SECURITIES & EXCHANGE COMMISSION EDGAR FILING
ACACIA RESEARCH CORP
Form: 10-K
Date Filed: 2019-03-15
Corporate Issuer CIK: 934549
© Copyright 2019, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the terms of use.
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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, 2018
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
Commission File Number 001-37721
____________________
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation organization)
120 NEWPORT CENTER DRIVE
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 every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes 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, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in
Rule 12b-2 of the Exchange Act:
Large accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Accelerated filer x
Smaller reporting company x
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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, 2018, 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
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reported by The Nasdaq Global Select Market on such date, was approximately $203,206,000. 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 11, 2019, 49,647,693 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.
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ACACIA RESEARCH CORPORATION
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2018
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Item 1B.
Risk Factors
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
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
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 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Exhibits, Financial Statement Schedules
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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, accounting matters and investments. 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
We invest in intellectual property, or IP, and related absolute return assets and engage in the licensing and enforcement of patented technologies. We
partner with inventors and patent owners, from small entities to large corporations, 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.
We generate revenues and related cash flows from the granting of IP rights for the use of patented technologies that our operating subsidiaries control or
own. We 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 variety of industries.
We have established a proven track record of licensing and enforcement success with over 1,560 license agreements executed to date, across nearly
200 patent portfolio licensing and enforcement programs. To date, we have generated gross licensing revenue of approximately $1.6 billion, and have returned
more than $767 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
or accessed through our website and references to our website address in this annual report are inactive textual references only. 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:
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our code of conduct for chief executive officer and other senior financial officers;
our code of conduct for employees and directors and our fraud policy;
our insider trading policy; and
charters for our audit committee, nominating and corporate governance committee and compensation committee.
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
Patents are an important asset class worldwide. Licensing and enforcing patents requires an experienced, well-capitalized, licensing partner. We have
partnered with patent owners, including individual inventors, universities, small companies and large multi-national corporations in a variety of technology
sectors. These patent owners may possess 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.
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. 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 indiscriminately challenge
any allegations of patent infringement. Inventors and patent holders without sufficient legal, financial and expert technical resources to bring and continue the
pursuit of costly and complex patent infringement actions are often effectively ignored.
As a result of the common reluctance of patent infringers to negotiate and ultimately enter into 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 infringement litigation. However, in our
experience, most patent infringement litigation settles out of court at amounts that are related to the strength of the patent portfolio and the value of the invention
or inventions 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.
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. Our relationship with patent owners drives our 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 patent owners as an advance against future licensing
revenue.
Patent Licensing 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, ranging from outright purchases to various forms of partnering arrangements.
Generally, we maintain a 100% to 200% preferred rate of return until all deployed capital and advanced operational costs are recovered by us. After
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. 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 includes three fundamental elements, as follows:
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• 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 patent or patent portfolio's 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. Patent discovery involves identifying 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.
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 a number of factors to consider
when analyzing a patent and determining a patent’s value including, (i) infringement, (ii) validity, (iii) enforceability and (iv) extent of usage.
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, which demonstrates how the manufacture,
sale, or use of an existing product compares against the claims of the patent.
The three main factors analyzed to determine validity are: (1) anticipation, which occurs when the claims of the patent are entirely revealed within a
single piece of prior art, (2) obviousness which considers whether the differences between prior art and the patented invention are so slight that they would have
been obvious at the time of invention to one who is skilled in the subject matter being patented, and (3) the existence of non-patentable subject matter, which
considers whether the subject matter includes naturally occurring things, abstract concepts, or algorithms that perform an ordinary function.
To determine enforceability, a number of factors are analyzed, 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 other factors.
Our business development efforts are geared toward maintaining those relationships and identifying and growing new relationships in order to generate
new technology-based patent opportunities for sustainable revenue and /or revenue growth.
Legislative and legal changes have increased the complexity of patent enforcement actions. We believe that this provides Acacia a competitive
advantage, as many patent monetization entities have either given up or failed. Furthermore, the challenging legislative environment has kept patent asset
acquisition prices low.
In fiscal year 2018, Acacia experienced a number of changes in the Company's outlook and leadership. With new management in place during the year,
the focus was on capturing the value of remaining portfolio assets while starting to rebuild the new business pipeline. In addition, we began to pursue other
business opportunities which complement our legacy licensing and enforcement business and leverage our IP expertise, as described below.
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 use in the marketplace and estimated value. While we prefer to convince unauthorized users of our patented inventions of the
value of the patented invention and secure a license
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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 from us. We often 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 the patented technology indefinitely,
without appropriate authorization.
We engage highly competent and experienced patent lawyers to prosecute our patent portfolio litigation. It is imperative for us 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.
Investments
In August 2016, we entered into an investment agreement with Veritone, a cloud-based Artificial Intelligence technology company. In connection with
this investment agreement, we provided a total of $53.3 million in funding. Upon Veritone’s consummation of its initial public offering on May 17, 2017, or IPO,
our loans and accrued interest were automatically converted into shares of Veritone common stock, and we were issued an additional warrant to purchase
additional shares of Veritone common stock as described elsewhere herein. As of December 31, 2018, the Company's investment in Veritone totaled $7.5
million.
In June 2017, we made a $2.25 million equity investment in Miso Robotics, Inc., or Miso Robotics, an innovative leader in robotics and Artificial
Intelligence, or AI, solutions. The investment was part of Miso Robotics’ closing of $3.1 million in Series A funding. In addition, in February 2018, we made an
additional equity investment totaling $6.0 million in the Series B financing round for Miso Robotics, increasing our fully diluted ownership interest to approximately
30%. Miso Robotics will use the capital to expand its suite of collaborative, adaptable robotic kitchen assistants and to broaden applications for Miso AI, the
company’s machine learning cloud platform.
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
2019 to approximately 2033, covering technologies used in a number of industries, including: transportation and automotive, telecommunications,
semiconductor, consumer electronics, energy efficiency, wireless, video/imaging and medical devices.
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 encounter competition in the area of patent portfolio investment opportunities and enforcement. Existing non-practicing entities compete in acquiring
rights to IP assets, and more entities may enter or leave the market in future periods.
We also compete with financial firms, corporate buyers and others acquiring IP and investing in other technology opportunities. Many of these
competitors may have more financial and human resources than us. 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 or in the future may 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 or
technology partnerships. Many potential competitors may have significantly greater resources than the resources that we or 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 us obsolete and/or uneconomical.
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Employees
As of December 31, 2018, on a consolidated basis, we had 13 full-time employees. Neither we, nor any of our subsidiaries, are a party to any collective
bargaining agreement. We believe we have good relations with our employees.
ITEM 1A. RISK FACTORS
An investment in our common stock involves risks. You should carefully consider the risks described below, together with all of the other information
included in this annual report, as well as in our other filings with the SEC, in evaluating our business. The risks described below 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. Certain statements below may be considered forward-looking statements. For additional information, see “Cautionary Note Regarding
Forward-Looking Statements.”
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 $105.0 million (includes $59.1 million of unrealized equity investment losses), and a net income of $22.2 million (including
$42.2 million of unrealized equity investment gains) for the years ended December 31, 2018 and 2017, respectively, and on a cumulative basis, we have
sustained substantial losses since our inception. As of December 31, 2018, our accumulated deficit was $422.5 million. As of December 31, 2018, we had
approximately $165.5 million in cash and cash equivalents and short-term investments and working capital of $170.4 million. Although we believe 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, 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. Additional increases in our expenses without commensurate increases in revenues could significantly increase our operating losses. Any
additional operating losses may have a material adverse effect on our stockholders’ equity and overall financial condition.
Recent U.S. tax legislation may adversely affect our financial condition, results of operations and cash flows, including the ability to use net
operating losses and certain other tax attributes.
On December 22, 2017, new tax legislation was signed into law. Among other things, it reduced the maximum federal corporate income tax rate to 21%
in future periods, limited interest deductions, adopted elements of a territorial tax system, imposed a one-time transition tax (or “repatriation tax”) on all
undistributed earnings and profits of certain U.S.-owned foreign corporations, revised the rules governing net operating losses and the rules governing foreign tax
credits, and introduced new anti-base erosion provisions. Many of these changes were effective immediately, without any transition periods or grandfathering for
existing transactions. While some of the changes made by the tax legislation may adversely affect the Company in one or more reporting periods and
prospectively, other changes may be beneficial on a going forward basis. The legislation is unclear in many respects and could be subject to potential
amendments and technical corrections, as well as interpretations and implementing regulations by the U.S. Treasury and the IRS, any of which could lessen or
increase certain adverse impacts of the legislation. In addition, it is not clear how these U.S. federal income tax changes will affect state and local taxation, which
often uses federal taxable income as a starting point for computing state and local tax liabilities. We continue to work with our tax advisors to determine the full
impact that the recent tax legislation as a whole will have on us. We urge our investors to consult with their legal and tax advisors with respect to such legislation.
The value of the Company’s deferred tax assets (including the value of our net operating loss carryforwards and our tax credit carryforwards for financial
statement purposes) was reduced by approximately $25.3 million in the fourth quarter of 2017 . We have provided for a full valuation allowance for net deferred
tax assets as of December 31, 2018 and 2017, and we do not expect the change in tax law to have a material impact on our consolidated financial statements
provided herein.
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 or any portion 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
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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 and short-term investments totaled $165.5 million and $136.6 million at December 31, 2018 and 2017 ,
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.
Failure to effectively manage our operational changes could strain our managerial, operational and financial resources and could adversely affect
our business and operating results.
Operational changes primarily relate to recent changes in our board of directors and senior management and the reductions in employee headcount
across our licensing, business development and engineering functions during the two year period ended December 31, 2018. During 2018, we announced
various changes to our board of directors and senior management, including a reconstituted board of directors and the terminations of our President, our Chief
Financial Officer, Senior Vice President of Finance and Treasurer and our Executive Vice President, General Counsel and Secretary. We also announced in
2018 the appointment of our new Chief Intellectual Property Officer Marc W. Booth. Changes in leadership and key management positions have inherent risks,
and there are no assurances that any of our recent changes will not affect our financial condition.
In addition, employee headcount has been reduced as a result of a decrease in patent portfolio intake during the two year period.
If we fail to manage our 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.
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 licensing and enforcement business has depended, in part, on our ability to invest in patented technologies, patent portfolios, or companies holding
such patented technologies and patent portfolios. Accordingly, historically we have engaged in patent portfolio investments in an effort to expand our patent
portfolio assets. Such investments and potential investments are subject to numerous risks, including the following:
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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;
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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 .
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,
inventions and companies that own IP through our relationships with inventors, universities, research institutions, technology companies and others. If our
operating subsidiaries are unable to maintain those relationships and identify and grow new relationships, then we may not be able to identify new technology-
based patent 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, enforcement and overall
business. 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.
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 in order to achieve favorable outcomes from such litigation. The outcome of such litigation is uncertain, and any unfavorable outcomes may
harm our financial condition.
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 operations evolve and industry conditions increase in complexity, it will become more difficult to find the best legal counsel to handle all of our
cases. This is due in part to many of the best law firms having conflicts 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 you
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 you that we will not be exposed to claims or sanctions against us which may be costly or impossible for us to defend. The
inability to retain the best legal counsel to represent our operating subsidiaries in infringement actions may result in unfavorable or adverse outcomes, which
may result in losses, exhaustion of financial resources or other adverse effects which could encumber our ability to effectively operate our business or execute
our business strategy.
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.
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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
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 which could have a material adverse effect on our operating results and financial condition.
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 and legal expenses prior to entering into license agreements and
generating license revenues. We 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 and there are no assurances that such enforcement actions will result in favorable results for us.
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.
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Our management concluded that our internal control over financial reporting was effective as of December 31, 2018. However, there are inherent
limitations on effectiveness of controls. Our management, including our chief intellectual property officer and corporate controller, 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.
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. Refer to Item 9A. “Controls and Procedures” for additional information related to the current period.
Our equity investments are subject to risks and we may experience significant financial losses.
As described herein, in August 2016, we invested in Veritone. In connection with this investment, we entered into an investment agreement and bridge
financing with Veritone, investing approximately $53.3 million in Veritone, comprised of common stock and warrants. In fiscal year 2018, we realized a loss of
$19.1 million on the sale of 2,700,000 shares of Veritone common stock at a weighted average price of $7.07. As of December 31, 2018, the Company's
investment in Veritone totaled $7.5 million.
In addition, in June 2017, we made a $2.25 million investment in Miso Robotics, as part of Miso Robotics’ closing of $3.1 million in Series A funding. In
February 2018, we made an additional strategic equity investment totaling $6.0 million in the Series B financing round for Miso Robotics.
Our equity investments are subject to a high degree of risk and could diminish our financial condition. Currently, none of our investees are profitable and
have limited financial resources. The overall sustained economic uncertainty, as well as financial, operational and other difficulties encountered by certain
companies in which we have equity investments increases the risk that the actual amounts realized in the future on our debt and equity investments will differ
significantly from the fair values currently assigned to them. In addition, the companies in which we have equity investments may not be able to compete
effectively or there may be insufficient demand for the services and products offered by these companies. These investments could also expose us to significant
financial losses and may limit alternative uses of our capital resources. If our investees suffer losses, our financial condition could be materially adversely
affected. In addition, applicable securities law restrictions and other factors may result in an inability to liquidate any equity components of our equity
investments.
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. 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
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actions or activities. In addition, the America Invents Act enacted a new inter-partes review process, or IPR 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 America Invents Act 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.
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 negative effect on our business in the future unless this trend changes.
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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
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. This includes competitors seeking to invest in the same
or similar patents and technologies that we may seek to invest in. As new technological advances occur, many of our patented 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.
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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’ IP, 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. 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. If economic conditions do not continue to improve, or if
they 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.
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:
•
•
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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;
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;
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•
•
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:
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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;
we may elect to account for equity investments in companies where our investment gives us the ability to exercise significant influence over the
operating and financial policies of the investee at fair value, which may result in significant fluctuations in operating results (unrealized gains and losses)
each period based on fluctuations in the stock price of our investments and the requirement to mark such investments to market at each balance sheet
date;
expenses related to, and the timing and results of, patent filings and other enforcement proceedings relating to IP 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:
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announcements of developments in our patent enforcement actions;
developments or disputes concerning our patents;
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•
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•
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our or our competitors’ technological innovations;
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, 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 $3,451.91 - $4,544.46 during the 52-weeks ended December 31, 2018 and
the NASDAQ Composite Index (IXIC) had a range of $6,190.17- $8,133.30 over the same period. Over the same period, our common stock fluctuated within a
range of $2.75 - $4.40.
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 industry, global economic or other negative 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.
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ITEM 2. PROPERTIES
Our principal executive, corporate and administrative offices are located in Newport Beach, California, where we lease approximately 2,075 square feet
of office space, under a lease agreement that expires in 2019. Our primary operating subsidiary, Acacia Research Group, LLC, and its subsidiaries, are
headquartered in Frisco, Texas, where we lease office space under a lease agreement that expires in 2020. Certain of our operating subsidiaries also maintain
additional office space in New York and 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 you
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 you 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 effectively
and efficiently monetize our assets.
On June 17, 2015, Celltrace Communications Ltd., or Celltrace, filed a lawsuit against Acacia in U.S. District Court for the Southern District of New York,
Case No. 1:15-cv-04746, alleging, among other things, significant damages for alleged breach of contract, unjust enrichment and fraud. Acacia disputes the
allegations and does not believe that Celltrace is entitled to any damages. Acacia successfully moved to compel arbitration of the dispute, and the District Court
stayed the litigation pending arbitration before the International Court of Arbitration for the International Chamber of Commerce, or the ICC. Celltrace appealed
the decision to the U.S. Court of Appeals for the Second Circuit, which denied the appeal. Celltrace filed its request for arbitration of the claims with the ICC on
November 28, 2016. Acacia filed an answer denying all allegations of wrongdoing and asserting affirmative defenses. A tribunal was appointed to preside over
the arbitration and conducted its first case management conference on June 26, 2017. The parties conducted discovery and submitted their cases in chief to the
tribunal in a series of written submissions per the tribunal’s orders between January 2018 and December 2018. The tribunal held an evidentiary hearing with live
witness testimony in New York City between February 4, 2019 and February 13, 2019. At the end of the hearing, the tribunal set a schedule for post-hearing
briefing by the parties, which is currently scheduled to conclude in April 2019, after which the tribunal will render a decision. Acacia continues to vigorously
contest all allegations of wrongdoing.
ITEM 4. MINE SAFETY DISCLOSURES
None.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
General
Our common stock trades on The NASDAQ Global Select Market under the symbol “ACTG.”
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. On February 23, 2016, our Board of Directors
terminated the company’s 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. 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.
Recent Sales of Unregistered Securities
None.
Stock Repurchase Program
In February 2018, our Board of Directors authorized a stock repurchase program, or the Program, to repurchase up to $20 million of our outstanding
common stock in open market purchases or private purchases, from time to time, in amounts and at prices to be determined by the Board of Directors at its
discretion. In determining whether or not to repurchase any shares of our common stock, our Board of Directors will consider such factors as the impact of the
repurchase on our cash position, as well as our capital needs and whether there is a better alternative use of our capital. In fiscal year 2018, we repurchased
1,190,420 shares of common stock at an average price of $3.89 for $4,634,000. All of these shares were repurchased during the second quarter of fiscal year
2018. The Program expired on February 28, 2019.
Holders of Common Stock
On March 11, 2019, there were approximately 49 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.
ITEM 6. SELECTED FINANCIAL DATA
Not required for "smaller reporting companies."
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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
We invest in intellectual property, or IP, and related absolute return assets and engage in the licensing and enforcement of patented technologies. We
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 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. We 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 have a proven track record of licensing and enforcement success with over 1,560 license agreements executed to date, across nearly 200 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 $1.6 billion, and have returned more than $767 million to our patent partners.
Our business is described more fully in Item 1. “Business,” of this annual report.
Executive Overview
For the years ended December 31, 2018 and 2017, we reported revenues of $131.5 million and $65.4 million. Cash and short-term investments totaled
$165.5 million as of December 31, 2018, as compared to $136.6 million as of December 31, 2017. Our operating activities during the periods presented were
focused on the continued operation of our patent licensing and enforcement business, including the continued pursuit of our ongoing patent licensing and
enforcement programs. During 2018 and 2017, we also focused on cost reduction and optimization efforts, including reductions in headcount, renegotiation of
certain existing arrangements, termination of certain patent licensing programs to maximize resource allocation, and reducing facilities costs.
Our team’s expertise in identifying and evaluating complex IP, and in developing and cultivating long-term business relationships, provides us a unique
window into innovation and technological advancement. We are increasing our efforts to leverage our expertise and experience to create new avenues and
monetize our existing IP assets, which we believe will lead to increased shareholder value. We will leverage our experience, expertise, data and relationships
developed as a leader in the IP industry to pursue these opportunities.
Enforcement Activities. As previously reported, in March 2017, our subsidiary, Saint Lawrence Communications, LLC, or Saint Lawrence, received a
jury verdict in its case against Motorola, Inc. in the United States District Court for the Eastern District of Texas, or District Court. The jury returned a verdict that
five U.S. patents were valid and infringed. The jury found that the infringement was willful and returned a damages award of nearly $9.2 million for past
infringement. In addition, our German subsidiary, Saint Lawrence Communications GmbH, was granted injunctions by the German court in enforcement
proceedings against Motorola, Inc. In the fourth quarter of 2018, Saint Lawrence and Saint Lawrence Communications GmbH entered into an agreement with
Motorola, Inc. to resolve the patent litigation.
During the second quarter of 2017, Saint Lawrence resolved its enforcement actions against ZTE including the U.S. lawsuit. In February 2018, Saint
Lawrence and Saint Lawrence Communications GmbH entered into an agreement with Apple Inc. to resolve all outstanding litigation.
As previously reported, in September 2016, our subsidiary Cellular Communications Equipment LLC, or CCE, received a jury verdict of infringement by
Apple, Inc. In the third quarter of 2017, CCE entered into an agreement with Apple Inc. to resolve the patent litigation.
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Investment in Veritone. In connection with its previous investment in Veritone in August 2016, Acacia received an aggregate total of 4,119,521 shares
and 1,120,432 warrants of Veritone. In fiscal year 2018, Acacia sold 2,700,000 shares of Veritone common stock at a weighted average price of $7.07 and
recorded a realized loss of $19.1 million on the sale. Refer to Note 6 to the consolidated financial statements elsewhere herein for additional information
regarding our investment in Veritone.
Investment in Miso Robotics. In June 2017, Acacia made a $2.25 million equity investment in Miso Robotics, as part of Miso Robotics’ closing of $3.1
million in Series A funding. In February 2018, we made an additional strategic equity investment totaling $6.0 million in the Series B financing round for Miso
Robotics. Refer to Note 6 to the consolidated financial statements elsewhere herein for additional information regarding our investment in Miso Robotics.
Patent Portfolio Intake. In fiscal year 2018, Acacia underwent a number of changes, including the establishment of a new IP team that is working to refill
the patent portfolio intake pipeline. In addition, the Company has experienced substantial deal flow and is currently considering many late stage opportunities.
Operating activities during the periods presented included the following:
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 and short-term investments
2018
2017
131,506
$
65,402
12
8
—
—
20
13
1
1
165,463 $
136,604
$
$
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;
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;
the willingness of prospective licensees to settle significant patent infringement cases and pay reasonable license fees for the use of our patented
technology, as such infringement cases approached a court determined trial date; and
fluctuations in overall patent portfolio related enforcement activities which are impacted by the portfolio intake challenges discussed above.
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.
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Summary of Results of Operations - For Fiscal Years 2018 and 2017
(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
Other operating costs and expenses (1)
Operating loss
Total other income (expense)
Provision for income taxes
Net (income) loss attributable to noncontrolling interests in subsidiaries
Net income (loss) attributable to Acacia Research Corporation
Fiscal Year
2018
2017
% Change
2018 vs. 2017
$
131,506 $
66,669
8,866
27,120
28,210
25,452
(24,811)
(78,858)
(1,179)
(181)
(105,029)
65,402
21,634
18,219
22,154
2,248
28,419
(27,272)
51,911
(2,955)
496
22,180
101 %
208 %
(51)%
22 %
*
(10)%
(9)%
(252)%
(60)%
(136)%
*
____________________________________
* Percentage change in excess of 300%
(1) Includes non-cash stock compensation charges (credits) of $(317,000) and $8.9 million in fiscal years 2018 and 2017 , respectively, included in general and administrative
expense in the consolidated statements of operations.
Overview - Fiscal Year 2018 compared with Fiscal Year 2017
•
•
Revenues increased $66.1 million, or 101% to $131.5 million, due primarily to an increase in average revenue per agreement. Refer to “Investments in
Patent Portfolios” below for additional information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement
related revenues.
Loss before provision for income taxes was $103.7 million for fiscal year 2018, as compared to income before provision for income taxes of $24.6 million for
fiscal year 2017. The net change was primarily comprised of the change in revenues described above, a net $59.1 million unrealized loss on our equity
investment in Veritone in fiscal year 2018, as compared to a net $49.5 million gain in fiscal year 2017, and a net increase in operating expenses, as follows:
•
Inventor royalties and contingent legal fees, on a combined basis, increased $45.0 million, or 208%. Contingent legal fees increased $14.8 million, or
89%, as compared to a 101% increase in revenue due to lower average contingent legal fee rates for the portfolios generating revenues in fiscal
year 2018. Inventor royalties increased $30.2 million, or 610%, as compared to the 101% increase in revenue, primarily due to lower average
inventor royalty rates for the portfolios generating revenues during fiscal year 2017.
• Litigation and licensing expenses-patents decreased $9.4 million, or 51%, to $8.9 million, due primarily to a net decrease in litigation support and third-
party technical consulting expenses associated with ongoing licensing and enforcement programs and an overall decrease in portfolio related
enforcement activities. Refer to “Investments in Patent Portfolios” below for additional information regarding the impact of portfolio acquisition
trends on licensing and enforcement activities and current and future licensing and enforcement related revenues.
• Amortization expense increased $5.0 million, or 22%, to $27.1 million, due to accelerated amortization related to patent portfolio sales or dispositions
during fiscal year 2018.
•
Impairment of patent-related intangible asset charges increased $26.0 million. Impairment charges reflect the impact of reductions in expected estimated
future net cash flows for certain patent portfolios and/or the impairment of certain portfolios that management determined it would no longer
allocate resources to in future periods.
• General and administrative expenses decreased $8.4 million, or 31%, to $18.9 million, due primarily to a decrease in non-cash stock compensation, a
reduction in personnel costs in fiscal years 2018 and 2017, and a decrease in variable performance based compensation costs.
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Excluding profits interests related non-cash stock compensation, non-cash stock compensation expense decreased $3.7 million, or 64% due primarily to
2017 non-cash stock compensation expense including amounts related to the August 2016 grant of options with market-based vesting conditions which
were fully expensed in fiscal year 2017. Profits interests related non-cash stock compensation expense decreased $5.5 million, primarily due to the
decrease in the fair value of our Veritone related profits interest units, consistent with the decrease in underlying Veritone stock price since December 31,
2017.
• Other income (expense) for fiscal year 2018 included an unrealized loss on our investment in Veritone totaling $59.1 million and a realized loss on the sale
of Veritone totaling $19.1 million . Other income (expense) for fiscal year 2017 comprised of an unrealized gain on conversion of our Veritone loans to
equity of $2.7 million and an unrealized gain on the exercise of our Primary Warrant of $4.6 million, both as of May 2017, and an unrealized gain related
to the change in fair value of our equity investment in Veritone through December 31, 2017 of $42.2 million.
•
Tax expense for fiscal years 2018 and 2017 primarily reflects the impact of state taxes and foreign withholding taxes incurred on revenue agreements
executed with third-party licensees domiciled in foreign jurisdictions.
Revenues for the periods presented included fees from the following licensing and enforcement programs:
• Bone Wedge technology(1)(2)
• Cardiology and Vascular Device technology (1)(2)
• DisplayPort and MIPI DSI technology (2)
• Electronic Access Control technology(2)
•
• Online Auction Guarantee technology(1)(2)
• Optical Networking technology(2)
______________________________________
Innovative Display technology(2)
(1)
(2)
Licensing and enforcement program generating revenue in fiscal year 2018.
Licensing and enforcement program generating revenue in fiscal year 2017.
• Semiconductor Testing technology (1)
• Semiconductor and Memory-Related technology(2)
• Shared Memory for Multimedia Processing(2)
• Speech codes used in wireless and wireline systems technology (1)(2)
• Super Resolutions Microscopy technology (1)(2)
• Video Conferencing technology(1)(2)
• Wireless Infrastructure and User Equipment technology (1)(2)
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 two pending patent infringement cases with
a scheduled trial date in the next twelve 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 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. Moreover, in the event of a
favorable outcome, there is, in our experience, 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
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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;
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; and
Fluctuations in overall patent portfolio related enforcement activities which are impacted by the portfolio intake challenges discussed above could
harm our operating results and our financial position.
Investments in Patent Portfolios
One of the significant challenges in our industry continues to be quality patent intake due to the challenges and complexity associated with the current
patent environment. In fiscal year 2018 we did not acquire any patent portfolios, compared to one portfolio during fiscal year 2017.
With respect to our licensing, enforcement and overall business, 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 maintain those relationships and identify and grow
new relationships, then we may not be able to identify new technology-based patent 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, enforcement and overall
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.
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
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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, including valuation of profits interests;
valuation of long-lived and intangible assets including goodwill;
valuation of investments; 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 upon transfer of control of promised bundled IP rights and other contractual performance obligations to licensees in an amount
that reflects the consideration we expect to receive in exchange for those IP Rights. Revenue contracts that provide promises to grant the right to use IP Rights
as they exist at the point in time at which the IP Rights are granted, are accounted for as performance obligations satisfied at a point in time and revenue is
recognized at the point in time that the applicable performance obligations are satisfied and all other revenue recognition criteria have been met.
For the periods presented, revenue contracts executed by the Company primarily provided for the payment of contractually determined, one-time, paid-
up license fees in consideration for the grant of certain IP Rights for patented technologies owned or controlled by Acacia (“Paid-up Revenue
Agreements”). Revenues also included license fees from sales-based revenue contracts, the majority of which were originally executed in prior periods, which
provide for the payment of quarterly license fees based on quarterly sales of applicable product units by licensees (“Recurring Revenue Agreements”).
Revenues may also include court ordered settlements or awards related to our patent portfolio ("Other Settlements") or sales of our patent portfolio ("Sales"). IP
Rights granted included the following, as applicable: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered
by patented technologies, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The IP
Rights granted were perpetual in nature, extending until the legal expiration date of the related patents. The individual IP Rights are not accounted for as
separate performance obligations, as (i) the nature of the promise, within the context of the contract, is to transfer combined items to which the promised IP
Rights are inputs and (ii) the Company's promise to transfer each individual IP right described above to the customer is not separately identifiable from other
promises to transfer IP Rights in the contract.
Since the promised IP Rights are not individually distinct, the Company combined each individual IP right in the contract into a bundle of IP rights that is
distinct, and accounted for all of the IP Rights promised in the contract as a single performance obligation. The IP Rights granted were “functional IP rights” that
have significant standalone functionality. Acacia's subsequent activities do not substantively change that functionality and do not significantly affect the utility of
the IP to which the licensee has rights. Acacia’s operating subsidiaries have no further obligation with respect to the grant of IP Rights, including no express or
implied obligation to maintain or upgrade the technology, or provide future support or services. The contracts provide for the grant (i.e., transfer of control) of the
licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the contract. Licensees legally obtain control of the IP Rights upon
execution of the contract. As such, the earnings process is complete and revenue is recognized upon the execution of the contract, when collectability is
probable and all other revenue recognition criteria have been met. Revenue contracts generally provide for payment of contractual amounts with 30-90 days of
execution of the contract, or the end of the quarter in which the sale or usage occurs for Recurring Revenue Agreements. Contractual payments made by
licensees are generally non-refundable.
