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 an opportunistic capital platform that purchases businesses based on the differentials between public and private market valuations. We use a wide range of transactional and operational capabilities to realize the intrinsic value in the businesses that we acquire. Our ideal transactions include the acquisition of public or private companies, the acquisition of divisions of other companies, or structured transactions that can result in the recapitalization or restructuring of the ownership of a business to enhance value. We are particularly attracted to complex 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 has provided, and we expect will continue to provide, us with industry expertise, and operating partners and industry experts to evaluate potential acquisition opportunities and enhance the oversight and value creation of such businesses once acquired. Starboard has provided ready access to its extensive network of highly successful industry executives and, as part of our relationship, Starboard assists with sourcing and evaluating appropriate acquisition opportunities.
Our focus is companies with market values in the sub-$2 billion range and
particularly on businesses valued at
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, operated underAcacia Research Group, LLC and its wholly-owned subsidiaries ("ARG"), we are a principal in the licensing and enforcement of patent portfolios, with our operating subsidiaries obtaining the rights in the patent portfolio or purchasing the patent portfolio outright. While we, from time to time, partner with inventors and patent owners, from small entities to large corporations, we assume all responsibility for advancing operational expenses while pursuing a patent licensing and enforcement program, and when applicable, share net licensing revenue with our patent partners as that program matures, on a pre-arranged and negotiated basis. We may also provide upfront capital to patent owners as an advance against future licensing revenue. 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 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. As ofDecember 31, 2022 , we have generated gross licensing revenue of approximately$1.7 billion , and have returned$849.2 million to our patent partners. 25
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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, 2022 . Refer to Note 1 to the consolidated financial statements elsewhere herein for additional information.
For more information related to our Industrial Operations, refer to the section entitled "Industrial Printing Solutions" below.
Recent Business Developments and Trends
Recapitalization
OnOctober 30, 2022 , the Company entered into a Recapitalization Agreement with the Investors, pursuant to which, among other things, the Company and Starboard agreed to enter into a series of transactions to restructure Starboard's existing investments in the Company in order to simplify the Company's capital structure. Under the Recapitalization Agreement, the Company and Starboard agreed to take certain actions in connection with the Recapitalization. For a detailed description of the Recapitalization and the actions taken and contemplated to be taken in connection therewith, see Note 8 to the consolidated financial statements elsewhere herein.
Change of Chief Executive Officer
Since 2021, we have announced various changes to our Board and senior management, including
•EffectiveNovember 1, 2022 ,Clifford Press resigned as the Chief Executive Officer and President of the Company, and as a member of the Board.Mr. Press' resignation was not due to any disagreement with the Company on any matter relating to its operations, policies, practices or otherwise known to any executive officer of the Company. •EffectiveNovember 1, 2022 ,Martin D. McNulty Jr ., the Company's current Chief Operating Officer and Head of M&A, was appointed interim Chief Executive Officer of the Company and will serve as the Principal Executive Officer of the Company. The Board intends to commence a search for a permanent successor. In addition, there have been other changes to the Company's management and the Board, as discussed in "Item 1A. Risk Factors - Risks Related to Our Business, Business Strategy, and Platform - Recent changes in the Company's management team and board of directors, as well as ongoing litigation related to the Company's former Chief Executive Officer, may be disruptive to, or cause uncertainty in, the Company's business, results of operations and the price of the Company's common stock." Changes in leadership and key management positions have inherent risks, and there are no assurances that any of our recent changes will not affect our operations and financial condition.
Acquisitions
InOctober 2021 , we consummated our first operating company in connection with our acquisition ofPrintronix . 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, 2022 . Refer to Note 1 to the consolidated financial statements elsewhere herein for additional information. 26
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InJune 2020 we acquired the Life Sciences Portfolio. In connection with the purchase of the equity securities in the Life Sciences Portfolio, we issued to the Investors$115.0 million principal amount of our senior secured notes, or Notes. As ofDecember 31, 2020 , all of the equity securities in the Life Sciences Portfolio were transferred to the Company. As ofDecember 31, 2022 , we have monetized a majority of the portfolio while retaining an interest in a number of operating businesses, including a controlling interest in one of the companies in the portfolio. Further, some of the businesses in which we continue to hold an interest generate income through the receipt of royalties and milestone payments. Refer to Note 3 to the consolidated financial statements elsewhere herein for more information.
Business Strategy
We intend to grow our company by acquiring additional operating businesses and intellectual property assets. However, we may not complete any acquisitions, and any acquisitions that we complete will be costly and could negatively affect our results of operations, and dilute our stockholders' ownership, or cause us to incur significant expense, and we may not realize the expected benefits of acquisitions.
Patent 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. Refer to Item 1A "Risk Factors- Risks Related to our Intellectual Property Business and Industry" for additional information regarding patent litigation and related risks.
