Acacia Research Reports Third Quarter Financial Results

Acacia Research Corporation(1) (Nasdaq: ACTG) today reported results for the three months ended September 30, 2017.

• Revenues for the third quarter of 2017 were $36,633,000, as compared to $64,658,000 in the comparable prior year quarter.
• GAAP and non-GAAP results for the third quarter of 2017 included an unrealized gain on our equity investment in Veritone (Nasdaq: VERI) totaling $158,979,000.
• GAAP net income for the third quarter of 2017 was $158,465,000, or $3.13 per diluted share, as compared to GAAP net income of $7,082,000, or $0.14 per diluted share for the comparable prior year quarter.
• Non-GAAP net income for the third quarter of 2017 was $167,610,000, or $3.31 per diluted share, as compared to non-GAAP net income of $16,093,000, or $0.32 per diluted share for the comparable prior year quarter. See below for information regarding non-GAAP financial measures.
• Cash and short-term investments totaled $158,568,000 as of September 30, 2017, as compared to $158,495,000 as of December 31, 2016.

Consolidated Financial Results - Overview

Financial highlights and operating activities during the periods presented included the following:

Third quarter 2017 revenues decreased $28,025,000, or 43%, to $36,633,000, as compared to $64,658,000 in the comparable prior year quarter. In the third quarter of 2017, one licensee individually accounted for 96% of revenues recognized. In the third quarter of 2016, two different licensees individually accounted for 60% and 27% of revenues recognized.

Third quarter 2017 inventor royalties expense decreased to zero, from $17,844,000 in the comparable prior year quarter, primarily due to no contractual inventor royalty obligations due on revenues recognized in the third quarter of 2017. Third quarter 2017 contingent legal fees expense increased 58%, as compared to a 43% decrease in related revenues, due to lower average contingent legal fee rates for the portfolios generating revenues in the third quarter of 2016, as compared to the portfolios generating revenues during the third quarter of 2017.

Third quarter 2017 total revenues, less inventor royalties expense and contingent legal fees expense was $24,460,000, or 67% of third quarter 2017 revenues, as compared to $39,105,000, or 60% of revenues recognized in the comparable prior year quarter.

Third quarter 2017 litigation and licensing expenses decreased 45%, 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. We expect litigation and licensing expenses to continue to fluctuate period to period in connection with our patent licensing and enforcement activities.

Third quarter 2017 non-cash patent amortization charges decreased 13%, reflecting a decrease in scheduled amortization on existing patent portfolios due primarily to various patent portfolio impairment charges previously recorded in the fourth quarter of 2016.

Third quarter 2017 general and administrative expenses decreased 44% due primarily to a reduction in personnel costs in connection with headcount reductions in 2016 and 2017, a decrease in variable performance based compensation costs and a decrease in corporate, general and administrative costs. Non-cash stock compensation expense increased due to the increase in the fair value of our Veritone related profits interest units, consistent with the increase in the underlying Veritone stock price during the period, and the impact of the full vesting of the profits interest units during the third quarter of 2017. Compensation expense for the profits interests is adjusted each reporting period for changes in estimated fair value, which is primarily based on the quoted market price of Veritone common stock.

Impairment charges for the third quarter of 2017 primarily reflect reductions in expected estimated future net cash flows for certain patent portfolios that management determined it would no longer allocate resources to in future periods. The impairment charges consisted of the excess of the asset’s carrying value over its estimated fair value as of the applicable measurement date.

Investment Gains (Losses)

Upon Veritone Inc.'s ("Veritone") consummation of its initial public offering on May 17, 2017 ("IPO"), Acacia's Loans and Bridge Facilities provided to Veritone, including accrued interest, were automatically converted into 1,969,186 shares of Veritone common stock. In addition, Acacia exercised its Primary Warrant, acquiring 2,150,335 shares of Veritone common stock. As of the IPO date, Acacia's investment in Veritone was recorded utilizing the fair value option, and therefore is marked to market at each balance sheet date, with related unrealized investment gains and losses reflected in the consolidated statement of operations. Total unrealized investment gains for the third quarter of 2017 totaled $158,979,000 related to the application of the fair value method of accounting to our equity investment in Veritone.

Tax expense for the three months ended September 30, 2016 primarily reflected the impact of foreign withholding taxes incurred on certain revenue agreements executed with third-party licensees domiciled in foreign jurisdictions in the third quarter of 2016.

INFORMATION ABOUT NON-GAAP FINANCIAL MEASURES

As used herein, “GAAP” refers to accounting principles generally accepted in the United States of America. To supplement our consolidated financial statements prepared and presented in accordance with GAAP, this earnings release includes financial measures, including (1) non-GAAP net income and (2) non-GAAP Earnings Per Share (“EPS”), that are considered non-GAAP financial measures as defined in Rule 101 of Regulation G promulgated by the Securities and Exchange Commission. Generally, a non-GAAP financial measure is a numerical measure of a company’s historical or future performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We use these non-GAAP, or pro forma, financial measures for internal financial and operational decision making purposes and as a means to evaluate period-to-period comparisons of the performance and results of operations of our core business and strategic partnerships. Our management believes that these non-GAAP financial measures provide meaningful supplemental information regarding the performance of our core business and strategic partnerships by excluding non-cash stock compensation charges (excluding non-cash stock compensation for Veritone investment related profits interests) and non-cash patent amortization charges (including impairment charges) that may not be indicative of our recurring core business and strategic partnerships operating results. These non-GAAP financial measures also facilitate management’s internal planning and comparisons to our historical performance and liquidity. We believe these non-GAAP financial measures are useful to investors as they allow for greater transparency with respect to key metrics used by management in its financial and operational decision making and are used by our institutional investors and the analyst community to help them analyze the performance and operational results of our core business and strategic partnerships.