For sales-based royalties, the Company includes in the transaction price some or all of an amount of estimated variable consideration to the extent that
it is probable that a significant reversal in the amount of cumulative revenue recognized will not
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occur when the uncertainty associated with the variable consideration is subsequently resolved. Notwithstanding, revenue is recognized for a sales-based
royalty promised in exchange for a license of IP Rights when the later of (i) the subsequent sale or usage occurs, or (ii) the performance obligation to which
some or all of the sales-based royalty has been allocated has been satisfied. Estimates are generally based on historical levels of activity, if available.
Revenues from contracts with significant financing components (either explicit or implicit) are recognized at an amount that reflects the price that a
licensee would have paid if the licensee had paid cash for the IP Rights when they transfer to the licensee. In determining the transaction price, the Company
adjusts the promised amount of consideration for the effects of the time value of money. As a practical expedient, the Company does not adjust the promised
amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the
entity transfers promised IP Rights to a customer and when the customer pays for the IP Rights will be one year or less.
In general, the Company is required to make certain judgments and estimates in connection with the accounting for revenue contracts with customers.
Such areas may include identifying performance obligations in the contract, estimating the timing of satisfaction of performance obligations, determining whether
a promise to grant a license is distinct from other promised goods or services, evaluating whether a license transfers to a customer at a point in time or over
time, allocating the transaction price to separate performance obligations, determining whether contracts contain a significant financing component, and
estimating revenues recognized at a point in time for sales-based royalties.
For fiscal years 2018 and 2017, 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 IP 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 contractual performance obligations 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. 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.
Stock-based Compensation Expense
Equity Based Awards. 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.
The Financial Accounting Standards Board issued a new standard, effective January 1, 2017, that changes the accounting for certain aspects of share-
based payments to employees, including allowing an employer to make an entity-wide accounting policy election to either estimate the number of awards that
are expected to vest (current generally accepted
accounting principles in the United States, or GAAP) or account for forfeitures when they occur. Effective January 1, 2017, we elected to account for forfeitures
of awards as they occur. The prior standard required us to estimate the number of awards for which the requisite service period is expected to be rendered and
base the accruals of compensation cost on the estimated number of awards that will vest. The adoption of this standard did not have a material impact on our
consolidated financial statements.
During the year ended December 31, 2016, the Company granted stock options with market-based vesting conditions. The options 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-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.
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Profits Interests Units. In February 2017, AIP Operation LLC, or AIP, an indirect subsidiary of ours, adopted a Profits Interests Plan, or the Profits
Interests Plan, that provides for the grant of AIP membership interests in the form of profits interests to certain members of management and the Board of
Directors of Acacia Research Corporation as compensation for services rendered. As of December 31, 2018 and 2017, AIP held the Veritone 10% Warrant
described in Note 6.
For the year ended December 31, 2018, the fair value of the Units was estimated at 40% of the fair value of the 10% Warrant, based on the Black-
Scholes option-pricing model (Level 2). For the year ended December 31, 2017, the fair value of the Units was estimated based on probable vesting dates and
values for the applicable instruments (i.e. common stock and warrants related to Acacia’s Veritone investment described at Note 6) underlying or associated with
the Units (Level 3).
Valuation of Long-lived and Intangible Assets
Patent Portfolio Impairment Testing. We review long-lived assets and intangible assets for potential impairment annually (quarterly for patents) and when
events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the expected undiscounted future cash flows
resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss is recorded 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.
For the fiscal year ended December 31, 2018 and 2017, we recorded $28.2 million and $2.2 million, respectively of patent portfolio impairment charges.
The impairment charges were recorded in the periods 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.
Investments
Investment in Veritone. We have elected to account for equity investments in companies with readily determinable fair values, where our investment
gives us the ability to exercise significant influence over the operating and financial policies of the investee, at fair value. If the fair value option is applied to an
investment that would otherwise be accounted for under the equity method of accounting, it is applied to all of the financial interests in the same entity that are
eligible items (i.e. common stock and warrants). Refer to Note 6 for information regarding our investment in Veritone.
Determination of whether we possess the ability to exercise significant influence requires significant judgment, including consideration of the extent to
which our voting interests, board representation, financial arrangements and other factors provide us with the ability to exercise significant influence with respect
to an investee. A change in facts or judgments resulting in the determination that control exists would result in consolidation of the investment and recognition of
related revenues and expenses with a corresponding non-controlling interest.
U.S. GAAP defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or
most advantageous market in an orderly transaction between market participants on the measurement date, and also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs, where available. The three-level hierarchy of valuation techniques established to measure fair value
includes: Level 1 - Observable Inputs; Level 2 - Pricing Models with Significant Observable Inputs; and Level 3 - Unobservable Inputs. Refer to Note 2 to the
consolidated financial statements elsewhere herein for additional information.
Whenever possible, we are required to use observable market inputs (Level 1 - quoted market prices) when measuring fair value. Our Veritone common
stock is reported at fair value, based on the applicable NASDAQ Global Select Market stock price as of the applicable valuation date, as adjusted for an
estimated DLOM (2017 only) associated with the restricted nature of the common stock acquired (Level 3 input). Acacia’s investment in Veritone warrants is
recorded at fair value, based on the Black-Scholes option-pricing model, as adjusted for an estimated DLOM (2017 only). A one percent increase in the DLOM
assumptions utilized at December 31, 2017 would result in a $1.1million decrease in the fair value of our investment in Veritone at December 31, 2017, and a
corresponding decrease in the net unrealized investment gain reflected in the consolidated statements of operations for the year ended December 31, 2017.
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Investment in Miso Robotics. In June 2017, we made an investment in the Series A Preferred financing round for Miso Robotics, an innovative leader in
robotics and AI solutions, totaling $2,250,000, acquiring a 22.6% ownership interest in Series A preferred stock of Miso Robotics, and one board seat. In February
2018, we made an additional equity investment in the Series B Preferred financing round for Miso Robotics totaling $6,000,000, increasing our ownership interest
(Series B preferred stock) in Miso Robotics to approximately 30%, and acquiring an additional board seat. As of February 2018, the preferred stock was not
deemed to be in-substance common stock due to the substantive liquidation preference associated with the preferred stock. As such, as of February 2018, our
investment in Miso Robotics is recorded at cost and assessed for any impairment at each balance sheet date. Prior to February 2018, the equity method of
accounting was applied.
Equity investments in common stock and in-substance common stock without readily determinable fair values in companies over which we have the
ability to exercise significant influence, are accounted for using the equity method of accounting. In-substance common stock is an investment in an entity that
has risk and reward characteristics that are substantially similar to that entity's common stock. An investment in preferred stock with substantive liquidation
preferences over common stock, are not substantially similar to the common stock, and therefore is not considered in-substance common stock. A liquidation
preference is substantive if the investment has a stated liquidation preference that is significant, from a fair value perspective, in relation to the purchase price of
the investment. A liquidation preference in an investee that has sufficient subordinated equity from a fair value perspective is substantive because, in the event of
liquidation, the investment will not participate in substantially all of the investee's losses. Investments in preferred stock with substantive liquidation preferences,
and therefore not deemed to be in-substance common stock, are accounted for at cost (subject to impairment considerations, if any), as adjusted for the impact
of changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.
Determination of whether an equity investment is in-substance common stock requires significant judgment, including an estimation of the fair value of
the equity investments in relation to the fair value of subordinated equity of the investee, if any. A change in estimates or judgments resulting in the
determination that an equity investment is or is not in-substance common stock would result in the application of either the equity method of accounting, or the
cost method of accounting to the investment.
The fair value of subordinated equity (i.e., common stock) and preferred stock for purposes of determining whether a liquidation preference is substantive
was determined utilizing an option pricing methodology, including a discount for lack of marketability. A one percent change in the DLOM assumptions utilized to
estimate the fair value of common stock would not have a material impact on the analysis.
We review investments quarterly for indicators of other-than-temporary impairment. This determination requires significant judgment. In making this
judgment, we consider available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds
its fair value, we evaluate, among other factors, general market conditions and the duration and extent to which the fair value is less than cost. We also consider
specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in
technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is
recorded to other income (expense) and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may
incur future impairments.
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 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, 2018 and 2017. 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
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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.
In fiscal years 2018 and 2017, 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 statements 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 2018 and 2017
Revenues
Revenues
New revenue agreements executed
Average revenue per agreement
$
$
2018
2017
$ Change
% Change
(in thousands, except percentage change values and number of agreements)
131,506 $
65,402 $
66,104
101%
2018 vs. 2017
12
10,959 $
20
3,270
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
2018 vs. 2017
(in thousands)
$
$
(26,160)
92,267
66,107
Three licensees individually accounted for 45%, 17% and 17%, respectively, of revenues recognized during the year ended December 31, 2018. Three
licensees individually accounted for 54%, 21% and 10%, respectively, of revenues recognized during the year ended December 31, 2017.
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 IP 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. Refer to “Investments in Patent Portfolios” above for information regarding the impact of
portfolio acquisition trends on current and future licensing and enforcement related revenues.
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Net Income (Loss)
2018
2017
$ Change
% Change
(in thousands, except percentages)
2018 vs. 2017
Net income (loss) attributable to Acacia Research
Corporation
$
(105,029) $
22,180 $
(127,209)
(574)%
A reconciliation of the change in net income (loss) for the periods presented is as follows:
Increase in revenues
Increase in inventor royalties and contingent legal fees combined
Decrease in general and administrative expenses
Decrease in litigation and licensing expenses
Increase in patent amortization expenses
Increase in impairment of patent-related intangible assets
Change in provision for income taxes
Unrealized gain (loss) and change in fair value of investment
Loss on sale of investment
Other
Net change in net income (loss)
Cost of Revenues
2018 vs. 2017
%
(in thousands, except percentage
values)
$
$
66,104
(45,035)
8,369
9,353
(4,966)
(25,962)
1,776
(108,629)
(19,095)
(9,124)
(52)%
35 %
(7)%
(7)%
4 %
20 %
(1)%
85 %
15 %
8 %
(127,209)
100 %
Inventor royalties
Contingent legal fees
Patent acquisition expenses
Litigation and licensing expenses - patents
Amortization of patents
2018
2017
$ Change
% Change
2018 vs. 2017
$
(in thousands, except percentages)
35,168 $
31,501
4,000
8,866
27,120
4,952 $
16,682
—
18,219
22,154
30,216
14,819
4,000
(9,353)
4,966
610 %
89 %
— %
(51)%
22 %
Inventor Royalties, Contingent Legal Fees Expense and Other Patent Acquisition Costs. The economic terms of patent portfolio related partnering
agreements and contingent legal fee arrangements, 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. Fiscal year 2018 included $4.0 million in other direct costs of revenues related to patent rights acquired and licensed in 2018.
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 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 decreased for the periods presented due to a net decrease in litigation support, patent prosecution and
litigation expenses associated with ongoing licensing and enforcement programs and an overall decrease in portfolio related enforcement activities. We expect
patent-related legal expenses to continue to decrease based upon
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the overall decrease in portfolio related enforcement activities as we continue monetizing our existing patent assets. Refer to “Investments in Patent Portfolios”
above for additional information regarding the impact of portfolio acquisition trends on licensing and enforcement activities and current and future licensing and
enforcement related revenues.
Amortization of Patents. The change in amortization expense for the comparable periods presented was due to the following:
Scheduled amortization related to patent portfolios owned or controlled as of the end of the
prior year
Patent portfolio sales and dispositions
Total change in patent amortization expense
Impairment Charges
2018 vs. 2017
(in thousands)
$
$
(3,341)
8,307
4,966
2018
2017
$ Change
% Change
(in thousands, except percentages)
2018 vs. 2017
Impairment of patent-related intangible assets
$
28,210 $
2,248 $
25,962
1,155%
Patent Impairment Charges
Impairment charges for fiscal year 2018 and 2017 primarily reflect reductions in expected estimated future net cash flows for certain patent portfolios to
which management determined it would no longer allocate resources in future. periods.Impairment charges consisted of the excess of the asset’s carrying value
over its estimated fair value as of the applicable measurement date.
Operating Expenses
2018
2017
$ Change
% Change
(in thousands, except percentages)
2018 vs. 2017
General and administrative
Non-cash stock compensation expense - G&A
Non-cash stock compensation expense - Veritone Profits
Interests
$
19,167 $
18,334 $
2,133
5,844
(2,450)
3,041
Total general and administrative expenses
$
18,850 $
27,219 $
833
(3,711)
(5,491)
(8,369)
5 %
(64)%
(181)%
(31)%
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, business development, state taxes based on gross receipts and other corporate costs. A summary of the main drivers
of the change in
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general and administrative expenses for the periods presented is as follows (in thousands):
Net change in personnel costs
Variable performance-based compensation expense
Corporate, general and administrative expense
Business development expense
Non-cash stock compensation expense - general and administrative (1)
Non-cash stock compensation expense - Veritone related profits interests (1)
Employee severance costs
Total change in general and administrative expenses
_________________________________________________________________
(1) - Refer to Note 9 in the accompany consolidated financial statements
2018 vs. 2017
(in thousands)
(1,102)
(278)
2,194
(412)
(3,711)
(5,491)
431
(8,369)
$
$
General and administrative non-cash stock compensation expense for fiscal year 2018, excluding profits interests related non-cash compensation,
decreased due to reductions in headcount and a $2.4 million reduction in scheduled non-cash stock compensation expense related to options with market-based
performance conditions with graded vesting features that resulted in higher non-cash stock compensation expense in fiscal year 2017, as compared to fiscal
year 2018.
Profits interests are classified as liability awards, which are measured at fair value on the grant date and re-measured each reporting period at fair value
until the award is settled. Compensation expense (included in “non-cash stock compensation expense - Veritone related profits interests” above) is adjusted
each reporting period for increases or decreases in the estimated fair value, which is primarily impacted by changes in the fair value of the underlying Veritone
common stock and warrants related to the liability. Upon vesting of the units, which occurred in September 2017, any previously unrecognized compensation
expense was immediately recognized for any changes in fair value. The fair value of the Veritone related profits interests Units totaled $591,000 and $3.0 million
as of December 31, 2018 and 2017, respectively. Refer to Note 9 in the condensed consolidated financial statements elsewhere herein for additional
information.
Other Operating Income (Expense)
Change in Fair Value of Investment, net. Our equity investment in Veritone is recorded at fair value, and therefore, is marked to market at each balance
sheet date. Results for fiscal year 2018 included a net unrealized loss on our equity investment in Veritone totaling $59.1 million and a realized loss of $19.1
million on the sale of 2,700,000 shares of Veritone common stock at a weighted average price of $7.07. Results for fiscal year 2017 included a net unrealized
gain on our equity investment in Veritone totaling $49.5 million, comprised of an unrealized gain on conversion of our Veritone loans to equity of $2.7 million and
an unrealized gain on the exercise of our Primary Warrant of $4.6 million, both as of May 2017, and an unrealized gain related to the change in fair value of our
equity investment in Veritone through December 31, 2017 of $42.2 million.
Other. Fiscal year 2018 and 2017 operating expenses included expenses for court ordered attorney fees and settlement and contingency accruals
totaling $2.6 million and $1.2 million, respectively.
Income Taxes
Provision for income taxes (in thousands)
$
Effective tax rate
2018
2017
(1,179)
$
1%
(2,955)
12%
Our effective tax rates for fiscal year 2018 and 2017, were primarily comprised of foreign taxes withheld on revenue agreements with licensees in foreign
jurisdictions, state taxes, and the impact of full valuation allowances recorded for net operating loss (2018 and 2017) and foreign tax credit related tax assets
generated in those periods due to uncertainty regarding future realization. Foreign taxes withheld related to revenue agreements executed with third-party
licensees domiciled in certain foreign jurisdictions for fiscal year 2018 and 2017 totaled $1.1 million and $2.9 million, respectively. Results for fiscal year 2017
included an unrealized gain on our equity investment in Veritone which created a deferred tax liability totaling approximately $10.6 million. The future anticipated
reversal of this deferred tax liability provides for a source of taxable
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income that allows for the realizability of existing deferred tax assets that have been reduced by a valuation allowance for the periods presented. The effective
tax rate reflects both the recognition of the deferred tax liability and the reversal of valuation allowance.
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 and cash equivalents on hand generated from our operating activities. Our management believes that our cash
and cash equivalent balances and anticipated cash flows from operations will be sufficient to meet our cash requirements through at least March 2020 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, or at all. The capital and credit markets have experienced extreme volatility and
disruption in recent years, and the volatility and impact of the disruption may continue. 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 the commercial
paper markets may not be a reliable source of short-term financing for us. If we fail to obtain additional financing 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 short-term investments totaled $165.5 million at December 31, 2018, compared to $136.6 million at
December 31, 2017. 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
2018
2017
$
20,877 $
(24,066)
(4,606)
$
(7,795) $
12,966
(16,114)
700
(2,448)
Cash Flows from Operating Activities. Cash receipts from licensees totaled $103.4 million and $91.2 million in fiscal years 2018 and 2017, 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 $82.5 million and $66.8 million in fiscal
years 2018 and 2017, respectively. The fluctuations in cash outflows for the periods presented reflects 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.
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Cash Flows from Investing Activities. Cash flows from investing activities and related changes were comprised of the following for the periods presented
(in thousands):
Investment in Investees (1)
Sale of investment(1)
Advances to Investee(1)
Purchases of property and equipment
Net sale (purchase) of available-for-sale investments
Net cash used in investing activities
(1) - Refer to Note 6 in the accompany consolidated financial statements
2018
2017
$
(7,000) $
(31,514)
19,097
—
(34)
(36,129)
$
(24,066) $
—
(4,000)
(2)
19,402
(16,114)
Investment in Veritone. In connection with its previous investment agreement with Veritone in August 2016, in fiscal year 2017 Acacia entered into an
additional secured convertible promissory note with Veritone and advanced $4.0 million. In addition, upon the consummation of Veritone’s IPO, Acacia exercised
its option to purchase an additional 2,150,335 shares of Veritone common stock, at an aggregate purchase price of $29.3 million. Acacia received an aggregate
total of 4,119,521 shares of common stock and 1,120,432 warrants of Veritone. In fiscal year 2018, Acacia sold 2,700,000 shares of Veritone common stock at a
weighted average price of $7.07 and recorded a realized loss of $19.1 million on the sale. Refer to Note 6 to the consolidated financial statements elsewhere
herein for additional information regarding our investment with Veritone.
Investment in Miso Robotics. In June 2017, Acacia made a $2.25 million equity investment in Miso Robotics, as part of Miso Robotics’ closing of $3.1
million in Series A funding. In February 2018, we made an additional strategic equity investment totaling $6.0 million in the Series B financing round for Miso
Robotics. Refer to Note 6 to the consolidated financial statements elsewhere herein for additional information regarding our investment in Miso.
Cash Flows from Financing Activities. Cash flows from financing activities and related changes included the following for the periods presented (in
thousands):
Repurchase of common stock
Proceeds from the exercise of stock options
Repurchases of common stock
Net cash provided by financing activities
2018
2017
$
$
(4,634) $
257
(229)
(4,606) $
—
745
(45)
700
Stock Repurchase Program. In February 2018, our Board of Directors authorized the Program to repurchase up to $20 million of our outstanding
common stock in open market purchases or private purchases, from time to time, in amounts and at prices to be determined by the Board of Directors at its
discretion. In determining whether or not to repurchase any shares of our common stock, our Board of Directors will consider such factors as the impact of the
repurchase on our cash position, as well as our capital needs and whether there is a better alternative use of our capital. We have no obligation to repurchase
any amount of our common stock under the Program. In fiscal year 2018, we repurchased 1,190,420 shares at an average price of $3.89 for $4,634,000. The
Program expired on February 28, 2019.
Working Capital
The primary components of working capital are cash and cash equivalents, short-term investments, accounts receivable, prepaid expenses, accounts
payable, accrued expenses, and royalties and contingent legal fees payable. Working capital at December 31, 2018 was $170.4 million, compared to $130.1
million at December 31, 2017.
Consolidated accounts receivable from licensees increased to $32.9 million at December 31, 2018, compared to $153,000 at December 31, 2017.
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 38%, 36%,
12% and 11%, respectively, of accounts receivable at December 31, 2018. One licensee accounted for 100% of accounts receivable at December 31, 2017.
Accounts payable and accrued expenses increased slightly to $8.3 million at December 31, 2018, from $8.0 million at December 31, 2017.
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Consolidated royalties and contingent legal fees payable increased to $22.7 million at December 31, 2018, compared to $1.6 million at December 31,
2017. 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.
All of accounts receivable from licensees at December 31, 2018 are scheduled to be collected in the first and second quarter of 2019, 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 through the third
quarter of 2019 in accordance with the underlying contractual arrangements.
Off-Balance Sheet Arrangements
We have not entered into off-balance sheet financing arrangements, other than operating leases.
Uncertain Tax Positions . At December 31, 2018, we had total unrecognized tax benefits of approximately $808,000 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, 2018. 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.
Recent Accounting Pronouncements
Refer to Note 2 to our notes to consolidated financial statements included elsewhere herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our short-term investment activities is to preserve principal while concurrently maximizing the income we receive from our short-
term 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 short-term 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, 2018, 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 short
term, highly liquid, investment grade, U.S. government and corporate securities (included in short-term investments in the accompanying consolidated balance
sheets). Short-term investment balances were zero at December 31, 2017.
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 short-term 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.
Investment Risk. We are exposed to investment risks related to changes in the underlying financial condition of certain of our equity investments in these
technology companies. The fair value of these investments can be significantly impacted by the risk of adverse changes in securities markets generally, as well
as risks related to the performance of the companies whose securities we have invested in, risks associated with specific industries, and other factors. These
investments are subject to significant fluctuations in fair value due to the volatility of the securities markets and of the underlying businesses. As of
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December 31, 2018 and 2017, the carrying value of our common stock and warrants in public and private companies was $18.7 million and $107.0 million,
respectively. We record our common stock and warrant investments in publicly traded companies at fair value, which is subject to market price volatility, and
represents $10.5 million and $104.8 million of our assets as of December 31, 2018 and 2017, respectively. As of December 31, 2018, a hypothetical 10%
adverse change in the market price of Veritone's publicly traded common stock would have resulted in a decrease of approximately $540,000 in the fair value of
our equity and equity warrant investments in Veritone and a decrease of approximately $301,000 in our other equity investments. As of December 31, 2017, a
hypothetical 10% adverse change in the market price of Veritone's publicly traded common stock would have resulted in a decrease of approximately $11.1
million in the fair value of our equity and equity warrant investments in Veritone. We evaluate our equity and equity warrant investments in private companies for
impairment when events and circumstances indicate that the decline in fair value of such assets below the carrying value is other-than temporary. Our analysis
includes a review of recent operating results and trends, recent sales/acquisitions of the investee securities, and other publicly available data. The current global
economic climate provides additional uncertainty. Valuations of private companies are inherently more complex due to the lack of readily available market data.
As such, we believe that market sensitivities are not practicable for our private company equity investments.
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
(a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Intellectual Property Officer and Corporate Controller, we
conducted an evaluation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this
evaluation, our Chief Intellectual Property Officer and Corporate Controller concluded that, as of December 31, 2018, our disclosure controls and procedures
were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our Chief Intellectual Property Officer and Corporate Controller, as appropriate to allow timely decisions regarding
required disclosure, and that such information is recorded, processed, summarized and reported within the time periods prescribed by the SEC.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Intellectual Property Officer and
Corporate Controller, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the
framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of
December 31, 2018.
Grant Thornton LLP, the independent registered public accounting firm who audited our consolidated financial statements included in this Annual Report
on Form 10-K, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2018, which is included
herein.
Changes in Internal Controls. There were no changes in our internal control over financial reporting during the fourth fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Inherent Limitations on Effectiveness of Controls. Our management, including our Chief Intellectual Property Officer and Corporate Controller, 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.
ITEM 9B. OTHER INFORMATION
On March 12, 2019, Acacia’s Board of Directors unanimously approved the adoption of a Tax Benefits Preservation Plan, or the 2019 Plan, with
Computershare Trust Company, N.A., as Rights Agent, or the Rights Agent. The 2019 Plan replaces the Company’s Tax Benefits Preservation Plan dated
March 15, 2016, or the 2016 Plan, which expires on March 15, 2019, and is substantially similar to 2016 Plan. While the 2019 Plan was effective upon adoption
by the Board, and while not required by the Company’s governing documents or by applicable law, as a matter of good corporate governance, the Company
intends to submit the 2019 Plan for stockholder ratification at its next annual meeting of stockholders.
The purpose of the 2019 Plan is to protect the Company’s ability to utilize potential tax assets, such as net operating loss carryforwards, or NOLs, and
tax credits, or Tax Benefits, to offset potential future taxable income. As of December 31, 2018, the Company had U.S. federal income tax NOLs totaling
approximately $222,860,808 and U.S. state income tax NOLs totaling approximately $19,470,755. The Internal Revenue Code of 1986, as amended, or the
Code, limits the ability of a company to use its NOLs if it experiences an “ownership change,” as defined in Section 382 of the Code. A company generally
experiences such an ownership change if the percentage of its stock owned by its “5-percent shareholders,” as defined in Section 382 of the Code, increases by
more than 50 percentage points over a rolling three-year period.
The 2019 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 2019 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 2019 Plan will
prevent the Company from experiencing an ownership change.
A company that experiences an ownership change generally will be subject to an annual limitation on certain of its pre-ownership change tax assets
equal to the value of the corporation immediately before the ownership change, multiplied by the long-term-tax-exempt rate (subject to certain adjustments),
provided that the annual limitation will be increased each year to the extent that there is an unused limitation in a prior year. The limitation arising from an
ownership change on the Company’s ability to utilize the Tax Benefits depends on the value of the Company’s stock at the time of the ownership change.
In connection with the adoption of the 2019 Plan, the board of directors of the Company authorized and declared a dividend distribution of one right, or a
Right, for each outstanding share of the common stock of the Company, to shareholders of record at the close of business on March 16, 2019.
Summary Description of the 2019 Plan
The following summary of the 2019 Plan does not purport to be complete and is qualified in its entirety by the full text of the 2019 Plan, a copy of which
is filed as Exhibit 4.1 and is incorporated herein by reference.
Distribution Date. Subject to certain exceptions, Rights would separate from the common stock and become exercisable apart from the common stock
only following the earlier of (i) the close of business on the tenth (10th) business day after public announcement that a person has become an “Acquiring
Person” or (ii) the close of business on the tenth (10th) business day (or such later date as the Board shall determine) after a third party makes a tender or
exchange offer which, if consummated, would result in such third party becoming an Acquiring Person.
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Exercise of Rights. On or after the Distribution Date, each Right would initially entitle the holder to purchase one one-thousandth of a share of the
Company’s Series B Junior Participating Preferred Stock, $0.001 par value, or the Series B Preferred Stock, for a purchase price of $12.00 (subject to
adjustment), or the Exercise Price. Under certain circumstances set forth in the 2019 Plan, the Company may suspend the exercisability of the Rights.
Definition of Acquiring Person . An “Acquiring Person” is a person or group that, together with affiliates and associates of such person or group, acquires
beneficial ownership of 4.9% or more of the common stock, other than: (i) the Company, its subsidiaries and their respective employee benefit plans; (ii) any
shareholder that, as of the time of the first public announcement of adoption of the 2019 Plan, beneficially owns 4.9% or more of the common stock (unless and
until such person thereafter acquires any additional shares of common stock, subject to certain exceptions); (iii) a person who becomes an Acquiring Person
solely as a result of the Company repurchasing shares of common stock or a stock dividend, stock split, reverse stock split or similar transaction effected by the
Company (unless and until such person acquires additional shares, other than in certain specified exempt transactions) and (iv) certain shareholders who,
inadvertently or without knowledge of the terms of the Rights, buy shares in excess of 4.899% of the common stock and who thereafter reduce the percentage of
shares owned below 4.9%. Prior to the Distribution Date, the Board has sole discretion to make an affirmative determination, taking into account the intent and
purposes of the 2019 Plan or other circumstances facing the Company, that a Person is not an Acquiring Person (even if such Person satisfies the requirements
of any of subclauses (i), (ii), (iii) or (iv) if and for so long as such Person complies with any limitations or conditions required by the Board in making such
determination).
“Flip-in” Feature. If any person or group of affiliated or associated persons becomes an Acquiring Person, then each Right (other than Rights owned by
an Acquiring Person, its affiliates, associates or certain transferees, which will become void) will entitle the holder to purchase, at the then current exercise price,
common stock (or, in certain circumstances, a combination of common stock, other securities, cash or other property) having a value of twice the exercise price
of the Right, in effect enabling a purchase at half-price. However, Rights are not exercisable following such an event until such time as the Rights are no longer
redeemable by the Company as described below.
“Flip-over” Feature. If, at any time after a person or group of affiliated or associated persons becomes an Acquiring Person, the Company engages in a
merger or other business combination transaction or series of related transactions in which the Company is not the surviving corporation, the common stock is
changed or exchanged, or fifty percent (50%) or more of its assets, cash flow or earning power is sold, then each Right (not previously voided by the occurrence
of a Flip-in Event) will entitle the holder to purchase, at the Right’s then current exercise price, common stock of such Acquiring Person having a value of twice
the Right’s then current exercise price, in effect enabling a purchase at half-price.
Exchange Option. At any time after a person or group of affiliated or associated persons becomes an Acquiring Person and prior to the acquisition by
such person or group of fifty percent (50%) or more of the then outstanding common stock, the Board may, in lieu of allowing Rights to be exercised, cause each
outstanding Right (other than Rights owned by an Acquiring Person, its affiliates, associates or certain transferees, which will become void) to be exchanged for
one share of common stock or one one-thousandth of a share of Series B Preferred Stock, in each case as adjusted to reflect stock splits or similar transactions.
Redemption. The Rights may be redeemed by the Board, at a price of $0.001 per Right at any time prior to the earlier of (i) the tenth (10th) business day
following a public announcement that a person or group of affiliated or associated persons has become an Acquiring Person or (ii) the final expiration of the
Rights.
