Acacia Research Corp: Form 10-Q for the period ended Mar 31, 2024

The following discussion should be read in conjunction with our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q ("Quarterly Report"). 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" to our Annual Report on Form 10-K for the year ended December 31, 2023 and elsewhere herein. For additional information, refer to the section above entitled “Cautionary Note Regarding Forward-Looking Statements.”

See the consolidated financial statements included elsewhere in the Quarterly Report for the definitions of certain capitalized terms used throughout the remainder of this Quarterly Report.

General

We are focused on acquiring and managing companies across industries – including but not limited to the industrial, energy, technology, and healthcare verticals. We focus on identifying, pursuing and acquiring businesses where we are uniquely positioned to deploy our differentiated strategy, people and processes to generate and compound shareholder value. We have a wide range of transactional and operational capabilities to realize the intrinsic value in the businesses that we acquire. Our ideal transactions include the acquisition of public or private companies, the acquisition of divisions of other companies, or structured transactions that can result in the recapitalization or restructuring of the ownership of a business to enhance value.

We are particularly attracted to complex situations where we believe value is not fully recognized, the value of certain operations are masked by a diversified business mix, or where private ownership has not invested the capital and/or resources necessary to support long-term value. Through our public market activities, we aim to initiate strategic block positions in public companies as a path to complete whole company acquisitions or strategic transactions that unlock value. We believe this business model is differentiated from private equity funds, which do not typically own public securities prior to acquiring companies, hedge funds, which do not typically acquire entire businesses, and other acquisition vehicles such Special Purpose Acquisition Companies, which are narrowly focused on completing one singular, defining acquisition.

Our focus is companies with market values in the sub-$2 billion range and particularly on businesses valued at $1billion or less. We are, however, opportunistic, and may pursue acquisitions that are larger under the right circumstance.

We believe the Company has the potential to develop advantaged opportunities due to its:

• disciplined focus on identifying opportunities where the Company can be an advantaged buyer, initiate a transaction opportunity spontaneously, avoid a traditional sale process and complete the purchase of a business, division or other asset at an attractive price;
• willingness to invest across industries and in off-the-run, often misunderstood assets that suffer from a complexity discount;
• relationships and partnership abilities across functions and sectors; and
• strong expertise in corporate governance and operational transformation

Our long-term focus positions our businesses to navigate economic cycles and allows sellers and other counterparties to have confidence that a transaction is not dependent on achieving the types of performance hurdles demanded by private equity sponsors. We consider opportunities based on the attractiveness of the underlying cash flows, without regard to a specific fund life or investment horizon.

People, Process and Performance

Our Company is built on the principles of People, Process and Performance. We have built a management team with demonstrated expertise in Research, Transactions and Execution, and Operations and Management of our targeted acquisitions. We believe our priorities and skills underpin a compelling value proposition for operating businesses, partners and future acquisition targets, including:

• the flexibility to consummate transactions using financing structures suited to the opportunity and involving third-party transaction structuring as needed;
• the ability to deliver ongoing financial and strategic support; and
• the financial capacity to maintain a long-term outlook and remain committed to a multi-year business plan.

Relationship with Starboard Value, LP

Our strategic relationship with Starboard provides us access to industry expertise, and operating partners and industry experts to evaluate potential acquisition opportunities and enhance the oversight and value creation of such businesses once acquired. Starboard has provided, and we expect will continue to provide, ready access to its extensive network of industry executives and, as part of our relationship, Starboard has assisted, and we expect will continue to assist, with sourcing and evaluating appropriate acquisition opportunities.

Intellectual Property Operations

The Company through its Patent Licensing, Enforcement and Technologies Business invests in IP and related absolute return assets and engages in the licensing and enforcement of patented technologies. Through our Patent Licensing, Enforcement and Technologies Business, operated under our wholly owned subsidiary, Acacia Research Group, LLC, and its wholly-owned subsidiaries (collectively, “ARG”), we are a principal in the licensing and enforcement of patent portfolios, with our operating subsidiaries obtaining the rights in the patent portfolio or purchasing the patent portfolio outright. While we, from time to time, partner with inventors and patent owners, from small entities to large corporations, we assume all responsibility for advancing operational expenses while pursuing a patent licensing and enforcement program, and 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.

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 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 have established a proven track record of licensing and enforcement success with over 1,600 license agreements executed as of March 31, 2024, across nearly 200 patent portfolio licensing and enforcement programs. As of March 31, 2024, we have generated gross licensing revenue of approximately $1.8 billion, and have returned $869.8 million to our patent partners. Since January 1, 2020, we have generated gross licensing revenue of approximately $228.1 million and returned approximately $80.1 million to our patent partners.

