Acacia Research (ACTG) 10-Q 2023 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

OR

☐ 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

Acacia Research Corporation

(Name of registrant as specified in its charter)

Delaware	95-4405754
(State or other jurisdiction of Incorporation or Organization)	(I.R.S. Employer identification No.)

767 Third Avenue,
6th Floor
New York,
NY	10017
(Address of principal executive offices)	(Zip Code)

(332) 236-8500

(Registrant’s telephone number, including area code)

N/A

(Former name or former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock	ACTG	The Nasdaq Stock Market LLC

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 such filing requirements for the past 90 days. Yes x 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 x No ☐

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	☐	Accelerated Filer ☐	☐
Non-accelerated Filer	x	Smaller reporting company	x
		Emerging Growth Company	☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of May 8, 2023, was 58,551,798.

ACACIA RESEARCH CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

March 31, 2023

TABLE OF CONTENTS

		Page
	CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	1
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of March 31, 2023 (Unaudited) and December 31, 2022	3
	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and 2022	4
	Unaudited Condensed Consolidated Statements of Series A Redeemable Convertible Preferred Stock and Stockholders' Equity for the Three Months Ended March 31, 2023 and 2022	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	52
Item 4.	Controls and Procedures	52
PART II.	OTHER INFORMATION	54
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	55
Item 6.	Exhibits	55

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the three months ended March 31, 2023 (this "Report") contains forward-looking statements within the meaning of the federal securities laws. To the extent that statements in this Quarterly Report are not recitations of historical fact, such statements constitute forward-looking statements, which, by definition, involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Throughout this Report, we have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecasts,” “goal,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” or other forms of these words or similar words or expressions or the negative thereof, although not all forward-looking statements contain these terms. Forward-looking statements include statements regarding, among other things, our business, operating, development, investment and finance strategies, our relationship with Starboard Value LP, the Recapitalization (as defined below), acquisition and development activities, financial results of our acquired businesses, intellectual property ("IP"), licensing and enforcement activities, other related business activities, capital expenditures, earnings, litigation, regulatory matters, markets for our services, liquidity and capital resources and accounting matters. Forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition, results of operations or performance to differ materially from our historical results or those expressed or implied in any forward-looking statement contained herein. All of our forward-looking statements include assumptions underlying or relating to such statements and are subject to numerous factors that present considerable risks and uncertainties, including, without limitation:

•Any inability to acquire additional operating businesses and intellectual property assets;

•Costs related to acquiring additional operating businesses and intellectual property;

•Any inability to retain employees and management teams of our operating businesses;

•Any inability to successfully run our platform and integrate our operating businesses;

•Facts that are not revealed in the due diligence process in connection with new acquisitions;

•Any determination that we may be deemed to be an investment company under the Investment Company Act of 1940, as amended;

•Disruptions or uncertainty caused by changes to the Company's management team and board of directors;

•Disruptions or delays caused by outsourcing services to third-party service providers;

•Changes in legislation, regulations, and rules associated with patent and tax law;

•Cybersecurity incidents, including cyberattacks, breaches of security and unauthorized access to or disclosure of confidential information;

•Delays in, or any failure to complete, the Recapitalization;

•Fluctuations in patent-related legal expenses;

•Findings by any relevant patent office that our patents are invalid or unenforceable;

•Our ability to retain legal counsel in connection with enforcement of our intellectual property;

•Delays in successful prosecution, enforcement, and licensing of our patent portfolio;

•Any inability of our operating businesses to protect their intellectual property;

•Any inability of our operating businesses to develop new products and enhance existing products;

•The loss of any Printronix major customers that generates a large portion of its revenue or the decrease in demand for Printronix' products;

•Any supply chain interruption or inability to manage inventory levels of our operating businesses;

•Printronix's inability to perform satisfactorily under service contracts; and

•Events that are outside of our control, such as political conditions and unrest in international markets, terrorist attacks, malicious human acts, hurricanes and other national disasters, pandemics, including the COVID-19 pandemic, and other similar events.

We have based our forward-looking statements on management’s current expectations and projections about trends affecting our business and industry and other future events. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. For additional information related to the risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the forward-looking statements described in this Report, refer to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the section entitled “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”), on March 17, 2023 (our “Annual Report”), as well as in our other public filings with the SEC. In addition, actual results may differ materially as a result of additional risks and uncertainties of which we are currently unaware or which we do not currently view as material to our business.

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The information contained in this Report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the SEC. You should read this Report in its entirety, together with the documents that we file as exhibits to this Report and the documents that we incorporate by reference into this Report, with the understanding that our future results may be materially different from what we currently expect. The forward-looking statements we make speak only as of the date on which they are made. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law or the rules of The Nasdaq Stock Market LLC. If we do update or correct any forward-looking statements, investors should not conclude that we will make additional updates or corrections.

We qualify all of our forward-looking statements by these cautionary statements.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ACACIA RESEARCH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

	March 31, 2023		December 31, 2022
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	364,227	$	287,786
Equity securities	60,724		61,608
Equity securities without readily determinable fair value	5,816		5,816
Equity method investments	30,934		30,934
Accounts receivable, net	8,666		8,231
Inventories	14,725		14,222
Prepaid expenses and other current assets	20,099		19,388
Total current assets	505,191		427,985
Property, plant and equipment, net	3,275		3,537
Goodwill	7,541		7,541
Other intangible assets, net	33,624		36,658
Leased right-of-use assets	1,614		2,005
Other non-current assets	5,359		5,202
Total assets	$	556,604	$	482,928
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	8,413	$	6,036
Accrued expenses and other current liabilities	12,694		14,058
Accrued compensation	5,490		4,737
Royalties and contingent legal fees payable	1,060		699
Deferred revenue	1,206		1,229
Senior secured notes payable	61,350		60,450
Total current liabilities	90,213		87,209
Deferred revenue, net of current portion	520		568
Series A embedded derivative liabilities	11,812		16,835
Series B warrant liabilities	73,152		84,780
Long-term lease liabilities	1,566		1,873
Deferred income tax liabilities, net	502		742
Other long-term liabilities	1,674		1,675
Total liabilities	179,439		193,682
Commitments and contingencies
Series A redeemable convertible preferred stock, par value $0.001 per share; stated value $100 per share; 350,000 shares authorized, issued and outstanding as of March 31, 2023 and December 31, 2022; aggregate liquidation preference of $35,000 as of March 31, 2023 and December 31, 2022	21,478		19,924
Stockholders' equity:
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; no shares issued or outstanding	—		—
Common stock, par value $0.001 per share; 300,000,000 shares authorized; 58,551,798 and 43,484,867 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	58		43
Treasury stock, at cost, 16,183,703 shares as of March 31, 2023 and December 31, 2022	(98,258)		(98,258)
Additional paid-in capital	740,187		663,284
Accumulated deficit	(297,342)		(306,789)
Total Acacia Research Corporation stockholders' equity	344,645		258,280
Noncontrolling interests	11,042		11,042
Total stockholders' equity	355,687		269,322
Total liabilities, redeemable convertible preferred stock, and stockholders' equity	$	556,604	$	482,928

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ACACIA RESEARCH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

	Three Months Ended March 31,
		2023		2022
Revenues:
Intellectual property operations		$	4,176	$	2,615
Industrial operations		10,627		10,892
Total revenues		14,803		13,507
Costs and expenses:
Cost of revenues - intellectual property operations		4,738		4,564
Cost of sales - industrial operations		5,220		4,192
Engineering and development expenses - industrial operations		216		190
Sales and marketing expenses - industrial operations		1,913		2,016
General and administrative expenses		12,040		11,053
Total costs and expenses		24,127		22,015
Operating loss		(9,324)		(8,508)
Other income (expense):
Equity securities investments:
Change in fair value of equity securities		3,343		(172,203)
(Loss) gain on sale of equity securities		(1,361)		66,876
Net realized and unrealized gain (loss)		1,982		(105,327)
Change in fair value of the Series A and B warrants and embedded derivatives		16,651		28,098
Gain (loss) on foreign currency exchange		80		(813)
Interest expense on Senior Secured Notes		(900)		(2,601)
Interest income and other, net		3,441		1,007
Total other income (expense)		21,254		(79,636)
Income (loss) before income taxes		11,930		(88,144)
Income tax (expense) benefit		(2,483)		14,878
Net income (loss) including noncontrolling interests in subsidiaries		9,447		(73,266)
Net income attributable to noncontrolling interests in subsidiaries		—		—
Net income (loss) attributable to Acacia Research Corporation		$	9,447	$	(73,266)
Income (loss) per share:
Net income (loss) attributable to common stockholders - Basic		$	5,958	$	(75,117)
Weighted average number of shares outstanding - Basic		47,971,931		46,544,313
Basic net income (loss) per common share		$	0.12	$	(1.61)
Net loss attributable to common stockholders - Diluted		$	(6,496)	$	(75,117)
Weighted average number of shares outstanding - Diluted		89,067,821		46,544,313
Diluted net loss per common share		$	(0.07)	$	(1.61)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ACACIA RESEARCH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

(In thousands, except share data)

	Three Months Ended March 31, 2023
	Series A Redeemable Convertible Preferred Stock			Common Stock			Treasury Stock		Additional Paid-in Capital		Accumulated Deficit		Noncontrolling Interests in Operating Subsidiaries		Total Stockholders' Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2022	350,000	$	19,924	43,484,867	$	43	$	(98,258)	$	663,284	$	(306,789)	$	11,042	$	269,322
Net income including    noncontrolling interests in    subsidiaries	—	—		—	—		—		—		9,447		—		9,447
Accretion of Series A    Redeemable Convertible    Preferred Stock to    redemption value	—	1,554		—	—		—		(1,554)		—		—		(1,554)
Dividend on Series A    Redeemable Convertible    Preferred Stock	—	—		—	—		—		(700)		—		—		(700)
Issuance of common stock from the Rights Offering	—	—		15,068,753	15		—		79,096		—		—		79,111
Issuance of common stock for    vesting of restricted stock    units	—	—		110,541	—		—		—		—		—		—
Issuance of common stock for    unvested restricted    stock awards, net of    forfeitures	—	—		(17,500)	—		—		—		—		—		—
Shares withheld related to net    share settlement of    share-based awards	—	—		(94,863)	—		—		(416)		—		—		(416)
Compensation expense for    share-based awards	—	—		—	—		—		477		—		—		477
Balance at March 31, 2023	350,000	$	21,478	58,551,798	$	58	$	(98,258)	$	740,187	$	(297,342)	$	11,042	$	355,687

	Three Months Ended March 31, 2022
	Series A Redeemable Convertible Preferred Stock			Common Stock			Treasury Stock		Additional Paid-in Capital		Accumulated Deficit		Noncontrolling Interests in Operating Subsidiaries		Total Stockholders' Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2021	350,000	$	14,753	48,807,748	$	49	$	(47,281)	$	648,389	$	(181,724)	$	11,042	$	430,475
Net loss including    noncontrolling interests in    subsidiaries	—	—		—	—		—		—		(73,266)		—		(73,266)
Accretion of Series A    Redeemable Convertible    Preferred Stock to    redemption value	—	1,151		—	—		—		(1,151)		—		—		(1,151)
Dividend on Series A    Redeemable Convertible    Preferred Stock	—	—		—	—		—		(700)		—		—		(700)
Issuance of common stock for    vesting of restricted stock    units	—	—		15,000	—		—		—		—		—		—
Issuance of common stock for    unvested restricted    stock awards, net of    forfeitures	—	—		292,667	—		—		—		—		—		—
Shares withheld related to net    share settlement of    share-based awards	—	—		(18,770)	—		—		(72)		—		—		(72)
Compensation expense for    share-based awards	—	—		—	—		—		1,174		—		—		1,174
Repurchase of common stock	—	—		(2,341,715)	(2)		(10,986)		—		—		—		(10,988)
Balance at March 31, 2022	350,000	$	15,904	46,754,930	$	47	$	(58,267)	$	647,640	$	(254,990)	$	11,042	$	345,472

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ACACIA RESEARCH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Three Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net income (loss) including noncontrolling interests in subsidiaries	$	9,447	$	(73,266)
Adjustments to reconcile net income (loss) including noncontrolling interests in subsidiaries to net cash used in    operating activities:
Depreciation and amortization	3,381		3,369
Amortization of debt discount and issuance costs	—		51
Change in fair value of Series A redeemable convertible preferred stock embedded derivatives	(5,023)		(3,942)
Change in fair value of Series A warrants	—		(896)
Change in fair value of Series B warrants	(11,628)		(23,260)
Compensation expense for share-based awards	477		1,174
(Gain) loss on foreign currency exchange	(80)		813
Change in fair value of equity securities	(3,343)		172,203
Gain (loss) on sale of equity securities	1,361		(66,876)
Deferred income taxes	(240)		(15,039)
Changes in assets and liabilities:
Accounts receivable	(451)		318
Inventories	(503)		(1,084)
Prepaid expenses and other assets	(391)		(1,246)
Accounts payable and accrued expenses	2,355		4,261
Royalties and contingent legal fees payable	360		(161)
Deferred revenue	(71)		418
Net cash used in operating activities	(4,349)		(3,163)
Cash flows from investing activities:
Purchases of equity securities	(5,166)		(92,877)
Sales of equity securities	8,032		102,842
Purchases of property and equipment	(83)		(34)
Net cash provided by investing activities	2,783		9,931
Cash flows from financing activities:
Repurchase of common stock	—		(10,988)
Paydown of Senior Secured Notes	—		(15,000)
Dividend on Series A Redeemable Convertible Preferred Stock	(700)		(700)
Taxes paid related to net share settlement of share-based awards	(416)		(72)
Proceeds from Rights Offering	79,111		—
Net cash provided by (used in) financing activities	77,995		(26,760)
Effect of exchange rates on cash and cash equivalents	12		—
Increase (decrease) in cash and cash equivalents	76,441		(19,992)
Cash and cash equivalents, beginning	287,786		309,361
Cash and cash equivalents, ending	$	364,227	$	289,369
Supplemental schedule of cash flow information:
Income taxes paid	147		2
Noncash investing and financing activities:
Accrued patent costs	6,000		—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

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ACACIA RESEARCH CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

Acacia Research Corporation (the “Company,” "Acacia," “we,” “us,” or "our") is an opportunistic capital platform that purchases businesses based on the differentials between public and private market valuations. We use 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.

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

We operate our business based on three key principles of People, Process and Performance and have built a management team with demonstrated expertise in Research, Transactions and Execution, and Operations and Management of our targeted acquisitions.