Power to Amend. Prior to a Distribution Date, the Company may amend the 2019 Plan in any respect without shareholder approval, other than to extend
the final expiration date of the Rights. From and after a Distribution Date, the Company may amend the 2019 Plan without the approval of holders of certificates
representing Rights in order to (i) cure any ambiguity, (ii) correct or supplement any provision which may be defective or inconsistent with any other provisions,
(iii) shorten or lengthen any time period (other than to lengthen the final expiration date of the Rights), or (iv) change or supplement the provisions in any
manner which the Company may deem necessary or desirable and which does not adversely affect the interests of the holders of certificates representing
Rights. The 2019 Plan, however, may not be amended at such time as the Rights are not redeemable (other than certain limited technical amendments).
Expiration. The Rights will expire on the earliest of (i) 5:00 P.M., New York, New York time, on March 15, 2021, (ii) the time at which the rights are
redeemed or exchanged pursuant to the 2019 Plan, (iii) the close of business on the effective date of the repeal of Section 382 or any successor statute if the
Board determines that the 2019 Plan is no longer necessary or desirable for the preservation of Tax Benefits or (iv) the close of business on the first day of a
taxable year of the Company to which the Board determines that Tax Benefits may not be carried forward.
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Rights Certificates. Prior to a Distribution Date, the Rights will be evidenced by, and trade with, the common stock and will not be exercisable or
transferable apart from the common stock. After a Distribution Date, the Rights Agent will send certificates representing Rights to shareholders and the Rights
will trade independent of the common stock.
No Rights as a Shareholder; Other Matters . Until a Right is exercised, the holder of Rights, as such, is not entitled to any separate rights as a
shareholder of the Company (such as voting or dividend rights). Although the distribution of the Rights will not be taxable to shareholders or to the Company for
U.S. federal income tax purposes, shareholders may, depending upon the circumstances, recognize taxable income in the event that the Rights become
exercisable for common stock (or other consideration) or for common stock of the acquiring company or in the event of the redemption of the Rights as set forth
above.
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 2019 annual meeting of stockholders to be filed with the SEC no later than April 30, 2019.
Code of Conduct.
We have adopted a Code of Conduct that applies to all employees, including our chief intellectual property officer and corporate controller 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 2019 annual meeting of stockholders to be filed with the SEC no later than April 30, 2019.
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 2019 annual meeting of stockholders to be filed with the SEC no later than April 30, 2019.
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 2019 annual meeting of stockholders to be filed with the SEC no later than April 30, 2019.
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 2019 annual meeting of stockholders to be filed with the SEC no later than April 30, 2019.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report.
(1) Financial Statements
Acacia Research Corporation Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Page
F- 1
F- 3
F- 4
F- 5
F- 6
F- 7
F- 8
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
10.9
10.17*
10.19
10.20*
10.21*
10.23*
10.24*
10.25*
10.27*
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 (20)
Tax Benefits Preservation Plan, dated as of March 16, 2019, 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
Form of Indemnification Agreement
Acacia Research Corporation Amended and Restated Executive Severance Policy (12)
Form of Purchase Agreement (16)
2013 Acacia Research Corporation Stock Incentive Plan (17)
Form of Stock Issuance Agreement under the 2013 Acacia Research Corporation Stock Incentive Plan (18)
2016 Acacia Research Corporation Stock Incentive Plan (21)
Form of Stock Option Agreement under the 2016 Acacia Research Corporation Stock Incentive Plan (24)
Form of Stock Issuance Agreement under the 2016 Acacia Research Corporation Stock Incentive Plan (24)
Employment Agreement, dated September 18, 2017, by and between Acacia Research Group LLC and Robert Stewart (25)
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10.28*
10.29
10.30
10.31
10.32
10.33
10.34
10.35*
10.36*
10.37*
10.38*
10.39*
10.40*
21.1
23.1
24.1
31.1†
31.2†
32.1
Form of Profits Interest Agreement Under AIP Operation LLC Profits Interest Plan (26)
Investment Agreement dated August 15, 2016, by and between Acacia Research Corporation and Veritone, Inc. (27)
Secured Promissory Note dated August 15, 2016, issued by Veritone, Inc. to Acacia Research Corporation (27)
Primary Common Stock Purchase Warrant dated August 15, 2016, issued by Veritone, Inc. to Acacia Research Corporation, together with form of
10% Warrant to Purchase Common Stock (27)
Common Stock Purchase Warrant dated August 15, 2016, issued by Veritone, Inc. to Acacia Research Corporation (27)
Common Stock Purchase Warrant dated November 25, 2016, issued by Veritone, Inc. to Acacia Research Corporation (27)
Common Stock Purchase Warrant dated November 25, 2016, issued by Veritone, Inc. to Acacia Research Corporation (27)
Employment Agreement, effective August 13, 2018, by and between Acacia Research Group, LLC and Marc Booth (29)
Separation Agreement and General Release of Claims, effective August 10, 2018, by and between Acacia Research Group, LLC and Clayton J.
Haynes (29)
Consulting Agreement, effective August 10, 2018, by and between Acacia Research Corporation and Clayton J. Haynes (29)
Separation Agreement and General Release of Claims, effective August 10, 2018, by and between Acacia Research Group, LLC and Edward J.
Treska (29)
Consulting Agreement, effective August 10, 2018, by and between Acacia Research Corporation and Edward J. Treska (29)
Separation Agreement and General Release of Claims, dated February 12, 2019, by and between Acacia Research Group, LLC and Kirsten
Hoover (30)
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
Power of Attorney (included in the signature page hereto).
Certification of Chief Intellectual Property Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
Certification of Corporate Controller Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
Certification of Chief Intellectual Property Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350
32.2
Certification of Corporate Controller 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)
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).
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(4)
(5)
(6)
(7)
(8)
(9)
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)
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).
(18)
Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on May 22, 2013 (File No. 000-26068).
(19)
Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 2015, filed on
November 9, 2015 (File No. 000-26068).
(20)
Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on March 28, 2016 (File No. 001-37721).
(21)
Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q for the period ended June 30, 2016, filed on August 9, 2016
(File No. 001-37721).
(22)
Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on March 4, 2016 (File No. 000-26068).
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(23)
Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on March 21, 2016 (File No. 000-26068).
(24)
(25)
(26)
Incorporated by reference to Acacia Research Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 10,
2017 (File No. 001-37721).
Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 2017, filed on
November 7, 2017 (File No. 001-37721).
Incorporated by reference to Acacia Research Corporation’s Quarterly Report on Form 10-Q for the period ended March 31, 2017, filed on May 10, 2017
(File No. 001-37721).
(27)
Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on March 16, 2017 (File No. 001-37721).
(28)
Incorporated by reference to Annex A to Acacia Research Corporation’s Definitive Proxy Statement on Schedule 14A
filed on May 3, 2018 (File No. 001-37721).
(29) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on August 16, 2018
(File No. 001-37721).
(30) Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on February 13, 2019
(File No. 001-37721).
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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 15, 2019
By:
ACACIA RESEARCH CORPORATION
/s/ Marc W. Booth
Marc W. Booth
Chief IP Officer
(Authorized Signatory)
POWER OF ATTORNEY
We, the undersigned directors and officers of Acacia Research Corporation, do hereby constitute and appoint Marc W. Booth and Kirsten L. Hoover, 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 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/
Marc W. Booth
Marc W. Booth
/s/
Kirsten L. Hoover
Kirsten L. Hoover
/s/
Allen Bradley
Allen Bradley
/s/
Maureen O'Connell
Maureen O'Connell
/s/
Clifford Press
Clifford Press
/s/
Alfred V. Tobia, Jr.
Alfred V. Tobia, Jr.
/s/
Katharine Wolanyk
Katharine Wolanyk
Chief Intellectual Property Officer
(Principal Executive Officer)
Corporate Controller
(Principal Financial Officer)
Director
Director
Director
Director
Director
43
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Acacia Research Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Acacia Research Corporation and subsidiaries (the “Company”) as of December 31, 2018
and 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the
period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 2018, 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) (“PCAOB”), the Company’s internal
control over financial reporting as of December 31, 2018, 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 15, 2019 expressed an unqualified opinion.
Change in accounting principle
As discussed in Note 13 to the financial statements, the Company has adopted new accounting guidance in 2018 related to accounting for revenue from
contracts with customers. Our opinion is not modified with respect to this matter.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2007.
Newport Beach, California
March 15, 2019
F- 1
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Acacia Research Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Acacia Research Corporation and subsidiaries (the “Company”) as of December 31, 2018, based
on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on
criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated
financial statements of the Company as of and for the year ended December 31, 2018, and our report dated March 15, 2019 expressed an unqualified opinion
on those financial statements.
Basis for opinion
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 are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and limitations of internal control over financial reporting
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.
/s/ GRANT THORNTON LLP
Newport Beach, California
March 15, 2019
F- 2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, 2018 and 2017
(In thousands, except share and per share information)
ASSETS
2018
2017
Current assets:
Cash and cash equivalents
Trading securities - debt
Trading securities - equity
Accounts receivable
Prepaid expenses and other current assets
Total current assets
Investment at fair value (1)
Other investments(1)
Patents, net of accumulated amortization
Other non-current assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses
Royalties and contingent legal fees payable
Total current liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 10)
Stockholders’ equity:
$
128,809 $
33,642
3,012
32,884
3,125
201,472
7,459
8,195
6,587
236
$
223,949 $
$
8,347 $
22,688
31,035
1,674
32,709
136,604
—
—
153
2,938
139,695
104,754
2,195
61,917
207
308,768
7,956
1,601
9,557
3,552
13,109
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; 49,639,319 shares issued and
outstanding as of December 31, 2018 and 50,639,926 shares issued and outstanding as of December 31, 2017
Treasury stock, at cost, 2,919,828 and 1,729,408 shares as of December 31, 2018 and 2017
Additional paid-in capital
Accumulated comprehensive loss
Accumulated deficit
Total Acacia Research Corporation stockholders’ equity
Noncontrolling interests in operating subsidiaries
Total stockholders’ equity
(1) Refer to Note 6 for additional information.
50
(39,272)
651,156
—
(422,541)
189,393
1,847
191,240
51
(34,640)
648,996
(88)
(320,018)
294,301
1,358
295,659
308,768
$
223,949 $
The accompanying notes are an integral part of these consolidated financial statements.
F- 3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2018 and 2017
(In thousands, except share and per share information)
Revenues
Portfolio operations:
Inventor royalties
Contingent legal fees
Patent acquisition expenses
Litigation and licensing expenses - patents
Amortization of patents
Impairment of patent-related intangible assets
Other portfolio expenses
Total portfolio operations
Net loss
General and administrative expenses (including non-cash stock compensation expense (credit) of ($317) in
2018 and $8,885 in 2017)
Operating loss
Other income (expense):
Change in fair value of investment, net (1)
Loss on sale of investment(1)
Gain on conversion of loans and accrued interest (1)
Gain on exercise of Primary Warrant(1)
Equity in losses of investee(1)
Other income (expense)
Interest income and other
Total other income (expense)
Income (loss) from operations before provision for income taxes
Provision for income taxes
Net income (loss) including noncontrolling interests in subsidiaries
Net (income) loss attributable to noncontrolling interests in subsidiaries
Net income (loss) attributable to Acacia Research Corporation
Net income (loss) attributable to common stockholders - basic and diluted
Basic and diluted income (loss) per common share
Weighted-average number of shares outstanding, basic
Weighted-average number of shares outstanding, diluted
(1) Refer to Note 6 for additional information.
2018
2017
$
131,506 $
65,402
35,168
31,501
4,000
8,866
27,120
28,210
2,602
137,467
(5,961)
18,850
(24,811)
(59,103)
(19,095)
—
—
—
(1,629)
969
(78,858)
(103,669)
(1,179)
(104,848)
(181)
$
$
$
(105,029) $
(105,029) $
(2.10) $
49,969,062
49,969,062
4,952
16,682
—
18,219
22,154
2,248
1,200
65,455
(53)
27,219
(27,272)
42,239
—
2,671
4,616
(220)
1,000
1,605
51,911
24,639
(2,955)
21,684
496
22,180
22,147
0.44
50,495,119
50,692,012
The accompanying notes are an integral part of these consolidated financial statements.
F- 4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2018 and 2017
(In thousands)
Net income (loss) including noncontrolling interests in 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 (gains) losses included in net income (loss)
Total other comprehensive income (loss)
Comprehensive income (loss) attributable to noncontrolling interests
Comprehensive income (loss) attributable to Acacia Research Corporation
2018
2017
(104,848) $
21,684
—
88
—
(104,760)
(181)
(104,941) $
(40)
58
(30)
21,672
496
22,168
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F- 5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2018 and 2017
(In thousands, except share information)
Balance at December 31, 2016
50,476,042 $
50 $ (34,640) $
642,453 $
(76)
$ (342,198) $
1,854 $ 267,443
Common
Shares
Common
Stock
Treasury
Stock
Additional
Paid-in
Capital
Accumulated
Comprehensive
Income (Loss)
Accumulated
Deficit
Noncontrolling
Interests in
Operating
Subsidiaries
Total
—
—
—
—
(496)
—
—
22,180
745
5,844
(45)
(496)
28
(40)
1,358
—
295,659
(105,029)
308
—
—
2,814
(4,634)
257
—
—
2,133
(229)
181
—
181
88
1,847 $ 191,240
Net income attributable to Acacia Research
Corporation
Stock options exercised
Compensation expense for share-based awards, net
of forfeitures
Repurchase of restricted common stock
Net loss attributable to noncontrolling interests in
subsidiaries
Unrealized gain on foreign currency translation
Unrealized loss on short-term investments
Balance at December 31, 2017
—
207,863
(35,310)
(8,669)
—
—
—
50,639,926
—
Net loss attributable to Acacia Research Corporation
Cumulative effect of new accounting principle
Repurchase of common stock
Stock options exercised
Compensation expense for share-based awards, net
of forfeitures
Repurchase of restricted common stock
Net income attributable to noncontrolling interests in
subsidiaries
Unrealized gain on foreign currency translation
—
(1,190,420)
82,615
166,998
(59,800)
—
—
—
1
—
—
—
—
—
51
—
—
(2)
—
1
—
—
—
—
—
—
—
—
—
—
(34,640)
—
—
(4,632)
—
—
—
—
—
—
744
5,844
(45)
—
—
—
648,996
—
—
—
257
2,132
(229)
—
—
—
—
—
—
—
28
(40)
(88)
—
—
—
—
—
—
—
88
22,180
—
—
—
—
—
—
(320,018)
(105,029)
2,506
—
—
—
—
—
—
Balance at December 31, 2018
50 $ (39,272) $
The accompanying notes are an integral part of these consolidated financial statements.
49,639,319 $
651,156 $
— $ (422,541) $
F- 6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2018 and 2017
(In thousands)
Cash flows from operating activities:
Net income (loss) including noncontrolling interests in subsidiaries
$
(104,848) $
21,684
Adjustments to reconcile net income (loss) including noncontrolling interests in subsidiaries to net cash
provided by operating activities:
2018
2017
Gain on conversion of loans and accrued interest
Gain on exercise of Primary Warrant
Change in fair value of investment, net
Loss on sale of investment
Depreciation and amortization
Non-cash stock compensation
Impairment of patent-related intangible assets
Other
Changes in assets and liabilities:
Accounts receivable
Prepaid expenses and other assets
Accounts payable and accrued expenses
Royalties and contingent legal fees payable
Net cash provided by operating activities
Cash flows from investing activities:
Investment in Investees
Sale of investment
Advances to Investee (Note 6)
Purchases of property and equipment
Purchases of short-term investments
Sales and maturities of short-term investments
Net cash used in investing activities
Cash flows from financing activities:
Repurchase of common stock
Proceeds from the exercise of stock options
Repurchases of restricted common stock
Net cash provided by (used in) financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents and restricted cash, beginning
Cash and cash equivalents and restricted cash, ending
—
—
59,103
19,095
27,145
(317)
28,210
564
(28,189)
(208)
963
19,359
20,877
(7,000)
19,097
—
(34)
(102,769)
66,640
(24,066)
(4,634)
257
(229)
(4,606)
(7,795)
136,604
$
128,809 $
(2,671)
(4,616)
(42,239)
—
22,243
8,885
2,248
(374)
26,597
(135)
(6,349)
(12,307)
12,966
(31,514)
—
(4,000)
(2)
(448,388)
467,790
(16,114)
—
745
(45)
700
(2,448)
139,052
136,604
The accompanying notes are an integral part of these consolidated financial statements.
F- 7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
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. In recent years, Acacia has also
invested in technology companies. Acacia leverages its experience, expertise, data and relationships developed as a leader in the IP industry to pursue these
opportunities. In some cases, these opportunities will complement, and/or supplement Acacia’s primary licensing and enforcement business.
Acacia’s operating subsidiaries generate revenues and related cash flows from the granting of IP rights for the use of patented technologies that its
operating subsidiaries control or own. Acacia’s operating subsidiaries assist patent owners with the prosecution and development of their patent portfolios, the
protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of their patented technologies and, where
necessary, with the enforcement against unauthorized users of their patented technologies through the filing of patent infringement litigation.
Acacia’s operating subsidiaries are principals in the licensing and enforcement effort, obtaining control of the rights in the patent portfolio, or control of
the patent portfolio outright. Acacia’s operating subsidiaries own or control the rights to multiple patent portfolios, which include U.S. patents and certain foreign
counterparts, covering technologies used in a wide variety of industries.
Neither Acacia nor its operating subsidiaries invent new technologies or products; rather, Acacia depends upon the identification and investment in new
patents, inventions and companies that own IP through its relationships with inventors, universities, research institutions, technology companies and others. If
Acacia’s operating subsidiaries are unable to maintain those relationships and identify and grow new relationships, then they may not be able to identify new
technology-based opportunities for sustainable revenue and/or revenue growth.
During fiscal year 2018, Acacia did not obtain control of any new patent portfolios. During fiscal year 2017 Acacia obtained control of one new patent
portfolio. In fiscal year 2016, Acacia obtained control of two new patent portfolios.
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. 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 ("U.S. GAAP").
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. The Acacia IP Fund was terminated as of December 31, 2017 and
is in the process of being liquidated.
Revenue Recognition. Revenue is recognized upon transfer of control of promised bundled IP rights (hereinafter “IP
Rights”) and other contractual performance obligations to licensees in an amount that reflects the consideration we expect to
F- 8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
receive in exchange for those IP Rights. Revenue contracts that provide promises to grant the right to use IP Rights as they exist at the point in time at which the
IP Rights are granted, are accounted for as performance obligations satisfied at a point in time and revenue is recognized at the point in time that the applicable
performance obligations are satisfied and all other revenue
recognition criteria have been met.
For the periods presented, revenue contracts executed by the Company primarily provided for the payment of contractually determined, one-time, paid-
up license fees in consideration for the grant of certain IP Rights for patented technologies owned or controlled by Acacia (“Paid-up Revenue
Agreements”). Revenues also included license fees from sales-based revenue contracts, the majority of which were originally executed in prior periods, that
provide for the payment of quarterly license fees based on quarterly sales of applicable product units by licensees (“Recurring Revenue Agreements”).
Revenues may also include court ordered settlements or awards related to our patent portfolio ("Other Settlements") or sales of our patent portfolio ("Sales") . IP
Rights granted included the following, as applicable: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered
by patented technologies, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The IP
Rights granted were perpetual in nature, extending until the legal expiration date of the related patents. The individual IP Rights are not accounted for as
separate performance obligations, as (i) the nature of the promise, within the context of the contract, is to transfer combined items to which the promised IP
Rights are inputs and (ii) the Company's promise to transfer each individual IP right described above to the customer is not separately identifiable from other
promises to transfer IP Rights in the contract.
Since the promised IP Rights are not individually distinct, the Company combined each individual IP right in the contract into a bundle of IP rights that is
distinct, and accounted for all of the IP Rights promised in the contract as a single performance obligation. The IP Rights granted were “functional IP rights” that
have significant standalone functionality. Acacia's subsequent activities do not substantively change that functionality and do not significantly affect the utility of
the IP to which the licensee has rights. Acacia’s operating subsidiaries have no further obligation with respect to the grant of IP Rights, including no express or
implied obligation to maintain or upgrade the technology, or provide future support or services. The contracts provide for the grant (i.e., transfer of control) of the
licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the contract. Licensees legally obtain control of the IP Rights upon
execution of the contract. As such, the earnings process is complete and revenue is recognized upon the execution of the contract, when collectability is
probable and all other revenue recognition criteria have been met. Revenue contracts generally provide for payment of contractual amounts with 30-90 days of
execution of the contract, or the end of the quarter in which the sale or usage occurs for Recurring Revenue Agreements. Contractual payments made by
licensees are generally non-refundable.
For sales-based royalties, the Company includes in the transaction price some or all of an amount of estimated variable consideration to the extent that
it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable
consideration is subsequently resolved. Notwithstanding, revenue is recognized for a sales-based royalty promised in exchange for a license of IP Rights when
the later of (i) the subsequent sale or usage occurs, or (ii) the performance obligation to which some or all of the sales-based royalty has been allocated has
been satisfied. Estimates are generally based on historical levels of activity, if available.
Revenues from contracts with significant financing components (either explicit or implicit) are recognized at an amount that reflects the price that a
licensee would have paid if the licensee had paid cash for the IP Rights when they transfer to the licensee. In determining the transaction price, the Company
adjusts the promised amount of consideration for the effects of the time value of money. As a practical expedient, the Company does not adjust the promised
amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the
entity transfers promised IP Rights to a customer and when the customer pays for the IP Rights will be one year or less.
In general, the Company is required to make certain judgments and estimates in connection with the accounting for revenue contracts with customers.
Such areas may include identifying performance obligations in the contract, estimating the timing of satisfaction of performance obligations, determining whether
a promise to grant a license is distinct from other promised goods or services, evaluating whether a license transfers to a customer at a point in time or over
time, allocating the transaction price to separate performance obligations, determining whether contracts contain a significant financing component, and
estimating revenues recognized at a point in time for sales-based royalties.
F- 9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues were comprised of the following for the periods presented (in thousands):
Paid-up Revenue Agreements
Recurring Revenue Agreements
Other Settlements
Sales
2018
2017
$
100,496 $
13,040
3,470
14,500
59,020
6,382
—
—
$
131,506 $
65,402
Refer to “Inventor Royalties and Contingent Legal Expenses” below for information on related direct costs of revenues.
Portfolio Operations. Cost of revenues include the costs and expenses incurred in connection with Acacia’s patent licensing and enforcement activities,
including inventor royalties paid to original patent owners, 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 “Portfolio operations” in the accompanying consolidated statements of operations.
Inventor Royalties and Contingent Legal Expenses. Inventor royalties are expensed in the consolidated statements of operations in the period that the
related revenues are recognized. 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 revenues are expensed in the
period recovered, and included in amortization expense in the consolidated statements of operations. Cost of revenues for fiscal year 2018 included $4.0 million
of costs to acquire certain patent rights related to revenues recognized in the period.
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. GAAP defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a
liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date, and also establishes a fair
value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three-level hierarchy of valuation techniques established
to measure fair value is defined as follows:
(i)
(ii)
Level 1 - Observable Inputs: Quoted prices in active markets for identical investments;
Level 2 - Pricing Models with Significant Observable Inputs : Other significant observable inputs, including quoted prices for similar investments,
(iii)
Level 3 - Unobservable Inputs: Significant unobservable inputs, including the entity’s own assumptions in determining the fair value of
interest rates, credit risk, etc.; and
investments.
Whenever possible, the Company is required to use observable market inputs (Level 1 - quoted market prices) when measuring fair value. In such
cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The
assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured. In certain cases,
inputs used to measure fair value fall into different levels of the fair value hierarchy. Financial assets and liabilities measured at fair value on a recurring basis
were as follows (in thousands):
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets as of December 31, 2018:
Trading securities - debt
Trading securities - equity
Investment at fair value - warrants (Note 6)
Investment at fair value - common stock (Note 6)
Total recurring fair value measurements as of December 31, 2018
Assets as of December 31, 2017:
Investments at fair value (Note 6)
Liabilities as of December 31, 2018:
Profits interest units
Liabilities as of December 31, 2017:
Profits interest units
Level 1
Level 2
Level 3
— $
33,642 $
3,012
—
5,395
—
2,064
—
8,407 $
35,706 $
—
—
—
—
—
— $
— $
104,754
— $
591 $
—
— $
— $
3,041
$
$
$
$
$
A reconciliation of the activity for fair value measurements categorized within Level 3 for the year ended December 31, 2018 is as follows (in thousands):
Opening balance as of January 1, 2018
Total gains and losses included in earnings for the period (1)
Non-cash stock compensation expense - Profits Interests
Change in fair value of investment, net
Realized loss on sale
Purchases, issues, sales and settlements
Transfers to Level 1 and Level 2
Total recurring fair value measurements(1)
Investment at Fair Value
Other Liabilities
Common Stock Warrants
Total
Profits Interest Units
$
90,795 $
13,959 $ 104,754 $
—
(47,208)
(19,095)
(19,097)
(5,395)
—
(11,895)
—
—
—
(59,103)
(19,095)
(19,097)
(2,064)
(7,459)
$
— $
— $
— $
3,041
(2,450)
—
—
—
(591)
—
____________________
(1) All gains and losses included in earnings for the period presented relate to assets and liabilities held as of December 31, 2018 and December 31, 2017.
(2) Refer to Note 6 for information regarding purchases, issues, sales and settlements activity for the years ended December 31, 2018 and 2017.
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.
Trading Securities- Debt. Investments in debt securities are reported at fair value on a recurring basis, with related realized and unrealized gains and
losses recorded in the statements of operations in other income (expense). Realized and unrealized gains and losses are recorded based on the specific
identification method. Interest is included in other income (expense).
Trading Securities - Equity. Investments in equity securities are reported at fair value on a recurring basis, with related realized and unrealized gains and
losses in the value of such securities recorded in the statements of operations in other income (expense). Dividend income is included in other income
(expense).
Impairment of Short-term Investments. Acacia evaluates its investments in marketable securities for potential impairment, employing a 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
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, short-term
investments and accounts receivable. Acacia places its cash equivalents and short-term investments primarily in highly rated money market funds and
investment grade marketable securities. Cash and cash equivalents are also invested in deposits with certain financial institutions and may, at times, exceed
federally insured limits. Acacia has not experienced any significant losses on its deposits of cash and cash equivalents.
Three licensees individually accounted for 45%, 17% and 17%, respectively, of revenues recognized during the year ended December 31, 2018. Three
licensees individually accounted for 54%, 21% and 10%, respectively, of revenues recognized during the year ended December 31, 2017. Four licensees
individually represented approximately 38%, 36%, 12% and 11%, respectively, of accounts receivable at December 31, 2018. One licensee individually
represented 100% of accounts receivable at December 31, 2017.
For 2018 and 2017, 26% and 39%, 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 statements 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.
Fair Value of Financial Instruments. The carrying value of cash and cash equivalents, accounts receivables, and current liabilities approximates their fair
values due to their short-term maturities.
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 five years.
Investments at Fair Value. On an individual investment basis, Acacia may elect to account for investments in companies where the Company has the
ability to exercise significant influence over operating and financial policies of the investee, at fair value. If the fair value option is applied to an investment that
would otherwise be accounted for under the
F- 12
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
equity method of accounting, it is applied to all of the financial interests in the same entity that are eligible items (i.e. common stock and warrants).
Other Investments. Equity investments in common stock and in-substance common stock without readily determinable fair values in companies over
which the Company has the ability to exercise significant influence, are accounted for using the equity method of accounting. Acacia includes its proportionate
share of earnings and/or losses of its equity method investees in equity in earnings (losses) of investee in the condensed consolidated statements of operations.
Investments in preferred stock with substantive liquidation preferences are accounted for at cost, (subject to impairment considerations, as described
below, if any), as adjusted for the impact of changes resulting from observable price changes in orderly transactions for identical or similar investments of the
same issuer. In-substance common stock is an investment in an entity that has risk and reward characteristics that are substantially similar to that entity's
common stock. An investment in preferred stock with substantive liquidation preferences over common stock, is not substantially similar to common stock, and
therefore is not considered in-substance common stock. A liquidation preference is substantive if the investment has a stated liquidation preference that is
significant, from a fair value perspective, in relation to the purchase price of the investment. A liquidation preference in an investee that has sufficient
subordinated equity from a fair value perspective is substantive because, in the event of liquidation, the investment will not participate in substantially all of the
investee's losses, if any.
The initial determination of whether an investment is substantially similar to common stock is made on the initial date of investment if the Company has
the ability to exercise significant influence over the operating and financial policies of the investee. That determination is reconsidered if (i) contractual terms of
the investment are changed, (ii) there is a significant change in the capital structure of the investee, including the investee's receipt of additional subordinated
financing, or (iii) the Company obtains an additional interest in an investment, resulting in the method of accounting for the cumulative interest being based on
the characteristics of the investment at the date at which the Company obtains the additional interest. Refer to Note 5 for additional information.
Impairment of Investments. Acacia reviews its investments quarterly for indicators of other-than-temporary impairment. This determination requires
significant judgment. In making this judgment, Acacia considers available quantitative and qualitative evidence in evaluating potential impairment of its
investments. If the cost of an investment exceeds its fair value, Acacia evaluates, among other factors, general market conditions and the duration and extent to
which the fair value is less than cost. Acacia also considers specific adverse conditions related to the financial health of and business outlook for the investee,
including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to
be other-than-temporary, an impairment charge is recorded in the consolidated statements of operations and a new cost basis in the investment is established.
Impairment of Long-lived Assets. Acacia reviews long-lived assets and intangible assets for potential impairment annually (quarterly for patents) and
when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the expected undiscounted future cash
flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss is recorded equal to the excess of the asset’s carrying
value over its fair value. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted
market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows.
In the event that management decides to no longer allocate resources to a patent portfolio, an impairment loss equal to the remaining carrying value of the asset
is recorded. Refer to Note 5 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 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.
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
F- 13
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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.
The Financial Accounting Standards Board (“FASB”) issued a new standard, effective January 1, 2017, that allows entities to make a policy election to
either estimate the number of awards that are expected to vest or account for forfeitures when they occur. Effective January 1, 2017, the Company elected to
account for forfeitures of awards as they occur. The prior standard required the Company to estimate the number of awards for which the requisite service period
is expected to be rendered and base the accruals of compensation cost on the estimated number of awards that will vest.
