ACACIA RESEARCH CORP - Quarter Report: 2022 September (Form 10-Q)
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 September 30, 2022
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: 1-37721
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) 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 November 7, 2022, was 43,540,276.
ACACIA RESEARCH CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
September 30, 2022
TABLE OF CONTENTS
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i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2022, or this Report, contains forward-looking statements within the meaning of the federal securities laws, which statements are subject to substantial risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Report, or incorporated by reference into this Report, are forward-looking statements. 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 address future events and conditions concerning, among other things, acquisition and development activities, financial results of our acquired businesses, intellectual property, or IP, licensing and enforcement activities, other related business activities, the impact of the COVID-19 pandemic, 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 in this Report. All of our forward-looking statements include assumptions underlying or relating to such statements that may cause actual results to differ materially from those that we are currently expecting, and are subject to numerous factors that present considerable risks and uncertainties, including, without limitation:
•our costly acquisitions of and investment in operating businesses and intellectual property;
•our ability to attract and retain employees and management teams of our operating businesses, the loss of any of whom could materially adversely affect our financial condition, business and results of operations;
•our relationship with Starboard Value LP and the impact of transactions we have undertaken with respect to its investments in our Company that are intended to simplify our capital structure;
•the due diligence process we undertake in connection with new acquisitions of operating businesses or intellectual property assets;
•our acquisition of privately held companies;
•we may be deemed to be an investment company under the Investment Company Act of 1940, as amended;
•our outsourcing of a number of services to third-party service providers, which are subject to disruptions, delays, and decrease in our control, which could adversely impact our results of operations;
•recent U.S. tax legislation;
•cybersecurity incidents; and
•public health threats such as COVID-19.
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 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, 2021, filed with the Securities and Exchange Commission (“SEC”), on March 31, 2022 (our “Annual Report”), as well as in our other public filings with the SEC. In addition, actual results may differ 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.
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.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACACIA RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| September 30, 2022 | December 31, 2021 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 241,874 | $ | 308,943 | |||||||
| Equity securities at fair value | 81,384 | 361,778 | |||||||||
| Equity securities without readily determinable fair value | 5,816 | 5,816 | |||||||||
| Investment securities - equity method investments | 72,106 | 30,934 | |||||||||
| Accounts receivable, net | 7,040 | 9,517 | |||||||||
| Inventories, net | 13,802 | 8,930 | |||||||||
| Prepaid expenses and other current assets | 5,173 | 4,764 | |||||||||
| Total current assets | 427,195 | 730,682 | |||||||||
| Long-term restricted cash | — | 418 | |||||||||
| Property, plant and equipment, net | 3,700 | 4,183 | |||||||||
| Goodwill | 7,470 | 7,470 | |||||||||
| Other intangible assets, net | 39,692 | 48,793 | |||||||||
| Leased right-of-use assets | 2,393 | 2,027 | |||||||||
| Other non-current assets | 4,819 | 5,283 | |||||||||
| Total assets | $ | 485,269 | $ | 798,856 | |||||||
| LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 5,097 | $ | 5,440 | |||||||
| Accrued expenses and other current liabilities | 9,258 | 6,227 | |||||||||
| Accrued compensation | 5,070 | 3,698 | |||||||||
| Royalties and contingent legal fees payable | 3,259 | 2,463 | |||||||||
| Deferred revenue | 1,403 | 1,114 | |||||||||
| Senior secured notes payable | 61,350 | 181,248 | |||||||||
| Total current liabilities | 85,437 | 200,190 | |||||||||
| Deferred revenue, net of current portion | 665 | 581 | |||||||||
| Series A warrant liabilities | 9,396 | 11,291 | |||||||||
| Series A embedded derivative liabilities | 22,389 | 18,448 | |||||||||
| Series B warrant liabilities | 59,742 | 96,378 | |||||||||
| Long-term lease liabilities | 2,186 | 2,027 | |||||||||
| Deferred income tax liabilities, net | 2,710 | 18,552 | |||||||||
| Other long-term liabilities | 1,781 | 6,161 | |||||||||
| Total liabilities | 184,306 | 353,628 | |||||||||
| 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 September 30, 2022 and December 31, 2021; aggregate liquidation preference of $35,000 as of September 30, 2022 and December 31, 2021 | 18,482 | 14,753 | |||||||||
| 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; 38,540,276 and 48,807,748 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | 38 | 49 | |||||||||
Treasury stock, at cost, 16,183,703 and 5,388,469 shares as of September 30, 2022 and December 31, 2021, respectively | (98,258) | (47,281) | |||||||||
| Additional paid-in capital | 644,329 | 648,389 | |||||||||
| Accumulated deficit | (288,403) | (181,724) | |||||||||
| Total Acacia Research Corporation stockholders' equity | 257,706 | 419,433 | |||||||||
| Noncontrolling interests | 24,775 | 11,042 | |||||||||
| Total stockholders' equity | 282,481 | 430,475 | |||||||||
| Total liabilities, redeemable convertible preferred stock, and stockholders' equity | $ | 485,269 | $ | 798,856 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
ACACIA RESEARCH CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Intellectual property operations | $ | 6,320 | $ | 1,582 | $ | 16,997 | $ | 24,785 | |||||||||||||||
| Industrial operations | 9,558 | — | 29,105 | — | |||||||||||||||||||
| Total revenues | 15,878 | 1,582 | 46,102 | 24,785 | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of revenues - intellectual property operations | 5,282 | 3,959 | 14,480 | 18,525 | |||||||||||||||||||
| Cost of sales - industrial operations | 4,648 | — | 13,432 | — | |||||||||||||||||||
| Engineering and development expenses - industrial operations | 156 | — | 491 | — | |||||||||||||||||||
| Sales and marketing expenses - industrial operations | 2,119 | — | 6,429 | — | |||||||||||||||||||
| General and administrative expenses | 15,038 | 10,345 | 36,813 | 23,014 | |||||||||||||||||||
| Total costs and expenses | 27,243 | 14,304 | 71,645 | 41,539 | |||||||||||||||||||
| Operating loss | (11,365) | (12,722) | (25,543) | (16,754) | |||||||||||||||||||
| Other (expense) income: | |||||||||||||||||||||||
| Equity securities investments: | |||||||||||||||||||||||
| Change in fair value of equity securities | (36,352) | 66,502 | (266,202) | 115,509 | |||||||||||||||||||
| Gain on sale of equity securities | 36,060 | 37,688 | 114,434 | 53,124 | |||||||||||||||||||
| Earnings on equity investment in joint venture | 850 | — | 42,935 | 2,737 | |||||||||||||||||||
| Net realized and unrealized gain (loss) | 558 | 104,190 | (108,833) | 171,370 | |||||||||||||||||||
| Change in fair value of investment | — | — | — | (2,752) | |||||||||||||||||||
| Gain on sale of investment | — | — | — | 3,591 | |||||||||||||||||||
| Change in fair value of the Series A and B warrants and embedded derivatives | 41,638 | 619 | 34,590 | (203,866) | |||||||||||||||||||
| Loss on foreign currency exchange | (1,905) | (17) | (4,532) | (193) | |||||||||||||||||||
| Interest expense on Senior Secured Notes | (1,072) | (2,378) | (5,532) | (5,142) | |||||||||||||||||||
| Interest income and other, net | 1,221 | 76 | 3,091 | 135 | |||||||||||||||||||
| Total other income (expense) | 40,440 | 102,490 | (81,216) | (36,857) | |||||||||||||||||||
| Income (loss) before income taxes | 29,075 | 89,768 | (106,759) | (53,611) | |||||||||||||||||||
| Income tax (expense) benefit | (679) | (11) | 14,399 | (531) | |||||||||||||||||||
| Net income (loss) including noncontrolling interests in subsidiaries | 28,396 | 89,757 | (92,360) | (54,142) | |||||||||||||||||||
| Net income attributable to noncontrolling interests in subsidiaries | (306) | — | (14,319) | (906) | |||||||||||||||||||
| Net income (loss) attributable to Acacia Research Corporation | $ | 28,090 | $ | 89,757 | $ | (106,679) | $ | (55,048) | |||||||||||||||
| Income (loss) per share: | |||||||||||||||||||||||
| Net income (loss) attributable to common stockholders - Basic | $ | 20,587 | $ | 73,110 | $ | (112,507) | $ | (58,595) | |||||||||||||||
| Weighted average number of shares outstanding - Basic | 38,052,426 | 48,949,504 | 42,830,700 | 48,759,873 | |||||||||||||||||||
| Basic net income (loss) per common share | $ | 0.54 | $ | 1.49 | $ | (2.63) | $ | (1.20) | |||||||||||||||
| Net income (loss) attributable to common stockholders - Diluted | $ | 1,531 | $ | 80,308 | $ | (112,507) | $ | (58,595) | |||||||||||||||
| Weighted average number of shares outstanding - Diluted | 71,164,236 | 93,081,502 | 42,830,700 | 48,759,873 | |||||||||||||||||||
| Diluted net income (loss) per common share | $ | 0.02 | $ | 0.86 | $ | (2.63) | $ | (1.20) | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
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 September 30, 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 June 30, 2022 | 350,000 | $ | 17,145 | 40,622,465 | $ | 41 | $ | (86,781) | $ | 646,352 | $ | (316,493) | $ | 25,055 | $ | 268,174 | ||||||||||||||||||||||||||||||||||||||||
| Net income including noncontrolling interests in subsidiaries | — | — | — | — | — | — | 28,090 | 306 | 28,396 | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests in subsidiaries | — | — | — | — | — | — | — | (586) | (586) | |||||||||||||||||||||||||||||||||||||||||||||||
| Accretion of Series A Redeemable Convertible Preferred Stock to redemption value | — | 1,337 | — | — | — | (1,337) | — | — | (1,337) | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividend on Series A Redeemable Convertible Preferred Stock | — | — | — | — | — | (700) | — | — | (700) | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for vesting of restricted stock units | — | — | 460,000 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of share-based awards | — | — | (235,489) | — | — | (1,017) | — | — | (1,017) | |||||||||||||||||||||||||||||||||||||||||||||||
| Compensation expense for share-based awards | — | — | — | — | — | 1,031 | — | — | 1,031 | |||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | (2,306,700) | (3) | (11,477) | — | — | — | (11,480) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 350,000 | $ | 18,482 | 38,540,276 | $ | 38 | $ | (98,258) | $ | 644,329 | $ | (288,403) | $ | 24,775 | $ | 282,481 | ||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 June 30, 2021 | 350,000 | $ | 12,695 | 49,616,602 | $ | 50 | $ | (43,270) | $ | 650,194 | $ | (475,726) | $ | 11,948 | $ | 143,196 | ||||||||||||||||||||||||||||||||||||||||
| Net income including noncontrolling interests in subsidiaries | — | — | — | — | — | — | 89,757 | — | 89,757 | |||||||||||||||||||||||||||||||||||||||||||||||
| Accretion of Series A Redeemable Convertible Preferred Stock to redemption value | — | 991 | — | — | — | (991) | — | — | (991) | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividend on Series A Redeemable Convertible Preferred Stock | — | — | — | — | — | (262) | — | — | (262) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | 30,000 | — | — | 108 | — | — | 108 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for unvested restricted stock awards, net of forfeitures | — | — | (54,750) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Compensation expense for share-based awards | — | — | — | — | — | 300 | — | — | 300 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 350,000 | $ | 13,686 | 49,591,852 | $ | 50 | $ | (43,270) | $ | 649,349 | $ | (385,969) | $ | 11,948 | $ | 232,108 | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ACACIA RESEARCH CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
| Nine Months Ended September 30, 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) income including noncontrolling interests in subsidiaries | — | — | — | — | — | — | (106,679) | 14,319 | (92,360) | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests in subsidiaries | — | — | — | — | — | — | — | (586) | (586) | |||||||||||||||||||||||||||||||||||||||||||||||
| Accretion of Series A Redeemable Convertible Preferred Stock to redemption value | — | 3,729 | — | — | — | (3,729) | — | — | (3,729) | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividend on Series A Redeemable Convertible Preferred Stock | — | — | — | — | — | (2,099) | — | — | (2,099) | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for vesting of restricted stock units | — | — | 635,501 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for unvested restricted stock awards, net of forfeitures | — | — | 242,667 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of share-based awards | — | — | (350,406) | — | — | (1,520) | — | — | (1,520) | |||||||||||||||||||||||||||||||||||||||||||||||
| Compensation expense for share-based awards | — | — | — | — | — | 3,288 | — | — | 3,288 | |||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | (10,795,234) | (11) | (50,977) | — | — | — | (50,988) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 350,000 | $ | 18,482 | 38,540,276 | $ | 38 | $ | (98,258) | $ | 644,329 | $ | (288,403) | $ | 24,775 | $ | 282,481 | ||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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, 2020 | 350,000 | $ | 10,924 | 49,279,453 | $ | 49 | $ | (43,270) | $ | 651,416 | $ | (330,921) | $ | 11,042 | $ | 288,316 | ||||||||||||||||||||||||||||||||||||||||
| Net (loss) income including noncontrolling interests in subsidiaries | — | — | — | — | — | — | (55,048) | 906 | (54,142) | |||||||||||||||||||||||||||||||||||||||||||||||
| Accretion of Series A Redeemable Convertible Preferred Stock to redemption value | — | 2,762 | — | — | — | (2,762) | — | — | (2,762) | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividend on Series A Redeemable Convertible Preferred Stock | — | — | — | — | — | (785) | — | — | (785) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | 60,000 | 1 | — | 201 | — | — | 202 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for vesting of restricted stock units | — | — | 28,834 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for unvested restricted stock awards, net of forfeitures | — | — | 223,565 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Compensation expense for share-based awards | — | — | — | — | — | 1,279 | — | — | 1,279 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 350,000 | $ | 13,686 | 49,591,852 | $ | 50 | $ | (43,270) | $ | 649,349 | $ | (385,969) | $ | 11,948 | $ | 232,108 | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
ACACIA RESEARCH CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss including noncontrolling interests in subsidiaries | $ | (92,360) | $ | (54,142) | |||||||
| Adjustments to reconcile net loss including noncontrolling interests in subsidiaries to net cash used in operating activities: | |||||||||||
| Change in fair value of investment | — | 2,752 | |||||||||
| Gain on sale of investment | — | (3,591) | |||||||||
| Depreciation and amortization | 10,140 | 7,198 | |||||||||
| Amortization of debt discount and issuance costs | 90 | 1 | |||||||||
| Change in fair value of Series A redeemable convertible preferred stock embedded derivatives | 3,941 | 14,683 | |||||||||
| Change in fair value of Series A warrants | (1,895) | 11,887 | |||||||||
| Change in fair value of Series B warrants | (36,636) | 177,296 | |||||||||
| Compensation expense for share-based awards | 3,288 | 1,279 | |||||||||
| Loss on foreign currency exchange | 4,530 | 193 | |||||||||
| Change in fair value of equity securities | 266,202 | (115,509) | |||||||||
| Gain on sale of equity securities | (114,434) | (53,124) | |||||||||
| Earnings on equity investment in joint venture | (42,935) | (2,737) | |||||||||
| Deferred income taxes | (15,971) | — | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | 2,242 | 94 | |||||||||
| Inventories | (4,872) | — | |||||||||
| Prepaid expenses and other assets | (1,078) | (2,191) | |||||||||
| Accounts payable and accrued expenses | 4,984 | 7,002 | |||||||||
| Royalties and contingent legal fees payable | 795 | (369) | |||||||||
| Deferred revenue | 371 | — | |||||||||
| Net cash used in operating activities | (13,598) | (9,278) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Patent acquisition | (5,000) | (13,000) | |||||||||
| Sale of investment at fair value | — | 3,591 | |||||||||
| Purchases of equity securities | (107,537) | (57,978) | |||||||||
| Sales of equity securities | 236,164 | 64,235 | |||||||||
| Distributions received from equity investment in joint venture | 1,178 | 1,830 | |||||||||
| Purchases of property and equipment | (552) | (67) | |||||||||
| Net cash provided by (used in) investing activities | 124,253 | (1,389) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repurchase of common stock | (50,988) | — | |||||||||
| Issuance of Senior Secured Notes, net of lender fee | — | 115,000 | |||||||||
| Paydown of Senior Secured Notes | (120,000) | (50,000) | |||||||||
| Dividend on Series A Redeemable Convertible Preferred Stock | (2,099) | (785) | |||||||||
| Taxes paid related to net share settlement of share-based awards | (1,520) | — | |||||||||
| Proceeds from exercise of stock options | — | 202 | |||||||||
| Net cash (used in) provided by financing activities | (174,607) | 64,417 | |||||||||
| Effect of exchange rates on cash and cash equivalents | (3,535) | (154) | |||||||||
| (Decrease) increase in cash and cash equivalents and restricted cash | (67,487) | 53,596 | |||||||||
| Cash and cash equivalents and restricted cash, beginning | 309,361 | 200,546 | |||||||||
| Cash and cash equivalents and restricted cash, ending | $ | 241,874 | $ | 254,142 | |||||||
| Supplemental schedule of cash flow information: | |||||||||||
| Interest paid | $ | 5,431 | $ | 2,340 | |||||||
| Income taxes paid | 209 | 9 | |||||||||
| Noncash investing and financing activities: | |||||||||||
| Patent acquisition in exchange of notes receivable | — | 4,000 | |||||||||
| Patent acquisition accrued liabilities | — | 13,000 | |||||||||
| Distribution to noncontrolling interests in subsidiaries | 586 | 906 | |||||||||
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,” “we,” “us,” or "our") is a permanent 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 to date has been on 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 September 30, 2022, we have monetized a portion 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 revenues through the receipt of royalties.
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. 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. ARG generates 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 nine months ended September 30, 2022, ARG did not obtain control of any new patent portfolios. During the year ended December 31, 2021, ARG obtained control of one new patent portfolio.
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
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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 from October 7, 2021 through September 30, 2022. As of December 31, 2021, management finalized the valuations of all acquired assets and liabilities assumed in the acquisition and there was no contingent consideration.
