Item 7. Management’s Discussion and Analysis
ITEM 7. 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 Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these “forward-looking statements” as a result of various factors including the risks we discuss in Item 1A “Risk Factors,” and elsewhere herein. For additional information, refer to the section above entitled “Cautionary Note Regarding Forward-Looking Statements.”
General
We are focused on acquiring and managing companies across industries – including but not limited to the industrial, energy, technology, and healthcare verticals. We focus on identifying, pursuing and acquiring businesses where we are uniquely positioned to deploy our differentiated strategy, people and processes to generate and compound shareholder value. We have a wide range of transactional and operational capabilities to realize the intrinsic value in the businesses that we acquire. Our ideal transactions include the acquisition of public or private companies, the acquisition of divisions of other companies, or structured transactions that can result in the recapitalization or restructuring of the ownership of a business to enhance value.
We are particularly attracted to complex situations where we believe value is not fully recognized, the value of certain operations are masked by a diversified business mix, or where private ownership has not invested the capital and/or resources necessary to support long-term value. Through our public market activities, we aim to initiate strategic block positions in public companies as a path to complete whole company acquisitions or strategic transactions that unlock value. We believe this business model is differentiated from private equity funds, which do not typically own public securities prior to acquiring companies, hedge funds, which do not typically acquire entire businesses, and other acquisition vehicles such Special Purpose Acquisition Companies, which are narrowly focused on completing one singular, defining acquisition.
Our focus is companies with market values in the sub-$2 billion range and particularly on businesses valued at $1billion or less. We are, however, opportunistic, and may pursue acquisitions that are larger under the right circumstance.
We believe the Company has the potential to develop advantaged opportunities due to its:
• disciplined focus on identifying opportunities where the Company can be an advantaged buyer, initiate a transaction opportunity spontaneously, avoid a traditional sale process and complete the purchase of a business, division or other asset at an attractive price;
• willingness to invest across industries and in off-the-run, often misunderstood assets that suffer from a complexity discount;
• relationships and partnership abilities across functions and sectors; and
• strong expertise in corporate governance and operational transformation
Our long-term focus positions our businesses to navigate economic cycles and allows sellers and other counterparties to have confidence that a transaction is not dependent on achieving the types of performance hurdles demanded by private equity sponsors. We consider opportunities based on the attractiveness of the underlying cash flows, without regard to a specific fund life or investment horizon.
People, Process and Performance
Our Company is built on the principles of People, Process and Performance. We have built a management team with demonstrated expertise in Research, Transactions and Execution, and Operations and Management of our targeted acquisitions. We believe our priorities and skills underpin a compelling value proposition for operating businesses, partners and future acquisition targets, including:
• the flexibility to consummate transactions using financing structures suited to the opportunity and involving third-party transaction structuring as needed;
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• the ability to deliver ongoing financial and strategic support; and
• the financial capacity to maintain a long-term outlook and remain committed to a multi-year business plan.
Relationship with Starboard Value, LP
Our strategic relationship with Starboard provides us access to industry expertise, and operating partners and industry experts to evaluate potential acquisition opportunities and enhance the oversight and value creation of such businesses once acquired. Starboard has provided, and we expect will continue to provide, ready access to its extensive network of industry executives and, as part of our relationship, Starboard has assisted, and we expect will continue to assist, with sourcing and evaluating appropriate acquisition opportunities.
Intellectual Property Operations
The Company through its Patent Licensing, Enforcement and Technologies Business invests in IP and related absolute return assets and engage in the licensing and enforcement of patented technologies. Through our Patent Licensing, Enforcement and Technologies Business, operated under our wholly owned subsidiary, Acacia Research Group, LLC, and its wholly-owned subsidiaries (collectively, “ ARG ” ), we are a principal in the licensing and enforcement of patent portfolios, with our operating subsidiaries obtaining the rights in the patent portfolio or purchasing the patent portfolio outright. While we, from time to time, partner with inventors and patent owners, from small entities to large corporations, we assume all responsibility for advancing operational expenses while pursuing a patent licensing and enforcement program, and when applicable, share net licensing revenue with our patent partners as that program matures, on a pre-arranged and negotiated basis. We may also provide upfront capital to patent owners as an advance against future licensing revenue.
Currently, on a consolidated basis, our operating subsidiaries own or control the rights to multiple patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a variety of industries. We generate revenues and related cash flows from the granting of IP rights for the use of patented technologies that our operating subsidiaries control or own.
We have established a proven track record of licensing and enforcement success with over 1,600 license agreements executed as of December 31, 2023, across nearly 200 patent portfolio licensing and enforcement programs. As of December 31, 2023, we have generated gross licensing revenue of approximately $1.8 billion, and have returned $865.2 million to our patent partners. During the past five calendar years ending on December 31, 2023, we generated gross licensing revenue of approximately $225.7 million and returned approximately $84.9 million to our patent partners.
For more information related to our Intellectual Property Operations, refer to additional detailed patent business discussion below.
Industrial Operations
In October 2021, we consummated our first operating company acquisition of Printronix. Printronix is a leading manufacturer and distributor of industrial impact printers, also known as line matrix printers, and related consumables and services. The Printronix business serves a diverse group of customers that operate across healthcare, food and beverage, manufacturing and logistics, and other sectors. This mature technology is known for its ability to operate in hazardous environments. Printronix has a manufacturing site located in Malaysia and third-party configuration sites located in the United States, Singapore and Holland, along with sales and support locations around the world to support its global network of users, channel partners and strategic alliances. This acquisition was made at what we believe to be an attractive purchase price, and we are now supporting existing management in its initiative to reduce costs and operate more efficiently and in its execution of strategic partnerships to generate growth.
For more information related to our Industrial Operations, refer to the section entitled “ Industrial Operations Business ” below.