The fair values of stock options granted during the periods presented were estimated using the Black-Scholes option-pricing model, based on the
following weighted-average assumptions:
Risk-free interest rate
Term
Volatility
Dividend yield
For the Years Ended
December 31, 2018
December 31, 2017
2.26%
4.37
51%
—%
1.77%
4.37
51%
—%
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 periods presented. 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.
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
F- 14
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issues. The expected stock price volatility was determined using historical volatility. The expected dividend yield was based on expectations regarding dividend
payments.
Profits Interest Units (“Units”) are accounted for in accordance with Accounting Standards Codification (“ASC”) 718-10, “Compensation - Stock
Compensation.” The Units vest as described at Note 9, and therefore, the vesting conditions do not meet the definition of service, market or performance
conditions, as defined in ASC 718. As such, the Units are classified as liability awards. Liability classified awards are measured at fair value on the grant date
and re-measured each reporting period at fair value until the award is settled. Compensation expense is adjusted each reporting period for changes in fair value
prorated for the portion of the requisite service period rendered. Initially, compensation expense was recognized on a straight-line basis over the employee’s
requisite service period (generally the vesting period of the equity award) which was five years. Upon full vesting of the award, which occurred during the three
months ended September 30, 2017, previously unrecognized compensation expense was immediately recognized in the period, and will continue to be fully
recognized for any changes in fair value, until the Units are settled. The Company has a purchase option to purchase the vested Units that are not otherwise
forfeited after termination of continuous service. The exercise price of the purchase option is the fair market value of the Units on the date of termination of
continuous service. At each reporting date, the value of the Units that are subject to the purchase option will be the measured at the fair value on the termination
date. Non-cash stock compensation expense related to the Units is reflected in general and administrative expense in the accompanying consolidated
statements of operations.
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.
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, the valuation of the loan and equity instruments discussed at Note 6, stock-based compensation expense including the valuation of profits interests,
impairment of patent-related intangible assets, the determination of the economic useful life of amortizable intangible assets, income taxes and valuation
allowances against net deferred tax assets, require its most difficult, subjective or complex judgments.
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 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.
F- 15
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 income (loss) attributable to Acacia Research Corporation
Undistributed earnings allocated to participating securities
Net income (loss) attributable to common stockholders – basic and diluted
Denominator:
2018
2017
$
$
(105,029) $
—
(105,029) $
22,180
(33)
22,147
Weighted-average shares used in computing net loss per share attributable to common stockholders – basic
49,969,062
50,495,119
Effect of potentially dilutive securities:
Common stock options and restricted stock units
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders
– diluted
Basic and diluted net loss per common share
Anti-dilutive equity-based incentive awards excluded from the computation of diluted loss per share
—
196,893
49,969,062
50,692,012
$
(2.10) $
3,129,719
0.44
4,425,187
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.
3. SHORT-TERM INVESTMENTS
Short-term investments for the periods presented were comprised of the following (in thousands):
Security Type
Trading securities - debt
Trading securities - equity
December 31, 2018
Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
$
$
33,643 $
3,389
37,032 $
18 $
27
45 $
(19) $
(404)
(423) $
33,642
3,012
36,654
Short-term investments as of December 31, 2018 were comprised of investments in corporate bonds (debt securities) and investments in equity
securities of publicly held companies (equity). For the years ended December 31, 2018 and 2017, proceeds from the sale of debt securities were $65,144,000
and$467,790,000, respectively. For the year ended December 31, 2018, proceeds from the sale of equity securities was $1,496,000. There were no short-term
investments as of December 31, 2017.
F- 16
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December 31, 2018 and 2017 (in thousands):
Payroll and other employee benefits
Accrued vacation
Accrued legal expenses - patent
Foreign taxes payable
Accrued consulting and other professional fees
Other accrued liabilities
5. PATENTS
2018
2017
$
205 $
144
5,974
374
1,241
409
$
8,347 $
465
294
5,479
15
1,364
339
7,956
Acacia’s only identifiable intangible assets are patents and patent rights, with estimated remaining economic useful lives ranging from one to five 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, 2018 and 2017 are as follows (in thousands):
Gross carrying amount - patents
Accumulated amortization - patents(1)
Patents, net
(1) Includes patent impairment charges for the applicable periods.
2018
2017
$
$
326,167 $
(319,580)
6,587 $
444,137
(382,220)
61,917
The weighted-average remaining estimated economic useful life of Acacia’s patents and patent rights is 4 years. Scheduled annual aggregate
amortization expense is estimated to be $2,559,000 in fiscal year 2019, $1,671,000 in 2020, $811,000 in 2021, $811,000 in 2022 and $735,000 in 2023.
Acacia recorded impairment of patent-related intangible asset charges totaling $ 28,210,000 and $2,248,000 for the years ended December 31, 2018 and
2017, 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. The impairment charges for the periods presented consisted of the excess of the
asset’s carrying value over its estimated fair value.
For the year ended December 31, 2018, 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 $8,307,000. For the
year ended December 31, 2017, there were no terminations or sales of patent portfolios.
For the years ended December 31, 2018 and 2017 , capitalized patent costs, accumulated amortization and impairment charges, and sales proceeds
related to patent-related sales and disposals are as follows (in thousands):
Capitalized patent costs
Accumulated amortization / impairment charges
Sales proceeds
2018
2017
$
117,970 $
109,663
14,500
—
—
—
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENTS
Investment at Fair Value
Veritone Investment Agreement. On August 15, 2016, Acacia entered into an Investment Agreement with Veritone, Inc. (“Veritone”) pursuant to which
Acacia funded in aggregate $20 million of loans to Veritone which were converted into 1,523,746 shares of Veritone’s common stock upon the public offering of
Veritone common stock on May 17, 2017 (“IPO”), based on a conversion price of $13.61 per share. Veritone also issued Acacia a total of 154,312 warrants to
purchase shares of Veritone’s common stock at an exercise price of $13.61 per share expiring in 2020.
In addition, in August 2016, Veritone issued Acacia a five-year warrant to purchase up to $50 million worth of shares of Veritone’s common stock at an
exercise price of $13.61 per share subject to certain adjustments. Upon the consummation of Veritone’s IPO, Acacia exercised its option to purchase an
additional 2,150,335 shares of Veritone common stock, at an aggregate purchase price of $29.3 million. Acacia then received an additional warrant that provides
for the issuance of an additional 809,400 shares of Veritone common stock at an exercise price of $13.61 per share expiring in 2022.
Veritone Bridge Loan. On March 14, 2017, Acacia entered into an additional secured convertible promissory note with Veritone pursuant to which
Acacia funded $4.0 million which was converted into 445,440 shares of Veritone’s common stock at a conversion price of $13.61 per share in the IPO. Acacia
also received a 10-year warrant to purchase up to 156,720 shares of Veritone common stock at an exercise price of $13.61 per share expiring in 2027.
As a result of the foregoing transactions, Acacia received an aggregate total of 4,119,521 of Veritone shares and 1,120,432 of warrants in Veritone. On
October 5, 2018, a registration statement on Form S-3 registering all of Acacia’s shares of Veritone common stock was declared effective by the SEC. During
the year ended December 31, 2018, Acacia sold 2,700,000 shares Veritone common stock at prices ranging from $4.95 to $10.44 and recorded a realized loss
of $19.1 million.
At December 31, 2018, the fair value of the 1,419,521 shares of Veritone common stock owned by Acacia totaled $5,395,000. At December 31, 2018,
the fair value of the 1,120,432 common stock purchase warrants held by Acacia totaled $2,064,000. The Veritone common shares were subject to a lock-up
agreement that expired on August 15, 2018, subsequent to which the fair value of the common stock (Level 1) and fair value of the common stock purchase
warrants (Level 2) excluded a DLOM.
Changes in the fair value of Acacia’s investment in Veritone are recorded as unrealized gains or losses in the consolidated statements of operations.
For the period from the IPO on May 17, 2017 to December 31, 2017 and for the year ended December 31, 2018, the accompanying consolidated statements of
operations reflected the following (in thousands):
2018
2017
Gain on conversion of loans and accrued interest (1)
Gain on exercise of warrant(2)
Change in fair value of investment, warrants
Change in fair value of investment, common stock
Loss on sale of investment, common stock
$
— $
—
(11,895)
(47,208)
(19,095)
Net realized and unrealized gain (loss) on investment at fair value
$
(78,198) $
__________________________
2,671
4,616
8,317
33,922
—
49,526
(1) Pre-conversion difference between carrying value of Loan and accrued interest and the estimated fair value of common stock discounted for lack of marketability.
(2) Pre-conversion difference between carrying value of Primary Warrant and the estimated fair value of common stock and 10% Warrant discounted for lack of marketability.
Miso Robotics Investment
In June 2017, Acacia made an investment in the Series A Preferred financing round for Miso Robotics, Inc. (“Miso Robotics”), an innovative leader in
robotics and artificial intelligence solutions, totaling $2,250,000, acquiring a 22.6% ownership interest in Series A preferred stock of Miso Robotics, and one board
seat. In February 2018, Acacia made an additional equity investment in the Series B Preferred financing round for Miso Robotics totaling $6,000,000, increasing
its ownership interest (Series B preferred stock) in Miso Robotics to approximately 30%, and acquiring an additional board seat.
F- 18
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of February 2018, the preferred stock was not deemed to be in-substance common stock due to the substantive liquidation preference associated
with the preferred stock. As such, as of February 2018, the cumulative investment in Miso Robotics is recorded at cost and assessed for any impairment at each
balance sheet date. Prior to February 2018, the equity method of accounting was applied.
7. STOCKHOLDERS’ EQUITY
Repurchases of Common Stock. In February 2018, Acacia’s Board of Directors authorized the repurchase of up to $20,000,000 of the Company’s
outstanding common stock in open market purchases or private purchases, from time to time, in amounts and at prices to be determined by the Board of
Directors at its discretion (the “Stock Repurchase Program”). In determining whether or not to repurchase any shares of Acacia’s common stock, Acacia’s Board
of Directors consider such factors as the impact of the repurchase on Acacia’s cash position, as well as Acacia’s capital needs and whether there is a better
alternative use of Acacia’s capital. Acacia has no obligation to repurchase any amount of its common stock under the Stock Repurchase Program. Repurchases
to date were made in the open market in compliance with applicable SEC rules. The authorization to repurchase shares presented an opportunity to reduce the
outstanding share count and enhance stockholder value. The repurchased shares are expected to be retired. Monthly stock repurchases for the periods
presented, all of which were purchased as part of a publicly announced plan or program, were as follows:
Total Number of
Shares Purchased
Average
Price paid
per Share
Approximate Dollar Value of
Shares that May Yet be
Purchased under the Program
Plan Expiration
May 1, 2018- May 30, 2018
Totals for 2018
1,190,420 $
1,190,420 $
3.89 $
3.89
15,366,000
February 28, 2019
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. On or after the distribution date, each right would
initially entitle the holder to purchase one one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock, $0.001 par value for a
purchase price of $15.00.
F- 19
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES
Acacia’s provision for income taxes for the fiscal periods presented consisted of the following (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Total deferred
Provision for income taxes
2018
2017
$
— $
87
1,092
1,179
—
—
—
—
90
2,865
2,955
—
—
—
$
1,179 $
2,955
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, 2018 and 2017 (in thousands):
Deferred tax assets:
Net operating loss and capital loss carryforwards and credits
Unrealized loss on investments held at fair value
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:
Unrealized gain on investments held at fair value
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
2018
2017
$
104,862 $
90,871
2,455
1,365
3,330
286
208
26
112,532
(112,532)
—
—
(18)
(18)
$
(18) $
—
2,635
6,197
984
167
35
100,889
(90,278)
10,611
(10,587)
(24)
(10,611)
—
F- 20
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Nondeductible permanent items
Change in tax rate
Valuation allowance
2018
2017
21 %
(1)%
— %
— %
(1)%
— %
(20)%
(1)%
35 %
8 %
— %
1 %
3 %
102 %
(137)%
12 %
For the periods presented, 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 statements of
operations in the period the determination is made.
At December 31, 2018, Acacia had U.S. federal and state income tax net operating loss carryforwards (“NOLs”) totaling approximately $222,861,000 and
$19,471,000, expiring between 2026 and 2038, and 2028 and 2038, respectively. Capital loss carryovers totaled $19,952,000 at December 31, 2018, expiring
between 2019 and 2023.
As of December 31, 2018, Acacia had approximately $51,508,000 of foreign tax credits, expiring between 2020 and 2026. 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 executed with licensees in foreign jurisdictions
and other state taxes. Excluding the impact of the change in valuation allowance and the impact of the federal tax rate change under the change in tax law
described below, annual effective tax rates were 19% and 47% for fiscal years 2018 and 2017, respectively. Results for fiscal year 2018 included an unrealized
loss on Acacia’s investment in Veritone which created a deferred tax asset totaling approximately $2,455,000. Results for fiscal year 2017 included an
unrealized gain on Acacia’s investment in Veritone which created a deferred tax liability totaling approximately $10,587,000. The 2017 deferred tax liability was
reversed in fiscal year 2018 as a result of the 2018 unrealized loss on Acacia’s investment in Veritone and the realized loss on the sale of Veritone common
stock. The effective tax rate reflects both the recognition of the deferred tax liability and the reversal of the valuation allowance.
Effective January 1, 2017, the Company adopted a new standard that requires all income tax effects of awards to be recognized in the income
statement when the awards vest or are settled. The adoption of this standard resulted in the Company recognizing gross federal and state deferred tax assets of
$21,350,000 and $1,559,000, respectively, for the year ended December 31, 2017 related to the impact of share-based payments to employees in prior
periods. These deferred tax assets are fully offset by a valuation allowance and were impacted by the change in tax rate described below.
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
2011. The California Franchise Tax Board is auditing the 2011 through 2016 California combined income tax returns. The California Franchise Tax Board has
proposed adjustments for 2011 and 2012 that, if expensed, would not be material to the consolidated statements of operations for the periods presented. We
have protested these adjustments.
At December 31, 2018 and 2017, the Company had total unrecognized tax benefits of approximately $808,000. No interest and penalties have been
recorded for the unrecognized tax benefits for the periods presented. At December 31, 2017, if recognized, approximately $808,000 of tax benefits, net of
valuation allowance, 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.
F- 21
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
On December 22, 2017, new U.S. tax legislation was enacted that has significantly changed the U.S. federal income taxation of U.S. corporations,
including by reducing the U.S. corporate income tax rate to 21%, revising the rules governing net operating losses and foreign tax credits, and introducing new
anti-base erosion provisions. For the year ended December 31, 2017, we reflected a write-down of our deferred income tax assets (including the value of our net
operating loss carryforwards and our tax credit carryforwards) due the reduction of the U.S. corporate income tax rate and recorded a reduction of approximately
$25,261,000 related to the revaluation of our deferred tax assets. This amount was not adjusted during the year ended December 31, 2018. Given the full
valuation allowance provided for net deferred tax assets as of December 31, 2018 and 2017, the change in tax law did not have a material impact on our
consolidated financial statements.
9. EQUITY-BASED INCENTIVE PLANS
Stock-Based Incentive Plans
The 2013 Acacia Research Corporation Stock Incentive Plan (“2013 Plan”) and the 2016 Acacia Research Corporation Stock Incentive Plan (“2016
Plan”) (collectively, the “Plans”) were approved by the stockholders of Acacia in May 2013 and June 2016, respectively. 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, 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. Through fiscal year 2016, each non-employee director received 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. In addition, each
new non-employee director received restricted
F- 22
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. These restricted stock units and stock options vested 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 unrestricted
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 initially reserved for issuance under the 2013 Plan was 4,750,000 shares. No new additional shares will be
added to the 2013 Plan without security holder approval (except for shares subject to outstanding awards that are forfeited or otherwise returned to the 2013
Plan). The stock issuable under the 2013 Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the
Company on the open market. In June 2016, 625,390 shares of common stock available for issuance under the 2013 Plan were transferred into the 2016 Plan.
At December 31, 2018, there were 709,000 shares available for grant under the 2013 Plan.
The number of shares of Common Stock initially reserved for issuance under the 2016 Plan was 4,500,000 shares plus 625,390 shares of common
stock available for issuance under the 2013 Plan, as of the effective date of the Plan. At December 31, 2018, there were 3,689,000 shares available for grant
under the 2016 Plan.
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. As
of December 31, 2018, there are 7,938,000 shares of common stock reserved for issuance under the Plans.
Stock-based award grant activity for the periods presented was as follows:
Restricted stock awards with time-based service conditions
Stock options with time-based service vesting conditions
Total incentive awards granted
2018
2017
Aggregate fair
value (in
thousands)
386
1,588
1,974
Aggregate fair
value (in
thousands)
—
2,930
2,930
Shares
— $
1,368,000
1,368,000 $
Shares
102,000 $
930,000
1,032,000 $
The following table summarizes stock option activity for the Plans for the year ended December 31, 2018:
Outstanding at December 31, 2017
Granted
Exercised
Expired/forfeited
Outstanding at December 31, 2018
Vested
Exercisable at December 31, 2018
Weighted-Average
Exercise
Price
Remaining
Contractual
Term
Aggregate
Intrinsic Value
5.13
3.91
3.12
5.00
4.96
4.82
4.82
4.1 years $
3.2 years $
3.2 years $
—
—
—
Options
5,830,000 $
930,000 $
(83,000) $
(3,168,000) $
3,509,000 $
2,339,000 $
2,339,000 $
The aggregate intrinsic value of options exercised during the years ended December 31, 2018 and 2017 was $51,000 and $296,000, respectively. The
aggregate intrinsic value of options vested during the year ended December 31, 2018 was $0. The aggregate fair value of options granted during the year
ended December 31, 2018 was $1,588,000. The aggregate fair value of options vested during the years ended December 31, 2018 and 2017 was $1,918,000
a n d $2,009,000, respectively. As of December 31, 2018, the total unrecognized compensation expense related to nonvested stock option awards was
$844,000, which is expected to be recognized over a weighted-average term of approximately 1 year.
F- 23
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes nonvested restricted share activity for the year ended December 31, 2018:
Nonvested restricted stock at December 31, 2017
Granted
Vested
Canceled
Nonvested restricted stock at December 31, 2018
Nonvested
Restricted
Shares
Weighted
Average Grant Date
Fair Value
123,000 $
102,000 $
(225,000) $
— $
— $
4.77
3.79
4.32
—
—
The weighted-average grant date fair value of nonvested restricted stock granted during the years ended December 31, 2018 and 2016 was $3.79 and
$3.12, respectively. There were no grants of restricted stock during the year ended December 31, 2017. The aggregate fair value of restricted stock that vested
during the years ended December 31, 2018 and 2017 was $972,000 and $1,560,000, respectively. As of December 31, 2018, there was no unrecognized
compensation expense related to nonvested restricted stock awards.
The following table summarizes restricted stock unit activity for the year ended December 31, 2018:
Nonvested restricted stock units outstanding at December 31, 2017
Vested
Nonvested restricted stock units outstanding at December 31, 2018
Vested restricted stock units outstanding at December 31, 2018
Restricted
Stock Units
Weighted
Average Grant Date
Fair Value
2,000 $
(2,000) $
— $
31,000 $
16.72
16.72
—
15.43
There were no restricted units granted during the years ended December 31, 2018 and 2017 . The aggregate fair value of restricted stock units that
vested during the years ended December 31, 2018 and 2017 was $40,000 and $200,000, respectively. As of December 31, 2018, there was no unrecognized
compensation expense related to restricted stock unit awards.
Profits Interest Plan
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 membership interests in AIP to certain members of management and the 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 fair value of AIP increases beyond the fair value at the issuance date of the
membership interests. The membership 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 (one-
third upon 150% appreciation, and the remaining two-thirds upon 300% appreciation in value of Acacia’s aggregate investment in Veritone), 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. The Units
were fully vested in September 2017.
Acacia owns 60% of the membership interests in AIP and at all times will control AIP. 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. As of
December 31, 2018, AIP holds the Veritone 10% Warrant described at Note 6.
Profits interests totaling 400 Units, or 40% of the membership interests in AIP, were granted in February 2017, with an aggregate grant date fair value of
$722,000. The fair value of the Units totaled $591,000 as of December 31, 2018. Upon full vesting of the units in September 2017, all previously unrecognized
compensation expense was immediately recognized.
F- 24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Compensation expense for the periods presented was comprised of the following:
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
Profits interests units
Total compensation expense
10. COMMITMENTS AND CONTINGENCIES
Operating Leases
2018
2017
$
460 $
1
—
1,672
—
(2,450)
$
(317) $
1,025
161
121
2,165
2,372
3,041
8,885
Acacia leases certain office space under various operating lease agreements expiring at various dates from 2019 through 2020. Minimum annual rental
commitments, net of guaranteed sublease income, for operating leases having initial or remaining noncancellable lease terms in excess of one year are as
follows (in thousands):
Years ending December 31,
2019
2020
Total minimum lease payments
$
$
599
89
688
Rent expense for the years ended December 31, 2018 and 2017 approximated $1,106,000 and $1,392,000, 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.
During the year ended December 31, 2018, we recorded a one-time charge of $629,000 for the excess of lease payments over anticipated sublease income
through expiration of the lease.
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.
Patent Enforcement
Certain of Acacia’s operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. In connection with any of Acacia’s
operating subsidiaries’ patent enforcement actions, it is possible that a defendant may request and/or a court may rule that an operating subsidiary has violated
statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such
enforcement actions. In such event, a court may issue monetary sanctions against Acacia or its operating subsidiaries or award attorney’s fees and/or expenses
to a defendant(s), which could be material.
Other
On June 17, 2015, Celltrace Communications Ltd. (“Celltrace”) filed a lawsuit against Acacia in U.S. District Court for the Southern District of New York,
Case No. 1:15-cv-04746, alleging, among other things, significant damages for alleged breach of contract, unjust enrichment and fraud. Acacia disputes the
allegations and does not believe that Celltrace is entitled to any damages. Acacia successfully moved to compel arbitration of the dispute, and the District Court
stayed the litigation
F- 25
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pending arbitration before the International Court of Arbitration for the International Chamber of Commerce (the “ICC”). Celltrace appealed the decision to the
U.S. Court of Appeals for the Second Circuit, which denied the appeal. Celltrace filed its request for arbitration of the claims with the ICC on November 28,
2016. Acacia filed an answer denying all allegations of wrongdoing and asserting affirmative defenses. A tribunal was appointed to preside over the arbitration
and conducted its first case management conference on June 26, 2017. The parties conducted discovery and submitted their cases in chief to the tribunal in a
series of written submissions per the tribunal’s orders between January 2018 and December 2018. The tribunal held an evidentiary hearing with live witness
testimony in New York City between February 4, 2019 and February 13, 2019. At the end of the hearing, the tribunal set a schedule for post-hearing briefing by
the parties, which is currently scheduled to conclude in April 2019, after which the tribunal will render a decision. Acacia continues to vigorously contest all
allegations of wrongdoing.
On December 6, 2017, the Federal Court of Canada allowed a counterclaim for invalidity of a patent asserted by Rapid Completions LLC and awarded
costs payable by Rapid Completions LLC in an amount to be determined.
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. Fiscal year 2018 operating expenses included expenses for settlement and contingency accruals totaling $2,602,000, net of prior accruals.
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, 2018.
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 invests in, licenses and enforces IP consisting primarily of patents, patent rights, and patented technologies. The Acacia IP Fund was terminated as of
December 31, 2017. The final distribution to the partners of the Acacia IP Fund will be made in 2019.
11. 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 as of July 2017 and prior 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
F- 26
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Results for the year
ended December 31, 2018 and 2017 include $2,458,000 and $1,421,000 in benefits paid under the executive severance policy.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for state income taxes totaled $140,000 and $181,000 for the years ended December 31, 2018 and 2017 , respectively. Foreign taxes
withheld totaled $1,093,000 and $2,865,000 for the years ended December 31, 2018 and 2017 , respectively. Refer to Note 4 for accrued foreign taxes payable.
Refer to Note 6 for information regarding noncash investing activity related to the investment in Veritone for the periods presented.
13. RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements - Recently 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. In
doing so, the Company is required to use more judgment and make more estimates in connection with the accounting for revenue contracts with customers than
under previous guidance, as described in Note 2. Under the standard, (i) an entity should account for a promise to provide a customer with a right to access the
entity’s IP as a performance obligation satisfied over time because the customer will simultaneously receive and consume the benefit from the entity’s
performance of providing access to its IP as the performance occurs, and (ii) an entity’s promise to provide a customer with the right to use its IP is satisfied at a
point in time. In addition, revenues from contracts with significant financing components should be recognized at an amount that reflects the price that a
customer would have paid if the customer had paid cash for the goods or services when they transfer to the customer (i.e. adjustment for the time value of
money). For sales and usage based royalties, the new standard requires that the Company include in the transaction price some or all of an amount of
estimated variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when
the uncertainty associated with the variable consideration is subsequently resolved.
The Company used the modified retrospective method of adoption and recognized the cumulative effect of initially applying the new revenue standard as
an adjustment to the opening balance of retained earnings on January 1, 2018. Comparative prior year periods were not adjusted. The new accounting standard
was applied to all contracts at the date of initial application. The cumulative effect of applying the new revenue standard, primarily relating to financing
components of contracts executed in prior periods and estimates of variable consideration for sales and usage based royalty agreements executed in prior
periods, was as follows (in thousands):
Balance Sheets:
Accounts receivable
Royalties and contingent legal fees payable
Accumulated deficit
Noncontrolling interests
Balance at December 31,
2017
Adjustments Due to ASC
606
Balance at January 1,
2018
$
153 $
1,601
(320,018)
1,358
4,542 $
1,728
2,506
308
4,695
3,329
(317,512)
1,666
The impact of the adoption of the new accounting standard on the condensed consolidated balance sheet and statement of operations was as follows (in
thousands):
F- 27
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Balance Sheets:
Accounts receivable
Royalties and contingent legal fees payable
Statements of Operations:
Revenues
Inventor royalties
Contingent legal fees
Balance as Reported
December 31, 2018
Balance under Legacy
GAAP
Effect of Change
32,884 $
22,688
28,500 $
20,404
4,384
2,284
Year Ended December 31, 2018
Balance as Reported
Balance under Legacy
GAAP
Effect of Change
131,506 $
35,168 $
31,501 $
131,723 $
34,295 $
32,020 $
217
(873)
519
$
$
$
$
In May 2017, the FASB issued amended guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as
a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions or the classification of the award
changes as a result of the change in terms or conditions. This amendment is effective prospectively for annual periods beginning on or after December 15,
2017. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
Recent Accounting Pronouncements - Not Yet Adopted.
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. The Company has two leases with terms that extend beyond 12 months at December 31, 2018. Both leases have guaranteed sublease income
through the termination of the lease. Management does not believe that the impact that adopting this new accounting guidance will have a material effect on its
financial statements and footnote disclosures and expects to adopt the new standard effective January 1, 2019.
14. FAIR VALUE DISCLOSURES
Acacia holds the following types of financial instruments at December 31, 2018 and 2017.
Trading securities - debt. Debt securities includes corporate bonds with fair value that is determined by third party quotations from outside pricing
services and/or computerized pricing models, which may be based on transactions, bids or estimates. Acacia classifies the fair value of corporate bonds within
Level 2 of the valuation hierarchy.
Trading securities - equity. Equity securities includes investments in public companies common stock and are recorded at fair value based on the quoted
market price of each share on the valuation date. The fair value of these securities are within Level 1 of the valuation hierarchy.
Investments at fair value - common stock. Acacia’s equity investment in Veritone common stock is recorded at fair value based on the quoted market
price of Veritone’s common stock on the applicable valuation date. The fair value at December 31, 2017 was adjusted for an estimated discount for lack of
marketability (“DLOM”) associated with the restricted nature of the common shares under a lock-up agreement at December 31, 2017 (Level 3 input). At
December 31, 2018, there were no restrictions on the common shares and the investment in common shares was transfered from Level 3 to Level 1.
Investments at fair value - warrants. Warrants are recorded at fair value, as based on the Black-Scholes option-pricing model (Level 2). Warrants on
securities under a lock-up agreement are adjusted for an estimated discount for lack of marketability (“DLOM”) associated with the restricted nature of the
common shares (Level 3).
F- 28
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Profits interests. For the year ended December 31, 2018, the fair value of the Units was estimated at 40% of the fair value of the 10% Warrant, based
on the Black-Scholes option-pricing model (Level 2). For the year ended December 31, 2017, the fair value of the Units was estimated based on probable
vesting dates and values for the applicable instruments (i.e. common stock and warrants related to Acacia’s Veritone investment described at Note 6) underlying
or associated with the Units (Level 3).
15. RELATED PARTY TRANSACTIONS
During the year ended December 31, 2018, the Company paid $976,000 in expenses related to the reimbursement of costs incurred by Sidus
Investment Management, LLC (“Sidus”) on behalf of the participants (together with Sidus, the “Participants”) named in the proxy statement filed on June 7, 2018
by the Participants, in connection with a contested proxy election. These expenses are included in general and administrative expenses on the consolidated
statements of operations. Alfred V. Tobia, Jr. and Clifford Press are related parties as each of them are Participants and members of the Company’s Board of
Directors. In addition, Sidus is a related party as Mr. Tobia is a Co-Founder and Managing Member at Sidus.
F- 29
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. 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, 2018. 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.
