees with the title of Senior Vice President and higher (“SVP and higher”) are entitled to receive certain benefits upon termination of employment. If employment of an SVP and higher employee is terminated for other than cause or other than on account of death or disability, Acacia will (i) promptly pay to the SVP and higher employee a lump sum amount equal to the aggregate of (a) accrued obligations (i.e., annual base salary through the date of termination to the extent not theretofore paid and any compensation previously deferred (together with any accrued interest or earnings thereon) and any accrued vacation pay, and reimbursable expenses, in each case to the extent not theretofore paid) and (b) three (3) months of base salary for each full year that the SVP and higher employee was employed by the Company (the “Severance Period”), up to a maximum of twelve (12) months (eighteen (18) months for executive officers of Acacia Research Corporation) of base salary, and (ii) provide to the SVP and higher employee, Acacia paid COBRA coverage for the medical and dental benefits selected in the year in which the termination occurs, for the duration of the Severance Period. 14. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for state income taxes totaled $223,000, $211,000 and $172,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Foreign taxes withheld totaled $14,776,000, $4,421,000 and $5,159,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Refer to Note 5 for accrued foreign taxes payable. Refer to Note 6 for information regarding noncash investing activity related to the investment in patent portfolios for the periods presented. Refer to Note 8 for information regarding noncash investing activity related to the investment in Veritone, Inc. for the periods presented. F- 31 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. QUARTERLY FINANCIAL DATA (unaudited) The following table sets forth unaudited consolidated statements of operations data for the eight quarters in the period ended December 31, 2016. This information has been derived from Acacia’s unaudited condensed consolidated financial statements that have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the information when read in conjunction with the audited consolidated financial statements and related notes thereto. Acacia’s quarterly results have been, and may in the future be, subject to significant fluctuations. As a result, Acacia believes that results of operations for interim periods should not be relied upon as any indication of the results to be expected in any future periods. Quarter Ended Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31, 2016 2016 2016 2016 2015 2015 2015 2015 $ 24,721 $ 41,351 $ 64,658 $ 21,969 $ 34,210 $ 40,336 $ 12,994 $ 37,497 (Unaudited, in thousands, except share and per share information) — 17,844 1,573 4,109 7,723 10,418 7,324 7,709 7,348 6,467 3,313 4,238 5,463 6,222 9,325 4,784 8,675 1,265 5,512 9,012 13,038 13,228 116 1,972 10,345 13,688 7,756 3,901 11,341 13,113 7,994 7,535 8,334 9,056 10,575 9,587 9,442 8,572 522 — — 1,334 40,165 — 1,742 (1,242) 34,423 76,293 (9,702) (34,942) (3) (52) 666 — — — 48,368 16,290 261 557 2,175 — — 997 — — 426 732 — — — 802 — — 3,465 860 74,731 30,149 250 31,024 47,820 39,336 39,830 150,673 (9,055) (13,610) 1,000 (26,836) (113,176) 592 228 (104) (180) — Amortization of patents 10,760 10,759 Revenues Operating costs and expenses: Cost of revenues: Inventor royalties Contingent legal fees Litigation and licensing expenses - patents General and administrative expenses (including non-cash stock compensation expense) Research, consulting and other expenses - business development Impairment of patent-related intangible assets Impairment of goodwill Other Total operating costs and expenses Operating income (loss) Total other income (expense) Income (loss) before (provision for) benefit from income taxes Provision for income taxes (9,705) (34,994) (192) (5,927) 16,551 (9,655) (8,463) (2,414) (13,382) (170) 896 (119) 777 (27,016) (113,176) (337) (4,174) (27,353) (117,350) Net income (loss) including noncontrolling interests (9,897) (40,921) 6,896 (10,877) (13,552) Net (income) loss attributable to noncontrolling interests in operating subsidiaries Net income (loss) attributable to Acacia Research Corporation Net loss per common share attributable to Acacia Research Corporation: (68) 348 186 266 422 (4,463) 43 1,440 $ (9,965) $ (40,573) $ 7,082 $ (10,611) $ (13,130) $ (3,686) $ (27,310) $ (115,910) Basic and diluted income (loss) per share $ (0.20) $ (0.81) $ 0.14 $ (0.21) $ (0.27) $ (0.08) $ (0.55) $ (2.33) Weighted-average number of shares outstanding, basic Weighted-average number of shares outstanding, diluted 49,925,550 50,015,869 50,124,302 50,237,784 49,212,207 49,423,472 49,630,369 49,749,941 49,925,550 50,015,869 50,618,757 50,237,784 49,212,207 49,423,472 49,630,369 49,749,941 F- 32 ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. SUBSEQUENT EVENTS On February 16, 2017, AIP Operation LLC, a Delaware limited liability company (“AIP”), and an indirect subsidiary of Acacia, adopted a Profits Interest Plan (the “Plan”) that provides for the grant of equity interests in AIP to certain members of management and Board of Directors of Acacia as compensation for services rendered for or on behalf of AIP. Each profits interest unit granted pursuant to the Plan is intended to qualify as a “profits interest” for U.S. federal income tax purposes and will only have value to the extent the equity value of AIP increases beyond the value at issuance. The equity interests are represented by units (the “Units”) reserved for the issuance of awards under the Plan. The Units entitle the holders to share in or be allocated certain AIP profits and losses and to receive or share in AIP distributions pursuant to the AIP Limited Liability Company Operating Agreement entered into as of February 16, 2017 (the “LLC Agreement”). In connection with the adoption of the Plan, a form of Profits Interest Agreement was approved pursuant to which Units may be granted from time to time. Units vest upon AIP’s achievement of certain performance milestones, subject to the continued service of the recipient, and are subject to the terms and conditions of the Plan, the Profits Interest Agreement and the LLC Agreement. Acacia owns substantially all of the equity in AIP and at all times will control AIP. Although AIP currently holds no material assets, Acacia from time to time may contribute to AIP certain assets or securities related to portfolio companies in which Acacia holds an interest. Units may be awarded as one- time, discretionary grants to recipients. EXHIBIT INDEX Exhibit Number Description 2.1 3.1 3.2 4.1 10.1* 10.2* 10.3* 10.4* 10.5* 10.6* 10.7* 10.8 10.9 10.10 10.11* 10.12 10.13 10.15* 10.16* Agreement and Plan of Merger, dated November 22, 2011, by and among Acacia Research Group LLC, Apollo Patent Corp., Adaptix, Inc., and Baker Communications Fund II (QP), L.P., solely in its capacity as representative for the shareholders of Adaptix, Inc.