We utilized these skill sets and resources to acquire a portfolio of equity securities of public and private life science businesses, or the “Life Sciences Portfolio,” in June 2020. As of March 31, 2023, we have monetized a majority of the portfolio while retaining an interest in a number of operating businesses, including a controlling interest in one of the companies in the portfolio. Further, some of the businesses in which we continue to hold an interest generate income through the receipt of royalties. Refer to Note 3 for additional information.

Relationship with Starboard Value, LP

Our strategic relationship with Starboard Value, LP (“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. Refer to Note 8 for additional information.

Recapitalization

On October 30, 2022, the Company entered into a Recapitalization Agreement (the “Recapitalization Agreement”) with Starboard and certain funds and accounts affiliated with, or managed by, Starboard (collectively, the “Investors”), pursuant to which, among other things, the Company and Starboard agreed to enter into a series of transactions (the “Recapitalization”) to restructure Starboard’s existing investments in the Company in order to simplify the Company’s capital structure. Under the Recapitalization Agreement, the Company and Starboard agreed to take certain actions in connection with the Recapitalization. Refer to Note 8 for a detailed description of the Recapitalization and the actions taken and contemplated to be taken in connection therewith.

Intellectual Property Operations – Patent Licensing, Enforcement and Technologies Business

The Company invests in intellectual property 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 Acacia Research Group, LLC and its wholly-owned subsidiaries ("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. When applicable, we 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. ARG generates

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revenues and related cash flows from the granting of IP rights for the use of patented technologies that its operating subsidiaries control or own.

Our Patent Licensing, Enforcement and Technologies Business depends upon the identification and investment in new patents, inventions and companies that own IP through relationships with inventors, universities, research institutions, technology companies and others. If ARG’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 the three months ended March 31, 2023 and the year ended December 31, 2022, ARG did not obtain control of any new patent portfolios.

Industrial Operations Acquisition

On October 7, 2021, we consummated our first operating company acquisition of Printronix Holding Corporation and subsidiaries (“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 execution of strategic partnerships to generate growth.

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.

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 consolidated financial statements include the accounts of Acacia and its wholly and majority-owned and controlled subsidiaries. All 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 Consolidated Statements of Series A Redeemable Convertible Preferred Stock and Stockholders’ Equity for noncontrolling interests activity.

In 2020, in connection with the transaction with Link Fund Solutions Limited, which is more fully described in Note 3, the Company acquired equity securities of Malin J1 Limited (“MalinJ1”). MalinJ1 is included in the Company’s consolidated financial statements because the Company, through its interest in the equity securities of MalinJ1, has the ability to control the operations and activities of MalinJ1. Viamet HoldCo LLC, a Delaware limited liability company and wholly-owned subsidiary of Acacia, is the majority shareholder of MalinJ1.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures required by U.S. GAAP in annual financial statements have been omitted or condensed in accordance with quarterly reporting requirements of the Securities and Exchange Commission ("SEC").

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These interim unaudited condensed consolidated financial statements and notes hereto should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2022, as reported by Acacia in its Annual Report on Form 10-K filed with the SEC on March 17, 2023, as well as in our other public filings with the SEC. The condensed consolidated interim financial statements of Acacia include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of Acacia's consolidated financial position as of March 31, 2023, and results of operations and its cash flows for the interim periods presented. The consolidated results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the entire fiscal year.

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.

Accounts Receivable and Allowance for Credit Losses

Intellectual Property Operations

ARG 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 credit losses 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 sheets and a charge to general and administrative expenses in the consolidated 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 credit losses established as of March 31, 2023 and December 31, 2022.

Industrial Operations

Printronix's accounts receivable are recorded at the invoiced amount and do not bear interest. Printronix performs initial and periodic credit evaluations on customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness. The allowance for credit losses is determined by evaluating individual customer receivables, based on contractual terms, reviewing the financial condition of customers, and from the historical experience of write-offs. Receivable losses are charged against the allowance when management believes the account has become uncollectible. Subsequent recoveries, if any, are credited to the allowance. As of March 31, 2023 and December 31, 2022, Printronix's combined allowance for credit losses and allowance for sales returns was $62,000 and $22,000, respectively.

Long-Term Notes Receivable

On October 13, 2021, Adaptix Limited issued £2.95 million, approximately $4.0 million at the exchange rate on October 13, 2021, in limited unsecured notes due in 2026 to Radcliffe 2 Ltd., a subsidiary of Merton Healthcare Holdco II LLC. The interest rate on the notes is 8.0% per year. During the three months ended March 31, 2023 and 2022, we recorded $71,000 and $78,000, respectively, in interest income related to the notes. As of March 31, 2023 and December 31, 2022, the receivable including interest was $4.1 million and $3.9 million, respectively, and is included in other non-current assets in the consolidated balance sheets.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the acquisition price of a business over the fair value of identified net assets of that business. We evaluate goodwill for impairment annually in the fourth quarter and on an interim basis if the facts and circumstances lead us to believe that more-likely-than-not there has been an impairment. When evaluating goodwill for impairment, we estimate the fair value of the reporting unit. Several methods may be used to estimate a reporting unit’s fair value, including, but not limited to, discounted projected future net earnings or net cash flows and multiples of earnings. If

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the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, then the excess is charged to earnings as an impairment loss. Refer to Note 6 for additional information.

ARG's patents include the cost of patents or patent rights acquired from third-parties or obtained in connection with business combinations. ARG's patent costs are amortized utilizing the straight-line method over their estimated useful lives, ranging from five to ten years. Refer to Note 6 for additional information.

Printronix's intangible assets consist of trade names and trademarks, patents and customer and distributor relationships. These definite-lived intangible assets, at the time of acquisition, are recorded at fair value and are stated net of accumulated amortization. Printronix currently amortizes the definite-lived intangible assets on a straight-line basis over their estimated useful lives of seven years. Refer to Note 6 for additional information.

Leases

The Company’s leases primarily consist of facility leases which are classified as operating leases. The Company assesses whether an arrangement contains a lease at inception. The Company recognizes a lease liability to make contractual payments under all leases with terms greater than twelve months and a corresponding right-of-use asset, representing its right to use the underlying asset for the lease term. Lease expense is recognized on a straight-line basis over the lease term. Refer to Note 11 for additional information.

Impairment of Long-lived Assets

The Company reviews long-lived assets, patents and other 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 in an amount 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. Fair value is generally estimated using the “Income Approach,” focusing on the estimated future net income-producing capability of the patent portfolios over their 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. Refer to Note 6 for additional information.

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 in the consolidated balance sheets. Refer to Note 12 for additional information.

Engineering and Development

Engineering and development costs are expensed as incurred and consist of labor, supplies, consulting and other costs related to developing and improving Printronix's products.

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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 currently one to four years. The fair value of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) are 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. Forfeitures are accounted for as they occur. Refer to Note 13 for additional information.

Foreign Currency Gains and Losses

In connection with our Printronix business, the U.S. dollar is the functional currency for all of the foreign subsidiaries. Transactions that are recorded in currencies other than the U.S. dollar may result in transaction gains or losses at the end of the reporting period and when trade receipts and payments occur. For these subsidiaries, the assets and liabilities have been re-measured at the end of the period for changes in exchange rates, except inventories and property, plant and equipment, which have been remeasured at historical average rates. The consolidated statements of operations have been reevaluated at average rates of exchange for the reporting period, except cost of sales and depreciation, which have been reevaluated at historical rates. Although Acacia historically has not had material foreign operations, Acacia is exposed 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, a note receivable and certain equity security investments. All foreign currency exchange activity is recorded in the 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. When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made.

Under U.S. GAAP, 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.

The provision for income taxes for interim periods is determined using an estimate of Acacia's annual effective rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, Acacia updates the estimate of the annual effective tax rate, and if the estimated tax rate changes, a cumulative adjustment is recorded.

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 income tax expense for the three months ended March 31, 2022 is primarily comprised of the impact of a partial valuation allowance recorded against our net deferred tax assets.

The Company's effective tax rates were 20% and 17% for the three months ended March 31, 2023 and 2022, respectively. 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. Our 2022 effective tax rate was lower than the U.S. federal statutory rate primarily due to the change in valuation allowance and 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, 2023 and December 31, 2022. These assets primarily consist of foreign tax credits and net operating loss carryforwards.

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At March 31, 2023 and December 31, 2022, the Company had total unrecognized tax benefits of approximately $760,000. At March 31, 2023 and December 31, 2022, $760,000 of unrecognized tax benefits were recorded in other long-term liabilities. No interest and penalties have been recorded for the unrecognized tax benefits for the periods presented. At March 31, 2023, if recognized, $760,000 of tax benefits would impact the Company’s effective tax rate subject to valuation allowance. The Company does not expect that the liability for unrecognized benefits will change significantly within the next 12 months. Acacia recognizes interest and penalties with respect to unrecognized tax benefits in income tax expense (benefit). 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.

Recent Accounting Pronouncements

Recently Adopted

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” to replace the incurred loss methodology with an expected credit loss model that requires consideration of a broader range of information to estimate credit losses over the lifetime of the asset, including current conditions and reasonable and supportable forecasts in addition to historical loss information, to determine expected credit losses. Pooling of assets with similar risk characteristics and the use of a loss model are also required. Also, in April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” to clarify the inclusion of recoveries of trade receivables previously written off when estimating an allowance for credit losses. The Company adopted the update on January 1, 2023. The adoption of the update did not have an impact on the Company's financial position, results of operations or financial statement disclosures.

In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” to require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with “Revenue from Contracts with Customers (Topic 606).” At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The Company adopted the update on January 1, 2023. The adoption of the update did not have an impact on the Company's financial position, results of operations or financial statement disclosures.

Not Yet Adopted

In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” to simplify the accounting for convertible instruments by eliminating large sections of the existing guidance in this area. It also eliminates several triggers for derivative accounting, including a requirement to settle certain contracts by delivering registered shares. This update reduces the number of accounting models for convertible instruments, revises the derivatives scope exception, and provides targeted improvements for earnings per share. Upon adoption, companies have the option to apply a modified or full retrospective transition approach. The amendments in this update will currently be effective for the Company on January 1, 2024, with early adoption permitted. Management is currently evaluating the impact that the amendments in this update may have on the Company’s consolidated financial statements.

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3. EQUITY SECURITIES

Equity securities for the periods presented were comprised of the following:

Security Type	Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
	(In thousands)
March 31, 2023:
Equity securities - Life Sciences Portfolio	$	28,498	$	15,337	$	(562)	$	43,273
Equity securities - other common stock	30,659		2,585		(15,793)		17,451
Total	$	59,157	$	17,922	$	(16,355)	$	60,724
December 31, 2022:
Equity securities - Life Sciences Portfolio	$	28,498	$	14,815	$	(617)	$	42,696
Equity securities - other common stock	34,885		4		(15,977)		18,912
Total	$	63,383	$	14,819	$	(16,594)	$	61,608

Equity Securities Portfolio Investment

On April 3, 2020, the Company entered into an Option Agreement with LF Equity Income Fund, which included general terms through which the Company was provided the option to purchase the Life Sciences Portfolio for an aggregate purchase price of £223.9 million, approximately $277.5 million at the exchange rate on April 3, 2020.

For accounting purposes, the total purchase price of the Life Sciences Portfolio was allocated to the individual equity securities based on their individual fair values as of April 3, 2020, in order to establish an appropriate cost basis for each of the acquired securities. The fair values of the public company securities were based on their quoted market price. The fair values of the private company securities were estimated based on recent financing transactions and secondary market transactions and factoring in a discount for the illiquidity of these securities. Included in our consolidated balance sheets as of March 31, 2023 and December 31, 2022, the total fair value of the remaining Life Sciences Portfolio investment was $69.0 million and $68.4 million, respectively.

As part of the Company’s acquisition of equity securities in the Life Sciences Portfolio, the Company acquired an equity interest in Arix Bioscience PLC (“Arix”), a public company listed on the London Stock Exchange. As of March 31, 2023 and December 31, 2022, the Company's investment in Arix was approximately 26%. In addition, two members of the Company's Board of Directors (the “Board”) have seats on the board of Arix, which is currently made up of five board members. Although the Company is presumed to have significant influence over operating and financial policies of Arix, we have elected to account for the investment under the fair value method. To date, the Company has not received any dividends from Arix. As of March 31, 2023, this investment does not meet the significance thresholds for additional summarized income statement disclosures, as defined by the SEC. As of March 31, 2023, the aggregate carrying amount of our Arix investment was $43.3 million, and is included in equity securities in the consolidated balance sheet.

The following unrealized and realized gains or losses from our investment in the Life Sciences Portfolio are recorded in the change in fair value of equity securities and gain or loss on sale of equity securities, respectively, in the consolidated statements of operations:

	Three Months Ended March 31,
		2023		2022
		(In thousands)
Change in fair value of equity securities of public    companies		$	577	$	(171,640)
Gain on sale of equity securities of public    companies		—		59,488
Net realized and unrealized gain (loss)		$	577	$	(112,152)

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As part of the Company’s acquisition of equity securities in the Life Sciences Portfolio, the Company acquired a majority interest in the equity securities of MalinJ1 (63.9%), which were transferred to the Company on December 3, 2020. The acquisition of the MalinJ1 securities was accounted for as an asset acquisition as there was a change of control of MalinJ1 and substantially all of the fair value of the assets acquired was concentrated in a single identifiable asset, an investment in Viamet Pharmaceuticals Holdings, LLC (“Viamet”). As such, the cost basis of the MalinJ1 securities was used to allocate to the Viamet investment, the single identifiable asset, and no goodwill was recognized. The Company through its consolidation of MalinJ1 accounts for the Viamet investment under the equity method as MalinJ1 owns 41.0% of outstanding shares of Viamet. As of March 31, 2023 and 2022, this investment does not meet the significance thresholds for additional summarized income statement disclosures, as defined by the SEC. During the three months ended March 31, 2023 and 2022, our consolidated earnings on equity investment was zero. No distributions were received during the three months ended March 31, 2023 and 2022.