COVID-19 Pandemic
The full impact of the COVID-19 pandemic continues to evolve as of the date of this report. While the Company does not expect the current situation to present direct risks to its business, and it has not had a material impact to date, the COVID-19 pandemic could adversely impact the Company’s operations, as well as the operations of its licensees and other business partners. Our business is fully able to operate in a socially distanced and/or remote capacity and in accordance with applicable laws, policies and best practices. Our workforce is provided ample paid sick leave, and we have in place robust disaster recovery and business continuity policies that have been revised to account for a long-term remote work contingency such as this. However, the ongoing pandemic may present risks that we do not currently consider material or risks that may evolve quickly that could have a materially adverse effect on our business, results of operations and financial condition.
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").
Reclassifications
Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported consolidated results of operations or cash flows.
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 and with 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
8
(“SEC”). 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, 2021, as reported by Acacia in its Annual Report on Form 10-K filed with the SEC on March 31, 2022, 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 September 30, 2022, and results of its operations and its cash flows for the interim periods presented. The consolidated results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the entire fiscal year.
Segment Reporting
The Company uses the management approach, which designates the internal organization that is used by management for making operating decisions and assessing performance as the basis of the Company’s reportable segments. Refer to Note 15 for additional information regarding our two reportable business segments: Intellectual Property Operations and Industrial Operations.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Acacia believes that, of the significant accounting policies described herein, the accounting policies associated with revenue recognition, estimates of variable consideration for revenue, including sales returns, the valuation of equity securities without readily determinable fair value, the determination of excess and obsolete inventories, bad debt allowances and product warranty liabilities, the valuation of Series A redeemable convertible preferred stock (the “Series A Redeemable Convertible Preferred Stock”), embedded derivatives, Series A warrants (the “Series A Warrants”) and Series B warrants (the “Series B Warrants”), stock-based compensation expense, impairment of goodwill, patent-related and other intangible assets, the determination of the economic useful life of amortizable intangible assets, and income taxes and valuation allowances against net deferred tax assets, require its most difficult, subjective or complex judgments.
Revenue Recognition
Intellectual Property Operations
ARG's revenue is recognized upon transfer of control (i.e., by the granting) of promised bundled IP Rights and other contractual performance obligations to licensees in an amount that reflects the consideration we expect to receive in exchange for those IP Rights. Revenue contracts that provide promises to grant the right to use IP Rights as they exist at the point in time at which the IP Rights are granted, are accounted for as performance obligations satisfied at a point in time and revenue is recognized at the point in time that the applicable performance obligations are satisfied and all other revenue recognition criteria have been met.
For the periods presented, revenue contracts executed by ARG primarily provided for the payment of contractually determined, one-time, paid-up license fees in consideration for the grant of certain IP Rights for patented technologies owned or controlled by ARG. Revenues also included license fees from sales-based revenue contracts, the majority of which were originally executed in prior periods, which provide for the payment of quarterly license fees based on quarterly sales of applicable product units by licensees (“Recurring License Revenue Agreements”). Revenues may also include court ordered settlements or awards related to our patent portfolio or sales of our patent portfolio. IP Rights granted included the following, as applicable: (i) the grant of a non-exclusive, future license to manufacture and/or sell products covered by patented technologies, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The IP Rights granted were generally perpetual in nature, extending until the legal expiration date of the related patents. The individual IP Rights are not accounted for as separate performance obligations, as (i) the nature of the promise, within the context of the contract, is to grant combined items to which the promised IP Rights are inputs and (ii) the Company's promise to grant each individual IP right described above to the customer is not separately identifiable from other promises to grant IP Rights in the contract.
Since the promised IP Rights are not individually distinct, ARG combined each individual IP Right in the contract into a bundle of IP Rights that is distinct, and accounted for all of the IP Rights promised in the contract as a single performance
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obligation. The IP Rights granted were “functional IP rights” that have significant standalone functionality. ARG’s subsequent activities do not substantively change that functionality and do not significantly affect the utility of the IP to which the licensee has rights. ARG’s operating subsidiaries have no further obligation with respect to the grant of IP Rights, including no express or implied obligation to maintain or upgrade the technology, or provide future support or services. The contracts provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the contract. Licensees legally obtain control of the IP Rights upon execution of the contract. As such, the earnings process is complete and revenue is recognized upon the execution of the contract, when collectability is probable and all other revenue recognition criteria have been met. Revenue contracts generally provide for payment of contractual amounts within 15-90 days of execution of the contract, or the end of the quarter in which the sale or usage occurs for Recurring License Revenue Agreements. Contractual payments made by licensees are generally non-refundable.
For sales-based royalties from Recurring License Revenue Agreements, ARG includes in the transaction price some or all of an amount of estimated variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Notwithstanding, revenue is recognized for a sales-based royalty promised in exchange for a license of IP Rights when the later of (i) the subsequent sale or usage occurs, or (ii) the performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied. Estimates are generally based on historical levels of activity, if available.
Revenues from contracts with significant financing components (either explicit or implicit) are recognized at an amount that reflects the price that a licensee would have paid if the licensee had paid cash for the IP Rights when they are granted to the licensee. In determining the transaction price, ARG adjusts the promised amount of consideration for the effects of the time value of money. As a practical expedient, ARG does not adjust the promised amount of consideration for the effects of a significant financing component if ARG expects, at contract inception, that the period between when the entity grants promised IP Rights to a customer and when the customer pays for the IP Rights will be one year or less.
In general, ARG is required to make certain judgments and estimates in connection with the accounting for revenue contracts with customers. Such areas may include identifying performance obligations in the contract, estimating the timing of satisfaction of performance obligations, determining whether a promise to grant a license is distinct from other promised goods or services, evaluating whether a license transfers to a customer at a point in time or over time, allocating the transaction price to separate performance obligations, determining whether contracts contain a significant financing component, and estimating revenues recognized at a point in time for sales-based royalties.
License revenues were comprised of the following for the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Paid-up license revenue agreements | $ | 6,000 | $ | 1,100 | $ | 15,553 | $ | 23,110 | |||||||||||||||
| Recurring License Revenue Agreements | 320 | 482 | 1,444 | 1,675 | |||||||||||||||||||
| Total | $ | 6,320 | $ | 1,582 | $ | 16,997 | $ | 24,785 | |||||||||||||||
Industrial Operations
Printronix recognizes revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration which it expects to receive for providing those goods or services. To determine the transaction price, Printronix estimates the amount of consideration to which it expects to be entitled in exchange for transferring promised goods or services to a customer. Elements of variable consideration are estimated at the time of sale which primarily include product rights of return, rebates, price protection and other incentives that occur under established sales programs. These estimates are developed using the expected value or the most likely amount method and are reviewed and updated, as necessary, at each reporting period. Revenues, inclusive of variable consideration, are recognized to the extent it is probable that a significant reversal recognized will not occur in future periods. The provision for returns and sales allowances is determined by an analysis of the historical rate of returns and sales allowances over recent quarters, and adjusted to reflect management’s future expectations.
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Printronix enters into contract arrangements that may include various combinations of tangible products (which include printers, consumables and parts) and services, which are generally capable of being distinct and accounted for as separate performance obligations. Printronix evaluates whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract has more than one performance obligation. This evaluation requires judgement, and the decision to combine a group of contracts or separate the combined or single contract into multiple distinct performance obligations may impact the amount of revenue recorded in a reporting period. Printronix deems performance obligations to be distinct if the customer can benefit from the product or service on its own or together with readily available resources (i.e. capable of being distinct) and if the transfer of products or services is separately identifiable from other promises in the contract (i.e. distinct within the context of the contract).
For contract arrangements that include multiple performance obligations, Printronix allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices for each performance obligation. In general, standalone selling prices are observable for tangible products and standard software while standalone selling prices for repair and maintenance services are developed with an expected cost-plus margin or residual approach. Regional pricing, marketing strategies and business practices are evaluated to derive the estimated standalone selling price using a cost-plus margin methodology.
Printronix recognizes revenue for each performance obligation upon transfer of control of the promised goods or services. Control is deemed to have been transferred when the customer has the ability to direct the use of and has obtained substantially all of the remaining benefits from the goods and services. The determination of whether control transfers at a point in time or over time requires judgment and includes consideration of the following: (i) the customer simultaneously receives and consumes the benefits provided as Printronix performs its promises, (ii) the performance creates or enhances an asset that is under control of the customer, (iii) the performance does not create an asset with an alternative use to Printronix, and (iv) Printronix has an enforceable right to payment for its performance completed to date.
Revenues for products are generally recognized upon shipment, whereas revenues for services are generally recognized over time, assuming all other criteria for revenue recognition have been met. Incremental costs of obtaining a contract are expensed as incurred. Service revenue commissions are tied to the revenue recognized during the current year of the related sale.
Printronix offers printer-maintenance services through service agreements that customers may purchase separately from the printer. These agreements commence upon expiration of the standard warranty period. Printronix provides the point-of-customer-contact, dispatches calls and sells the parts used for printer repairs to service providers. Printronix contracts third parties to perform the on-site repair services at the time of sale which covers the period of service at a set amount. The maintenance service agreements are separately priced at a stand-alone value. For those transactions in which maintenance service agreements are purchased concurrently with the purchase of printers, the revenue is deferred based on the selling price, which approximates the stand-alone value for separately sold maintenance services agreements. Revenue from maintenance service contracts are recognized on a straight-line basis over the period of each individual contract, which is consistent with the pattern in which the benefit is consumed by the customer.
Printronix's net revenues were comprised of the following for the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
| 2022 | 2022 | ||||||||||
| (In thousands) | |||||||||||
| Printers, consumables and parts | $ | 8,509 | $ | 26,023 | |||||||
| Services | 1,049 | 3,082 | |||||||||
| Total | $ | 9,558 | $ | 29,105 | |||||||
Refer to Note 15 for additional information regarding net sales to customers by geographic region.
Deferred revenue in the consolidated balance sheets represents a contract liability under Accounting Standards Codification (“ASC”) 606 and consists of payments and billings in advance of the performance. Printronix recognized approximately $932,000 and $2.8 million in revenue that was previously included in the beginning balance of deferred revenue during the three and nine months ended September 30, 2022, respectively.
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Printronix's payment terms vary by the type and location of its customers and the products, solutions or services offered. The time between invoicing and when payment is due is not significant. In instances where the timing of revenue recognition differs from the timing of invoicing, Printronix has determined that its contracts do not include a significant financing component.
Printronix's remaining performance obligations, following the transfer of products to customers, primarily relate to repair and support services. The aggregated transaction price allocated to remaining performance obligations for arrangements with an original term exceeding one year was $822,000 and $772,000, inclusive of deferred revenue, as of September 30, 2022 and December 31, 2021, respectively. On average, remaining performance obligations as of September 30, 2022 are expected to be recognized over a period of approximately two years.
Cost of Revenues
Intellectual Property Operations
Cost of revenues include the costs and expenses incurred in connection with ARG’s patent licensing and enforcement activities, including inventor royalties paid to original patent owners, patent maintenance and prosecution costs, contingent legal fees paid to external patent counsel, other patent-related legal expenses paid to external patent counsel, licensing and enforcement related research, consulting and other expenses paid to third-parties and the amortization of patent-related investment costs. Cost of revenues were comprised of the following for the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Inventor royalties | $ | 732 | $ | 280 | $ | 1,092 | $ | 823 | |||||||||||||||
| Contingent legal fees | 1,010 | 285 | 2,314 | 5,735 | |||||||||||||||||||
| Litigation and licensing expenses | 939 | 782 | 3,272 | 4,881 | |||||||||||||||||||
| Amortization of patents | 2,601 | 2,612 | 7,802 | 7,086 | |||||||||||||||||||
| Total | $ | 5,282 | $ | 3,959 | $ | 14,480 | $ | 18,525 | |||||||||||||||
Inventor Royalties and Contingent Legal Expenses
Inventor royalties are expensed in the consolidated statements of operations in the period that the related revenues are recognized. Patent costs, including any upfront advances paid to patent owners by ARG’s operating subsidiaries, that are recoverable from future net revenues are amortized over the estimated economic useful life of the related patents, or as the prepaid royalties are earned by the inventor, as appropriate, and the related expense is included in amortization expense in the consolidated statements of operations. Any unamortized upfront advances recovered from net revenues are expensed in the period recovered and included in amortization expense in the consolidated statements of operations.
Contingent legal fees are expensed in the consolidated statements of operations in the period that the related revenues are recognized. In instances where there are no recoveries from potential infringers, no contingent legal fees are paid; however, ARG’s operating subsidiaries may be liable for certain out of pocket legal costs incurred pursuant to the underlying legal services agreement.
Inventor royalty and contingent legal agreements generally provide for payment by ARG of contractual amounts 30 days subsequent to the quarter end during which related license fee payments are received from licensees by ARG.
Litigation and Licensing Expenses
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.
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Industrial Operations
Included in cost of sales are inventory costs (refer to "Inventories" below), indirect labor, overhead and warranty costs. Printronix offers both assurance-type and service-type product warranties with varying terms depending on the product, region and customer contracts. Warranty periods range from three months to two years. The provision for warranty costs is determined by applying the historical claims experience and estimated repair costs to the outstanding units under warranty.
The following is a summary of the accrued warranty liabilities, which are included in accrued expenses and other current liabilities, and other long-term liabilities in the consolidated balance sheets:
| Nine Months Ended September 30, | |||||
| 2022 | |||||
| (In thousands) | |||||
| Beginning balance | $ | 222 | |||
| Estimated future warranty expense | 23 | ||||
| Warranty claims settled | (111) | ||||
| Ending balance | $ | 134 | |||
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk are cash equivalents and accounts receivable. The Company places its cash equivalents primarily in highly rated money market funds and investment grade marketable securities. Cash and cash equivalents are also invested in deposits with certain financial institutions and may, at times, exceed federally insured limits. The Company has not experienced any significant losses on its deposits of cash and cash equivalents.
Intellectual Property Operations
Two licensees individually accounted for 47% each of revenues recognized during the three months ended September 30, 2022. Four licensees individually accounted for more than 10% of total recognized revenue, ranging from 13% to 32%, during the three months ended September 30, 2021. Three licensee individually accounted for 18%, 18% and 31% of revenues recognized during the nine months ended September 30, 2022. Three licensees individually accounted for 50%, 19% and 12% of revenues recognized during the nine months ended September 30, 2021.
Historically, ARG has not had material foreign operations. Based on the jurisdiction of the entity obligated to satisfy payment obligations pursuant to the applicable license revenue arrangement, for the three and nine months ended September 30, 2022, approximately zero percent and 4%, respectively, of revenues were attributable to licensees domiciled in foreign jurisdictions. For the three and nine months ended September 30, 2021, 8% and 15%, respectively, of revenues were attributable to licensees domiciled in foreign jurisdictions. Refer to Note 15 for additional information regarding revenue from customers by geographic region.
Two licensees individually represented approximately 53% and 47% of accounts receivable at September 30, 2022. Two licensees individually represented approximately 59% and 41% of accounts receivable at December 31, 2021.
Industrial Operations
No single Printronix customer accounted for more than 10% of revenue for the three and nine months ended September 30, 2022. Printronix has significant foreign operations, refer to Note 15 for additional information regarding net sales to customers by geographic region.
No single Printronix customer represented 10% or more of accounts receivable as of September 30, 2022, and one customer represented 11% of accounts receivable as of December 31, 2021. Exposure to credit risk is limited by the large number of customers comprising the remainder of the Printronix customer base and by periodic customer credit evaluations performed by Printronix.
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No single Printronix vendor accounted for 10% or more of purchases for the three and nine months ended September 30, 2022. Accounts payable to two vendors represented 12% and 10% of accounts payable as of September 30, 2022, and one vendor represented 14% of accounts payable as of December 31, 2021.
Cash and Cash Equivalents
The Company considers all highly liquid securities with original maturities of three months or less when purchased to be cash equivalents. For the periods presented, Acacia’s cash equivalents are comprised of investments in AAA rated money market funds that invest in first-tier only securities, which primarily include domestic commercial paper and securities issued or guaranteed by the U.S. government or its agencies.
Equity Securities at Fair Value
Investments in equity securities are reported at fair value on a recurring basis, with related realized and unrealized gains and losses in the value of such securities recorded in the consolidated statements of operations in other income or (expense). Dividend income is included in other income or (expense). Refer to Note 9 for additional information related to fair value measurements.
Equity securities at fair value for the periods presented were comprised of the following:
| Security Type | Cost | Gross Unrealized Gain | Gross Unrealized Loss | Fair Value | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| September 30, 2022: | ||||||||||||||||||||||||||
| Equity securities - Life Sciences Portfolio (Note 3) | $ | 38,066 | $ | 19,232 | $ | (1,014) | $ | 56,284 | ||||||||||||||||||
| Equity securities - other common stock | 47,600 | 8 | (22,508) | 25,100 | ||||||||||||||||||||||
| Total | $ | 85,666 | $ | 19,240 | $ | (23,522) | $ | 81,384 | ||||||||||||||||||
| December 31, 2021: | ||||||||||||||||||||||||||
| Equity securities - Life Sciences Portfolio (Note 3) | $ | 56,037 | $ | 262,811 | $ | (1,488) | $ | 317,360 | ||||||||||||||||||
| Equity securities - other common stock | 43,822 | 2,068 | (1,472) | 44,418 | ||||||||||||||||||||||
| Total | $ | 99,859 | $ | 264,879 | $ | (2,960) | $ | 361,778 | ||||||||||||||||||
Equity Securities Without Readily Determinable Fair Value
For equity securities that do not have a readily determinable fair value, the Company elected to report them under the measurement alternative. They are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. The fair values of the private company securities were estimated based on recent financing transactions and secondary market transactions and factoring in any adjustments for illiquidity or preference of these securities. Changes in fair value are reported in the consolidated statements of operations in other income or (expense). To date, the Company has not recorded any impairments nor upward or downward adjustments on our equity securities without readily determinable fair values held as of September 30, 2022 and December 31, 2021. Refer to Note 3 for additional information.
Equity Method Investments
Equity investments in common stock and in-substance common stock without readily determinable fair values in companies over which the Company has the ability to exercise significant influence, are accounted for using the equity method of accounting. Acacia includes its proportionate share of earnings and/or losses of its equity method investees in earnings on equity investment in joint venture in the consolidated statements of operations. Refer to Note 3 for additional information.