Litigation and Licensing Expense
We expect patent-related legal expenses to continue to fluctuate from period to period based on the factors summarized herein, in connection with future trial dates, international enforcement, strategic patent portfolio prosecution and our current and future patent portfolio investment, prosecution, licensing and enforcement activities. Refer to Item 1A "Risk Factors" for additional information regarding litigation and licensing expense risk.
Investments in Patent Portfolios
With respect to our licensing, enforcement and overall business, neither we nor our operating subsidiaries invent new technologies or products; rather, we depend upon the identification and investment in patents, inventions and companies that own IP through our relationships with inventors, universities, research institutions, technology companies and others. If our operating subsidiaries are unable to maintain those relationships and identify and grow new relationships, then we may not be able to identify new technology-based patent opportunities for sustainable revenue and /or revenue growth. Our current or future relationships may not provide the volume or quality of technologies necessary to sustain our licensing, enforcement and overall business. In some cases, universities and other technology sources compete against us as they seek to develop and commercialize technologies. Universities may receive financing for basic research in exchange for the exclusive right to commercialize resulting inventions. These and other strategies employed by potential partners may reduce the number of technology sources and potential clients to whom we can market our solutions. If we are unable to maintain current relationships and sources of technology or to secure new relationships and sources of technology, such inability may have a material adverse effect on our revenues, operating results, financial condition and ability to maintain our licensing and enforcement business.
Patent Portfolio Intake
One of the significant challenges in the intellectual property industry continues to be quality patent intake due to the challenges and complexity associated with the current patent environment.
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During the year endedDecember 31, 2022 , we did not acquire any new patent portfolios. During 2021, we acquired one new patent portfolio consisting of Wi-Fi 6 standard essential patents. In 2020, we acquired five new patent portfolios consisting of (i) flash memory technology, (ii) voice activation and control technology, (iii) wireless networks, (iv) internet search, advertising and cloud computing technology and (v) GPS navigation. The patents and patent rights acquired in 2021 and 2020 have estimated economic useful lives of approximately five years.
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 Recapitalization Agreement In order to establish a strategic and ongoing relationship between the Company and Starboard, onNovember 18, 2019 , the Company and Starboard entered into a Securities Purchase Agreement (the "Securities Purchase Agreement"), which provided the terms of Starboard's initial capital commitment in the Company (the "2019 Transaction"). As a result of the 2019 Transaction, which was approved by the Company's stockholders for purposes of NASDAQ Rules 5635(b) and 5635(d) at a stockholder meeting held onFebruary 14, 2020 , Starboard acquired the following securities and ownership positions in the Company: (i) 350,000 shares of Series A Preferred Stock, (ii) Series A Warrants to purchase up to 5,000,000 shares of common stock (the "Series A Warrants") and (iii) Series B Warrants to purchase up to 100,000,000 shares of common stock. The Securities Purchase Agreement also established the terms of certain senior secured notes issued by the Company. OnNovember 12, 2021 , the Board formed a Special Committee comprised of directors not affiliated or associated with Starboard in order to explore the possibility of simplifying the Company's capital structure. Management of the Company believes that the Company's capital structure, with multiple different series of securities, makes it difficult for investors to understand and value the Company and is an impediment to new public investment. Further to this purpose and following ongoing negotiations with Starboard, onOctober 30, 2022 the Company entered into a Recapitalization Agreement with Starboard, pursuant to which, among other things, the Company and Starboard agreed to enter into a series of transactions to restructure Starboard's existing investments in the Company in order to simplify the Company's capital structure.