Energy Operations
In November 2023, we invested $10.0 million to acquire a 50.4% equity interest in Benchmark. Headquartered in Austin, Texas, Benchmark is an independent oil and gas company engaged in the acquisition, production and development of oil
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and gas assets in mature resource plays in Texas and Oklahoma. Benchmark is run by an experienced management team led by Chief Executive Officer Kirk Goehring, who previously served as Chief Operating Officer of both Benchmark and Jones Energy, Inc. Benchmark’s existing assets consist of over 13,000 net acres primarily located in Roberts and Hemphill Counties in Texas, and an interest in over 125 wells, the majority of which are operated. Acacia has made a control investment in Benchmark and intends to utilize its significant capital base to acquire predictable and shallow decline, cash-flowing oil and gas properties whose value can be enhanced via a disciplined, field optimization strategy, with risk managed through robust commodity hedges and low leverage. Through its investment in Benchmark, the Company, along with the Benchmark management team, will evaluate future growth and acquisitions of oil and gas assets at attractive valuations. The Company’s consolidated financial statements include Benchmark’s consolidated operations from November 13, 2023 through December 31, 2023. Refer to Note 3 to the consolidated financial statements elsewhere herein for additional information.
For more information, refer to the section entitled “ Energy Operations ” below.
Recent Business Developments and Trends
Recapitalization
On October 30, 2022, the Company entered into a Recapitalization Agreement with 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. Subsequently, and in accordance with the terms contained in the Series A Redeemable Convertible Preferred Stock, as amended, and the Recapitalization Agreement, on July 13, 2023, Starboard completed the Preferred Stock Conversion.
Further to the terms of the Recapitalization Agreement and in accordance with the terms of the Series B Warrants, on July 13, 2023, Starboard completed the Series B Warrants Exercise, the cancellation of $60.0 million aggregate principal amount of the Senior Secured Notes held by Starboard and the receipt by the Company of aggregate gross proceeds of approximately $55.0 million.
Starboard beneficially owns 61,123,595 shares of our common stock as of March 11, 2024, representing approximately 61.2% of the common stock based on 99,895,473 shares of common stock issued and outstanding as of such date and no shares of Series A Redeemable Convertible Preferred Stock, no Series B Warrants, nor any Senior Secured Notes remain outstanding.
For a detailed description of the Series B Warrants Exercise, and the cancellations of the Senior Secured notes, the Recapitalization, the Recapitalization Agreement, and the Recapitalization Transactions, see Notes 1 and 10 to the consolidated financial statements.
Change of Chief Executive Officer and Litigation Settlement
Since 2021, we have announced various changes to our Board and senior management . Changes in leadership and key management positions have inherent risks, and there are no assurances that any of our recent changes or future changes will not affect our operations and financial condition.
On September 19, 2023, the Company together with ARG amicably settled with Clifford Press, former President and Chief Executive Officer of the Company, all claims, including counterclaims filed by Mr. Press, in connection with the arbitration demand previously filed by the Company against Mr. Press. As part of the settlement, and, in exchange for, among other things, a release of claims by Mr. Press in favor of the Company and agreements by Mr. Press related to non-interference and cooperation, the Company paid to Mr. Press a total of $770,000 along with reimbursement of certain counsel fees and expenses in the amount of $480,000.
In February 2024, after over one year of service from Mr. McNulty as the Company’s Interim Chief Executive Officer, the Board appointed Mr. McNulty as Chief Executive Officer of the Company on a permanent basis. In addition, the Board expanded the size of the Board from six to seven directors and the Board appointed Mr. McNulty Jr. as a director of the Company to serve until the Company’s 2024 annual meeting of stockholders and until his successor is duly elected and qualified.
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Life Sciences Portfolio
In June 2020 we acquired a portfolio of investments in 18 public and private life sciences companies (the “Life Sciences Portfolio”). That purchase was funded with a combination of available cash and capital from Starboard, for a total of approximately $282.0 million at the time of acquisition. Through the end of 2023, we have received proceeds of $507.1 million as we monetized the Life Sciences portfolio. We retained an investment in the Life Sciences Portfolio consisting of public and private securities valued at $82.8 million at December 31, 2023. On January 19, 2024, we completed the sale of our 33,023,210 shares of Arix Bioscience PLC (“Arix”) to RTW Biotech Opportunities Operating Ltd, a subsidiary of RTW Biotech Opportunities Ltd, for $57.1 million in aggregate (representing £1.43 per share at an exchange rate of 1.2087 USD/GBP). Following the completion of the share sale, we no longer own any shares of Arix. Additionally, some of the businesses in which we continue to hold an interest generate income through the receipt of royalties and milestone payments. Refer to Note 4 to the consolidated financial statements elsewhere herein for more information.
Acquisitions
In October 2021, we consummated our first operating company acquisition in connection with our acquisition of Printronix. We acquired all of the outstanding stock of Printronix, for a cash purchase price of approximately $37.0 million, which included an initial $33.0 million cash payment and a $4.0 million working capital adjustment. The Company's consolidated financial statements include Printronix's consolidated operations. Refer to Note 1 to the consolidated financial statements elsewhere herein for additional information.
In November 2023, we invested $10.0 million to acquire a 50.4% equity interest in Benchmark. Headquartered in Austin, Texas, Benchmark is an independent oil and gas company engaged in the acquisition, production and development of oil and gas assets in mature resource plays in Texas and Oklahoma.
On February16, 2024, Benchmark entered into a Purchase and Sale Agreement. Pursuant to the Purchase and Sale Agreement, Benchmark has agreed to purchase and Revolution has agreed to sell the Assets, which include approximately 140,000 net acres and approximately 470 operated producing wells in the Western Anadarko Basin throughout the Texas Panhandle and Western Oklahoma.
