What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-17 compared with 2022-03-31 · 259 added, 262 removed, 249 unchanged (68% of the section changed)

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For additional information, refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements.”

We are a permanent capital platform that purchases businesses based on the differentials between public and private market valuations.

We are an opportunistic capital platform that purchases businesses based on the differentials between public and private market valuations.

We use a wide range of transactional and operational capabilities to realize the intrinsic value in the businesses that we acquire.

Our ideal transactions include the acquisition of public or private companies, the acquisition of divisions of other companies, or structured transactions that can result in the recapitalization or restructuring of the ownership of a business to enhance value.

We are particularly attracted to complex 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 are particularly attracted to complex situations, where value is not fully recognized in the public markets, where values of certain operations are masked by a diversified business mix, or where private ownership has not invested capital necessary to drive long-term value.

We aim to operate a transactional platform through which we can initiate a strategic block position in public companies as a path to complete whole company acquisitions or strategic transactions that unlock value.

We believe this business model is differentiated from private equity funds, which do not typically own public securities prior to acquiring companies, hedge funds, which do not typically acquire entire businesses, and other acquisition vehicles such Special Purpose Acquisition Companies, which are narrowly focused on completing one singular, defining acquisition.

We have a strategic relationship with Starboard that 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 have a strategic relationship with Starboard that has provided, and we expect will continue to provide, us with industry expertise, and operating partners and industry experts to evaluate potential acquisition opportunities and enhance the oversight and value creation of such businesses once acquired.

Starboard has provided ready access to its extensive network of highly successful industry executives and, as part of our relationship, Starboard assists with sourcing and evaluating appropriate acquisition opportunities.

Our focus is companies with market values in the sub-$2 billion range and particularly on businesses valued at $1 billion or less.

We are, however, opportunistic, and may pursue acquisitions that are larger under the right circumstance.

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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 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.

Through our Patent Licensing, Enforcement and Technologies Business, operated under Acacia Research Group, LLC and its wholly-owned subsidiaries ("ARG"), we are a principal in the licensing and enforcement of patent portfolios, with our operating subsidiaries obtaining the rights in the patent portfolio or purchasing the patent portfolio outright.

While we, from time to time, partner with inventors and patent owners, from small entities to large corporations, we assume all responsibility for advancing operational expenses while pursuing a patent licensing and enforcement program, and when applicable, share net licensing revenue with our patent partners as that program matures, on a pre-arranged and negotiated basis.

We may also provide upfront capital to patent owners as an advance against future licensing revenue.

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patents and certain foreign counterparts, covering technologies used in a variety of industries.

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 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.

To date, we have generated gross licensing revenue of approximately $1.7 billion, and have returned $837.0 million to our patent partners.

As of December 31, 2022, we have generated gross licensing revenue of approximately $1.7 billion, and have returned $849.2 million to our patent partners.

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

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Refer to Note 1 to the consolidated financial statements elsewhere herein for additional information.

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

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 cash is held in major financial institutions primarily in government instruments.

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 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 Buyers, affiliated with, or managed by, Starboard Value LP, or Starboard, $115.0 million principal amount of our senior secured notes, or Notes.

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

Recent Business Developments and Trends

Recapitalization

On October 30, 2022, the Company entered into a Recapitalization Agreement with the Investors, pursuant to which, among other things, the Company and Starboard agreed to enter into a series of transactions to restructure Starboard’s existing investments in the Company in order to simplify the Company’s capital structure.

Under the Recapitalization Agreement, the Company and Starboard agreed to take certain actions in connection with the Recapitalization.

For a detailed description of the Recapitalization and the actions taken and contemplated to be taken in connection therewith, see Note 8 to the consolidated financial statements elsewhere herein.

Change of Chief Executive Officer

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

• Effective November 1, 2022, Clifford Press resigned as the Chief Executive Officer and President of the Company, and as a member of the Board.