Investments in preferred stock with substantive liquidation preferences are accounted for at cost, (subject to impairment considerations, as described below, if any), as adjusted for the impact of changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. In-substance common stock is an investment
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in an entity that has risk and reward characteristics that are substantially similar to that entity's common stock. An investment in preferred stock with substantive liquidation preferences over common stock, is not substantially similar to common stock, and therefore is not considered in-substance common stock. A liquidation preference is substantive if the investment has a stated liquidation preference that is significant, from a fair value perspective, in relation to the purchase price of the investment. A liquidation preference in an investee that has sufficient subordinated equity from a fair value perspective is substantive because, in the event of liquidation, the investment will not participate in substantially all of the investee's losses, if any. The initial determination of whether an investment is substantially similar to common stock is made on the initial date of investment if the Company has the ability to exercise significant influence over the operating and financial policies of the investee. That determination is reconsidered if (i) contractual terms of the investment are changed, (ii) there is a significant change in the capital structure of the investee, including the investee's receipt of additional subordinated financing, or (iii) the Company obtains an additional interest in an investment, resulting in the method of accounting for the cumulative interest being based on the characteristics of the investment at the date at which the Company obtains the additional interest.
Investment at Fair Value
On an individual investment basis, Acacia may elect to account for investments in companies where the Company has the ability to exercise significant influence over operating and financial policies of the investee, at fair value. If the fair value method is applied to an investment that would otherwise be accounted for under the equity method of accounting, it is applied to all of the financial interests in the same entity that are eligible items (i.e., common stock and warrants). As part of the Company’s equity securities in the Life Sciences Portfolio, the Company has elected to apply the fair value method to one investment, refer to Note 3 for additional information.
During 2016 and 2017, Acacia made certain investments in Veritone, Inc. (“Veritone”). As a result of these transactions, Acacia received shares of Veritone common stock and warrants. We elected the fair value method for our investment in Veritone upon acquisition. During 2018, Acacia began to divest its investments in Veritone. During 2020, Acacia sold its remaining shares of common stock. During the quarter ended March 31, 2021, included in the consolidated statement of operations, Acacia recorded an unrealized loss of $2.8 million from our investment in warrants, as reflected in the change in fair value of investment, and Acacia exercised all remaining warrants and recorded a realized gain on sale of investment of $3.6 million. Since March 2021, the Company no longer has an investment in Veritone common stock and warrants.
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 Doubtful Accounts
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 doubtful accounts may be established to reflect the Company’s best estimate of probable losses inherent in the accounts receivable balance, and is reflected as a contra-asset account on the balance 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 doubtful accounts established as of September 30, 2022 and December 31, 2021.
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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 doubtful accounts 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 September 30, 2022 and December 31, 2021, Printronix's combined allowance for doubtful accounts and allowance for sales returns was $28,000 and $78,000, respectively.
Inventories
Printronix's inventories, which include material, labor and overhead costs, are valued at the lower of cost or net realizable value. Cost is determined at standard cost adjusted on a first-in, first-out basis for variances. Cost includes shipping and handling fees and other costs, including freight insurance and customs duties for international shipments, which are subsequently expensed to cost of sales. Printronix evaluates and records a provision to reduce the carrying value of inventory for estimated excess and obsolete stocks based upon forecasted demand, planned obsolescence and market conditions. Refer to Note 4 for additional information.
Long-Term Restricted Cash
Restricted cash related to a standby letter of credit, which expired and was cancelled in March 2022.
Property, Plant and Equipment
Property and equipment are recorded at cost. Major additions and improvements that materially extend useful lives of property and equipment are capitalized. Maintenance and repairs are charged against the results of operations as incurred. When these assets are sold or otherwise disposed of, the asset and related depreciation are relieved, and any gain or loss is included in the consolidated statements of operations for the period of sale or disposal. Refer to Note 5 for additional information. Depreciation and amortization is computed on a straight-line basis over the following estimated useful lives of the assets:
| Machinery and equipment | 2 to 10 years | ||||
| Furniture and fixtures | 3 to 5 years | ||||
| Computer hardware and software | 3 to 5 years | ||||
| Leasehold improvements | 2 to 5 years (Lesser of lease term or useful life of improvement) | ||||
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 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 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.
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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.
Series A Warrants and Series B Warrants
The fair value of the Series A Warrants and the Series B Warrants are estimated using a Black-Scholes option-pricing model. Refer to Notes 8, 9 and 16 (Subsequent Events) for additional information related to the Series A Warrants and the Series B Warrants and their fair value measurements.
Embedded Derivatives
Embedded derivatives that are required to be bifurcated from their host contract are valued separately from the host instrument. A binomial lattice framework is used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock issued by the Company in 2019. Refer to Notes 8 and 9 for additional information related to the embedded derivatives and their fair value measurements.
Contingent Liabilities
The Company, from time to time, is involved in certain legal proceedings. Based upon consultation with outside counsel handling its defense in these matters and the Company’s analysis of potential outcomes, if the Company determines that a loss arising from such matters is probable and can be reasonably estimated, an estimate of the contingent liability is recorded in its consolidated financial statements. If only a range of estimated loss can be determined, an amount within the range that, based on estimates, assumptions and judgments, reflects the most likely outcome, is recorded as a contingent liability in the consolidated financial statements. In situations where none of the estimates within the estimated range is a better estimate of probable loss than any other amount, the Company records the low end of the range. Any such accrual would be charged to expense in the appropriate period. Litigation expenses for these types of contingencies are recognized in the period in which the litigation services were provided. Refer to Note 11 for additional information.
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Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, restricted cash, accounts receivables and current liabilities approximates their fair values due to their short-term maturities.
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. Refer to Note 9 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.
Advertising
Printronix expenses advertising costs, including promotional literature, brochures and trade shows, as incurred, and is included in sales and marketing expenses in the consolidated statements of operations.
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 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.
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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 tax 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/benefit for the three and nine months ended September 30, 2022 primarily reflects the decrease in deferred tax liabilities attributable to the unrealized losses recorded in the periods presented, and our income tax expense for the three and nine months ended September 30, 2021 primarily relates to changes in the valuation allowance, as well as state taxes.
The Company’s effective tax rates were 2% and zero for the three months ended September 30, 2022 and 2021, respectively. The Company’s effective tax rates were 13% and (1)% for the nine months ended September 30, 2022 and 2021, respectively. Our 2022 effective tax rates were lower than the U.S. federal statutory rate primarily due to non-taxable income, expiration of foreign tax credits and changes in valuation allowance. Our 2021 effective tax rates were lower than the U.S. federal statutory rate primarily due to the change in valuation allowance, as well as state income taxes. 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 September 30, 2022 and December 31, 2021. These assets primarily consist of foreign tax credits and net operating loss carryforwards.
At September 30, 2022 and December 31, 2021, the Company had total unrecognized tax benefits of approximately $887,000. At September 30, 2022 and December 31, 2021, approximately $887,000 and $110,000, respectively, of unrecognized tax benefits were recorded in other long-term liabilities and the remaining amount was included as an offset to deferred tax assets. No interest and penalties have been recorded for the unrecognized tax benefits for the periods presented. At September 30, 2022, if recognized, $887,000 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 tax 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.
Income/Loss Per Share
For periods in which the Company generates net income, the Company computes basic net income per share attributable to common stockholders using the two-class method required for capital structures that include participating securities. Under the two-class method, securities that participate in non-forfeitable dividends, such as the Company’s outstanding unvested restricted stock and Series A Redeemable Convertible Preferred Stock, are considered participating securities and are allocated a portion of the Company’s earnings. For periods in which the Company generates a net loss, net losses are not allocated to holders of the Company’s participating securities as the security holders are not contractually obligated to share in the Company’s losses.
Basic net income/loss per share of common stock is computed by dividing net income/loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net income/loss per share of common stock is computed by dividing net income/loss attributable to common stockholders by the weighted average number of common and dilutive common equivalent shares outstanding for the period using the treasury stock method or the as-converted method, or the two-class method for participating securities, whichever is more dilutive. Potentially dilutive common stock equivalents consist of stock options, restricted stock units, unvested restricted stock, Series A Redeemable Convertible Preferred Stock, Series A Warrants and Series B Warrants. Refer to Note 14 for additional information.
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Recent Accounting Pronouncements
Recently Adopted
In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” The amendments in this update clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. As such, an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction (e.g. an entity cannot apply a discount to the price of an equity security subject to a lock-up agreement). The amendments also require the following disclosures for equity securities subject to contractual sale restrictions: (i) the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet, (ii) the nature and remaining duration of the restriction(s), and (iii) the circumstances that could cause a lapse in the restriction(s). The amendments are to be applied prospectively and are effective on January 1, 2024 for public entities, with early adoption permitted. The Company adopted the update on June 30, 2022. 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 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 amendments in these updates will be adopted by the Company on January 1, 2023. Management has completed its evaluation of the impact that the amendments in these updates will have on the Company’s consolidated financial statements and there are no significant implementation matters that still need to be addressed. Based on Management's evaluation of the new standard, the Company does not expect it to have a material effect on the Company’s consolidated financial statements or disclosures, accordingly, a cumulative-effect adjustment to the opening accumulated deficit as of January 1, 2023 is not expected.
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.
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 amendments in this update will be applied prospectively and will be adopted by the Company on January 1, 2023. Management does not expect the adoption of this new standard to have a material effect on the Company’s consolidated financial statements.
3. EQUITY SECURITIES PORTFOLIO INVESTMENT
On April 3, 2020, the Company entered into an Option Agreement with LF Equity Income Fund (“Seller”), which included general terms through which the Company was provided the option to purchase life sciences equity securities in a portfolio of public and private companies (“Life Sciences Portfolio”) for an aggregate purchase price of £223.9 million, approximately $277.5 million at the exchange rate on April 3, 2020.
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On June 4, 2020, the Company executed the Transaction Agreement between Link Fund Solutions Limited, Seller, and the Company. Pursuant to the Transaction Agreement, the Company agreed to purchase from Seller and Seller agreed to transfer to the Company the specified equity securities of all companies in the Life Sciences Portfolio at set prices at various future dates. The transfer dates would vary among the Life Sciences Portfolio companies as the Transaction Agreement gives the Company the exclusive right to determine when to call for transfer of each security, and because each Life Sciences Portfolio company (or its existing equity holders) may be required to approve the transfer due to rights of first refusals and other company-specific terms and conditions. Thus, the execution of the Transaction Agreement resulted in forward contracts for the Company to purchase equity securities in each public and private company at a specified price on a future date.
In accordance with the Transaction Agreement, the Company transferred the total purchase price of £223.9 million into an escrow account. Upon the transfer of equity securities in the Life Sciences Portfolio to the Company, the associated funds were released from the escrow account to Seller based on the consideration amount assigned to the equity securities for such Life Sciences Portfolio company in the Transaction Agreement. As of December 31, 2020, all of the equity securities in the Life Sciences Portfolio were transferred to the Company pursuant to the Transaction Agreement. The Company has sold a portion of the equity securities of such Life Sciences Portfolio while retaining an interest in a number of operating businesses, including a controlling interest in one of the companies.
During the year ended December 31, 2020, Seller returned a total of £4.5 million of the Company’s prepaid investment upon the failure to obtain the approval of the existing equity holders, pursuant to their rights of first refusals, of one of the companies in connection with the transfer of its securities. In addition, due to an ownership restriction applicable to one of the companies, the Company sold a small portion of an equity securities derivative for £33,000 before the remaining shares of such company could be transferred to us. The Company recognized a net gain of $2.8 million related to the returned prepaid investments and sale of the derivative.
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 September 30, 2022 and December 31, 2021, the total fair value of the remaining Life Sciences Portfolio investment was $109.4 million and $343.1 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. During the nine months ended September 30, 2022, the Company increased its investment in Arix amounting to approximately 22% as of September 30, 2022. 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 September 30, 2022, this investment does not meet the significance thresholds for additional summarized income statement disclosures, as defined by the SEC. As of September 30, 2022, the aggregate carrying amount of our Arix investment was $33.8 million, and is included in equity securities at fair value, in the consolidated balance sheet.
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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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Change in fair value of equity securities of public companies | $ | (39,008) | $ | 243,930 | $ | (243,106) | $ | 214,247 | |||||||||||||||
| Change in fair value of equity securities without readily determinable fair value | — | (180,023) | — | (102,067) | |||||||||||||||||||
| Gain on sale of equity securities of public companies | 36,397 | 37,112 | 101,102 | 52,167 | |||||||||||||||||||
| Net realized and unrealized (loss) gain | $ | (2,611) | $ | 101,019 | $ | (142,004) | $ | 164,347 | |||||||||||||||
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. During the nine months ended September 30, 2022 and 2021, our consolidated earnings on equity investment was $42.9 million and $2.7 million, respectively, included in the consolidated statements of operations. During the nine months ended September 30, 2022, distributions received were $1.2 million to Acacia and $586,000 to noncontrolling interests. During the nine months ended September 30, 2021, distributions received were $1.8 million to Acacia and $906,000 to noncontrolling interests.
In April 2022, Viamet received a certain drug approval from the United States Food and Drug Administration ("FDA"). In connection with the FDA approval, MalinJ1 was due a milestone payment in the amount of $40.0 million. The Company's portion of that milestone payment is anticipated to be received before year-end 2022 in the approximate amount of $27.0 million, with interest accrued at 8.5% per year. In June 2022, in connection with the submission to the European Medicines Agency, MalinJ1 was due an additional milestone payment in the amount of $1.8 million. The Company's portion of that milestone payment was received in July 2022 in the approximate amount of $1.2 million. During 2022, the Company has recorded consolidated earnings on equity investment of $42.9 million, including the two milestones and approximately $1.2 million in accrued interest.
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 and nine months ended September 30, 2022, we recorded $70,000 and $221,000, respectively, in interest income related to the notes. As of September 30, 2022 and December 31, 2021, the receivable including interest was $3.5 million and $4.0 million, respectively, and is included in other non-current assets in the consolidated balance sheets.
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4. INVENTORIES, NET
Printronix's inventories, net consisted of the following:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Raw materials | $ | 4,244 | $ | 3,207 | |||||||
| Subassemblies and work in process | 2,944 | 1,712 | |||||||||
| Finished goods | 7,095 | 4,011 | |||||||||
| 14,283 | 8,930 | ||||||||||
| Inventory reserves | (481) | — | |||||||||
| Inventories, net | $ | 13,802 | $ | 8,930 | |||||||
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Machinery and equipment | $ | 2,984 | $ | 2,077 | |||||||
| Furniture and fixtures | 546 | 1,036 | |||||||||
| Computer hardware and software | 612 | 614 | |||||||||
| Leasehold improvements | 999 | 1,034 | |||||||||
| 5,141 | 4,761 | ||||||||||
| Accumulated depreciation and amortization | (1,441) | (578) | |||||||||
| Property, plant and equipment, net | $ | 3,700 | $ | 4,183 | |||||||
Total depreciation and amortization expense in the consolidated statements of operations was $329,000 and $39,000 for the three months ended September 30, 2022 and 2021, respectively, and $1.0 million and $112,000 for the nine months ended September 30, 2022 and 2021, respectively. Our Intellectual Property Operations and parent company include depreciation and amortization in general and administrative expenses, and our Industrial Operations allocates depreciation and amortization to all applicable operating expense categories.
6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Changes in the carrying amount of goodwill consisted of the following:
| Nine Months Ended September 30, | |||||
| 2022 | |||||
| (In thousands) | |||||
| Beginning balance | $ | 7,470 | |||
| Acquisition of business | — | ||||
| Impairment losses | — | ||||
| Ending balance | $ | 7,470 | |||
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.
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Other intangible assets, net consisted of the following:
| September 30, 2022 | |||||||||||||||||||||||
| Weighted Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Patents: | |||||||||||||||||||||||
| Intellectual property operations | 6 years | $ | 331,403 | $ | (302,143) | $ | 29,260 | ||||||||||||||||
| Industrial operations | 7 years | 3,400 | (476) | 2,924 | |||||||||||||||||||
| Total patents | 334,803 | (302,619) | 32,184 | ||||||||||||||||||||
| Customer relationships - industrial operations | 7 years | 5,300 | (742) | 4,558 | |||||||||||||||||||
| Trade name and trademarks - industrial operations | 7 years | 3,430 | (480) | 2,950 | |||||||||||||||||||
| Total | $ | 343,533 | $ | (303,841) | $ | 39,692 | |||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Weighted Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Patents: | |||||||||||||||||||||||
| Intellectual property operations | 6 years | $ | 331,403 | $ | (294,341) | $ | 37,062 | ||||||||||||||||
| Industrial operations | 7 years | 3,400 | (112) | 3,288 | |||||||||||||||||||
| Total patents | 334,803 | (294,453) | 40,350 | ||||||||||||||||||||
| Customer relationships - industrial operations | 7 years | 5,300 | (174) | 5,126 | |||||||||||||||||||
| Trade name and trademarks - industrial operations | 7 years | 3,430 | (113) | 3,317 | |||||||||||||||||||
| Total | $ | 343,533 | $ | (294,740) | $ | 48,793 | |||||||||||||||||
Total other intangible asset amortization expense in the consolidated statements of operations was $3.0 million and $2.6 million for the three months ended September 30, 2022 and 2021, respectively, and $9.1 million and $7.1 million for the nine months ended September 30, 2022 and 2021, respectively. The Company did not record charges related to the impairment of other intangible assets for the nine months ended September 30, 2022 and 2021. There was no accelerated amortization of other intangible assets for the nine months ended September 30, 2022 and 2021. During 2021, ARG reduced its gross patent costs and accumulated amortization by approximately $35.0 million for patents that were fully amortized. Intellectual Property Operations amortization of patents is expensed in cost of revenues and Industrial Operations amortization is expensed in general and administrative expenses.
