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 2024 and 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 $2.3 million 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 2024 period unrealized loss and realized gain primarily relates to the sale of Arix shares.

During the third quarter of 2023, we recorded consolidated earnings on equity investment of $3.4 million for one milestone earned during the period. There were no other milestones earned during the nine months ended September 30, 2024. Refer to Note 3 to the consolidated financial statements elsewhere herein for additional information.

Non-recurring legacy legal expense

During the nine months ended September 30, 2024, we recorded an additional accrual of $12.9 million in connection with the AIP Matter in other income (expense) and an accrual of $2.0 million in connection with Slingshot settlement in the consolidated statements of operations. Refer to Note 13 to the consolidated financial statements elsewhere herein for additional information.

Income Taxes

Our income tax expense for the three months ended September 30, 2024 is primarily attributable to changes to the forecasted benefit of losses estimated for 2024. Our income tax benefit for the nine months ended September 30, 2024 is primarily attributable to recognizing a benefit for losses incurred year to date offset by foreign withholding taxes. Our income tax benefit for the three months ended September 30, 2023 is primarily attributable to recognizing an income tax benefit on losses incurred in jurisdictions for which a valuation allowance is not needed. Our income tax expense for the nine months ended September 30, 2023 is primarily attributable to foreign taxes withheld and state income taxes.

Our 2024 effective tax rate in each period differed from the U.S. federal statutory rate primarily due to foreign withholding taxes which we could not recognize as a foreign tax credit and non-deductible items. Our 2023 effective tax rate in each period 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 September 30, 2024 and December 31, 2023 on foreign tax credits and certain state net operating losses. Refer to Note 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 September 30, 2024, are recognized as liabilities or generally are otherwise described in Note 13, "Commitments and Contingencies," to the consolidated financial statements included elsewhere herein. Our facilities lease obligations, guarantees and certain contingent obligations are further described in Note 13 to the accompanying consolidated financial statements. Historically, we have not entered into off-balance sheet financing arrangements. In addition, the obligations of Energy Operations Business related to the Benchmark Revolving Credit Facility are further described in Note 2 to the accompanying consolidated financial statements. The obligations of our Energy Operations Business related to the asset retirement obligations are further described in Note 9 to the accompanying consolidated financial statements.

Additional 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. At September 30, 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 September 30, 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 Revolution Purchase Price and related fees for the Benchmark Transaction was $59.9 million, which was funded from cash on hand. The remainder of the Revolution Purchase Price was funded by a combination of borrowings under the Benchmark Revolving Credit Facility of approximately $82.7 million and a cash contribution of approximately $15.3 million from other investors in Benchmark, including McArron Partners. Refer to Note 2 to the accompanying consolidated financial statements for additional information regarding the Revolving Credit Facility.

On October 18, 2024 the Company acquired Deflecto for a purchase price of $103.7 million, which was funded with a combination of borrowings under the Deflecto Term Loan and from cash on hand. Refer to Note 1 to the accompanying consolidated financial statements for additional information.

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 $374.2 million at September 30, 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 $90.9 million and $6.3 million for the nine months ended September 30, 2024 and 2023, respectively. Cash receipts from Printronix's customers totaled $23.8 million and $28.8 million for the nine months ended September 30, 2024 and 2023, respectively. Cash receipts from Benchmark's customers totaled $37.4 million for the nine months ended September 30, 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 nine months ended September 30, 2024 was $70.4 million, compared to cash used in operations of $18.0 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, increase in inventories, 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 September 30, 2024 decreased to $18.8 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 expenses and other current liabilities 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 outflows from investing activities for the nine months ended September 30, 2024 was $117.1 million, as compared to cash inflow of $8.6 million in the comparable prior period, primarily due to the acquisition of oil and gas properties in the Transaction and net cash inflows from our trading securities portfolio equity securities transactions and sale of Arix shares. Refer to Note 1 to the consolidated financial statements elsewhere herein for additional information regarding the Transaction. 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 nine months ended September 30, 2024 increased to $66.6 million, as compared to cash flow of $66.4 million in the comparable prior period, primarily due to contributions from noncontrolling interest related to the Revolution Transaction and net cash inflows from borrowings on the Benchmark Revolving Credit Facility partially offset by the repurchase of common stock. Refer to Note 1 to the consolidated financial statements elsewhere herein for additional information regarding the Revolution Transaction. Refer to Note 14 to the consolidated financial statements elsewhere herein for additional information regarding the repurchase of common stock.

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.