For more information related to our Intellectual Property Operations, refer to additional detailed patent business discussion below.

Industrial Operations

In October 2021, we consummated our first operating company acquisition of Printronix. Printronix is a leading manufacturer and distributor of industrial impact printers, also known as line matrix printers, and related consumables and services. The Printronix business serves a diverse group of customers that operate across healthcare, food and beverage, manufacturing and logistics, and other sectors. This mature technology is known for its ability to operate in hazardous environments. Printronix has a manufacturing site located in Malaysia and third-party configuration sites located in the United States, Singapore and Holland, along with sales and support locations around the world to support its global network of users, channel partners and strategic alliances. This acquisition was made at what we believe to be an attractive purchase price, and we are now supporting existing management in its initiative to reduce costs and operate more efficiently and in its execution of strategic partnerships to generate growth.

For more information related to our Industrial Operations, refer to the section entitled “Industrial Operations Business” below.

Energy Operations

In November 2023, we invested $10.0 million to acquire a 50.4% equity interest in Benchmark. Headquartered in Austin, Texas, Benchmark is an independent oil and gas company engaged in the acquisition, production and development of oil and gas assets in mature resource plays in Texas and Oklahoma. Benchmark is run by an experienced management team led by Chief Executive Officer Kirk Goehring, who previously served as Chief Operating Officer of both Benchmark and Jones Energy, Inc. Prior to Benchmark's acquisition of additional assets in April 2024 (as discussed below), Benchmark’s assets consisted of over 13,000 net acres primarily located in Roberts and Hemphill Counties in Texas, and an interest in over 125 wells, the majority of which are operated. Acacia made a control investment in Benchmark and intends to utilize its significant capital base to acquire predictable and shallow decline, cash-flowing oil and gas properties whose value can be enhanced via a disciplined, field optimization strategy, with risk managed through robust commodity hedges and low leverage. Through its investment in Benchmark, the Company, along with the Benchmark management team, will evaluate future growth and acquisitions of oil and gas assets at attractive valuations. The Company’s consolidated financial statements include Benchmark’s consolidated operations from November 13, 2023 through March 31, 2024. Refer to Note 1 to the consolidated financial statements elsewhere herein for additional information.

On April 17, 2024, Benchmark consummated the previously announced transactions contemplated in the Purchase and Sale Agreement. Pursuant to the Purchase Agreement, Benchmark acquired certain upstream assets and related facilities in Texas and Oklahoma, including approximately 140,000 net acres and an interest in approximately 470 operated producing wells for a purchase price of $145 million in cash, subject to customary post-closing adjustments. The Company’s contribution to Benchmark to fund its portion of the Purchase Price and related fees was $59.9 million, which was funded from cash on hand. The remainder of the Purchase Price was funded by a combination of borrowings under the Revolving Credit Facility and a cash contribution of $15.25 million from other investors in Benchmark, including McArron Partners. Following closing, the Company’s interest in Benchmark is approximately 73.5%. Refer to Note 2 to the accompanying consolidated financial statements for additional information regarding the Revolving Credit Facility.

For more information, refer to the section entitled “Energy Operations” below.

Recent Business Developments and Trends

Recapitalization

On October 30, 2022, the Company entered into a Recapitalization Agreement with Starboard, pursuant to which, among other things, the Company and Starboard agreed to enter into a series of transactions to restructure Starboard’s existing investments in the Company in order to simplify the Company’s capital structure. Subsequently, and in accordance with the terms contained in the Series A Redeemable Convertible Preferred Stock, as amended, and the Recapitalization Agreement, on July 13, 2023, Starboard completed the Preferred Stock Conversion.

Further to the terms of the Recapitalization Agreement and in accordance with the terms of the Series B Warrants, on July 13, 2023, Starboard completed the Series B Warrants Exercise, the cancellation of $60.0 million aggregate principal amount of the Senior Secured Notes held by Starboard and the receipt by the Company of aggregate gross proceeds of approximately $55.0 million.

Starboard beneficially owns 61,123,595 shares of our common stock as of May 6, 2024, representing approximately 61.2% of the common stock based on 100,021,951 shares of common stock issued and outstanding as of such date and no shares of Series A Redeemable Convertible Preferred Stock, no Series B Warrants, nor any Senior Secured Notes remain outstanding.

For a detailed description of the Series B Warrants Exercise, and the cancellations of the Senior Secured notes, the Recapitalization, the Recapitalization Agreement, and the Recapitalization Transactions, see Note 9 to the consolidated financial statements.