The following table presents the scheduled annual aggregate amortization expense (in thousands):
| Years Ending December 31, | |||||
| Remainder of 2022 | $ | 3,035 | |||
| 2023 | 12,068 | ||||
| 2024 | 10,692 | ||||
| 2025 | 8,348 | ||||
| 2026 | 2,483 | ||||
| Thereafter | 3,066 | ||||
| Total | $ | 39,692 | |||
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During 2021, ARG accrued certain patent and patent rights acquisition costs, which amounted to $5.0 million at December 31, 2021 and was included in other long-term liabilities in the consolidated balance sheet. Such amount was fully paid in June 2022.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Accrued loss contingency (see Note 11) | $ | 4,500 | $ | — | |||||||
| Accrued consulting and other professional fees | 1,290 | 438 | |||||||||
| Customer deposit | — | 3,000 | |||||||||
| Income taxes payable | 681 | 506 | |||||||||
| Product warranty liability, current | 42 | 84 | |||||||||
| Service contract costs, current | 416 | 307 | |||||||||
| 1,556 | 935 | ||||||||||
| Other accrued liabilities | 773 | 957 | |||||||||
| Total | $ | 9,258 | $ | 6,227 | |||||||
8. STARBOARD INVESTMENT
Note Regarding Subsequent Events
As more fully described in Note 16, on October 30, 2022 the Company entered into a Recapitalization Agreement (the “Recapitalization Agreement”) with Starboard and the Investors (as defined below), 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. Unless otherwise noted, the following discussion of Starboard’s investments in the Company does not reflect the transactions effected or to be effected pursuant to the Recapitalization Agreement, or any other matters contemplated in connection with the Recapitalization.
Series A Redeemable Convertible Preferred Stock
On November 18, 2019, the Company entered into a Securities Purchase Agreement with Starboard Value LP (“Starboard”) and certain funds and accounts affiliated with, or managed by, Starboard (collectively, 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.
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 have 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 is 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
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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 is 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.
When the Company issues Notes, 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 September 30, 2022 and December 31, 2021.
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.
The Company 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
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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 will 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 will 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. Accretion for the three months ended September 30, 2022 and 2021 was $1.3 million and $991,000, respectively, and for the nine months ended September 30, 2022 and 2021 was $3.7 million and $2.8 million, respectively.
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 Governance Agreement, the Company agreed to (i) increase the size of the Board from six to seven members, (ii) appoint Jonathan Sagal as a director of the Company, (iii) grant Starboard the right to recommend two additional directors for appointment to the board, (iv) form a Strategic Committee of the Board tasked with sourcing and performing due diligence on potential acquisition targets, (v) appoint certain directors to the Strategic Committee, and (vi) appoint a director to the Nominating and Corporate Governance Committee.
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 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. As of September 30, 2022 and December 31, 2021, the fair value of the Series A embedded derivative was $22.4 million and $18.4 million, respectively.
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 Preferred Stock into common stock in accordance with the terms of the Certificate of Designations. Refer to Note 16 for additional information related to the Preferred Stock.
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. The Series A 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 September 30, 2022 and December 31, 2021, the fair value of the Series A Warrants was $9.4 million and $11.3 million, respectively. As of September 30, 2022, the Series A Warrants have not been exercised.
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In accordance with the terms of the Recapitalization Agreement, within five (5) business days following the date of the Recapitalization Agreement, the Investors were required to consummate the Series A Warrants Exercise, and the Company was to issue to the Investors shares of common stock in accordance with the terms of the Series A Warrants and to pay to Starboard an aggregate amount of $9,000,000 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). Refer to Note 16 for additional information related to the Series A Warrants.
The Series A 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.
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 September 30, 2022, the Series B Warrants have not been exercised.
During the quarter ended September 30, 2022, the cash exercise feature of the Unadjusted Series B Warrants expiration date of August 25, 2022 was extended to October 28, 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 September 30, 2022 and December 31, 2021, the total fair value of the Series B Warrants was $59.7 million and $96.4 million, respectively. On October 28, 2022, the cash exercise feature of the Unadjusted Series B Warrants expired. The fair value of the Unadjusted Series B Warrants as of September 30, 2022 was $533,000, which is included in the total fair value set forth above.
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. The remaining Series B Warrants will be cancelled immediately following the completion of the Rights Offering. Refer to Note 16 for additional information related to the Series B Warrants.
Each of the Series A Warrants and Series B Warrants and Series A Redeemable Convertible Preferred Stock includes a “4.89% blocker” which prevents Starboard from exercising or converting the securities is, after giving effect thereto, Starboard would own in excess of 4.877% of the outstanding shares of common stock of the Company.
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.
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”)
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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 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 $1.3 million accrued and unpaid interest on the New Notes as of September 30, 2022 and December 31, 2021, 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 September 30, 2022 and December 31, 2021 was $60.0 million and $180.0 million, respectively.
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.
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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 September 30, 2022 and 2021, $34,000 and $289,000, respectively, was amortized to interest expense. For the nine months ended September 30, 2022 and 2021, $90,000 and $516,000, respectively, was amortized to interest expense. The discount was fully amortized during the quarter ended September 30, 2022. Refer to Note 16 for additional information related to the Series A Redeemable Convertible Preferred Stock and Series B Warrants.
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 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 September 30, 2022 and December 31, 2021:
Equity Securities at Fair Value. 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 September 30, 2022, the aggregate carrying amount of this investment was $33.8 million, and is included in equity securities at fair value, in the consolidated balance sheet (refer to Note 3 for additional information). At December 31, 2021, our Level 2 equity securities included an investment measured with an applied pricing model that included significant observable inputs to the public company common stock value. The fair value of this Level 2 equity security investment as of December 31, 2021 was estimated based on a discount of 3 percent determined using the following significant inputs to the pricing model: expected term of restriction of 3 months and volatility of approximately 45 percent.
Series A Warrants. Series A Warrants are recorded at fair value, using Black-Scholes option-pricing model (Level 3). In the quarter ended March 31, 2021, there was a change in estimate with regard to the calculation of the volatility assumption used in the Black-Scholes option-pricing model. As a result, the Series A Warrants are measured as Level 3 as opposed to Level 2 as measured previously. The fair value of the Series A Warrants as of September 30, 2022 was estimated based on the following significant assumptions: volatility of 42 percent, risk-free rate of 4.05 percent, term of 5.13 years and a dividend yield of 0 percent. The fair value of the Series A Warrants as of December 31, 2021 was estimated based on the following significant assumptions: volatility of 30 percent, risk-free rate of 1.33 percent, term of 5.79 years and a dividend
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yield of 0 percent. Refer to the "Embedded derivative liabilities" discussion below for additional information on assumptions.
Series B Warrants. Series B Warrants are recorded at fair value, using Black-Scholes option-pricing model (Level 3). In the quarter ended March 31, 2021, there was a change in methodology used to an acceptable Black-Scholes option-pricing model from a Monte Carlo valuation technique used to value the Series B Warrants as of December 31, 2020. The fair value of the two Series B Warrants as of September 30, 2022 was estimated based on the following significant assumptions: (1) volatility of 42 percent, risk-free rate of 4.05 percent, term of 5.13 years and a dividend yield of 0 percent, and (2) volatility of 50 percent, risk-free rate of 2.79 percent, term of 0.08 years and a dividend yield of 0 percent. The fair value of the two Series B Warrants as of December 31, 2021 was estimated based on the following significant assumptions: (1) volatility of 30 percent, risk-free rate of 1.34 percent, term of 5.88 years and a dividend yield of 0 percent, and (2) volatility of 25 percent, risk-free rate of 0.25 percent, term of 0.65 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. A binomial lattice framework is used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock issued by the Company in 2019 (Level 3). The binomial model utilizes the Tsiveriotis and Fernandes implementation in which a convertible instrument is split into two separate components within a single lattice framework: a cash-only component which is subject to the selected risk-adjusted discount rate and an equity component which is subject only to the risk-free rate. The model considers the (i) implied volatility of the value of our common stock, (ii) appropriate risk-free interest rate, (iii) credit spread, (iv) dividend yield, (v) dividend accrual (and a step-up in rates), and (vi) event probabilities of the various conversion and redemption scenarios.
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. The selected volatility, as described below, represents 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. The assumed base case term used in the valuation model is the period remaining until November 15, 2027, the Series A Redeemable Convertible Preferred Stock maturity date. The risk-free interest rate is 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 significant assumptions utilized in the Company’s valuation of the embedded derivative at September 30, 2022 are as follows: volatility of 42 percent, risk-free rate of 4.10 percent, term of 5.13 years, a dividend yield of 0 percent and a discount rate of 17.30 percent. The significant assumptions utilized in the Company’s valuation of the embedded derivative at December 31, 2021 are as follows: volatility of 30 percent, risk-free rate of 1.30 percent, term of 5.87 years, a dividend yield of 0 percent and a discount rate of 9.60 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 | |||||||||||||||||||||||
| September 30, 2022: | |||||||||||||||||||||||
| Equity securities at fair value | $ | 81,384 | $ | — | $ | — | $ | 81,384 | |||||||||||||||
| December 31, 2021: | |||||||||||||||||||||||
| Equity securities at fair value | $ | 113,630 | $ | 248,148 | $ | — | $ | 361,778 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| September 30, 2022: | |||||||||||||||||||||||
| Series A warrants | $ | — | $ | — | $ | 9,396 | $ | 9,396 | |||||||||||||||
| Series A embedded derivative liabilities | — | — | 22,389 | 22,389 | |||||||||||||||||||
| Series B warrants | — | — | 59,742 | 59,742 | |||||||||||||||||||
| Total | $ | — | $ | — | $ | 91,527 | $ | 91,527 | |||||||||||||||
| December 31, 2021: | |||||||||||||||||||||||
| Series A warrants | $ | — | $ | — | $ | 11,291 | $ | 11,291 | |||||||||||||||
| Series A embedded derivative liabilities | — | — | 18,448 | 18,448 | |||||||||||||||||||
| Series B warrants | — | — | 96,378 | 96,378 | |||||||||||||||||||
| Total | $ | — | $ | — | $ | 126,117 | $ | 126,117 | |||||||||||||||
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, 2020 | $ | — | $ | 26,728 | $ | 52,341 | $ | 79,069 | |||||||||||||||
| Transfer to Level 3 | 6,640 | — | — | 6,640 | |||||||||||||||||||
| Remeasurement to fair value | 11,887 | 14,683 | 177,296 | 203,866 | |||||||||||||||||||
| Balance at September 30, 2021 | $ | 18,527 | $ | 41,411 | $ | 229,637 | $ | 289,575 | |||||||||||||||
| Balance at December 31, 2021 | $ | 11,291 | $ | 18,448 | $ | 96,378 | $ | 126,117 | |||||||||||||||
| Remeasurement to fair value | (1,895) | 3,941 | (36,636) | (34,590) | |||||||||||||||||||
| Balance at September 30, 2022 | $ | 9,396 | $ | 22,389 | $ | 59,742 | $ | 91,527 | |||||||||||||||
For the three months ended September 30, 2022 and 2021, the changes in the estimated fair value of the Series A warrants, Series A embedded derivatives and Series B warrants were, $(3.4) million, $(1.2) million and $(37.0) million, and $63,000, $220,000 and $(902,000), respectively.
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.
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10. RELATED PARTY TRANSACTIONS
During 2019, Acacia purchased shares of common stock of Drive Shack, Inc. (“Drive Shack”) for an aggregate purchase price of $2.4 million. At the time, Drive Shack and Clifford Press, Chief Executive Officer and director of Acacia, were related parties as Mr. Press was a board member of Drive Shack until June 2021. During the quarter ended September 30, 2021, Acacia sold its investment receiving proceeds of $1.8 million and recognized a loss of $515,000.
The Company reimbursed an aggregate amount of $46,000 during the nine months ended September 30, 2022 to a former executive officer in connection with legal fees incurred following such officer’s departure from the Company. The Company reimbursed an aggregate amount of $408,000 during the quarter ended December 31, 2021.
Refer to Note 16 for information about the Recapitalization Agreement with Starboard.
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 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 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,
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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.
•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.
The Company's operating lease costs were $474,000 and $155,000 for the three months ended September 30, 2022 and 2021, respectively, and $1.3 million, and $457,000 for the nine months ended September 30, 2022 and 2021, respectively.
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 September 30, 2022 (in thousands):
| Years Ending December 31, | |||||
| Remainder of 2022 | $ | 371 | |||
| 2023 | 1,513 | ||||
| 2024 | 1,123 | ||||
| 2025 | 445 | ||||
| 2026 | 232 | ||||
| Thereafter | 58 | ||||
| Total minimum payments | 3,742 | ||||
| Less: short-term lease liabilities | (1,556) | ||||
| Long-term lease liabilities | $ | 2,186 | |||
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.
In December 2017, the Federal Court of Canada allowed a counterclaim for invalidity of a patent asserted by Rapid Completions LLC and awarded costs payable by Rapid Completions LLC. During the year ended December 31, 2021, the Company made approximately $1.2 million in settlement payments. This settlement was fully paid as of December 31, 2021 and all claims were withdrawn.
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On September 6, 2019, Slingshot Technologies, LLC, or Slingshot, filed a lawsuit in Delaware Chancery Court against the Company and ARG, or collectively, the Acacia Entities, Monarch Networking Solutions LLC (“Monarch”), Acacia board member Katharine Wolanyk, and Transpacific IP Group, Ltd., or 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. Acacia intends to file its motion for summary judgment on Slingshot’s claims on or before November 14, 2022, to which Slingshot must respond by December 14, 2022. The Chancery Court has set a two-day trial on liability for April 18–19, 2023, with a third day of trial on damages to follow in the event that Slingshot prevails on liability. The Acacia Entities maintain, and believe that discovery has confirmed, that Slingshot’s allegations are baseless, that the Acacia Entities neither had access to nor used Slingshot’s information in acquiring the portfolio, that the Acacia Entities acquired the portfolio as a result of the independent efforts of its IP licensing group, and that Slingshot suffered no damages given its exclusive option to purchase the portfolio had already ended and it has proven itself incapable of closing on the portfolio purchase.
The Company is in a legal dispute with a third-party relating to an agreement entered into in connection with the Life Sciences Portfolio. The third-party is alleging unpaid fees as well as additional claims for damages arising from breach of contract. No claims relating to the dispute have been filed by either party as of the date of this report. The Company intends to enter into settlement discussions with the third-party and to seek to resolve the claims in arbitration as necessary. While the outcome of any such settlement discussions or arbitration is uncertain, the Company has evaluated a range of possible outcomes and has recorded an estimated accrued loss contingency. Such amount is included in accrued expenses and other current liabilities in the September 30, 2022 consolidated balance sheet.
For the three and nine months ended September 30, 2022, ARG incurred no operating expenses for settlement and contingency accruals. For the three months ended September 30, 2021, ARG incurred no operating expenses for settlement and contingency accruals. For the nine months ended September 30, 2021, ARG incurred $338,000 in operating expenses for settlement and contingency accruals.
Guarantees and Indemnifications
Certain of Acacia’s operating subsidiaries have made guarantees and indemnities under which they may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. In connection with certain facility leases, Acacia and certain of its operating subsidiaries have indemnified lessors for certain claims arising from the facilities or the leases. Acacia indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware. However, Acacia has a directors and officers insurance policy that may reduce its exposure in certain circumstances and may enable it to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to statute of limitations. The majority of guarantees and indemnities do not provide any limitations of the maximum potential future payments that Acacia could be obligated to make. To date, Acacia has made no payments related to these guarantees and indemnities. Acacia estimates the fair value of its indemnification obligations to be insignificant based on this history and therefore, have not recorded any liability for these guarantees and indemnities in the consolidated balance sheets. Additionally, no events or transactions have occurred that would result in a material liability at September 30, 2022.
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 September 30, 2022 and December 31, 2021, 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
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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 nine months ended September 30, 2022, 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 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.
Stock repurchases, all of which were purchased as part of a publicly announced plan or program, were as follows:
| Total Number of Shares Purchased | Average Price paid per Share | Approximate Dollar Value of Shares that May Yet be Purchased under the Program | |||||||||||||||
| (In thousands) | |||||||||||||||||
| December 1, 2021 - December 31, 2021 | 784,104 | $ | 5.12 | $ | 11,004 | ||||||||||||
| January 1, 2022 - January 31, 2022 | 1,588,820 | $ | 4.85 | $ | 3,286 | ||||||||||||
| February 1, 2022 - February 28, 2022 | 752,895 | $ | 4.36 | $ | — | ||||||||||||
| Total repurchases in the quarter | 2,341,715 | $ | 4.69 | ||||||||||||||
| Total program repurchases | 3,125,819 | $ | 4.80 | ||||||||||||||
| April 1, 2022 - April 30, 2022 | 692,538 | $ | 4.48 | $ | 36,901 | ||||||||||||
| May 1, 2022 - May 31, 2022 | 2,192,238 | $ | 4.59 | $ | 26,832 | ||||||||||||
| June 1, 2022 - June 30, 2022 | 3,262,043 | $ | 4.71 | $ | 11,480 | ||||||||||||
| Total repurchases in the quarter | 6,146,819 | $ | 4.64 | ||||||||||||||
| July 1, 2022 - July 31, 2022 | 2,306,700 | $ | 4.98 | $ | — | ||||||||||||
| Total program repurchases | 8,453,519 | $ | 4.73 | ||||||||||||||
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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 Plan
On March 12, 2019, the Board announced that it had unanimously approved the adoption of a Tax Benefits Preservation Plan (the “Plan”). Our stockholders ratified the adoption of the Plan in July 2019. The purpose of the Plan 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 Plan is designed to reduce the likelihood that the Company will experience an ownership change by discouraging (i) any person or group from acquiring beneficial ownership of 4.9% or more of the Company’s outstanding common stock and (ii) any existing stockholders who, as of the time of the first public announcement of the adoption of the Plan, beneficially own more than 4.9% of the Company’s then-outstanding shares of the Company’s common stock from acquiring additional shares of the Company’s common stock (subject to certain exceptions). There is no guarantee, however, that the Plan will prevent the Company from experiencing an ownership change.
In connection with the adoption of the Plan, the Board authorized and declared a dividend distribution of one right for each outstanding share of the Company’s common stock to stockholders of record at the close of business on March 16, 2019. On or after the distribution date, each right would initially entitle the holder to purchase one one-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock, $0.001 par value for a purchase price of $12.00. On March 15, 2021 the rights expired pursuant to their terms.
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. Like the Plan, 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 to four years and restricted shares with time-based vesting generally vest in full after 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
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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).