Revenues
Portfolio operations:
Inventor royalties
Contingent legal fees
Patent acquisition expenses
Litigation and licensing expenses - patents
Amortization of patents
Impairment of patent-related intangible assets
Other portfolio expenses
Total portfolio operations
Net revenue (loss)
General and administrative expenses (including non-
cash stock compensation expense)
Operating income (loss)
Total other income (expense)
Income (loss) before provision for income taxes
Provision for income taxes
Quarter Ended
Mar. 31,
Jun. 30,
Sept. 30,
Dec. 31,
Mar. 31,
Jun. 30,
Sept. 30,
Dec. 31,
2018
2018
2018
2018
2017
2017
2017
2017
$
62,093 $
6,485 $
13,725 $
49,203 $
8,854 $
16,457 $
36,633 $
3,458
(Unaudited, in thousands, except share and per share information)
21,744
15,759
4,000
2,989
5,330
—
—
49,822
12,271
1,241
1,037
—
2,639
5,278
28,210
—
38,405
(31,920)
1,181
2,949
—
1,549
4,952
—
2,202
12,833
892
11,002
11,756
—
1,689
11,560
—
400
36,407
12,796
666
627
—
6,386
5,515
—
—
4,273
3,236
—
4,134
5,571
—
—
13,194
(4,340)
17,214
(757)
—
12,173
—
4,073
5,625
2,248
—
24,119
12,514
13
646
—
3,626
5,443
—
1,200
10,928
(7,470)
3,301
6,916
5,855
2,778
8,970
(40,890)
(31,920)
(191)
(38,836)
10,615
(28,221)
(285)
(4,963)
(27,595)
(32,558)
(306)
10,018
(20,988)
(10,970)
(397)
7,236
(11,576)
696
(10,880)
(1,241)
7,167
(7,924)
(4,862)
(12,786)
(1,478)
12,956
(442)
159,027
158,585
(216)
(140)
(7,330)
(102,950)
(110,280)
(20)
Net income (loss) including noncontrolling interests
(32,111)
(28,506)
(32,864)
(11,367)
(12,121)
(14,264)
158,369
(110,300)
Net (income) loss attributable to noncontrolling
interests in subsidiaries
Net income (loss) attributable to Acacia Research
Corporation
Net income (loss) per common share attributable to
Acacia Research Corporation:
73
79
(331)
(2)
291
12
96
97
$
(32,038) $ (28,427) $
(33,195) $ (11,369) $
(11,830) $ (14,252) $
158,465 $ (110,203)
Basic and diluted income (loss) per share
$
(0.63) $
(0.57) $
(0.67) $
(0.23) $
(0.24) $
(0.28) $
3.13 $
(2.18)
Weighted-average number of shares outstanding,
basic
Weighted-average number of shares outstanding,
diluted
50,632,958 50,061,812 49,557,748 49,639,172 50,333,056 50,499,948 50,554,234 50,590,460
50,632,958 50,061,812 49,557,748 49,639,172 50,333,056 50,499,948 50,599,974 50,590,460
F- 30
ACACIA RESEARCH CORPORATION
and
COMPUTERSHARE TRUST COMPANY, N.A
as Rights Agent
TAX BENEFITS PRESERVATION PLAN
Dated as of March 16, 2019
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
TABLE OF CONTENTS
Section 1 Certain Definitions.
Section 2 Appointment of Rights Agent
Section 3 Issuance of Rights Certificates.
Section 4 Form of Rights Certificates.
Section 5 Countersignature and Registration.
Section 6 Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated,
Destroyed, Lost or Stolen Rights Certificates.
Section 7 Exercise of Rights; Purchase Price; Expiration Date of Rights.
Section 8 Cancellation and Destruction of Rights Certificates
Section 9 Reservation and Availability of Capital Stock.
Section 10 Preferred Stock Record Date
Section 11 Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights
Section 12 Certificate of Adjusted Purchase Price or Number of Shares
Section 13 Consolidation, Merger or Sale or Transfer of Assets, Cash Flow or Earning Power.
Section 14 Fractional Rights and Fractional Shares.
Section 15 Rights of Action
Section 16 Agreement of Rights Holders
Section 17 Rights Certificate Holder Not Deemed a Stockholder
Section 18 Concerning the Rights Agent
Section 19 Merger or Consolidation or Change of Name of Rights Agent.
Section 20 Rights and Duties of Rights Agent
Section 21 Change of Rights Agent
Section 22 Issuance of New Rights Certificates
Section 23 Redemption and Termination.
Section 24 Exchange.
Section 25 Notice of Certain Events.
Section 26 Notices
Section 27 Supplements and Amendments
Section 28 Successors
Section 29 Determinations and Actions by the Board, etc
Section 30 Benefits of this Agreement
Section 31 Severability
Section 32 Governing Law
Section 33 Counterparts
Section 34 Descriptive Headings; Interpretation.
Section 35 Force Majeure
Page
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit A --
Exhibit B --
Exhibit C --
EXHIBITS
Form of Certificate of Designation, Preferences and Rights of Participating
Preferred Stock
Form of Rights Certificate
Summary of Terms
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
TAX BENEFITS PRESERVATION PLAN, dated as of March 16, 2019 (the “Agreement”), between Acacia Research Corporation., a Delaware
corporation (the “Company”), and Computershare Trust Company, N.A., a federally chartered trust company (the “Rights Agent”).
TAX BENEFITS PRESERVATION PLAN
WITNESSETH:
WHEREAS, the Company and certain of its Subsidiaries have generated certain Tax Benefits (as hereinafter defined) for United States federal income
tax purposes, such Tax Benefits may potentially provide valuable benefits to the Company, the Company desires to avoid an “ownership change” within the
meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and the Treasury Regulations (as hereinafter defined) promulgated
thereunder, and thereby preserve its ability to utilize such Tax Benefits, and, in furtherance of such objective, the Company desires to enter into this Agreement.
WHEREAS, on March 12, 2019, the Board of Directors of the Company (the “Board”) authorized and declared a dividend of one preferred stock
purchase right (a “Right”) for each share of Common Stock (as defined below) outstanding at the close of business (as defined below) on March 16, 2019 (the
“Record Date”) and authorized the issuance, upon the terms and subject to the conditions herein, of one Right (subject to adjustment) in respect of each share of
Common Stock issued after the Record Date, each Right representing the right to purchase, upon the terms and subject to the conditions herein, one one-
thousandth (subject to adjustment) of a share of Preferred Stock (as defined below);
NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows:
Section 1 Certain Definitions.
For purposes of this Agreement, the following terms have the meanings indicated:
(a) “Acquiring Person” shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial
Owner of 4.9% or more of the shares of Common Stock then outstanding, but shall not include:
(i) the Company;
(ii) any Subsidiary of the Company;
established by the Company for or pursuant to the terms of any such plan;
(iii) any employee benefit plan of the Company, or of any Subsidiary of the Company, or any Person organized, appointed or
(iv) any Person who or which becomes the Beneficial Owner of 4.9% or more of the shares of Common Stock then outstanding
solely as a result of (A) a reduction in the number of shares of Common Stock outstanding due to the repurchase of shares of Common Stock by the Company
(or any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person organized, appointed or
established by the Company for or pursuant to the terms of any such plan) or (B) a stock dividend, stock split, reverse stock split or similar transaction effected
by the Company, in each case unless and until such Person acquires Beneficial Ownership of additional shares of Common Stock, except solely as the result of
any subsequent transaction described in clause (A) or (B) of this Section 1(a)(iv);
(v) any Person who or which, within ten (10) Business Days of being requested by the Company to advise it regarding the
same, certifies to the Company that such Person acquired shares of Common Stock in excess of 4.899% inadvertently or without knowledge of the terms of the
Rights and who or which, together with all Affiliates and Associates, thereafter within ten (10) Business Days following such certification reduces such Person’s,
together with its Affiliates’ and Associates’, Beneficial Ownership to less than 4.9% of the shares of Common Stock then outstanding; provided, however, that (x)
if the Person requested to so certify fails to do so within ten (10) Business Days or breaches or violates such certification, then such Person shall become an
Acquiring Person immediately after such ten (10) Business Day period or such breach or violation or (y) if the Person together with its Affiliates and Associates
fails to reduce Beneficial Ownership to less than 4.9% within ten (10) Business Days following such certification, then such Person shall become an Acquiring
Person immediately after such ten (10) Business Day period;
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(vi) any Exempt Person, but only for so long as such Exempt Person, together with such Person’s Affiliates and Associates,
does not become the Beneficial Owner of any additional shares of Common Stock while such Person is an Exempt Person, except solely as the result of any
transaction described in clause (A) or (B) of Section 1(a)(iv);
(vii) any Person that the Board determines, in its sole discretion, in light of the intent and purposes of this Agreement or other
circumstances facing the Company, shall not be deemed an Acquiring Person, for so long as such Person complies with any limitations or conditions required by
the Board in making such determination; provided, further that such Person shall be an “Acquiring Person” if the Board makes a contrary determination in good
faith; and
Person, such Person does not Beneficially Own any Common Stock.
(viii) any Person if, on the date that would have been (absent this clause viii) a Stock Acquisition Date with respect to such
(b) “Act” shall mean the Securities Act of 1933, as amended.
(c) “Adjustment Shares” shall have the meaning set forth in Section 11(a)(ii) hereof.
(d) “Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act and, to the extent not included within the foregoing, shall also include with respect to any Person, any other Person whose
shares of Common Stock would be deemed to be constructively owned by such first Person, owned by a single “entity” with respect to such first Person as
defined in Section 1.382-3(a)(1) of the Treasury Regulations, or otherwise aggregated with shares owned by such first Person, pursuant to the provisions of
Section 382 of the Code and the Treasury Regulations promulgated thereunder.
(e) “Agreement” shall have the meaning set forth in the preamble to this Agreement.
(f) A Person shall be deemed the “Beneficial Owner” of, and shall be deemed to “beneficially own”:
(i) any securities that such Person or any of such Person’s Affiliates or Associates owns directly or has the right to acquire (whether such
right is exercisable immediately, or only after the passage of time, compliance with regulatory requirements, the fulfillment of a condition, or otherwise) pursuant
to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, other rights, warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, (A) any shares of Common Stock by virtue of owning
securities or other interests (including rights, options or warrants) that are convertible or exchangeable into, or exercisable for, such shares of Common Stock,
except to the extent that upon the issuance, acquisition or transfer of such securities or other interests, such securities or other interests would be treated as
exercised under Section 1.382-4(d) or other applicable sections of the Treasury Regulations, (B) securities tendered pursuant to a tender offer or exchange offer
made by or on behalf of such Person or any of such Person’s Affiliates or Associates until such tendered securities are accepted for purchase or exchange or
(C) securities issuable upon exercise of Rights;
(ii) any securities that such Person or any of such Person’s Affiliates or Associates (A) directly or indirectly has the right to vote
or dispose of, alone or in concert with others, or (B) beneficially owns, directly or indirectly, for purposes of Section 13(d) of the Exchange Act and Rule 13d-3 of
the General Rules and Regulations under the Exchange Act, including, with respect to both clause (A) and clause (B), pursuant to any agreement, arrangement
or understanding (whether or not in writing), but only if the effect of such agreement, arrangement or understanding is to treat such Persons as an “entity” under
Section 1.382-3(a)(1) of the Treasury Regulations; provided that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security under
this subparagraph (ii) on account of an agreement, arrangement or understanding to vote such security that (X) arises solely from a revocable proxy given to
such Person or any of such Person’s Affiliates or Associates in response to a public proxy solicitation made pursuant to and in accordance with the applicable
provisions of the General Rules and Regulations under the Exchange Act, and (Y) is not also then reportable on Schedule 13D under the Exchange Act (or any
comparable or successor report); and
(iii) any securities that are beneficially owned, directly or indirectly, by any other Person, if such Person or any of such Person’s
Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) with such other Person or any of such other Person’s
Affiliates or Associates for the purpose of acquiring, holding, voting (other than voting pursuant to a revocable proxy as described in the proviso to Section 1(f)(ii)
hereof) or disposing of any securities of the Company, but only if the effect of such agreement, arrangement or understanding is to treat such Persons as an
“entity” under Section 1.382-3(a)(1) of the Treasury Regulations.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Notwithstanding the foregoing, a Person shall be deemed the “Beneficial Owner” of, and shall be deemed to “beneficially own,” securities if such Person
would be deemed constructively to own such securities pursuant to Sections 1.382-2T(h) and 1.382-4(d) of the Treasury Regulations, such Person owns such
securities pursuant to a “coordinated acquisition” treated as a single “entity” as defined in Section 1.382-3(a)(1) of the Treasury Regulations, or such securities
are otherwise aggregated with securities owned by such Person, pursuant to the provisions of Section 382 of the Code and the Treasury Regulations
promulgated thereunder.
The term “Beneficial Ownership” shall have a corresponding meaning.
(g) “Board” shall have the meaning set forth in the recitals of this Agreement.
(h) “Business Day” shall mean any day other than a Saturday, Sunday or a day on which banking institutions in the State of New York
or New Jersey are authorized or obligated by law or executive order to close.
(i) “close of business” on any given date shall mean 5:00 P.M., New York, New York time, on such date; provided, however, that if
such date is not a Business Day, it shall mean 5:00 P.M., New York, New York time, on the next succeeding Business Day.
(j) “Code” shall have the meaning set forth in the recitals to this Agreement.
(k) “Common Stock” shall mean the common stock of the Company of $0.001 par value, except that “Common Stock” when used with
reference to any other Person other than the Company shall mean the capital stock of such Person with the greatest voting power, or the equity securities or
other equity interest having power to control or direct the management, of such Person (or, if such Person is a Subsidiary of another Person, the Person or
Persons that ultimately control such first mentioned Person).
(l) “Common Stock Equivalents” shall have the meaning set forth in Section 11(a)(iii) hereof.
(m) “Company” shall have the meaning set forth in the preamble to this Agreement.
(n) “Current Market Price” shall have the meaning set forth in Section 11(d) hereof.
(o) “Current Value” shall have the meaning set forth in Section 11(a)(iii) hereof.
(p) “Distribution Date” shall have the meaning set forth in Section 3(a) hereof.
(q) “Equivalent Preferred Stock” shall have the meaning set forth in Section 11(b) hereof.
(r) “Exempt Person” shall mean any Person who or which, together with all Affiliates and Associates of such Person, is, as of the
Exempt Time, the Beneficial Owner of 4.9% or more of the shares of Common Stock then outstanding. Any Exempt Person who, together with such Person’s
Affiliates and Associates, after the Exempt Time becomes the Beneficial Owner of less than 4.9% of the shares of Common Stock then outstanding shall cease
to be an Exempt Person and shall be subject to all the provisions of this Agreement in the same manner as any Person who is not and was not an Exempt
Person.
(s) “Exempt Time” shall mean the time of the first public announcement of adoption of this Agreement.
(t) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
(u) “Exchange Ratio” shall have the meaning set forth in Section 24(a) hereof.
(v) “Expiration Date” shall have the meaning set forth in Section 7(a) hereof.
(w) “Final Expiration Date” shall have the meaning set forth in Section 7(a) hereof.
(x) “NASDAQ” shall have the meaning set forth in Section 11(d)(i) hereof.
(y) “NOLs” shall mean the Company’s net operating loss carryforwards.
(z) “NYSE” shall have the meaning set forth in Section 11(d)(i) hereof.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(aa) “Person” shall mean any individual, firm, corporation, partnership, limited liability company, limited liability partnership, trust, syndicate or
other entity, or group of persons making a “coordinated acquisition” of Common Stock or otherwise treated as an “entity” within the meaning of Section 1.382-3(a)
(1) of the Treasury Regulations or otherwise, and also includes any successor (by merger or otherwise) of any such individual or entity.
(bb) “Preferred Stock” shall mean shares of Series B Junior Participating Preferred Stock, par value $0.001, of the Company having the terms
set forth in Exhibit A hereto, and, to the extent that there are not a sufficient number of shares of Series B Junior Participating Preferred Stock authorized to
permit the full exercise of the Rights, any other series of preferred stock of the Company designated for such purpose containing terms substantially similar to
the terms of the Series B Junior Participating Preferred Stock.
(cc) “Principal Party” shall have the meaning set forth in Section 13(b) hereof.
(dd) “Purchase Price” shall have the meaning set forth in Section 4(a) hereof.
(ee) “Record Date” shall have the meaning set forth in the recitals of this Agreement.
(ff) “Redemption Price” shall have the meaning set forth in Section 23(a) hereof.
(gg) “Rights” shall have the meaning set forth in the recitals of this Agreement.
(hh) “Rights Agent” shall have the meaning set forth in the preamble of this Agreement.
(ii) “Rights Certificates” shall have the meaning set forth in Section 3(a) hereof.
(jj) “Rights Dividend Declaration Date” shall have the meaning set forth in the recitals of this Agreement.
(kk) “Section 11(a)(ii) Event” shall mean any event described in Section 11(a)(ii) hereof.
(ll) “Section 11(a)(ii) Trigger Date” shall have the meaning set forth in Section 11(a)(iii) hereof.
(mm) “Section 13 Event” shall mean any event described in clauses (x), (y) or (z) of Section 13(a) hereof.
(nn) “Spread” shall have the meaning set forth in Section 11(a)(iii) hereof.
(oo) “Stock Acquisition Date” shall mean the first date of public announcement (which, for purposes of this definition, shall include a report filed or
amended pursuant to Section 13(d) under the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such.
(pp) “Subsidiary” shall mean, with reference to any Person, any corporation or other entity of which an amount of securities or other ownership
interests having ordinary voting power sufficient to elect at least a majority of the directors or other Persons having similar functions of such corporation or other
entity are at the time, directly or indirectly, beneficially owned, or otherwise controlled by such Person.
(qq) “Substitution Period” shall have the meaning set forth in Section 11(a)(iii) hereof.
(rr) “Tax Benefits” shall mean the net operating loss carryovers, capital loss carryovers, general business credit carryovers, alternative minimum
tax credit carryovers and foreign tax credit carryovers, as well as any loss or deduction attributable to a “net unrealized built-in loss” within the meaning of Section
382 of the Code and the Treasury Regulations promulgated thereunder, of the Company or any of its Subsidiaries.
(ss) “Trading Day” shall have the meaning set forth in Section 11(d)(i) hereof.
(tt) “Treasury Regulations” shall mean the final and temporary (but not proposed) tax regulations promulgated under the Code, as such
regulations may be amended from time to time.
(uu) “Triggering Event” shall mean any Section 11(a)(ii) Event or any Section 13 Event.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Section 2 Appointment of Rights Agent. The Company hereby appoints the Rights Agent to act as agent for the Company in accordance with the
express terms and conditions hereof (and no implied terms or conditions), and the Rights Agent hereby accepts such appointment. The Company may from time
to time appoint such co-rights agents as it may deem necessary or desirable upon ten (10) days’ prior written notice to the Rights Agent setting forth the
respective rights and duties of the Rights Agent and any co-rights agent. The Rights Agent shall have no duty to supervise, and in no event shall be liable for, the
acts or omissions of any such co-rights agent.
Section 3 Issuance of Rights Certificates.
(a) Until the earlier of (i) the close of business on the tenth (10th) Business Day after the Stock Acquisition Date (or, if the tenth (10th) Business
Day after the Stock Acquisition Date occurs before the Record Date, the close of business on the Record Date), or (ii) the close of business on the tenth (10th)
Business Day (or such later date as the Board shall determine) after the date that a tender or exchange offer by any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person organized, appointed or established
by the Company for or pursuant to the terms of any such plan) is first published or sent or given within the meaning of Rule 14d-2(a) of the General Rules and
Regulations under the Exchange Act, if upon consummation thereof, such Person would become an Acquiring Person (the earlier of (i) and (ii) being herein
referred to as the “Distribution Date”), (x) the Rights will be evidenced (subject to the provisions of paragraphs (b) and (c) of this Section 3) by the certificates
evidencing the Common Stock registered in the names of the holders of the Common Stock (which certificates evidencing the Common Stock shall be deemed
also to be certificates evidencing the Rights) and not by separate certificates (or, for uncertificated shares registered in book entry form, by notations in the
respective book entry accounts for the Common Stock), and (y) the Rights will be transferable only in connection with the transfer of the underlying shares of
Common Stock (including a transfer to the Company). The Company promptly shall notify the Rights Agent in writing upon the occurrence of the Distribution
Date and, if such notification is given orally, the Company shall confirm the same in writing on or prior to the next following Business Day. Until such notice is
received by the Rights Agent, the Rights Agent may presume conclusively for all purposes that the Distribution Date has not occurred. As soon as practicable
after the Distribution Date and receipt by the Rights Agent of notice of such occurrence, the Rights Agent, if requested by the Company in writing and provided
with all necessary information and documentation, will, subject to the following sentence, send by first-class, insured, postage prepaid mail (or such other means
as may be selected by the Company and not reasonably objected to by the Rights Agent), to each record holder of the Common Stock as of the close of
business on the Distribution Date, at the address of such holder then shown on the records of the Company or the transfer agent or the registrar for the
Common Stock, one or more rights certificates, in substantially the form of Exhibit B hereto (the “Rights Certificates”), duly executed and countersigned in the
manner provided for in Section 5(a) hereof, evidencing one Right for each share of Common Stock so held, subject to adjustment as provided herein. To the
extent that a Section 11(a)(ii) Event has also occurred, the Company may implement such procedures, as it deems appropriate in its sole discretion, (with prompt
written notice of the same to the Rights Agent), to minimize the possibility that Rights are received by Persons whose Rights would be null and void under
Section 7(e) hereof. In the event that an adjustment in the number of Rights per share of Common Stock has been made pursuant to Section 11(p) hereof, at
the time of distribution of the Rights Certificates, the Company shall make the necessary and appropriate rounding adjustments (in accordance with Section 4(a)
hereof) so that Rights Certificates representing only whole numbers of Rights are distributed and cash is paid in lieu of any fractional Rights. As of and after the
Distribution Date, the Rights will be evidenced solely by such Rights Certificates and may be transferred by the transfer of the Rights Certificates as permitted
hereby, separately and apart from any transfer of one or more shares of Common Stock, and the holders of such Rights Certificates as listed in the records of
the Company or any transfer agent or registrar for the Rights shall be the record holders thereof.
(b) The Company will make available, as promptly as practicable following the date hereof, a copy of the Summary of Rights to any
holder of Rights who may so request from time to time prior to the Expiration Date. With respect to certificates evidencing the Common Stock outstanding as of
the Record Date, or issued subsequent to the Record Date, unless and until the Distribution Date shall occur, the Rights will be evidenced by the certificates for
the Common Stock (or, in the case of shares reflected on the direct registration system, the notations in the book-entry account system of the transfer agent for
the Common Stock) and the registered holders of the Common Stock shall also be the registered holders of the associated Rights. Until the earlier of the
Distribution Date or the Expiration Date, the transfer of any shares of Common Stock in respect of which Rights have been issued shall also constitute the
transfer of the Rights associated with such shares of Common Stock. Notwithstanding anything to the contrary set forth in this Agreement, upon the
effectiveness of a redemption pursuant to Section 23 hereof or an exchange pursuant to Section 24 hereof, the Company shall not thereafter issue any
additional Rights and, for the avoidance of doubt, no Rights shall be attached to or shall be issued with any shares of Common Stock (including any shares of
Common Stock issued pursuant to an exchange) at any time thereafter.
(c) Rights shall be issued in respect of all shares of Common Stock that are issued (whether originally issued or delivered from the
Company’s treasury) after the Record Date but prior to the earlier of the Distribution Date or the Expiration Date or, in certain circumstances provided in Section
22 hereof, after the Distribution Date. Certificates representing
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
such shares of Common Stock shall also be deemed to be certificates for Rights, and shall bear a legend in substantially the following form if such certificates
are issued after the Exempt Time but prior to the earlier of the Distribution Date or the Expiration Date:
This certificate also evidences and entitles the holder hereof to certain Rights as set forth in the Tax Benefits Preservation Plan between Acacia
Research Corporation (the “Company”) and Computershare Trust Company, N.A. (or any successor Rights Agent) (the “Rights Agent”) dated as of March 16,
2019 as it may be supplemented, amended or restated from time to time (the “Tax Benefits Preservation Plan”), the terms of which are hereby incorporated
herein by reference and a copy of which is on file at the principal offices of the Company. Under certain circumstances, as set forth in the Tax Benefits
Preservation Plan, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Company will mail to the holder
of this certificate a copy of the Tax Benefits Preservation Plan, as in effect on the date of mailing, without charge, promptly after receipt of a written request
therefor. Under certain circumstances set forth in the Tax Benefits Preservation Plan, Rights issued to, or held by, any Person who is, was or becomes an
Acquiring Person or any Affiliate or Associate thereof (as such terms are defined in the Tax Benefits Preservation Plan), whether currently held by or on behalf of
such Person or by any subsequent holder, may become null and void.
With respect to such certificates containing the foregoing legend, until the earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Stock represented by such certificates shall be evidenced by such certificates alone and registered holders of Common Stock shall
also be the registered holders of the associated Rights, and the transfer of any of such certificates shall also constitute the transfer of the Rights associated with
the Common Stock represented by such certificates. Similarly, during such time periods, transfers of shares participating in the direct registration system shall
also be deemed to be transfers of the associated Rights. In the case of any shares participating in the direct registration system, the Company shall cause the
transfer agent for the Common Stock to include on each direct registration account statement with respect thereto issued prior to the Distribution Date a notation
to the effect that the Company will mail to the stockholder a copy of this Agreement, as in effect on the date of mailing, without charge, promptly after receipt of a
written request therefor and that the recipient of the statement, as a holder of shares of Common Stock, may have certain rights thereunder. In the event that
shares of the Common Stock are not represented by certificates, references in this Agreement to certificates shall be deemed to refer to the notations in the
book-entry accounts reflecting ownership of such shares.
Section 4 Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to purchase and of assignment to be printed on the reverse thereof) shall each
be substantially in the form set forth in Exhibit B hereto and may have such changes or marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement and which do not affect
the rights, duties, liabilities or responsibilities of the Rights Agent, or as may be required to comply with any applicable law or with any rule or regulation made
pursuant thereto or with any applicable rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage.
Subject to the provisions of Section 11 and Section 22 hereof, the Rights Certificates, whenever distributed, shall be dated as of the Record Date and on their
face shall entitle the holders thereof to purchase such number of one one-thousandths of a share of Preferred Stock as shall be set forth therein at the price set
forth therein (such exercise price per one one-thousandths of a share, the “Purchase Price”), but the amount and type of securities purchasable upon the
exercise of each Right and the Purchase Price thereof shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a), Section 11(i) or Section 22 hereof that represents Rights beneficially owned
by: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any Associate or Affiliate of an
Acquiring Person) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any Associate or
Affiliate of an Acquiring Person) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant
to either (A) a transfer (whether or not for consideration) from the Acquiring Person (or an Associate or Affiliate of the Acquiring Person) to holders of equity
interests in such Acquiring Person or to any Person with whom the Acquiring Person (or an Associate or Affiliate of the Acquiring Person) has any continuing
agreement, arrangement or understanding (whether or not in writing) regarding the transferred Rights or (B) a transfer that the Board has determined is part of a
plan, arrangement or understanding (whether or not in writing) that has as a primary purpose or effect the avoidance of Section 7(e) hereof, and any Rights
Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer, exchange, replacement or adjustment of any other Rights Certificate referred to in
this sentence, shall contain (if the Company and the Rights Agent have knowledge that such Person is an Acquiring Person or an Associate or Affiliate thereof or
transferee of such Persons or a nominee of any of the foregoing and to the extent feasible and only if the Company has provided specific written instructions to
the Rights Agent) a legend in substantially the following form:
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Rights represented by this Rights Certificate are or were beneficially owned by a Person who was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person (as such terms are defined in the Tax Benefits Preservation Plan between Acacia Research Corporation and Computershare
Trust Company, N.A. (or any successor Rights Agent) dated as of March 16, 2019, as it may be supplemented, amended or restated from time to time (the “Tax
Benefits Preservation Plan”)). Accordingly, this Rights Certificate and the Rights represented hereby may become null and void in the circumstances specified in
Section 7(e) of the Tax Benefits Preservation Plan.
Section 5 Countersignature and Registration .
(a) The Rights Certificates shall be executed on behalf of the Company by its Chairman of the Board, its Chief Executive Officer, its
President or any Vice President, either manually or by facsimile signature, and shall have affixed thereto the Company’s seal or a facsimile thereof which shall
be attested by the General Counsel of the Company, either manually or by facsimile signature. The Rights Certificates shall be countersigned by an authorized
signatory of the Rights Agent, either manually or by facsimile signature and shall not be valid for any purpose unless so countersigned. In case any officer of the
Company who shall have signed any of the Rights Certificates shall cease to be such officer of the Company before countersignature by an authorized signatory
of the Rights Agent and issuance and delivery by the Company, such Rights Certificates, nevertheless, may be countersigned by an authorized signatory of the
Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Rights Certificates had not ceased
to be such officer of the Company; and any Rights Certificates may be signed on behalf of the Company by any person who, at the actual date of the execution
of such Rights Certificate, shall be a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Agreement any
such person was not such an officer. In case any authorized signatory of the Rights Agent who has countersigned any of the Rights Certificates ceases to be an
authorized signatory of the Rights Agent before issuance and delivery by the Company, such Rights Certificates, nevertheless, may be issued and delivered by
the Company with the same force and effect as though the person who countersigned such Rights Certificates had not ceased to be an authorized signatory of
the Rights Agent; and any Rights Certificates may be countersigned on behalf of the Rights Agent by any person who, at the actual date of the countersignature
of such Rights Certificate, is properly authorized to countersign such Rights Certificate, although at the date of the execution of this Agreement any such person
was not so authorized.
(b) Following the Distribution Date and receipt by the Rights Agent of notice of such occurrence and of all other necessary or relevant
information and documentation, as provided in Section 3(a) hereof, the Rights Agent will keep, or cause to be kept, at its office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise or transfer, books for registration and transfer of the Rights Certificates issued hereunder.
Such books shall show the names and addresses of the respective holders of the Rights Certificates, the number of Rights evidenced on its face by each of the
Rights Certificates and the date of each of the Rights Certificates.
Section 6 Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates .
(a) Subject to the provisions of Section 4(b), Section 7(e) and Section 14 hereof, at any time after the close of business on the
Distribution Date, and at or prior to the close of business on the Expiration Date, any Rights Certificate or Certificates (other than Rights Certificates representing
Rights that have become null and void pursuant to Section 7(e) hereof or that may have been redeemed or exchanged pursuant to Section 24 hereof) may be
transferred, split up, combined or exchanged for another Rights Certificate or Certificates, entitling the registered holder to purchase a like number of one one-
thousandths of a share of Preferred Stock (or, following a Triggering Event, Common Stock, other securities, cash or other assets, as the case may be) as the
Rights Certificate or Certificates surrendered then entitles such holder (or former holder in the case of a transfer) to purchase. Any registered holder desiring to
transfer, split up, combine or exchange any Rights Certificate or Certificates shall make such request in writing delivered to the Rights Agent, and shall
surrender the Rights Certificate or Certificates to be transferred, split up, combined or exchanged, with the form of assignment and certificate contained therein
properly completed and duly executed and with all signatures guaranteed, at the office or offices of the Rights Agent designated for such purpose.
Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with
respect to the transfer of any such surrendered Rights Certificate until the registered holder thereof shall have (i) properly completed and duly executed the
certificate contained in the form of assignment on the reverse side of such Rights Certificate, (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company or the Rights Agent shall reasonably request, and (iii) paid a
sum sufficient to cover any tax or charge that may be imposed in connection with any transfer, split up, combination or exchange of Rights Certificates as
required by Section 9(e) hereof. Thereupon the Rights Agent shall, subject to Section 4(b), Section 7(e), Section 14 and Section 24 hereof, countersign and
deliver to the Person entitled thereto a Rights Certificate or Certificates, as the case may be, as so requested, registered in such name or names as may be
designated by the surrendering registered holder. The Rights Agent shall promptly
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
forward any such sum collected by it to the Company or to such Persons as the Company may specify by written notice. The Rights Agent shall have no duty or
obligation to take any action under any section of this Agreement related to the exchange, issuance or delivery of Rights Certificates or which requires payment
by a Rights holder of applicable taxes or charges unless and until it is satisfied that all such taxes and/or charges have been paid.
(b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity or security satisfactory to them, along with a signature guarantee and such
other and further documentation as the Company or the Rights Agent may reasonably request, and reimbursement to the Company and the Rights Agent of all
reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Rights Certificate, if mutilated, the Company will execute
and deliver a new Rights Certificate of like tenor to the Rights Agent for countersignature and delivery to the registered holder thereof in lieu of the Rights
Certificate so lost, stolen, destroyed or mutilated.
Section 7 Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) Subject to (e) hereof, at any time after the Distribution Date the registered holder of any Rights Certificate may exercise the Rights
evidenced thereby (except as otherwise provided herein including the restrictions on exercisability set forth in Section 9(c) and Section 11(a)(iii)) in whole or in
part upon surrender of the Rights Certificate, with the form of election to purchase and the certificate on the reverse side thereof properly completed and duly
executed, to the Rights Agent at the office or offices of the Rights Agent designated for such purpose, together with payment of the aggregate Purchase Price
with respect to the total number of one one-thousandths of a share of Preferred Stock (or other securities, cash or other assets, as the case may be) as to which
such surrendered Rights are then exercisable, and an amount equal to any tax or charge required to be paid under Section 9(e) hereof, at or prior to the earliest
of (i) 5:00 P.M., New York, New York time, on March 15, 2021 (such date, the “Final Expiration Date”), (ii) the time at which the Rights are redeemed as provided
in Section 23 hereof, (iii) the time at which the Rights are exchanged as provided in Section 24 hereof, (iv) the close of business on the effective date of the
repeal of Section 382 of the Code if the Board determines that this Agreement is no longer necessary or desirable for the preservation of Tax Benefits or (v) the
close of business on the first day of a taxable year of the Company to which the Board of Directors of the Company determines that no Tax Benefits may be
carried forward (the earliest of (i) - (v) being herein referred to as the “Expiration Date”). The obligations of the Rights Agent under this Agreement shall terminate
upon the earlier of the Expiration Date and such time as all outstanding Rights have been exercised, redeemed or exchanged hereunder (other than Rights
which have become null and void pursuant to the provisions of Section 7(e) hereof); provided, that following such termination the Rights Agent shall be required
to complete all of its outstanding work and all work, if any, required to be performed by it under this Agreement in connection with such expiration, exercise,
redemption or exchange.
(b) The Purchase Price for each one one-thousandth of a share of Preferred Stock pursuant to the exercise of a Right initially shall be
$12.00, shall be subject to adjustment from time to time as provided in Section 11 and Section 13(a) hereof and shall be payable in accordance with paragraph
(c) below.
(c) Subject to (e) hereof, upon receipt of a Rights Certificate representing exercisable Rights, with the form of election to purchase and
the certificate properly completed and duly executed, accompanied by payment, with respect to each Right so exercised, of the Purchase Price per one one-
thousandth of a share of Preferred Stock (or other shares, securities, cash or other assets, as the case may be) to be purchased as set forth below and an
amount equal to any tax or charge required to be paid under Section 9(e) hereof, the Rights Agent shall, subject to Section 7(f) and Section 20(k) hereof,
thereupon promptly (i) (A) requisition from any transfer agent of the shares of Preferred Stock (or make available, if the Rights Agent is the transfer agent for
such shares) certificates for the total number of one one-thousandths of a share of Preferred Stock to be purchased and the Company hereby irrevocably
authorizes and directs each such transfer agent to comply with all such requests, or (B) if the Company shall have elected to deposit the total number of shares
of Preferred Stock issuable upon exercise of the Rights hereunder with a depositary agent, requisition from the depositary agent depositary receipts representing
such number of one one-thousandths of a share of Preferred Stock as are to be purchased (in which case certificates for the shares of Preferred Stock
represented by such receipts shall be deposited by the transfer agent with the depositary agent) and the Company hereby irrevocably authorizes and directs
each such depositary agent to comply with such request, (ii) when necessary to comply with this Agreement, requisition from the Company the amount of cash,
if any, to be paid in lieu of the issuance of fractional shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts,
cause the same to be delivered to or, upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated
by such holder, and (iv) when necessary to comply with this Agreement, after receipt thereof, deliver such cash, if any, to or upon the order of the registered
holder of such Rights Certificate. The payment of the Purchase Price (as such amount may be reduced pursuant to Section 11(a)(iii) hereof) and an amount
equal to any tax or charge required to be paid under Section 9(e) hereof, shall be made in cash or by certified bank check or bank draft payable to the order of
the Company. In the event that the Company is obligated to issue other securities (including Common Stock) of the Company, pay cash and/or distribute other
property pursuant to Section 11(a) hereof,
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
the Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if
and when necessary to comply with this Agreement. The Company reserves the right to require prior to the occurrence of a Triggering Event that, upon any
exercise of Rights, a number of Rights be exercised so that only whole shares of Preferred Stock would be issued.
(d) In case the registered holder of any Rights Certificate shall properly exercise less than all the Rights evidenced thereby, a new
Rights Certificate evidencing the Rights remaining unexercised shall be issued by the Rights Agent and, if requested and provided with all necessary information
and documents by the registered holder of Rights Certificates, delivered to, or upon the order of, the registered holder of such Rights Certificate or to its duly
authorized assigns, registered in such name or names as may be designated by such holder, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any
Rights beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any
Associate or Affiliate of an Acquiring Person) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or
of any Associate or Affiliate of an Acquiring Person) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives
such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person (or an Associate or Affiliate of the Acquiring Person) to
holders of equity interests in such Acquiring Person (or such Associate or Affiliate of an Acquiring Person) or to any Person with whom the Acquiring Person (or
an Associate or Affiliate of the Acquiring Person) has any continuing agreement, arrangement or understanding (whether or not in writing) regarding the
transferred Rights or (B) a transfer that the Board has determined is part of a plan, arrangement or understanding that has as a primary purpose or effect the
avoidance of this (e), shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such
Rights, or any Rights Certificate which formerly evidenced such Rights, whether under any provision of this Agreement or otherwise. The Company shall notify
the Rights Agent when this (e) and/or Section 4(b) hereof applies and shall use all reasonable efforts to ensure that the provisions of this (e) and Section 4(b)
hereof are complied with, but neither the Company nor the Rights Agent shall have any liability or obligation to any holder of Rights Certificates or any other
Person as a result of the Company’s failure to make any determinations with respect to an Acquiring Person or any of such Acquiring Person’s Affiliates,
Associates or their respective transferees hereunder. Until such notice is received by the Rights Agent, the Rights Agent shall have no duties, responsibilities or
obligations with respect to this (e) and Section 4(b) hereof and shall be deemed not to have any knowledge of the identity of any such Acquiring Person,
Associate or Affiliate, or the nominee of any of the foregoing.
(f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder of Rights or other securities upon the occurrence of any purported exercise as set forth in this Section 7
unless such registered holder shall have (i) properly completed and duly executed the certificate contained in the form of election to purchase set forth on the
reverse side of the Rights Certificate surrendered for such exercise, and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company or the Rights Agent shall reasonably request.
Section 8 Cancellation and Destruction of Rights Certificates. All Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination, redemption or exchange shall, if surrendered to the Company or any of its agents, be delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Rights Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled
Rights Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Rights Certificates, and in such case shall deliver a
certificate of destruction thereof to the Company.
Section 9 Reservation and Availability of Capital Stock.
(a) The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued shares
of Preferred Stock (and, following the occurrence of a Triggering Event, out of its authorized and unissued shares of Common Stock and/or other securities or
out of its authorized and issued shares held in its treasury), the number of shares of Preferred Stock (and, following the occurrence of a Triggering Event,
Common Stock and/or other securities) that, as provided in this Agreement including Section 11(a)(iii) hereof, will be sufficient to permit the exercise in full of all
outstanding Rights.
(b) So long as the shares of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other
securities) issuable and deliverable upon the exercise of the Rights may be listed on any national securities exchange, the Company shall use its best efforts to
cause, from and after such time as the Rights become exercisable
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(but only to the extent that it is reasonably likely that the Rights will be exercised), all shares reserved for such issuance to be listed on such exchange upon
official notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as practicable following the earliest date after the first occurrence of a
Section 11(a)(ii) Event on which the consideration to be delivered by the Company upon exercise of the Rights has been determined in accordance with Section
11(a)(iii) hereof, a registration statement under the Act, with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause
such registration statement to become effective as soon as practicable after such filing, and (iii) cause such registration statement to remain effective (with a
prospectus at all times meeting the requirements of the Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities,
and (B) the Expiration Date. The Company will also take such action as may be appropriate under, or to ensure compliance with, the securities or “blue sky”
laws of the various states in connection with the exercisability of the Rights. The Company may temporarily suspend, for a period of time not to exceed ninety
(90) days after the date set forth in clause (i) of the first sentence of this Section 9(c), the exercisability of the Rights in order to prepare and file such registration
statement and permit it to become effective. Upon any such suspension, the Company shall issue a public announcement stating that the exercisability of the
Rights has been temporarily suspended, as well as a public announcement at such time as the suspension has been rescinded. In addition, if the Company shall
determine that a registration statement is required following the Distribution Date, the Company may temporarily suspend the exercisability of the Rights until
such time as a registration statement has been declared effective and give prompt written notice of the same to the Rights Agent. Notwithstanding any provision
of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction if the requisite qualification in such jurisdiction shall not have been
obtained, the exercise thereof shall not be permitted under applicable law, or a registration statement in respect thereof shall not have been declared effective.
The Company shall promptly notify the Rights Agent in writing after it makes a public announcement pursuant to this Section 9(c) and furnish the Rights Agent
with a copy of such announcement(s).
(d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all one one-thousandths of a
share of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other securities) delivered upon exercise of Rights shall, at
the time of delivery of the certificates for such shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and
nonassessable.
(e) The Company further covenants and agrees that it will pay when due and payable any and all taxes and charges that may be payable in
respect of the issuance or delivery of the Rights Certificates and of any certificates for a number of one one-thousandths of a share of Preferred Stock (or
Common Stock and/or other securities, as the case may be) upon the exercise of Rights. Neither the Rights Agent nor the Company shall, however, be required
to pay any tax or charge that may be payable in respect of any transfer or delivery of Rights Certificates to a Person other than, or the issuance or delivery of a
number of one one-thousandths of a share of Preferred Stock (or Common Stock and/or other securities, as the case may be) in respect of a name other than
that of the registered holder of the Rights Certificates evidencing Rights surrendered for exercise, nor shall the Rights Agent or the Company be required to
register for transfer, issue or deliver any certificates for a number of one one-thousandths of a share of Preferred Stock (or Common Stock and/or other
securities, as the case may be) in a name other than that of the registered holder upon the exercise of any Rights until such tax or charge shall have been paid
(any such tax or charge being payable by the holder of such Rights Certificates at the time of surrender) or until it has been established to the Company’s and
the Rights Agent’s satisfaction that no such tax or charge is due.
Section 10 Preferred Stock Record Date. Each Person in whose name any certificate evidencing a number of one one-thousandths of a share of
Preferred Stock (or Common Stock and/or other securities, as the case may be) is issued upon the exercise of Rights shall for all purposes be deemed to have
become the holder of record of such fractional shares of Preferred Stock (or Common Stock and/or other securities, as the case may be) represented thereby
on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Purchase
Price (and all applicable taxes and charges) was duly made; provided, however, that if the date of such surrender and payment is a date upon which the
Preferred Stock (or Common Stock and/or other securities, as the case may be) transfer books of the Company are closed, such Person shall be deemed to
have become the record holder of such shares (fractional or otherwise) on, and such certificate shall be dated, the next succeeding Business Day on which the
Preferred Stock (or Common Stock and/or other securities, as the case may be) transfer books of the Company are open. Prior to the exercise of the Rights
evidenced thereby, the holder of a Rights Certificate shall not be entitled to any rights of a stockholder of the Company with respect to shares for which the
Rights shall be exercisable, including the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as expressly provided herein.
Section 11 Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights . The Purchase Price, the number and kind of shares covered
by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Stock payable in
shares of Preferred Stock, (B) subdivide or split the outstanding shares of Preferred Stock, (C) combine or consolidate the outstanding shares of Preferred Stock
into a smaller number of shares, through a reverse stock split or otherwise, or (D) issue any shares of its capital stock in a reclassification of the Preferred Stock
(including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a) and Section 7(e) hereof, the Purchase Price in effect at the time of the record date for such dividend or of the effective
date of such subdivision, split, combination, consolidation or reclassification, and the number and kind of shares of Preferred Stock or capital stock, as the case
may be, issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive, upon
payment of the Purchase Price then in effect, the aggregate number and kind of shares of Preferred Stock or capital stock, as the case may be, that, if such
Right had been exercised immediately prior to such date and at a time when the Preferred Stock transfer books of the Company were open, such holder would
have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, split, combination, consolidation or reclassification. If an
event occurs that would require an adjustment under both this Section 11(a)(i) and Section 11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i)
shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii) hereof.
(ii) Subject to Section 24 hereof, in the event that any Person shall, at any time after the Rights Dividend Declaration Date,
become an Acquiring Person, unless the event causing such Person to become an Acquiring Person is a transaction set forth in Section 13(a) hereof, then,
promptly following the occurrence of such event, proper provision shall be made so that each holder of a Right (except as provided below and in Section 7(e)
hereof) shall thereafter have the right to receive, upon exercise thereof at the then current Purchase Price in accordance with the terms of this Agreement, in lieu
of a number of one one-thousandths of a share of Preferred Stock, such number of shares of Common Stock as shall equal the result obtained by (x) multiplying
the then-current Purchase Price by the then number of one one-thousandths of a share of Preferred Stock for which a Right was exercisable immediately prior to
the first occurrence of a Section 11(a)(ii) Event, and (y) dividing that product (which, following such first occurrence, shall thereafter be referred to as the
“Purchase Price” for each Right and for all purposes of this Agreement) by fifty percent (50%) of the Current Market Price (determined pursuant to Section 11(d)
hereof) per share of Common Stock on the date of such first occurrence (such number of shares, the “Adjustment Shares”). The Company shall provide the
Rights Agent with written notice of the identity of any Acquiring Person, Associate or Affiliate, or the nominee of any of the foregoing, and the Rights Agent may
rely on such notice in carrying out its duties under this Agreement, and shall be deemed not to have any knowledge of the identity of any such Acquiring Person,
Associate or Affiliate, or the nominee of any of the foregoing unless and until it shall have received such notice.
(iii) In the event that the number of shares of Common Stock authorized by the Company’s Restated Certificate of Incorporation,
as may be amended from time to time, but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights, is not sufficient to
permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii) of this Section 11(a), the Company shall (A) determine the value of
the Adjustment Shares issuable upon the exercise of a Right (the “Current Value”), and (B) with respect to each Right (subject to Section 7(e) hereof), make
adequate provision to substitute for the Adjustment Shares, upon the exercise of a Right and payment of the applicable Purchase Price, (1) cash, (2) a reduction
in the Purchase Price, (3) Common Stock or other equity securities of the Company (including shares, or units of shares, of preferred stock, such as the
Preferred Stock, that the Board has deemed to have essentially the same value or economic rights as shares of Common Stock (such equity securities being
referred to herein as “Common Stock Equivalents”)), (4) debt securities of the Company, (5) other assets, or (6) any combination of the foregoing, having an
aggregate value equal to the Current Value (less the amount of any reduction in the Purchase Price), where such aggregate value has been determined by the
Board based upon the advice of a nationally recognized investment banking firm selected by the Board; provided, however, that if the Company shall not have
made adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the later of (x) the first occurrence of a Section 11(a)(ii)
Event and (y) the date on which the Company’s right of redemption pursuant to expires (the later of (x) and (y) being referred to herein as the “Section 11(a)(ii)
Trigger Date”), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price,
shares of Common Stock (to the extent available) and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. For
purposes of the preceding sentence, the term “Spread” shall mean the excess of (i) the Current Value over (ii) the Purchase Price. If the Board determines in
good faith that it is likely that sufficient additional shares of Common Stock could be authorized for issuance upon exercise in full of the Rights, the thirty (30) day
period set forth above may be extended to the extent necessary, but not more than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order that the
Company may seek stockholder approval for the authorization of such additional shares (such thirty (30) day period, as it may be extended, is herein called the
“Substitution Period”). To the extent that the Company determines that action should be taken pursuant to the first and/or third sentences of this Section 11(a)(iii),
the Company (1) shall provide, subject to Section 7(e) hereof, that such action shall apply uniformly to all outstanding Rights, and (2) may suspend the
exercisability of the Rights until the expiration of the Substitution Period in order to seek such stockholder approval for such authorization of additional shares
and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof. In the event of any
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
such suspension, the Company shall issue a public announcement (with prompt written notice thereof to the Rights Agent) stating that the exercisability of the
Rights has been temporarily suspended, as well as a public announcement (with prompt written notice thereof to the Rights Agent) at such time as the
suspension is no longer in effect. For purposes of this Section 11(a)(iii), the value of each Adjustment Share shall be the Current Market Price per share of
Common Stock on the Section 11(a)(ii) Trigger Date and the per share or per unit value of any Common Stock Equivalent shall be deemed to equal the Current
Market Price per share of Common Stock on such date.
(b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of shares of Preferred Stock
entitling them to subscribe for or purchase (for a period expiring within forty-five (45) calendar days after, but not including such record date) shares of Preferred
Stock (or shares having the same rights, privileges and preferences as the shares of Preferred Stock (“Equivalent Preferred Stock”)) or securities convertible into
Preferred Stock or Equivalent Preferred Stock at a price per share of Preferred Stock or per share of Equivalent Preferred Stock (or having a conversion price per
share, if a security convertible into Preferred Stock or Equivalent Preferred Stock) less than the Current Market Price (as determined pursuant to Section 11(d)
hereof) per share of Preferred Stock on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of shares of Preferred Stock outstanding
on such record date, plus the number of shares of Preferred Stock that the aggregate offering price of the total number of shares of Preferred Stock and/or
Equivalent Preferred Stock to be so offered (and/or the aggregate initial conversion price of the convertible securities to be so offered) would purchase at such
Current Market Price, and the denominator of which shall be the number of shares of Preferred Stock outstanding on such record date, plus the number of
additional shares of Preferred Stock and/or Equivalent Preferred Stock to be offered for subscription or purchase (or into which the convertible securities to be so
offered are initially convertible). In case such subscription price may be paid by delivery of consideration, part or all of which may be in a form other than cash,
the value of such consideration shall be as determined in good faith by the Board, whose determination shall be described in a statement filed with the Rights
Agent that shall be binding and conclusive for all purposes on the Rights Agent and the holders of the Rights. Shares of Preferred Stock owned by or held for the
account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever
such a record date is fixed, and in the event that such rights or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price that
would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for a distribution to all holders of shares of Preferred Stock (including any such
distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of cash (other than a regular
quarterly cash dividend out of the earnings or retained earnings of the Company), assets (other than a dividend payable in Preferred Stock, but including any
dividend payable in stock other than Preferred Stock) or evidences of indebtedness, or of subscription rights or warrants (excluding those referred to in Section
11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the Current Market Price (as determined pursuant to Section 11(d) hereof) per share of Preferred Stock
on such record date, less the fair market value (as determined in good faith by the Board, whose determination shall be described in a written statement filed
with the Rights Agent that shall be binding on the Rights Agent and the holders of the Rights) of the portion of the cash, assets or evidences of indebtedness so
to be distributed or of such subscription rights or warrants applicable to a share of Preferred Stock, and the denominator of which shall be such Current Market
Price (as determined pursuant to Section 11(d) hereof) per share of Preferred Stock. Such adjustments shall be made successively whenever such a record
date is fixed, and in the event that such distribution is not so made, the Purchase Price shall be adjusted to be the Purchase Price that would have been in effect
if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, other than computations made pursuant to Section 11(a)(iii) hereof, the “Current
Market Price” per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of such Common Stock for the
thirty (30) consecutive Trading Days immediately prior to but not including such date, and for purposes of computations made pursuant to Section 11(a)(iii)
hereof, the Current Market Price per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of such
Common Stock for the ten (10) consecutive Trading Days immediately following but not including such date; provided, however, that in the event that the
Current Market Price per share of Common Stock is determined during a period following the announcement by the issuer of such Common Stock of (A) a
dividend or distribution on such Common Stock payable in shares of such Common Stock or securities convertible into shares of such Common Stock (other
than the Rights), or (B) any subdivision, combination, consolidation, reverse stock split or reclassification of such Common Stock, and the ex-dividend date for
such dividend or distribution, or the record date for such subdivision, combination, consolidation, reverse stock split or reclassification shall not have occurred
prior to the commencement of the requisite thirty (30) Trading Day or ten (10) Trading Day period, as set forth above, then, and in each such case, the Current
Market Price shall be properly adjusted to take into account ex-dividend trading. The closing price for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
securities listed or admitted to trading on the New York Stock Exchange (the “NYSE”) or, if the shares of Common Stock are not listed or admitted to trading on
the NYSE, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on
which the shares of Common Stock are listed or admitted to trading or, if on any such date the shares of Common Stock are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers Automated Quotations System (“NASDAQ”) or such other system then in use, or, if on any such date
the shares of Common Stock are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market
maker making a market in the Common Stock selected by the Board. If on any such date no market maker is making a market in the Common Stock, the fair
value of such shares on such date as determined in good faith by the Board shall be used. The term “Trading Day” shall mean a day on which the principal
national securities exchange on which the shares of Common Stock are listed or admitted to trading is open for the transaction of business or, if the shares of
Common Stock are not listed or admitted to trading on any national securities exchange, a Business Day. If the Common Stock is not publicly held or not so
listed or traded, the Current Market Price per share shall mean the fair value per share as determined in good faith by the Board, whose determination shall be
described in a written statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights.
(ii) For the purpose of any computation hereunder, the “Current Market Price” per share of Preferred Stock shall be determined in the
same manner as set forth above for the Common Stock in clause (i) of this Section 11(d) (other than the last sentence thereof). If the Current Market Price per
share of Preferred Stock cannot be determined in the manner provided above or if the Preferred Stock is not publicly held or listed or traded in a manner
described in clause (i) of this Section 11(d), the Current Market Price per share of Preferred Stock shall be conclusively deemed to be an amount equal to 1,000
(as such number may be appropriately adjusted for such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock
occurring after the date of this Agreement) multiplied by the Current Market Price per share of Common Stock. If neither the Common Stock nor the Preferred
Stock is publicly held or so listed or traded, Current Market Price per share of the Preferred Stock shall mean the fair value per share as determined in good
faith by the Board, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of
the Rights.
(e) Anything herein to the contrary notwithstanding, no adjustment in the Purchase Price shall be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in the Purchase Price; provided, however, that any adjustments that by reason of this Section
11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be
made to the nearest cent or to the nearest ten-thousandth of a share of Common Stock or other share or one-millionth of a share of Preferred Stock, as the case
may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three (3)
years from the date of the transaction that mandates such adjustment, or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter
exercised shall become entitled to receive any shares of capital stock other than Preferred Stock, thereafter the number of such other shares so receivable upon
exercise of any Right and the Purchase Price thereof shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Stock contained in Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and the provisions of
Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred Stock shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence
the right to purchase, at the adjusted Purchase Price, the number of one one-thousandths of a share of Preferred Stock purchasable from time to time hereunder
upon exercise of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in (i) hereof, upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c) hereof, each Right outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of one one-thousandths of a share of Preferred Stock (calculated to the nearest one-
millionth) obtained by (i) multiplying (x) the number of one one-thousandths of a share covered by a Right immediately prior to this adjustment, by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase Price, and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in lieu of
any adjustment in the number of one one-thousandths of a share of Preferred Stock purchasable upon the exercise of a Right. Each of the Rights outstanding
after the adjustment in the number of Rights shall be exercisable for the number of one one-thousandths of a share of Preferred Stock for which a Right was
exercisable immediately prior to such
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one ten-
thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately
after adjustment of the Purchase Price. The Company shall make a public announcement (with prompt written notice thereof to the Rights Agent) of its election
to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record
date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least ten (10)
days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this (i),
the Company shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Rights Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the
Company, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date
of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders shall be entitled
after such adjustment. Rights Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at
the option of the Company, the adjusted Purchase Price) and shall be registered in the names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the number of one one-thousandths of a share of Preferred
Stock issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price per one
one-thousandth of a share and the number of one one-thousandth of a share that were expressed in the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the Purchase Price below the then stated value, if any, of the
number of one one-thousandths of a share of Preferred Stock issuable upon exercise of the Rights, the Company shall take any corporate action that may, in the
opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable such number of one one-thousandths
of a share of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for
a specified event, the Company may elect to defer (with prompt written notice thereof to the Rights Agent) until the occurrence of such event the issuance to the
holder of any Right exercised after such record date the number of one one-thousandths of a share of Preferred Stock and other capital stock or securities of the
Company, if any, issuable upon such exercise over and above the number of one one-thousandths of a share of Preferred Stock and other capital stock or
securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the
Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder’s right to receive such additional shares (fractional or
otherwise) or securities upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase
Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that in its good faith judgment the Board shall determine to be
advisable in order that any (i) consolidation or subdivision of the Preferred Stock, (ii) issuance wholly for cash of any shares of Preferred Stock at less than the
Current Market Price, (iii) issuance wholly for cash of shares of Preferred Stock or securities that by their terms are convertible into or exchangeable for shares of
Preferred Stock, (iv) stock dividends or (v) issuance of rights, options or warrants referred to in this Section 11, hereafter made by the Company to holders of its
Preferred Stock shall not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at any time after the Distribution Date, (i) consolidate with any other Person
(other than a Subsidiary of the Company in a transaction that complies with Section 11(o) hereof), (ii) merge with or into any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o) hereof), or (iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets, cash flow or earning power aggregating more than fifty percent (50%) of the assets, cash flow or earning
power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or
more transactions each of which complies with Section 11(o) hereof), if (x) at the time of or immediately after such consolidation, merger or sale there are any
rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such consolidation, merger or sale, the stockholders of the Person
who constitutes, or would constitute, the “Principal Party” for purposes of Section 13(a) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates or Associates.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(o) The Company covenants and agrees that, after the Distribution Date, it will not, except as permitted by Section 23, Section 24 or
Section 27 hereof, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish
substantially or otherwise eliminate the benefits intended to be afforded by the Rights.
(p) Anything in this Agreement to the contrary notwithstanding, in the event that the Company shall at any time after the Rights
Dividend Declaration Date and prior to the Distribution Date (i) declare a dividend on the outstanding shares of Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, the
number of Rights associated with each share of Common Stock then outstanding, or issued or delivered thereafter but prior to the Distribution Date, shall be
proportionately adjusted so that the number of Rights thereafter associated with each share of Common Stock following any such event shall equal the result
obtained by multiplying the number of Rights associated with each share of Common Stock immediately prior to such event by a fraction the numerator of which
shall be the total number of shares of Common Stock outstanding immediately prior to the occurrence of the event and the denominator of which shall be the
total number of shares of Common Stock outstanding immediately following the occurrence of such event.
Section 12 Certificate of Adjusted Purchase Price or Number of Shares . Whenever an adjustment is made or any event affecting the Rights or their
exercisability (including without limitation an event which causes Rights to become null and void) occurs as provided in Section 11 and hereof, the Company shall
(a) promptly prepare a certificate setting forth such adjustment or describing such event, and a brief, reasonably detailed statement of the facts, computations
and methodology accounting for such adjustment, (b) promptly file with the Rights Agent, and with each transfer agent for the Preferred Stock and the Common
Stock, a copy of such certificate, and (c) if a Distribution Date has occurred, mail a brief summary thereof to each holder of a Rights Certificate in accordance
with Section 25 hereof. Notwithstanding the foregoing sentence, the failure of the Company to make such certification or give such notice shall not affect the
validity of such adjustment or the force or effect of the requirement for such adjustment. The Rights Agent shall be fully protected in relying on any such
certificate and on any adjustment or statement therein contained and shall have no duty or liability with respect to, and shall not be deemed to have knowledge
of, any adjustment or any such event unless and until it shall have received such a certificate.
Section 13 Consolidation, Merger or Sale or Transfer of Assets, Cash Flow or Earning Power .