Under the terms and conditions of the Purchase and Sale Agreement, which has an economic effective date of March 1, 2024, the aggregate consideration to be paid to Revolution in the Revolution Transaction will consist of $145 million in cash, subject to customary post-closing adjustments. Benchmark expects the Revolution Transaction to close in the second quarter of 2024 subject to customary closing conditions, as more fully described below.
The Company’s expected contribution to Benchmark to fund its portion of the Purchase Price for the Revolution Transaction is $57.5 million which the Company anticipates will be funded from cash on hand. The remainder of the Purchase Price is expected to be funded by a combination of borrowings by Benchmark under a new revolving credit agreement of approximately $72.5 million and the remaining being funded through a cash contribution of approximately $15 million from McArron Partners, the other investor in Benchmark. Following the Revolution Transaction, the Company’s interest in Benchmark is expected to be approximately 73.1%.
Business Strategy
We intend to grow our Company by acquiring additional operating businesses, energy assets and intellectual property assets. However, we may not complete any acquisitions, and any acquisitions that we complete will be costly and could negatively affect our results of operations, and dilute our stockholders’ ownership, or cause us to incur significant expense, and we may not realize the expected benefits of acquisitions.
Inflation
Historically, inflation has not had a significant impact on us or any of our subsidiaries. While insignificant to our consolidated enterprise, during the year ended December 31, 2023, our Printronix subsidiary experienced some inflation from higher cost of raw materials than in previous years due to higher electronic and electrical and metal components. 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. Printronix have also implemented cost rationalization measures to combat the rising cost that is driven by inflation and currency pressures. Additionally, our Energy Operations Business may experience inflation. The oil and natural gas industry and the broader U.S. economy have
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experienced higher than expected inflationary pressures in recent years related to increases in oil and natural gas prices, continued supply chain disruptions, labor shortages and geopolitical instability, among other pressures.
Patent Licensing and Enforcement
Patent Litigation Trial Dates and Related Trials
As of the date of this Annual Report, our Patent Licensing, Enforcement and Technologies Business has one pending patent infringement case with scheduled trial dates in the next twelve months. Patent infringement trials are components of its overall patent licensing process and are one of many factors that contribute to possible future revenue generating opportunities. Scheduled trial dates, as promulgated by the respective court, merely provide an indication of when, in future periods, the trials may occur according to the court’s scheduling calendar at a specific point in time. A court may change previously scheduled trial dates. In fact, courts often reschedule trial dates for various reasons that are unrelated to the underlying patent assets and typically for reasons that are beyond the control of our Patent Licensing, Enforcement and Technologies Business. While scheduled trial dates provide an indication of the timing of possible future revenue generating opportunities, the trials themselves and the immediately preceding periods represent the possible future revenue generating opportunities. These future opportunities can result in varying outcomes. Refer to Item 1A “Risk Factors — Risks Related to our Intellectual Property Business and Industry ” of this Annual Report for additional information regarding patent litigation and related risks.
Litigation and Licensing Expense
We expect patent-related legal expenses to continue to fluctuate from period to period based on the factors summarized herein, in connection with future trial dates, international enforcement, strategic patent portfolio prosecution and our current and future patent portfolio investment, prosecution, licensing and enforcement activities. Refer to Item 1A “Risk Factors” of this Annual Report for additional information regarding litigation and licensing expense risk.
Investments in Patent Portfolios
With respect to our licensing, enforcement and overall business, neither we nor our operating subsidiaries invent new technologies or products; rather, we depend upon the identification and investment in patents, inventions and companies that own IP through our relationships with inventors, universities, research institutions, technology companies and others. If our operating subsidiaries are unable to maintain those relationships and identify and grow new relationships, then we may not be able to identify new technology-based patent opportunities for sustainable revenue and /or revenue growth.
Our current or future relationships may not provide the volume or quality of technologies necessary to sustain our licensing, enforcement and overall business. In some cases, universities and other technology sources compete against us as they seek to develop and commercialize technologies. Universities may receive financing for basic research in exchange for the exclusive right to commercialize resulting inventions. These and other strategies employed by potential partners may reduce the number of technology sources and potential clients to whom we can market our solutions. If we are unable to maintain current relationships and sources of technology or to secure new relationships and sources of technology, such inability may have a material adverse effect on our revenues, operating results, financial condition and ability to maintain our licensing and enforcement business.
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 years ended December 31, 2023 and 2022, we did not acquire any new patent portfolios. Dur ing 2021, we acquired one new patent portfolio consisting of Wi-Fi 6 standard essential patents. In 2020, we acquired five new patent portfolios consisting of (i) flash memory technology, (ii) voice activation and control technology, (iii) wireless networks, (iv) internet search, advertising and cloud computing technology and (v) GPS navigation. The patents and patent rights acquired in 2021 and 2020 have estimated economic useful lives of approximately five years.
Industrial Operations Business
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Our Printronix subsidiary is a worldwide leader in multi‐technology supply‐chain printing solutions for a variety of industries, including manufacturing, transportation and logistics, retail distribution, food and beverage distribution, and pharmaceutical distribution. Printronix’s line matrix printers are used for mission critical applications within these industries, including labeling and inventory management, build sheets, invoicing, manifests and bills of lading, and reporting. In China, India and other developing countries in Asia and Africa, our printers are also prevalent in the banking and government sectors. Printronix has manufacturing, configuration and/or distribution sites located in Malaysia, the United States, Singapore, China and the Netherlands, along with sales and support locations around the world to support its global network of users, channel partners, and strategic alliances. Printronix designs and manufactures printers and related consumable products for various industrial printing applications. Printers consist of hardware and embedded software and may be sold with maintenance service agreements, which are serviced by outside contractors. Consumable products include inked ribbons which are used within Printronix's printers. Printronix’s products are primarily sold through Printronix’s global network of channel partners, such as dealers and distributors, to end‐users.