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 September 30, 2022, there were 112,449 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 September 30, 2022, there were 5,833,670 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 September 30, 2022, there are 8,662,005 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, 2021 | 555,417 | $ | 5.61 | $ | 71 | 7.3 years | |||||||||||||||||
| Granted | 1,155,000 | $ | 3.61 | $ | — | ||||||||||||||||||
| Exercised | — | $ | — | $ | — | ||||||||||||||||||
| Forfeited/Expired | (30,000) | $ | 5.75 | $ | — | ||||||||||||||||||
| Outstanding at September 30, 2022 | 1,680,417 | $ | 4.24 | $ | 518 | 8.5 years | |||||||||||||||||
| Exercisable at September 30, 2022 | 262,917 | $ | 5.37 | $ | 26 | 5.1 years | |||||||||||||||||
| Vested and expected to vest at September 30, 2022 | 1,680,417 | $ | 4.24 | $ | 518 | 8.5 years | |||||||||||||||||
| Unrecognized stock-based compensation expense at September 30, 2022 (in thousands) | $ | 1,527 | |||||||||||||||||||||
| Weighted average remaining vesting period at September 30, 2022 | 2.4 years | ||||||||||||||||||||||
Stock options granted in 2022 are time-based and will vest in full after to four years. During the nine months ended September 30, 2022, the Company granted 1,155,000 stock options at a weighted average grant-date fair value of $1.19 per share using the Black-Scholes option-pricing model. The fair value was estimated based on the following weighted average assumptions: volatility of 30 percent, risk-free interest rate of 1.85 percent, term of 6.11 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
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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 nine months ended September 30, 2022 was $235,000.
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, 2021 | 517,569 | $ | 4.74 | 1,014,166 | $ | 3.73 | |||||||||||||||||
| Granted | 296,000 | $ | 3.62 | 709,804 | $ | 3.73 | |||||||||||||||||
| Vested | (258,232) | $ | 4.71 | (635,501) | $ | 2.60 | |||||||||||||||||
| Forfeited | (53,333) | $ | 4.89 | (53,000) | $ | 4.13 | |||||||||||||||||
| Nonvested at September 30, 2022 | 502,004 | $ | 4.08 | 1,035,469 | $ | 4.40 | |||||||||||||||||
| Unrecognized stock-based compensation expense at September 30, 2022 (in thousands) | $ | 1,571 | $ | 3,590 | |||||||||||||||||||
| Weighted average remaining vesting period at September 30, 2022 | 1.8 years | 2.0 years | |||||||||||||||||||||
RSAs and RSUs granted in 2022 are time-based and will vest in full after to four years. The aggregate fair value of RSAs vested during the nine months ended September 30, 2022 was $1.2 million. The aggregate fair value of RSUs vested during the nine months ended September 30, 2022 was $1.7 million. During the nine months ended September 30, 2022, RSAs and RSUs totaling 893,733 shares were vested and 350,406 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 period end. The remaining units fully vested on September 3, 2022. Compensation expense (credit) for RSUs with market-based vesting conditions for the nine months ended September 30, 2022 and 2021, was $143,000 and $(124,000), respectively.
Compensation expense (credit) for share-based awards recognized in general and administrative expenses was comprised of the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Options | $ | 162 | $ | 28 | $ | 464 | $ | 38 | |||||||||||||||
| RSAs | 294 | 465 | 1,165 | 1,150 | |||||||||||||||||||
| RSUs | 575 | (193) | 1,659 | 91 | |||||||||||||||||||
| Total compensation expense for share-based awards | $ | 1,031 | $ | 300 | $ | 3,288 | $ | 1,279 | |||||||||||||||
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Total unrecognized stock-based compensation expense as of September 30, 2022 was $6.7 million, which will be amortized over a weighted average remaining vesting period of 2.0 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 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 September 30, 2022 and December 31, 2021, 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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands, except share and per share data) | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) attributable to Acacia Research Corporation | $ | 28,090 | $ | 89,757 | $ | (106,679) | $ | (55,048) | |||||||||||||||
| Dividend on Series A redeemable convertible preferred stock | (700) | (262) | (2,099) | (785) | |||||||||||||||||||
| Accretion of Series A redeemable convertible preferred stock | (1,337) | (991) | (3,729) | (2,762) | |||||||||||||||||||
| Undistributed earnings allocated to participating securities | (5,466) | (15,394) | — | — | |||||||||||||||||||
| Net income (loss) attributable to common stockholders - Basic | 20,587 | 73,110 | (112,507) | (58,595) | |||||||||||||||||||
| Less: Change in fair value of Series A warrants | (3,389) | 63 | — | — | |||||||||||||||||||
| Less: Change in fair value of dilutive Series B warrants | (21,766) | (902) | — | — | |||||||||||||||||||
| Add: Interest expense associated with Starboard Notes, net of tax | 850 | 1,536 | — | — | |||||||||||||||||||
| Add: Undistributed earnings allocated to participating securities | 5,466 | 15,394 | — | — | |||||||||||||||||||
| Reallocation of undistributed earnings to participating securities | (217) | (8,893) | — | — | |||||||||||||||||||
| Net income (loss) attributable to common stockholders - Diluted | $ | 1,531 | $ | 80,308 | $ | (112,507) | $ | (58,595) | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average shares used in computing net income (loss) per share attributable to common stockholders - Basic | 38,052,426 | 48,949,504 | 42,830,700 | 48,759,873 | |||||||||||||||||||
| Potentially dilutive common shares: | |||||||||||||||||||||||
| Restricted stock units | 539,989 | 798,356 | — | — | |||||||||||||||||||
| Stock options | 18,397 | 35,815 | — | — | |||||||||||||||||||
| Series A Warrants | 1,046,575 | 2,019,724 | — | — | |||||||||||||||||||
| Series B Warrants | 31,506,849 | 41,278,103 | — | — | |||||||||||||||||||
| Weighted average shares used in computing net income (loss) per share attributable to common stockholders - Diluted | 71,164,236 | 93,081,502 | 42,830,700 | 48,759,873 | |||||||||||||||||||
| Basic net income (loss) per common share | $ | 0.54 | $ | 1.49 | $ | (2.63) | $ | (1.20) | |||||||||||||||
| Diluted net income (loss) per common share | $ | 0.02 | $ | 0.86 | $ | (2.63) | $ | (1.20) | |||||||||||||||
| Anti-dilutive potential common shares excluded from the computation of diluted net income/loss per share: | |||||||||||||||||||||||
| Equity-based incentive awards | 1,027,082 | 398,168 | 3,217,890 | 2,230,624 | |||||||||||||||||||
| Series A warrants | — | — | 5,000,000 | 5,000,000 | |||||||||||||||||||
| Series B warrants | 68,493,151 | — | 100,000,000 | 100,000,000 | |||||||||||||||||||
| Total | 69,520,233 | 398,168 | 108,217,890 | 107,230,624 | |||||||||||||||||||
15. SEGMENT REPORTING
As of September 30, 2022, the Company operates and reports its results in two reportable segments: Intellectual Property Operations and Industrial Operations. Historically, the Company has managed and reported under a single reporting segment. In October 2021, the Company acquired Printronix, which comprises all of the operations of the Company’s Industrial Operations reportable segment and led to the identification of the additional reporting segment. 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
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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. 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 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. The Industrial Operations reporting segment did not exist prior to the acquisition of Printronix in October 2021. Therefore, for the three and nine months ended September 30, 2021, the consolidated results represented the results of the Company’s single reporting segment.
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The Company's segment information is as follows:
| Three Months Ended September 30, | |||||||||||||||||
| 2022 | |||||||||||||||||
| Intellectual Property Operations | Industrial Operations | Total | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Revenues: | |||||||||||||||||
| License fees | $ | 6,320 | $ | — | $ | 6,320 | |||||||||||
| Printers and parts | — | 3,799 | 3,799 | ||||||||||||||
| Consumable products | — | 4,710 | 4,710 | ||||||||||||||
| Services | — | 1,049 | 1,049 | ||||||||||||||
| Total revenues | 6,320 | 9,558 | 15,878 | ||||||||||||||
| Cost of revenues: | |||||||||||||||||
| Inventor royalties | 732 | — | 732 | ||||||||||||||
| Contingent legal fees | 1,010 | — | 1,010 | ||||||||||||||
| Litigation and licensing expenses | 939 | — | 939 | ||||||||||||||
| Amortization of patents | 2,601 | — | 2,601 | ||||||||||||||
| Cost of sales | — | 4,648 | 4,648 | ||||||||||||||
| Total cost of revenues | 5,282 | 4,648 | 9,930 | ||||||||||||||
| Segment gross profit | 1,038 | 4,910 | 5,948 | ||||||||||||||
| Other operating expenses: | |||||||||||||||||
| Engineering and development expenses | — | 156 | 156 | ||||||||||||||
| Sales and marketing expenses | — | 2,119 | 2,119 | ||||||||||||||
| Amortization of intangible assets | — | 433 | 433 | ||||||||||||||
| General and administrative expenses | 1,527 | 1,756 | 3,283 | ||||||||||||||
| Total other operating expenses | 1,527 | 4,464 | 5,991 | ||||||||||||||
| Segment operating (loss) income | $ | (489) | $ | 446 | (43) | ||||||||||||
| Parent general and administrative expenses | 11,322 | ||||||||||||||||
| Operating loss | (11,365) | ||||||||||||||||
| Total other income | 40,440 | ||||||||||||||||
| Income before income taxes | $ | 29,075 | |||||||||||||||
For comparability purposes, Acacia's three months ended September 30, 2021 general and administrative expenses, as reported in the consolidated statement of operations, were $10.3 million and included parent general and administrative expenses of $8.7 million, which derives a comparative Intellectual Property Operations general and administrative expense amount of approximately $1.6 million.
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| Nine Months Ended September 30, | |||||||||||||||||
| 2022 | |||||||||||||||||
| Intellectual Property Operations | Industrial Operations | Total | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Revenues: | |||||||||||||||||
| License fees | $ | 16,997 | $ | — | $ | 16,997 | |||||||||||
| Printers and parts | — | 11,715 | 11,715 | ||||||||||||||
| Consumable products | — | 14,308 | 14,308 | ||||||||||||||
| Services | — | 3,082 | 3,082 | ||||||||||||||
| Total revenues | 16,997 | 29,105 | 46,102 | ||||||||||||||
| Cost of revenues: | |||||||||||||||||
| Inventor royalties | 1,092 | — | 1,092 | ||||||||||||||
| Contingent legal fees | 2,314 | — | 2,314 | ||||||||||||||
| Litigation and licensing expenses | 3,272 | — | 3,272 | ||||||||||||||
| Amortization of patents | 7,802 | — | 7,802 | ||||||||||||||
| Cost of sales | — | 13,432 | 13,432 | ||||||||||||||
| Total cost of revenues | 14,480 | 13,432 | 27,912 | ||||||||||||||
| Segment gross profit | 2,517 | 15,673 | 18,190 | ||||||||||||||
| Other operating expenses: | |||||||||||||||||
| Engineering and development expenses | — | 491 | 491 | ||||||||||||||
| Sales and marketing expenses | — | 6,429 | 6,429 | ||||||||||||||
| Amortization of intangible assets | — | 1,299 | 1,299 | ||||||||||||||
| General and administrative expenses | 5,050 | 6,431 | 11,481 | ||||||||||||||
| Total other operating expenses | 5,050 | 14,650 | 19,700 | ||||||||||||||
| Segment operating (loss) income | $ | (2,533) | $ | 1,023 | (1,510) | ||||||||||||
| Parent general and administrative expenses | 24,033 | ||||||||||||||||
| Operating loss | (25,543) | ||||||||||||||||
| Total other expense | (81,216) | ||||||||||||||||
| Loss before income taxes | $ | (106,759) | |||||||||||||||
For comparability purposes, Acacia's nine months ended September 30, 2021 general and administrative expenses, as reported in the consolidated statement of operations, were $23.0 million and included parent general and administrative expenses of $19.0 million, which derives a comparative Intellectual Property Operations general and administrative expense amount of approximately $4.1 million.
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| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Equity securities investments: | |||||||||||
| Equity securities at fair value | $ | 81,384 | $ | 361,778 | |||||||
| Equity securities without readily determinable fair value | 5,816 | 5,816 | |||||||||
| Investment securities - equity method investments | 72,106 | 30,934 | |||||||||
| Total parent equity securities investments | 159,306 | 398,528 | |||||||||
| Other parent assets | 103,602 | 172,726 | |||||||||
| Segment total assets: | |||||||||||
| Intellectual property operations | 170,421 | 175,286 | |||||||||
| Industrial operations | 51,940 | 52,316 | |||||||||
| Total assets | $ | 485,269 | $ | 798,856 | |||||||
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 September 30, | |||||||||||||||||
| 2022 | |||||||||||||||||
| Intellectual Property Operations | Industrial Operations | Total | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Revenues by geographic area: | |||||||||||||||||
| United States | $ | 6,311 | $ | 3,996 | $ | 10,307 | |||||||||||
| Canada and Latin America | 1 | 217 | 218 | ||||||||||||||
| Total Americas | 6,312 | 4,213 | 10,525 | ||||||||||||||
| Europe, Middle East and Africa | — | 2,282 | 2,282 | ||||||||||||||
| China | — | 1,403 | 1,403 | ||||||||||||||
| India | — | 582 | 582 | ||||||||||||||
| Asia-Pacific, excluding China and India | 8 | 1,078 | 1,086 | ||||||||||||||
| Total Asia-Pacific | 8 | 3,063 | 3,071 | ||||||||||||||
| Total revenues | $ | 6,320 | $ | 9,558 | $ | 15,878 | |||||||||||
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| Nine Months Ended September 30, | |||||||||||||||||
| 2022 | |||||||||||||||||
| Intellectual Property Operations | Industrial Operations | Total | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Revenues by geographic area: | |||||||||||||||||
| United States | $ | 16,372 | $ | 11,877 | $ | 28,249 | |||||||||||
| Canada and Latin America | 11 | 769 | 780 | ||||||||||||||
| Total Americas | 16,383 | 12,646 | 29,029 | ||||||||||||||
| Europe, Middle East and Africa | 589 | 7,088 | 7,677 | ||||||||||||||
| China | — | 3,627 | 3,627 | ||||||||||||||
| India | — | 2,563 | 2,563 | ||||||||||||||
| Asia-Pacific, excluding China and India | 25 | 3,181 | 3,206 | ||||||||||||||
| Total Asia-Pacific | 25 | 9,371 | 9,396 | ||||||||||||||
| Total revenues | $ | 16,997 | $ | 29,105 | $ | 46,102 | |||||||||||
| September 30, 2022 | |||||||||||||||||
| Intellectual Property Operations | Industrial Operations | Total | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Long-lived tangible assets by geographic area: | |||||||||||||||||
| United States | $ | 333 | $ | 346 | $ | 679 | |||||||||||
| Malaysia | — | 2,780 | 2,780 | ||||||||||||||
| Other foreign countries | — | 241 | 241 | ||||||||||||||
| Total | $ | 333 | $ | 3,367 | $ | 3,700 | |||||||||||
| December 31, 2021 | |||||||||||||||||
| Intellectual Property Operations | Industrial Operations | Total | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Long-lived tangible assets by geographic area: | |||||||||||||||||
| United States | $ | 204 | $ | 473 | $ | 677 | |||||||||||
| Malaysia | — | 3,203 | 3,203 | ||||||||||||||
| Other foreign countries | — | 303 | 303 | ||||||||||||||
| Total | $ | 204 | $ | 3,979 | $ | 4,183 | |||||||||||
16. SUBSEQUENT EVENTS
Expiration of the Cash Exercise Feature of the Unadjusted Series B Warrants
On October 28, 2022, the cash exercise feature of the Unadjusted Series B Warrants expired. Refer to Note 8 for additional information.
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Recapitalization
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 effect 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, including, among other things, the following:
•Series A Redeemable Convertible Preferred Stock. Subject to the receipt of stockholder approval at the Company’s next annual meeting of stockholders, (i) the Company will use its reasonable best efforts to 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.
•Series A Warrants. In accordance with the terms of the Recapitalization Agreement, within five (5) business days following the date of the Recapitalization Agreement, (i) the Investors were obligated to irrevocably exercise all of the Series A Warrants for cash and (ii) the Company was obligated to subsequently issue to the Investors shares of common stock in accordance with the terms of the Series A Warrants and pay to Starboard an aggregate amount of $9,000,000 representing a negotiated settlement of the foregone time value of the Series A Warrants (which amount will be paid through a reduction in the exercise price of the Series A Warrants). Effective as of November 1, 2022, the Investors exercised 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 $9,250,000, which amount represents a reduction in the exercise price of $1.80 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 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 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 will be cancelled immediately following the completion of the Rights Offering (as defined below).
•Rights Offering. The Company will launch a rights offering in accordance with the terms of the Series B Warrants (the “Rights Offering”) pursuant to which each holder of the Company’s common stock will receive the right to purchase (a “Purchase Right”) one share of common stock at $5.25 per share (the “Rights Exercise Price”) for every four (4) shares of common stock held by such holder (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), and each Investor will receive an equivalent right in accordance with the terms of the Series B Warrants. The Investors will receive rights to purchase approximately 25,000,000 shares of common stock and have committed to purchase a minimum of 15,000,000 shares in the Rights Offering (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). In addition, concurrently with the Rights Offering, each of the Investors holding Series A Convertible Preferred Stock shall have the right to purchase from the Company a number of shares of Common Stock equal to 25% times the number of shares of Common Stock issuable upon conversion of such Series A Convertible Preferred Stock at a price equal to the Rights Exercise Price, which purchase rights shall expire at the same time as the Purchase Rights.
•Recapitalization Payment. At the closing of the Series B Warrants Exercise (the “Closing”), 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 Redeemable Convertible 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.
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•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 will include at least two (2) directors that are independent of, and not affiliates (as defined in Rule 144 under the Securities Act of 1933, as amended) of, Starboard, with current Board members Maureen O’Connell and Isaac T. Kohlberg satisfying this initial condition. The parties also agreed that Katharine Wolanyk will 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, within five (5) business days following the date of the Recapitalization Agreement, the Company agreed to take all necessary action to appoint Gavin Molinelli as a Board member and as Chair of the Board, which appointment was effected on October 30, 2022. The Company and Starboard also agreed that, following the Closing until the end of the Applicable Period, the number of directors serving on the Board will not exceed ten (10) members.
