ACACIA RESEARCH CORPORATION 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 entitled "Cautionary Note Regarding Forward-Looking Statements."
General
We are a permanent capital platform that purchases businesses based on the differentials between public and private market valuations. We use a wide range of transactional and operational capabilities to realize the intrinsic value in the businesses that we acquire. Our ideal transactions include the acquisition of public or private companies, the acquisition of divisions of other companies, or structured transactions that can result in the recapitalization or restructuring of the ownership of a business to enhance value. We are particularly attracted to complex or multi-factor situations, where value is not fully recognized in the public markets, where values of certain operations are masked by a diversified business mix, or where private ownership has not invested capital necessary to drive long-term value. We aim to operate a transactional platform through which we can initiate a strategic block position in public companies as a path to complete whole company acquisitions or strategic transactions that unlock value. We believe this business model is differentiated from private equity funds, which do not typically own public securities prior to acquiring companies, hedge funds, which do not typically acquire entire businesses, and other acquisition vehicles such Special Purpose Acquisition Companies, which are narrowly focused on completing one singular, defining acquisition. We have a strategic relationship with Starboard that provides us access to capital, industry expertise, and a deep bench of operating partners and industry experts to evaluate potential acquisition opportunities and enhance the oversight and value creation of such businesses once acquired. Starboard provides ready access to its extensive network of highly successful industry executives and, as part of our relationship, Starboard assists with sourcing and evaluating appropriate acquisition opportunities. Our focus to date has been on companies with market values in the sub-$2 billion range and particularly on businesses valued at$1 billion or less. We are, however, opportunistic, and may pursue acquisitions that are larger under the right circumstance.
Our business is described more fully in Item 1. "Business," of this annual report.
Intellectual Property Operations
We invest in IP and related absolute return assets and engage in the licensing and enforcement of patented technologies. Through ourPatent 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. 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 includeU.S. patents and certain foreign counterparts, covering technologies used in a variety of industries. We generate 21
--------------------------------------------------------------------------------
Table of Contents
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.
For more information related to our Intellectual Property Operations, refer to additional detailed patent business discussion below.
Industrial Operations
InOctober 2021 , we consummated our first operating company acquisition ofPrintronix .Printronix is a leading manufacturer and distributor of industrial impact printers, also known as line matrix printers, and related consumables and services. ThePrintronix 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 inMalaysia and third-party configuration sites located inthe United States ,Singapore andHolland , along with sales and support locations around the world to support its global network of users, channel partners and strategic alliances. This acquisition was made at what we believe to be an attractive purchase price, and we are now supporting existing management in its execution of strategic partnerships to generate growth. We acquired all of the outstanding stock ofPrintronix , 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 includePrintronix's consolidated operations fromOctober 7, 2021 throughDecember 31, 2021 . Refer to Note 3 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
22--------------------------------------------------------------------------------
Table of Contents
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 inJune 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. As ofDecember 31, 2020 , all of the equity securities in the Life Sciences Portfolio were transferred to the Company. As ofDecember 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
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 thePrintronix acquisition, Life Sciences Portfolio and Notes, respectively. For the years endedDecember 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 ofDecember 31, 2021 , as compared to$274.6 million as ofDecember 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.
Patent Litigation Trial Dates and Related Trials
As of the date of this report, our operating subsidiaries have four pending patent infringement cases with scheduled trial dates in the next twelve months. Patent infringement trials are components of our overall patent licensing process and are one of many factors that contribute to possible future revenue generating opportunities for us. Scheduled trial dates, as promulgated by the respective court, merely provide an indication of when, in future periods, the trials may occur according to the court's scheduling calendar at a specific point in time. A court may change previously scheduled trial dates. In fact, courts often reschedule trial dates for various reasons that are unrelated to the underlying patent assets and typically for reasons that are beyond our control. While scheduled trial dates provide an indication of the timing of possible future revenue generating opportunities for us, the trials themselves and the immediately preceding periods represent the possible future revenue generating opportunities. These future opportunities can result in varying outcomes. In fact, it is difficult to predict the outcome of patent enforcement litigation at the trial level and outcomes can be unfavorable. It can be difficult to understand complex patented technologies, and as a result, this may lead to a higher rate of unfavorable 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.