Energy Operations Business
Headquartered in Austin, Texas, Benchmark is an independent oil and gas company engaged in the acquisition, production and development of oil and gas assets in mature resource plays in Texas and Oklahoma. Benchmark is run by an experienced management team led by Chief Executive Officer Kirk Goehring, who previously served as Chief Operating Officer of both Benchmark and Jones Energy, Inc. Benchmark’s existing assets consist of over 13,000 net acres primarily located in Roberts and Hemphill Counties in Texas, and an interest in over 125 wells, the majority of which are operated. Acacia has made a control investment in Benchmark and intends to utilize its significant capital base to acquire predictable and shallow decline, cash-flowing oil and gas properties whose value can be enhanced via a disciplined, field optimization strategy, with risk managed through robust commodity hedges and low leverage. Through its investment in Benchmark, the Company, along with the Benchmark management team, will evaluate future growth and acquisitions of oil and gas assets at attractive valuations.
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.
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Our management does not attempt to manage for smooth sequential periodic growth in revenues from period to period, and therefore, periodic results can be uneven. Unlike most operating businesses and industries, licensing revenues not generated in a current period are not necessarily foregone but, depending on whether negotiations, litigation or both continue into subsequent periods, and depending on a number of other factors, such potential revenues may be pushed into subsequent annual periods.
Industrial Operations
Refer to "Industrial Operations Business" above for information related to Printronix's operating activities.
Energy Operations
Refer to "Energy Operations Business" above for information related to Benchmark's operating activities.
In addition to the following results of operations discussion, more information related to our Intellectual Property Operations, Industrial Operations and Energy Operations segment revenues, cost of revenues and cost of production may be found in Notes 2 and 19 to the consolidated financial statements.
Results of Operations
The results reflected in this section with respect to Benchmark for the year ended December 31, 2023 include results for the period from November 13, 2023 to December 31, 2023 following our acquisition of Benchmark.
Summary of Results of Operations
Years Ended
December 31,
2023 2022 $ Change % Change
(In thousands, except percentage change values)
Total revenues $ 125,102 $ 59,223 $ 65,879 111 %
Total costs and expenses 104,166 99,315 4,851 5 %
Operating income (loss) 20,936 (40,092) 61,028 (152 %)
Total other income (expense) 46,490 (87,058) 133,548 (153 %)
Income (loss) before income taxes 67,426 (127,150) 194,576 (153 %)
Income tax benefit 1,504 16,211 (14,707) (91 %)
Net income (loss) attributable to Acacia Research Corporation 67,060 (125,065) 192,125 (154 %)
Results of Operations - year ended December 31, 2023 compared with the year ended December 31, 2022
Total revenues increased $65.9 million to $125.1 million for the year ended December 31, 2023, as compared to $59.2 million for the year ended December 31, 2022 , primarily due to an increase in our Intellectual Property Operations revenues partially offset by a decrease in Industrial Operations revenues. ARG revenues increased due to one patent portfolio that generated license revenue in the fourth quarter of 2023, which contributed to Intellectual Property Operations revenues increasing by $69.6 million. Refer to “Investments in Patent Portfolios” above for additional information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues. The decrease in Industrial Operations revenue of $4.6 million is due to lower units of printers sold. Refer to “Industrial Operations – Revenues ” below for further detailed discussion. In addition, post-acquisition revenues from Benchmark for the period from November 13, 2023 to December 31, 2023 contributed $848,000. Refer to “Energy Operations – Revenues ” below for further discussion.
Income before income taxes was $67.4 million for the year ended December 31, 2023, as compared to loss of $127.2 million in the prior year. The net increase was comprised of the change in total revenues described above and other changes in operating expenses and other income or expense as follows:
• Inventor royalties decreased $187,000, from $1.2 million to $1.0 million in 2023, primarily due to license agreement activity and related revenues generated in 2023 with no inventor royalty obligations. Refer to "Intellectual Property Operations – Cost of Revenues " below for further discussion.
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• Contingent legal fees increased $8.6 million, from $2.4 million to $11.0 million in 2023, primarily due to the change in Intellectual Property Operations revenues described above. Refer to "Intellectual Property Operations – Cost of Revenues " below for further discussion.
• Litigation and licensing expenses increased $6.8 million, from $4.0 million to $10.8 million in 2023, primarily due to a net increase in litigation support and third-party technical consulting expenses associated with ongoing litigation. Refer to "Intellectual Property Operations – Cost of Revenues " below for further discussion.
• Printronix cost of sales, engineering and development expenses, and sales and marketing expenses decreased approximately $3.0 million, from $28.6 million to $25.7 million in 2023. Refer to "Industrial Operations – Cost of Revenues " and "Operating Expenses" below for further discussion.
• Post-acquisition cost of production from Benchmark for the period from November 13, 2023 through December 31, 2023 added operating expenses in the amount of $656,000 in 2023. Refer to "Energy Operations – Cost of Production" below for further discussion.
• General and administrative expenses decreased $9.0 million, from $52.7 million to $43.7 million in 2023, primarily due to lower parent company and Intellectual Property Operations costs including, compensation expense for share-based awards, personnel costs, severance costs and our Industrial Operations general and administrative costs, offset partially by an increase in variable performance-based compensation costs and the addition of $264,000 expenses from our Energy Operations related to post-acquisition general and administrative costs from Benchmark for the period from November 13, 2023 through December 31, 2023. Refer to " General and Administrative Expenses " below for further detail and discussion.