Change of Chief Executive Officer and Litigation Settlement

Since 2021, we have announced various changes to our Board and senior management. Changes in leadership and key management positions have inherent risks, and there are no assurances that any of our recent changes or future changes will not affect our operations and financial condition.

On September 19, 2023, the Company together with ARG amicably settled with Clifford Press, former President and Chief Executive Officer of the Company, all claims, including counterclaims filed by Mr. Press, in connection with the arbitration demand previously filed by the Company against Mr. Press. As part of the settlement, and, in exchange for, among other things, a release of claims by Mr. Press in favor of the Company and agreements by Mr. Press related to non-interference and cooperation, the Company paid to Mr. Press a total of $770,000 along with reimbursement of certain counsel fees and expenses in the amount of $480,000.

In February 2024, after over one year of service from Mr. McNulty as the Company’s Interim Chief Executive Officer, the Board appointed Mr. McNulty as Chief Executive Officer of the Company on a permanent basis. In addition, the Board expanded the size of the Board from six to seven directors and the Board appointed Mr. McNulty Jr. as a director of the Company to serve until the Company’s 2024 annual meeting of stockholders and until his successor is duly elected and qualified.

Life Sciences Portfolio

In June 2020 we acquired a portfolio of investments in 18 public and private life sciences companies (the “Life Sciences Portfolio”). That purchase was funded with a combination of available cash and capital from Starboard, for a total of approximately $282.0 million at the time of acquisition. Through the end of March 31, 2024, we have received proceeds of $564.1 million as we monetized the Life Sciences portfolio. We retained an investment in the Life Sciences Portfolio consisting of public and private securities valued at $25.7 million at March 31, 2024. On January 19, 2024, we completed the sale of our 33,023,210 shares of Arix Bioscience PLC (“Arix”) to RTW Biotech Opportunities Operating Ltd, a subsidiary of RTW Biotech Opportunities Ltd, for $57.1 million in aggregate (representing £1.43 per share at an exchange rate of 1.2087 USD/GBP). Following the completion of the share sale, we no longer own any shares of Arix. Additionally, some of the businesses in which we continue to hold an interest generate income through the receipt of royalties and milestone payments. Refer to Note 3 to the consolidated financial statements elsewhere herein for more information.

Acquisitions

In October 2021, we consummated our first operating company acquisition in connection with our acquisition of Printronix. We acquired all of the outstanding stock of Printronix, for a cash purchase price of approximately $37.0 million, which included an initial $33.0 million cash payment and a $4.0 million working capital adjustment. The Company's consolidated financial statements include Printronix's consolidated operations. Refer to Note 1 to the consolidated financial statements elsewhere herein for additional information.

In November 2023, we invested $10.0 million to acquire a 50.4% equity interest in Benchmark. Headquartered in Austin, Texas, Benchmark is an independent oil and gas company engaged in the acquisition, production and development of oil and gas assets in mature resource plays in Texas and Oklahoma.

On April 17, 2024, Benchmark consummated the previously announced Transaction contemplated in the Purchase Agreement pursuant to which Benchmark acquired certain upstream assets and related facilities in Texas and Oklahoma, including approximately 140,000 net acres and an interest in approximately 470 operated producing wells, for a purchase price of $145 million in cash, subject to customary post-closing adjustments (as described further in Note 1 to the accompanying consolidated financial statements). Following closing, the Company's interest in Benchmark is approximately 73.5%.

Business Strategy

We intend to grow our Company by acquiring additional operating businesses, energy assets and intellectual property assets. However, we may not complete any acquisitions, and any acquisitions that we complete will be costly and could negatively affect our results of operations, and dilute our stockholders’ ownership, or cause us to incur significant expense, and we may not realize the expected benefits of acquisitions.

Inflation

Historically, inflation has not had a significant impact on us or any of our subsidiaries. While insignificant to our consolidated enterprise, during the three months ended March 31, 2024, inflation for our Printronix subsidiary slowed down with only a small increase in cost of raw materials than in previous years related to its electronic and electrical and metal components. Printronix will continue to adjust its selling price as required in response to higher costs. Printronix have also implemented cost rationalization measures to combat the rising cost that is driven by inflation and currency pressures. Additionally, our Energy Operations Business may experience inflation. The oil and natural gas industry and the broader U.S. economy have experienced higher than expected inflationary pressures in recent years related to increases in oil and natural gas prices, continued supply chain disruptions, labor shortages and geopolitical instability, among other pressures.