(15) Amended and Restated Certificate of Incorporation (1) Amended and Restated Bylaws (21) Tax Benefits Preservation Plan, dated as of March 16, 2016, by and between Acacia Research Corporation and Computershare Inc., as Rights Agent, which includes the form of Certificate of Designation of Series A Cumulative Participating Preferred Stock as Exhibit A, the Form of Right Certificate as Exhibit B and the Summary of Terms as Exhibit C (24) Acacia Research Corporation 1996 Stock Option Plan, as amended (2) Form of Option Agreement constituting the Acacia Research Corporation 1996 Executive Stock Bonus Plan (3) 2002 Acacia Technologies Stock Incentive Plan (4) 2007 Acacia Technologies Stock Incentive Plan (5) Form of Acacia Technologies Stock Option Agreement under the 2007 Acacia Technologies Stock Incentive Plan (6) Form of Acacia Technologies Stock Issuance Agreement under the 2002 Acacia Technologies Stock Incentive Plan (6) Form of Acacia Technologies Stock Issuance Agreement under the 2007 Acacia Technologies Stock Incentive Plan (6) Office Space Lease dated January 28, 2002, between Acacia Research Corporation and The Irvine Company (7) Form of Indemnification Agreement (8) Third Amendment to Lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (9) Employment Agreement, dated September 22, 2015, by and between Acacia Research Group LLC and Edward Treska (20) Fourth Amendment to Lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (10) Fifth Amendment to Lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (10) Employment Agreement, dated September 22, 2015, by and between Acacia Research Group LLC and Robert L. Harris (20) Employment Agreement, dated September 22, 2015, by and between Acacia Research Group LLC and Clayton J. Haynes (20) F- 33 10.17* Acacia Research Corporation Amended and Restated Executive Severance Policy (12) 10.18 10.19 10.20* 10.21* 10.22* 10.23* 10.24* 10.25* 10.26 18.1 21.1 23.1 24.1 31.1† 31.2† 32.1 32.2 Sixth Amendment to Lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (14) Form of Purchase Agreement (16) 2013 Acacia Research Corporation Stock Incentive Plan (18) Form of Stock Issuance Agreement under the 2013 Acacia Research Corporation Stock Incentive Plan (19) Employment Agreement, dated September 22, 2015, by and between Acacia Research Group LLC and Matthew Vella (20) 2016 Acacia Research Corporation Stock Incentive Plan (22) Form of Stock Option Agreement under the 2016 Acacia Research Corporation Stock Incentive Plan Form of Stock Issuance Agreement under the 2016 Acacia Research Corporation Stock Incentive Plan Director Service Agreement, dated February 29, 2016, by and between Acacia Research Corporation and Robert L. Harris (23) Preferability Letter dated February 25, 2010 from Grant Thornton LLP, independent registered public accounting firm, regarding change in accounting principle (13) List of Subsidiaries Consent of Independent Registered Public Accounting Firm Power of Attorney (included in the signature page hereto). Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 Certification of Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 101 ___________________________ Interactive Date Files Pursuant to Rule 405 of Regulation S-T. * The referenced exhibit is a management contract, compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10- K pursuant to Item 15(c) of Form 10-K. † The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K are not deemed filed with the SEC and are not to be incorporated by reference into any filing of Acacia Research Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, regardless of any general incorporation language contained in any filing. (1) (2) (3) (4) (5) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on June 5, 2008 (File No. 000-26068). Incorporated by reference to Appendix A to Acacia Research Corporation’s Definitive Proxy Statement on Schedule 14A filed on April 20, 2000 (File No. 000-26068). Incorporated by reference to Appendix A to Acacia Research Corporation’s Definitive Proxy Statement on Schedule 14A filed on April 26, 1996 (File No. 000-26068). Incorporated by reference to Annex E to the Proxy Statement/Prospectus which formed part of Acacia Research Corporation’s Registration Statement on Form S-4 (File No. 333-87654) which became effective on November 8, 2002. Incorporated by reference to Acacia Research Corporation’s Registration Statement on Form S-8 (File No. 333-144754) which became effective on July 20, 2007. (6) (7) (8) (9) Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 2007, filed on November 2, 2007 (File No. 000-26068). Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10‑K for the year ended December 31, 2001, filed on March 27, 2002 (File No. 000‑26068). Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q for the period ended June 30, 2012, filed on July 30, 2012 (File No. 000-26068). Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q for the period ended March 31, 2006, filed on May 10, 2006 (File No. 000‑26068). (10) Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on March 14, 2008 (File No. 000-26068). (11) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on April 2, 2008 (File No. 000-26068). (12) (13) (14) (15) Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009 (File No. 000-26068). Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009, filed on February 26, 2010, as amended on March 1, 2010 (File No. 000-26068) Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010, filed on February 28, 2011, as amended on March 24, 2011 (File No. 000-26068). Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K/A filed on January 19, 2012 (File No. 000-26068). Portions of this exhibit have been omitted pursuant to a request for confidential treatment under Rule 24-b-2 of the Securities Exchange Act of 1934, as amended. The omitted material has been separately filed with the Securities and Exchange Commission. (16) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on February 16, 2012 (File No. 000-26068). (17) (18) Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012, filed on February 28, 2013 (File No. 000-26068). Incorporated by reference to Appendix A to Acacia Research Corporation’s Definitive Proxy Statement on Schedule 14A filed on April 24, 2013 (File No. 000-26068). (19) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on May 22, 2013 (File No. 000-26068). (20) Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q filed on November 9, 2015 (File No. 000-26068). (21) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on March 28, 2016 (File No. 000-37721). (22) Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q filed on August 9, 2016 (File No. 001-37721). (23) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on March 4, 2016 (File No. 000-26068). (24) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on March 21, 2016 (File No. 000-26068). ACACIA RESEARCH CORPORATION STOCK OPTION AGREEMENT r e c i t a l s: A. The Board has adopted the 2016 Acacia Research Corporation Stock Incentive Plan (the “Plan”) (i) to enhance the Corporation’s ability to attract and retain the services of qualified employees, officers, directors, consultants and other service providers upon whose judgment, initiative and efforts the successful conduct and development of the Corporation’s business largely depends, and (ii) to provide additional incentives to such persons or entities to devote their utmost effort and skill to the advancement and betterment of the Corporation, by providing them an opportunity to participate in the ownership of the Corporation and thereby have an interest in the success and increased value of the Corporation. B. Optionee is to render valuable services to the Corporation (or a Parent or Subsidiary), and this Stock Option Agreement (the “Agreement”) is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Corporation's grant of an option to Optionee. C. All capitalized terms but not defined in this Agreement shall have the meanings assigned to them in the Appendix attached to the Plan. NOW, THEREFORE, it is hereby agreed as follows: GRANT OF OPTION. The Corporation hereby grants to Optionee, as of the date of grant of the options (the “Grant Date”) as specified in the Notice of Grant of Stock Option (the “Grant Notice”), an option to purchase up to the number of shares of Common Stock subject to the option as specified in the Grant Notice (the “Option Shares”) specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 hereof at the exercise price per Option Share as specified in the Grant Notice (the “Exercise Price”). OPTION TERM. This option shall have a maximum term of seven (7) years2 measured from the Grant Date and shall accordingly expire at the close of business on the expiration date specified in the Grant Notice (the “Expiration Date”), unless sooner terminated in accordance with Paragraph 5 or 6 hereof. LIMITED TRANSFERABILITY. This option shall be neither transferable nor assignable by Optionee other than by will or by the laws of descent and distribution following Optionee's death and may be exercised, during Optionee's lifetime, only by Optionee. However, if this option is designated a Non-Statutory Option in the Grant Notice, then this option may be assigned in whole or in part during Optionee's lifetime to one or more members of the Optionee's Immediate Family or to a trust established for the exclusive benefit of Optionee or one or more members of the Optionee's Immediate Family or to the Optionee's former spouse, to the extent such assignment is in connection with Optionee's estate plan or pursuant to a domestic relations order. The assigned portion shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such assignment. The terms applicable to the assigned portion shall be the same as those in effect for this option immediately prior to such assignment. Notwithstanding the foregoing, the Optionee may also designate one or more persons as the beneficiary or beneficiaries of this option and this option shall, in accordance with such designation, 2 NTD: Option to expire on date set forth in grant notice. Cannot exceed 10 years. automatically be transferred to such beneficiary or beneficiaries upon the Optionee's death while holding this option. Such beneficiary or beneficiaries shall take the transferred option subject to all the terms and conditions of this Agreement, including (without limitation) the limited time period during which the option may be exercised following the Optionee's death. DATES OF EXERCISE. This option shall become exercisable for the Option Shares in one or more installments as specified in the Grant Notice. As the option becomes exercisable for such installments, those installments shall accumulate, and the option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the option term under Paragraph 5 or 6 hereof. CESSATION OF SERVICE. The option term specified in Paragraph 2 hereof shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable: • • • • Should Optionee cease to remain in Service for any reason (other than death, Permanent Disability, Voluntary Termination, which shall mean Optionee terminates employment voluntarily, or Misconduct) while this option is outstanding, then Optionee shall have a period of six (6) months (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date. Should Optionee voluntarily terminate Service while this option is outstanding, then Optionee shall have a period of three (3) months (commencing with the date of such Voluntary Termination) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date. Should Optionee die while this option is outstanding, then the personal representative of Optionee's estate or the person or persons to whom the option is transferred pursuant to Optionee's will or in accordance with the laws of descent and distribution or any person or trust to whom all or a portion of this option is transferred in accordance with Paragraph 3 hereof or the designated beneficiary or beneficiaries of this option shall have the right to exercise this option. Such right shall lapse, and this option shall cease to be outstanding, upon the earlier of (i) the expiration of the twelve (12)-month period measured from the date of Optionee's death or (ii) the Expiration Date. Should Optionee cease Service by reason of Permanent Disability while this option is outstanding, then Optionee shall have a period of twelve (12) months (commencing with the date of such cessation of Service) during which to exercise this option. In no event shall this option be exercisable at any time after the Expiration Date. During the limited period of post-Service exercisability, this option may not be exercised in the aggregate for more than the number of vested Option Shares for which the option is exercisable at the time of Optionee's cessation of Service. Upon the expiration of such limited exercise period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding for any vested Option Shares for which the option has