Press’ resignation was not due to any disagreement with the Company on any matter relating to its operations, policies, practices or otherwise known to any executive officer of the Company.

• Effective November 1, 2022, Martin D.

McNulty Jr., the Company’s current Chief Operating Officer and Head of M&A, was appointed interim Chief Executive Officer of the Company and will serve as the Principal Executive Officer of the Company.

The Board intends to commence a search for a permanent successor.

In addition, there have been other changes to the Company’s management and the Board, as discussed in “Item 1A.

Risk Factors — Risks Related to Our Business, Business Strategy, and Platform — Recent changes in the Company’s management team and board of directors, as well as ongoing litigation related to the Company’s former Chief Executive Officer, may be disruptive to, or cause uncertainty in, the Company’s business, results of operations and the price of the Company’s common stock.” Changes in leadership and key management positions have inherent risks, and there are no assurances that any of our recent changes will not affect our operations and financial condition.

In October 2021, we consummated our first operating company in connection with our acquisition of Printronix.

We acquired all of the outstanding stock of Printronix, for a cash purchase price of approximately $37.0 million, which included an initial $33.0 million cash payment and a $4.0 million working capital adjustment.

The Company's consolidated financial statements include Printronix's consolidated operations from October 7, 2021 through December 31, 2022.

Refer to Note 1 to the consolidated financial statements elsewhere herein for additional information.

In June 2020 we acquired the Life Sciences Portfolio.

In connection with the purchase of the equity securities in the Life Sciences Portfolio, we issued to the Investors $115.0 million principal amount of our senior secured notes, or Notes.

As of December 31, 2020, all of the equity securities in the Life Sciences Portfolio were transferred to the Company.

As of December 31, 2021, 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 3, 4 and 10 to the consolidated financial statements elsewhere herein for more information related to the Printronix acquisition, Life Sciences Portfolio and Notes, respectively.

For the years ended December 31, 2021 and 2020, we reported revenues of $88.0 million and $29.8 million.

Cash and cash equivalents and equity securities totaled $670.7 million as of December 31, 2021, as compared to $274.6 million as of December 31, 2020.

Our operating activities during the periods presented were focused on the continued operation of our patent licensing and enforcement business, including the continued pursuit of our ongoing patent licensing and enforcement programs.

As of December 31, 2022, we have monetized a majority of the portfolio while retaining an interest in a number of operating businesses, including a controlling interest in one of the companies in the portfolio.

Further, some of the businesses in which we continue to hold an interest generate income through the receipt of royalties and milestone payments.

Refer to Note 3 to the consolidated financial statements elsewhere herein for more information.

Business Strategy

We intend to grow our company by acquiring additional operating businesses and intellectual property assets.

However, we may not complete any acquisitions, and any acquisitions that we complete will be costly and could negatively affect our results of operations, and dilute our stockholders’ ownership, or cause us to incur significant expense, and we may not realize the expected benefits of acquisitions.

Patent Licensing and Enforcement

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These future opportunities can result in varying outcomes.

In fact, it is difficult to predict the outcome of patent enforcement litigation at the trial level and outcomes can be unfavorable.

It can be difficult to understand complex patented technologies, and as a result, this may lead to a higher rate of unfavorable litigation outcomes.

Moreover, in the event of a favorable outcome, there is, in our experience, a higher rate of successful appeals in patent enforcement litigation than more standard business litigation.

Such appeals are expensive and time consuming, resulting in increased costs and a potential for delayed or foregone revenue opportunities in the event of modification or reversal of favorable outcomes.

Although we diligently pursue enforcement litigation, we cannot predict with reliability the decisions made by juries and trial courts.

Please refer to Item 1A.

“Risk Factors” for additional information regarding trials, patent litigation and related risks.

Refer to Item 1A “Risk Factors — Risks Related to our Intellectual Property Business and Industry ” for additional information regarding patent litigation and related risks.