•Fair Price Provision. 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. Additionally, solely to the extent that the Company reasonably determines in good faith that a stockholder vote is required in connection with the Rights Offering under applicable Nasdaq rules, the requisite stockholder approval for any such transaction shall have been obtained. If stockholder approval is required, the timing of the proposed Rights Offering may change.
The Recapitalization Agreement may be terminated by either party under certain circumstances, including if (i) the parties agree to terminate by mutual consent, (ii) a governmental entity issues an order permanently prohibiting the Recapitalization, (iii) 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 (iv) the Closing does not occur on or before July 31, 2023.
Under the Recapitalization Agreement, at its next annual meeting of Stockholders, the Company is required to use its reasonable best efforts to obtain the requisite stockholder approval for an amendment to the Certificate of Designations. Additionally, if the Company reasonably determines in good faith that all or any portion of the transactions contemplated in connection with the Rights Offering require stockholder approval under the applicable Nasdaq rules, the Company will be required to use its reasonable best efforts to obtain the requisite stockholder approval of any such transaction.
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.
Resignation of Chief Executive Officer; Appointment of Interim Chief Executive Officer
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.
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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, 2021,“Risk Factors,” and elsewhere herein. For additional information, refer to the section above entitled “Cautionary Note Regarding Forward-Looking Statements.”
General
We are a permanent 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 or multi-factor 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 Value LP ("Starboard") that provides us access to capital, industry expertise, and a deep bench of operating partners and industry experts to evaluate potential acquisition opportunities and enhance the oversight and value creation of such businesses once acquired. Starboard provides 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 to date has been on 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. 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 September 30, 2022, we have generated gross licensing revenue of approximately $1.7 billion, and have returned $843.1 million to our patent partners.
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For more information related to our Intellectual Property Operations, refer to additional detailed patent business discussion below.
Industrial Operations
In October 2021, we consummated our first operating company acquisition of Printronix. Printronix is a leading manufacturer and distributor of industrial impact printers, also known as line matrix printers, and related consumables and services. The Printronix business serves a diverse group of customers that operate across healthcare, food and beverage, manufacturing and logistics, and other sectors. This mature technology is known for its ability to operate in hazardous environments. Printronix has a manufacturing site located in Malaysia and third-party configuration sites located in the United States, Singapore and Holland, along with sales and support locations around the world to support its global network of users, channel partners and strategic alliances. This acquisition was made at what we believe to be an attractive purchase price, and we are now supporting existing management in its 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 from October 7, 2021 through September 30, 2022. Refer to Note 1 to the consolidated financial statements elsewhere herein for additional information.
For more information related to our Industrial Operations, refer to the section entitled "Industrial Printing Solutions" below.
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. A detailed description of the Recapitalization and the actions contemplated to be taken in connection therewith is set forth in the section entitled “Recent Business Matters – Recapitalization” below.
Resignation of Chief Executive Officer; Appointment of Interim Chief Executive Officer
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.
COVID-19 Pandemic
The full impact of the COVID-19 pandemic continues to evolve as of the date of this report. While the Company does not expect the current situation to present direct risks to its business, and it has not had a material impact to date, the COVID-19 pandemic could adversely impact the Company’s operations, as well as the operations of its licensees and other business partners. Our business is fully able to operate in a socially distanced and/or remote capacity and in accordance with applicable laws, policies and best practices. Our workforce is provided ample paid sick leave, and we have in place robust disaster recovery and business continuity policies that have been revised to account for a long-term remote work contingency such as this. However, the ongoing pandemic may present risks that we do not currently consider material or risks that may evolve quickly that could have a materially adverse effect on our business, results of operations and financial condition.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer’s social security payments, net operating loss utilization and carryback periods
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and modifications to the net interest deduction limitations. The CARES Act has not had a material impact on the Company’s income tax provision.
On December 27, 2020, the President of the United States signed the Consolidated Appropriations Act, 2021 (“Consolidated Appropriations Act”) into law. The Consolidated Appropriations Act is intended to enhance and expand certain provisions of the CARES Act, allows for the deductions of expenses related to the Payroll Protection Program funds received by companies, and provides an update to meals and entertainment expensing for 2021. The Consolidated Appropriations Act did not have a material impact to the Company’s income tax provision for 2020. The Company does not expect a material impact from the Consolidated Appropriations Act on its financial position, results of operations and cash flows going forward.
On March 11, 2021 the United States enacted the American Rescue Plan Act of 2021. This Act includes various income and payroll tax measures. The Company does not expect a material impact from the American Rescue Plan on its consolidated financial statements and related disclosures.
Executive Overview
During 2021 and 2020, we focused on diversifying our business and leveraging our resources and skill sets to complete strategic acquisitions of businesses, divisions, and/or assets with a focus on mature technology, healthcare, industrial and certain financial segments intended to unlock and realize value. Refer to "General" above for additional information.
This led to our acquisition of the "Life Sciences Portfolio" in June 2020. In connection with the purchase of the equity securities in the Life Sciences Portfolio, we issued to certain funds and accounts, or the Investors, affiliated with, or managed by, Starboard, $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 September 30, 2022, we have monetized a portion 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 revenues through the receipt of royalties.
In addition, in October 2021, we consummated our first operating company acquisition of Printronix.
Refer to “Recent Business Matters – Starboard Securities and Senior Secured Notes” and “Recent Business Matters – Equity Securities Portfolio Investment” below, and “General – Industrial Operations” above, and Notes 1, 3 and 8 to the consolidated financial statements elsewhere herein for more information related to the Printronix acquisition, Life Sciences Portfolio and Notes, respectively.
For the nine months ended September 30, 2022 and 2021, we reported consolidated revenues of $46.1 million and $24.8 million. Cash and cash equivalents and equity securities at fair value totaled $323.3 million as of September 30, 2022, as compared to $670.7 million as of December 31, 2021. Our operating activities during the periods presented were focused on the continued operation of our Patent Licensing, Enforcement and Technologies Business, including the continued pursuit of our ongoing patent licensing and enforcement programs, and beginning in October 2021, our Industrial Operations business through our Printronix subsidiary.
Patent Licensing and Enforcement
Patent Litigation Trial Dates and Related Trials
As of the date of this report, our operating subsidiaries have three 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. In fact, it is difficult to predict the outcome of patent enforcement litigation at the trial level and outcomes can be unfavorable. It can be difficult to understand complex patented technologies, and as a result, this may lead to a higher rate of unfavorable
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litigation outcomes. Moreover, in the event of a favorable outcome, there is, in our experience, a higher rate of successful appeals in patent enforcement litigation than more standard business litigation. Such appeals are expensive and time consuming, resulting in increased costs and a potential for delayed or foregone revenue opportunities in the event of modification or reversal of favorable outcomes. Although we diligently pursue enforcement litigation, we cannot predict with reliability the decisions made by juries and trial courts. Refer to Item 1A “Risk Factors” of our Annual Report for additional information regarding trials, patent litigation and related risks.
Litigation and Licensing Expense
We expect patent-related legal expenses to continue to fluctuate from period to period based on the factors summarized herein, in connection with future trial dates, international enforcement, strategic patent portfolio prosecution and our current and future patent portfolio investment, prosecution, licensing and enforcement activities. The pursuit of enforcement actions in connection with our licensing and enforcement programs can involve certain risks and uncertainties, including the following:
•Increases in patent-related legal expenses associated with patent infringement litigation, including, but not limited to, increases in costs billed by outside legal counsel for discovery, depositions, economic analyses, damages assessments, expert witnesses and other consultants, re-exam and inter partes review costs, case-related audio/video presentations and other litigation support and administrative costs, could increase our operating costs and decrease our profit generating opportunities;
•Our patented technologies and enforcement actions are complex and, as a result, we may be required to appeal adverse decisions by trial courts in order to successfully enforce our patents. Moreover, such appeals may not be successful;
•New legislation, regulations or rules related to enforcement actions, including any fee or cost shifting provisions, could significantly increase our operating costs and decrease our profit generating opportunities. Increased focus on the growing number of patent-related lawsuits may result in legislative changes which increase our costs and related risks of asserting patent enforcement actions;
•Courts may rule that our subsidiaries have violated certain statutory, regulatory, federal, local or governing rules or standards by pursuing such enforcement actions, which may expose us and our operating subsidiaries to material liabilities, which could harm our operating results and our financial position;
•The complexity of negotiations and potential magnitude of exposure for potential infringers associated with higher quality patent portfolios may lead to increased intervals of time between the filing of litigation and potential revenue events (i.e., Markman dates, trial dates), which may lead to increased legal expenses, consistent with the higher revenue potential of such portfolios; and
•Fluctuations in overall patent portfolio related enforcement activities which are impacted by the portfolio intake challenges discussed above could harm our operating results and our financial position.
Investments in Patent Portfolios
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 nine months ended September 30, 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
Starboard Securities and Senior Secured Notes
In 2019, as part of our strategy to grow, we began evaluating a wide range of strategic opportunities that culminated in the strategic investment in the Company by certain funds and accounts, or the Investors, affiliated with, or managed by, Starboard Value LP, or Starboard. On November 18, 2019, the Company entered into a Securities Purchase Agreement with Starboard and the Investors, or the Securities Purchase Agreement, pursuant to which the Investors purchased (i) 350,000 shares of the Company’s newly designated Series A Convertible Preferred Stock, or Series A Preferred Stock, at an aggregate purchase price of $35.0 million, and warrants to purchase up to 5 million shares of the Company’s common stock, or Series A Warrants. The Securities Purchase Agreements also established the terms of certain senior secured notes, or Notes, and additional warrants, or the Series B Warrants, which may be issued to the Investors in the future. Refer to Note 8 to the consolidated financial statements elsewhere herein for additional information related to the Series A Preferred Stock, Series A Warrants and Series B Warrants. In connection with the Investor’s investment, Starboard was granted certain corporate governance rights, including the right to appoint Jonathan Sagal, Managing Director of Starboard, as a director of the Company and recommend two additional directors for appointment to our Board. The Series A Preferred Stock, Series A Warrants and Series B Warrants are referred to herein as, collectively, the “Starboard Securities.”
On February 14, 2020, the Company’s stockholders approved, for purposes of Nasdaq Rules 5635(b) and 5635(d), as applicable, (i) the voting of the Series A Preferred Stock on an as-converted basis and (ii) the issuance of the maximum number of shares of common stock issuable in connection with the potential future (A) conversion of the Series A Preferred Stock and (B) exercise of the Series A and Series B Warrants, in each case, without giving effect to the exchange cap set forth in the Series A Preferred Stock Certificate of Designations and in the Series A Warrants, issued pursuant to the Securities Purchase Agreement dated November 18, 2019. The Company’s stockholders also approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the total number of authorized shares of common stock by 200 million shares, from 100 million shares to 300 million shares.
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 of either (i) $5.25 per share, if exercising by cash payment, 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.
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On June 4, 2020, pursuant to the terms of the Securities Purchase Agreement 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, or the Supplemental Agreement, through which, the Company agreed to redeem $80.0 million aggregate principal amount of the Notes by September 30, 2020, and $35.0 million aggregate principal amount of the Notes by December 31, 2020, resulting in the total principal outstanding being paid by December 31, 2020. Per the Supplemental Agreement, interest is payable semiannually at a rate of 6.00% per annum, and in an event of default, the interest rate is increased to 10.00% per annum. 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”). The Notes outlined certain financial and non-financial covenants. Additionally, all or any portion of the principal amount outstanding under the Notes may, at the election of the holders, be surrendered to the Company for cancellation in payment of the exercise price upon the exercise of the Series B Warrants.
On June 30, 2020, the Company entered into an Exchange Agreement, or 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 the Investors, including the holders of the Notes. Pursuant to the Exchange Agreement, the holders of the Notes exchanged the entire outstanding principal amount of the Notes for new senior notes, or the New Notes, issued by Merton and 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 a 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 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 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 between the Company, Starboard and the Investors.
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 September 30, 2022 and December 31, 2021 was $60.0 million and $180.0 million, respectively. Refer to Note 8 to the consolidated financial statements elsewhere herein for additional information.
On October 28, 2022, the cash exercise feature of the Unadjusted Series B Warrants expired. The fair value of the Unadjusted Series B Warrants on September 30, 2022 was $533,000. Refer to Note 8 to the consolidated financial statements elsewhere herein for additional information.
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Recapitalization
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 effect 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, including, among other things, the following:
•Series A Redeemable Convertible Preferred Stock. Subject to the receipt of stockholder approval at the Company’s next annual meeting of stockholders, (i) the Company will use its reasonable best efforts to cause the Certificate of Designations for Series A Redeemable Convertible Preferred Stock 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.
•Series A Warrants. Within five (5) business days following the date of the Recapitalization Agreement, (i) the Investors were obligated to irrevocably exercise all of the Series A Warrants for cash and (ii) the Company was obligated to subsequently issue to the Investors shares of common stock in accordance with the terms of the Series A Warrants and pay to Starboard an aggregate amount of $9,000,000 representing a negotiated settlement of the foregone time value of the Series A Warrants (which amount will be paid through a reduction in the exercise price of the Series A Warrants). Effective as of November 1, 2022, the Investors exercised 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 $9,250,000, which amount represents a reduction in the exercise price of $1.80 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 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 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 will be cancelled immediately following the completion of the Rights Offering (as defined below).
•Rights Offering. The Company will launch a rights offering in accordance with the terms of the Series B Warrants (the “Rights Offering”) pursuant to which each holder of the Company’s common stock will receive the right to purchase (a “Purchase Right”) one share of common stock at $5.25 per share (the “Rights Exercise Price”) for every four (4) shares of common stock held by such holder (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), and each Investor will receive an equivalent right in accordance with the terms of the Series B Warrants. The Investors will receive rights to purchase approximately 25,000,000 shares of common stock and have committed to purchase a minimum of 15,000,000 shares in the Rights Offering (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). In addition, concurrently with the Rights Offering, each of the Investors holding Series A Convertible Preferred Stock shall have the right to purchase from the Company a number of shares of Common Stock equal to 25% times the number of shares of Common Stock issuable upon conversion of such Series A Convertible Preferred Stock at a price equal to the Rights Exercise Price, which purchase rights shall expire at the same time as the Purchase Rights.
•Recapitalization Payment. At the closing of the Series B Warrants Exercise (the “Closing”), 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 Redeemable Convertible 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.
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•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 will include at least two (2) directors that are independent of, and not affiliates (as defined in Rule 144 under the Securities Act of 1933, as amended) of, Starboard, with current Board members Maureen O’Connell and Isaac T. Kohlberg satisfying this initial condition. The parties also agreed that Katharine Wolanyk will 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, within five (5) business days following the date of the Recapitalization Agreement, the Company agreed to take all necessary action to appoint Gavin Molinelli as a Board member and as Chair of the Board, which appointment was effected on October 30, 2022. The Company and Starboard also agreed that, following the Closing until the end of the Applicable Period, the number of directors serving on the Board will not exceed ten (10) members.
•Fair Price Provision. 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. Additionally, solely to the extent that the Company reasonably determines in good faith that a stockholder vote is required in connection with the Rights Offering under applicable Nasdaq rules, the requisite stockholder approval for any such transaction shall have been obtained. If stockholder approval is required, the timing of the proposed Rights Offering may change.
The Recapitalization Agreement may be terminated by either party under certain circumstances, including if (i) the parties agree to terminate by mutual consent, (ii) a governmental entity issues an order permanently prohibiting the Recapitalization, (iii) 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 (iv) the Closing does not occur on or before July 31, 2023.
Under the Recapitalization Agreement, at its next annual meeting of Stockholders, the Company is required to use its reasonable best efforts to obtain the requisite stockholder approval for an amendment to the Certificate of Designations. Additionally, if the Company reasonably determines in good faith that all or any portion of the transactions contemplated in connection with the Rights Offering require stockholder approval under the applicable Nasdaq rules, the Company will be required to use its reasonable best efforts to obtain the requisite stockholder approval of any such transaction.
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.
Equity Securities Portfolio Investment
On April 3, 2020, the Company entered into an Option Agreement with Seller to purchase equity securities in 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. On June 4, 2020, the Company executed the Transaction Agreement between Link Fund Solutions Limited, or Link, Seller, and the Company. Pursuant to the Transaction Agreement, the Company will purchase from Seller and Seller will transfer to the Company the specified equity securities of all companies in the Life Sciences Portfolio at set prices at various future dates. In accordance with the Transaction Agreement, the Company transferred the total purchase price of £223.9 million into an escrow account. Upon the transfer of equity securities in the Life Sciences Portfolio to the
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Company, the associated funds were released from the escrow account to Seller based on the consideration amount assigned to the equity securities for such Life Sciences Portfolio company in the Transaction Agreement. As of December 31, 2020, all of the equity securities in the Life Sciences Portfolio were transferred to the Company pursuant to the Transaction Agreement. Refer to Note 3 to the consolidated financial statements elsewhere herein for additional information.
Industrial Operations Acquisition
Refer to “General – Industrial Operations” 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 2 to the consolidated financial statements elsewhere herein.