not been exercised. However, this option shall, immediately upon Optionee's cessation of Service for any reason, terminate and cease to be outstanding with respect to any Option Shares for which this option is not otherwise at that time exercisable. Should Optionee's Service be terminated for Misconduct, then this option shall terminate immediately and cease to remain outstanding. CHANGE IN CONTROL/HOSTILE TAKE-OVER Unless otherwise determined by the Plan Administrator in the event of a Change in Control/Hostile Take-Over, any surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) may assume or continue this option or may substitute similar stock awards for this option (including but not limited to, awards to acquire the same consideration paid to the stockholders of the Corporation pursuant to the Change in Control/Hostile Take-Over), and any reacquisition or repurchase rights held by the Corporation in respect of Common Stock issued pursuant to this option may be assigned by the Corporation to the successor of the Corporation (or the successor’s parent company, if any), in connection with such Change in Control/Hostile Take-Over. A surviving corporation or acquiring corporation (or its parent) may choose to assume or continue only a portion of this option or substitute a similar stock award for only a portion of this option, or may choose not to assume this option. The terms of any assumption, continuation or substitution will be set by the Board. If either (x) Optionee’s employment with the Corporation is terminated by the Corporation without Cause (which termination shall be effective as of the date specified by the Corporation in a written notice to Optionee), other than due to death or Permanent Disability, or in the event Optionee terminates his or her employment with Good Reason, in either case within twelve months following a Change in Control/Hostile Take-Over, or (y) Optionee voluntarily terminates his or her employment on his or her own initiative after the twelfth month but no later than the thirteenth month following a Change in Control/Hostile Take-Over, in either case of (x) or (y), then the vesting of this option will be accelerated in full and the time when this option may be exercised will be accelerated in full. Such vesting acceleration will occur on the date of termination of Optionee’s Service. In the event of a Change in Control/Hostile Take-Over in which the surviving corporation or acquiring corporation (or its parent company) does not assume or continue this option or substitute similar stock awards for this option, then if this option has not been assumed, continued or substituted, the vesting of this option will be accelerated in full to a date prior to the effective time of such Change in Control/Hostile Take-Over (contingent upon the effectiveness of the Change in Control/Hostile Take-Over) as the Board will determine (or, if the Board does not determine such a date, to the date that is five days prior to the effective time of the Change in Control/Hostile Take-Over), and this option will terminate if not exercised (if applicable) at or prior to the effective time of the Change in Control/Hostile Take-Over, and any reacquisition or repurchase rights held by the Corporation with respect to this option will lapse (contingent upon the effectiveness of the Change in Control/Hostile Take-Over). Notwithstanding the foregoing, in the event this option will terminate if not exercised prior to the effective time of a Change in Control/Hostile Take-Over, the Board may provide, in its sole discretion, that Optionee may not exercise this option but instead will receive a payment, in such form as may be determined by the Board, equal in value to the excess, if any, of (i) the value of the property Optionee would have received upon the exercise of this option immediately prior to the effective time of the Change in Control/Hostile Take-Over (including, at the discretion of the Board, any unvested portion of this option), over (ii) any exercise price payable by Optionee in connection with such exercise. For clarity, this payment may be zero if the value of the property is equal to or less than the exercise price. Payments under this provision may be delayed to the same extent that payment of consideration to the holders of the Common Stock in connection with the Change in Control/Hostile Take-Over is delayed as a result of escrows, earn outs, holdbacks or any other contingencies. The portion of any Incentive Option accelerated in connection with a Change in Control or Hostile Take-Over shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non- Statutory Option under the Federal tax laws. ADJUSTMENT IN OPTION SHARES. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to the number and/or class of securities and the Exercise Price in effect under this option. Such adjustments to this option are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under this option. The adjustments determined by the Plan Administrator shall be final, binding and conclusive STOCKHOLDER RIGHTS. The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have exercised the option, paid the Exercise Price and become a holder of record of the purchased shares. MANNER OF EXERCISING OPTION. In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or any other person or persons exercising the option) must take the following actions: Execute and deliver to the Corporation a Preclearance to Exercise Options Form, attached hereto as Schedule I, for the Option Shares for which the option is exercised. Pay the aggregate Exercise Price for the purchased shares in one or more of the following forms: • • • cash or check made payable to the Corporation; the surrender of shares of Common Stock owned by Optionee (provided that shares acquired pursuant to the exercise of options granted by the Corporation must have been held by Optionee for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes), which surrendered shares shall be valued at Fair Market Value as of the date of such exercise; the cancellation of indebtedness of the Corporation to Optionee; • • • provided that a public market for the Common Stock exists, a “same day sale” commitment from Optionee and an NASD Dealer whereby Optionee irrevocably elects to exercise this option and to sell a portion of the shares so purchased to pay for the Exercise Price and whereby the NASD Dealer irrevocably commits upon receipt of such shares to forward the Exercise Price directly to the Corporation; the waiver of compensation due or accrued for services rendered or to be rendered during a vesting period; or any combination of the foregoing methods of payment or any other consideration or method of payment as shall be permitted by applicable law. Except to the extent the sale and remittance procedure is utilized in connection with the option exercise, payment of the Exercise Price must accompany the Notice of Exercise delivered to the Corporation in connection with the option exercise. Furnish to the Corporation appropriate documentation that the person or persons exercising the option (if other than Optionee) have the right to exercise this option. Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all Federal, state and local income and employment tax withholding requirements applicable to the option exercise. As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares, with the appropriate legends affixed thereto. To the extent any such Option Shares are unvested, the certificates for those Option Shares shall be endorsed with an appropriate legend evidencing the Corporation's repurchase rights and may be held in escrow with the Corporation until such shares vest. In no event may this option be exercised for any fractional shares. NO IMPAIRMENT OF RIGHTS. This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise make changes in its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. In addition, this Agreement shall not in any way be construed or interpreted so as to affect adversely or otherwise impair the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee's Service at any time for any reason, with or without cause. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of this option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any Stock Exchange on which the Common Stock may be listed for trading at the time of such exercise and issuance. The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraphs 3 and 6 hereof, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee's assigns and the legal representatives, heirs and legatees of Optionee's estate. NOTICES. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee's signature line on the Grant Notice. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. CONSTRUCTION. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option. GOVERNING LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of Delaware without resort to that State's conflict-of-laws rules. EXCESS SHARES. If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may without stockholder approval be issued under the Plan, then this option shall be void with respect to those excess shares, unless stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the provisions of the Plan. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE OPTION. In the event this option is designated an Incentive Option in the Grant Notice, the option is intended to be an incentive stock option as described in Code Section 422, but the Corporation does not represent or warrant that the option qualifies as such. Optionee should consult with his or her own tax advisors regarding the tax effects of this option and the requirements necessary to obtain favorable income tax treatment under Code Section 422, including, but not limited to, holding period requirements with respect to the Option Shares after exercise of this option. In addition, the following terms and conditions shall also apply to the grant: This option shall cease to qualify for favorable tax treatment as an Incentive Option if (and to the extent) this option is exercised for one or more Option Shares: (A) more than three (3) months after the date Optionee ceases to be an Employee for any reason other than death or Permanent Disability or (B) more than twelve (12) months after the date Optionee ceases to be an Employee by reason of Permanent Disability. No installment under this option shall qualify for favorable tax treatment as an Incentive Option if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which such installment first becomes exercisable hereunder would, when added to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock or other securities for which this option or any other Incentive Options granted to Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. Should such One Hundred Thousand Dollar ($100,000) limitation be exceeded in any calendar year, this option shall nevertheless become exercisable for the excess shares in such calendar year as a Non-Statutory Option. Should the exercisability of this option be accelerated upon a Change in Control, then this option shall qualify for favorable tax treatment as an Incentive Option only to the extent the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which this option first becomes exercisable in the calendar year in which the Change in Control occurs does not, when added to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock or other securities for which this option or one or more other Incentive Options granted to Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. Should the applicable One Hundred Thousand Dollar ($100,000) limitation be exceeded in the calendar year of such Change in Control, the option may nevertheless be exercised for the excess shares in such calendar year as a Non-Statutory Option. Should Optionee hold, in addition to this option, one or more other options to purchase Common Stock which become exercisable for the first time in the same calendar year as this option, then the foregoing limitations on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. SCHEDULE I PRECLEARANCE TO EXERCISE OPTIONS I,_______________________, hereby notify Acacia Research Corporation (the “Corporation”) that I elect to purchase ____________ shares (the “Exercised Shares”) of the Corporation’s Common Stock (“Common Stock”) at the option exercise price of ________per share (the “Exercise Price”) pursuant to that certain option granted to me under the Acacia Research Corporation 2016 Stock Incentive Plan on ____________, 20__(the “Option”). Type of Option _______ Incentive Option (ISO) _______Non-Statutory Option (Non-Qual) Type of Transaction ____ Cash Exercise (Purchase of the option shares with the intent to hold the shares for sale at a future date). NOTE: If you choose to do a cash exercise, you may not sell the acquired share without subsequent approval during a period when the trading window is open. Please refer to the Acacia Insider Trading Policy. ____ Cashless Exercise (Same-day purchase of the option shares and immediate sale of all the shares on the open market.) ____ Sell-to-Cover Exercise (Purchase of the option shares and immediate sale of less than all the shares). NOTE: If you choose to do a Sell-to-Cover exercise, you may not sell the remaining shares without subsequent approval during a period when the trading window is