• Compensation expense for share-based awards, included in general and administrative expenses above, decreased $523,000, from $3.8 million to $3.3 million in 2023, primarily due to forfeitures for terminated employees, which was partially offset by restricted stock and option grants issued to employees and the Board in 2023 and 2022.
• Unrealized gain from the change in fair value of our equity securities was $31.4 million in 2023, as compared to an unrealized loss of $263.7 million in the prior year. The unrealized gain and loss were derived from our Life Sciences Portfolio and trading securities portfolio. The prior year unrealized loss primarily relates to the reversal of unrealized gains previously recorded for shares sold during the year for realized gains. Refer to " Equity Securities Investments " below for further discussion.
• Realized loss from the sale of equity securities was $10.9 million in 2023, as compared to a realized gain of $125.3 million in the prior year. The realized gains and losses were similarly derived from the sales activity from our Life Sciences Portfolio and trading securities portfolio. Refer to " Equity Securities Investments " below for further discussion.
• Earnings on equity investment in joint venture decreased $38.4 million, from $42.5 million to $4.2 million in 2023. The current year includes the earnings on equity investment in joint venture from two milestone payments while the prior year included higher milestone payment amounts with related accrued interest and earnings on equity investment in the joint venture. Refer to " Equity Securities Investments " below for a detailed discussion.
• Unrealized gain from the Series B warrants and the embedded derivative fair value measurements was $8.2 million in 2023, as compared to an unrealized gain of $13.1 million from the Series A and Series B warrants and embedded derivative fair value measurements in the prior year. Refer to Notes 10 and 11 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Securities and fair value measurements.
• Gain on foreign currency exchange was $53,000 in 2023, as compared to a loss on foreign currency exchange of $3.3 million in the prior year. The gains and losses were 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 $4.5 million, from $6.4 million to $1.9 million in 2023, due to the cancellation of the remaining $60.0 million aggregate principal amount outstanding of the Senior Secured Notes on July 13, 2023, pursuant to the Series B Warrants Exercise. Refer to Note 10 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Senior Secured Notes.
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• Interest income and other, net was $15.5 million in 2023, as compared to $5.4 million in the prior year, mainly due to an increase in interest income from our cash equivalents, offset partially by an increase in the write off of the remaining limited unsecured notes of Adaptix Limited. 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.
Intellectual Property Operations
Revenues
ARG's revenue activity for the periods presented included the following:
Years Ended
December 31,
2023 2022 $ Change % Change
(In thousands, except percentage change values and count totals)
Paid-up license revenue agreements $ 87,835 $ 17,788 $ 70,047 394 %
Recurring license revenue agreements 1,321 1,720 (399) (23 %)
Total revenues $ 89,156 $ 19,508 $ 69,648 357 %
New license agreements executed 16 17 (1) (6 %)
Licensing and enforcement programs
generating revenues 7 8 (1) (13 %)
For the periods presented above, the majority of the revenue agreements executed during the relevant period provided for the payment of one-time, paid-up license fees in consideration for the grant of certain IP Rights for patented technology owned by our operating subsidiaries. These rights were primarily granted on a perpetual basis, extending until the expiration of the underlying patents. Paid-up revenue increased $70.0 million due to one patent portfolio that generated license revenue in the fourth quarter of 2023. Recurring revenue, that provides for quarterly sales-based license fees, decreased $399,000 from various on-going license arrangements.
Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our revenue arrangements and related concentrations for the periods presented herein.
Refer to “Investments in Patent Portfolios” above for information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues.
Cost of Revenues
Years Ended
December 31,
2023 2022 $ Change % Change
(In thousands, except percentage change values)
Inventor royalties $ 1,025 $ 1,212 $ (187) (15 %)
Contingent legal fees 10,998 2,444 8,554 350 %
Litigation and licensing expenses 10,771 3,970 6,801 171 %
Amortization of patents 11,370 10,403 967 9 %
Total $ 34,164 $ 18,029 $ 16,135 89 %
Refer to detailed change explanations above for the year ended December 31, 2023 and 2022 regarding cost of revenues for our Intellectual Property Operations.
The economic terms of patent portfolio related partnering agreements and contingent legal fee arrangements, if any, including royalty obligations, if any, royalty rates, contingent fee rates and other terms and conditions, vary across the patent portfolios owned or controlled by our operating subsidiaries. In certain instances, we have invested in certain patent portfolios without future patent partner royalty obligations. The costs associated with the forementioned obligations fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of revenue agreements executed each period and the mix of specific patent portfolios, with varying economic terms and conditions, generating revenues each period.
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Litigation and licensing expenses include patent-related litigation, enforcement and prosecution costs incurred by law firms and external patent attorneys engaged on either an hourly basis or a contingent fee basis. Litigation and licensing expenses also includes third-party patent research, development, patent prosecution and maintenance fees, re-exam and inter partes reviews, consulting and other costs incurred in connection with the licensing and enforcement of patent portfolios. Refer to “Investments in Patent Portfolios” above for additional information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues.
Industrial Operations
Revenues
Printronix's net revenues for the periods presented included the following:
Years Ended
December 31,
2023 2022 $ Change % Change
(In thousands, except percentage change value)
Printers and parts $ 12,513 $ 16,118 $ (3,605) (22 %)
Consumable products 19,091 19,314 (223) (1 %)
Services 3,494 4,283 (789) (18 %)
Total $ 35,098 $ 39,715 $ (4,617) (12 %)
For the periods presented above, the majority of the contract agreements executed in the relevant period include various combinations of tangible products (which include printers, consumables and parts) and services. Revenue from printers and parts decreased $3.6 million due to a decrease in the number of printer units sold. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding Printronix's revenue arrangements and related concentrations. Refer to “Industrial Operations Business” above for additional information related to Printronix's operating activities.