(a) In the event that, following the Stock Acquisition Date, directly or indirectly, (x) the Company shall consolidate with, or merge with
and into, any other Person (other than a Subsidiary of the Company in a transaction that complies with Section 11(o) hereof), and the Company shall not be the
continuing or surviving corporation of such consolidation or merger, (y) any Person (other than a Subsidiary of the Company in a transaction that complies with
Section 11(o) hereof) shall consolidate with, or merge with or into, the Company, and the Company shall be the continuing or surviving corporation of such
consolidation or merger and, in connection with such consolidation or merger, all or part of the outstanding shares of Common Stock shall be changed into or
exchanged for stock or other securities of any other Person or cash or any other property, or (z) the Company shall sell or otherwise transfer (or one or more of
its Subsidiaries shall sell or otherwise transfer), in one transaction or a series of related transactions, assets, cash flow or earning power aggregating more than
fifty percent (50%) of the assets, cash flow or earning power of the Company and its Subsidiaries (taken as a whole) to any Person or Persons (other than the
Company or any Subsidiary of the Company in one or more transactions each of which complies with Section 11(o) hereof), then, and in each such case, proper
provision shall be made so that: (i) each holder of a Right, except as provided in Section 7(e) hereof, shall thereafter have the right to receive, upon the exercise
thereof at the then current Purchase Price in accordance with the terms of this Agreement, such number of validly authorized and issued, fully paid,
nonassessable and freely tradeable shares of Common Stock of the Principal Party, not subject to any liens, encumbrances, rights of first refusal or other
adverse claims, as shall be equal to the result obtained by (1) multiplying the then current Purchase Price by the number of one one-thousandths of a share of
Preferred Stock for which a Right is exercisable immediately prior to the first occurrence of a Section 13 Event (or, if a Section 11(a)(ii) Event has occurred prior
to the first occurrence of a Section 13 Event, multiplying the number of such one one-thousandths of a share for which a Right was exercisable immediately prior
to the first occurrence of a Section 11(a)(ii) Event by the Purchase Price in effect immediately prior to such first occurrence of a Section 11(a)(ii) Event), and (2)
dividing that product (which, following the first occurrence of a Section 13 Event, shall be referred to as the “Purchase Price” for each Right and for all purposes
of this Agreement) by 50% of the Current Market Price (determined pursuant to Section 11(d)(i) hereof) per share of the Common Stock of such Principal Party
on the date of consummation of such Section 13 Event; (ii) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such, all the
obligations and duties of the Company pursuant to this Agreement; (iii) the term “Company” shall thereafter be deemed to refer to such Principal Party, it being
specifically intended that the provisions of Section 11 hereof shall apply only to such Principal Party following the first occurrence of a Section 11(a)(ii) Event; (iv)
such Principal Party shall take such steps (including the reservation of a sufficient number of shares of its Common Stock) in connection with the consummation
of any such transaction as may be necessary to assure that the provisions hereof shall thereafter be applicable, as
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nearly as reasonably may be, in relation to its shares of Common Stock thereafter deliverable upon the exercise of the Rights; and (v) the provisions of Section
11(a)(ii) hereof shall be of no effect following the first occurrence of any Section 13 Event.
(b) “Principal Party” shall mean:
(i) in the case of any transaction described in clause (x) or (y) of the first sentence of (a) hereof, the Person that is the issuer of any
securities into which shares of Common Stock of the Company are converted in such merger or consolidation, and if no securities are so issued, the Person that
is the other party to such merger or consolidation; and
greatest portion of the assets, cash flow or earning power transferred pursuant to such transaction or transactions;
(ii) in the case of any transaction described in clause (z) of the first sentence of (a) hereof, the Person that is the party receiving the
provided, however, that in any such case, (1) if the Common Stock of such Person is not at such time and has not been continuously over the preceding twelve
(12) month period registered under Section 12 of the Exchange Act, and such Person is a direct or indirect Subsidiary of another Person the Common Stock of
which is and has been so registered, “Principal Party” shall refer to such other Person; and (2) in case such Person is a Subsidiary, directly or indirectly, of more
than one Person, the Common Stock of two or more of which are and have been so registered, “Principal Party” shall refer to whichever of such Persons is the
issuer of the Common Stock having the greatest aggregate market value.
(c) The Company shall not consummate any such consolidation, merger, sale or transfer unless the Principal Party shall have a sufficient
number of authorized shares of its Common Stock that have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance
with this Section 13 and unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental
agreement providing for the terms set forth in paragraphs (a) and (b) of this Section 13 and further providing that, as soon as practicable after the date of any
consolidation, merger or sale of assets mentioned in paragraph (a) of this, the Principal Party will:
(i) prepare and file a registration statement under the Act, with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, and will use its best efforts to cause such registration statement to (A) become effective as soon as practicable
after such filing and (B) remain effective (with a prospectus at all times meeting the requirements of the Act) until the Expiration Date; (ii) take all such other
action as may be necessary to enable the Principal Party to issue the securities purchasable upon exercise of the Rights, including the registration or
qualification of such securities under all requisite securities laws of jurisdictions of the various states and the listing of such securities on such exchanges and
trading markets as may be necessary or appropriate; and
all respects with the requirements for registration on Form 10 (or any successor form) under the Exchange Act.
(ii) deliver to holders of the Rights historical financial statements for the Principal Party and each of its Affiliates that comply in
The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. In the event that a Section 13
Event shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the Rights which have not theretofore been exercised shall thereafter become
exercisable in the manner described in (a).
Section 14 Fractional Rights and Fractional Shares .
(a) The Company shall not be required to issue fractions of Rights, except prior to the Distribution Date as provided in Section 11(p) hereof, or to
distribute Rights Certificates that evidence fractional Rights. In lieu of such fractional Rights, the Company shall pay to the registered holders of the Rights
Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of
a whole Right. For purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day
immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price of the Rights for any Trading Day shall be
the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the NYSE or, if the Rights are not
listed or admitted to trading on the NYSE, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal
national securities exchange on which the Rights are listed or admitted to trading, or if the Rights are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or
such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as
furnished by a professional market
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maker making a market in the Rights, selected by the Board. If on any such date no such market maker is making a market in the Rights, the fair value of the
Rights on such date as determined in good faith by the Board shall be used, which determination shall be described in a statement filed with the Rights Agent
and, in relation to the Rights Agent shall be conclusive for all purposes.
(b) The Company shall not be required to issue fractions of shares of Preferred Stock (other than fractions which are integral multiples of
one one-thousandth of a share of Preferred Stock) upon exercise of the Rights or to distribute certificates that evidence fractional shares of Preferred Stock
(other than fractions that are integral multiples of one one-thousandth of a share of Preferred Stock). In lieu of the issuance of fractional shares of Preferred Stock
that are not integral multiples of one one-thousandth of a share of Preferred Stock, the Company may pay to the registered holders of Rights Certificates at the
time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one one-thousandth of a share of
Preferred Stock. For purposes of this Section 14(b), the current market value of one one-thousandth of a share of Preferred Stock shall be one one-thousandth
of the closing price of a share of Preferred Stock (as determined pursuant to Section 11(d)(ii) hereof) on the Trading Day immediately prior to the date of such
exercise.
(c) Following the occurrence of a Triggering Event, the Company shall not be required to issue fractions of shares of Common Stock
upon exercise of the Rights or to distribute certificates that evidence fractional shares of Common Stock. In lieu of fractional shares of Common Stock, the
Company may pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of one (1) share of Common Stock. For purposes of this Section 14(c), the current market value of one share of Common
Stock shall be the closing price per share of Common Stock (as determined pursuant to Section 11(d)(i) hereof) on the Trading Day immediately prior to the date
of such exercise.
(d) Whenever a payment for fractional Rights or any fractional shares is to be made by the Rights Agent, the Company shall (i) promptly
prepare and deliver to the Rights Agent a certificate setting forth in reasonable detail the facts related to such payments and the prices and/or formulas utilized in
calculating such payments, and (ii) provide sufficient monies to the Rights Agent in the form of fully collected funds to make such payments. The Rights Agent
shall be fully protected in relying upon such a certificate and shall have no duty with respect to, and shall not be deemed to have knowledge of any payment for
fractional Rights or fractional shares under any Section of this Agreement relating to the payment of fractional Rights or fractional shares unless and until the
Rights Agent shall have received such a certificate and sufficient monies.
(e) The holder of a Right by the acceptance of the Rights expressly waives such holder’s right to receive any fractional Rights or any
fractional shares upon exercise of a Right, except as permitted by this Section 14.
Section 15 Rights of Action. All rights of action in respect of this Agreement, other than the rights of action given to the Rights Agent under Section 18
and Section 20 hereof, are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of the
Common Stock); and any registered holder of any Rights Certificate (or, prior to the Distribution Date, of the Common Stock), without the consent of the Rights
Agent or of the holder of any other Rights Certificate (or, prior to the Distribution Date, of the Common Stock), may, in such holder’s own behalf and for such
holder’s own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, such
holder’s right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without
limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and shall be entitled to specific performance of the obligations hereunder and injunctive relief against actual or
threatened violations of the obligations hereunder of any Person subject to this Agreement.
Section 16 Agreement of Rights Holders. Every holder of a Right by accepting the same consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of shares of Common Stock;
(b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at
the office or offices of the Rights Agent designated for such purposes, properly executed and duly endorsed or accompanied by a proper instrument of transfer
and with the appropriate forms and certificates duly executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company and the Rights Agent may deem and treat the Person in whose name a
Rights Certificate (or, prior to the Distribution Date, the associated Common Stock certificate (or book entry shares in respect of Common Stock)) is registered as
the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificates or the
associated Common Stock certificate (or
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notices provided to holders of book entry shares of Common Stock) made by anyone other than the Company or the Rights Agent) for all purposes whatsoever,
and neither the Company nor the Rights Agent, subject to the last sentence of Section 7(e) hereof, shall be required to be affected by any notice to the contrary;
and
(d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent nor any of their directors,
officers, employees, or agents shall have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this
Agreement by reason of any preliminary or permanent injunction or other order, judgment, decree or ruling (whether interlocutory or final) issued by a court of
competent jurisdiction or by a governmental, regulatory, self-regulatory or administrative agency or commission, or any statute, rule, regulation or executive
order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation; provided, however, the
Company shall use its best efforts to have any such injunction, order, judgment, decree or ruling lifted or otherwise overturned as soon as possible.
Section 17 Rights Certificate Holder Not Deemed a Stockholder . No holder, as such, of any Rights Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the number of one one-thousandths of a share of Preferred Stock or any other securities of the Company that may
at any time be issuable on the exercise or exchange of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be
construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of
meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until the
Right or Rights evidenced by such Rights Certificate shall have been exercised or exchanged in accordance with the provisions hereof.
Section 18 Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to
time, on demand of the Rights Agent, its reasonable expenses and counsel fees and disbursements and other disbursements incurred in the preparation,
negotiation, delivery, amendment, administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also
agrees to indemnify the Rights Agent and its Affiliates, directors, officers, employees, or agents for, and to hold it harmless against, any loss, liability, damage,
judgment, fine, penalty, claim, demand, settlement, cost or expense (including, without limitation, the reasonable fees and expenses of legal counsel), incurred
without gross negligence, bad faith or willful misconduct on the part of the Rights Agent (each as determined by a final judgment of a court of competent
jurisdiction), for any action taken, suffered or omitted to be taken by the Rights Agent in connection with the acceptance, administration, exercise and
performance of its duties under this Agreement, including the costs and expenses of defending against any claim of liability and the costs and expenses of
enforcing this right of indemnification. The provisions of this Section 18 and Section 20 hereof shall survive (a) the termination or expiration of this Agreement, (b)
the termination of the obligations of the Rights Agent hereunder in accordance with Section 7(a) hereof, (c) the exercise or expiration of the Rights and (d) the
resignation, replacement or removal of the Rights Agent.
(b) The Rights Agent shall be authorized and protected and shall incur no liability for or in respect of any action taken, suffered or omitted
to be taken by it in connection with its acceptance and administration of this Agreement and the exercise and performance of its duties hereunder in reliance
upon any Rights Certificate or certificate for Common Stock or for other securities of the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed,
executed and, where necessary, verified, guaranteed or acknowledged, by the proper Person or Persons, or otherwise upon the advice of counsel as set forth in
Section 20 hereof. The Rights Agent shall not be deemed to have knowledge of any event of which it was supposed to receive notice thereof hereunder, but for
which it has not received such notice in writing and the Rights Agent shall be fully protected and shall incur no liability for failing to take any action in connection
therewith, unless and until it has received such notice in writing.
Section 19 Merger or Consolidation or Change of Name of Rights Agent .
(a) Any Person into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any Person
resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any Person succeeding to the
stockholder services or stock transfer business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this
Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; but only if such Person would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Rights Certificates shall have been countersigned but not delivered, any such
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successor Rights Agent may adopt the countersignature of an authorized signatory of a predecessor Rights Agent and deliver such Rights Certificates so
countersigned, and if at that time any of the Rights Certificates shall not have been countersigned, an authorized signatory of any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor or in the name of the successor Rights Agent. In all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and in this Agreement.
(b) If at any time the name of the Rights Agent shall be changed and at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature of an authorized signatory under its prior name and deliver Rights Certificates so
countersigned; and if at that time any of the Rights Certificates shall not have been countersigned, an authorized signatory of the Rights Agent may countersign
such Rights Certificates either in its prior name or in its changed name. In all such cases such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
Section 20 Rights and Duties of Rights Agent. The Rights Agent undertakes to perform only the duties and obligations expressly imposed by this
Agreement (and no implied duties or obligations) upon the following terms and conditions, by all of which the Company and the holders of Rights Certificates, by
their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company or an employee of the Rights Agent),
and the advice or opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to, and the Rights Agent shall incur no
liability for or in respect of, any action taken, suffered or omitted to be taken by it in the absence of gross negligence, bad faith and willful misconduct (which
gross negligence, bad faith or willful misconduct must be determined by a final, non-appealable judgment of a court of competent jurisdiction) and in accordance
with such advice or opinion.
(b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact
or matter (including, without limitation, the identity of any Acquiring Person and the determination of Current Market Price) be proved or established by the
Company prior to taking, suffering or omitting to take any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, the Chief Executive Officer, the
Chief Financial Officer, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Company and
delivered to the Rights Agent, and such certificate shall be full and complete authorization and protection to the Rights Agent for, and the Rights Agent shall incur
no liability for or in respect of, any action taken, suffered or omitted to be taken by it in the absence of gross negligence, bad faith or willful misconduct (which
gross negligence, bad faith or willful misconduct must be determined by a final, non-appealable judgment of a court of competent jurisdiction) under the
provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own gross negligence, bad faith or willful misconduct (which gross negligence,
bad faith or willful misconduct must be determined by a final, non-appealable judgment of a court of competent jurisdiction). Anything to the contrary in this
Agreement notwithstanding, in no event shall the Rights Agent be liable for special, punitive, indirect, consequential or incidental loss or damage of any kind
whatsoever (including but not limited to lost profits), even if the Rights Agent has been advised of the likelihood of such loss or damage. Any liability of the
Rights Agent under this Agreement will be limited to the amount of annual fees paid by the Company to the Rights Agent during the twelve (12) months
immediately preceding the event for which recovery from the Rights Agent is being sought.
(d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the
Rights Certificates or be required to verify the same (except as to its countersignature on such Rights Certificates), but all such statements and recitals are and
shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not have any liability for or be under any responsibility in respect of the validity of this Agreement or the
execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Rights Certificate (except its
countersignature thereof) or any modification or order of any court, tribunal, or governmental authority in connection with the foregoing; nor shall it be liable or
responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor shall it be responsible for
any change in the exercisability of the Rights (including the Rights becoming null and void pursuant to Section 11 hereof) or any change or adjustment in the
terms of the Rights required under the provisions of Sections 3, 11, 23 or 24 hereof (provided, that the foregoing does not nullify any express duties the Rights
Agent may have in such Sections herein) or responsible for the manner, method or amount thereof or the ascertaining of the existence of facts that would
require any such change or adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after receipt of the certificate described in
Section 12 hereof, upon which the Rights Agent may rely); nor shall it by any act hereunder be deemed to make any representation or
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warranty as to the authorization or reservation of any shares of Common Stock or Preferred Stock to be issued pursuant to this Agreement or any Rights
Certificate or as to whether any shares of Common Stock or Preferred Stock will, when so issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder
from the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, the President, any Vice President, the Secretary, any Assistant
Secretary, the Treasurer or any Assistant Treasurer of the Company, and is authorized to apply to such officers for advice or instructions in connection with its
duties, and such instructions shall be full authorization and protection to the Rights Agent and the Rights Agent shall not be liable for or in respect of any action
taken, suffered or omitted to be taken by it in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. The
Rights Agent shall be fully authorized and protected in relying upon the most recent instructions received by any such officer. Any application by the Rights Agent
for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken, suffered or omitted by the
Rights Agent under this Agreement and the date on and/or after which such action shall be taken or suffered or such omission shall be effective. The Rights
Agent shall not be liable for any action taken, suffered or omitted to be taken by it in accordance with a proposal included in any such application on or after the
date specified in such application (which date shall not be less than five (5) Business Days after the date any officer of the Company actually receives such
application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the case of
an omission), the Rights Agent shall have received written instructions in response to such application specifying the action to be taken, suffered or omitted.
(h) The Rights Agent and any stockholder, member, Affiliate, director, officer or employee of the Rights Agent may buy, sell or deal in
any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract
with or lend money to the Company or otherwise act as fully and freely as though the Rights Agent were not Rights Agent under this Agreement. Nothing herein
shall preclude the Rights Agent or any such stockholder, member, Affiliate, director, officer or employee from acting in any other capacity for the Company or for
any other Person.
(i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either
itself (through its directors, officers and employees) or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any
act, omission, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company or any other Person resulting from any such act,
omission, default, neglect or misconduct, absent gross negligence, bad faith or willful misconduct in the selection and continued employment thereof (which
gross negligence, bad faith or willful misconduct must be determined by a final, non-appealable judgment of a court of competent jurisdiction).
(j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder (other than internal costs incurred by the Rights Agent in providing services to the Company in the
ordinary course of its business as Rights Agent) or in the exercise of its rights if it reasonably believes that repayment of such funds or adequate indemnification
against such risk or liability is not reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form
of assignment or form of election to purchase, as the case may be, has either not been properly completed and duly executed or indicates an affirmative
response to clause 1 and/or 2 thereof, the Rights Agent shall not take any further action with respect to such requested exercise or transfer without first
consulting with the Company.
Section 21 Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this
Agreement upon thirty (30) days’ notice in writing mailed to the Company in the manner set forth in Section 26 herein, and in the event that the Rights Agent or
one or more of its Affiliates is not also the transfer agent for the Company, to each transfer agent of the Common Stock and Preferred Stock by first-class mail,
postage prepaid, or nationally recognized overnight delivery. If at any time the Rights Agent or one of its Affiliates is also the transfer agent for the Company, in
the event such transfer agency relationship terminates, the Rights Agent will be deemed to have resigned automatically and be discharged from its duties under
this Agreement as of the effective date of such termination, and the Company shall be responsible for sending any required notice. The Company may remove
the Rights Agent or any successor Rights Agent upon thirty (30) days’ notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common
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Stock and Preferred Stock, by registered or certified mail, and, if such removal occurs after the Distribution Date, to the holders of the Rights Certificates by first-
class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights
Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after giving notice of such removal or after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (which holder shall, with such
notice, submit such holder’s Rights Certificate for inspection by the Company), then any registered holder of any Rights Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be
(a) a Person organized and doing business in good standing under the laws of the United States or of the State of New York or of any other state of the United
States, authorized under such laws to exercise stockholder services powers and which has, along with its Affiliates, at the time of its appointment as Rights
Agent a combined capital and surplus of at least $50,000,000 or (b) an Affiliate of a Person described in clause (a) of this sentence. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further
act or deed, and the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for the foregoing purpose, but the Rights Agent shall not be required to make any
additional expenditure or assume any additional liability in connection with the foregoing. Not later than the effective date of any such appointment, the Company
shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock and the Preferred Stock, and, if such
appointment occurs after the Distribution Date, mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice
provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the
appointment of the successor Rights Agent, as the case may be.
Section 22 Issuance of New Rights Certificates. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by the Board to reflect any adjustment or change in the
Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the
provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Common Stock following the Distribution Date and prior to the
redemption, exchange or expiration of the Rights, the Company (a) shall, with respect to shares of Common Stock so issued or sold pursuant to the exercise of
stock options or under any employee benefit plan or arrangement, granted or awarded as of the Distribution Date, or upon the exercise, conversion or exchange
of securities hereinafter issued by the Company (except as may otherwise be provided in the instrument(s) governing such securities), and (b) may, in any other
case, if deemed necessary or appropriate by the Board, issue Rights Certificates representing the appropriate number of Rights in connection with such
issuance or sale; provided, however, that (i) no such Rights Certificate shall be issued if, and to the extent that, the Company shall be advised by counsel that
such issuance would create a significant risk of material adverse tax consequences to the Company or the Person to whom such Rights Certificate would be
issued, and (ii) no such Rights Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.
Section 23 Redemption and Termination .
(a) The Board may, at its option, at any time prior to the earlier of (i) the close of business on the tenth (10th) Business Day following
the Stock Acquisition Date (or, if the Stock Acquisition Date shall have occurred prior to the Record Date, the close of business on the tenth (10th) Business Day
following the Record Date), or (ii) the Final Expiration Date, redeem all but not less than all of the then outstanding Rights at a redemption price of $0.001 per
Right, as such amount may be appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such
redemption price being hereinafter referred to as the “Redemption Price”). Notwithstanding anything contained in this Agreement to the contrary, the Rights shall
not be exercisable after the first occurrence of a Section 11(a)(ii) Event until such time as the Company’s right of redemption hereunder has expired. The
Company may, at its option, pay the Redemption Price in cash, shares of Common Stock (based on the Current Market Price of the Common Stock at the time
of redemption) or any other form of consideration deemed appropriate by the Board.
(b) Immediately upon the action of the Board ordering the redemption of the Rights, evidence of which shall have been filed with the
Rights Agent and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of
Rights shall be to receive the Redemption Price for each Right so held. Promptly after the action of the Board ordering the redemption of the Rights, the
Company shall give notice of such redemption to the Rights Agent and the holders of the then outstanding Rights by mailing such notice to all such holders at
each holder’s last address as it appears upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent
for the Common Stock. Any notice that is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such
notice of redemption will state the method by which the payment of the Redemption Price will be made.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(c) Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any
manner other than that specifically set forth in this Section 23 and other than in connection with the purchase or repurchase by any of them of Common Stock
prior to the Distribution Date.
Section 24 Exchange.
(a) The Board may, at its option, at any time after any Person becomes an Acquiring Person, exchange all or part of the then
outstanding and exercisable Rights (which shall not include Rights that have become null and void pursuant to the provisions of Section 7(e) hereof) for Common
Stock at an exchange ratio of one share of Common Stock per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such exchange ratio being hereinafter referred to as the “Exchange Ratio”). Notwithstanding the foregoing, the Board shall not be
empowered to effect such exchange at any time after (i) any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the
Company or any such Subsidiary, or any entity holding Common Stock for or pursuant to the terms of any such plan), together with all Affiliates and Associates
of such Person, becomes the Beneficial Owner of fifty percent (50%) or more of the Common Stock then outstanding or (ii) the occurrence of an event specified
in Section 13(a) hereof.
(b) Immediately upon the action of the Board ordering the exchange of any Rights pursuant to subsection (a) of this Section 24 and
without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be
to receive that number of shares of Common Stock equal to the number of Rights held by such holder multiplied by the Exchange Ratio. The Company shall
promptly give public notice of any such exchange (with prompt written notice thereof to the Rights Agent); provided, however, that the failure to give, or any
defect in, such notice shall not affect the legality or validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the
holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice that is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the
Common Stock for Rights will be effected and, in the event of any partial exchange, the number of Rights that will be exchanged. Any partial exchange shall be
effected pro rata based on the number of Rights (other than Rights that have become null and void pursuant to the provisions of Section 7(e) hereof) held by
each holder of Rights.
(c) Following the action of the Board ordering the exchange of any Rights pursuant to subsection (a) of this Section 24, the Company
may implement such procedures in its sole discretion as it deems appropriate for the purpose of ensuring that the Common Stock (or such other consideration)
issuable upon an exchange pursuant to this Section 24 not be received by holders of Rights that have become null and void pursuant to Section 7(e) hereof. In
furtherance thereof, if so directed by the Company, all or a portion of the shares of Common Stock (or other consideration) potentially issuable to holders of
Rights upon an exchange pursuant to this Section 24, who have not verified to the satisfaction of the Company, in its sole discretion, that they are not Acquiring
Persons, may be deposited in a trust established by the Company pending receipt of appropriate verification.
(d) In any exchange pursuant to this Section 24, the Company, at its option, may substitute Preferred Stock (or Equivalent Preferred
Stock) for Common Stock exchangeable for Rights, at the initial rate of one one-thousandth of a share of Preferred Stock (or Equivalent Preferred Stock) for each
share of Common Stock, as appropriately adjusted to reflect stock splits, stock dividends and other similar transactions after the date hereof.
(e) In the event that there shall not be sufficient shares of Common Stock issued but not outstanding or authorized but unissued to
permit any exchange of Rights as contemplated in accordance with this Section 24, the Company shall take all such action as may be necessary to authorize
additional shares of Common Stock for issuance upon exchange of the Rights.
(f) The Company shall not be required to issue fractions of shares of Common Stock or to distribute certificates that evidence fractional
shares of Common Stock. In lieu of such fractional shares of Common Stock, there shall be paid to the registered holders of the Rights Certificates with regard
to which such fractional shares of Common Stock would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a
whole share of Common Stock. For the purposes of this subsection (f), the current market value of a whole share of Common Stock shall be the closing price of
a share of Common Stock (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
exchange pursuant to this Section 24.
Section 25 Notice of Certain Events.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(a) In case the Company shall propose, at any time after the Distribution Date, (i) to pay any dividend payable in stock of any class to
the holders of Preferred Stock or to make any other distribution to the holders of Preferred Stock (other than a regular quarterly cash dividend out of earnings or
retained earnings of the Company), (ii) to offer to the holders of Preferred Stock rights or warrants to subscribe for or to purchase any additional shares of
Preferred Stock or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of its Preferred Stock (other than a
reclassification involving only the subdivision of outstanding shares of Preferred Stock), (iv) to effect any consolidation or merger into or with any other Person
(other than a Subsidiary of the Company in a transaction that complies with Section 11(o) hereof), or to effect any sale or other transfer (or to permit one or more
of its Subsidiaries to effect any sale or other transfer), in one transaction or a series of related transactions, of more than fifty percent (50%) of the assets, cash
flow or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its
Subsidiaries in one or more transactions each of which complies with Section 11(o) hereof), or (v) to effect the liquidation, dissolution or winding up of the
Company, then, in each such case, the Company shall give to the Rights Agent and to the extent feasible to each holder of a Rights Certificate, in accordance
with Section 26 hereof, a notice of such proposed action, which notice shall specify the record date for the purposes of such stock dividend, distribution of rights
or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of
participation therein by the holders of the shares of Preferred Stock, if any such date is to be fixed, and such notice shall be so given in the case of any action
covered by clause (i) or (ii) above at least twenty (20) days prior to but not including the record date for determining holders of the shares of Preferred Stock for
purposes of such action, and in the case of any such other action, at least twenty (20) days prior to but not including the date of the taking of such proposed
action or the date of participation therein by the holders of the shares of Preferred Stock, whichever shall be the earlier.
(b) In the event that any Section 11(a)(ii) Event shall occur, (i) the Company shall as soon as practicable thereafter give to the Rights
Agent and to each holder of a Rights Certificate, to the extent feasible and in accordance with Section 26 hereof, a notice of the occurrence of such event, which
notice shall specify the event and the consequences of the event to holders of Rights under Section 11(a)(ii) hereof, and (ii) all references in the preceding
paragraph to Preferred Stock shall be deemed thereafter to refer to Common Stock and/or, if appropriate, other securities. Until such notice is received by the
Rights Agent, the Rights Agent may presume conclusively for all purposes that no such Section 11(a)(ii) Event has occurred.
Section 26 Notices. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the Company shall be sufficiently given or made if in writing and sent or delivered by recognized national overnight delivery service or first-class mail,
postage prepaid, addressed (until another address is filed in writing with the Rights Agent by the Company) as follows:
Acacia Research Corporation
120 Newport Center Drive
Newport Beach, California 92660
Attention: Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the
holder of any Rights Certificate to or on the Rights Agent shall be sufficiently given or made if in writing and sent or delivered by recognized national overnight
delivery service or first-class mail, postage prepaid, addressed (until another address is filed in writing by the Rights Agent with the Company) as follows:
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
Attention: Relationship Manager
With a copy to:
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
Attention: Legal Department
Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing shares of Common Stock) shall be sufficiently given or made if in writing and sent or
delivered by recognized national overnight delivery service or first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown
on the registry books of the Company.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Section 27 Supplements and Amendments. Subject to this Section 27, this Agreement may be supplemented or amended at the times and for the
purposes set forth below. Prior to the Distribution Date, the Company and the Rights Agent shall, if the Company so directs, supplement or amend any provision
of this Agreement, other than to extend the Final Expiration Date, without the approval of any holders of shares of Common Stock. From and after the
Distribution Date, the Company and the Rights Agent shall, if the Company so directs, supplement or amend this Agreement without the approval of any holders
of Rights Certificates in order (i) to cure any ambiguity, (ii) to correct or supplement any provision contained herein that may be defective or inconsistent with any
other provisions herein, (iii) to shorten or lengthen any time period hereunder (other than to lengthen the Final Expiration Date) or (iv) to change or supplement
the provisions hereunder in any manner that the Company may deem necessary or desirable and that shall not adversely affect the interests of the holders of
Rights Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person). Upon the delivery of a certificate from an appropriate
officer of the Company that states that the proposed supplement or amendment is in compliance with the terms of this Section 27, the Rights Agent shall execute
such supplement or amendment; provided, that, the Rights Agent may, but shall not be obligated to, enter into any supplement or amendment that affects the
Rights Agent’s own rights, duties, obligations or immunities under this Agreement. Notwithstanding anything herein to the contrary, this Agreement may not be
amended (other than pursuant to clauses (i) or (ii) of the third sentence of this Section 27) at a time when the Rights are not redeemable.