open. Please refer to the Acacia Insider Trading policy. Concurrently with the delivery of this Notice of Exercise to the Corporation, I shall pay, or cause to be paid to the Corporation the Exercise Price for the Exercised Shares in accordance with the provisions of my agreement with the Corporation (or other documents) evidencing the Option and shall deliver whatever additional documents may be required by such agreement as a condition for exercise. I hereby certify as of the date above that: • • • I have previously received and am familiar with the Corporation’s Insider Trading Policy; I have complied with all procedures established by the Corporation’s Insider Trading Policy in connection with the transaction described above; and To my knowledge, I am not in possession of any material nonpublic information about the Corporation and/or its affiliated companies. I acknowledge that I have ten (10) business days from the date of approval, or until the window closes, whichever is shorter, in which to complete the trade I have requested. I also acknowledge that I will notify ________ by email as soon as I have given my broker any exercise instructions. _______________________ __________________________________ Date Signature APPROVED: _________________________________ Date:_____________________________ ACACIA RESEARCH CORPORATION 2016 ACACIA RESEARCH CORPORATION STOCK INCENTIVE PLAN STOCK ISSUANCE AGREEMENT THIS AGREEMENT is made this [date] day of [month], 201_, by and between Acacia Research Corporation, a Delaware corporation, and [namename], a Participant in the Corporation’s 2016 Acacia Research Corporation Stock Incentive Plan (the “Plan”). All capitalized terms in this Agreement shall have the meaning assigned to them in this Agreement, in the attached Appendix or, if such term is not defined in this Agreement or the Appendix, such term shall have the meaning assigned to it under the Plan. A. GRANT OF SHARES 1. Grant. Participant is hereby granted _____ shares of Common Stock (the “Shares”) pursuant to the provisions of the Stock Issuance Program. 2. Consideration. With respect to the par value of the Shares, such Shares are granted in consideration for past services provided by the Participant to the Corporation. The consideration for the remaining value of the Shares is provided and for the services Participant shall provide to the Corporation over the vesting period provided in Paragraph C.2. 3. Other Documents. Participant shall deliver a duly executed blank Assignment Separate from Certificate (in the form attached hereto as Exhibit I) with respect to the Shares. 4. Stockholder Rights. Until such time as the Unvested Shares are forfeited pursuant to Paragraph C.1., Participant (or any successor in interest) shall have all the rights of a stockholder (including voting, dividend and liquidation rights) with respect to the Shares, subject, however, to the transfer restrictions of this Agreement. 5. accordance with Paragraph C.2. Escrow. The Corporation shall have the right to hold the Shares in escrow until those shares have vested in 6. Compliance with Law. Under no circumstances shall shares of Common Stock or other assets be issued or delivered to Participant pursuant to the provisions of this Agreement unless, in the opinion of counsel for the Corporation or its successors, there shall have been compliance with all applicable requirements of applicable securities laws, all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock is at the time listed for trading and all other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. B. TRANSFER RESTRICTIONS 1. Restriction on Transfer. Except for any Permitted Transfer, Participant shall not transfer, assign, encumber or otherwise dispose of any of the Shares which are Unvested Shares. 2. Restrictive Legend. The stock certificate for the Shares shall be endorsed with the following restrictive legend: “THE SHARES REPRESENTED BY THIS CERTIFICATE ARE UNVESTED AND SUBJECT TO FORFEITURE TO THE CORPORATION IN CERTAIN CIRCUMSTANCES AND ACCORDINGLY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED, OR IN ANY MANNER DISPOSED OF EXCEPT IN CONFORMITY WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). A COPY OF SUCH AGREEMENT IS MAINTAINED AT THE CORPORATION’S PRINCIPAL CORPORATE OFFICES.” 3. Transferee Obligations. Each person (other than the Corporation) to whom the Shares are transferred by means of a Permitted Transfer must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Corporation that such person is bound by the provisions of this Agreement and that the transferred shares are subject to the forfeiture provisions to the same extent such shares would be so subject if retained by Participant. C. FORFEITURE OF SHARES. 1. Forfeiture of Shares. On the date Participant ceases for any reason to remain in Service, all of the Shares in which Participant is not, at the time of his or her termination of Service, vested in accordance with Paragraph C.2. of this Agreement (such shares to be hereinafter referred to as the “Unvested Shares”) shall be forfeited, shall become the property of the Corporation and the Participant shall no longer have any right to or ownership of such Shares. The certificates representing the forfeited Unvested Shares shall be delivered to the Corporation as soon as possible after the termination of Service. 2. Termination of Forfeiture. One-sixth of the Shares shall vest and the forfeiture shall lapse on each six month anniversary of your first day of employment, so that on the third year anniversary of your first day of employment, the forfeiture shall have lapsed as to all of the Shares and there will be no Unvested Shares. This vesting is subject to Participant's continuous service from the first day of employment through each vesting date. 3. Recapitalization. Any new, substituted or additional securities or other property (including cash paid other than as a regular cash dividend) which is by reason of any Recapitalization distributed with respect to the Shares shall be immediately subject to forfeiture pursuant to this Paragraph C and any escrow requirements hereunder, but only to the extent the Shares are at the time covered by such forfeiture or escrow requirements. Appropriate adjustments to reflect such distribution shall be made to the number, kind, type and/or class of securities subject to this Agreement in order to reflect the effect of any such Recapitalization upon the Corporation’s capital structure. 4. Change in Control./Hostile Take-Over. All of the Shares shall become fully vested and any Forfeiture Provision shall terminate in full, immediately prior to and contingent upon a Change in Control or Hostile Take-Over. D. TAX PROVISIONS. 