Patent Licensing and Enforcement

Patent Litigation Trial Dates and Related Trials

As of the date of this Quarterly Report, our Patent Licensing, Enforcement and Technologies Business has no pending patent infringement case with scheduled trial dates in the next twelve months. Patent infringement trials are components of its overall patent licensing process and are one of many factors that contribute to possible future revenue generating opportunities. 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 the control of our Patent Licensing, Enforcement and Technologies Business. While scheduled trial dates provide an indication of the timing of possible future revenue generating opportunities, the trials themselves and the immediately preceding periods represent the possible future revenue generating opportunities.

Litigation and Licensing Expense

We expect patent-related legal expenses to continue to fluctuate from period to period based on the factors summarized herein, in connection with future trial dates, international enforcement, strategic patent portfolio prosecution and our current and future patent portfolio investment, prosecution, licensing and enforcement activities.

Investments in Patent Portfolios

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 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. 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.

Patent Portfolio Intake

One of the significant challenges in the intellectual property industry continues to be quality patent intake due to the challenges and complexity associated with the current patent environment.

During the three months ended March 31, 2024 as well as 2023 and 2022, we did not acquire any new patent portfolios. During 2021, we acquired one new patent portfolio consisting of Wi-Fi 6 standard essential patents. In 2020, we acquired five new patent portfolios consisting of (i) flash memory technology, (ii) voice activation and control technology, (iii)

wireless networks, (iv) internet search, advertising and cloud computing technology and (v) GPS navigation. The patents and patent rights acquired in 2021 and 2020 have estimated economic useful lives of approximately five years.

Industrial Operations Business

Our Printronix subsidiary is a worldwide leader in multi‐technology supply‐chain printing solutions for a variety of industries, including manufacturing, transportation and logistics, retail distribution, food and beverage distribution, and pharmaceutical distribution. Printronix’s line matrix printers are used for mission critical applications within these industries, including labeling and inventory management, build sheets, invoicing, manifests and bills of lading, and reporting. In China, India and other developing countries in Asia and Africa, our printers are also prevalent in the banking and government sectors. Printronix has manufacturing, configuration and/or distribution sites located in Malaysia, the United States, Singapore, China and the Netherlands, along with sales and support locations around the world to support its global network of users, channel partners, and strategic alliances. Printronix designs and manufactures printers and related consumable products for various industrial printing applications. Printers consist of hardware and embedded software and may be sold with maintenance service agreements, which are serviced by outside contractors. Consumable products include inked ribbons which are used within Printronix's printers. Printronix’s products are primarily sold through Printronix’s global network of channel partners, such as dealers and distributors, to end‐users.

Energy Operations Business

Headquartered in Austin, Texas, Benchmark is an independent oil and gas company engaged in the acquisition, production and development of oil and gas assets in mature resource plays in Texas and Oklahoma. Benchmark is run by an experienced management team led by Chief Executive Officer Kirk Goehring, who previously served as Chief Operating Officer of both Benchmark and Jones Energy, Inc. After the acquisition of Revolution, Benchmark’s existing assets consist of approximately 153,000 net acres and an interest in approximately 605 wells, the majority of which are operated. Acacia owns approximately 73.5% of Benchmark. Benchmark intends to enhance the value of such assets via a disciplined, field optimization strategy, with risk managed through robust commodity hedges and low leverage. Through its investment in Benchmark, the Company, along with the Benchmark management team, will evaluate future growth and acquisitions of oil and gas assets at attractive valuations.

Operating Activities

Intellectual Property Operations

Our Intellectual Property Operations revenues historically have fluctuated quarterly, and can vary significantly period to period, 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 from 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 annual periods.

Industrial Operations

Refer to "Industrial Operations Business" above for information related to Printronix's operating activities.

Energy Operations

Refer to "Energy Operations Business" above for information related to Benchmark's operating activities.

In addition to the following results of operations discussion, more information related to our Intellectual Property Operations, Industrial Operations and Energy Operations segment revenues, cost of revenues and cost of production may be found in Notes 2 and 16 to the consolidated financial statements.

Results of Operations

Summary of Results of Operations

(In thousands, except percentage change values)

Results of Operations - three months ended March 31, 2024 compared with the three months ended March 31, 2023

Total revenues increased $9.5 million to $24.3 million for the three months ended March 31, 2024, as compared to $14.8 million for the three months ended March 31, 2023, primarily due to an increase in our Intellectual Property Operations revenues and revenues contributed from Benchmark of $1.9 million partially offset by a decrease in Industrial Operations revenues. ARG revenues increased due to an increase in the number of license agreements executed and higher average license fees, which contributed to Intellectual Property Operations revenues increasing by $9.4 million. Refer to “Investments in Patent Portfolios” above for additional information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues. The decrease in Industrial Operations revenue of $1.8 million is due to lower units of printers sold. Refer to “Industrial Operations – Revenues” below for further detailed discussion.