4. INVENTORIES

Printronix's inventories consisted of the following:

	March 31, 2023		December 31, 2022
	(In thousands)
Raw materials	$	2,096	$	4,335
Subassemblies and work in process	5,277		3,045
Finished goods	7,773		7,340
	15,146		14,720
Inventory reserves	(421)		(498)
Total inventories	$	14,725	$	14,222

5. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consisted of the following:

	March 31, 2023		December 31, 2022
	(In thousands)
Machinery and equipment	$	3,140	$	3,057
Furniture and fixtures	577		585
Computer hardware and software	663		660
Leasehold improvements	1,019		1,025
	5,399		5,327
Accumulated depreciation and amortization	(2,124)		(1,790)
Property, plant and equipment, net	$	3,275	$	3,537

Total depreciation and amortization expense in the consolidated statements of operations was $347,000 and $335,000 for the three months ended March 31, 2023 and 2022, respectively. Our Intellectual Property Operations and parent company include depreciation and amortization in general and administrative expenses. For the three months ended March 31, 2023, our Industrial Operations allocated depreciation and amortization, totaling $313,000, to all applicable operating expense categories, including cost of sales of $111,000. For the three months ended March 31, 2022, our Industrial Operations allocated depreciation and amortization, totaling $308,000, to all applicable operating expense categories, including cost of sales of $104,000.

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6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Changes in the carrying amount of goodwill consisted of the following:

	March 31, 2023		December 31, 2022
	(In thousands)
Beginning balance	$	7,541	$	7,470
Acquisition of business	—		—
Tax adjustment	—		71
Impairment losses	—		—
Ending balance	$	7,541	$	7,541

The ending balance of goodwill includes no accumulated impairment losses to date. All goodwill is allocated to our Industrial Operations segment, refer to Note 1 for additional information related to the Printronix acquisition.

Other intangible assets, net consisted of the following:

	March 31, 2023
	Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net Book Value
		(In thousands)
Patents:
Intellectual property operations	6 years	$	331,402	$	(307,344)	$	24,058
Industrial operations	7 years	3,400		(718)		2,682
Total patents		334,802		(308,062)		26,740
Customer relationships - industrial operations	7 years	5,300		(1,121)		4,179
Trade name and trademarks - industrial operations	7 years	3,430		(725)		2,705
Total		$	343,532	$	(309,908)	$	33,624

	December 31, 2022
	Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net Book Value
		(In thousands)
Patents:
Intellectual property operations	6 years	$	331,403	$	(304,744)	$	26,659
Industrial operations	7 years	3,400		(597)		2,803
Total patents		334,803		(305,341)		29,462
Customer relationships - industrial operations	7 years	5,300		(931)		4,369
Trade name and trademarks - industrial operations	7 years	3,430		(603)		2,827
Total		$	343,533	$	(306,875)	$	36,658

Total other intangible asset amortization expense in the consolidated statements of operations was $3.0 million for the three months ended March 31, 2023 and 2022. The Company did not record charges related to impairment of other intangible assets for the three months ended March 31, 2023 and 2022. There was no accelerated amortization of other intangible assets for the three months ended March 31, 2023 and 2022. Intellectual Property Operations amortization of patents is expensed in cost of revenues and Industrial Operations amortization is expensed in general and administrative expenses.

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The following table presents the scheduled annual aggregate amortization expense (in thousands):

Years Ending December 31,
Remainder of 2023	$	9,035
2024	10,692
2025	8,347
2026	2,483
2027	1,733
Thereafter	1,334
Total	$	33,624

During the year ended December 31, 2022, ARG entered into an agreement granting ARG the exclusive option to acquire all rights to license and enforce a patent portfolio and all future patents and patent applications, and incurred $15.0 million of certain patent and patent rights costs. As of March 31, 2023 and December 31, 2022 $6.0 million and $9.0 million was accrued, respectively and included in accrued expenses and other current liabilities (see Note 7). The first $3.0 million installment was paid in February 2023 and the remaining two installments are due in April and June 2023. The patent costs are included in prepaid expenses and other current assets in the consolidated balance sheet as of March 31, 2023.

7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following:

	March 31, 2023		December 31, 2022
	(In thousands)
Accrued consulting and other professional fees	$	1,446	$	1,173
Income taxes payable	2,496		474
Product warranty liability, current	40		36
Service contract costs, current	253		280
Short-term lease liability	1,493		1,559
Accrued patent cost (see Note 6)	6,000		9,000
Other accrued liabilities	966		1,536
Total	$	12,694	$	14,058

8. STARBOARD INVESTMENT

Recapitalization Agreement

On October 30, 2022 the Company entered into the Recapitalization Agreement with Starboard and the Investors, 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. As applicable, the following discussion of Starboard’s investments in the Company reflect the transactions effected or to be effected pursuant to the Recapitalization Agreement.

Series A Redeemable Convertible Preferred Stock

On November 18, 2019, the Company entered into a Securities Purchase Agreement with the Investors pursuant to which the Company issued (i) 350,000 shares of Series A Redeemable Convertible Preferred Stock with a par value of $0.001 per share and a stated value of $100 per share, and (ii) Series A Warrants to purchase up to 5 million shares of the Company’s common stock to the Investors. The Securities Purchase Agreement also established the terms of certain senior secured notes and additional Series B Warrants which may be issued to Starboard in the future. On June 4, 2020, the Company entered into a Supplemental Agreement, as defined below under “Senior Secured Notes”, with certain contractual agreements affecting the Series A Redeemable Convertible Preferred Stock, reflected below.

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The Series A Redeemable Convertible Preferred Stock can be converted into a number of shares of common stock equal to (i) the stated value thereof plus accrued and unpaid dividends, divided by (ii) the conversion price of $3.65 (subject to certain anti-dilution adjustments). Holders may elect to convert the Series A Redeemable Convertible Preferred Stock into common stock at any time. The Company may elect to convert the Series A Redeemable Convertible Preferred Stock into shares of common stock any time on or after November 15, 2025, provided that the closing price of the Company’s common stock equals or exceeds 190% of the conversion price for 30 consecutive trading days and assuming certain other conditions of the common stock have been met.

Holders had the option to redeem all or a portion of the Series A Redeemable Convertible Preferred Stock during the period of May 15, 2022 through August 15, 2022, provided that there was not outstanding at least $50.0 million aggregate principal of senior secured notes to the Investors pursuant to the Securities Purchase Agreement at the time of the redemption. Holders also have the option to redeem all or a portion of the Series A Redeemable Convertible Preferred Stock during the period of November 15, 2024 through February 15, 2025. Additionally, holders have the option to redeem all or a portion of the Series A Redeemable Convertible Preferred Stock upon the occurrence of (i) a change of control or (ii) various other triggering events, such as the suspension from trading or delisting of the Company’s common stock. If the Series A Redeemable Convertible Preferred Stock is redeemed at the option of the holders, the redemption price may include a make-whole amount or a stated premium, depending on the redemption scenario.

The Company may redeem all, and not less than all, of the Series A Redeemable Convertible Preferred Stock (i) upon a change of control or (ii) during the period of May 15, 2022 through August 15, 2022, provided that there was not outstanding at least $50.0 million aggregate principal of the senior secured notes at the time of the redemption, and assuming certain conditions of the common stock have been met. If the Series A Redeemable Convertible Preferred Stock is redeemed at the option of the Company, the redemption price would include a make-whole amount or a 15% premium depending on the circumstances.

If any Series A Redeemable Convertible Preferred Stock remains outstanding on November 15, 2027, the Company shall redeem such Series A Redeemable Convertible Preferred Stock in cash.

In all redemption scenarios, the redemption price for the Series A Redeemable Convertible Preferred Stock includes the stated value plus accrued and unpaid dividends. In addition, depending on the redemption scenario, the redemption price may also include a make-whole amount or stated premium as described above.

The Holder may exchange the Series A Redeemable Convertible Preferred Stock for (i) Notes and (ii) Series B Warrants to purchase common stock.

The Series A Redeemable Convertible Preferred Stock accrues cumulative dividends quarterly at annual rate of 3.0% on the stated value. Upon certain triggering events, the dividend rate will increase to 7.0% if the triggering event occurs before an approved investment or 10.0% on the stated value if the triggering event occurs after an approved investment. In connection with the approved investment in June 2020, the Company and the Investors agreed that the dividend rate on the Series A Redeemable Convertible Preferred Stock would accrue at 3.0% so long as no triggering event occurs and the Company maintains $35.0 million in escrow. Series A Redeemable Convertible Preferred Stock also participates on an as-converted basis in any regular or special dividends paid to common stockholders. During October 2021, the Company consummated a suitable acquisition, accordingly $35.0 million was released to the Company from escrow (refer to Note 1 for discussion related to the Printronix acquisition). Upon consummation of the approved acquisition in October 2021, the dividend rate increased to 8.0% on the stated value. There are no accrued and unpaid dividends as of March 31, 2023 and December 31, 2022.

Holders of the Series A Redeemable Convertible Preferred Stock have the right to vote with common stockholders on an as-converted basis on all matters. Holders of Series A Redeemable Convertible Preferred Stock will also be entitled to a separate class vote with respect to amendments to the Company’s organizational documents that generally have an adverse effect on the Series A Redeemable Convertible Preferred Stock.

Upon liquidation of the Company, holders of Series A Redeemable Convertible Preferred Stock have a liquidation preference over holders of our common stock and will be entitled to receive, prior to any distribution to holders of our common stock, an amount equal to the greater of (i) the stated value plus accrued and unpaid dividends or (ii) the amount that would have been received if the Series A Redeemable Convertible Preferred Stock had been converted into common stock immediately prior to the liquidation event at the then effective conversion price.

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In connection with the issuance of the Series A Redeemable Convertible Preferred Stock, the Company executed a Registration Rights Agreement with Starboard and the Investors and a Governance Agreement with Starboard and certain affiliates of Starboard. Under the Registration Rights Agreement, the Company agreed to provide certain registration rights with respect to the Series A Redeemable Convertible Preferred Stock and shares of common stock issued upon conversion.

In accordance with the Recapitalization Agreement, subject to the receipt of stockholder approval at the Company’s next annual meeting of stockholders, (i) the Company will cause the Certificate of Designations to be amended and restated in the form attached to the Recapitalization Agreement in order to remove the “4.89% blocker” provision and (ii) on or prior to July 14, 2023, the Investors will convert an aggregate amount of 350,000 shares of Series A Redeemable Convertible Preferred Stock into common stock in accordance with the terms of the Certificate of Designations.

The Company has determined that certain features of the Series A Redeemable Convertible Preferred Stock should be bifurcated and accounted for as a derivative. Each of these features are bundled together as a single, compound embedded derivative.

During 2019, total proceeds received and transaction costs incurred from the issuance of the Series A Redeemable Convertible Preferred Stock amounted to $35.0 million and $1.3 million, respectively. Proceeds received were allocated based on the fair value of the instrument without the Series A Warrants and of the Series A Warrants themselves at the time of issuance. The proceeds allocated to the Series A Redeemable Convertible Preferred Stock were then further allocated between the host preferred stock instrument and the embedded derivative, with the embedded derivative recorded at fair value and the Series A Redeemable Convertible Preferred Stock recorded at the residual amount. The portion of the proceeds allocated to the Series A Warrants, embedded derivative, and Series A Redeemable Convertible Preferred Stock was $4.8 million, $21.2 million, and $8.9 million, respectively. Transaction costs were also allocated between the Series A Redeemable Convertible Preferred Stock and the Series A Warrants on the same basis as the proceeds. The transaction costs allocated to the Series A Redeemable Convertible Preferred Stock were treated as a discount to the Series A Redeemable Convertible Preferred Stock. The transaction costs allocated to the Series A Warrants were expensed as incurred.

The Company classifies the Series A Redeemable Convertible Preferred Stock as mezzanine equity as the instrument would become redeemable at the option of the holder in various scenarios or otherwise on November 15, 2027. As it is probable that the Series A Redeemable Convertible Preferred Stock would become redeemable, the Company accretes the instrument to its redemption value using the effective interest method and recognizes any changes against additional paid in capital in the absence of retained earnings. The Company determined that upon entering into the Recapitalization Agreement, the Series A Redeemable Convertible Preferred Stock was not modified related to the redemption, as such action is subject to the receipt of stockholder approval at the Company’s next annual meeting of stockholders. Accordingly, the Series A Redeemable Convertible Preferred Stock will continue to be classified as temporary equity and will continue to be accreted to its redemption value to the earliest redemption date of November 15, 2024. Accretion for the three months ended March 31, 2023 and 2022 was $1.6 million and $1.2 million, respectively.

The following features of the Series A Redeemable Convertible Preferred Stock are required to be bifurcated from the host preferred stock and accounted for separately as an embedded derivative: (i) the right of the holders to redeem the shares (the “put option”), (ii) the right of the holders to receive common stock upon conversion of the shares (the “conversion option”), (iii) the right of the Company to redeem the shares (the “call option”), and (iv) the change in dividend rate upon consummation of an approved investment or a triggering event (the “contingent dividend rate feature”).

These features are required to be accounted for separately from the Series A Redeemable Convertible Preferred Stock because the features were determined to be not clearly and closely related to the debt-like host and also did not meet any other scope exceptions for derivative accounting. Therefore, these features are bundled together and are accounted for as a single, compound embedded derivative liability.

Accordingly, we have recorded an embedded derivative liability representing the combined fair value of each of these features. The embedded derivative liability is adjusted to reflect fair value at each period end with changes in fair value recorded as other income or (expense) in the “Change in fair value of the Series A and B warrants and embedded derivatives” financial statement line item of the consolidated statements of operations. In connection with the Recapitalization Agreement, the Company determined that the embedded features will continue to be bifurcated from the host Series A Redeemable Convertible Preferred Stock and accounted for separately as a compound derivative. As of March 31, 2023 and December 31, 2022, the fair value of the Series A embedded derivative was $11.8 million and $16.8 million, respectively.

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Series A Warrants

On November 18, 2019, in connection with the issuance of the Series A Redeemable Convertible Preferred Stock, the Company issued detachable Series A Warrants to acquire up to 5 million shares of common stock at a price of $3.65 per share (subject to certain anti-dilution adjustments) at any time during a period of eight years beginning on the instrument’s issuance date of the Series A Warrants. The fair value of the Series A Warrants was $4.8 million upon issuance. On November 1, 2022, the Series A Warrants were fully exercised, and the Company recognized the common stock issued at its fair value in equity and an approximate $2.0 million charge as a component of the change in fair value of the Series A Warrants in other expense, which resulted in a fair value of zero.

In accordance with the terms of the Recapitalization Agreement, effective as of November 1, 2022, the Investors consummated the Series A Warrants Exercise (exercising the Series A Warrants in full) and the Company issued an aggregate of 5,000,000 shares of the Company’s common stock to the Investors in consideration of their payment of the cash exercise price of $9.3 million, which amount represents a reduction in the exercise price to account for a negotiated settlement by the parties to account for the forgone time value of money of the Series A Warrants.