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Results of Operations
Summary of Results of Operations
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentage change values) | |||||||||||||||||||||||||||||||||||||||||||||||
| Total revenues | $ | 15,878 | $ | 1,582 | $ | 14,296 | 904 | % | $ | 46,102 | $ | 24,785 | $ | 21,317 | 86 | % | |||||||||||||||||||||||||||||||
| Total costs and expenses | 27,243 | 14,304 | 12,939 | 90 | % | 71,645 | 41,539 | 30,106 | 72 | % | |||||||||||||||||||||||||||||||||||||
| Operating loss | (11,365) | (12,722) | 1,357 | (11 | %) | (25,543) | (16,754) | (8,789) | 52 | % | |||||||||||||||||||||||||||||||||||||
| Total other income (expense) | 40,440 | 102,490 | (62,050) | (61 | %) | (81,216) | (36,857) | (44,359) | 120 | % | |||||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | 29,075 | 89,768 | (60,693) | (68 | %) | (106,759) | (53,611) | (53,148) | 99 | % | |||||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | (679) | (11) | (668) | 6,073 | % | 14,399 | (531) | 14,930 | (2,812 | %) | |||||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to Acacia Research Corporation | 28,090 | 89,757 | (61,667) | (69 | %) | (106,679) | (55,048) | (51,631) | 94 | % | |||||||||||||||||||||||||||||||||||||
Results of Operations - three months ended September 30, 2022 compared with the three months ended September 30, 2021
Total revenues increased $14.3 million to $15.9 million for the three months ended September 30, 2022, as compared to $1.6 million for the three months ended September 30, 2021, due to an increase in ARG's revenues and the net revenues contributed from Printronix of $9.6 million. ARG executed one new license agreement during the third quarter of 2022, a decrease of two versus the comparable prior period, however ARG's revenues increased by $4.7 million due to an increase in average revenue per agreement. 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. Refer to "Revenues" below for further discussion.
Income before income taxes was $29.1 million for the three months ended September 30, 2022, as compared to income of $89.8 million in the comparable prior period. The net income decrease was comprised of the change in total revenues described above and other changes in operating expenses and other income or expense as follows:
•Inventor royalties increased $452,000, from $280,000 to $732,000 in 2022, 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 increased $725,000, from $285,000 to $1.0 million in 2022, primarily due to the increase in ARG's revenues described above. Refer to "Cost of Revenues – Intellectual Property Operations" below for further discussion.
•Litigation and licensing expenses increased $157,000, from $782,000 to $939,000 in 2022, 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.
•Amortization of patents expense from our intellectual property operations decreased $11,000, from $2.6 million to $2.6 million in 2022. Refer to "Cost of Revenues – Intellectual Property Operations" below.
•Printronix cost of sales, engineering and development expenses, and sales and marketing expenses for the third quarter of 2022 added a total of $6.9 million to our consolidated operating expenses. Refer to "Cost of Revenues – Industrial Operations" and "Operating Expenses" below for further discussion.
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•General and administrative expenses increased $4.7 million, from $10.3 million to $15.0 million in 2022, primarily due to higher parent company and Intellectual Property Operations costs including, a parent company contingency accrual in the third quarter of 2022 (refer to Note 11 to the consolidated financial statements elsewhere herein for additional information), compensation expense for share-based awards, variable performance-based compensation costs, payroll costs and accounting fees, and $2.2 million from our Industrial Operations general and administrative costs and amortization expense for the third quarter of 2022, which were substantially offset by lower parent company and Intellectual Property Operations legal and consulting business development related expenses. Refer to "General and Administrative Expenses" below for further detail and discussion.
•Compensation expense for share-based awards, included in general and administrative expenses above, increased $731,000, from $300,000 to $1.0 million in 2022, primarily due to restricted stock and option grants issued to employees and the Board of Directors in 2022 and 2021, which includes a partial offset by forfeitures for terminated employees.
•Unrealized loss from the change in fair value of our equity securities was $36.4 million in 2022, as compared to an unrealized gain of $66.5 million in the comparable prior period. The unrealized loss and gain were derived from our Life Sciences Portfolio and trading securities portfolio. The current period unrealized loss primarily relates to valuation decreases from two Life Sciences Portfolio securities. Refer to "Equity Securities Investments" below for further discussion.
•Realized gain from the sale of our equity securities decreased $1.6 million, from $37.7 million to $36.1 million in 2022. The realized gains were derived from our Life Sciences Portfolio and trading securities portfolio. The current period realized gain primarily relates to sales activity from two Life Sciences Portfolio securities. Refer to "Equity Securities Investments" below for further discussion.
•Earnings on equity investment in joint venture was $850,000 in 2022, as compared to zero in the comparable prior period. Refer to "Equity Securities Investments" below for a detailed discussion.
•We recognized an unrealized gain of $41.6 million from the fair value measurements of the Series A and Series B warrants and the embedded derivative in 2022, as compared to an unrealized gain of $619,000 in the comparable prior period. Refer to Note 8 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Securities.
•Loss on foreign currency exchange increased $1.9 million, from $17,000 to $1.9 million in 2022. 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 $1.3 million, from $2.4 million to $1.1 million in 2022, due to decreased interest expense related to recent Note paydowns. 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 $1.2 million in 2022, as compared to $76,000 in the comparable prior period, mainly due to an increase in dividend income from our cash equivalents and equity security investments. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our cash and cash equivalents and investments in equity securities.
Results of Operations - nine months ended September 30, 2022 compared with the nine months ended September 30, 2021
Total revenues increased $21.3 million to $46.1 million for the nine months ended September 30, 2022, as compared to $24.8 million for the nine months ended September 30, 2021, due to the net revenues contributed from Printronix of $29.1 million. ARG executed thirteen new license agreements during 2022, a decrease of three versus the comparable prior period, which contributed to ARG's revenues decreasing by $7.8 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. Refer to "Revenues" below for further detailed discussion.
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Loss before income taxes was $106.8 million for nine months ended September 30, 2022, as compared to a loss of $53.6 million in the comparable prior period. The net loss 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 $269,000, from $823,000 to $1.1 million in 2022, 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 $3.4 million, from $5.7 million to $2.3 million in 2022, primarily due to the decrease in ARG's revenues described above. Refer to "Cost of Revenues – Intellectual Property Operations" below for further discussion.
•Litigation and licensing expenses decreased $1.6 million, from $4.9 million to $3.3 million in 2022, primarily due to a net decrease 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.
•Amortization of patents expense from our intellectual property operations increased $716,000, from $7.1 million to $7.8 million in 2022, due to an increase in scheduled amortization resulting from the new portfolio acquired in 2021. Refer to "Cost of Revenues – Intellectual Property Operations" below.
•Printronix cost of sales, engineering and development expenses, and sales and marketing expenses for 2022 added a total of $20.4 million to our consolidated operating expenses. Refer to "Cost of Revenues – Industrial Operations" and "Operating Expenses" below for further discussion.
•General and administrative expenses increased $13.8 million, from $23.0 million to $36.8 million in 2022, primarily due to higher parent company and Intellectual Property Operations costs including, a parent company contingency accrual in the third quarter of 2022 (refer to Note 11 to the consolidated financial statements elsewhere herein for additional information), compensation expense for share-based awards, variable performance-based compensation costs, payroll costs and accounting fees, and $7.7 million from our Industrial Operations general and administrative costs and amortization expense for 2022, which were partially offset by lower parent company and Intellectual Property Operations legal and consulting business development related expenses. Refer to "General and Administrative Expenses" below for further detail and discussion.
•Compensation expense for share-based awards, included in general and administrative expenses above, increased $2.0 million, from $1.3 million to $3.3 million in 2022, primarily due to restricted stock and option grants issued to employees and the Board of Directors in 2022 and 2021, which includes a partial offset by forfeitures for terminated employees.
•Unrealized loss from the change in fair value of our equity securities was $266.2 million in 2022, as compared to an unrealized gain of $115.5 million in the comparable prior period. The unrealized loss and gain were derived from our Life Sciences Portfolio and trading securities portfolio. The current period unrealized loss primarily relates to one Life Sciences Portfolio security valuation decrease. Refer to "Equity Securities Investments" below for further discussion.
•Realized gain from the sale of our equity securities increased $61.3 million, from $53.1 million to $114.4 million in 2022. The realized gains were derived from our Life Sciences Portfolio and trading securities portfolio. The current period realized gain primarily relates to sales activity from two Life Sciences Portfolio securities and one trading security. Refer to "Equity Securities Investments" below for further discussion.
•Earnings on equity investment in joint venture was $42.9 million in 2022, as compared to $2.7 million in the comparable prior period. Refer to "Equity Securities Investments" below for a detailed discussion.
•We recognized an unrealized loss of $2.8 million on the fair value investment in 2021 related to our former investment in Veritone. Refer to "Equity Securities Investments" below for further discussion.
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•We recognized a realized gain on sale of $3.6 million on the fair value investment in 2021 related to our former investment in Veritone. Refer to "Equity Securities Investments" below for further discussion.
•We recognized an unrealized gain of $34.6 million from the fair value measurements of the Series A and Series B warrants and the embedded derivative in 2022, as compared to an unrealized loss of $203.9 million in the comparable prior period. Refer to Note 8 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Securities.
•Loss on foreign currency exchange increased $4.3 million, from $193,000 to $4.5 million in 2022. 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 increased $390,000, from $5.1 million to $5.5 million in 2022, due to increased interest expense related to recent Note activity. 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 $3.1 million in 2022, as compared to $135,000 in the comparable prior period, mainly due to an increase in dividend income from our cash equivalents and equity security investments. Refer to Note 2 to the consolidated financial statements elsewhere herein 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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentage change values and count totals) | |||||||||||||||||||||||||||||||||||||||||||||||
| Paid-up license revenue agreements | $ | 6,000 | $ | 1,100 | $ | 4,900 | 445 | % | $ | 15,553 | $ | 23,110 | $ | (7,557) | (33 | %) | |||||||||||||||||||||||||||||||
| Recurring license revenue agreements | 320 | 482 | (162) | (34 | %) | 1,444 | 1,675 | (231) | (14 | %) | |||||||||||||||||||||||||||||||||||||
| Total revenues | $ | 6,320 | $ | 1,582 | $ | 4,738 | 299 | % | $ | 16,997 | $ | 24,785 | $ | (7,788) | (31 | %) | |||||||||||||||||||||||||||||||
| New license agreements executed | 1 | 3 | (2) | (67 | %) | 13 | 16 | (3) | (19 | %) | |||||||||||||||||||||||||||||||||||||
| Licensing and enforcement programs generating revenues | 5 | 3 | 2 | 67 | % | 8 | 8 | — | — | % | |||||||||||||||||||||||||||||||||||||
| Licensing and enforcement programs with initial revenues | — | — | — | n/a | — | 3 | (3) | (100 | %) | ||||||||||||||||||||||||||||||||||||||
| New patent portfolios | — | — | — | n/a | — | 1 | (1) | (100 | %) | ||||||||||||||||||||||||||||||||||||||
For the periods presented above, the majority of the revenue agreements executed provided for the payment of one-time, paid-up license fees in consideration for the grant of certain IP Rights for patented technology owned by our operating subsidiaries. These rights were primarily granted on a perpetual basis, extending until the expiration of the underlying patents. On a year-to-date basis, paid-up revenue decreased $7.6 million from ten new license agreements executed during 2022 related to five programs generating revenues. Recurring revenue, that provides for quarterly sales-based license fees, decreased $231,000 year-to-date from various on-going license arrangements including three new license agreements executed during 2022 related to four programs generating revenues, including one program that provided revenues in both paid-up and recurring revenue categories.
Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our revenue arrangements and related concentrations for the periods presented herein.
Refer to “Investments in Patent Portfolios” above for information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues.
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Industrial Operations
Printronix's net revenues included the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
| 2022 | 2022 | ||||||||||
| (In thousands) | |||||||||||
| Printers and parts | $ | 3,799 | $ | 11,715 | |||||||
| Consumable products | 4,710 | 14,308 | |||||||||
| Services | 1,049 | 3,082 | |||||||||
| Total | $ | 9,558 | $ | 29,105 | |||||||
Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding Printronix's revenue arrangements and related concentrations. Refer to “Industrial Printing Solutions” above for additional information related to Printronix's operating activities.
Cost of Revenues
Intellectual Property Operations
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentage change values) | |||||||||||||||||||||||||||||||||||||||||||||||
| Inventor royalties | $ | 732 | $ | 280 | $ | 452 | 161 | % | $ | 1,092 | $ | 823 | $ | 269 | 33 | % | |||||||||||||||||||||||||||||||
| Contingent legal fees | 1,010 | 285 | 725 | 254 | % | 2,314 | 5,735 | (3,421) | (60 | %) | |||||||||||||||||||||||||||||||||||||
| Litigation and licensing expenses | 939 | 782 | 157 | 20 | % | 3,272 | 4,881 | (1,609) | (33 | %) | |||||||||||||||||||||||||||||||||||||
| Amortization of patents | 2,601 | 2,612 | (11) | 0 | % | 7,802 | 7,086 | 716 | 10 | % | |||||||||||||||||||||||||||||||||||||
| Total | $ | 5,282 | $ | 3,959 | $ | 1,323 | 33 | % | $ | 14,480 | $ | 18,525 | $ | (4,045) | (22 | %) | |||||||||||||||||||||||||||||||
Refer to detailed change explanations above for the three and nine months ended September 30, 2022 cost of revenues from 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 and nine months ended September 30, 2022 was $4.6 million and $13.4 million, respectively. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding Printronix's cost of sales.
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Operating Expenses
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentage change values) | |||||||||||||||||||||||||||||||||||||||||||||||
| Engineering and development expenses - industrial operations | $ | 156 | $ | — | $ | 156 | n/a | $ | 491 | $ | — | $ | 491 | n/a | |||||||||||||||||||||||||||||||||
| Sales and marketing expenses - industrial operations | 2,119 | — | 2,119 | n/a | 6,429 | — | 6,429 | n/a | |||||||||||||||||||||||||||||||||||||||
| General and administrative costs - intellectual property operations | 1,527 | 1,618 | (91) | (6 | %) | 5,050 | 4,061 | 989 | 24 | % | |||||||||||||||||||||||||||||||||||||
| General and administrative costs - industrial operations | 2,189 | — | 2,189 | n/a | 7,730 | — | 7,730 | n/a | |||||||||||||||||||||||||||||||||||||||
| Parent general and administrative expenses | 11,322 | 8,727 | 2,595 | 30 | % | 24,033 | 18,953 | 5,080 | 27 | % | |||||||||||||||||||||||||||||||||||||
| Total general and administrative expenses | 15,038 | 10,345 | 4,693 | 45 | % | 36,813 | 23,014 | 13,799 | 60 | % | |||||||||||||||||||||||||||||||||||||
| Total | $ | 17,313 | $ | 10,345 | $ | 6,968 | 67 | % | $ | 43,733 | $ | 23,014 | $ | 20,719 | 90 | % | |||||||||||||||||||||||||||||||
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 September 30, | Nine Months Ended September 30, | ||||||||||
| 2022 vs. 2021 | 2022 vs. 2021 | ||||||||||
| (In thousands) | |||||||||||
| Personnel costs and board fees | $ | 256 | $ | 791 | |||||||
| Variable performance-based compensation costs | 581 | 818 | |||||||||
| Other general and administrative costs | 1,455 | 2,833 | |||||||||
| General and administrative costs - industrial operations | 1,756 | 6,431 | |||||||||
| Amortization of industrial operations intangible assets | 433 | 1,299 | |||||||||
| Compensation expense for share-based awards | 731 | 2,009 | |||||||||
| Non-recurring employee severance costs | (519) | (382) | |||||||||
| Total change in general and administrative expenses | $ | 4,693 | $ | 13,799 | |||||||
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 increases in personnel cost and board fees for the periods presented were primarily due to an increase in headcount and related costs. The change in variable performance-based compensation costs was primarily due to fluctuations in performance-based compensation accruals. The increases in other general and administrative costs, which relates to our parent company and Intellectual Property Operations business, were primarily due to a parent company contingency accrual in the third quarter of 2022 (refer to Note 11 to the consolidated financial statements elsewhere herein for additional information) and higher accounting fees, partially offset by lower legal and consulting business development related expenses. Compensation expense for share-based awards increased primarily due to restricted stock and option grants issued to employees and the Board of Directors in 2022 and 2021. Non-recurring employee severance costs fluctuate based on the severance arrangements of terminated employees. In addition, our Industrial Operations related general and administrative costs and amortization contributed to the increased expenses in 2022. Refer to additional general and administrative change explanations above.
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Other Income/Expense
Equity Securities Investments
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentage change values) | |||||||||||||||||||||||||||||||||||||||||||||||
| Change in fair value of equity securities | $ | (36,352) | $ | 66,502 | $ | (102,854) | (155 | %) | $ | (266,202) | $ | 115,509 | $ | (381,711) | (330 | %) | |||||||||||||||||||||||||||||||
| Gain on sale of equity securities | 36,060 | 37,688 | (1,628) | (4 | %) | 114,434 | 53,124 | 61,310 | 115 | % | |||||||||||||||||||||||||||||||||||||
| Earnings on equity investment in joint venture | 850 | — | 850 | n/a | 42,935 | 2,737 | 40,198 | 1,469 | % | ||||||||||||||||||||||||||||||||||||||
| Net realized and unrealized gain (loss) | 558 | 104,190 | (103,632) | (99 | %) | (108,833) | 171,370 | (280,203) | (164 | %) | |||||||||||||||||||||||||||||||||||||
| Change in fair value of investment | — | — | — | — | — | (2,752) | 2,752 | (100 | %) | ||||||||||||||||||||||||||||||||||||||
| Gain on sale of investment | — | — | — | — | — | 3,591 | (3,591) | (100 | %) | ||||||||||||||||||||||||||||||||||||||
| Total net realized and unrealized gain (loss) | $ | 558 | $ | 104,190 | $ | (103,632) | (99 | %) | $ | (108,833) | $ | 172,209 | $ | (281,042) | (163 | %) | |||||||||||||||||||||||||||||||
Our equity securities investments, including the Life Sciences Portfolio and trading securities portfolio, are recorded at fair value at each balance sheet date. Refer to periodic change explanations above. Refer to Notes 2 and 3 to the consolidated financial statements elsewhere herein for additional information regarding our investment in the Life Sciences Portfolio and other equity securities.
Our year-to-date results included a significant unrealized loss from the change in fair value of our equity securities as compared to a gain in the prior period, while realized gains from the sale of our equity securities increased, as compared to the prior period. These changes were derived from our Life Sciences Portfolio and trading securities portfolio, in which, our sales activity of certain investments increased relative to securities that were held with unrealized gains in the prior year. The current period unrealized loss primarily relates to one Life Sciences Portfolio security valuation decrease. The current period realized gain primarily relates to sales activity from two Life Sciences Portfolio securities and one trading security.