Under the Recapitalization Agreement, the Company and Starboard agreed, among other things, to take all of the following actions in connection with restructuring Starboard's existing investments in the Company:
•Series A Warrants. Within five (5) business days following the date of the Recapitalization Agreement, Starboard exercised all of the Series A Warrants for cash, and the Company issued to Starboard 5,000,000 shares of common stock in accordance with the terms of the Series A Warrants and paid to Starboard an aggregate amount of$9,000,000 representing a negotiated settlement of the foregone time value of the Series A Warrants (which amount was paid through a reduction in the exercise price of the Series A Warrants). •Preferred Stock. Subject to the receipt of stockholder approval at the Company's next annual meeting of stockholders, (i) the Company will cause the Amended and Restated Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, dated as ofJanuary 7, 2020 (the "Certificate of Designations") to be amended and 28 -------------------------------------------------------------------------------- Table of Contents restated in the form attached to the Recapitalization Agreement in order to remove the "4.89% blocker" provision and (ii) on or prior toJuly 14, 2023 , Starboard will convert an aggregate amount of 350,000 shares of Series A Preferred Stock into common stock in accordance with the terms of the Certificate of Designations. •Series B Warrants. On or prior toJuly 14, 2023 , Starboard will irrevocably exercise 31,506,849 of the Series B Warrants (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction relating to the common stock occurring after the date of the Recapitalization Agreement), through a "Note Cancellation" (as defined in the Series B Warrants) or a combination of a "Note Cancellation" and a "Limited Cash Exercise" (as defined in the Series B Warrants) in accordance with the terms of the Series B Warrants, as determined by Starboard (the "Series B Warrants Exercise"). The remaining Series B Warrants will be cancelled immediately following the completion of the Rights Offering. •Rights Offering. The Company agreed to launch the Rights Offering described in further detail in the section titled "Rights Offering and Concurrent Private Rights Offering" below. In connection with the Rights Offering, the Company agreed to provide Starboard with rights to purchase 28,647,259 shares of common stock and Starboard committed to purchase a minimum of 15,000,000 shares of common stock. •Recapitalization Payment. At the closing of the Series B Warrants Exercise, the Company will pay to Starboard an aggregate amount of$66,000,000 (the "Recapitalization Payment") representing a negotiated settlement of the foregone time value of the Series B Warrants and the Series A Preferred Stock (which amount will be paid through a reduction in the exercise price of the Series B Warrants). If stockholder approval for the amendment to the Certificate of Designations to remove the "4.89% blocker provision" is not obtained, the Recapitalization Payment will be reduced by$12,700,000 . •Governance. Under the Recapitalization Agreement, the parties agreed that for a period from the date of the Recapitalization Agreement untilMay 12, 2026 (the "Applicable Period"), the Board of the Company will include at least two (2) directors that are independent of, and not affiliates (as defined in Rule 144 of the Securities Exchange Act of 1934, as amended) of, Starboard, with current Board membersMaureen O'Connell andIsaac T. Kohlberg satisfying this initial condition under the Recapitalization Agreement. The parties also agreed thatKatharine Wolanyk would continue to serve as a director of the Company until at leastMay 12, 2024 (or such earlier date ifMs. Wolanyk is unwilling or unable to serve as a director for any reason or resigns as a director). Additionally, the Company appointedGavin Molinelli as a member and as Chair of the Board. The Company and Starboard also agreed that, following the closing of the Series B Warrants Exercise until the end of the Applicable Period, the number of directors serving on the Board will not exceed 10 members. Effective as of the later of the Closing and the date on which none of the Notes (as defined in Note 8 to the accompanying consolidated financial statements) remain outstanding, the existing Governance Agreement will be automatically terminated.
Refer to Note 8 to the consolidated financial statements elsewhere herein for more information.
Rights Offering and Concurrent Private Rights Offering
OnFebruary 14, 2023 , the Company commenced the Rights Offering. Under the terms of the Rights Offering, the Company distributed non-transferable subscription rights to record holders ("Eligible Securityholders") of the Company's common stock held as of5 p.m. Eastern time onFebruary 13, 2023 , the record date for the Rights Offering. The subscription period for the Rights Offering terminated at5 p.m. Eastern time onMarch 1, 2023 (the "Expiration Time"). Pursuant to the Rights Offering, Eligible Securityholders received one non-transferable subscription right (a "Subscription Right") for every four shares of common stock owned by such Eligible Securityholders. Each Subscription Right entitled an Eligible Securityholder to purchase, at such Eligible Securityholder's election, one share of common stock at a price of$5.25 per share (the "Subscription Price"). Starboard received private subscription rights to purchase common stock at the Subscription Price pursuant to a concurrent private rights offering (the "Concurrent Private Rights Offering") in connection with their ownership of common stock and, on an as-converted basis, the Company's Series B Warrants and shares of the Series A Preferred Stock. The private subscription rights provided to Starboard pursuant to the Concurrent Private Rights Offering were on substantially the same terms as the Subscription Rights, and were distributed substantially concurrently with the distribution of the Subscription Rights and expired at the Expiration Time. The Company received aggregate gross proceeds of approximately$361,000 from the Rights Offering and aggregate gross proceeds of approximately$78.8 million from the Concurrent Private Rights Offering and issued an aggregate of 15,068,753 shares of common stock. 29
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Industrial Operations Acquisition
Refer to "Recent Business Developments and Trends - Acquisitions" above for
information related to our
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.
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.
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Results of Operations
The results reflected in this section with respect toPrintronix include results for the full year endedDecember 31, 2022 compared to an approximate three month period endedDecember 31, 2021 following our acquisition ofPrintronix .