1. Tax Consequences. Participant has reviewed with Participant’s own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Participant is relying solely on such advisors and not on any statements or representations of the Corporation or any of its agents. Participant understands that Participant (and not the Corporation) shall be responsible for any tax liability that may arise as a result of the transactions contemplated by this Agreement. Participant understands that Section 83 of the Code, taxes as ordinary income the difference between the purchase price for the Shares and the Fair Market Value of the Shares as of the date any restrictions on the Shares lapse. In this context, “restriction” includes forfeiture provision pursuant to Paragraph C.1. with respect to the Unvested Shares. Participant understands that Participant may elect to be taxed at the time the Shares are granted rather than when and as the forfeiture provision lapses by filing an election under Section 83(b) of the Code with the IRS within thirty (30) days from the date of grant. Participant acknowledges that it is Participant’s sole responsibility, and not the Corporation’s, to file a timely election under code section 83(b), even if Participant requests the Corporation or its representatives to make this filing on his or her behalf. 2. Withholding Obligations. At the time the Shares subject to this Agreement are granted, or at any time thereafter as requested by the Corporation, Participant hereby authorizes withholding from payroll and any other amounts payable to Participant, including these Shares, and otherwise agrees to make adequate provision for, any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Corporation or any Parent or Subsidiary, if any, which arise in connection with the grant of the Shares. The Corporation, in its sole discretion, and in compliance with any applicable legal conditions or restrictions, may withhold from fully vested Shares otherwise deliverable to Participant upon the vesting of the Unvested Shares a number of whole Shares having a Fair Market Value, as determined by the Corporation as of the date of vesting, not in excess of the amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid adverse financial accounting treatment). Any adverse consequences to Participant arising in connection with such share withholding procedure shall be the Participant’s sole responsibility. Unless the tax withholding obligations of the Corporation or any Parent or Subsidiary are satisfied, the Corporation shall have no obligation to issue a certificate for such Shares or release such Shares from any escrow provided for herein. E. GENERAL PROVISIONS 1. Assignment. The Corporation may assign its rights under this Agreement, including, but not limited to the forfeiture provision of Paragraph C.1., to any person or entity selected by the Board, including (without limitation) one or more stockholders of the Corporation. 2. Employment At Will . Nothing in this Agreement or in the Plan shall confer upon Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Participant) or of Participant, which rights are hereby expressly reserved by each, to terminate Participant’s Service at any time for any reason, with or without cause. 3. Notices. Any notice required to be given under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled to such notice at the address indicated below such party’s signature line on this Agreement or at such other address as such party may designate by ten (10) days advance written notice under this paragraph to all other parties to this Agreement. 4. No Waiver. The failure of the Corporation in any instance to enforce the forfeiture provision or any other term of this Agreement shall not constitute a waiver of any other forfeiture provision or other term that may subsequently arise under the provisions of this Agreement or any other agreement between the Corporation and Participant. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. 5. Cancellation of Shares. If the Shares subject to this Agreement are forfeited, then from and after such time, the person from whom such Shares are forfeited shall no longer have any rights as a holder of such Shares. Such shares shall be deemed forfeited in accordance with the applicable provisions hereof, and the Corporation shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement. 6. Participant Undertaking. Participant hereby agrees to take whatever additional action and execute whatever additional documents the Corporation may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either Participant or the Shares pursuant to the provisions of this Agreement. 7. Agreement is Entire Contract. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and shall in all respects be construed in conformity with the terms of the Plan. In the event of a conflict between the Plan and this Agreement, the terms of the Plan shall govern. 8. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflict-of-laws rules thereof or of any other jurisdiction. 9. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 10. Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and upon Participant, Participant’s assigns and the legal representatives, heirs and legatees of Participant’s estate, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms hereof. 11. Representations. Participant agrees upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Corporation to carry out the purposes or intent of this Agreement. 12. Participant acknowledges and agrees that Participant has reviewed the Agreement in its entirety, has had an opportunity to obtain the advice of counsel prior to executing and accepting the award and fully understands all provisions of the Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated above. ACACIA RESEARCH CORPORATION By:_________________________________ Title:________________________________ Address:_____________________________ _____________________________ By:________________________________ Name:________________________________ Address:______________________________ ______________________________ PARTICIPANT SPOUSAL ACKNOWLEDGMENT The undersigned spouse of the Participant has read and hereby approves the foregoing Stock Issuance Agreement. In consideration of the Corporation’s granting the Participant the right to acquire the Shares in accordance with the terms of such Agreement, the undersigned hereby agrees to be irrevocably bound by all the terms of such Agreement, including (without limitation) the forfeiture to the Corporation (or its assigns) any Shares in which the Participant is not vested at the time of his or her termination of