During 2021, we began to recognize earnings on our equity investment in joint venture, which is part of the Life Sciences Portfolio. In April 2022, such investment received a certain drug approval from the United States Food and Drug Administration. On a consolidated basis, we were due a milestone payment in the amount of $40.0 million, with interest accrued at 8.5% per year. Our portion of that milestone payment is anticipated to be received before year-end 2022. In June 2022, in connection with the submission to the European Medicines Agency, on a consolidated basis, we were due an additional milestone payment in the amount of $1.8 million. Our portion of that milestone payment was received in July 2022. During 2022, we recorded consolidated earnings on equity investment of $42.9 million, including the two milestones and approximately $1.2 million in accrued interest. Refer to Note 3 to the consolidated financial statements elsewhere herein for additional information.
Our prior year-to-date results included an unrealized loss on the fair value investment in Veritone, while we recognized a realized gain on sale of the equity investment in Veritone. Acacia no longer has an investment in Veritone common stock and warrants. Refer to additional change explanations above. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our former investment in Veritone.
Income Taxes
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentage change values) | |||||||||||||||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | $ | (679) | $ | (11) | $ | (668) | 6,073 | % | $ | 14,399 | $ | (531) | $ | 14,930 | (2,812 | %) | |||||||||||||||||||||||||||||||
| Effective tax rate | 2 | % | — | % | n/a | 2 | % | 13 | % | (1) | % | n/a | 14 | % | |||||||||||||||||||||||||||||||||
Our income tax (expense) benefit for the three and nine months ended September 30, 2022 primarily reflects the decrease in deferred tax liabilities attributable to the unrealized losses recorded in the periods presented, and our income tax expense for the three and nine months ended September 30, 2021 primarily relates to changes in the valuation allowance, as well as state taxes.
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Our 2022 effective tax rates were lower than the U.S. federal statutory rate primarily due to non-taxable income, expiration of foreign tax credits and changes in valuation allowance. Our 2021 effective tax rates were lower than the U.S. federal statutory rate primarily due to the change in valuation allowance, as well as state income taxes. 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 September 30, 2022 and December 31, 2021. These assets primarily consist of foreign tax credits and net operating loss carryforwards.
Inflation
Historically, inflation has not had a significant impact on us or any of our subsidiaries. While insignificant to our consolidated enterprise, during the nine months ended September 30, 2022, 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.
Liquidity and Capital Resources
General
Our material cash requirements as of September 30, 2022, are recognized as liabilities or are otherwise described in Note 11, "Commitments and Contingencies," to the consolidated financial statements included elsewhere herein. Cash requirements are generally derived from our operating and investing activities including expenditures for working capital (discussed below), human capital, business development, investments in equity securities and intellectual property, and business combinations. Our facilities lease obligations, guarantees and certain contingent obligations are further described in Note 11 to the consolidated financial statements. Historically, we have not entered into off-balance sheet financing arrangements. At September 30, 2022, we had unrecognized tax benefits, as further described in Note 2 to the consolidated financial statements.
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 us or Acacia's 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 generated from our operating activities, and as deemed appropriate by management from our availability of Senior Secured Notes (discussed above under the caption “Recent Business Matters – Starboard Securities and Senior Secured Notes”). Our management believes that our cash and cash equivalent balances, anticipated cash flows from operations and the transactions contemplated 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, equity securities at fair value and long-term restricted cash totaled $323.3 million at September 30, 2022, compared to $671.1 million at December 31, 2021.
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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:
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Net cash (used in) provided by: | |||||||||||
| Operating activities | $ | (13,598) | $ | (9,278) | |||||||
| Investing activities | 124,253 | (1,389) | |||||||||
| Financing activities | (174,607) | 64,417 | |||||||||
| Effect of exchange rates on cash and cash equivalents | (3,535) | (154) | |||||||||
| (Decrease) increase in cash and cash equivalents and restricted cash | $ | (67,487) | $ | 53,596 | |||||||
Cash Flows from Operating Activities
Cash receipts from ARG's licensees totaled $14.2 million and $24.9 million for the nine months ended September 30, 2022 and 2021, respectively. Cash receipts from Printronix's customers totaled $31.0 million for the nine months ended September 30, 2022. The fluctuations in cash receipts for the periods presented primarily reflects the corresponding fluctuations in revenues recognized during the same periods, as described above, and the related timing of payments received from licensees and customers.
Our reported cash used in operations for the nine months ended September 30, 2022 increased to $13.6 million, as compared to $9.3 million in the comparable prior period, due to net outflows from the total changes in assets and liabilities (refer to Working Capital discussion below), most notably from accounts payable and accrued expense related payments and inventory related purchases, partially offset by the total change in net loss (described above) and related noncash adjustments.
Working Capital
Our working capital related to cash flows from operating activities at September 30, 2022 decreased to $1.9 million, compared to $4.3 million at December 31, 2021, which was comprised of the changes discussed below.
Accounts receivable decreased to $7.0 million at September 30, 2022, compared to $9.5 million at December 31, 2021. Refer to the related cash receipts discussion above. Printronix's inventories increased to $13.8 million at September 30, 2022, compared to $8.9 million at December 31, 2021. Prepaid expenses and other current assets increased to $5.2 million at September 30, 2022, compared to $4.8 million at December 31, 2021. Accounts payable, accrued expenses and other current liabilities and accrued compensation increased to $19.4 million at September 30, 2022, compared to $15.4 million at December 31, 2021, primarily due to a contingency accrual in the third quarter of 2022 (refer to Note 11 to the consolidated financial statements elsewhere herein for additional information). Royalties and contingent legal fees payable increased to $3.3 million at September 30, 2022, compared to $2.5 million at December 31, 2021. The royalties and contingent legal fees payable are generally scheduled to be paid in the subsequent quarter upon our receipt of the related fee payments from licensees, in accordance with the underlying contractual arrangements. Printronix's current deferred revenue increased to $1.4 million at September 30, 2022, compared to $1.1 million at December 31, 2021.
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Cash Flows from Investing Activities
Cash flows from investing activities were comprised of the following for the periods presented:
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Patent acquisition | $ | (5,000) | $ | (13,000) | |||||||
| Sale of investment at fair value | — | 3,591 | |||||||||
| Purchases of equity securities | (107,537) | (57,978) | |||||||||
| Sales of equity securities | 236,164 | 64,235 | |||||||||
| Distributions received from equity investment in joint venture | 1,178 | 1,830 | |||||||||
| Purchases of property and equipment | (552) | (67) | |||||||||
| Net cash provided by (used in) investing activities | $ | 124,253 | $ | (1,389) | |||||||
Cash flows from investing activities for the nine months ended September 30, 2022 increased to $124.3 million, as compared to an outflow of $1.4 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 2022. 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:
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Repurchase of common stock | $ | (50,988) | $ | — | |||||||
| Issuance of Senior Secured Notes, net of lender fee | — | 115,000 | |||||||||
| Paydown of Senior Secured Notes | (120,000) | (50,000) | |||||||||
| Dividend on Series A Redeemable Convertible Preferred Stock | (2,099) | (785) | |||||||||
| Taxes paid related to net share settlement of share-based awards | (1,520) | — | |||||||||
| Proceeds from exercise of stock options | — | 202 | |||||||||
| Net cash (used in) provided by financing activities | $ | (174,607) | $ | 64,417 | |||||||
Cash outflows from financing activities for the nine months ended September 30, 2022 increased to $174.6 million, as compared to cash flow of $64.4 million in the comparable prior period, primarily due to activity related to our Senior Secured Notes and our common stock repurchases (refer to Note 12). Refer to “Recent Business Matters – Starboard Securities and Senior Secured Notes,” above, and Note 8 to the consolidated financial statements elsewhere herein for additional information related to the Senior Secured Notes.
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 effect the Recapitalization to restructure Starboard’s existing investments in the Company and simplify the Company’s capital structure. Under the Recapitalization Agreement, the Company and Starboard agreed to take certain actions in connection with the Recapitalization, including the conversion of the Series A Redeemable Convertible Preferred Stock into shares of our common stock, and the exercise of the Series A Warrants and the Series B Warrants, in each case, on the terms and subject to the conditions of the Recapitalization Agreement. A detailed description of the transactions contemplated in connection with the Recapitalization is set forth in the section entitled “Recent Business Matters – Recapitalization” above.
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
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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 to the consolidated financial statements included elsewhere herein, 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 A Warrants and Series B Warrants;
•valuation of embedded derivatives; and
•accounting for income taxes.
We discuss below the critical accounting assumptions, judgements and estimates associated with these policies. Historically, our critical accounting estimates relative to our significant accounting policies have not differed materially from actual results. For further information on the related significant accounting policies, refer to Note 2 to the consolidated financial statements.
Revenue Recognition
As described below, significant management judgment must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue recognized or deferred for any period, if management made different judgments.
Printronix recognizes revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration which it expects to receive for providing those goods or services. To determine the transaction price, Printronix estimates the amount of consideration to which it expects to be entitled in exchange for transferring promised goods or services to a customer. Elements of variable consideration are estimated at the time of sale which primarily include product rights of return, rebates, price protection and other incentives that occur under established sales programs. These estimates are developed using the expected value or the most likely amount method and are reviewed and updated, as necessary, at each reporting period. Revenues, inclusive of variable consideration, are recognized to the extent it is probable that a significant reversal recognized will not occur in future periods. The provision for returns and sales allowances is determined by an analysis of the historical rate of returns and sales allowances over recent quarters, and adjusted to reflect management’s future expectations. For additional information regarding Printronix's net revenues, refer to Note 2 to the consolidated financial statements.
Valuation of Long-lived Assets, Goodwill and Other Intangible 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. For additional information regarding ARG's patent portfolio valuation estimates, refer to Note 2 to the consolidated financial statements. The Company did not record any long-lived asset, patent or other intangible asset impairment charges for the nine months ended September 30, 2022 and 2021.
Goodwill asset impairment reviews include determining the estimated fair values of our reporting units. 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. The key assumptions and inputs used in such
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determinations may include forecasting revenues and expenses, cash flows and capital expenditures, as well as an appropriate discount rate and other inputs. Significant judgment by management is required in estimating the fair value of a reporting unit and in performing impairment reviews. Due to the inherent subjectivity and uncertainty in forecasting future cash flows and earnings over long periods of time, actual results may vary materially from the forecasts. If the carrying value of a reporting unit exceeds the estimated fair value of the reporting unit, then the excess, limited to the carrying amount of goodwill, will be charged to operations as an impairment loss. The Company's goodwill balance relates to Printronix, which was acquired on October 7, 2021, refer to Note 1 to the consolidated financial statements for additional information. The Company did not record any goodwill impairment charges for the nine months ended September 30, 2022.
Valuation of Series A Warrants and Series B Warrants
The fair value of the Series A Warrants and the Series B Warrants are estimated using a Black-Scholes option-pricing model. Refer to Note 9 to the consolidated financial statements for detailed information related to these fair value measurements. Of the assumptions used in the Black-Scholes option-pricing model, volatility changes would have the most significant impact on the fair value. As of September 30, 2022, a hypothetical 10% increase in the volatility would have resulted in an increased liability balance of approximately $1.3 million and $9.0 million, in our Series A Warrants and Series B Warrants, respectively. Refer to Note 16 to the consolidated financial statements for more information on Series A Warrants and Series B Warrants.
Valuation of Embedded Derivatives
Embedded derivatives that are required to be bifurcated from their host contract are valued separately from the host instrument. A binomial lattice framework is used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock. Refer to Note 9 to the consolidated financial statements for detailed information related to this fair value measurement. Of the assumptions used in the binomial lattice framework, discount rate changes would have the most significant impact on the fair value. As of September 30, 2022, a hypothetical 1% increase in the discount rate would have resulted in an increased liability balance of approximately $245,000.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the estimating of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statements of operations.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and our valuation allowance. Due to uncertainties related to our ability to utilize certain deferred tax assets in future periods, we have recorded a partial valuation allowance against our net deferred tax assets as of September 30, 2022 and December 31, 2021. These assets primarily consist of foreign tax credits and net operating loss carryforwards. Refer to Note 2 to the consolidated financial statements for additional information.
In assessing the need for a valuation allowance, management has considered both the positive and negative evidence available, including but not limited to, estimates of future taxable income and related probabilities, estimates surrounding the character of future income and the timing of realization, consideration of the period over which our deferred tax assets may be recoverable, our recent history of net income and prior history of losses, projected future outcomes, industry and market trends and the nature of existing deferred tax assets. In management’s estimate, any positive indicators, including forecasts of potential future profitability of our businesses, are outweighed by the uncertainties surrounding our estimates and judgments of potential future taxable income, primarily due to uncertainties surrounding the timing of realization of future taxable income and the character of such income in particular future periods (i.e. foreign or domestic). In the event that actual results differ from these estimates or we adjust these estimates should we believe we would be able to realize these deferred tax assets in the future, an adjustment to the valuation allowance would increase income in the period such determination was made.
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Any changes in the judgments, assumptions and estimates associated with our analysis of the need for a valuation allowance in any future periods could materially impact our financial position and results of operations in the periods in which those determinations are made.
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 at fair value 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 at fair value 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 at fair value in a variety of securities. Cash equivalents are comprised of investments in 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 September 30, 2022 and December 31, 2021, the carrying value of our equity investments in public and private companies was $159.3 million and $398.5 million, respectively.
We record our equity investments in publicly traded companies at fair value, which are subject to market price volatility. As of September 30, 2022, 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 $8.1 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 Acacia historically has 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 September 30, 2022, a hypothetical 10% change in exchange rates related to our at risk foreign denominated equity securities would have approximately a $5.6 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 September 30, 2022, 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 September 30, 2022) 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, except as set forth below.
The completion of our Recapitalization is subject to certain closing conditions, which unless satisfied prevent the Company from achieving the desired capital structure. The completion of the Recapitalization may have negative effects on the Company.
Certain capital structure decisions, and all or any portion of the transactions contemplated in connection with the Rights Offering may require stockholder approval, which may limit our flexibility to manage and optimize our capital structure. Furthermore, we may not obtain the requisite stockholder approval for an amendment to the Certificate of Designations necessary to permit conversion of our Series A Convertible Preferred Stock into common stock as contemplated by the Recapitalization Agreement. The consummation of the Series B Warrant Exercise is subject to certain conditions, which may not be satisfied, including but not limited to: (i) the expiration or termination of the applicable waiting period under the HSR Act; (ii) the absence of any law or order prohibiting the consummation of the transaction as contemplated by the Recapitalization Agreement; (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. Starboard
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may not be able to make the requisite registrations, filings and notices with the FTC and the DOJ required to consummate the transactions contemplated by the Recapitalization Agreement. Moreover, both the Company and Starboard have the right to terminate the Recapitalization Agreement under certain circumstances, including if (i) the parties agree to terminate by mutual consent, (ii) a governmental entity issues an order permanently prohibiting the Recapitalization, (iii) 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 (iv) the Closing does not occur on or before July 31, 2023. There is no assurance that these closing conditions will be met.
Recent changes in the Company’s management team and board of directors may be disruptive to, or cause uncertainty in, its business, results of operations and the price of the Company’s common stock.
In connection with the entry into the Recapitalization Agreement, on October 30, 2022, Gavin Molinelli, Partner and Portfolio Manager at Starboard was appointed as Chair of the Company’s Board to serve until the Company’s 2023 annual meeting of stockholders and until his successor is duly elected and qualified.
Under the terms of the Recapitalization Agreement, (i) following the Closing (as defined in the Recapitalization Agreement) and until May 12, 2026, the maximum size of the Board would be increased to ten (10) members, and (ii) effective as of the later of the Closing and the date on which none of the Notes remain outstanding, the Governance Agreement and the Securities Purchase Agreement will be automatically terminated.
Effective November 1, 2022, Clifford Press resigned as the Chief Executive Officer and President of the Company, and as a member of the Board.
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.
Changes in the Company’s management team and to the Board, may be disruptive to, or cause uncertainty in, the Company’s business, and any additional changes to the management team or the Board could have a negative impact on the Company’s ability to manage and grow its business effectively. Any such disruption or uncertainty or difficulty in efficiently and effectively filling key roles could have a negative impact on the Company’s results of operations and the price of the Company’s common stock.
If the ownership of our common stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing significant corporate decisions and may result in conflicts of interest.
At the completion of the Recapitalization, Starboard will own shares sufficient for majority votes over all matters requiring stockholder votes, including the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; amendments to our certificate of incorporation or our bylaws; and our winding up and dissolution.
This concentration of ownership may delay, deter or prevent acts that would be favored by our other stockholders. The interests of Starboard may not always coincide with our interests or the interests of our other stockholders. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of us. Also, Starboard may seek to cause us to take courses of action that, in its judgment, could enhance its investment in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders. As a result, the market price of our common stock could decline or stockholders might not receive a premium over the then-current market price of our common stock upon a change in control. In addition, this concentration of share ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Repurchases of Common Stock
On March 31, 2022, our 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 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. Our monthly stock repurchases, all of which were purchased as part of a publicly announced plan or program, made in the quarter covered by this report are as follows:
| Total Number of Shares Purchased | Average Price paid per Share | Approximate Dollar Value of Shares that May Yet be Purchased under the Program | |||||||||||||||
| (In thousands) | |||||||||||||||||
| July 1, 2022 - July 31, 2022 | 2,306,700 | $ | 4.98 | $ | — | ||||||||||||
Refer to Note 12 to the consolidated financial statements elsewhere herein for additional information.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
| EXHIBIT NUMBER | EXHIBIT | ||||||||||
| 3.1 | |||||||||||
| 3.2 | |||||||||||
| 10.1 | |||||||||||
| 10.2* | |||||||||||
| 10.3 | |||||||||||
| 10.4 | |||||||||||
| 10.5 | |||||||||||
| 31.1# | |||||||||||
| 31.2# | |||||||||||
| 32.1† | |||||||||||
| 32.2† | |||||||||||
| 101# | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2022 and 2021, 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: November 10, 2022 | /s/ Martin D. McNulty Jr. | ||||
By: Martin D. McNulty Jr. | |||||
| Interim Chief Executive Officer (Principal Executive Officer and Duly Authorized Signatory) | |||||
Date: November 10, 2022 | /s/ Richard Rosenstein | ||||
| By: Richard Rosenstein | |||||
| Chief Financial Officer (Principal Financial Officer) | |||||
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