Summary of Results of Operations
Years Ended
December 31,
2022 2021 $ Change % Change
(In thousands, except percentage change values)
Total revenues $ 59,223 $ 88,047 $ (28,824) (33 %)
Total costs and expenses 99,315 73,502 25,813 35 %
Operating (loss) income (40,092) 14,545 (54,637) (376 %)
Total other (expense) income (87,058) 160,107 (247,165) (154 %)
(Loss) income before income taxes (127,150) 174,652 (301,802) (173 %) Income tax benefit (expense) 16,211 (24,287) 40,498 (167 %) Net (loss) income attributable to Acacia Research Corporation (125,065) 149,197 (274,262) (184 %)
Results of Operations - year ended
Total revenues decreased$28.8 million to$59.2 million for the year endedDecember 31, 2022 , as compared to$88.0 million for the year endedDecember 31, 2021 , due to a decrease in our Intellectual Property Operations revenues. ARG executed 17 new license agreements during 2022, a decrease of six versus the comparable prior period, which contributed to Intellectual Property Operations revenues decreasing by$56.5 million . Refer to "Investments in Patent Portfolios" above for additional information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues. The decrease was offset by the additional net revenues contributed fromPrintronix of$27.7 million . Refer to "Revenues" below for further detailed discussion.
Loss before income taxes was
•Inventor royalties increased$70,000 , from$1.1 million to$1.2 million in 2022, primarily due to license agreement activity and related revenues generated with inventor royalty obligations. Refer to "Cost of Revenues - Intellectual Property Operations" below for further discussion.
•Contingent legal fees decreased
•Litigation and licensing expenses decreased$1.5 million , from$5.5 million to$4.0 million in 2022, primarily due to a net decrease in litigation support and third-party technical consulting expenses associated with ongoing litigation. Refer to "Cost of Revenues - Intellectual Property Operations" below for further discussion. •Amortization of patents expense from our intellectual property operations increased$552,000 , from$9.9 million to$10.4 million in 2022, due to an increase in scheduled amortization resulting from the new portfolio acquired in 2021. Refer to "Cost of Revenues - Intellectual Property Operations" below. •Printronix cost of sales, engineering and development expenses, and sales and marketing expenses for 2022 added a total of$19.5 million to our consolidated operating expenses. Refer to "Cost of Revenues - Industrial Operations" and "Operating Expenses" below for further discussion.
•We recognized other patent portfolio expense of
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•General and administrative expenses increased$17.0 million , from$35.7 million to$52.7 million in 2022, primarily due to higher parent company and Intellectual Property Operations costs including, parent company consulting and legal fees related to the Recapitalization Agreement and the Life Sciences Portfolio, severance expense, compensation expense for share-based awards, personnel costs and board fees, accounting fees, and$7.2 million from our Industrial Operations general and administrative costs and amortization expense. Refer to "General and Administrative Expenses" below for further detail and discussion. •Compensation expense for share-based awards, included in general and administrative expenses above, increased$1.8 million , from$2.1 million to$3.8 million in 2022, primarily due to restricted stock and option grants issued to employees and the Board in 2022 and 2021, which includes a partial offset by forfeitures for terminated employees. •Unrealized loss from the change in fair value of our equity securities was$263.7 million in 2022, as compared to an unrealized gain of$87.5 million in the prior year. The unrealized loss and gain were derived from our Life Sciences Portfolio and trading securities portfolio. The current period unrealized loss primarily relates to the reversal of prior period unrealized gains for Life Sciences Portfolio securities that were sold for a realized gain in 2022. Refer to "Equity Securities Investments" below for further discussion. •Realized gain from the sale of our equity securities increased$9.2 million , from$116.1 million to$125.3 million in 2022. The realized gains were derived from our Life Sciences Portfolio and trading securities portfolio. The current period realized gain primarily relates to sales activity from two Life Sciences Portfolio securities and one trading security. Refer to "Equity Securities Investments" below for further discussion.