Series B Warrants

On February 25, 2020, pursuant to the terms of the Securities Purchase Agreement with Starboard and the Investors, the Company issued Series B Warrants to purchase up to 100 million shares of the Company’s common stock at an exercise price (subject to certain price-based anti-dilution adjustments) of either (i) $5.25 per share, if exercising by cash payment, within 30 months from the issuance date (i.e., August 25, 2022); or (ii) $3.65 per share, if exercising by cancellation of a portion of Notes. The Company issued the Series B Warrants for an aggregate purchase price of $4.6 million. The Series B Warrants expire on November 15, 2027.

In connection with the issuance of the Notes on June 4, 2020, the terms of certain of the Series B Warrants were amended to permit the payment of the lower exercise price of $3.65 through the payment of cash, rather than only through the cancellation of Notes outstanding, at any time until the expiration date of November 15, 2027. 31,506,849 of the Series B Warrants are subject to this adjustment with the remaining balance of 68,493,151 Series B Warrants continuing under their original terms (the Series B Warrants not subject to such adjustment, the “Unadjusted Series B Warrants”). As of March 31, 2023, the Series B Warrants have not been exercised.

During the third quarter of 2022, the cash exercise feature of the Unadjusted Series B Warrants expiration date of August 25, 2022 was extended to October 28, 2022. On October 28, 2022, the cash exercise feature of the Unadjusted Series B Warrants expired, which resulted in a fair value of zero for the related 68,493,151 warrants.

In accordance with the terms of the Recapitalization Agreement, on or prior to July 14, 2023 (unless stockholder approval is required), the Company and Starboard will amend the Series B Warrant Agreement to remove the 4.89% blocker, and Starboard will irrevocably exercise 31,506,849 of the Series B Warrants (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction relating to the common stock occurring after the date of the Recapitalization Agreement), through the Series B Warrants Exercise. In March 2023, the remaining Series B Warrants were cancelled immediately following the completion of the Rights Offering (as described below).

At the closing of the Series B Warrants Exercise (the “Closing”), the Company will pay to Starboard an aggregate amount of $66.0 million (the “Recapitalization Payment”) representing a negotiated settlement of the foregone time value of the Series B Warrants and the Series A Redeemable Convertible Preferred Stock (which amount will be paid through a reduction in the exercise price of the Series B Warrants). As a result of the Recapitalization Agreement, the conversion of the Series A Redeemable Convertible Preferred Stock is probable (as discussed above), therefore, the Recapitalization Payment effectively modifies the exercise price of the Series B Warrants. Upon the Closing, the Investors will exercise the Series B Warrants at a reduced price and the Company will issue an aggregate of 31,506,849 shares of the Company’s common stock to the Investors in consideration of their cash payment and cancellation of any outstanding Notes. If stockholder approval for the amendment to the Certificate of Designations to remove the “4.89% blocker” provision is not obtained, the Recapitalization Payment will be reduced by $12.7 million.

The Series B Warrants are classified as a liability in accordance with ASC 480, "Distinguishing Liabilities from Equity", as the agreement provides for net cash settlement upon a change in control, which is outside the control of the Company. In connection with the Recapitalization Agreement and related warrant modification, the Company recognized the

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incremental fair value as a component of the change in fair value of the Series B Warrants in other expense as of December 31, 2022.

The Series B Warrants will be recognized at fair value at each reporting period until exercised or expiration, with changes in fair value recognized in other income or (expense) in the consolidated statements of operations. As of March 31, 2023 and December 31, 2022, the total fair value of the Series B Warrants was $73.2 million and $84.8 million, respectively.

Senior Secured Notes

On June 4, 2020, pursuant to the Securities Purchase Agreement dated November 18, 2019 with Starboard and the Investors, the Company issued $115.0 million in Notes to the Investors. Also on June 4, 2020, in connection with the issuance of the Notes, the Company entered into a Supplemental Agreement with Starboard (the “Supplemental Agreement”), as discussed further below.

On June 30, 2020, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with Merton Acquisition HoldCo LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company (“Merton”) and Starboard, on behalf of itself and on behalf of certain funds and accounts under its management, including the holders of the Notes. Pursuant to the Exchange Agreement, the holders of the Notes exchanged the entire outstanding principal amount for new senior notes (the “New Notes”) issued by Merton having an aggregate outstanding original principal amount of $115.0 million.

The New Notes bear interest at a rate of 6.00% per annum and had an initial maturity date of December 31, 2020. The New Notes are fully guaranteed by the Company and are secured by an all-assets pledge of the Company and Merton and non-recourse equity pledges of each of the Company’s material subsidiaries. Pursuant to the Exchange Agreement, the New Notes (i) are deemed to be “Notes” for purposes of the Securities Purchase Agreement, (ii) are deemed to be “June 2020 Approved Investment Notes” for purposes of the Supplemental Agreement, and with the Company agreeing to redeem $80.0 million principal amount of the New Notes by September 30, 2020 and $35.0 million principal amount of the New Notes by December 31, 2020, and (iii) are deemed to be “Notes” for the purposes of the Series B Warrants, and therefore may be tendered pursuant to a Note Cancellation under the Series B Warrants on the terms set forth in the Series B Warrants and the New Notes. Delivery of notes in the form of the New Notes will also satisfy the delivery of Exchange Notes pursuant to Section 16(i) of the Certificate of Designations of the Company’s Series A Convertible Preferred Stock, par value $0.001 per share (the “Certificate of Designations”). The New Notes will not be deemed to be “Notes” for the purposes of the Registration Rights Agreement, dated as of November 18, 2019, by and among the Company, Starboard and the Investors.

Because the New Notes, as amended (as described below), are to be settled within twelve months pursuant to their terms, they are classified as current liabilities in the consolidated balance sheets. The Company capitalized $4.6 million in lender fees associated with the issuance of the Notes and amortized such fees over the approximate seven month period ended December 31, 2020, which was the initial redemption date of the Notes. There was $1.4 million and $450,000 of accrued and unpaid interest on the New Notes as of March 31, 2023 and December 31, 2022, respectively.

On January 29, 2021, the Company redeemed $50.0 million of the New Notes and on March 31, 2021, the Company reissued $50.0 million of the New Notes. On June 30, 2021, the Company issued $30.0 million in additional New Notes (the “June 2021 Merton Notes”) and amended the maturity date of the New Notes to October 15, 2021. On September 30, 2021, the Company issued $35.0 million in additional New Notes (the “September 2021 Merton Notes”) and amended the maturity date of the New Notes to December 1, 2021. The June 2021 Merton Notes and the September 2021 Merton Notes cannot be used to exercise Series B Warrants issued to Starboard. On November 30, 2021, the Company amended the maturity date of the New Notes to January 31, 2022. On January 31, 2022, the Company amended the maturity date of the New Notes to April 15, 2022, and agreed to repay an aggregate of $15.0 million principal amount of the New Notes, resulting in a principal amount outstanding of $165.0 million. On April 14, 2022, the Company amended the New Notes to extend the maturity date to July 15, 2022, permit the investment in certain types of derivative instruments and permit certain guarantees in connection with such derivative instruments, each as defined therein, and agreed to repay an aggregate of $50.0 million principal amount of the New Notes, resulting in a principal amount outstanding of $115.0 million. On July 15, 2022, the Company amended the maturity date of the New Notes to July 14, 2023, and agreed to repay an aggregate of $55.0 million principal amount of the New Notes, resulting in a principal amount outstanding of $60.0 million. The total principal amount outstanding of New Notes as of March 31, 2023 and December 31, 2022 was $60.0 million.

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Modifications to Series A Redeemable Convertible Preferred Stock and Series B Warrants

The June 4, 2020 Supplemental Agreement also provided for (i) a waiver of increased dividends under the original terms of the Series A Redeemable Convertible Preferred Stock that would have otherwise accrued due to the Company’s use of the $35.0 million proceeds received from Starboard and the Investors upon the issuance of the Series A Redeemable Convertible Preferred Stock in November 2019, (ii) the replacement of original optional redemption rights for the Series A Redeemable Convertible Preferred Stock provided to both the Company and the holders that otherwise would have been nullified through the issuance of the Notes, and (iii) an amendment to the terms of the previously issued Series B Warrants to permit the payment of the lower exercise price of $3.65 through the payment of cash, rather than only through the cancellation of Notes outstanding, at any time until the expiration of the Series B Warrants on November 15, 2027. 31,506,849 of the Series B Warrants are subject to this adjustment with the remaining balance of 68,493,151 Series B Warrants continuing under their original terms.

We analyzed the amendments to the Series A Redeemable Convertible Preferred Stock and determined that the amendments were not significant. Therefore, the amendments are accounted for as a modification on a prospective basis.

The incremental fair value of the Series B Warrants associated with the modification of their terms in connection with the issuance of the Notes was $1.3 million and is recognized as a discount on the Notes and will be amortized to interest expense over the contractual life of the Notes. For the three months ended March 31, 2023 and 2022, zero and $51,000, respectively, was amortized to interest expense. The discount was fully amortized during the quarter ended September 30, 2022.

Rights Offering and Concurrent Private Rights Offering

On February 14, 2023, pursuant to the requirements of the Recapitalization Agreement and in accordance with the terms of the Series B Warrants, the Company commenced a rights offering (the “Rights Offering”). Under the terms of the Rights Offering, the Company distributed non-transferable subscription rights to record holders (“Eligible Securityholders”) of the Company’s common stock held as of 5 p.m. Eastern time on February 13, 2023, the record date for the Rights Offering. The subscription period for the Rights Offering terminated at 5 p.m. Eastern time on March 1, 2023 (the “Expiration Time”). Pursuant to the Rights Offering, Eligible Securityholders received one non-transferable subscription right (a “Subscription Right”) for every four shares of common stock owned by such Eligible Securityholders. Each Subscription Right entitled an Eligible Securityholder to purchase, at such Eligible Securityholder’s election, one share of common stock at a price of $5.25 per share (the “Subscription Price”).

The Investors received private subscription rights to purchase common stock at the Subscription Price pursuant to a concurrent private rights offering (the “Concurrent Private Rights Offering”) in connection with their ownership of common stock and, on an as-converted basis, the Company’s Series B Warrants and shares of the Company’s Series A Redeemable Convertible Preferred Stock. The private subscription rights provided to the Investors pursuant to the Concurrent Private Rights Offering were on substantially the same terms as the Subscription Rights, and were distributed substantially concurrently with the distribution of the Subscription Rights and expired at the Expiration Time.

The Company determined that upon entering into the Recapitalization Agreement on October 30, 2022, the Rights Offering and Concurrent Private Rights Offering and related commitment required no recognition in the Company's financial statements. The Company recognized the proceeds received from the sale of the shares in equity when the sale occurred.

The Company received aggregate gross proceeds of approximately $361,000 from the Rights Offering and aggregate gross proceeds of approximately $78.8 million from the Concurrent Private Rights Offering.

After giving effect to the issuance of 68,753 shares of common stock in the Rights Offering and 15,000,000 shares of Common Stock in the Concurrent Private Rights Offering, the Company has 58,543,312 shares of common stock issued and outstanding. Following the Closing, Starboard may be deemed the beneficial owner of 20,000,000 shares of common stock, representing approximately 34.2% of the issued and outstanding common stock as of March 6, 2023. The Rights Offering was made pursuant to a prospectus supplement to the Company’s shelf registration statement on Form S-3 (No. 333-249984), filed with the SEC on February 14, 2023.

Other Provisions of the Recapitalization Agreement

On February 14, 2023, Company entered into an amended and restated Registration Rights Agreement with Starboard as contemplated by the Recapitalization Agreement.

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Pursuant to the amended Registration Rights Agreement, the Company has agreed to file a registration statement covering the resale of the shares of Common Stock, issuable or issued to Starboard pursuant to or in accordance with Section 1.1 of the Recapitalization Agreement, including the shares issued to Starboard in the Concurrent Private Rights Offering, within 90 days after a written request made prior to the first anniversary of the Closing Date (as defined in the Registration Rights Agreement). The Registration Rights Agreement also provides Starboard with additional rights to require that the Company file a registration statement in other circumstances. The Registration Rights Agreement includes other customary terms.

The Recapitalization Agreement includes a “fair price” provision requiring, in addition to any other stockholder vote required by the Company’s Certificate of Incorporation or Delaware law, the affirmative vote of the holders of a majority of the outstanding voting stock held by stockholders of the Company other than Starboard and its affiliates, by or with whom or on whose behalf, directly or indirectly, a business combination is proposed, in order to approve such a business combination; provided, that the additional majority voting requirement would not be applicable if either (x) the business combination is approved by the Board by the affirmative vote of at least a majority of the directors who are unaffiliated with Starboard or (y) (i) the consideration to be received by stockholders other than Starboard and its affiliates meets certain minimum price conditions, and (ii) the consideration to be received by stockholders other than Starboard and its affiliates is of the same form and kind as the consideration paid by Starboard and its affiliates.

The consummation of the Series B Warrant Exercise is subject to certain conditions, including: (i) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976; (ii) the absence of any law or order prohibiting the consummation of the Series B Warrant Exercise; (iii) the representations and warranties of the Company and Starboard being true and correct, subject to the materiality standards contained in the Recapitalization Agreement; and (iv) the Company and Starboard having complied in all material respects with their respective obligations under the Recapitalization Agreement.

The Recapitalization Agreement may be terminated by either party under certain circumstances, including if (i) a governmental entity issues an order permanently prohibiting the Recapitalization, (ii) there is an uncured breach of the Recapitalization Agreement by the other party that results in a condition to Closing not being capable of being satisfied, or (iii) the Closing does not occur on or before July 31, 2023.

The Recapitalization Agreement also provides that, effective as of the later of the Closing and the date on which no Notes remain outstanding, (i) the Securities Purchase Agreement and (ii) that certain Governance Agreement, dated as of November 18, 2019, as amended and restated on January 7, 2020, shall be automatically terminated and of no further force and effect without any further action by any party thereto.

9. 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)Level 1 - Observable Inputs:  Quoted prices in active markets for identical investments;

(ii)Level 2 - Pricing Models with Significant Observable Inputs:  Other significant observable inputs, including quoted prices for similar investments, interest rates, credit risk, etc.; and

(iii)Level 3 - Unobservable Inputs:  Unobservable inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Management estimates include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs, including the entity’s own assumptions in determining the fair value of derivatives and certain investments.

Whenever possible, the Company is required to use observable market inputs (Level 1) 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

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factors specific to the asset or liability being measured. In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy.