Section 28 Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure
to the benefit of their respective successors and assigns hereunder.
Section 29 Determinations and Actions by the Board, etc. . For all purposes of this Agreement, any calculation of the number of shares of Common Stock
or any other class of capital stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares
of Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules
and Regulations under the Exchange Act or Section 382 of the Code and the Treasury Regulations promulgated thereunder, as appropriate. The Board shall
have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board or to the Company,
or as may be necessary or advisable in the administration of this Agreement, including, the right and power to (i) interpret the provisions of this Agreement, and
(ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the
Rights or to amend this Agreement). All such actions, calculations, interpretations and determinations (including for purposes of clause (y) below, all omissions
with respect to the foregoing) which are done or made by the Board in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent,
the holders of the Rights and all other Persons, and (y) not subject the Board, or any of the directors on the Board to any liability to the holders of the Rights.
The Rights Agent shall be entitled to assume the Board acted in good faith and shall be fully protected and incur no liability in the Rights Agent’s reliance
thereon.
Section 30 Benefits of this Agreement . Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent
and the registered holders of the Rights Certificates (and, prior to the Distribution Date, registered holders of the Common Stock) any legal or equitable right,
remedy or claim under this Agreement. This Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders
of the Rights Certificates (and, prior to the Distribution Date, registered holders of the Common Stock).
Section 31 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to
be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and
shall in no way be affected, impaired or invalidated; provided, that notwithstanding anything in this Agreement to the contrary, if any such term, provision,
covenant or restriction is held by such court or authority to be invalid, void or unenforceable and the Board determines in its good faith judgment that severing
the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the close of business on the tenth (10th) Business Day following the date of such determination by the Board and
provided further that if any such excluded term, provision, covenant or restriction shall adversely affect the rights, immunities, duties or obligations of the Rights
Agent, the Rights Agent shall be entitled to resign immediately upon written notice to the Company. Without limiting the foregoing, if any provision requiring a
specific group of directors of the Company to act is held by any court of competent jurisdiction or other authority to be invalid, void or unenforceable, such
determination shall then be made by the Board in accordance with applicable law and the Company’s Restated Certificate of Incorporation and Bylaws, each as
may be amended from time to time.
Section 32 Governing Law. This Agreement, each Right and each Rights Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely within such State.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Section 33 Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. A signature to this Agreement transmitted
electronically shall have the same authority, effect and enforceability as an original signature.
Section 34 Descriptive Headings; Interpretation.
meaning or construction of any of the provisions hereof.
(a) Descriptive headings of the several sections of this Agreement are inserted for convenience only and shall not control or affect the
“without limitation.”
(b) Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words
reference shall also apply to any successor or replacement provision or Treasury Regulation, as applicable.
(c) For purposes of this Agreement, whenever a specific provision of the Code or a specific Treasury Regulation is referenced, such
Section 35 Force Majeure. Notwithstanding anything to the contrary contained herein, the Rights Agent shall not be liable for any delays or failures in
performance resulting from acts beyond its reasonable control including, without limitation, acts of God, terrorist acts, shortage of supply, breakdowns or
malfunctions, interruptions or malfunction of computer facilities, or loss of data due to power failures or mechanical difficulties with information storage or
retrieval systems, labor difficulties, war or civil unrest.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, all as of the day and year first above written.
ACACIA RESEARCH CORPORATION
By:
Name:
Title:
COMPUTERSHARE TRUST COMPANY, N.A., as Rights Agent
By:
Name:
Title:
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATE OF DESIGNATION, PREFERENCES AND
RIGHTS OF SERIES B JUNIOR PARTICIPATING PREFERRED STOCK
of
ACACIA RESEARCH CORPORATION
Exhibit A
Pursuant to Section 151 of the General Corporation Law of the State of Delaware
I, Jennifer Graff, Secretary of Acacia Research Corporation, a corporation organized and existing under the General Corporation Law of the State of
Delaware (herein referred to as the “Company”), in accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY :
That pursuant to the authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Company (as may
be amended from time to time, the “Certificate of Incorporation”), the said Board of Directors on March 12, 2019, adopted the following resolution creating a
series of 300,000 shares of Preferred Stock designated as Series B Junior Participating Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of Directors of the Company in accordance with the provisions of the Certificate of
Incorporation, a series of Preferred Stock of the Company be and it hereby is created, and that the designation and amount thereof and the voting powers,
preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are
as follows:
Section 1. Designation and Amount. The shares of such series shall be designated as “Series B Junior Participating Preferred Stock” and the number of
shares constituting such series shall be 300,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided,
however, that no decrease shall reduce the number of shares of Series B Junior Participating Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the exercise of any options,
rights or warrants issuable upon conversion of any outstanding securities issued by the Company convertible into Series B Junior Participating Preferred Stock.
Section 2. Dividends and Distributions .
(A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the
shares of Series B Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series B Junior Participating Preferred Stock, in
preference to the holders of common stock of the Company with $0.001 par value (the “Common Stock”), and of any other junior stock, shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of
March, June, September and December in each year (each such date being referred to herein as a “Quarterly Dividend Payment Date”), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series B Junior Participating Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, one thousand (1,000)
times the aggregate per share amount of all cash dividends, and one thousand (1,000) times the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first
Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series B Junior Participating Preferred Stock. In the event the
Company shall at any time after March 16, 2019 (the “Rights Dividend Declaration Date”), (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each
such case the amount to which holders of shares of Series B Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b)
of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to
such event.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(B) The Company shall declare a dividend or distribution on the Series B Junior Participating Preferred Stock as provided in Paragraph
(A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided
that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date
and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series B Junior Participating Preferred Stock shall nevertheless
be payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series B Junior Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series B Junior Participating Preferred Stock, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of
shares of Series B Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series B Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of Series B Junior Participating Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more than thirty (30) days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series B Junior Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each share of Series B Junior Participating Preferred Stock shall entitle
the holder thereof to one thousand (1,000) votes on all matters submitted to a vote of the stockholders of the Company. In the event the Company shall at any
time after the Rights Dividend Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which
holders of shares of Series B Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a
fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number
of shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided by applicable law, the holders of shares of Series B Junior Participating Preferred Stock and the
holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Company.
(C) Holders of Series B Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions payable on the Series B Junior Participating Preferred Stock as
provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series B Junior
Participating Preferred Stock outstanding shall have been paid in full, the Company shall not:
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Junior Participating Preferred Stock;
(i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration
(ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series B Junior Participating Preferred Stock, except dividends paid ratably on the Series B
Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders
of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series B Junior Participating Preferred Stock, provided that the Company may at any time redeem, purchase
or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Company ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series B Junior Participating Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of Series B Junior Participating Preferred Stock, or any shares of
stock ranking on a parity with the Series B Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(B) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of
stock of the Company unless the Company could, under Paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such
manner.
Section 5. Reacquired Shares. Any shares of Series B Junior Participating Preferred Stock purchased or otherwise acquired by the Company in any
manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up . (i) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Company, no
distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B
Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series B Junior Participating Preferred Stock shall have received an amount
equal to $1,000 per share of Series B Junior Participating Preferred Stock, plus an amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment (the “Series B Liquidation Preference”). Following the payment of the full amount of the Series B
Liquidation Preference, no additional distributions shall be made to the holders of shares of Series B Junior Participating Preferred Stock unless, prior thereto,
the holders of shares of Common Stock shall have received an amount per share (the “Common Adjustment”) equal to the quotient obtained by dividing (i) the
Series B Liquidation Preference by (ii) one thousand (1,000) (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as stock
splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the “Adjustment Number”). Following the payment of
the full amount of the Series B Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series B Junior Participating Preferred
Stock and Common Stock, respectively, holders of Series B Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and
Common Stock, on a per share basis, respectively.
(A) In the event, however, that there are not sufficient assets available to permit payment in full of the Series B Liquidation Preference
and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series B Junior Participating Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Stock.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(B) In the event the Company shall at any time after the Rights Dividend Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of
shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a
fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number
of shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of
Series B Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to one thousand (1,000) times the aggregate amount of stock, securities, cash and/or any other property (payable in kind),
as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Company shall at any time after the Rights
Dividend Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series B Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series B Junior Participating Preferred Stock shall not be redeemable.
Section 9. Ranking. The Series B Junior Participating Preferred Stock shall rank junior to all other series of the Company’s Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise.
Section 10. Amendment. At any time when any shares of Series B Junior Participating Preferred Stock are outstanding, neither the Certificate of
Incorporation nor this Certificate of Designation shall be amended in any manner that would materially alter or change the powers, preferences or special rights
of the Series B Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority of the outstanding
shares of Series B Junior Participating Preferred Stock, voting separately as a class.
Section 11. Fractional Shares. Series B Junior Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder’s fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of
holders of Series B Junior Participating Preferred Stock.
A-4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
IN WITNESS WHEREOF, Acacia Research Corporation has caused this Certificate of Designation to be executed in its corporate name this 15 th day of
March, 2019.
ACACIA RESEARCH CORPORATION
By:
Name:
Title:
/s/ Jennifer Graff
Jennifer Graff
Secretary
A-5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit B
Certificate No. R- ________ Rights
[Form of Rights Certificate]
NOT EXERCISABLE AFTER MARCH 15, 2021 OR SUCH EARLIER DATE AS THE RIGHTS ARE REDEEMED, EXCHANGED OR TERMINATED.
THE RIGHTS ARE SUBJECT TO REDEMPTION AT THE OPTION OF THE COMPANY, AT $0.001 PER RIGHT, AND TO EXCHANGE ON THE TERMS SET
FORTH IN THE PLAN. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON (AS SUCH TERM IS
DEFINED IN THE PLAN) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS
RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR
ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE PLAN). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE
RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF THE PLAN.]
Rights Certificate
ACACIA RESEARCH CORPORATION This certifies that ______________________, or registered assigns, is the registered owner of the number of
Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Tax Benefits Preservation Plan, dated as
of March 16, 2019 (the “Plan”), between Acacia Research Corporation, a Delaware corporation (the “Company”), and Computershare Trust Company, N.A., a
federally chartered trust company, as rights agent (the “Rights Agent”), to purchase from the Company at any time prior to 5:00 P.M. (New York, New York time)
on March 15, 2021, unless the Rights are earlier redeemed or exchanged, at the office or offices of the Rights Agent designated for such purpose, or its
successors as Rights Agent, one one-thousandth of a fully paid, nonassessable share of Series B Junior Participating Preferred Stock (the “Preferred Stock”) of
the Company, at a purchase price of $12.00 per one one-thousandth of a share (the “Purchase Price”), upon presentation and surrender of this Rights Certificate
with the Form of Election to Purchase and related certificate duly executed. The number of Rights evidenced by this Rights Certificate (and the number of shares
which may be purchased upon exercise thereof) set forth above, and the Purchase Price per share set forth above, are the number and Purchase Price as of
March 16, 2019, based on the Preferred Stock as constituted at such date. The Company reserves the right to require prior to the occurrence of a Triggering
Event (as such term is defined in the Plan) that a number of Rights be exercised so that only whole shares of Preferred Stock will be issued. Capitalized terms
used in this Rights Certificate without definition shall have the meanings ascribed to them in the Plan.
Upon the occurrence of a Section 11(a)(ii) Event, if the Rights evidenced by this Rights Certificate are beneficially owned by (i) an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person, (ii) a transferee of any such Acquiring Person, Associate or Affiliate, or (iii) under certain circumstances
specified in the Plan, a transferee of a person who, after such transfer, became an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, such
Rights shall become null and void and no holder hereof shall have any right with respect to such Rights from and after the occurrence of such Section 11(a)(ii)
Event.
As provided in the Plan, the Purchase Price and the number and kind of shares of Preferred Stock or other securities that may be purchased upon the
exercise of the Rights evidenced by this Rights Certificate are subject to modification and adjustment upon the occurrence of certain events, including Triggering
Events.
This Rights Certificate is subject to all of the terms, provisions and conditions of the Plan, which terms, provisions and conditions are hereby
incorporated herein by reference and made a part hereof and to which the Plan reference is hereby made for a full description of the rights, limitations of rights,
obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Rights Certificates, which limitations of rights include the
temporary suspension of the exercisability of such Rights under the specific circumstances set forth in the Plan. Copies of the Plan are on file at the above-
mentioned office of the Company and are also available upon written request to the Company.
B-1
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
This Rights Certificate, with or without other Rights Certificates, upon surrender at the office or offices of the Rights Agent designated for such purpose,
may be exchanged for another Rights Certificate or Rights Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate
number of one one-thousandths of a share of Preferred Stock as the Rights evidenced by the Rights Certificate or Rights Certificates surrendered shall have
entitled such holder to purchase. If this Rights Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Rights
Certificate or Rights Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Plan, the Rights evidenced by this Rights Certificate may be redeemed by the Company at its option at a redemption
price of $0.001 per Right at any time prior to the earlier of the close of business on (i) the tenth (10th) Business Day following the Stock Acquisition Date (as
such time period may be extended pursuant to the Plan), and (ii) the Final Expiration Date. In addition, under certain circumstances following the Stock
Acquisition Date, the Rights may be exchanged, in whole or in part, for shares of the Common Stock, or shares of preferred stock of the Company having
essentially the same value or economic rights as such shares. Immediately upon the action of the Board of Directors of the Company authorizing any such
exchange, and without any further action or any notice, the Rights (other than Rights which are not subject to such exchange) will terminate and the Rights will
only enable holders to receive the shares issuable upon such exchange.
No fractional shares of Preferred Stock will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a share of Preferred Stock, which may, at the election of the Company, be evidenced by depositary receipts), but in lieu
thereof a cash payment will be made, as provided in the Plan. The Company, at its election, may require that a number of Rights be exercised so that only whole
shares of Preferred Stock would be issued.
No holder of this Rights Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of shares of Preferred Stock or
of any other securities of the Company that may at any time be issuable on the exercise hereof, nor shall anything contained in the Plan or herein be construed
to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give consent to or withhold consent from any corporate action, or, to receive notice of meetings or other
actions affecting stockholders (except as provided in the Plan), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by
this Rights Certificate shall have been exercised as provided in the Plan.
This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent.
B-2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
WITNESS the signature of a proper officer of the Company.
Dated as of _______________ ____, 20___
ACACIA RESEARCH CORPORATION
Countersigned:
COMPUTERSHARE TRUST COMPANY, N.A.,
as Rights Agent
By:
Name:
Title:
By:
Name:
Title:
B-3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED ____________________________________ hereby sells, assigns and transfers unto
(Please print name and address of transferee)
_____________________________________________________________________________ this Rights Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint __________________ as attorney-in-fact, to transfer the within Rights Certificate on the books of the
within named Company, with full power of substitution.
Dated _______________ ____, 20___
Signature Guaranteed:
Signature
NOTICE: The signature(s) must be guaranteed by a participant in a Medallion Signature Guarantee Program at a guarantee level acceptable to the Company’s
transfer agent.
The undersigned hereby certifies by checking the appropriate boxes that:
Certificate
(1) this Rights Certificate ☐ is ☐ is not being sold, assigned and transferred by or on behalf of a Person who is or was an Acquiring Person or an Affiliate
or Associate of any such Acquiring Person (as such terms are defined pursuant to the Plan);
(2) after due inquiry and to the best knowledge of the undersigned, it ☐ did ☐ did not acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of an Acquiring Person.
Dated _____________ ____, 20___
Signature Guaranteed:
_________________________
Signature
NOTICE: The signature(s) must be guaranteed by an eligible guarantor institution (a bank, stockbroker, savings and loan association or credit union with
membership in an approved signature guarantee medallion program) at a guarantee level satisfactory to the Rights Agent. A notary public is not sufficient.
B-4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTICE
The signature to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above is not completed in connection with a purported assignment, the Company may deem the Beneficial Owner
of the Rights evidenced by the attached Rights Certificate to be an Acquiring Person or an Affiliate or Associate thereof or a transferee of any of the foregoing
and accordingly may deem the Rights evidenced by such Rights Certificate to be null and void and not transferable or exercisable.
The signature(s) must be guaranteed by a participant in a Medallion Signature Guarantee Program at a guarantee level acceptable to the Company’s
transfer agent.
B-5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights represented by the Rights Certificate.)
To: ACACIA RESEARCH CORPORATION:
The undersigned hereby irrevocably elects to exercise __________ Rights represented by this Rights Certificate to purchase the shares of Preferred
Stock issuable upon the exercise of the Rights (or such other securities of the Company or of any other person which may be issuable upon the exercise of the
Rights) and requests that certificates for such shares be issued in the name of and delivered to:
Please insert social security
or other identifying number
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance of such Rights shall be
registered in the name of and delivered to:
Please insert social security
or other identifying number
(Please print name and address)
Dated _______________ ____, 20___
Signature Guaranteed:
Signature
NOTICE: The signature(s) must be guaranteed by an eligible guarantor institution (a bank, stockbroker, savings and loan association or credit union with
membership in an approved signature guarantee medallion program) at a guarantee level satisfactory to the Rights Agent. A notary public is not sufficient.
B-6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The undersigned hereby certifies by checking the appropriate boxes that:
Certificate
(1) the Rights evidenced by this Rights Certificate ☐ are ☐ are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined pursuant to the Plan);
(2) after due inquiry and to the best knowledge of the undersigned, it ☐ did ☐ did not acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person.
Dated _____________ ____, 20___
Signature Guaranteed:
_____________________
Signature
NOTICE: The signature(s) must be guaranteed by a participant in a Medallion Signature Guarantee Program at a guarantee level acceptable to the Company’s
transfer agent.
B-7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTICE
The signature to the foregoing Election to Purchase and Certificate must correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above is not completed in connection with a purported exercise, the Company may deem the Beneficial Owner of
the Rights evidenced by the attached Rights Certificate to be an Acquiring Person or an Affiliate or Associate thereof or a transferee of any of the foregoing and
accordingly may deem the Rights evidenced by such Rights Certificate to be null and void and not transferable or exercisable.
The signature(s) must be guaranteed by a participant in a Medallion Signature Guarantee Program at a guarantee level acceptable to the Company’s
transfer agent.
B-8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
AS SET FORTH IN THE TAX BENEFITS PRESERVATION PLAN, RIGHTS ISSUED OR TRANSFERRED TO, OR BENEFICIALLY OWNED BY, ANY
PERSON THAT IS, WAS OR BECOMES AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE TAX BENEFITS PRESERVATION PLAN),
WHETHER CURRENTLY BENEFICIALLY OWNED BY OR ON BEHALF OF SUCH PERSON OR BY ANY SUBSEQUENT HOLDER, MAY BE NULL AND
VOID
Exhibit C
SUMMARY OF TERMS
ACACIA RESEARCH CORPORATION
TAX BENEFITS PRESERVATION PLAN
Acacia Research Corporation (the “Company”) has certain U.S. federal and state income tax net operating loss
carryforwards. The Internal Revenue Code of 1986, as amended (the “Code”) limits the ability of a company to use its net
operating losses and certain other tax assets (“Tax Benefits”) to reduce potential future federal income tax obligations if
such company experiences an “ownership change,” as defined in Section 382 of the Code. A company generally
experiences such an ownership change if the percentage of its stock owned by its “5-percent shareholders,” as defined in
Section 382 of the Code, increases by more than 50 percentage points over a rolling three-year period. The Plan is
intended to act as a deterrent to any person or group, together with its affiliates and associates, being or becoming the
beneficial owner of 4.9% or more of the common stock, par value $0.001 per share, of the Company (the “Common
Stock”).
On March 12, 2019, the Board of Directors of the Company (the “Board”), authorized and declared a dividend distribution
of one right (a “Right”) for each outstanding share of the common stock of the Company with $0.001 par value (the
“Common Stock”) to stockholders of record at the close of business on March 16, 2019 (the “Record Date”). Each Right
entitles the registered holder to purchase from the Company a unit consisting of one one-thousandth of a share (a “Unit”)
of a series of Series B Junior Participating Preferred Stock, par value $0.001 (the “Preferred Stock”), at a purchase price of
$12.00 per Unit, subject to adjustment (the “Purchase Price”).
C-1
Purpose
Form of Security
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Initially, the Rights will be attached to all shares of Common Stock then outstanding, and no separate rights certificates
(“Rights Certificates”) will be distributed.
Until a Distribution Date (as defined below), (i) the Rights will be evidenced by the certificates for the Common Stock (or, in
the case of shares reflected on the direct registration system, by the notations in the book-entry account system) and will
only be transferred with such Common Stock, (ii) new Common Stock certificates issued after the Record Date will contain
a legend incorporating the Plan by reference and (iii) the surrender for transfer of any certificates for Common Stock
outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such
certificates.
As soon as practicable after a Distribution Date, Rights Certificates will be mailed to holders of record of the Common
Stock as of the close of business on a Distribution Date and, thereafter, the separate Rights Certificates alone will
represent the Rights. Except as otherwise determined by the Board, only shares of Common Stock issued prior to a
Distribution Date will be issued with the Rights.
Rights Certificates
C-2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Prior to a Distribution Date (as defined below), the Rights are not exercisable.
Subject to certain exceptions specified in the Plan, the Rights will separate from the Common Stock and a distribution date
(a “Distribution Date”) will occur upon the earlier of (i) ten (10) business days following a public announcement that a
person or group of affiliated or associated persons (an “Acquiring Person”) has acquired beneficial ownership of 4.9% or
more of the outstanding shares of Common Stock (the “Stock Acquisition Date”), other than as a result of (x) repurchases
of stock by the Company, (y) a stock dividend, stock split, reverse stock split or similar transaction or (z) certain inadvertent
actions by certain stockholders; and (ii) ten (10) business days (or such later date as the Board shall determine) following
the commencement after the date of the Plan of a tender offer or exchange offer that, if consummated, would result in a
person or group becoming an Acquiring Person. However, no person who, at the time of the first public announcement of
the Plan, beneficially owned 4.9% or more of the outstanding shares of Common Stock will be deemed an Acquiring
Person, unless and until such person acquires beneficial ownership of additional shares of Common Stock, with certain
exceptions. In addition, no person who beneficially owns 4.9% or more of the outstanding shares of Common Stock will be
deemed an Acquiring Person if the Board, in its sole discretion, so determines in light of the intent and purposes of the
Plan or other circumstances facing the Company. For purposes of the Plan, beneficial ownership is defined to include any
securities which a person would be deemed to constructively own or which otherwise would be aggregated with shares
owned by a person pursuant to Section 382 of the Code.
Pursuant to the Plan, the Company reserves the right to require prior to the occurrence of a Triggering Event (as defined
below) that, upon any exercise of Rights, a number of Rights be exercised so that only (i) whole shares of Common Stock
or (ii) whole shares of Preferred Stock and fractional shares of Preferred Stock that are integral multiples of one one-
thousandth of a share of Preferred Stock will be issued.
The Rights will expire on the earliest of (i) 5:00 P.M., New York, New York time, on March 15, 2021, (ii) the time at which
the Rights are redeemed pursuant to the Plan, (iii) the time at which the Rights are exchanged pursuant to the Plan, (iv)
the close of business on the effective date of the repeal of Section 382 or any successor statute if the Board determines
that the Plan is no longer necessary or desirable for the preservation of Tax Benefits or (v) the close of business on the
first day of a taxable year of the Company to which the Board determines that Tax Benefits may not be carried forward.
C-3
Exercise Period
Expiration
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Flip-in Trigger
Flip-over Trigger
Exchange Feature
If any person or group of affiliated or associated persons becomes an Acquiring Person, each holder of a Right (other than
Rights owned by an Acquiring Person, its affiliates, associates or certain transferees, which will become void) will thereafter
have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of
the Company (including the Preferred Stock)) having a value equal to two times the exercise price of the Right. However,
Rights are not exercisable following the occurrence of the event set forth above until such time as the Rights are no longer
redeemable by the Company as set forth below.
If, at any time following the Stock Acquisition Date, (i) the Company engages in a merger or other business combination
transaction in which the Company is not the surviving corporation, (ii) the Company engages in a merger or other business
combination transaction in which the Company is the surviving corporation and the Common Stock of the Company is
changed or exchanged, or (iii) fifty percent (50%) or more of the Company’s assets, cash flow or earning power is sold or
transferred, each holder of a Right (except Rights which have previously been voided as set forth above) shall thereafter
have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the
exercise price of the Right. The events set forth in this paragraph and in the paragraph under the heading “Flip-in Trigger”
are referred to as the “Triggering Events.”
At any time after a person or group of affiliated or associated persons becomes an Acquiring Person and prior to the
acquisition by such person or group of fifty percent (50%) or more of the outstanding Common Stock, the Board may, in
lieu of allowing Rights to be exercised, exchange the Rights (other than Rights owned by such person or group that have
become null and void), in whole or in part, for Common Stock or Preferred Stock at an exchange ratio (the “Exchange
Ratio”) of one share of Common Stock, or one one-thousandth of a share of Preferred Stock (or of a share of a class or
series of the Company’s preferred stock having equivalent rights, preferences and privileges), per Right (subject to
adjustment). Immediately upon the action of the Board ordering the exchange of any Rights, the right to exercise such
Rights will terminate and the only right thereafter of the holder of such Right will be to receive the Exchange Ratio.
The Purchase Price payable, and the number of Units of Preferred Stock or other securities or property issuable, upon
exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a dividend on the
Preferred Stock payable in shares of Preferred Stock, a subdivision or split of outstanding shares of Preferred Stock, a
combination or consolidation of Preferred Stock into a smaller number of shares through a reverse stock split or otherwise,
or reclassification of the Preferred Stock, (ii) if holders of the Preferred Stock are granted certain rights, options or warrants
to subscribe for Preferred Stock or convertible securities at less than the current market price of the Preferred Stock, or (iii)
upon the distribution to holders of the Preferred Stock of cash (excluding regular quarterly cash dividends), assets,
evidences of indebtedness or of subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments amount to at
least one percent (1%) of the Purchase Price. The Company will not be required to issue fractions of shares of Preferred
Stock (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock). In lieu of the
issuance of fractional shares of Preferred Stock that are not integral multiples of one one-thousandth of a share of Preferred
Stock, the Company may pay to the holders of Rights Certificates at the time such Rights are exercised an amount in
cash equal to the same fraction of the current market value (based on the market price of the Preferred Stock on the last
trading date prior to exercise) of one one-thousandth of a share of Preferred Stock.
Equitable Adjustments
C-4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Redemption Rights
Amendment
Anti-Takeover Effects
Miscellaneous
At any time until the earlier of (i) ten business days following the Stock Acquisition Date or (ii) March 15, 2021, the Board
may redeem all (but not less than all) the Rights at a price (subject to adjustment) of $0.001 per Right (payable in cash,
Common Stock or other consideration deemed appropriate by the Board). Immediately upon the action of the Board
ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the
$0.001 redemption price.
Prior to a Distribution Date, the provisions of the Plan may be amended or supplemented by the Company (acting through
the Board) and the Rights Agent, other than to extend the final expiration date of the Rights, without the approval of any
holders of shares of Common Stock. After a Distribution Date, the provisions of the Plan may be amended by the
Company (acting through the Board) and the Rights Agent in order to cure any ambiguity, to correct or supplement any
provision that may be defective or inconsistent with any other provisions of the Plan, to make changes that do not
adversely affect the interests of holders of Rights, or to shorten or lengthen any time period under the Plan, except that the
Plan may not be amended to extend the final expiration date of the Rights without stockholder approval. Notwithstanding
the foregoing, no amendment may be made at such time as the Rights are not redeemable, except for certain limited
technical amendments, including to cure any ambiguity or correct or supplement any provision contained in the Plan which
may be defective or inconsistent with any other provision therein.
The Rights may have certain anti-takeover effects. The Rights may cause substantial dilution to any person or group that
attempts to acquire the Company without the approval of the Board. As a result, the overall effect of the Rights may be to
render more difficult or discourage a merger, tender offer or other business combination involving the Company that is not
supported by the Board.
Until a Right is exercised, the holder thereof, as such, will have no separate rights as a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends in respect of the Rights. Although the distribution of the
Rights will not be taxable to stockholders or to the Company for U.S. federal income tax purposes, stockholders may,
depending upon the circumstances, recognize taxable income in the event that the Rights become exercisable for
Common Stock (or other consideration) of the Company or for common stock of the acquiring company or in the event of
the redemption of the Rights as set forth above.
A copy of the Plan has been or will be filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A or a
Current Report on Form 8-K. A copy of the Plan is available free of charge from the Company. This summary description of the Rights does not
purport to be complete and is qualified in its entirety by reference to the Plan, which is incorporated herein by reference.
C-5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21.1
The following is a listing of the significant subsidiaries of Acacia Research Corporation:
Acacia Global Acquisition LLC and subsidiaries
Jurisdiction of
Incorporation
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.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated March 15, 2019, 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, 2018. We hereby consent to the incorporation by reference
of said reports in the Registration Statements of Acacia Research Corporation on Forms S-8 (File No. 333-189135 and File No. 333-217878).
EXHIBIT 23.1
/s/ GRANT THORNTON LLP
Newport Beach, California
March 15, 2019
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
I, Marc W. Booth, 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 15, 2019
/s/ Marc W. Booth
Marc W. Booth
Chief Intellectual Property Officer
(Principal Executive Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
I, Kirsten L. Hoover, 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 15, 2019
/s/ Kirsten L. Hoover
Kirsten L. Hoover
Corporate Controller
(Principal Financial Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION
In connection with the Annual Report of Acacia Research Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2018, as
filed with the Securities and Exchange Commission on March 15, 2019 (the “Report”), I, Marc W. Booth, Chief Intellectual Property 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/ Marc W. Booth
Marc W. Booth
Chief Intellectual Property Officer
March 15, 2019
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.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION
In connection with the Annual Report of Acacia Research Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2018, as
filed with the Securities and Exchange Commission on March 15, 2019 (the “Report”), I, Kirsten L. Hoover, Corporate Controller 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/ Kirsten L. Hoover
Kirsten L. Hoover
Corporate Controller
March 15, 2019
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.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.