Litigation and Licensing Expense

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

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;

• 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.

Refer to Item 1A “Risk Factors” for additional information regarding litigation and licensing expense risk.

Investments in Patent Portfolios

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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 year ended December 31, 2021, we acquired one new patent portfolio consisting of Wi-Fi 6 standard essential patents.

The patents and patent rights acquired in 2021 have estimated economic useful lives of approximately five years.

During the year ended December 31, 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 2020 have estimated economic useful lives of approximately five years.

The patents and patent rights acquired in 2021 and 2020 have estimated economic useful lives of approximately five years.

Industrial Printing Solutions

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Recent Business Matters

Starboard Securities and Senior Secured Notes

In 2019, as part of its strategy to grow, the Company began evaluating a wide range of strategic opportunities that culminated in the strategic investment in the Company by certain funds and accounts, or the Buyers, 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 Buyers, or the Securities Purchase Agreement, pursuant to which the Buyers 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 Buyers in the future.

Refer to Notes 2 and 10 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 Buyer’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 of Directors.

The investment by the Buyers is referred to herein as the “Starboard Investment,” and 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 Buyers, 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.

Refer to Note 10 to the consolidated financial statements elsewhere herein for additional information.

On June 4, 2020, pursuant to the terms of the Securities Purchase Agreement with Starboard and the Buyers, the Company issued $115.0 million in Notes to the Buyers.

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, 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 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, or Merton, and Starboard, on behalf of itself and on behalf of the Buyers, 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 Buyers.

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 and September 2021 Merton Notes cannot be used to exercise Series B Warrants issued to Starboard Value.

On November 30, 2021, the Company amended the maturity date of the New Notes to January 31, 2022.

The total principal amount outstanding of New Notes as of December 31, 2021 and 2020 was $180.0 million and $115.0 million, respectively.

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.

Refer to Note 10 to the consolidated financial statements elsewhere herein for additional information.

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 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 4 to the consolidated financial statements elsewhere herein for additional information.

Recapitalization Agreement

In order to establish a strategic and ongoing relationship between the Company and Starboard, on November 18, 2019, the Company and Starboard entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”), which provided the terms of Starboard’s initial capital commitment in the Company (the “2019 Transaction”).

As a result of the 2019 Transaction, which was approved by the Company’s stockholders for purposes of NASDAQ Rules 5635(b) and 5635(d) at a stockholder meeting held on February 14, 2020, Starboard acquired the following securities and ownership positions in the Company:

(i) 350,000 shares of Series A Preferred Stock, (ii) Series A Warrants to purchase up to 5,000,000 shares of common stock (the “Series A Warrants”) and (iii) Series B Warrants to purchase up to 100,000,000 shares of common stock.

The Securities Purchase Agreement also established the terms of certain senior secured notes issued by the Company.

On November 12, 2021, the Board formed a Special Committee comprised of directors not affiliated or associated with Starboard in order to explore the possibility of simplifying the Company’s capital structure.

Management of the Company believes that the Company’s capital structure, with multiple different series of securities, makes it difficult for investors to understand and value the Company and is an impediment to new public investment.

Further to this purpose and following ongoing negotiations with Starboard, on October 30, 2022 the Company entered into a Recapitalization Agreement with Starboard, pursuant to which, among other things, the Company and Starboard agreed to enter into a series of transactions to restructure Starboard’s existing investments in the Company in order to simplify the Company’s capital structure.

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

• Series A Warrants .

Within five (5) business days following the date of the Recapitalization Agreement, Starboard exercised all of the Series A Warrants for cash, and the Company issued to Starboard 5,000,000 shares of common stock in accordance with the terms of the Series A Warrants and paid to Starboard an aggregate amount of $9,000,000 representing a negotiated settlement of the foregone time value of the Series A Warrants (which amount was paid through a reduction in the exercise price of the Series A Warrants).

• Preferred Stock .