The Company held the following types of financial instruments at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:

Equity Securities. Equity securities includes investments in public company 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. Equity investments that do not have regular market pricing, but for which fair value can be determined based on other data values or market prices, are recorded at fair value within Level 2 of the valuation hierarchy. The Company has elected to apply the fair value method to one equity securities investment that would otherwise be accounted for under the equity method of accounting. As of March 31, 2023, the aggregate carrying amount of this investment was $43.3 million, and is included in equity securities, in the consolidated balance sheet (refer to Note 3 for additional information).

Series B Warrants. Series B Warrants are recorded at fair value, using a Black-Scholes option-pricing model (Level 3). On October 28, 2022, the cash exercise feature of the Unadjusted Series B Warrants expired, which resulted in a fair value of zero for such warrants (refer to Note 8 for additional information). The fair value of the remaining Series B Warrants as of March 31, 2023 was estimated based on the following significant assumptions: volatility of 47 percent, risk-free rate of 4.86 percent, term of 0.29 years and a dividend yield of 0 percent. The fair value of the two Series B Warrants as of December 31, 2022 was estimated based on the following significant assumptions: volatility of 53 percent, risk-free rate of 4.76 percent, term of 0.54 years and a dividend yield of 0 percent. Refer to the "Embedded derivative liabilities" discussion below for additional information on assumptions.

Embedded derivative liabilities. Embedded derivatives that are required to be bifurcated from their host contract are evaluated and valued separately from the host instrument. During the quarter ended December 31, 2022 in connection with the Recapitalization Agreement, the Company changed its methodology from a binomial lattice framework to an as-converted value (Level 3), based on an expected Series A Convertible Preferred Stock conversion date on or prior to July 14, 2023 (refer to Note 8 for additional information).

The volatility of the Company’s common stock is estimated by analyzing the Company’s historical volatility, implied volatility of publicly traded stock options, and the Company’s current asset composition and financial leverage. Prior to December 31, 2022, the selected volatility, as described herein, represented a haircut from the Company’s actual realized historical volatility. A volatility haircut is a concept used to describe a commonly observed occurrence in which the volatility implied by market prices involving options, warrants and convertible debt is lower than historical actual realized volatility. Prior to December 31, 2022, the assumed base case term used in the valuation models was the period remaining until November 15, 2027, the Series A Redeemable Convertible Preferred Stock maturity date. The risk-free interest rate was based on the yield on the U.S. Treasury with a remaining term equal to the expected term of the conversion and early redemption options. The fair value of the embedded derivative as of March 31, 2023 was estimated based on the following significant assumptions: coupon rate of 8 percent, conversion ratio of 27.40, conversion date of July 14, 2023 and a discount rate of 15.70 percent. The fair value of the embedded derivative as of December 31, 2022 was estimated based on the following significant assumptions: coupon rate of 8 percent, conversion ratio of 27.40, conversion date of July 14, 2023 and a discount rate of 16.30 percent. The fair value measurement of the embedded derivative is sensitive to these assumptions and changes in these assumptions could result in a materially different fair value measurement.

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Financial assets and liabilities measured at fair value on a recurring basis were as follows:

	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets
March 31, 2023:
Equity securities	$	60,724	$	—	$	—	$	60,724
December 31, 2022:
Equity securities	$	61,608	$	—	$	—	$	61,608
Liabilities
March 31, 2023:
Series A embedded derivative liabilities	$	—	$	—	$	11,812	$	11,812
Series B warrants	—		—		73,152		73,152
Total	$	—	$	—	$	84,964	$	84,964
December 31, 2022:
Series A embedded derivative liabilities	$	—	$	—	$	16,835	$	16,835
Series B warrants	—		—		84,780		84,780
Total	$	—	$	—	$	101,615	$	101,615

The following table sets forth a summary of the changes in the estimated fair value of the Company’s Level 3 liabilities, which are measured at fair value as a on a recurring basis:

	Series A Warrant Liabilities		Series A Embedded Derivative Liabilities		Series B Warrant Liabilities		Total
	(In thousands)
Balance at December 31, 2021	$	11,291	$	18,448	$	96,378	$	126,117
Remeasurement to fair value	(896)		(3,942)		(23,260)		(28,098)
Balance at March 31, 2022	10,395		14,506		73,118		98,019
Balance at December 31, 2022	$	—	$	16,835	$	84,780	$	101,615
Remeasurement to fair value	—		(5,023)		(11,628)		(16,651)
Balance at March 31, 2023	$	—	$	11,812	$	73,152	$	84,964

In accordance with U.S. GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. The Company reviews the carrying value of equity securities without readily determinable fair value, equity method investments and patents on a quarterly basis for indications of impairment, and other long-lived assets at least annually. When indications of potential impairment are identified, the Company may be required to determine the fair value of those assets and record an adjustment for the carrying amount in excess of the fair value determined. Any fair value determination would be based on valuation approaches, which are appropriate under the circumstances and utilize Level 2 and Level 3 measurements as required.

10. RELATED PARTY TRANSACTIONS

The Company reimbursed an aggregate amount of zero and $36,000 during the three months ended March 31, 2023 and 2022, respectively, to a former executive officer in connection with legal fees incurred following such officer’s departure from the Company.

Refer to Note 8 for information about the Recapitalization Agreement with Starboard.

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11. COMMITMENTS AND CONTINGENCIES

Facility Leases

Acacia primarily leases office facilities under operating lease arrangements that will end in various years through February 2025.

On June 7, 2019, Acacia entered into a building lease agreement with Jamboree Center 4 LLC. Pursuant to the lease, we have leased 8,293 square feet of office space in Irvine, California. The lease commenced on August 1, 2019. The term of the lease is 60 months from the commencement date, provides for annual rent increases, and does not provide us the right to early terminate or extend our lease terms.

On January 7, 2020, Acacia entered into a building lease agreement with Sage Realty Corporation. Pursuant to the lease, as amended, we have leased approximately 8,600 square feet of office space for our corporate headquarters in New York, New York. The lease commenced on February 1, 2020. The term of the initial lease was 24 months from the commencement date, provides for annual rent increases, and does not provide us the right to early terminate or extend our lease terms. During August 2021, we entered into a first amendment of the New York office lease, to commence for a period of three years upon landlord's substantial completion of adequate substitution space. On January 25, 2022, the substitution space was substantially completed and the new expiration date is February 28, 2025. During July 2022, we entered into a second amendment of the New York office lease, to add space to the existing premises and increase the annual fixed rent through the existing expiration date. The new fixed rent commenced upon landlord's substantial completion of the additional space, which occurred on September 19, 2022.

Printronix conducts its foreign and domestic operations using leased facilities under non-cancelable operating leases that expire at various dates through February 2028. Printronix has leased 73,649 square feet of facilities space, of which the significant leases are as follows:

•On November 10, 2020, Printronix entered into a building lease agreement with PPC Irvine Center Investment, LLC for 8,662 square feet of office space in Irvine, California. The lease commenced on April 1, 2021. The term of the lease is 65 months from the commencement date, provides for annual rent increases and provides the right to early terminate the lease under certain circumstances, as well as extend the lease term.

•On September 30, 2019, Printronix entered into a building lease agreement with Dynamics Sing Sdn. Bhd for 52,000 square feet of warehouse/manufacturing space in Johor, Malaysia. The lease commenced on December 29, 2019. The term of the lease is 48 months from the commencement date, has no annual rent increases and provides the right to early terminate or extend our lease term. The Malaysia factory lease has two renewal options for an additional four years and one additional renewal option for two years.

•On June 2, 2022, Printronix entered into a building lease agreement with HSBC Institutional Trust Services (Singapore) Limited for 4,560 square feet of office space in Singapore. The lease commenced on June 13, 2022. The term of the lease is 36 months from the commencement date, has no annual rent increases and does not provide the right to early terminate or extend the lease term.

•On November 28, 2019, Printronix entered into a building lease agreement with PF Grand Paris for 3,045 square feet of office space in Paris, France. The lease commenced on March 1, 2019. The term of the lease is 109 months from the commencement date, has no annual rent increases and provides the right to early terminate the lease under certain circumstances, however it does not provide for an extension of the lease term.

•On November 1, 2020, Printronix entered into a building lease agreement with Shanghai SongYun Enterprise Management Center for 2,422 square feet of office space in Shanghai, China. The lease commenced on November 1, 2020. The term of the lease is 48 months from the commencement date, has no annual rent increases and provides the right to early terminate or extend the lease term.

The Company's operating lease costs were $388,000 and $293,000 for the three months ended March 31, 2023 and 2022, respectively.

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The table below presents aggregate future minimum lease payments due under the Company's leases discussed above, reconciled to long-term lease liabilities and short-term lease liabilities (included in accrued expenses and other current liabilities) included in the consolidated balance sheet as of March 31, 2023 (in thousands):

Years Ending December 31,
Remainder of 2023	$	1,157
2024	1,140
2025	457
2026	239
2027	66
Thereafter	—
Total minimum payments	3,059
Less: short-term lease liabilities	(1,493)
Long-term lease liabilities	$	1,566

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 and Legal Proceedings

The Company 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 the Company’s consolidated financial position, results of operations or cash flows.

Certain of Acacia’s operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. In connection with any of Acacia’s operating subsidiaries’ patent enforcement actions, it is possible that a defendant may request and/or a court may rule that an operating subsidiary has violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against Acacia or its operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material.

On September 6, 2019, Slingshot Technologies, LLC ("Slingshot"), filed a lawsuit in Delaware Chancery Court against the Company and ARG (collectively, the "Acacia Entities"), Monarch Networking Solutions LLC (“Monarch”), Acacia board member Katharine Wolanyk, and Transpacific IP Group, Ltd. ("Transpacific"). Slingshot alleges that the Acacia Entities and Monarch misappropriated its confidential and proprietary information, purportedly furnished to the Acacia Entities and Monarch by Ms. Wolanyk, in acquiring a patent portfolio from Transpacific after Slingshot’s exclusive option to purchase the same patent portfolio from Transpacific had already expired. Slingshot seeks monetary damages, as well as equitable and injunctive relief related to its alleged right to own the portfolio. On March 15, 2021, the court issued orders granting Monarch’s motion to dismiss for lack of personal jurisdiction and Ms. Wolanyk’s motion to dismiss for lack of subject matter jurisdiction. The remaining parties served written discovery requests and responses, exchanged their respective document productions, and completed depositions as of October 27, 2022. On November 18, 2022, the Acacia Entities and Transpacific filed motions for summary judgment on Slingshot’s claims. As the Acacia Entities argue in their motion, discovery has confirmed that Slingshot’s allegations are baseless, the Acacia Entities neither had access to nor used Slingshot’s information in acquiring the portfolio, and the Acacia Entities acquired the portfolio as a result of the independent efforts of their IP licensing group. Slingshot filed its opposition to the summary judgment motions on December 23, 2022, and the Acacia Entities and Transpacific filed their replies on January 10, 2023. The Chancery Court

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took off calendar the two-day trial on liability that had been scheduled for April 18–19, 2023, and instead set the hearing on the summary judgment motions for April 19, 2023. On April 19, 2023, the Chancery Court heard oral argument and took the summary judgment motions under advisement.

Guarantees and Indemnifications

Acacia and 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 material 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 material liability for these guarantees and indemnities in the consolidated balance sheets. Additionally, no events or transactions have occurred that would result in a material liability as of March 31, 2023.

Printronix posted collateral in the form of a surety bond or other similar instruments, which are issued by independent insurance carriers (the “Surety”), to cover the risk of loss related to certain customs and employment activities. If any of the entities that hold such bonds should require payment from the Surety, Printronix would be obligated to indemnify and reimburse the Surety for all costs incurred. As of March 31, 2023 and December 31, 2022, Printronix had approximately $100,000 of these bonds outstanding.

Environmental Cleanup

Printronix maintained a manufacturing operation in a leased facility in Irvine, California from 1980 to 1994. The facility was used for similar manufacturing operations by another tenant from 1968 to 1977. The manufacturing operations employed by the previous tenant are believed to have resulted in the contamination of soil and groundwater under the facility which included chlorinated volatile organic compounds (“VOCs”). Evidence indicates that the VOCs requiring cleanup were used by the prior tenant and not by Printronix. Printronix worked with the prior tenant, which agreed to share the costs of the activities in an equal percentage with Printronix, and the state regulatory agencies, including the California Department of Toxic Substances Control, to investigate and cleanup the subsurface contamination. A significant soil cleanup project was completed in 2017.

In 2020, Printronix executed an agreement with the prior tenant whereby the prior tenant would take 100% responsibility for the costs and process of the cleanup going forward. Printronix is in process of filing for release of such responsibility from a governmental agency and so may currently be found to be secondarily liable if the prior tenant cannot fulfil their responsibilities under the agreement. Accordingly, Printronix no longer takes part in monitoring or paying for any future investigation or cleanup activity. Printronix expects to have no such further costs associated with this facility. During 2020, Printronix was able to recover $24,000 from the prior tenant. Since that date and for the three months ended March 31, 2023, Printronix has incurred no related legal fees.

12. STOCKHOLDERS’ EQUITY

Repurchases of Common Stock

On December 6, 2021, the Board approved a stock repurchase program, which authorized the purchase of up to $15.0 million of the Company’s common stock through open market purchases, through block trades, through 10b5-1 plans, or by means of private purchases, from time to time, through December 6, 2022. During February 2022, we completed the December 2021 program with total common stock purchases of 3,125,819 shares for the aggregate amount of $15.0 million.

On March 31, 2022, the Board approved a stock repurchase program for up to $40.0 million of shares of common stock. The repurchase authorization had no time limit and did not require the repurchase of a minimum number of shares. The common stock may be repurchased on the open market, in block trades, or in privately negotiated transactions, including

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under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Exchange Act. During July 2022, we completed the March 2022 program with total common stock purchases of 8,453,519 shares for the aggregate amount of $40.0 million. There were no stock repurchases for the three months ended March 31, 2023.

In determining whether or not to repurchase any shares of Acacia’s common stock, the Board considers such factors, among others, 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 its Stock Repurchase Programs. Repurchases to date were made in the open market in compliance with applicable SEC rules. The authorizations to repurchase shares presented an opportunity to reduce the outstanding share count and enhance stockholder value.

Tax Benefits Preservation Charter Provision

The Company has a provision in its Amended and Restated Certificate of Incorporation, as amended (the “Charter Provision”) which generally prohibits transfers of its common stock that could result in an ownership change. The purpose of the Charter Provision is to protect the Company’s ability to utilize potential tax assets, such as net operating loss carryforwards and tax credits to offset potential future taxable income. The Charter Provision was approved by the Company’s stockholders on July 15, 2019.