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:
23--------------------------------------------------------------------------------
Table of Contents
•Increases in patent-related legal expenses associated with patent infringement litigation, including, but not limited to, increases in costs billed by outside legal counsel for discovery, depositions, economic analyses, damages assessments, expert witnesses and other consultants, re-exam and inter partes review costs, case-related audio/video presentations and other litigation support and administrative costs, could increase our operating costs and decrease our profit generating opportunities;
•Our patented technologies and enforcement actions are complex and, as a result, we may be required to appeal adverse decisions by trial courts in order to successfully enforce our patents. Moreover, such appeals may not be successful;
•New legislation, regulations or rules related to enforcement actions, including any fee or cost shifting provisions, could significantly increase our operating costs and decrease our profit generating opportunities. Increased focus on the growing number of patent-related lawsuits may result in legislative changes which increase our costs and related risks of asserting patent enforcement actions;
•Courts may rule that our subsidiaries have violated certain statutory, regulatory, federal, local or governing rules or standards by pursuing such enforcement actions, which may expose us and our operating subsidiaries to material liabilities, which could harm our operating results and our financial position;
•The complexity of negotiations and potential magnitude of exposure for potential infringers associated with higher quality patent portfolios may lead to increased intervals of time between the filing of litigation and potential revenue events (i.e., Markman dates, trial dates), which may lead to increased legal expenses, consistent with the higher revenue potential of such portfolios; and •Fluctuations in overall patent portfolio related enforcement activities which are impacted by the portfolio intake challenges discussed above could harm our operating results and our financial position.
Investments in Patent Portfolios
With respect to our licensing, enforcement and overall business, neither we nor our operating subsidiaries invent new technologies or products; rather, we depend upon the identification and investment in patents, inventions and companies that own IP through our relationships with inventors, universities, research institutions, technology companies and others. If our operating subsidiaries are unable to maintain those relationships and identify and grow new relationships, then we may not be able to identify new technology-based patent opportunities for sustainable revenue and /or revenue growth. Our current or future relationships may not provide the volume or quality of technologies necessary to sustain our licensing, enforcement and overall business. In some cases, universities and other technology sources compete against us as they seek to develop and commercialize technologies. Universities may receive financing for basic research in exchange for the exclusive right to commercialize resulting inventions. These and other strategies employed by potential partners may reduce the number of technology sources and potential clients to whom we can market our solutions. If we are unable to maintain current relationships and sources of technology or to secure new relationships and sources of technology, such inability may have a material adverse effect on our revenues, operating results, financial condition and ability to maintain our licensing and enforcement business.
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 year endedDecember 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. 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. 24
--------------------------------------------------------------------------------
Table of Contents
Industrial Printing Solutions
OurPrintronix subsidiary is a worldwide leader in multitechnology supplychain 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. InChina ,India and other developing countries inAsia andAfrica , our printers are also prevalent in the banking and government sectors.Printronix has manufacturing, configuration and/or distribution sites located inMalaysia ,the United States ,Singapore ,China andthe 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 withinPrintronix's printers.Printronix's products are primarily sold throughPrintronix's global network of channel partners, such as dealers and distributors, to endusers.