Subject to the receipt of stockholder approval at the Company’s next annual meeting of stockholders, (i) the Company will cause the Amended and Restated Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, dated as of January 7, 2020 (the “Certificate of Designations”) to be amended and

restated in the form attached to the Recapitalization Agreement in order to remove the “4.89% blocker” provision and (ii) on or prior to July 14, 2023, Starboard will convert an aggregate amount of 350,000 shares of Series A Preferred Stock into common stock in accordance with the terms of the Certificate of Designations.

• Series B Warrants .

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

The remaining Series B Warrants will be cancelled immediately following the completion of the Rights Offering.

• Rights Offering .

The Company agreed to launch the Rights Offering described in further detail in the section titled “ Rights Offering and Concurrent Private Rights Offering ” below.

In connection with the Rights Offering, the Company agreed to provide Starboard with rights to purchase 28,647,259 shares of common stock and Starboard committed to purchase a minimum of 15,000,000 shares of common stock.

• Recapitalization Payment .

At the closing of the Series B Warrants Exercise, the Company will pay to Starboard an aggregate amount of $66,000,000 (the “Recapitalization Payment”) representing a negotiated settlement of the foregone time value of the Series B Warrants and the Series A Preferred Stock (which amount will be paid through a reduction in the exercise price of the Series B Warrants).

If stockholder approval for the amendment to the Certificate of Designations to remove the “4.89% blocker provision” is not obtained, the Recapitalization Payment will be reduced by $12,700,000.

• Governance .

Under the Recapitalization Agreement, the parties agreed that for a period from the date of the Recapitalization Agreement until May 12, 2026 (the “Applicable Period”), the Board of the Company will include at least two (2) directors that are independent of, and not affiliates (as defined in Rule 144 of the Securities Exchange Act of 1934, as amended) of, Starboard, with current Board members Maureen O’Connell and Isaac T.

Kohlberg satisfying this initial condition under the Recapitalization Agreement.

The parties also agreed that Katharine Wolanyk would continue to serve as a director of the Company until at least May 12, 2024 (or such earlier date if Ms.

Wolanyk is unwilling or unable to serve as a director for any reason or resigns as a director).

Additionally, the Company appointed Gavin Molinelli as a member and as Chair of the Board.

The Company and Starboard also agreed that, following the closing of the Series B Warrants Exercise until the end of the Applicable Period, the number of directors serving on the Board will not exceed 10 members.

Effective as of the later of the Closing and the date on which none of the Notes (as defined in Note 8 to the accompanying consolidated financial statements) remain outstanding, the existing Governance Agreement will be automatically terminated.

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

Rights Offering and Concurrent Private Rights Offering

On February 14, 2023, the Company commenced the Rights Offering.

Under the terms of the Rights Offering, the Company distributed non-transferable subscription rights to record holders (“Eligible Securityholders”) of the Company’s common stock held as of 5 p.m.

Eastern time on February 13, 2023, the record date for the Rights Offering.

The subscription period for the Rights Offering terminated at 5 p.m.

Eastern time on March 1, 2023 (the “Expiration Time”).

Pursuant to the Rights Offering, Eligible Securityholders received one non-transferable subscription right (a “Subscription Right”) for every four shares of common stock owned by such Eligible Securityholders.

Each Subscription Right entitled an Eligible Securityholder to purchase, at such Eligible Securityholder’s election, one share of common stock at a price of $5.25 per share (the “Subscription Price”).

Starboard received private subscription rights to purchase common stock at the Subscription Price pursuant to a concurrent private rights offering (the “Concurrent Private Rights Offering”) in connection with their ownership of common stock and, on an as-converted basis, the Company’s Series B Warrants and shares of the Series A Preferred Stock.

The private subscription rights provided to Starboard pursuant to the Concurrent Private Rights Offering were on substantially the same terms as the Subscription Rights, and were distributed substantially concurrently with the distribution of the Subscription Rights and expired at the Expiration Time.