•Earnings on equity investment in joint venture was
•We recognized an unrealized loss of$2.8 million on the fair value investment and a realized gain on sale of investment of$3.6 million in 2021 related to our former investment in Veritone. Refer to "Equity Securities Investments" below for further discussion. •Unrealized gain from the Series A and Series B warrants and the embedded derivative fair value measurements was$13.1 million in 2022, as compared to an unrealized loss of$40.4 million in the prior year. We recognized an unrealized gain of$15.1 million from the fair value measurements of the Series A and Series B warrants and the embedded derivative in 2022, partially offset by a loss of$2.0 million upon the exercise of the Series A warrants inNovember 2022 . Refer to Note 8 to the consolidated financial statements elsewhere herein for additional information regarding theStarboard Securities . •Loss on foreign currency exchange increased$3.2 million , from$89,000 to$3.3 million in 2022. The increase was primarily derived from our foreign cash accounts exposed to fluctuations in foreign currency exchange rates between theU.S. dollar and the British Pound. •Interest expense on Senior Secured Notes decreased$1.5 million , from$7.9 million to$6.4 million in 2022, due to decreased interest expense related to recent Note activity. Refer to Note 8 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Senior Secured Notes. •Interest income and other, net was$5.4 million in 2022, as compared to$501,000 in the comparable prior period, mainly due to an increase in dividend income from our cash equivalents and equity security investments. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our cash and cash equivalents and investments in equity securities. 32
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Revenues
Intellectual Property Operations
ARG's revenue activity for the periods presented included the following:
Years Ended
December 31,
2022 2021 $ Change % Change
(In thousands, except percentage change values and count totals)
Paid-up license revenue agreements $ 17,788 $ 73,585 $ (55,797) (76 %)
Recurring license revenue agreements 1,720 2,458 (738) (30 %) Total revenues$ 19,508 $ 76,043 $ (56,535) (74 %) New license agreements executed 17 23 (6) (26
%)
Licensing and enforcement programs
generating revenues 8 9 (1) (11
%)
Licensing and enforcement programs
with initial revenues - 4 (4) (100 %) New patent portfolios - 1 (1) (100 %) 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 decreased$55.8 million due to a decrease in the number of agreements executed and a decrease in the average revenue per agreement. Recurring revenue, that provides for quarterly sales-based license fees, decreased$738,000 from various on-going license arrangements.
Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our revenue arrangements and related concentrations for the periods presented herein.
Refer to "Investments in Patent Portfolios" above for information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues.
Industrial Operations
Year Ended October 7, 2021
December 31, to December 31,
2022 2021 $ Change % Change
(In thousands, except percentage change value)
Printers and parts $ 16,118 $ 4,961 $ 11,157 225 %
Consumable products 19,314 5,973 13,341 223 %
Services 4,283 1,070 3,213 300 %
Total $ 39,715 $ 12,004 $ 27,711 231 %
Refer to Note 2 to the consolidated financial statements elsewhere herein for
additional information regarding Printronix's revenue arrangements and related
concentrations. Refer to "Industrial Printing Solutions" above for additional
information related to Printronix's operating activities.
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Cost of Revenues
Intellectual Property Operations
Years Ended
December 31,
2022 2021 $ Change % Change
(In thousands, except percentage change values)
Inventor royalties $ 1,212 $ 1,142 $ 70 6 %
Contingent legal fees 2,444 12,074 (9,630) (80 %)
Litigation and licensing expenses 3,970 5,462 (1,492) (27 %)
Amortization of patents 10,403 9,851 552 6 %
Other patent portfolio expense - 162 (162) (100 %)
Total $ 18,029 $ 28,691 $ (10,662) (37 %)
Refer to detailed change explanations above 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. 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 for the years endedDecember 31, 2022 and 2021 was$19.4 million and$7.4 million , respectively.Printronix's cost of sales figures include the full year endedDecember 31, 2022 compared to an approximate three month period endedDecember 31, 2021 following our acquisition ofPrintronix . 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, 2022 2021 $ Change % Change (In thousands, except percentage change values) Engineering and development expenses - industrial operations $ 626$ 200 $ 426 213 % Sales and marketing expenses - industrial operations 8,621 1,538 7,083
461 %
General and administrative costs - intellectual property operations
5,428 6,177 (749) (12 %)
General and administrative costs - industrial operations 9,986 2,797 7,189 257 %
Parent general and administrative expenses 37,266 26,692 10,574 40 %
Total general and administrative expenses 52,680 35,666 17,014 48 %
Total $ 61,927 $ 37,404 $ 24,523 66 %
The operating expenses table above includes the Company's general and
administrative expenses by operation and Printronix's engineering and
development expenses and sales and marketing expenses. The periods presented
above include Printronix's operating expenses for the full year ended December
31, 2022 compared to an approximate three month period
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ended
General and Administrative Expenses
A summary of the main drivers of the change in general and administrative
expenses is as follows:
Years Ended
December 31,
2022 vs. 2021
(In thousands)
Personnel costs and board fees $ 1,391
Variable performance-based compensation costs
(848)
Other general and administrative costs
4,836
General and administrative costs - industrial operations
5,856
Amortization of industrial operations intangible assets
1,333
Compensation expense for share-based awards
1,767
Non-recurring employee severance costs
2,679
Total change in general and administrative expenses $
17,014