Cost of Revenues
Years Ended
December 31,
2023 2022 $ Change % Change
(In thousands, except percentage change values)
Cost of revenues - industrial operations $ 18,009 $ 19,359 $ (1,350) (7 %)
Refer to detailed change explanations above for the years ended December 31, 2023 and 2022 regarding cost of revenues for our Industrial Operations. The decrease in Printronix's cost of revenues for the year ended December 31, 2023 is due to change in revenue described above. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding Printronix's cost of sales.
Energy Operations
Revenues
Benchmark's revenues from November 13, 2023 through December 31, 2023 included the following (in thousands):
Oil sales $ 256
Natural gas sales 372
Natural gas liquids sales 220
Total $ 848
Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding Benchmark's revenue arrangements and related concentrations.
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Cost of Production
Benchmark's cost of production from November 13, 2023 through December 31, 2023 was $656,000. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding Benchmark's cost of production.
Operating Expenses
Years Ended
December 31,
2023 2022 $ Change % Change
(In thousands, except percentage change values)
Engineering and development expenses - industrial operations $ 735 $ 626 $ 109 17 %
Sales and marketing expenses - industrial operations 6,908 8,621 (1,713) (20 %)
General and administrative costs - intellectual property operations 7,402 5,428 1,974 36 %
General and administrative costs - industrial operations 8,722 9,986 (1,264) (13 %)
General and administrative costs - energy operations 264 — 264 n/a
Parent general and administrative expenses 27,306 37,266 (9,960) (27 %)
Total general and administrative expenses 43,694 52,680 (8,986) (17 %)
Total $ 51,337 $ 61,927 $ (10,590) (17 %)
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. The table includes Benchmark's general and administrative costs for the post acquisition period from November 13, 2023 through December 31, 2023. 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:
Years Ended
December 31,
2023 vs. 2022
(In thousands)
Personnel costs and board fees $ (1,005)
Variable performance-based compensation costs 1,047
Other general and administrative costs (3,772)
General and administrative costs - industrial operations (1,264)
General and administrative costs - energy operations 264
Compensation expense for share-based awards (523)
Non-recurring employee severance costs (3,733)
Total change in general and administrative expenses $ (8,986)
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 table above includes our Energy Operations general and administrative expenses for the post acquisition period from November 13, 2023 through December 31, 2023.
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The decrease in personnel cost and board fees and compensation expense for share-based awards was primarily due to a decrease in headcount and related costs. The increase in variable performance-based compensation costs was primarily due to fluctuations in performance-based compensation accruals. The decrease in other general and administrative costs, which relates to our parent company and Intellectual Property Operations business, were primarily due to lower legal fees. Refer to Note 2 to the consolidated financial statements elsewhere herein for the additional information regarding the limited unsecured notes. The decrease in general and administrative costs of Industrial Operations is due to Printronix's initiative to reduce costs and operate more efficiently. Non-recurring employee severance costs fluctuate based on the severance arrangements of terminated employees. In addition, our Energy Operations related general and administrative costs increased from post-acquisition expenses from Benchmark for the period from November 13, 2023 through December 31, 2023. Refer to additional general and administrative change explanations above.
Other Income/Expense
Equity Securities Investments
Years Ended
December 31,
2023 2022 $ Change % Change
(In thousands, except percentage change values)
Change in fair value of equity securities $ 31,423 $ (263,695) $ 295,118 (112 %)
(Loss) gain on sale of equity securities (10,930) 125,318 (136,248) (109 %)
Earnings on equity investment in joint venture 4,167 42,531 (38,364) (90 %)
Total net realized and unrealized gain (loss) $ 24,660 $ (95,846) $ 120,506 (126 %)
Our equity securities investments, including the Life Sciences Portfolio and trading securities portfolio, are recorded at fair value at each balance sheet date. During the fourth quarter of 2022, Acacia fully exited its position in Oxford Nanopore. Refer to periodic change explanations above. Refer to Notes 2 and 4 to the consolidated financial statements elsewhere herein for additional information regarding our investment in the Life Sciences Portfolio and other equity securities.
Our results included an unrealized gain from the change in fair value of our equity securities as compared to an unrealized loss in the prior year, and included realized loss from the sale of our equity securities as compared to a realized gain in the prior year. These changes were derived from our Life Sciences Portfolio and trading securities portfolio. The current period unrealized gain primarily relates to our Life Sciences Portfolio and trading securities portfolio. The current period realized loss primarily relates to sales activity from trading securities portfolio.
During 2023, we recorded consolidated earnings on equity investment in joint venture, which is part of the Life Sciences Portfolio, of $4.2 million for two milestones earned during the period. During 2022, we recorded consolidated earnings on equity investment of $42.5 million, including two milestones and accrued interest that were due in 2022. Refer to Note 4 to the consolidated financial statements elsewhere herein for additional information.
Income Taxes
Years Ended
December 31,
2023 2022 $ Change % Change
(In thousands, except percentage change values)
Income tax benefit $ 1,504 $ 16,211 $ (14,707) (91 %)
Effective tax rate (2) % (13) % n/a 11 %
Our income tax benefit for the year ended December 31, 2023 is primarily attributable to the use of tax attributes against 2023 earnings and the release of valuation allowance on the remaining federal net operating losses. Our income tax benefit for the year ended December 31, 2022 primarily reflects the decrease in deferred tax liabilities attributable to the unrealized losses recorded, expiration of foreign tax credits and changes in the valuation allowance.
Our 2023 effective tax rate was lower than the U.S. federal statutory rate primarily due to utilization of foreign tax credits, changes in valuation allowance, as well as non-deductible items. Our 2022 effective tax rate was lower than the U.S. federal statutory rate primarily due to the change in valuation allowance, as well as non-deductible items. The effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions used
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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 December 31, 2023 and 2022. Refer to Notes 2 and 17 to the consolidated financial statements elsewhere herein for additional income tax information.