The Company received aggregate gross proceeds of approximately $361,000 from the Rights Offering and aggregate gross proceeds of approximately $78.8 million from the Concurrent Private Rights Offering and issued an aggregate of 15,068,753 shares of common stock.

Industrial Operations Acquisition

Refer to “General – Industrial Operations ” above for information related to our Printronix acquisition.

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

Operating Activities

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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.

Revenues for the years ended December 31, 2021 and 2020 included fees from the following technology licensing and enforcement programs:

• Bone Wedge technology (1)(2)

• MIPI DSI technology (2)

• Flash Memory technology (1)

• Semiconductor and Memory-Related technology (2)

• Internet search, advertising and cloud computing technology (1)(2)

• Super Resolutions Microscopy technology (2)

• Speech codecs used in wireless and wireline systems technology (1)(2)

• Video Conferencing technology (2)

• Wireless Infrastructure and User Equipment Technology (1)(2)

• Internet radio ad placement (2)

• Networking and Security technology (1)

• Computer-Aided Design technology (1)(2)

• Wireless Mesh Networking technology (1)

• GPS navigation technology (2)

• Wi-Fi 6 standard essential patents technology (1)

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(1) Licensing and enforcement program generating revenue in 2021.

(2) Licensing and enforcement program generating revenue in 2020.

Industrial Operations

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Results of Operations

The results reflected in this section with respect to Printronix include results for the full year ended December 31, 2022 compared to an approximate three month period ended December 31, 2021 following our acquisition of Printronix.

Summary of Results of Operations

Years Ended December 31,

2022 2021 $ Change % Change

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Total costs and expenses 99,315 73,502 25,813 35 %

Operating income (loss) 14,545 (19,518) 34,063 (175 %)

Total other income 160,107 127,590 32,517 25 %

Income before income taxes 174,652 108,072 66,580 62 %

Income tax (expense) benefit (24,287) 1,159 (25,446) (2,196 %)

Net income attributable to Acacia Research Corporation 149,197 109,231 39,966 37 %

Results of Operations - year ended December 31, 2021 compared with year ended December 31, 2020

Total revenues increased $58.3 million to $88.0 million in 2021, as compared to $29.8 million in the prior year, primarily due to an increase in Acacia's revenues from one new patent portfolio that generated initial license revenue in the fourth quarter of 2021 and six new license agreements executed during the year.

Operating (loss) income (40,092) 14,545 (54,637) (376 %)

Total other (expense) income (87,058) 160,107 (247,165) (154 %)

(Loss) income before income taxes (127,150) 174,652 (301,802) (173 %)

Income tax benefit (expense) 16,211 (24,287) 40,498 (167 %)

Net (loss) income attributable to Acacia Research Corporation (125,065) 149,197 (274,262) (184 %)

Results of Operations - year ended December 31, 2022 compared with the year ended December 31, 2021

Total revenues decreased $28.8 million to $59.2 million for the year ended December 31, 2022, as compared to $88.0 million for the year ended December 31, 2021, due to a decrease in our Intellectual Property Operations revenues.

ARG executed 17 new license agreements during 2022, a decrease of six versus the comparable prior period, which contributed to Intellectual Property Operations revenues decreasing by $56.5 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.

In addition, post acquisition net revenue from Printronix for the period from October 7, 2021 to December 31, 2021 contributed $12.0 million.

Refer to "Revenues" below for further discussion.

Income before income taxes was $174.7 million for 2021, as compared to income before income taxes of $108.1 million in the prior year.

The net increase was comprised of the increases in revenues described above and other changes in operating expenses and other income or expense as follows:

• Inventor royalties decreased $6.2 million, from $7.3 million to $1.1 million in 2021, primarily due to a higher percentage of revenues generated during 2021 having no inventor royalty obligations.