Recent Business Matters
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. OnNovember 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 appointJonathan 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 ." OnFebruary 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 datedNovember 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. OnFebruary 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. OnJune 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 onJune 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 bySeptember 30, 2020 , and$35.0 million aggregate principal amount of the Notes byDecember 31, 2020 , resulting in the total principal outstanding being paid byDecember 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 25
--------------------------------------------------------------------------------
Table of Contents
expiration date ofNovember 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. OnJune 30, 2020 , the Company entered into an Exchange Agreement, or the Exchange Agreement, withMerton Acquisition HoldCo LLC , aDelaware 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 ofDecember 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 bySeptember 30, 2020 and$35.0 million principal amount of the New Notes byDecember 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 ofNovember 18, 2019 , by and between the Company, Starboard and the Buyers. OnJanuary 29, 2021 , the Company redeemed$50.0 million of the New Notes and onMarch 31, 2021 , the Company reissued$50.0 million of the New Notes. OnJune 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 toOctober 15, 2021 . OnSeptember 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 toDecember 1, 2021 . The June andSeptember 2021 Merton Notes cannot be used to exercise Series B Warrants issued to Starboard Value. OnNovember 30, 2021 , the Company amended the maturity date of the New Notes toJanuary 31, 2022 . The total principal amount outstanding of New Notes as ofDecember 31, 2021 and 2020 was$180.0 million and$115.0 million , respectively. OnJanuary 31, 2022 , the Company amended the maturity date of the New Notes toApril 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.
OnApril 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 onApril 3, 2020 . OnJune 4, 2020 , the Company executed the Transaction Agreement betweenLink 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 ofDecember 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.
Industrial Operations Acquisition
Refer to "General - Industrial Operations" above for information related to our
26--------------------------------------------------------------------------------
Table of Contents
Operating Activities
Intellectual Property Operations
Our Intellectual Property Operations revenues historically have fluctuated quarterly, and can vary significantly period to period, based on a number of factors including the following:
•the dollar amount of agreements executed each period, which can be driven by the nature and characteristics of the technology or technologies being licensed and the magnitude of infringement associated with a specific licensee;
•the specific terms and conditions of agreements executed each period including the nature and characteristics of rights granted, and the periods of infringement or term of use contemplated by the respective payments;
•fluctuations in the total number of agreements executed each period;
•the number of, timing, results and uncertainties associated with patent licensing negotiations, mediations, patent infringement actions, trial dates and other enforcement proceedings relating to our patent licensing and enforcement programs;
•the relative maturity of licensing programs during the applicable periods;
•other external factors, including the periodic status or results of ongoing negotiations, the status or results of ongoing litigations and appeals, actual or perceived shifts in the regulatory environment, impact of unrelated patent related judicial proceedings and other macroeconomic factors; •the willingness of prospective licensees to settle significant patent infringement cases and pay reasonable license fees for the use of our patented technology, as such infringement cases approached a court determined trial date; and
•fluctuations in overall patent portfolio related enforcement activities which are impacted by the portfolio intake challenges discussed above.
Our management does not attempt to manage for smooth sequential periodic growth in revenues from period to period, and therefore, periodic results can be uneven. Unlike most operating businesses and industries, licensing revenues not generated in a current period are not necessarily foregone but, depending on whether negotiations, litigation or both continue into subsequent periods, and depending on a number of other factors, such potential revenues may be pushed into subsequent annual periods.
Revenues for the years ended
• 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 • Super Resolutions Microscopy technology(2)
technology(1)(2)
• Speech codecs used in wireless and wireline • Video Conferencing technology(2)
systems technology(1)(2) • Wireless Infrastructure and User Equipment • Internet radio ad placement (2)
Technology(1)(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)
____________________
(1)Licensing and enforcement program generating revenue in 2021. (2)Licensing and enforcement program generating revenue in 2020.
27--------------------------------------------------------------------------------
Table of Contents
Industrial Operations
Refer to "Industrial Printing Solutions" above for information related to
In addition to the following results of operations discussion, more information related to our Intellectual Property Operations and Industrial Operations segment revenues and cost of revenues, may be found in Note 2 to the consolidated financial statements elsewhere herein.
Results of Operations
Summary of Results of Operations
Years Ended December 31,
2021 2020 $ Change % Change
(In thousands, except percentage change values)
Total revenues $ 88,047 $ 29,782 $ 58,265 196 %
Total costs and expenses 73,502 49,300 24,202 49 %
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
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. 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 fromPrintronix for the period fromOctober 7, 2021 toDecember 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. Refer to "Cost of Revenues - Intellectual Property Operations" below for further discussion.