Non-GAAP Net income and EPS. We define non-GAAP net income as net income calculated in accordance with GAAP, plus non-cash stock compensation charges and non-cash patent amortization charges. Non-GAAP EPS is defined as non-GAAP net income divided by the weighted average outstanding shares, on a fully-diluted basis, calculated in accordance with GAAP, for the respective reporting period.

Due to the inherent volatility in stock prices, the use of estimates and assumptions in connection with the valuation and expensing of share-based awards and the variety of award types that companies can issue under FASB ASC Topic 718, management believes that providing a non-GAAP financial measure that excludes non-cash stock compensation allows investors to make meaningful comparisons between our recurring core business and strategic partnerships operating results and those of other companies period to period, as well as providing our management with a critical tool for financial and operational decision making and for evaluating our own period-to-period recurring core business and strategic partnerships operating results. Non-cash stock compensation for our Veritone investment related profits interests are not excluded as the related liability is marked to market along with our equity investment in Veritone, and therefore, the liability will fluctuate consistent with increases or decreases in the fair value of our Veritone equity investment. Similarly, due to the variability associated with the timing and amount of patent acquisition payments and estimates inherent in the capitalization and amortization of patent acquisition costs, management believes that providing a non-GAAP financial measure that excludes non-cash patent amortization charges allows investors to make meaningful comparisons between our recurring core business and strategic partnerships operating results and those of other companies, and also provides our management with a useful tool for financial and operational decision making and for evaluating our own period-to-period recurring core business and strategic partnerships operating results.

There are a number of limitations related to the use of non-GAAP net income and EPS versus net income and EPS calculated in accordance with GAAP. For example, non-GAAP net income excludes the impact of significant non-cash stock compensation charges and non-cash patent amortization charges that are or may be recurring, and that may or will continue to be recurring for the foreseeable future. In addition, non-cash stock compensation is a critical component of our employee compensation programs and non-cash patent amortization reflects the cost of certain patent portfolio acquisitions, amortized on a straight-line basis over the estimated economic useful life of the respective patent portfolio, and may reflect the acceleration of amortization related to recoupable up-front patent portfolio acquisition costs. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP net income and EPS and evaluating non-GAAP net income and EPS in conjunction with net income and EPS calculated in accordance with GAAP.

The accompanying table below provides a reconciliation of the non-GAAP financial measures presented to the most directly comparable financial measures prepared in accordance with GAAP.

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A conference call is scheduled for today. The Acacia Research presentation will start at 1:30 p.m. Pacific Time (4:30 p.m. Eastern).

To listen to the presentation by phone, dial (800) 930-1344 for callers in the U.S. and Canada and (719) 325-4933 for international callers, both of whom will need to enter the conference ID 3196872 when prompted.

There will be a live webcast hosted by NASDAQ that will be available for 30 days and can be accessed at Acacia’s website at www.acaciaresearch.com.

ABOUT ACACIA RESEARCH CORPORATION

Founded in 1993, Acacia Research Corporation (ACTG) is the industry leader in patent licensing. An intermediary in the patent marketplace, Acacia partners with inventors and patent owners to unlock the financial value in their patented inventions. Acacia bridges the gap between invention and application, facilitating efficiency and delivering monetary rewards to the patent owner.

Information about Acacia Research Corporation and its subsidiaries is available at www.acaciaresearch.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This news release contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are based upon our current expectations and speak only as of the date hereof. Our actual results may differ materially and adversely from those expressed in any forward-looking statements as a result of various factors and uncertainties, including the ability to successfully develop licensing programs and attract new business, rapid technological change in relevantmarkets, changes in demand for current and future intellectual property rights, legislative, regulatory and competitive developments addressing licensing and enforcement of patents and/or intellectual property in general and general economic conditions. Our Annual Report on Form 10-K, recent and forthcoming Quarterly Reports on Form 10-Q, recent Current Reports on Form 8-K, and any amendments to the forgoing, and other SEC filings discuss some of the important risk factors that may affect our business, results of operations and financial condition. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

The results achieved in the most recent quarter are not necessarily indicative of the results to be achieved by us in any subsequent quarters, as it is currently anticipated that Acacia Research Corporation’s financial results will vary, and may vary significantly, from quarter to quarter. This variance is expected to result from a number of factors, including risk factors affecting our results of operations and financial condition referenced above, and the particular structure of our licensing transactions, which may impact the amount of inventor royalties and contingent legal fees expenses we incur period to period.

Business Highlights and Recent Developments(2)

Third quarter 2017 business highlights and recent developments include the following:

• Cellular Communications Equipment LLC and Parthenon Unified Memory Architecture LLC entered into an agreement with Apple Inc. to resolve patent litigation.
• Teleconference Systems LLC entered into a settlement and patent license agreement with Genband, Inc. This agreement resolved patent litigation, Civil Action No. 6:17-cv-00139, pending in the United States District Court for the Eastern District of Texas.

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