General and administrative expenses include employee compensation and related personnel costs, including variable performance based compensation and compensation expense for share-based awards, office and facilities costs, legal and accounting professional fees, public relations, stock administration, business development, fixed asset depreciation, amortization of Industrial Operations intangible assets, state taxes based on gross receipts and other corporate costs. The table above includes our Industrial Operations general and administrative expenses for the full year endedDecember 31, 2022 compared to an approximate three month period endedDecember 31, 2021 following our acquisition ofPrintronix . The increases in personnel cost and board fees for the periods presented were primarily due to an increase in headcount and related costs. The decrease in variable performance-based compensation costs was primarily due to fluctuations in performance-based compensation accruals. The increases in other general and administrative costs, which relates to our parent company and Intellectual Property Operations business, were primarily due to parent company consulting and legal fees related to the Recapitalization Agreement and the Life Sciences Portfolio and higher accounting fees. Compensation expense for share-based awards increased primarily due to restricted stock and option grants issued to employees and the Board in 2022 and 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 contributed to the increased expenses in 2022. Refer to additional general and administrative change explanations above. Other Income/Expense Equity Securities Investments Years Ended December 31, 2022 2021 $ Change % Change (In thousands, except percentage change values) Change in fair value of equity securities$ (263,695) $ 87,527 $ (351,222) (401 %) Gain on sale of equity securities 125,318 116,129 9,189 8 % Earnings on equity investment in joint venture 42,531 3,530 39,001 1,105 % Net realized and unrealized (loss) gain (95,846) 207,186 (303,032)
(146 %)
Change in fair value of investment - (2,752) 2,752 (100 %) Gain on sale of investment - 3,591 (3,591) (100 %) Total net realized and unrealized (loss) gain$ (95,846) $ 208,025 $ (303,871) (146 %) 35
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Our equity securities investments, including the Life Sciences Portfolio and trading securities portfolio, are recorded at fair value at each balance sheet date. 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 prior period, while realized gains from the sale of our equity securities increased, as compared to the prior period. These changes were derived from our Life Sciences Portfolio and trading securities portfolio. The current period unrealized loss primarily relates to the reversal of prior period unrealized gains for Life Sciences Portfolio securities that were sold for a realized gain in 2022. The current period realized gain primarily relates to sales activity from two Life Sciences Portfolio securities and one trading security. During 2021, we began to recognize earnings on our equity investment in joint venture, which is part of the Life Sciences Portfolio. InApril 2022 , such investment received a certain drug approval from theUnited States Food and Drug Administration . On a consolidated basis, we were due a milestone payment in the amount of$40.0 million , with interest accrued at 8.5% per year. Our portion of that milestone payment in the amount of$27.2 million , which includes accrued interest, was received inNovember 2022 . InJune 2022 , in connection with the submission to theEuropean Medicines Agency , on a consolidated basis, we were due an additional milestone payment in the amount of$1.8 million . Our portion of that milestone payment was received inJuly 2022 . During 2022, we recorded consolidated earnings on equity investment of$42.5 million , including the two milestones and accrued interest. Refer to Note 3 to the consolidated financial statements elsewhere herein for additional information. Our prior year 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 2 to the consolidated financial statements elsewhere herein for additional information regarding our former investment in Veritone. Income Taxes Years Ended December 31, 2022 2021 $ Change % Change (In thousands, except percentage change values) Income tax benefit (expense)$ 16,211 $ (24,287) $ 40,498 (167 %) Effective tax rate (13) % 14 % n/a (27) % Our income tax benefit for the year endedDecember 31, 2022 primarily reflects the decrease in deferred tax liabilities attributable to the unrealized losses recorded, expiration of foreign tax credits and changes in the valuation allowance. Our income tax expense for the year endedDecember 31, 2021 is 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. Our 2022 effective tax rates were lower than theU.S. federal statutory rate primarily due to expiration of foreign tax credits and changes in valuation allowance. Our 2021 effective tax rates were lower than theU.S. federal statutory rate primarily due to the change in valuation allowance, as well as non-deductible items. The effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions used 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 ofDecember 31, 2022 and 2021. Refer to Notes 2 and 15 to the consolidated financial statements elsewhere herein for additional income tax information. Inflation Historically, inflation has not had a significant impact on us or any of our subsidiaries. While insignificant to our consolidated enterprise, during the year endedDecember 31, 2022 , ourPrintronix subsidiary experienced some inflation from higher freight costs and in the cost of raw materials than in previous years. WhilePrintronix inventory costs have 36
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been impacted by these inflationary pressures, up to this point
Liquidity and Capital Resources
General
Our foreseeable material cash requirements as ofDecember 31, 2022 , are recognized as liabilities or generally are otherwise described in Note 11, "Commitments and Contingencies," to the consolidated financial statements included elsewhere herein. Our most significant liabilities as reflected on our balance sheet as ofDecember 31, 2022 include the Senior Secured Notes and, because of certain provisions in the related agreements that provide for net cash settlement upon a change in control, the Series B Warrants. For additional information, see Note 8, "Starboard Investment " to the consolidated financial statements included elsewhere herein. The Senior Secured Notes mature onJuly 14, 2023 . In accordance with the terms of the Recapitalization Agreement, on or prior toJuly 14, 2023 , a portion of the Series B Warrants are expected to be exercised for common stock through the Series B Warrants Exercise. In addition to the foregoing, we will be required to make the Recapitalization Payment at the closing of the Series B Warrants Exercise. 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 11 to the consolidated financial statements. Historically, we have not entered into off-balance sheet financing arrangements. AtDecember 31, 2022 , we had unrecognized tax benefits, as further described in Note 15 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. 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 in Note 8 to the consolidated financial statements elsewhere herein). We expect to satisfy our obligations under the existing Senior Secured Notes that mature onJuly 14, 2023 and make the Recapitalization Payment with cash on hand.