13. 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. The 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 one year after grant and expire ten years after grant. Stock options with time-based vesting generally vest over three to four years and restricted shares with time-based vesting generally vest in full after one to four 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:

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 receiving RSAs 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. The eligible individuals receiving RSUs shall not have full stockholder rights until they vest.

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).

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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 March 31, 2023, there were 244,364 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 2016 Plan. In May 2022, security holders approved an increase of 5,500,000 shares of common stock authorized to be issued pursuant to the 2016 Plan. At March 31, 2023, there were 5,775,756 shares available for grant under the 2016 Plan.

Upon the exercise of stock options, the granting of RSAs, or the delivery of shares pursuant to vested RSUs, it is Acacia’s policy to issue new shares of common stock. The Board may amend or modify the Plans at any time, subject to any required stockholder approval. As of March 31, 2023, there are 8,501,249 shares of common stock reserved for issuance under the Plans.

The following table summarizes stock option activity for the Plans:

	Options		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life
					(In thousands)
Outstanding at December 31, 2022	1,310,417		$	4.29	$	535	8.0 years
Granted	243,319		$	4.27	$	—
Exercised	—		$	—	$	—
Forfeited/Expired	(187,500)		$	4.94	$	49
Outstanding at March 31, 2023	1,366,236		$	4.20	$	199	7.3 years
Exercisable at March 31, 2023	403,749		$	4.54	$	67	4.6 years
Vested and expected to vest at March 31, 2023	1,366,236		$	4.20	$	199	7.3 years
Unrecognized stock-based compensation expense at March 31, 2023 (in thousands)	$	1,285
Weighted average remaining vesting period at March 31, 2023	2.5 years

Stock options granted in 2023 are time-based and will vest in full after three to four years. During the three months ended March 31, 2023, the Company granted 243,319 stock options at a weighted average grant-date fair value of $2.10 per share using the Black-Scholes option-pricing model. The fair value was estimated based on the following weighted average assumptions: volatility of 46 percent, risk-free interest rate of 3.67 percent, term of 6.00 years and a dividend yield of 0 percent as the Company does not pay common stock dividends. The volatility of the Company’s common stock is estimated by analyzing the Company’s historical volatility, implied volatility of publicly traded stock options, and the Company’s current asset composition and financial leverage (refer to Note 9 "Embedded derivative liabilities" for additional information). The risk-free rate is based on the term assumption and U.S. Treasury constant maturities as published by the Federal Reserve. The Company currently uses the "simplified" method for determining the term, due to the limited option grant history, which assumes that the exercise date of an option would be halfway between its vesting date and the expiration date. The aggregate fair value of options vested during the three months ended March 31, 2023 was $209,000.

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The following table summarizes nonvested restricted stock activity for the Plans:

	RSAs				RSUs
	Shares		Weighted Average Grant Date Fair Value		Units		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2022	406,001		$	4.02	842,302		$	4.42
Granted	—		$	—	509,798		$	4.27
Vested	(131,001)		$	4.18	(110,541)		$	3.90
Forfeited	(17,500)		$	5.14	(126,666)		$	4.59
Nonvested at March 31, 2023	257,500		$	3.85	1,114,893		$	4.39
Unrecognized stock-based compensation expense at March 31, 2023 (in thousands)	$	861			$	3,863
Weighted average remaining vesting period at March 31, 2023	1.6 years				2.4 years

RSUs granted in 2023 are time-based and will vest in full after one to four years. The aggregate fair value of RSAs vested during the three months ended March 31, 2023 was $548,000. The aggregate fair value of RSUs vested during the three months ended March 31, 2023 was $431,000. During the three months ended March 31, 2023, RSAs and RSUs totaling 241,542 shares were vested and 94,863 shares of common stock were withheld to pay applicable required employee statutory withholding taxes based on the market value of the shares on the vesting date.

Certain RSUs were granted in September 2019 with market-based vesting conditions that vest based upon the Company achieving specified stock price targets over a three-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 expense is recognized with a market-based vesting condition provided that the requisite service is rendered, regardless of when, if ever, the market condition is satisfied. Assumptions utilized in connection with the Monte Carlo valuation technique, that resulted in a fair value of $1.42 per unit, included: risk-free interest rate of 1.38 percent, term of 3.00 years, expected volatility of 38 percent and expected dividend yield of 0 percent. The risk-free interest rate was determined based on the yields available on U.S. Treasury zero-coupon issues. The expected stock price volatility was determined using historical volatility. The expected dividend yield was based on expectations regarding dividend payments. During the year ended December 31, 2021, 450,000 RSUs were forfeited, leaving 450,000 units with market-based vesting conditions outstanding and unvested at prior period end. The remaining units fully vested on September 3, 2022. Compensation expense for RSUs with market-based vesting conditions for the three months ended March 31, 2023 and 2022, was zero and $143,000, respectively.

Compensation expense for share-based awards recognized in general and administrative expenses was comprised of the following:

	Three Months Ended March 31,
		2023		2022
		(In thousands)
Options		$	28	$	132
RSAs		209		528
RSUs		240		514
Total compensation expense for share-based awards		$	477	$	1,174

Total unrecognized stock-based compensation expense as of March 31, 2023 was $6.0 million, which will be amortized over a weighted average remaining vesting period of 2.3 years.

Profits Interest Plan

Profits Interest Units (“PIUs”) were accounted for in accordance with ASC 718, “Compensation - Stock Compensation.” The vesting conditions did not meet the definition of service, market or performance conditions, as defined in ASC 718. As such, the PIUs were classified as liability awards. Compensation expense was adjusted for changes in fair value prorated

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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. The Company has a purchase option to purchase the vested PIUs that are not otherwise forfeited after termination of continuous service. The exercise price of the purchase option is the fair market value of the PIUs on the date of termination of continuous service. The individuals holding PIUs are no longer employed by the Company. Included in other long-term liabilities in the consolidated balance sheets as of March 31, 2023 and December 31, 2022, the PIUs totaled $591,000, which was their fair value as of December 31, 2018 after termination of service.

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14. INCOME/LOSS PER SHARE

The following table presents the calculation of basic and diluted income/loss per share of common stock:

	Three Months Ended March 31,
		2023		2022
		(In thousands, except share and per share data)
Numerator:
Net income (loss) attributable to Acacia Research Corporation		$	9,447	$	(73,266)
Dividend on Series A redeemable convertible preferred stock		(700)		(700)
Accretion of Series A redeemable convertible preferred stock		(1,554)		(1,151)
Undistributed earnings allocated to participating securities		(1,235)		—
Net income (loss) attributable to common stockholders - Basic		5,958		(75,117)
Add: Dividend on Series A redeemable convertible preferred    stock		700		—
Add: Accretion of Series A redeemable convertible preferred    stock		1,554		—
Less: Change in fair value of Series A redeemable    convertible preferred stock embedded derivative		(5,023)		—
Less: Change in fair value of Series A warrants		—		—
Less: Change in fair value of dilutive Series B warrants		(11,628)		—
Add: Interest expense associated with Starboard Notes,    net of tax		708		—
Add: Undistributed earnings allocated to participating    securities		1,235		—
Reallocation of undistributed earnings to participating    securities		—		—
Net loss attributable to common stockholders - Diluted		$	(6,496)	$	(75,117)
Denominator:
Weighted average shares used in computing net (loss) income    per share attributable to common stockholders - Basic		47,971,931		46,544,313
Potentially dilutive common shares:
Series A Preferred Stock		9,589,041		—
Restricted stock units		—		—
Stock options		—		—
Series A Warrants		—		—
Series B Warrants		31,506,849		—
Weighted average shares used in computing net (loss) income    per share attributable to common stockholders - Diluted		89,067,821		46,544,313
Basic net income (loss) per common share		$	0.12	$	(1.61)
Diluted net loss per common share		$	(0.07)	$	(1.61)
Anti-dilutive potential common shares excluded from the    computation of diluted net income/loss per share:
Equity-based incentive awards		2,368,870		4,029,318
Series A warrants		—		5,000,000
Series B warrants		—		100,000,000
Total		2,368,870		109,029,318

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15. SEGMENT REPORTING

As of March 31, 2023, the Company operates and reports its results in two reportable segments: Intellectual Property Operations and Industrial Operations.

The Company reports segment information based on the management approach and organizes its businesses based on products and services. The management approach designates the internal reporting used by the chief operating decision maker for decision making and performance assessment as the basis for determining the Company’s reportable segments. The performance measure of the Company’s reportable segments is primarily income or (loss) from operations. Income or (loss) from operations for each segment includes all revenues, cost of revenues, gross profit and other operating expenses directly attributable to the segment. Other than the Company's equity securities investments, specific asset information is not included in managements review at this time.

The Company’s Intellectual Property Operations segment 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 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. When applicable, we share net licensing revenue with our patent partners as that program matures, on a prearranged 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.

The Company’s Industrial Operations segment generates operating income by designing and manufacturing printers and consumable products for various industrial printing applications. Printers consist of hardware and embedded software and may be sold with maintenance service agreements. Consumable products include inked ribbons which are used in Printronix’s printers. Printronix’s products are primarily sold through channel partners, such as dealers and distributors, to end-users.

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The Company's segment information is as follows:

	Three Months Ended March 31,
	2023						2022
	Intellectual Property Operations		Industrial Operations		Total		Intellectual Property Operations		Industrial Operations		Total
	(In thousands)
Revenues:
License fees	$	4,176	$	—	$	4,176	$	2,615	$	—	$	2,615
Printers and parts	—		4,464		4,464		—		4,254		4,254
Consumable products	—		5,170		5,170		—		5,384		5,384
Services	—		993		993		—		1,254		1,254
Total revenues	4,176		10,627		14,803		2,615		10,892		13,507
Cost of revenues:
Inventor royalties	221		—		221		170		—		170
Contingent legal fees	532		—		532		549		—		549
Litigation and licensing expenses	1,384		—		1,384		1,244		—		1,244
Amortization of patents	2,601		—		2,601		2,601		—		2,601
Cost of sales	—		5,220		5,220		—		4,192		4,192
Total cost of revenues	4,738		5,220		9,958		4,564		4,192		8,756
Segment gross profit	(562)		5,407		4,845		(1,949)		6,700		4,751
Other operating expenses:
Engineering and development expenses	—		216		216		—		190		190
Sales and marketing expenses	—		1,913		1,913		—		2,016		2,016
Amortization of intangible assets	—		433		433		—		433		433
General and administrative expenses	1,897		2,285		4,182		1,716		2,422		4,138
Total other operating expenses	1,897		4,847		6,744		1,716		5,061		6,777
Segment operating (loss) income	$	(2,459)	$	560	(1,899)		$	(3,665)	$	1,639	(2,026)
Parent general and administrative expenses					7,425						6,482
Operating loss					(9,324)						(8,508)
Total other (expense) income					21,254						(79,636)
(Loss) income before income taxes					$	11,930					$	(88,144)

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	March 31, 2023		December 31, 2022
	(In thousands)
Equity securities investments:
Equity securities	$	60,724	$	61,608
Equity securities without readily determinable fair value	5,816		5,816
Equity method investments	30,934		30,934
Total parent equity securities investments	97,474		98,358
Other parent assets	235,144		156,394
Segment total assets:
Intellectual property operations	171,639		176,119
Industrial operations	52,347		52,057
Total assets	$	556,604	$	482,928

The Company's revenues and long-lived tangible assets by geographic area are presented below. Intellectual Property Operations revenues are attributed to licensees domiciled in foreign jurisdictions. Printronix's net sales to external customers are attributed to geographic areas based upon the final destination of products shipped. The Company, primarily through its Printronix subsidiary, has identified three global regions for marketing its products and services: Americas, Europe, Middle East and Africa, and Asia-Pacific. Assets are summarized based on the location of held assets.

	Three Months Ended March 31,
	2023						2022
	Intellectual Property Operations		Industrial Operations		Total		Intellectual Property Operations		Industrial Operations		Total
	(In thousands)
Revenues by geographic area:
United States	$	673	$	4,234	$	4,907	$	2,097	$	3,849	$	5,946
Canada and Latin America	501		219		720		6		372		378
Total Americas	1,174		4,453		5,627		2,103		4,221		6,324
Europe, Middle East and Africa	—		2,965		2,965		500		2,508		3,008
China	3,000		843		3,843		—		1,133		1,133
India	—		828		828		—		1,749		1,749
Asia-Pacific, excluding China and India	2		1,538		1,540		12		1,281		1,293
Total Asia-Pacific	3,002		3,209		6,211		12		4,163		4,175
Total revenues	$	4,176	$	10,627	$	14,803	$	2,615	$	10,892	$	13,507

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	March 31, 2023
	Intellectual Property Operations		Industrial Operations		Total
	(In thousands)
Long-lived tangible assets by geographic area:
United States	$	290	$	255	$	545
Malaysia	—		2,543		2,543
Other foreign countries	—		187		187
Total	$	290	$	2,985	$	3,275

	December 31, 2022
	Intellectual Property Operations		Industrial Operations		Total
	(In thousands)
Long-lived tangible assets by geographic area:
United States	$	324	$	302	$	626
Malaysia	—		2,703		2,703
Other foreign countries	—		208		208
Total	$	324	$	3,213	$	3,537

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ITEM 2. 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 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 to our Annual Report on Form 10-K for the year ended December 31, 2022, “Risk Factors,” and elsewhere herein. For additional information, refer to the section above entitled “Cautionary Note Regarding Forward-Looking Statements.”

General

We are an opportunistic capital platform that purchases businesses based on the differentials between public and private market valuations. We use 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 value is not fully recognized in the public markets, where values of certain operations are masked by a diversified business mix, or where private ownership has not invested capital necessary to drive long-term value. We aim to operate a transactional platform through which we can initiate a strategic block position 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.

We have a strategic relationship with Starboard that has provided, and we expect will continue to provide, us with 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 ready access to its extensive network of highly successful industry executives and, as part of our relationship, Starboard assists with sourcing and evaluating appropriate acquisition opportunities.

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

Intellectual Property Operations

We invest in IP and related absolute return assets and engage in the licensing and enforcement of patented technologies. Through our Patent Licensing, Enforcement and Technologies Business, operated under Acacia Research Group, LLC and its wholly-owned subsidiaries ("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 to date, across nearly 200 patent portfolio licensing and enforcement programs. As of March 31, 2023, we have generated gross licensing revenue of approximately $1.7 billion, and have returned $852.4 million to our patent partners.

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

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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 execution of strategic partnerships to generate growth.