Liquidity and Capital Resources
General
Our foreseeable material cash requirements as of December 31, 2023, are recognized as liabilities or generally are otherwise described in Note 13, "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 13 to the consolidated financial statements. Historically, we have not entered into off-balance sheet financing arrangements. At December 31, 2023, we had unrecognized tax benefits, as further described in Note 17 to the consolidated financial statements.
On July 13, 2023, in accordance with the terms of the Recapitalization Agreement, Starboard completed the Series B Warrants Exercise and pursuant to the Series B Warrants Exercise, the Company cancelled $60.0 million aggregate principal amount of Senior Secured Notes held by Starboard and received aggregate gross proceeds of approximately $55.0 million. At the closing of the Series B Warrants Exercise, the Company effectively paid to Starboard an aggregate amount of $66.0 million representing a negotiated settlement of the foregone time value of the Series B Warrants and the Series A Redeemable Convertible Preferred Stock (which amount was paid through a reduction in the exercise price of the Series B Warrants). This effectively modified the exercise price of the Series B Warrants. Upon the Series B Warrants Exercise, the Investors exercised the Series B Warrants at a reduced price and Company issued an aggregate of 31,506,849 shares of the Company's common stock to the Investors in consideration of their cash payment and cancellation of any outstanding Senior Secured Notes. No shares of Series A Redeemable Convertible Preferred Stock, no Series B Warrants, nor any Senior Secured Notes remain. For additional information, see Note 10, "Starboard Investment" to the consolidated financial statements.
Certain of our operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. In connection with any of our operating subsidiaries’ patent enforcement actions, it is possible that a defendant may request and/or a court may rule that an operating subsidiary has violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material.
At December 31, 2023, our primary sources of liquidity are cash and cash equivalents on hand and cash generated from our operating activities. Our cash and cash equivalents on hand includes proceeds of the completed Rights Offering and Concurrent Private Rights Offering (each as defined in Note 10 to the consolidated financial statements).
The Company’s expected contribution to Benchmark to fund its portion of the Purchase Price for the Revolution Transaction is $57.5 million, which the Company anticipates will be funded from cash on hand. The remainder of the Purchase Price is expected to be funded by a combination of borrowings by Benchmark under a new revolving credit agreement of approximately $72.5 million and the remaining being funded through a cash contribution of approximately $15 million from McArron Partners, the other investor in Benchmark.
Furthermore, we intend to grow our company by acquiring additional operating businesses and intellectual property assets. We expect to finance such acquisitions through cash on hand or by engaging in equity or debt financing.
Our management believes that our cash and cash equivalent balances and cash flows from operations will be sufficient to meet our cash requirements through at least twelve months from the date of this Annual Report and for the foreseeable
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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”. Any efforts to seek additional funding could be made through issuances of equity or debt, or other external financing. However, additional funding may not be available to us on favorable terms, or at all. The capital and credit markets have experienced extreme volatility and disruption in recent years, and the volatility and impact of the disruption may continue. At times during this period, the volatility and disruption has reached unprecedented levels. In several cases, the markets have exerted downward pressure on stock prices and credit capacity for certain issuers, and the commercial paper markets may not be a reliable source of short-term financing for us. If we fail to obtain additional financing when needed, we may not be able to execute our business plans and our business, conducted by our operating subsidiaries, may suffer.
Cash, Cash Equivalents and Investments
Our consolidated cash, cash equivalents and equity securities totaled $403.2 million at December 31, 2023, compared to $349.4 million at December 31, 2022.
Cash Flows Summary
The net change in cash and cash equivalents and restricted cash for the periods presented was comprised of the following:
Years Ended December 31,
2023 2022
(In thousands)
Net cash provided by (used in):
Operating activities $ (22,506) $ (37,336)
Investing activities 16,178 184,464
Financing activities 58,632 (166,137)
Effect of exchange rates on cash and cash equivalents 1 (2,566)
Increase (decrease) in cash and cash equivalents $ 52,305 $ (21,575)
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Cash Flows from Operating Activities
Cash flows from operating activities were comprised of the following for the periods presented:
Years Ended December 31,
2023 2022
(In thousands)
Net income (loss) including noncontrolling interests in subsidiaries $ 68,930 $ (110,939)
Adjustments to reconcile net income (loss) including noncontrolling interests in
subsidiaries to net cash used in operating activities:
Depreciation, depletion and amortization 14,728 13,514
Amortization of debt discount and issuance costs — 90
Change in fair values Series A redeemable convertible preferred stock embedded derivatives, Series A warrants and Series B warrants (6,716) (15,106)
Loss on exercise of Series A warrants — 2,004
Gain on exercise of Series B warrants (1,525) —
Compensation expense for share-based awards 3,297 3,820
(Gain) loss on foreign currency exchange (53) 3,324
Change in fair value of equity securities (31,423) 263,695
Loss (gain) on sale of equity securities 10,930 (125,318)
Unrealized gain on derivatives (781) —
Earnings on equity investment in joint venture (4,167) (42,531)
Deferred income taxes (3,657) (17,810)
Changes in assets and liabilities:
Accounts receivable (70,313) 998
Inventories 3,301 (5,291)
Prepaid expenses and other assets (820) (5,986)
Accounts payable and accrued expenses (4,651) (136)
Royalties and contingent legal fees payable 751 (1,764)
Deferred revenue (337) 100
Net cash used in operating activities $ (22,506) $ (37,336)
Cash receipts from ARG's licensees totaled $12.2 million and $16.6 million for the years ended December 31, 2023 and 2022, respectively. Cash receipts from Printronix's customers totaled $37.3 million and $40.5 million for the years ended December 31, 2023 and 2022, respectively. Cash receipts from Benchmark's customers totaled $1.8 million for the post acquisition period from November 13, 2023 through December 31, 2023. 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 year ended December 31, 2023 was $22.5 million, compared to $37.3 million in the prior year. The decrease in cash used in operations was primarily due to net outflows from the total changes in assets and liabilities (refer to Working Capital discussion below), increase in accounts receivable and inventory related sales, and by the total change in net income (described above) and related noncash adjustments.
