ACACIA RESEARCH CORP

Operating Expenses

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

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 variable performance-based compensation costs was primarily due to fluctuations in performance-based compensation. Compensation expense for share-based awards increased primarily due to restricted stock and option grants issued to employees and the Board of Directors in 2023 partially offset by forfeitures. 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. 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 contributed $385,000 of the increased expenses. Refer to additional general and administrative change explanations above.

Other Income/Expense

Equity Securities Investments

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 first quarter of 2024, Acacia fully exited its position in Arix. Refer to periodic change explanations above. Refer to Notes 2 and 3 to the consolidated financial statements elsewhere herein for additional information regarding our investment in the Life Sciences Portfolio and other equity securities.

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

Legal Liability Fee

In the first quarter of 2024, we recorded an additional accrual of $6.2 million in other income (expense) in the consolidated statements of operations in connection with the AIP Matter. Refer to Note 12 to the consolidated financial statements elsewhere herein for additional information.

Income Taxes

Our income tax benefit for the three months ended March 31, 2024 is primarily attributable to recognizing a benefit for losses incurred year-to-date offset by foreign withholding taxes. Our income tax expense for the three months ended March 31, 2023 is primarily attributable to foreign taxes withheld and foreign and state income taxes.

Our 2024 effective tax rate was higher than the U.S. federal statutory rate primarily due to dividends received deduction offset by foreign withholding taxes which we could not recognize as a foreign tax credit. Our 2023 effective tax rate was lower than the U.S. federal statutory rate primarily due to expiration of foreign tax credits changes in valuation allowance, as well as non-deductible items. The effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions used to estimate the effective tax rate, including factors such as expected utilization of net operating loss carryforwards, changes in or the interpretation of tax laws in jurisdictions where the Company conducts business, the Company’s expansion into new states or foreign countries, and the amount of valuation allowances against deferred tax assets.

The Company has recorded a partial valuation allowance against our net deferred tax assets as of March 31, 2024 and December 31, 2023. Refer to Notes 2 to the consolidated financial statements elsewhere herein for additional income tax information.

Liquidity and Capital Resources

General

Our foreseeable material cash requirements as of March 31, 2024, are recognized as liabilities or generally are otherwise described in Note 12, "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 12 to the consolidated financial statements. Historically, we have not entered into off-balance sheet financing arrangements. At March 31, 2024, we had unrecognized tax benefits, as further described in Note 2 to the consolidated financial statements.

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

At March 31, 2024, our primary sources of liquidity were cash and cash equivalents on hand and cash generated from our operating activities.

The Company’s contribution to Benchmark to fund its portion of the Purchase Price and related fees for the Transaction was $59.9 million, which was funded from cash on hand. The remainder of the Purchase Price was funded by a combination of borrowings under the Revolving Credit Facility of approximately $82.7 million and a cash contribution of approximately $15.3 million from McArron Partners, the other investor in Benchmark. Refer to Note 2 to the accompanying consolidated financial statements for additional information regarding the Revolving Credit Facility.

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 Quarterly Report and for the foreseeable future. We may, however, encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated, including those set forth under “Item 1A, Risk Factors” of our 2023 Annual Report. Any efforts to seek additional funding could be made through issuances of equity or debt, or other external financing. However, additional funding may not be available to us on favorable terms, or at all. The capital and credit markets have experienced extreme volatility and disruption in recent years, and the volatility and impact of the disruption may continue. At times during this period, the volatility and disruption has reached unprecedented levels. In several cases, the markets have exerted downward pressure on stock prices and credit capacity for certain issuers, and the commercial paper markets may not be a reliable source of short-term financing for us. If we fail to obtain additional financing when needed, we may not be able to execute our business plans and our business, conducted by our operating subsidiaries, may suffer.

Cash, Cash Equivalents and Investments

Our consolidated cash, cash equivalents and equity securities totaled $461.7 million at March 31, 2024, compared to $403.2 million at December 31, 2023.

Cash Flows Summary

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

Cash Flows from Operating Activities

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

Cash receipts from ARG's licensees totaled $77.5 million and $4.4 million for the three months ended March 31, 2024 and 2023, respectively. Cash receipts from Printronix's customers totaled $8.5 million and $10.0 million for the three months ended March 31, 2024 and 2023, respectively. Cash receipts from Benchmark's customers totaled $1.3 million for the three months ended March 31, 2024. 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 provided by operations for the three months ended March 31, 2024 was $54.8 million, compared to cash used in operations of $4.3 million in the comparable prior period. The increase in cash provided by operations was primarily due to net inflows from the total changes in assets and liabilities (refer to Working Capital discussion below), decrease in accounts receivable and inventory related sales, increase in prepaid expense and other assets, increase in accounts payable, decrease in royalties and contingent legal fees payable and by the total change in net income (described above) and related noncash adjustments.

Working Capital

Our working capital related to cash flows from operating activities at March 31, 2024 increased to $28.9 million, compared to $87.0 million at December 31, 2023, which was comprised of the changes in assets and liabilities presented above. The decrease is primarily due to change in accounts receivable and royalties and contingent legal fees payable, which is related to the timing of the cash receipts related to Intellectual Property Operations Business, partially offset by the increase in accrued loss contingency related to the AIP Matter (refer to Note 12 for additional information regarding the AIP Matter) and prepaid expenses and other assets primarily due to the prepaid expenses related to our Energy Operations Business.

Cash Flows from Investing Activities

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

Cash flows from investing activities for the three months ended March 31, 2024 increased to $42.0 million, as compared to cash flow of $2.8 million in the comparable prior period, primarily due to net cash inflows from our trading securities portfolio equity securities transactions and sale of Arix shares. Refer to “Other Income/Expense –Equity Securities Investments” above and Note 3 to the consolidated financial statements elsewhere herein for additional information related to Life Sciences Portfolio.

Cash Flows from Financing Activities

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

Cash flows from financing activities for the three months ended March 31, 2024 decreased to $1.8 million, as compared to cash flow of $78.0 million in the comparable prior period, primarily due to completion of the Rights Offering and Concurrent Private Rights Offering in the comparable prior period. Refer to Note 9 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 financial condition or results of operations. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly.

We believe that of the significant accounting policies discussed in Note 2 included in our 2023 Annual Report, 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; and

•accounting for income taxes.

Our critical accounting estimates have not changed materially from those disclosed in the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2023 Annual Report. For further information on the significant accounting policies related to the revenue recognition, estimates of crude oil and natural gas reserves, valuation of long-lived assets, goodwill and other intangible assets and income taxes, refer to Note 2 to the consolidated financial statements and other related significant account policies included in our 2023 Annual Report.

Recent Accounting Pronouncements

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