Loss before income taxes was $1.3 million for the three months ended March 31, 2024, as compared to income of $11.9 million in the comparable prior period. The net decrease was comprised of the change in total revenues described above and other changes in operating expenses and other income or expense as follows:

• Inventor royalties increased $385,000, from $221,000 to $606,000 in 2024, primarily due to license agreement activity and related revenues generated in 2024. Refer to "Intellectual Property Operations – Cost of Revenues" below for further discussion.
• Contingent legal fees increased $1.3 million, from $532,000 to $1.8 million in 2024, primarily due to the change in Intellectual Property Operations revenues described above. Refer to "Intellectual Property Operations – Cost of Revenues" below for further discussion.
• Litigation and licensing expenses decreased $246,000, from $1.4 million to $1.1 million in 2024, primarily due to a net decrease in litigation support and third-party technical consulting expenses associated with ongoing litigation. Refer to "Intellectual Property Operations – Cost of Revenues" below for further discussion.
• Printronix cost of sales, engineering and development expenses, and sales and marketing expenses decreased approximately $1.6 million, from $7.3 million to $5.7 million in 2024. Refer to "Industrial Operations – Cost of Revenues" and "Operating Expenses" below for further discussion.
• Benchmark's cost of production for the first quarter of 2024 added a total of $1.3 million to our consolidated operating expenses. Refer to "Energy Operations – Cost of Production" below for further discussion.
• General and administrative expenses increased $313,000, from $12.0 million to $12.4 million in 2024, primarily due to an increase in Intellectual Property Operations variable performance-based compensation costs and an increase in parent compensation expense for share-based awards and $385,000 from our Energy Operations general and administrative costs for the first quarter of 2024, partially offset by a decrease in our Industrial Operations general and administrative costs, other general and administrative costs and severance costs. Refer to "General and Administrative Expenses" below for further detail and discussion.
• Compensation expense for share-based awards, included in general and administrative expenses above, increased $381,000, from $477,000 to $858,000 in 2024, primarily due to restricted stock and option grants issued to employees and the Board in 2023, which includes a partial offset for forfeitures.
• Unrealized loss from the change in fair value of our equity securities was $26.7 million in 2024, as compared to an unrealized gain of $3.3 million in the comparable prior period. The unrealized gain and loss were derived from our Life Sciences Portfolio and trading securities portfolio. The current period unrealized loss primarily relates to the reversal of unrealized gains previously recorded for Arix shares sold in January 2024 for realized gains. Refer to Note 3 to the consolidated financial statements elsewhere herein for additional information regarding the sale of Arix shares and refer to "Equity Securities Investments" below for further discussion.
• Realized gain from the sale of equity securities was $28.9 million in 2024, as compared to a realized loss of $1.4 million in the comparable prior period. The realized gains and losses were similarly derived from the sales activity from our Life Sciences Portfolio and trading securities portfolio. The current period realized gains primarily relates to the Arix shares sold in January 2024. Refer to Note 3 to the consolidated financial statements elsewhere herein for additional information regarding the sale of Arix shares and refer to "Equity Securities Investments" below for further discussion.
• Legal liability fee of $6.2 million in 2024 is related to the additional accrual made in connection with the AIP Matter. Refer to Note 12 to the consolidated financial statements elsewhere herein for additional information regarding the legal liability fee accrued in connection with the AIP Matter.
• Unrealized gain from the Series B warrants and the embedded derivative fair value measurements was zero in 2024, as compared to a gain of $16.7 million in the comparable prior period, primarily due to the exercise of the remaining Series B Warrants and conversion of the Series A Redeemable Convertible Preferred Stock into the Company's common stock in 2023. In 2024, no shares of Series A Redeemable Convertible Preferred Stock and no Series B Warrants remained outstanding. Refer to Notes 9 and 10 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Securities and fair value measurements.
• Interest expense on Senior Secured Notes was zero in 2024, as compared to interest expense of $900,000 in the comparable prior period, due to the cancellation of the remaining $60.0 million aggregate principal amount outstanding of the Senior Secured Notes on July 13, 2023, pursuant to the Series B Warrants Exercise. Refer to Note 9 to the consolidated financial statements elsewhere herein for additional information.
• Interest income and other, net was $4.9 million in 2024, as compared to $3.4 million in the comparable prior period, mainly due to an increase in interest income from our cash equivalents. Refer to Note 2 included in our 2023 Annual Report for additional information regarding our cash and cash equivalents and investments in equity securities.