•Contingent legal fees increased
•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. 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. 28
--------------------------------------------------------------------------------
Table of Contents
•Post-acquisition cost of sales, engineering and development expenses, and sales and marketing expenses fromPrintronix for the period fromOctober 7, 2021 toDecember 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 fromPrintronix for the period fromOctober 7, 2021 throughDecember 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. Refer to "Equity Securities Investments" below for further discussion. •Realized gain from the sale of our equity securities increased$108.8 million , from$7.4 million to$116.1 million in 2021. The realized gains were primarily derived from our Life Sciences Portfolio. The current period realized gain primarily relates to the sale of three Life Sciences Portfolio securities. Refer to "Equity Securities Investments" below for further discussion. In the prior year, we also recognized a net gain of$2.8 million related to returned prepaid investments and the sale of an equity security derivative.
•Earnings on equity investment in joint venture was
•We recognized an unrealized loss of$2.8 million on the fair value investment in 2021, as compared to an unrealized gain of$5.5 million in the prior year. Refer to "Equity Securities Investments" below for further discussion.
•We recognized a realized gain on sale of
•We incurred an unrealized loss of$40.4 million from the fair value measurements of the Series A and Series B warrants and the embedded derivative in 2021, as compared to an unrealized loss of$58.2 million in the prior year. Refer to Note 10 to the consolidated financial statements elsewhere herein for additional information regarding theStarboard Securities . •Loss on foreign currency exchange decreased$4.8 million , from$4.9 million to$89,000 in 2021, primarily from our transaction related to theEquity Securities Portfolio Investment in 2020. Refer to Note 4 to the consolidated financial statements elsewhere herein for additional information. •Interest expense on Senior Secured Notes decreased$2.2 million , from$10.1 million to$7.9 million in 2021, primarily due to$4.6 million in deferred debt issuance costs being fully amortized in 2020, partially offset by increased interest expense from recent Note issuances. Refer to Note 10 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Senior Secured Notes. •Interest income and other decreased$337,000 , from$838,000 to$501,000 in 2021, mainly due to a decrease in interest income from our former investment in debt securities, which was sold in 2020. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our cash and cash equivalents, former debt securities investments and investments in equity securities. 29
--------------------------------------------------------------------------------
Table of Contents
Revenues
Intellectual Property Operations
Acacia's revenue for the periods presented included the following:
Years Ended December 31,
2021 2020 $ Change % Change
Revenues (in thousands, except percentage
change
values) $ 76,043 $ 29,782 $ 46,261 155 %
New license agreements executed 23 17 6 35 %
Licensing and enforcement programs
generating
revenues 9 11 (2) (18 %)
Licensing and enforcement programs with
initial
revenues 4 2 2 100 %
New patent portfolios 1 5 (4) (80 %)
For the periods presented above, the majority of the revenue agreements executed
provided for the payment of one-time, paid-up license fees in consideration for
the grant of certain IP Rights for patented technology owned by our operating
subsidiaries. These rights were primarily granted on a perpetual basis,
extending until the expiration of the underlying patents. Paid-up revenue
increased $45.2 million primarily from one new patent portfolio that generated
initial license revenue in the fourth quarter of 2021 and other new license
agreements executed during the year. Recurring revenue, that provides for
quarterly sales-based license fees, increased $1.1 million in 2021.
Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our revenue arrangements and related concentrations for the periods presented herein.
Refer to "Investments in Patent Portfolios" above for information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues.