Working Capital
Our working capital related to cash flows from operating activities at December 31, 2023 increased to $87.0 million, compared to $15.1 million at December 31, 2022, which was comprised of the changes in assets and liabilities presented above. The increase is primarily due to change in accounts receivable, which is related to the timing of the cash receipts related to Intellectual Property Operations Business.
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Cash Flows from Investing Activities
Cash flows from investing activities were comprised of the following for the periods presented:
Years Ended December 31,
2023 2022
(In thousands)
Acquisition, net of cash acquired (Note 3) $ (9,409) $ —
Cash reinvested 9,965 —
Patent acquisition (6,000) (5,000)
Purchases of equity securities (13,072) (112,142)
Sales of equity securities 32,106 273,934
Distributions received from equity investment in joint venture 2,777 28,404
Purchases of property and equipment (189) (732)
Net cash provided by investing activities $ 16,178 $ 184,464
Cash flows from investing activities for the year ended December 31, 2023 decreased to $16.2 million, as compared to cash flow of $184.5 million in the prior year, primarily due to net cash inflows from our Life Sciences Portfolio, trading securities portfolio equity securities transactions and Acacia's acquisition of Benchmark in 2023. Refer to “Other Income/Expense – Equity Securities Investments ” and “Recent Business Developments and Trends - Acquisitions ” above and Notes 3 and 4 to the consolidated financial statements elsewhere herein for additional information related to Acacia's acquisition of Benchmark and Life Sciences Portfolio, respectively.
Cash Flows from Financing Activities
Cash flows from financing activities included the following for the periods presented:
Years Ended December 31,
2023 2022
(In thousands)
Repurchase of common stock $ — $ (50,988)
Paydown of Revolving Credit Facility (7,700) —
Paydown of Senior Secured Notes (60,000) (120,000)
Dividend on Series A Redeemable Convertible Preferred Stock (1,400) (2,799)
Taxes paid related to net share settlement of share-based awards (614) (1,600)
Proceeds from Rights Offering 79,111 —
Proceeds from exercise of Series A warrants — 9,250
Proceeds from exercise of Series B warrants 49,000 —
Proceeds from exercise of stock options 235 —
Net cash provided by (used in) financing activities $ 58,632 $ (166,137)
Cash inflows from financing activities for the year ended December 31, 2023 increased to $58.6 million, as compared to cash outflow of $166.1 million in the prior year, primarily due to activity related to the Rights Offering and Concurrent Private Rights Offering. On October 30, 2022, the Company entered into a Recapitalization Agreement with Starboard and the Investors. On July 13, 2023, Starboard completed the Series B Warrants Exercise through a combination of a "Note Cancellation" and a "Limited Cash Exercise." Refer to Note 10 to the consolidated financial statements elsewhere herein for additional information.
Critical Accounting Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing these financial statements, we make assumptions, judgments and estimates that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our
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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;
• estimates of crude oil and natural gas reserves
• valuation of long-lived assets, goodwill and other intangible assets;
• valuation of 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.
Benchmark recognizes revenue when performance obligations are satisfied at the point control of the product is transferred to the customer. Virtually all of Benchmark's contracts' pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of the oil and natural gas products and prevailing supply and demand conditions. As a result, the price of the oil and natural gas fluctuate to remain competitive with other available oil and natural gas supplies. To the extent actual volumes and prices of oil and natural gas products are unavailable at the time of reporting, Benchmark will estimate the amounts. For additional information regarding Benchmark's revenues, refer to Note 2 to the consolidated financial statements. The differences between such estimates and actual amounts of oil and natural gas sales are recorded in the following month upon receipt of payment from the customer and any differences have historically been insignificant.
Estimate of Crude Oil and Natural Gas Reserves
Estimates of crude oil and natural gas reserves, as determined by independent petroleum engineers, are continually subject to revision based on price, production history and other factors. Estimated crude oil and natural gas reserves affect the
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carrying value of oil and gas properties, depreciation, depletion and amortizations, asset retirement obligations, and evaluation of impairment of oil and natural gas properties. Changes in the estimated reserves could have a significant impact on future results of operations.
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 years ended December 31, 2023 and 2022.
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 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 primarily Printronix, which was acquired on October 7, 2021, and Benchmark, which was acquired on November 13, 2023, refer to Notes 1 and 3 to the consolidated financial statements for additional information. The Company did not record any goodwill impairment charges for the years ended December 31, 2023 and 2022.
Valuation of Series B Warrants
The fair value of 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 December 31, 2023, the fair value of the Series B Warrants is zero. Refer to Note 10 to the consolidated financial statements for more information.
Valuation of Embedded Derivatives
Embedded derivatives that are required to be bifurcated from their host contract are valued separately from the host instrument. An as-converted value was used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock when it was outstanding. Refer to Note 11 to the consolidated financial statements for detailed information related to this fair value measurement. Of the assumptions used in the as-converted model, discount rate changes had the most significant impact on the fair value. As of December 31, 2023, the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock is zero because it is no longer outstanding. Refer to Note 10 to the consolidated financial statements for more information.
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.
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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 December 31, 2023 and 2022. These assets primarily consist of foreign tax credits and net operating loss carryforwards. Refer to Note 17 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.
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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