Intellectual Property Operations

Revenues

ARG's revenue activity for the periods presented included the following:

(In thousands, except percentage change values and count totals)

For the periods presented above, the majority of the revenue agreements executed during the relevant period provided for the payment of one-time, paid-up license fees in consideration for the grant of certain IP Rights for patented technology owned by our operating subsidiaries. These rights were primarily granted on a perpetual basis, extending until the expiration of the underlying patents. Paid-up revenue increased $8.5 million due to one patent portfolio that generated license revenue in the first quarter of 2024. Recurring revenue, that provides for quarterly sales-based license fees, increased $982,000 from various on-going license arrangements.

Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our revenue arrangements and related concentrations for the periods presented herein.

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.

Cost of Revenues

(In thousands, except percentage change values)

Refer to detailed change explanations above for the three months ended March 31, 2024 and 2023 regarding cost of revenues for our Intellectual Property Operations.

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 patent partner royalty obligations. The costs associated with the forementioned obligations fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of revenue agreements executed each period and the mix of specific patent portfolios, with varying economic terms and conditions, generating revenues each period.

Litigation and licensing expenses include patent-related litigation, enforcement and prosecution costs incurred by law firms and external patent attorneys engaged on either an hourly basis or a contingent fee basis. Litigation and licensing expenses also includes third-party patent research, development, patent prosecution and maintenance fees, re-exam and inter partes reviews, consulting and other costs incurred in connection with the licensing and enforcement of patent portfolios. Refer to “Investments in Patent Portfolios” above for additional information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues.

Industrial Operations

Revenues

Printronix's net revenues for the periods presented included the following:

(In thousands, except percentage change value)

For the periods presented above, the majority of the contract agreements executed in the relevant period include various combinations of tangible products (which include printers, consumables and parts) and services. Revenue from printers and parts decreased $1.4 million due to a decrease in the number of printer units sold. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding Printronix's revenue arrangements and related concentrations. Refer to “Industrial Operations Business” above for additional information related to Printronix's operating activities.

Cost of Revenues

(In thousands, except percentage change values)

Refer to detailed change explanations above for the three months ended March 31, 2024 and 2023 regarding cost of revenues for our Industrial Operations. The decrease in Printronix's cost of revenues for the three months ended March 31, 2024 is due to change in revenue described above. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding Printronix's cost of sales.

Energy Operations

Revenues

Benchmark's revenues for the three months ended March 31, 2024 included the following (in thousands):

Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding Benchmark's revenue arrangements and related concentrations.

Cost of Production

Benchmark's cost of production for the three months ended March 31, 2024 was $1.3 million. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding Benchmark's cost of production.

Operating Expenses

(In thousands, except percentage change values)

The operating expenses table above includes the Company's general and administrative expenses by operation, Printronix's engineering and development expenses and sales and marketing expenses, and Benchmark's general and administrative costs. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding Printronix's operating expenses.

General and Administrative Expenses

A summary of the main drivers of the change in general and administrative expenses is as follows:

(In thousands)

General and administrative expenses include employee compensation and related personnel costs, including variable performance based compensation and compensation expense for share-based awards, office and facilities costs, legal and accounting professional fees, public relations, stock administration, business development, fixed asset depreciation, amortization of Industrial Operations intangible assets, state taxes based on gross receipts and other corporate costs.

The increase in variable performance-based compensation costs was primarily due to fluctuations in performance-based compensation. Compensation expense for share-based awards increased primarily due to restricted stock and option grants issued to employees and the Board of Directors in 2023 partially offset by forfeitures. The decrease in other general and administrative costs, which relates to our parent company and Intellectual Property Operations business, were primarily due to lower legal fees. The decrease in general and administrative costs of Industrial Operations is due to Printronix's initiative to reduce costs and operate more efficiently. Non-recurring employee severance costs fluctuate based on the severance arrangements of terminated employees. In addition, our Energy Operations related general and administrative costs contributed $385,000 of the increased expenses. Refer to additional general and administrative change explanations above.

Other Income/Expense

Equity Securities Investments

(In thousands, except percentage change values)

Our equity securities investments, including the Life Sciences Portfolio and trading securities portfolio, are recorded at fair value at each balance sheet date. During the first quarter of 2024, Acacia fully exited its position in Arix. Refer to periodic change explanations above. Refer to Notes 2 and 3 to the consolidated financial statements elsewhere herein for additional information regarding our investment in the Life Sciences Portfolio and other equity securities.