Service. PARTICIPANT'S SPOUSE By:________________________________ Name:________________________________ Address:______________________________ ______________________________ EXHIBIT I ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED _______________________ hereby sell(s), assign(s) and transfer(s) unto Acacia Research Corporation (the “Corporation”), _____________________ (________) shares of the Common Stock of the Corporation standing in his or her name on the books of the Corporation represented by Certificate No. ______________ herewith and do(es) hereby irrevocably constitute and appoint ______________________________ Attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. Dated: _________________, _____. Signature ________________________________ Instruction: Please do not fill in any blanks other than the signature line. Please sign exactly as you would like your name to appear on the issued stock certificate. The purpose of this assignment is to enable the Corporation to enforce the forfeiture provision without requiring additional signatures on the part of Participant. APPENDIX The following definitions shall be in effect under the Agreement: A. B. Agreement shall mean this Stock Issuance Agreement. Owner shall mean Participant and all subsequent holders of the Shares who derive their chain of ownership through a Permitted Transfer from Participant. C. Participant shall mean the person to whom the Shares are issued under the Stock Issuance Program. D. Permitted Transfer shall mean (i) a gratuitous transfer of the Shares, provided and only if Participant obtains the Corporation’s prior written consent to such transfer, (ii) a transfer of title to the Shares effected pursuant to Participant’s will or the laws of inheritance following Participant’s death or (iii) a transfer to the Corporation in pledge as security for any purchase-money indebtedness incurred by Participant in connection with the acquisition of the Shares. E. F. Plan shall mean the Corporation’s 2013 Acacia Research Corporation Stock Incentive Plan. Shares shall have the meaning assigned to such term in Paragraph A.1. G. Recapitalization shall mean any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the Corporation’s outstanding Common Stock as a class without the Corporation’s receipt of consideration. H. Service shall mean the Participant’s performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an employee, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance, a non-employee member of the board of directors or an independent consultant. Service shall not be deemed to cease during a period of military leave, sick leave or other personal leave approved by the Corporation; provided, however, that except to the extent otherwise required by law, no Service credit shall be given for purposes of the vesting of the Unvested Shares hereunder for any period the Participant is on a leave of absence. I. J. Stock Issuance Program shall mean the Stock Issuance Program under the Plan. Unvested Shares shall have the meaning assigned to such term in Paragraph C.1. SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 The following is a listing of the significant subsidiaries of Acacia Research Corporation: Jurisdiction of Incorporation Acacia Global Acquisition LLC and subsidiaries Delaware Acacia Research Group, LLC, formerly Acacia Patent Acquisition, LLC and subsidiaries Delaware Acacia Global Acquisition LLC and Acacia Research Group, LLC, wholly own multiple consolidated operating subsidiaries, that are included in Acacia Research Corporation's consolidated financial statements included elsewhere herein, each of which are separate and distinct legal entities, and all of which are in the patent acquisition, development, licensing and enforcement business. All of the operating subsidiaries wholly owned by Acacia Global Acquisition LLC and Acacia Research Group, LLC operate in the United States. EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our reports dated March 10, 2017, with respect to the consolidated financial statements and internal control over financial reporting included in the Annual Report of Acacia Research Corporation on Form 10-K for the year ended December 31, 2016. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Acacia Research Corporation on Forms S-3 (File No. 333-122452, File No. 333-157623, File No. 333-173045, File No. 333-180858) and on Forms S-8 (File No. 333-102181, File No. 333-109352, File No. 333-119811, File No. 333-127583, File No. 333- 131463, File No. 333-140280, File No. 333-144754, File No. 333-149849, File No. 333-157626, File No. 333-165110, File No. 333-172538, File No. 333- 179010, File No. 333-189135). /s/ GRANT THORNTON LLP Irvine, California March 10, 2017 I, Marvin Key, certify that: 1. I have reviewed this Annual Report on Form 10-K of Acacia Research Corporation; CERTIFICATION EXHIBIT 31.1 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: March 10, 2017 /s/ Marvin Key Marvin Key Interim Chief Executive Officer (Principal Executive Officer) I, Clayton J. Haynes, certify that: 1. I have reviewed this Annual Report on Form 10-K of Acacia Research Corporation; CERTIFICATION EXHIBIT 31.2 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: March 10, 2017 /s/ Clayton J. Haynes Clayton J. Haynes Chief Financial Officer (Principal Financial Officer) CERTIFICATION In connection with the Annual Report of Acacia Research Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2016, as filed with the Securities and Exchange Commission on March 10, 2017 (the “Report”), I, Marvin Key, Interim Chief Executive Officer of the Company, certify, pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 (15 U.S.C. 78m or 780(d)) and 18 U.S.C. Section 1350, that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. EXHIBIT 32.1 By: /s/ Marvin Key Marvin Key Interim Chief Executive Officer March 10, 2017 This certification accompanies this Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934. CERTIFICATION In connection with the Annual Report of Acacia Research Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2016, as filed with the Securities and Exchange Commission on March 10, 2017 (the “Report”), I, Clayton J. Haynes, Chief Financial Officer of the Company, certify, pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 780(d)) and 18 U.S.C. Section 1350, that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. EXHIBIT 32.2 By: /s/ Clayton J. Haynes Clayton J. Haynes Chief Financial Officer March 10, 2017 This certification accompanies this Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934. 

Continue reading text version or see original annual report in PDF format above