Industrial Operations
Printers and parts$ 4,961 Consumable products 5,973 Services 1,070 Total$ 12,004 Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regardingPrintronix's revenue arrangements and related concentrations. 30
--------------------------------------------------------------------------------
Table of Contents
Cost of Revenues
Intellectual Property Operations
Years Ended December 31,
2021 2020 $ Change % Change
(In thousands, except percentage change values)
Inventor royalties $ 1,142 $ 7,349 $ (6,207) (84 %)
Contingent legal fees 12,074 7,419 4,655 63 %
Litigation and licensing expenses 5,462 5,683 (221) (4 %)
Amortization of patents 9,851 4,681 5,170 110 %
Other patent portfolio expense (income) 162 (308) 470 (153 %)
Total $ 28,691 $ 24,824 $ 3,867 16 %
For the year ended
The economic terms of patent portfolio related partnering agreements and contingent legal fee arrangements, if any, including royalty obligations, if any, royalty rates, contingent fee rates and other terms and conditions, vary across the patent portfolios owned or controlled by our operating subsidiaries. In certain instances, we have invested in certain patent portfolios without future patent partner royalty obligations. The costs associated with the forementioned obligations fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of revenue agreements executed each period and the mix of specific patent portfolios, with varying economic terms and conditions, generating revenues each period. Litigation and licensing expenses include patent-related litigation, enforcement and prosecution costs incurred by law firms and external patent attorneys engaged on either an hourly basis or a contingent fee basis. Litigation and licensing expenses also includes third-party patent research, development, patent prosecution and maintenance fees, re-exam and inter partes reviews, consulting and other costs incurred in connection with the licensing and enforcement of patent portfolios. Litigation and licensing expenses decreased for the periods presented due to a net decrease in patent maintenance fees and consulting fees. Refer to "Investments in Patent Portfolios" above for additional information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues.
Industrial Operations
Printronix's cost of sales fromOctober 7, 2021 throughDecember 31, 2021 was$7.4 million . Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regardingPrintronix's cost of sales. Operating Expenses Years Ended December 31, 2021 2020 $ Change % Change (In thousands, except percentage change values) Engineering and development expenses - industrial operations $ 200 $ -$ 200 n/a Sales and marketing expenses - industrial operations 1,538 - 1,538 n/a General and administrative costs - intellectual property operations 6,177 4,976 1,201 24 % General and administrative costs - industrial operations 2,797 - 2,797 n/a Parent general and administrative expenses 26,692 19,500 7,192 37 % Total general and administrative expenses 35,666 24,476 11,190 46 % Total$ 37,404 $ 24,476 $ 12,928 53 % 31
--------------------------------------------------------------------------------
Table of Contents
The table above includesPrintronix's engineering and development expenses and sales and marketing expenses for the post acquisition period fromOctober 7, 2021 throughDecember 31, 2021 . Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regardingPrintronix's operating expenses.
General and Administrative Expenses
A summary of the main drivers of the change in general and administrative
expenses for the years ended
2021 vs. 2020
(In thousands)
Personnel costs and board fees $ 1,802
Variable performance-based compensation costs 26
Other general and administrative costs 6,124
General and administrative costs - industrial operations 2,398
Amortization of industrial operations intangible assets 399
Compensation expense for share-based awards 391
Non-recurring employee severance costs 50
Total change in general and administrative expenses
General and administrative expenses include employee compensation and related personnel costs, including variable performance based compensation and compensation expense for share-based awards, office and facilities costs, legal and accounting professional fees, public relations, stock administration, business development, fixed asset depreciation, amortization of Industrial Operations intangible assets, state taxes based on gross receipts and other corporate costs. The increase in personnel cost and board fees for the periods presented was primarily due to an increase in headcount and related costs. The change in variable performance-based compensation costs was primarily due to fluctuations in performance-based compensation accruals. The increase in other general and administrative costs, which relates to our Parent company and Intellectual Property Operations business, was primarily due to higher legal and business development related expenses. Compensation expense for share-based awards increased primarily due to stock grants issued to employees and the Board of Directors in 2021. Non-recurring employee severance costs fluctuate based on the severance arrangements of terminated employees. In addition, our Industrial Operations related general and administrative costs and amortization increased from post-acquisition expenses fromPrintronix for the period fromOctober 7, 2021 throughDecember 31, 2021 . Refer to additional general and administrative change explanations above. Other Income (Expense) Equity Securities Investments Years Ended December 31, 2021 2020 $ Change % Change (In thousands, except percentage change values) Change in fair value of equity securities$ 87,527 $ 176,173 $ (88,646) (50 %) Gain on sale of equity securities 116,129 7,352 108,777 1,480 % Earnings on equity investment in joint venture 3,530 - 3,530 n/a Net realized and unrealized gain 207,186 183,525 23,661 13 % Gain on sale of prepaid investment and derivative - 2,845 (2,845) (100 %) Change in fair value of investment (2,752) 5,474 (8,226) (150 %) Gain on sale of investment 3,591 8,187 (4,596) (56 %) Total net realized and unrealized gain$ 208,025 $ 200,031 $ 7,994 4 % 32
--------------------------------------------------------------------------------
Table of Contents
Acacia seeks to acquire undervalued businesses with a primary focus on mature technology, life sciences, industrial and certain financial services segments, and pursues opportunities for value creation that leverage Acacia's significant capital resources as well as its expertise in corporate governance and operational restructuring.