Our results included an unrealized loss from the change in fair value of our equity securities as compared to an unrealized gain in the comparable prior period, and included realized gain from the sale of our equity securities as compared to a realized loss in the prior year. These changes were derived from our Life Sciences Portfolio and trading securities portfolio. The current period unrealized loss and realized gain primarily relates to the sale of Arix shares.

Legal Liability Fee

(In thousands, except percentage change values)

In the first quarter of 2024, we recorded an additional accrual of $6.2 million in other income (expense) in the consolidated statements of operations in connection with the AIP Matter. Refer to Note 12 to the consolidated financial statements elsewhere herein for additional information.

Income Taxes

(In thousands, except percentage change values)

Our income tax benefit for the three months ended March 31, 2024 is primarily attributable to recognizing a benefit for losses incurred year-to-date offset by foreign withholding taxes. Our income tax expense for the three months ended March 31, 2023 is primarily attributable to foreign taxes withheld and foreign and state income taxes.

Our 2024 effective tax rate was higher than the U.S. federal statutory rate primarily due to dividends received deduction offset by foreign withholding taxes which we could not recognize as a foreign tax credit. Our 2023 effective tax rate was lower than the U.S. federal statutory rate primarily due to expiration of foreign tax credits changes in valuation allowance, as well as non-deductible items. The effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions used to estimate the effective tax rate, including factors such as expected utilization of net operating loss carryforwards, changes in or the interpretation of tax laws in jurisdictions where the Company conducts business, the Company’s expansion into new states or foreign countries, and the amount of valuation allowances against deferred tax assets.

The Company has recorded a partial valuation allowance against our net deferred tax assets as of March 31, 2024 and December 31, 2023. Refer to Notes 2 to the consolidated financial statements elsewhere herein for additional income tax information.

Liquidity and Capital Resources

General

Our foreseeable material cash requirements as of March 31, 2024, are recognized as liabilities or generally are otherwise described in Note 12, "Commitments and Contingencies," to the consolidated financial statements included elsewhere herein.

Cash requirements are generally derived from our operating and investing activities including expenditures for working capital (discussed below), human capital, business development, investments in equity securities and intellectual property, and business combinations. Our facilities lease obligations, guarantees and certain contingent obligations are further described in Note 12 to the consolidated financial statements. Historically, we have not entered into off-balance sheet financing arrangements. At March 31, 2024, we had unrecognized tax benefits, as further described in Note 2 to the consolidated financial statements.

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.

At March 31, 2024, our primary sources of liquidity were cash and cash equivalents on hand and cash generated from our operating activities.

The Company’s contribution to Benchmark to fund its portion of the Purchase Price and related fees for the Transaction was $59.9 million, which was funded from cash on hand. The remainder of the Purchase Price was funded by a combination of borrowings under the Revolving Credit Facility of approximately $82.7 million and a cash contribution of approximately $15.3 million from McArron Partners, the other investor in Benchmark. Refer to Note 2 to the accompanying consolidated financial statements for additional information regarding the Revolving Credit Facility.

Furthermore, we intend to grow our company by acquiring additional operating businesses and intellectual property assets. We expect to finance such acquisitions through cash on hand or by engaging in equity or debt financing.

Our management believes that our cash and cash equivalent balances and cash flows from operations will be sufficient to meet our cash requirements through at least twelve months from the date of this Quarterly Report 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” of our 2023 Annual Report. 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 to us 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.

Cash, Cash Equivalents and Investments

Our consolidated cash, cash equivalents and equity securities totaled $461.7 million at March 31, 2024, compared to $403.2 million at December 31, 2023.

Cash Flows Summary

The net change in cash and cash equivalents for the periods presented was comprised of the following:

(In thousands)

Cash Flows from Operating Activities

Cash flows from operating activities were comprised of the following for the periods presented:

(In thousands)

55

Cash receipts from ARG's licensees totaled $77.5 million and $4.4 million for the three months ended March 31, 2024 and 2023, respectively. Cash receipts from Printronix's customers totaled $8.5 million and $10.0 million for the three months ended March 31, 2024 and 2023, respectively. Cash receipts from Benchmark's customers totaled $1.3 million for the three months ended March 31, 2024. 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 and customers.