The decrease was offset by the additional net revenues contributed from Printronix of $27.7 million.

Refer to "Revenues" below for further detailed discussion.

Loss before income taxes was $127.2 million for the year ended December 31, 2022, as compared to income of $174.7 million in the prior year.

The net decrease was comprised of the change in total revenues described above and other changes in operating expenses and other income or expense as follows:

• Inventor royalties increased $70,000, from $1.1 million to $1.2 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 increased $4.7 million, from $7.4 million to $12.1 million in 2021, primarily due to the increase in revenues described above.

• Contingent legal fees decreased $9.6 million, from $12.1 million to $2.4 million in 2022, primarily due to the decrease in Intellectual Property Operations revenues described above.

Refer to "Cost of Revenues – Intellectual Property Operations " below for further discussion.

• Litigation and licensing expenses decreased $221,000, from $5.7 million to $5.5 million in 2021, primarily due to a net decrease in litigation support and third-party technical consulting expenses associated with ongoing litigation.

• Litigation and licensing expenses decreased $1.5 million, from $5.5 million to $4.0 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 $5.2 million, from $4.7 million to $9.9 million in 2021, due to an increase in scheduled amortization resulting from the new portfolios acquired in 2020 and 2021.

• Other patent portfolio expense was $162,000 in 2021, as compared to income of $308,000 in 2020.

The 2020 income was due to the reversal of previously recorded expenses for settlement and contingency accruals.

• Post-acquisition cost of sales, engineering and development expenses, and sales and marketing expenses from Printronix for the period from October 7, 2021 to December 31, 2021 added such operating expenses in the aggregate amount of $9.1 million in 2021.

Refer to "Cost of Revenues – Industrial Operations " below for further discussion.

• General and administrative expenses increased $11.2 million, from $24.5 million to $35.7 million in 2021, primarily due to higher Parent company and Intellectual Property Operations legal and business development related expenses, personnel costs and board fees, and $2.8 million from our Industrial Operations related to post-acquisition general and administrative costs from Printronix for the period from October 7, 2021 through December 31, 2021.

Refer to " General and Administrative Expenses " below for further discussion.

• Compensation expense for share-based awards, included in general and administrative expenses above, increased $391,000, from $1.7 million to $2.1 million in 2021, primarily due to stock grants issued to employees and the Board of Directors in 2021, partially offset by forfeitures for terminated employees.

• Unrealized gain from the change in fair value of our equity securities decreased $88.6 million, from $176.2 million to $87.5 million in 2021.

The unrealized gains were primarily derived from our Life Sciences Portfolio.

The current period unrealized gain primarily relates to one Life Sciences Portfolio company’s valuation increase in connection with its initial public offering.

• Amortization of patents expense from our intellectual property operations increased $552,000, from $9.9 million to $10.4 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 $19.5 million to our consolidated operating expenses.

Refer to "Cost of Revenues – Industrial Operations " and "Operating Expenses" below for further discussion.

• We recognized other patent portfolio expense of $162,000 in 2021 for settlement and contingency expenses.

• General and administrative expenses increased $17.0 million, from $35.7 million to $52.7 million in 2022, primarily due to higher parent company and Intellectual Property Operations costs including, parent company consulting and legal fees related to the Recapitalization Agreement and the Life Sciences Portfolio, severance expense, compensation expense for share-based awards, personnel costs and board fees, accounting fees, and $7.2 million from our Industrial Operations general and administrative costs and amortization expense.

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 $1.8 million, from $2.1 million to $3.8 million in 2022, primarily due to restricted stock and option grants issued to employees and the Board 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 $263.7 million in 2022, as compared to an unrealized gain of $87.5 million in the prior year.

The unrealized loss and gain were derived from our Life Sciences Portfolio and trading securities portfolio.

The current period unrealized loss primarily relates to the reversal of prior period unrealized gains for Life Sciences Portfolio securities that were sold for a realized gain in 2022.