Our equity securities investments in the Life Sciences Portfolio, Veritone and other equity securities are recorded at fair value at each balance sheet date.
Our year-to-date results included a decreased unrealized gain from the change in
fair value of our equity securities, while realized gains from the sale of our
equity securities increased, as compared to the prior year. These changes were
primarily derived from our Life Sciences Portfolio, in which, our sales activity
of certain investments increased relative to securities that were held with
unrealized gains in the prior year. During 2021, we began to recognize earnings
on our equity investment in joint venture, which is part of the Life Sciences
Portfolio. In the prior year, we also recognized a net gain related to returned
prepaid investments and the sale of an equity security derivative that was part
of the Life Sciences Portfolio. Refer to additional 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 year-to-date results included an unrealized loss on the fair value
investment in Veritone, while we recognized a realized gain on sale of the
equity investment in Veritone. Acacia no longer has an investment in Veritone
common stock and warrants. Refer to additional change explanations above. Refer
to Note 5 to the consolidated financial statements elsewhere herein for
additional information regarding the investment in Veritone.
Income Taxes
Years Ended December 31,
2021 2020 $ Change % Change
(In thousands, except percentage change values)
Income tax (expense) benefit $ (24,287) $ 1,159 $ (25,446) (2,196 %)
Effective tax rate 14 % (1) % n/a 15 %
Our effective tax rates for the years ended December 31, 2021 and 2020, were
primarily comprised of foreign taxes withheld and refunded on revenue agreements
with licensees in foreign jurisdictions, state taxes, and the impact of
valuation allowance changes. Foreign taxes withheld and refunded related to
revenue agreements executed with third-party licensees domiciled in certain
foreign jurisdictions for the years ended December 31, 2021 and 2020 totaled
($8.3) million and $1.4 million , respectively.
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of its
assets and liabilities along with net operating loss and tax credit
carryforwards. The Company records a valuation allowance against its deferred
tax assets to reduce the net carrying value to an amount it believes is more
likely than not to be realized. When the Company establishes or reduces the
valuation allowance against its deferred tax assets, the provision for income
taxes will increase or decrease, respectively, in the period such determination
is made. For the years ended December 31, 2021 and 2020, the Company recorded a
partial valuation allowance of $40.6 million and a full valuation allowance of
$77.0 million , respectively, against its deferred tax assets. Refer to Note 17
to the consolidated financial statements elsewhere herein for additional
information.
Inflation
Inflation has not had a significant impact on us or any of our subsidiaries in the current or prior periods.