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, anticipated cash flows from operations and the transactions taken and contemplated to be taken in connection with the Recapitalization, 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 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 and long-term
restricted cash totaled
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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,
2022 2021
(In thousands)
Net cash (used in) provided by:
Operating activities $ (37,336) $ 13,326
Investing activities 184,464 35,751
Financing activities (166,137) 59,738
Effect of exchange rates on cash and cash equivalents (2,566) -
(Decrease) increase in cash and cash equivalents and restricted cash
$ (21,575) $ 108,815
Cash Flows from Operating Activities
Cash receipts from ARG's licensees totaled$16.6 million and$75.8 million for the years endedDecember 31, 2022 and 2021, respectively. Cash receipts fromPrintronix's customers totaled$40.5 million and$11.7 million for the year endedDecember 31, 2022 and the period fromOctober 7, 2021 throughDecember 31, 2021 , 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 and customers. Our reported cash used in operations for the year endedDecember 31, 2022 was$37.3 million , compared to$13.3 million cash provided by operations in the prior year. Our 2022 cash used in operations was due to net outflows from the total changes in assets and liabilities (refer to Working Capital discussion below), most notably from a patent cost related payment of$6.0 million (refer to Note 6 to the consolidated financial statements elsewhere herein for additional information), inventory related purchases and royalties and contingent legal fees related payments, and by the total change in net loss (described above) and related noncash adjustments.
Working Capital
Our working capital related to cash flows from operating activities at
Accounts receivable decreased to$8.2 million atDecember 31, 2022 , compared to$9.5 million atDecember 31, 2021 . Refer to the related cash receipts discussion above.Printronix's inventories increased to$14.2 million atDecember 31, 2022 , compared to$8.9 million atDecember 31, 2021 . Prepaid expenses and other current assets increased to$19.4 million atDecember 31, 2022 , compared to$4.8 million atDecember 31, 2021 , primarily due to certain patent related costs incurred of$15.0 million (refer to Note 6 to the consolidated financial statements elsewhere herein for additional information). Accounts payable, accrued expenses and other current liabilities and accrued compensation increased to$24.8 million atDecember 31, 2022 , compared to$15.4 million atDecember 31, 2021 , primarily due to accrued patent costs of$9.0 million (refer to Note 6 to the consolidated financial statements elsewhere herein for additional information), severance accruals in the fourth quarter of 2022 and higher accounting fees. Royalties and contingent legal fees payable decreased to$699,000 atDecember 31, 2022 , compared to$2.5 million atDecember 31, 2021 due to the reversal of a previously recorded accrual.Printronix's current deferred revenue increased to$1.2 million atDecember 31, 2022 , compared to$1.1 million atDecember 31, 2021 . 38
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Cash Flows from Investing Activities
Cash flows from investing activities were comprised of the following for the
periods presented:
Years Ended December 31,
2022 2021
(In thousands)
Acquisition, net of cash acquired $ - $ (33,250)
Patent acquisition (5,000) (21,000)
Sale of investment at fair value - 3,591
Purchases of equity securities (112,142) (66,624)
Sales of equity securities 273,934 154,784
Cash distributed for notes receivable - (4,021)
Distributions received from equity investment in joint venture 28,404
2,362
Purchases of property and equipment (732) (91)
Net cash provided by investing activities $ 184,464 $ 35,751
Cash flows from investing activities for the year ended December 31, 2022
increased to $184.5 million , as compared to cash flow of $35.8 million in the
prior year, primarily due to net cash inflows from our Life Sciences Portfolio
and trading securities portfolio equity securities transactions in 2022. Refer
to "Other Income/Expense - Equity Securities Investments" above for additional
information.