For more information related to our Industrial Operations, refer to the section entitled "Industrial Printing Solutions" below.

Recent Business Developments and Trends

Recapitalization

On October 30, 2022, the Company entered into a Recapitalization Agreement (the "Recapitalization Agreement") with the Investors, 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. Under the Recapitalization Agreement, the Company and Starboard agreed to take certain actions in connection with the Recapitalization. For a detailed description of the Recapitalization and the actions taken and contemplated to be taken in connection therewith, see Note 8 to the consolidated financial statements elsewhere herein.

Change of Chief Executive Officer

Since 2021, we have announced various changes to our Board and senior management, including

•Effective November 1, 2022, Clifford Press resigned as the Chief Executive Officer and President of the Company, and as a member of the Board. Mr. Press’ resignation was not due to any disagreement with the Company on any matter relating to its operations, policies, practices or otherwise known to any executive officer of the Company.

•Effective November 1, 2022, Martin D. McNulty Jr., the Company’s current Chief Operating Officer and Head of M&A, was appointed interim Chief Executive Officer of the Company and will serve as the Principal Executive Officer of the Company. The Board intends to commence a search for a permanent successor.

In addition, there have been other changes to the Company’s management and the Board, as discussed in Item 1A to our Annual Report on Form 10-K for the year ended December 31, 2022, "Risk Factors — Risks Related to Our Business, Business Strategy, and Platform — Recent changes in the Company’s management team and board of directors, as well as ongoing litigation related to the Company’s former Chief Executive Officer, may be disruptive to, or cause uncertainty in, the Company’s business, results of operations and the price of the Company’s common stock.” 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 operations and financial condition.

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 June 2020 we acquired the Life Sciences Portfolio. In connection with the purchase of the equity securities in the Life Sciences Portfolio, we issued to the Investors $115.0 million principal amount of our senior secured notes, or Notes. As of December 31, 2020, all of the equity securities in the Life Sciences Portfolio were transferred to the Company. As of March 31, 2023, we have monetized a majority of the portfolio while retaining an interest in a number of operating businesses, including a controlling interest in one of the companies in the portfolio. Further, some of the businesses in

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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.

Business Strategy

We intend to grow our company by acquiring additional operating businesses 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, 2023, our Printronix subsidiary experienced some inflation from higher freight costs and in the cost of raw materials than in previous years. While Printronix inventory costs have been impacted by these inflationary pressures, up to this point Printronix has generally been able to adjust selling prices in response to these higher costs.

Patent Licensing and Enforcement

Patent Litigation Trial Dates and Related Trials

As of the date of this report, our operating subsidiaries have five pending patent infringement cases with scheduled trial dates 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. Refer to Item 1A “Risk Factors— Risks Related to our Intellectual Property Business and Industry” of our Annual Report for additional information regarding patent litigation and related risks.

Litigation and Licensing Expense

We expect patent-related legal expenses to continue to fluctuate from period to period based on the factors summarized herein, in connection with future trial dates, international enforcement, strategic patent portfolio prosecution and our current and future patent portfolio investment, prosecution, licensing and enforcement activities. Refer to Item 1A “Risk Factors” of our Annual Report for additional information regarding litigation and licensing expense risk.

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.

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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, 2023 and during 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 Printing Solutions

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.

Recent Business Matters

Recapitalization Agreement

In order to establish a strategic and ongoing relationship between the Company and Starboard, on November 18, 2019, the Company and Starboard entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”), which provided the terms of Starboard’s initial capital commitment in the Company (the “2019 Transaction”). As a result of the 2019 Transaction, which was approved by the Company’s stockholders for purposes of NASDAQ Rules 5635(b) and 5635(d) at a stockholder meeting held on February 14, 2020, Starboard acquired the following securities and ownership positions in the Company: (i) 350,000 shares of Series A Preferred Stock, (ii) Series A Warrants to purchase up to 5,000,000 shares of common stock (the “Series A Warrants”) and (iii) Series B Warrants to purchase up to 100,000,000 shares of common stock. The Securities Purchase Agreement also established the terms of certain senior secured notes issued by the Company.

On November 12, 2021, the Board formed a Special Committee comprised of directors not affiliated or associated with Starboard in order to explore the possibility of simplifying the Company’s capital structure. Management of the Company believes that the Company’s capital structure, with multiple different series of securities, makes it difficult for investors to understand and value the Company and is an impediment to new public investment.

Further to this purpose and following ongoing negotiations with Starboard, on October 30, 2022, and following the unanimous recommendation thereof of the Special Committee of the Board, 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.

Under the Recapitalization Agreement, the Company and Starboard agreed, among other things, to take all of the following actions in connection with restructuring Starboard’s existing investments in the Company:

•Series A Warrants. Within five (5) business days following the date of the Recapitalization Agreement, Starboard exercised all of the Series A Warrants for cash, and the Company issued to Starboard 5,000,000 shares of common stock in accordance with the terms of the Series A Warrants and paid to Starboard an aggregate amount of $9,000,000

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representing a negotiated settlement of the foregone time value of the Series A Warrants (which amount was paid through a reduction in the exercise price of the Series A Warrants).

•Preferred Stock. Subject to the receipt of stockholder approval at the Company’s next annual meeting of stockholders, (i) the Company will cause the Amended and Restated Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, dated as of January 7, 2020 (the “Certificate of Designations”) to be amended and restated in the form attached to the Recapitalization Agreement in order to remove the “4.89% blocker” provision and (ii) on or prior to July 14, 2023, Starboard will convert an aggregate amount of 350,000 shares of Series A Preferred Stock into common stock in accordance with the terms of the amended and restated Certificate of Designations.

•Series B Warrants. On or prior to July 14, 2023, Starboard will irrevocably exercise 31,506,849 of the Series B Warrants (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction relating to the common stock occurring after the date of the Recapitalization Agreement), through a “Note Cancellation” (as defined in the Series B Warrants) or a combination of a “Note Cancellation” and a “Limited Cash Exercise” (as defined in the Series B Warrants) in accordance with the terms of the Series B Warrants, as determined by Starboard (the “Series B Warrants Exercise”). The remaining Series B Warrants were cancelled immediately following the completion of the Rights Offering.

•Rights Offering. The Company agreed to launch the Rights Offering described in further detail in the section titled “Rights Offering and Concurrent Private Rights Offering” below. In connection with the Rights Offering, the Company agreed to provide Starboard with rights to purchase 28,647,259 shares of common stock and Starboard committed to purchase a minimum of 15,000,000 shares of common stock.

•Recapitalization Payment. At the closing of the Series B Warrants Exercise, the Company will pay to Starboard an aggregate amount of $66,000,000 (the “Recapitalization Payment”) representing a negotiated settlement of the foregone time value of the Series B Warrants and the Series A Preferred Stock (which amount will be paid through a reduction in the exercise price of the Series B Warrants). If stockholder approval for the amendment to the Certificate of Designations to remove the “4.89% blocker provision” is not obtained, the Recapitalization Payment will be reduced by $12,700,000.

•Governance. Under the Recapitalization Agreement, the parties agreed that for a period from the date of the Recapitalization Agreement until May 12, 2026 (the “Applicable Period”), the Board of the Company will include at least two (2) directors that are independent of, and not affiliates (as defined in Rule 144 of the Securities Exchange Act of 1934, as amended) of, Starboard, with current Board members Maureen O’Connell and Isaac T. Kohlberg satisfying this initial condition under the Recapitalization Agreement. The parties also agreed that Katharine Wolanyk would continue to serve as a director of the Company until at least May 12, 2024 (or such earlier date if Ms. Wolanyk is unwilling or unable to serve as a director for any reason or resigns as a director). Additionally, the Company appointed Gavin Molinelli as a member and as Chair of the Board. The Company and Starboard also agreed that, following the closing of the Series B Warrants Exercise until the end of the Applicable Period, the number of directors serving on the Board will not exceed 10 members. Effective as of the later of the Closing and the date on which none of the Notes (as defined in Note 8 to the accompanying consolidated financial statements) remain outstanding, the existing Governance Agreement will be automatically terminated.

Refer to Note 8 to the consolidated financial statements elsewhere herein for more information.

Rights Offering and Concurrent Private Rights Offering

On February 14, 2023, the Company commenced the Rights Offering. Under the terms of the Rights Offering, the Company distributed non-transferable subscription rights to record holders (“Eligible Securityholders”) of the Company’s common stock held as of 5 p.m. Eastern time on February 13, 2023, the record date for the Rights Offering. The subscription period for the Rights Offering terminated at 5 p.m. Eastern time on March 1, 2023 (the “Expiration Time”). Pursuant to the Rights Offering, Eligible Securityholders received one non-transferable subscription right (a “Subscription Right”) for every four shares of common stock owned by such Eligible Securityholders. Each Subscription Right entitled an Eligible Securityholder to purchase, at such Eligible Securityholder’s election, one share of common stock at a price of $5.25 per share (the “Subscription Price”).

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Starboard received private subscription rights to purchase common stock at the Subscription Price pursuant to a concurrent private rights offering (the “Concurrent Private Rights Offering”) in connection with their ownership of common stock and, on an as-converted basis, the Company’s Series B Warrants and shares of the Series A Preferred Stock. The private subscription rights provided to Starboard pursuant to the Concurrent Private Rights Offering were on substantially the same terms as the Subscription Rights, and were distributed substantially concurrently with the distribution of the Subscription Rights and expired at the Expiration Time. The Company received aggregate gross proceeds of approximately $361,000 from the Rights Offering and aggregate gross proceeds of approximately $78.8 million from the Concurrent Private Rights Offering and issued an aggregate of 15,068,753 shares of common stock.

Industrial Operations Acquisition

Refer to “Recent Business Developments and Trends – Acquisitions” above for information related to our Printronix acquisition.

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 Printing Solutions" above for information related to Printronix's operating activities.

In addition to the following results of operations discussion, more information related to our Intellectual Property Operations and Industrial Operations segment revenues and cost of revenues, may be found in Note 15 to the consolidated financial statements elsewhere herein and Note 2 included in our Annual Report on Form 10-K, for the year ended December 31, 2022, as filed with the SEC on March 17, 2023.

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Results of Operations

Summary of Results of Operations

	Three Months Ended March 31,
		2023		2022		$ Change		% Change
		(In thousands, except percentage change values)
Total revenues		$	14,803	$	13,507	$	1,296	10	%
Total costs and expenses		24,127		22,015		2,112		10	%
Operating loss		(9,324)		(8,508)		(816)		10	%
Total other income (expense)		21,254		(79,636)		100,890		(127	%)
Income (loss) before income taxes		11,930		(88,144)		100,074		(114	%)
Income tax (expense) benefit		(2,483)		14,878		(17,361)		(117	%)
Net income (loss) attributable to Acacia Research Corporation		9,447		(73,266)		82,713		(113	%)

Results of Operations - three months ended March 31, 2023 compared with the three months ended March 31, 2022

Total revenues increased $1.3 million to $14.8 million for the three months ended March 31, 2023, as compared to $13.5 million for the three months ended March 31, 2022, due to an increase in our Intellectual Property Operations revenues. ARG executed 4 new license agreements during the first quarter of 2023, which contributed to Intellectual Property Operations revenues increasing by $1.6 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 increase was offset by the decrease in net revenues contributed from Printronix of $265,000. Refer to "Revenues" below for further detailed discussion.

Income before income taxes was $11.9 million for the three months ended March 31, 2023, as compared to loss before income taxes of $88.1 million in the comparable prior period. The net increase 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 $51,000, from $170,000 to $221,000 in 2023, primarily due to license agreement activity and related revenues generated with inventor royalty obligations. Refer to "Cost of Revenues – Intellectual Property Operations" below for further discussion.

•Contingent legal fees decreased $17,000, from $549,000 to $532,000 in 2023, primarily due to the change in Intellectual Property Operations revenues described above. Refer to "Cost of Revenues – Intellectual Property Operations" below for further discussion.

•Litigation and licensing expenses increased $140,000, from $1.2 million to $1.4 million in 2023, primarily due to a net increase in litigation support and third-party technical consulting expenses associated with ongoing litigation. Refer to "Cost of Revenues – Intellectual Property Operations" below for further discussion.

•Printronix cost of sales, engineering and development expenses, and sales and marketing expenses for the first quarter of 2023 increased $1.0 million, from $6.4 million to $7.3 million. Refer to "Cost of Revenues – Industrial Operations" and "Operating Expenses" below for further discussion.

•General and administrative expenses increased $987,000, from $11.1 million to $12.0 million in 2023, primarily due to higher parent company and Intellectual Property Operations costs including, parent company consulting and legal fees related to the termination of the former Chief Executive Officer and SEC matters, accounting fees, and severance expense offset partially by a decrease in compensation expense for share-based awards, variable performance-based compensations costs, personnel costs and board fees, and our Industrial Operations general and administrative 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, decreased $697,000, from $1.2 million to $477,000 in 2023, primarily due to forfeitures for terminated employees, which includes a partial offset by restricted stock and option grants issued to employees and the Board in 2023 and 2022.

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•Unrealized gain from the change in fair value of our equity securities was $3.3 million in 2023, as compared to an unrealized loss of $172.2 million in the comparable prior period. The unrealized gain and loss were derived from our Life Sciences Portfolio and trading securities portfolio. Refer to "Equity Securities Investments" below for further discussion.

•Realized loss from the sale of equity securities was $1.4 million in 2023, as compared to a realized gain of $66.9 million in the comparable prior period. The realized loss was derived from the sales activity from our trading securities portfolio. Refer to "Equity Securities Investments" below for further discussion.

•Unrealized gain from the Series B warrants and the embedded derivative fair value measurements was $16.7 million in 2023, as compared to an unrealized gain of $28.1 million from the Series A and Series B warrants and embedded derivative fair value measurements in the comparable prior period. Refer to Notes 8 and 9 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Securities and fair value measurements.

•Gain on foreign currency exchange was $80,000 in 2023, as compared to a loss on foreign currency exchange of $813,000 in the comparable prior period. The increase was primarily derived from our foreign cash accounts exposed to fluctuations in foreign currency exchange rates between the U.S. dollar and the British Pound.

•Interest expense on Senior Secured Notes decreased $1.7 million, from $2.6 million to $900,000 in 2023, due to decreased interest expense related to lower principal amount of Senior Secured Notes outstanding in 2023. Refer to Note 8 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Senior Secured Notes.

•Interest income and other, net was $3.4 million in 2023, as compared to $1.0 million in the comparable prior period, mainly due to an increase in interest income from our cash equivalents and equity security investments. Refer to Note 2 included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 17, 2023 for additional information regarding our cash and cash equivalents and investments in equity securities.