Liquidity and Capital Resources
General
Our material cash requirements as ofDecember 31, 2021 , are recognized as liabilities or 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 33
--------------------------------------------------------------------------------
Table of Contents
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. AtDecember 31, 2021 , we had unrecognized tax benefits, as further described in Note 17 to the consolidated financial statements. Certain of Acacia's operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. In connection with any of Acacia's operating subsidiaries' patent enforcement actions, it is possible that a defendant may request and/or a court may rule that an operating subsidiary has violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or Acacia's operating subsidiaries or award attorney's fees and/or expenses to a defendant(s), which could be material. Our primary sources of liquidity are cash and cash equivalents on hand generated from our operating activities, and as deemed appropriate by management from our availability of Senior Secured Notes (discussed above under the caption "Recent Business Matters -Starboard Securities and Senior Secured Notes"). Our management believes that our cash and cash equivalent balances, anticipated cash flows from operations and our availability of Senior Secured Notes will be sufficient to meet our cash requirements through at least twelve months from the date of this report and for the foreseeable future. We may, however, encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated, including those set forth under Part I, 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, equity securities at fair value and long-term restricted cash totaled$671.1 million atDecember 31, 2021 , compared to$309.6 million atDecember 31, 2020 .
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,
2021 2020
(In thousands)
Net cash provided by (used in):
Operating activities $ 13,326 $ (19,620)
Investing activities 35,751 18,598
Financing activities 59,738 109,209
Increase in cash and cash equivalents and restricted cash
$ 108,187
Cash Flows from Operating Activities
Cash receipts from Acacia's licensees totaled$75.8 million and$29.2 million for the years endedDecember 31, 2021 and 2020, respectively. The fluctuations in cash receipts for the periods presented primarily reflects the corresponding fluctuations in revenues recognized during the same periods, as described above, and the related timing of payments received from licensees. Cash flows from operations for the year endedDecember 31, 2021 increased to$13.3 million , as compared to a$19.6 million cash outflow in the prior year, primarily due to our higher net income, as described above, the change in fair value of equity securities and to a lesser extent the net changes in working capital cash flows (further discussed below), which were partially offset by the change in gain on sale of equity securities. 34
--------------------------------------------------------------------------------
Table of Contents
Working Capital
Working capital at
Accounts receivable increased to$9.5 million atDecember 31, 2021 , compared to$506,000 atDecember 31, 2020 , primarily due to thePrintronix acquisition. Inventories of$8.9 million were also added fromPrintronix . Prepaid expenses and other current assets increased to$4.8 million atDecember 31, 2021 , compared to$5.8 million atDecember 31, 2020 , primarily due to thePrintronix acquisition. Accounts payable, accrued expenses and accrued compensation increased to$15.4 million atDecember 31, 2021 , compared to$7.0 million atDecember 31, 2020 , primarily due to thePrintronix acquisition. Royalties and contingent legal fees payable increased to$2.5 million atDecember 31, 2021 , compared to$2.2 million atDecember 31, 2020 . The royalties and contingent legal fees payable are generally scheduled to be paid in the subsequent quarter upon our receipt of the related fee payments from licensees, in accordance with the underlying contractual arrangements. Deferred revenue of$1.1 million was also added fromPrintronix .