Our reported cash provided by operations for the three months ended March 31, 2024 was $54.8 million, compared to cash used in operations of $4.3 million in the comparable prior period. The increase in cash provided by operations was primarily due to net inflows from the total changes in assets and liabilities (refer to Working Capital discussion below), decrease in accounts receivable and inventory related sales, increase in prepaid expense and other assets, increase in accounts payable, decrease in royalties and contingent legal fees payable and by the total change in net income (described above) and related noncash adjustments.

Working Capital

Our working capital related to cash flows from operating activities at March 31, 2024 increased to $28.9 million, compared to $87.0 million at December 31, 2023, which was comprised of the changes in assets and liabilities presented above. The decrease is primarily due to change in accounts receivable and royalties and contingent legal fees payable, which is related to the timing of the cash receipts related to Intellectual Property Operations Business, partially offset by the increase in accrued loss contingency related to the AIP Matter (refer to Note 12 for additional information regarding the AIP Matter) and prepaid expenses and other assets primarily due to the prepaid expenses related to our Energy Operations Business.

Cash Flows from Investing Activities

Cash flows from investing activities were comprised of the following for the periods presented:

(In thousands)

Cash flows from investing activities for the three months ended March 31, 2024 increased to $42.0 million, as compared to cash flow of $2.8 million in the comparable prior period, primarily due to net cash inflows from our trading securities portfolio equity securities transactions and sale of Arix shares. Refer to “Other Income/Expense – Equity Securities Investments” above and Note 3 to the consolidated financial statements elsewhere herein for additional information related to Life Sciences Portfolio.

Cash Flows from Financing Activities

Cash flows from financing activities included the following for the periods presented:

(In thousands)

56

Cash flows from financing activities for the three months ended March 31, 2024 decreased to $1.8 million, as compared to cash flow of $78.0 million in the comparable prior period, primarily due to completion of the Rights Offering and Concurrent Private Rights Offering in the comparable prior period. Refer to Note 9 to the consolidated financial statements elsewhere herein for additional information.

Critical Accounting Estimates

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 involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly.

We believe that of the significant accounting policies discussed in Note 2 included in our 2023 Annual Report, the following accounting policies require our most difficult, subjective or complex assumptions, judgments and estimates:

• revenue recognition;
• estimates of crude oil and natural gas reserves;
• valuation of long-lived assets, goodwill and other intangible assets; and
• accounting for income taxes.

Our critical accounting estimates have not changed materially from those disclosed in the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2023 Annual Report. For further information on the significant accounting policies related to the revenue recognition, estimates of crude oil and natural gas reserves, valuation of long-lived assets, goodwill and other intangible assets and income taxes, refer to Note 2 to the consolidated financial statements and other related significant account policies included in our 2023 Annual Report.

Recent Accounting Pronouncements

Refer to Note 2 to consolidated financial statements included elsewhere herein.

The primary objective of our short-term investment activities is to preserve principal while concurrently maximizing the income we receive from our equity securities 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 equity securities 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 equity securities in a variety of securities. Cash equivalents are comprised of investments in U.S. treasury securities and AAA rated money market funds that invest in first-tier only securities, which primarily include domestic commercial paper and securities issued or guaranteed by the U.S. government or its agencies. 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. 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 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 March 31, 2024 and December 31, 2023, the carrying value of our equity investments in public and private companies was $59.7 million and $99.8 million, respectively.

We record our equity investments in publicly traded companies at fair value, which are subject to market price volatility. As of March 31, 2024, a hypothetical 10% adverse change in the market price of our investments in publicly traded common stock would have resulted in a decrease of approximately $2.3 million in such equity investments. We evaluate our equity 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.

Foreign Currency Exchange Risk

Although we historically have not had material foreign operations, we are also exposed to market risks related to fluctuations in foreign currency exchange rates between the U.S. dollar, and the British Pound and Euro currency exchange rates, primarily related to foreign cash accounts. As of March 31, 2024, we did not have any foreign denominated equity securities.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, 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 principal executive officer and principal financial officer concluded that, as of March 31, 2024, 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 principal executive officer and principal financial officer, 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.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error 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.

An investment in our common stock involves risks. Before making an investment decision, you should carefully consider all of the information in this Quarterly Report on Form 10-Q, including in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as our consolidated financial statements and the accompanying notes thereto. In addition, you should carefully consider the risks and uncertainties in “Item 1A. Risk Factors” in our 2023 Annual Report, as well as in our other public filings with the SEC. If any of the identified risks are realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that case, the trading price of our common stock may decline, and you could lose all or part of your investment. In addition, other risks of which we are currently unaware, or which we do not currently view as material, could have a material adverse effect on our business, financial condition, operating results and prospects. There have been no material changes to the risk factors previously reported in our 2023 Annual Report.