Cash Flows from Financing Activities
Cash flows from financing activities included the following for the periods
presented:
Years Ended December 31,
2022 2021
(In thousands)
Repurchase of common stock $ (50,988) $ (4,012)
Issuance of Senior Secured Notes, net of lender fee - 115,000
Paydown of Senior Secured Notes (120,000) (50,000)
Dividend on Series A Redeemable Convertible Preferred Stock (2,799)
(1,452)
Taxes paid related to net share settlement of share-based awards
(1,600) -
Proceeds from exercise of Series A warrants 9,250 -
Proceeds from exercise of stock options - 202
Net cash (used in) provided by financing activities $ (166,137) $ 59,738
Cash outflows from financing activities for the year ended December 31, 2022
increased to $166.1 million , as compared to cash flow of $59.7 million in the
prior year, primarily due to activity related to our Senior Secured Notes and
our common stock repurchases (refer to Note 12). Refer to Note 8 to the
consolidated financial statements elsewhere herein for additional information
related to the Senior Secured Notes.
On
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 39
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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, goodwill and other intangible assets;
•valuation of Series B Warrants;
•valuation of embedded derivatives; and
•accounting for income taxes.
We discuss below the critical accounting assumptions, judgements and estimates associated with these policies. Historically, our critical accounting estimates relative to our significant accounting policies have not differed materially from actual results. For further information on the related significant accounting policies, refer to Note 2 to the consolidated financial statements.
Revenue Recognition
As described below, significant management judgment must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue recognized or deferred for any period, if management made different judgments.
Printronix recognizes revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration which it expects to receive for providing those goods or services. To determine the transaction price,Printronix estimates the amount of consideration to which it expects to be entitled in exchange for transferring promised goods or services to a customer. Elements of variable consideration are estimated at the time of sale which primarily include product rights of return, rebates, price protection and other incentives that occur under established sales programs. These estimates are developed using the expected value or the most likely amount method and are reviewed and updated, as necessary, at each reporting period. Revenues, inclusive of variable consideration, are recognized to the extent it is probable that a significant reversal recognized will not occur in future periods. The provision for returns and sales allowances is determined by an analysis of the historical rate of returns and sales allowances over recent quarters, and adjusted to reflect management's future expectations. For additional information regardingPrintronix's net revenues, refer to Note 2 to the consolidated financial statements.
Valuation of Long-lived Assets,
The Company reviews long-lived assets, patents and other intangible assets for potential impairment annually (quarterly for patents) and when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss is recorded in an amount equal to the excess of the asset's carrying value over its fair value. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. For additional information regarding ARG's patent portfolio valuation estimates, refer to Note 2 to the consolidated financial statements. The Company did not record any long-lived asset, patent or other intangible asset impairment charges for the years endedDecember 31, 2022 and 2021.Goodwill asset impairment reviews include determining the estimated fair values of our reporting units. We evaluateGoodwill for impairment annually in the fourth quarter and on an interim basis if the facts and circumstances lead us to believe that more-likely-than-not there has been an impairment. The key assumptions and inputs used in such determinations may include forecasting revenues and expenses, cash flows and capital expenditures, as well as an appropriate discount rate and other inputs. Significant judgment by management is required in estimating the fair value of a reporting unit and in performing impairment reviews. Due to the inherent subjectivity and uncertainty in forecasting future 40
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cash flows and earnings over long periods of time, actual results may vary materially from the forecasts. If the carrying value of a reporting unit exceeds the estimated fair value of the reporting unit, then the excess, limited to the carrying amount of goodwill, will be charged to operations as an impairment loss. The Company's goodwill balance relates toPrintronix , which was acquired onOctober 7, 2021 , refer to Note 1 to the consolidated financial statements for additional information. The Company did not record any goodwill impairment charges for the years endedDecember 31, 2022 and 2021.
Valuation of Series B Warrants
The fair value of the Series B Warrants are estimated using a Black-Scholes option-pricing model. Refer to Note 9 to the consolidated financial statements for detailed information related to these fair value measurements. Of the assumptions used in the Black-Scholes option-pricing model, volatility changes would have the most significant impact on the fair value. As ofDecember 31, 2022 , a hypothetical 10% increase in the volatility would have resulted in an increased liability balance of approximately$133,000 in our Series B Warrants. Refer to Note 8 to the consolidated financial statements for more information.
Valuation of Embedded Derivatives
Embedded derivatives that are required to be bifurcated from their host contract are valued separately from the host instrument. An as-converted value is currently used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock. Refer to Note 9 to the consolidated financial statements for detailed information related to this fair value measurement. Of the assumptions used in the as-converted model, discount rate changes would have the most significant impact on the fair value. As ofDecember 31, 2022 , a hypothetical 1% increase in the discount rate would have resulted in an increased liability balance of approximately$959,000 . Refer to Note 8 to the consolidated financial statements for more information.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the estimating of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statements of operations. 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, 2022 and 2021. These assets primarily consist of foreign tax credits and net operating loss carryforwards. Refer to Note 15 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.
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Recent Accounting Pronouncements
Refer to Note 2 to consolidated financial statements included elsewhere herein.
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