Cash Flows from Investing Activities
Cash flows from investing activities were comprised of the following for the
periods presented:
Years Ended December 31,
2021 2020
(In thousands)
Acquisition, net of cash acquired (Note 3) $ (33,250) $ -
Patent acquisition (21,000) (13,780)
Sale of investment at fair value 3,591 12,409
Purchases of equity securities (66,624) (46,492)
Sales of equity securities 154,784 228,873
Maturities and sales of debt securities - 118,459
Cash distributed for notes receivable (4,021) -
Acquisition of Life Sciences Portfolio equity securities - (280,263)
Distributions received from equity investment in joint venture 2,362 -
Distributions to noncontrolling interests in operating subsidiary
- (409)
Purchases of property and equipment (91) (199)
Net cash provided by investing activities $
35,751
Cash flows from investing activities for the year endedDecember 31, 2021 increased to$35.8 million , as compared to$18.6 million in the prior year, primarily due to the positive change from our 2020 Life Sciences Portfolio acquisition, partially offset by the changes from equity and debt securities maturities and sales and Acacia's acquisition ofPrintronix . Refer to "Recent Business Matters -Equity Securities Portfolio Investment " and "Recent Business Matters - Industrial Operations Acquisition" above, and Notes 3 and 4 to the consolidated financial statements elsewhere herein for additional information related to Acacia's acquisition ofPrintronix and the Life Sciences Portfolio, respectively. 35
--------------------------------------------------------------------------------
Table of Contents
Cash Flows from Financing Activities
Cash flows from financing activities included the following for the periods
presented:
Years Ended December 31,
2021 2020
(In thousands)
Repurchase of common stock $ (4,012) $ (3,998)
Issuance of Senior Secured Notes, net of lender fee 115,000 110,437
Paydown of Senior Secured Notes (50,000) -
Senior Secured Notes issuance costs paid to other parties - (496)
Dividend on Series A Redeemable Convertible Preferred Stock (1,452) (1,382)
Issuance of Series B warrants - 4,600
Proceeds from exercise of stock options 202 48
Net cash provided by financing activities $
59,738
Cash flows from financing activities for the year endedDecember 31, 2021 decreased to$59.7 million , as compared to$109.2 million in the prior year, primarily due to activity related to our Senior Secured Notes. Refer to "Recent Business Matters -Starboard Securities and Senior Secured Notes," above, and Note 10 to the consolidated financial statements elsewhere herein for additional information related to the Senior Secured Notes.
Critical Accounting Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted inthe United States of America . In preparing these financial statements, we make assumptions, judgments and estimates that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that of the significant accounting policies discussed in Note 2 to the consolidated financial statements included elsewhere herein, the following accounting policies require our most difficult, subjective or complex assumptions, judgments and estimates:
•revenue recognition;
•valuation of long-lived assets and other intangible assets;
•valuation of Series A Warrants and Series B Warrants;
•valuation of embedded derivatives; and
•accounting for income taxes.
We discuss below the critical accounting assumptions, judgements and estimates associated with these policies. Historically, our critical accounting estimates relative to our significant accounting policies have not differed materially from actual results. For further information on the related significant accounting policies, refer to Note 2 to the consolidated financial statements.
Revenue Recognition
As described below, significant management judgment must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue recognized or deferred for any period, if management made different judgments.
36--------------------------------------------------------------------------------
Table of Contents
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 regardingPrintronix's net revenues fromOctober 7, 2021 throughDecember 31, 2021 , refer to Note 2 to the consolidated financial statements.
Valuation of Long-lived Assets 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 Acacia'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 endedDecember 31, 2021 and 2020.
Valuation of Series A Warrants and Series B Warrants
The fair value of the Series A and B Warrants are estimated using a Black-Scholes option-pricing model. Refer to Note 11 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 ofDecember 31, 2021 , a hypothetical 10% increase in the volatility would have resulted in an increased liability balance of approximately$1.6 million and$21.5 million , in our Series A and B Warrants, respectively.
Valuation of Embedded Derivatives
Embedded derivatives that are required to be bifurcated from their host contract are valued separately from the host instrument. A binomial lattice framework is used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock. Refer to Note 11 to the consolidated financial statements for detailed information related to this fair value measurement. Of the assumptions used in the binomial lattice framework, volatility and discount rate changes would have the most significant impact on the fair value. As ofDecember 31, 2021 , a hypothetical 10% increase in the volatility and 1% increase in the discount rate would have resulted in an increased liability balance of approximately$672,000 and$1.2 million , respectively.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the estimating of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statements of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and our valuation allowance. Due to uncertainties related to our ability to utilize certain deferred tax assets in future periods, we have recorded a partial valuation allowance against our net deferred tax assets as ofDecember 31, 2021 and a full valuation allowance as ofDecember 31, 2020 . These assets primarily consist of foreign tax credits, capital loss 37
--------------------------------------------------------------------------------
Table of Contents
carryforwards 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.
© Edgar Online, source