Revenues

Intellectual Property Operations

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

	Three Months Ended March 31,
		2023		2022		$ Change		% Change
		(In thousands, except percentage change values and count totals)
Paid-up license revenue agreements		$	3,900	$	2,193	$	1,707	78	%
Recurring license revenue agreements		276		422		(146)		(35	%)
Total revenues		$	4,176	$	2,615	$	1,561	60	%
New license agreements executed		4		9		(5)		(56	%)
Licensing and enforcement programs    generating revenues		6		7		(1)		(14	%)

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 $1.7 million due to an increase in the average revenue per agreement despite the decrease in the number of agreements executed. Recurring revenue, that provides for quarterly sales-based license fees, decreased $146,000 from various on-going license arrangements.

Refer to Note 2 included in our Annual Report on Form 10-K, for the year ended December 31, 2022, as filed with the SEC on March 17, 2023 for additional information regarding our revenue arrangements and related concentrations for the periods presented herein.

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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.

Industrial Operations

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

	Three Months Ended March 31,
		2023		2022		$ Change		% Change
		(In thousands, except percentage change value)
Printers and parts		$	4,464	$	4,254	$	210	5	%
Consumable products		5,170		5,384		(214)		(4	%)
Services		993		1,254		(261)		(21	%)
Total		$	10,627	$	10,892	$	(265)	(2	%)

Refer to Note 2 included in our Annual Report on Form 10-K, for the year ended December 31, 2022, as filed with the SEC on March 17, 2023 for additional information regarding Printronix's revenue arrangements and related concentrations. Refer to “Industrial Printing Solutions” above for additional information related to Printronix's operating activities.

Cost of Revenues

Intellectual Property Operations

	Three Months Ended March 31,
		2023		2022		$ Change		% Change
		(In thousands, except percentage change values)
Inventor royalties		$	221	$	170	$	51	30	%
Contingent legal fees		532		549		(17)		(3	%)
Litigation and licensing expenses		1,384		1,244		140		11	%
Amortization of patents		2,601		2,601		—		0	%
Total		$	4,738	$	4,564	$	174	4	%

Refer to detailed change explanations above for the three months ended March 31, 2023 and 2022 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

Printronix's cost of sales for the three months ended March 31, 2023 and 2022 was $5.2 million and $4.2 million, respectively. The increase in Printronix's cost of sales is due to under absorption of overhead cost. Refer to Note 2 included in our Annual Report on Form 10-K, for the year ended December 31, 2022, as filed with the SEC on March 17, 2023 for additional information regarding Printronix's cost of sales.

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Operating Expenses

	Three Months Ended March 31,
		2023		2022		$ Change		% Change
		(In thousands, except percentage change values)
Engineering and development expenses - industrial operations		$	216	$	190	$	26	14	%
Sales and marketing expenses - industrial operations		1,913		2,016		(103)		(5	%)
General and administrative costs - intellectual property operations		1,897		1,716		181		11	%
General and administrative costs - industrial operations		2,718		2,855		(137)		(5	%)
Parent general and administrative expenses		7,425		6,482		943		15	%
Total general and administrative expenses		12,040		11,053		987		9	%
Total		$	14,169	$	13,259	$	910	7	%

The operating expenses table above includes the Company's general and administrative expenses by operation and Printronix's engineering and development expenses and sales and marketing expenses. 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:

	Three Months Ended March 31,
	2023 vs. 2022
	(In thousands)
Personnel costs and board fees	$	(145)
Variable performance-based compensation costs	(386)
Other general and administrative costs	1,952
General and administrative costs - industrial operations	(137)
Compensation expense for share-based awards	(697)
Non-recurring employee severance costs	400
Total change in general and administrative expenses	$	987

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 decrease in personnel cost and board fees, variable performance-based compensation costs and compensation expense for share-based awards was primarily due to a decrease in headcount and related costs. The increases in other general and administrative costs, which relates to our parent company and Intellectual Property Operations business, were primarily due to parent company consulting and legal fees related to the termination of the former Chief Executive Officer and SEC matters. Non-recurring employee severance costs fluctuate based on the severance arrangements of terminated employees. Refer to additional general and administrative change explanations above.

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Other Income/Expense

Equity Securities Investments

	Three Months Ended March 31,
		2023		2022		$ Change		% Change
		(In thousands, except percentage change values)
Change in fair value of equity securities		$	3,343	$	(172,203)	$	175,546	(102	%)
(Loss) gain on sale of equity securities		(1,361)		66,876		(68,237)		(102	%)
Total net realized and unrealized (loss) gain		$	1,982	$	(105,327)	$	107,309	(102	%)

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 fourth quarter of 2022, Acacia fully exited its position in Oxford Nanopore. Refer to periodic change explanations above. Refer to Notes 3 to the consolidated financial statements elsewhere herein for additional information regarding our investment in the Life Sciences Portfolio and other equity securities.

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

Income Taxes

	Three Months Ended March 31,
		2023			2022			$ Change		% Change
		(In thousands, except percentage change values)
Income tax (expense) benefit		$	(2,483)		$	14,878		$	(17,361)	(117	%)
Effective tax rate		20		%	(17)		%	n/a		37	%

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 income tax benefit for the three months ended March 31, 2022 primarily reflects the decrease in deferred tax liabilities attributable to the unrealized loss recorded in the period.

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. Our 2022 effective tax rate was lower than the U.S. federal statutory rate primarily due to the change 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, 2023 and December 31, 2022. Refer to Note 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, 2023, are recognized as liabilities or generally are otherwise described in Note 11, "Commitments and Contingencies," to the consolidated financial statements included elsewhere herein. Our most significant liabilities as reflected on our balance sheet as of March 31, 2023 include the Senior Secured Notes and, because of certain provisions in the related agreements that provide for net cash settlement upon a change in control, the Series B Warrants. For additional information, see Note 8, "Starboard Investment" to the consolidated financial statements included elsewhere herein. The Senior Secured Notes mature on July 14, 2023. In accordance with the terms of

47

the Recapitalization Agreement, on or prior to July 14, 2023, a portion of the Series B Warrants are expected to be exercised for common stock through the Series B Warrants Exercise. In addition to the foregoing, we will be required to make the Recapitalization Payment at the closing of the Series B Warrants Exercise.

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 11 to the consolidated financial statements. Historically, we have not entered into off-balance sheet financing arrangements. At March 31, 2023, 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.

Our primary sources of liquidity are cash and cash equivalents on hand, cash generated from our operating activities, and borrowings in connection with the Senior Secured Notes (discussed in Note 8 to the consolidated financial statements elsewhere herein). Our cash and cash equivalents on hand includes proceeds of the recently completed Rights Offering and Concurrent Private Rights Offering. We expect to satisfy our obligations under the existing Senior Secured Notes that mature on July 14, 2023 and make the Recapitalization Payment with cash on hand.

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, anticipated cash flows from operations and the transactions taken and contemplated to be taken in connection with the Recapitalization, and our availability of Senior Secured Notes will be sufficient to meet our cash requirements through at least twelve months from the date of this 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 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 $425.0 million at March 31, 2023, compared to $349.4 million at December 31, 2022.

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Cash Flows Summary

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

	Three Months Ended March 31,
	2023		2022
	(In thousands)
Net cash (used in) provided by:
Operating activities	$	(4,349)	$	(3,163)
Investing activities	2,783		9,931
Financing activities	77,995		(26,760)
Effect of exchange rates on cash and cash equivalents	12		—
Increase (decrease) in cash and cash equivalents	$	76,441	$	(19,992)

Cash Flows from Operating Activities

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

	Three Months Ended March 31,
	2023		2022
	(In thousands)
Net income (loss) including noncontrolling interests in subsidiaries	$	9,447	$	(73,266)
Adjustments to reconcile net income (loss) including noncontrolling interests in subsidiaries to net cash used in    operating activities:
Depreciation and amortization	3,381		3,369
Amortization of debt discount and issuance costs	—		51
Change in fair values Series A redeemable convertible preferred stock embedded derivatives, Series A warrants and Series B warrants	(16,651)		(28,098)
Compensation expense for share-based awards	477		1,174
(Gain) loss on foreign currency exchange	(80)		813
Change in fair value of equity securities	(3,343)		172,203
Gain (loss) on sale of equity securities	1,361		(66,876)
Deferred income taxes	(240)		(15,039)
Changes in assets and liabilities:
Accounts receivable	(451)		318
Inventories	(503)		(1,084)
Prepaid expenses and other assets	(391)		(1,246)
Accounts payable and accrued expenses	2,355		4,261
Royalties and contingent legal fees payable	360		(161)
Deferred revenue	(71)		418
Net cash used in operating activities	$	(4,349)	$	(3,163)

Cash receipts from ARG's licensees totaled $4.4 million and $2.7 million for the three months ended March 31, 2023 and 2022, respectively. Cash receipts from Printronix's customers totaled $10.0 million and $11.2 million for the three months ended March 31, 2023 and 2022, 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 and customers.

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Our reported cash used in operations for the three months ended March 31, 2023 was $4.3 million, compared to $3.2 million cash provided by operations in the comparable prior period. The increase in cash used in operations was primarily due to net outflows from the total changes in assets and liabilities (refer to Working Capital discussion below), inventory related purchases and royalties and contingent legal fees related payments, 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, 2023 decreased to $14.6 million, compared to $15.1 million at December 31, 2022, which was comprised of the changes in assets and liabilities presented above. The decrease is primarily due to change in accounts payable, accrued expenses and other current liabilities and accrued compensation, which is related to legal fees and income tax payable and severance accruals in the first quarter of 2023, partially offset by an installment of the accrued patent cost (refer to Note 6).

Cash Flows from Investing Activities

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

	Three Months Ended March 31,
	2023		2022
	(In thousands)
Purchases of equity securities	(5,166)		(92,877)
Sales of equity securities	8,032		102,842
Purchases of property and equipment	(83)		(34)
Net cash provided by investing activities	$	2,783	$	9,931

Cash flows from investing activities for the three months ended March 31, 2023 increased to $2.8 million, as compared to cash flow of $9.9 million in the comparable prior period, primarily due to net cash inflows from our Life Sciences Portfolio and trading securities portfolio equity securities transactions in 2023. Refer to “Other Income/Expense – Equity Securities Investments” above for additional information.

Cash Flows from Financing Activities

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

	Three Months Ended March 31,
	2023		2022
	(In thousands)
Repurchase of common stock	$	—	$	(10,988)
Paydown of Senior Secured Notes	—		(15,000)
Dividend on Series A Redeemable Convertible Preferred Stock	(700)		(700)
Taxes paid related to net share settlement of share-based awards	(416)		(72)
Proceeds from Rights Offering	79,111		—
Net cash provided by (used in) financing activities	$	77,995	$	(26,760)

Cash inflows from financing activities for the three months ended March 31, 2023 increased to $78.0 million, as compared to cash outflow of $26.8 million in the comparable prior period, primarily due to activity related to the Rights Offering and Concurrent Private Rights Offering (refer to Note 8).

On October 30, 2022, the Company entered into a Recapitalization Agreement with Starboard and the Investors. Refer to Note 8 to the consolidated financial statements elsewhere herein for additional information.

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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 Annual Report on Form 10-K, for the year ended December 31, 2022, as filed with the SEC on March 17, 2023, the following accounting policies require our most difficult, subjective or complex assumptions, judgments and estimates:

•revenue recognition;

•valuation of long-lived assets, goodwill and other intangible assets;

•valuation of Series B Warrants;

•valuation of embedded derivatives; 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 Annual Report on Form 10-K, for the year ended December 31, 2022, as filed with the SEC on March 17, 2023. For further information on the significant accounting policies related to the 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 Annual Report on Form 10-K, for the year ended December 31, 2022, as filed with the SEC on March 17, 2023.

Recent Accounting Pronouncements

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

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ITEM 3. 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 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, 2023 and December 31, 2022, the carrying value of our equity investments in public and private companies was $97.5 million and $98.4 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, 2023, 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 $6.1 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, a note receivable and certain equity security investments. As of March 31, 2023, a hypothetical 10% change in exchange rates related to our at risk foreign denominated equity securities would have approximately a $4.3 million effect on our financial position and results of operations.

ITEM 4. CONTROLS AND PROCEDURES

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, 2023, 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.

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter (the quarter ended March 31, 2023) 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.

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PART II - OTHER INFORMATION

ITEM 1. 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. Refer to Note 11 to the consolidated financial statements elsewhere herein for additional information related to legal proceedings.

ITEM 1A. RISK FACTORS

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 the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, as well as our consolidated financial statements and the accompanying notes thereto. In addition, you should carefully consider the risks and uncertainties in the section entitled “Risk Factors” in Part I, Item 1A of our 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 changes to the Risk Factors previously reported in our Annual Report.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

EXHIBIT NUMBER	EXHIBIT
4.1	Form of Subscription Rights Certificate (incorporated by reference to the Exhibit 4.1 to the Company's Current Report on Form 8-K filed on February 14, 2023)
10.1	Amended and Restated Registration Rights Agreement dated as of February 14, 2023, by and among Acacia Research Corporation and the investors listed on the Schedule of Buyers attached thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 14, 2023)
10.2*	Consulting Agreement, effective January 28, 2023, among Acacia Research Corporation and Richard Rosenstein (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 2022, filed on March 17, 2023)
31.1#	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
31.2#	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
32.1†	Certification of Principal Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350
32.2†	Certification of Principal Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350
101#	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2023 and 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Series A Redeemable Convertible Preferred Stock and Stockholders' Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
104#	Cover Page Interactive Data File (formatted in iXBRL and included in Exhibit 101)

_________________________

#    Filed herewith.

*The referenced exhibit is a management contract, compensatory plan or arrangement required to be filed as an exhibit to this Quarterly Report on Form 10-Q pursuant to Item 15(a)(3) of Form 10-K.

†    The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any of the Registrant’s filings under the Securities Act or the Exchange Act, irrespective of any general incorporation language contained in any such filing.

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SIGNATURES

Pursuant to the requirements 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.

	ACACIA RESEARCH CORPORATION
Date: May 11, 2023	/s/ Martin D. McNulty Jr.
	By: Martin D. McNulty Jr.
	Interim Chief Executive Officer (Principal Executive Officer and Duly Authorized Signatory)
Date: May 11, 2023	/s/ Kirsten Hoover
	By: Kirsten Hoover
	Interim Chief Financial Officer (Principal Financial Officer and Accounting Officer)

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