The following discussion should be read in conjunction with our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q ("Quarterly 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 to our Annual Report on Form 10-K for the year endedDecember 31, 2021 ,"Risk Factors," and elsewhere herein. For additional information, refer to the section above entitled "Cautionary Note Regarding Forward-Looking Statements."
General
We are a permanent capital platform that purchases businesses based on the differentials between public and private market valuations. We use a wide range of transactional and operational capabilities to realize the intrinsic value in the businesses that we acquire. Our ideal transactions include the acquisition of public or private companies, the acquisition of divisions of other companies, or structured transactions that can result in the recapitalization or restructuring of the ownership of a business to enhance value. We are particularly attracted to complex or multi-factor situations, where value is not fully recognized in the public markets, where values of certain operations are masked by a diversified business mix, or where private ownership has not invested capital necessary to drive long-term value. We aim to operate a transactional platform through which we can initiate a strategic block position in public companies as a path to complete whole company acquisitions or strategic transactions that unlock value. We believe this business model is differentiated from private equity funds, which do not typically own public securities prior to acquiring companies, hedge funds, which do not typically acquire entire businesses, and other acquisition vehicles such Special Purpose Acquisition Companies, which are narrowly focused on completing one singular, defining acquisition. We have a strategic relationship withStarboard Value LP ("Starboard") that provides us access to capital, industry expertise, and a deep bench of operating partners and industry experts to evaluate potential acquisition opportunities and enhance the oversight and value creation of such businesses once acquired. Starboard provides ready access to its extensive network of highly successful industry executives and, as part of our relationship, Starboard assists with sourcing and evaluating appropriate acquisition opportunities. Our focus to date has been on companies with market values in the sub-$2 billion range and particularly on businesses valued at$1 billion or less. We are, however, opportunistic, and may pursue acquisitions that are larger under the right circumstance.
Intellectual Property Operations
We invest in IP and related absolute return assets and engage in the licensing and enforcement of patented technologies. Through ourPatent Licensing , Enforcement and Technologies Business we are a principal in the licensing and enforcement of patent portfolios, with our operating subsidiaries obtaining the rights in the patent portfolio or purchasing the patent portfolio outright. We assume all responsibility for advancing operational expenses while pursuing a patent licensing and enforcement program, and when applicable, share net licensing revenue with our patent partners as that program matures, on a pre-arranged and negotiated basis. We may also provide upfront capital to patent owners as an advance against future licensing revenue. Currently, on a consolidated basis, our operating subsidiaries own or control the rights to multiple patent portfolios, which includeU.S. patents and certain foreign counterparts, covering technologies used in a variety of industries. We generate revenues and related cash flows from the granting of IP rights for the use of patented technologies that our operating subsidiaries control or own. We have established a proven track record of licensing and enforcement success with over 1,600 license agreements executed to date, across nearly 200 patent portfolio licensing and enforcement programs. To date, we have generated gross licensing revenue of approximately$1.7 billion , and have returned$837.2 million to our patent partners.
For more information related to our Intellectual Property Operations, refer to additional detailed patent business discussion below.
42
--------------------------------------------------------------------------------
Table of Contents
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 throughMarch 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.
COVID-19 Pandemic
The full impact of the COVID-19 pandemic continues to evolve as of the date of this report. While the Company does not expect the current situation to present direct risks to its business, and it has not had a material impact to date, the COVID-19 pandemic could adversely impact the Company's operations, as well as the operations of its licensees and other business partners. Our business is fully able to operate in a socially distanced and/or remote capacity and in accordance with applicable laws, policies and best practices. Our workforce is provided ample paid sick leave, and we have in place robust disaster recovery and business continuity policies that have been revised to account for a long-term remote work contingency such as this. However, the ongoing pandemic may present risks that we do not currently consider material or risks that may evolve quickly that could have a materially adverse effect on our business, results of operations and financial condition. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law onMarch 27, 2020 . The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer's social security payments, net operating loss utilization and carryback periods and modifications to the net interest deduction limitations. The CARES Act has not had a material impact on the Company's income tax provision. OnDecember 27, 2020 , the President ofthe United States signed the Consolidated Appropriations Act, 2021 ("Consolidated Appropriations Act") into law. The Consolidated Appropriations Act is intended to enhance and expand certain provisions of the CARES Act, allows for the deductions of expenses related to the Payroll Protection Program funds received by companies, and provides an update to meals and entertainment expensing for 2021. The Consolidated Appropriations Act did not have a material impact to the Company's income tax provision for 2020. The Company does not expect a material impact from the Consolidated Appropriations Act on its financial position, results of operations and cash flows going forward.
On
Executive Overview
During 2021 and 2020, we focused on diversifying our business and leveraging our resources and skill sets to complete strategic acquisitions of businesses, divisions, and/or assets with a focus on mature technology, healthcare, industrial and certain financial segments intended to unlock and realize value. Refer to "General" above for additional information. This led to our acquisition of the Life Sciences Portfolio inJune 2020 . In connection with the purchase of the equity securities in the Life Sciences Portfolio, we issued to certain funds and accounts, or the Buyers, affiliated with, or managed by, Starboard,$115.0 million principal amount of our senior secured notes, or Notes. As ofDecember 31, 2020 , all of the 43
--------------------------------------------------------------------------------
Table of Contents
equity securities in the Life Sciences Portfolio were transferred to the Company. As ofMarch 31, 2022 , we have monetized a portion of the portfolio while retaining an interest in a number of operating businesses, including a controlling interest in one of the companies in the portfolio. Further, some of the businesses in which we continue to hold an interest generate revenues through the receipt of royalties.
In addition, in
Refer to "Recent Business Matters -Starboard Securities and Senior Secured Notes" and "Recent Business Matters -Equity Securities Portfolio Investment " below, and "General - Industrial Operations" above, and Notes 1, 3 and 8 to the consolidated financial statements elsewhere herein for more information related to thePrintronix acquisition, Life Sciences Portfolio and Notes, respectively. For the three months endedMarch 31, 2022 and 2021, we reported consolidated revenues of$13.5 million and$5.8 million . Cash and cash equivalents and equity securities at fair value totaled$535.9 million as ofMarch 31, 2022 , as compared to$670.7 million as ofDecember 31, 2021 . Our operating activities during the periods presented were focused on the continued operation of our patent licensing and enforcement business, including the continued pursuit of our ongoing patent licensing and enforcement programs.
Patent Litigation Trial Dates and Related Trials
As of the date of this report, our operating subsidiaries have four pending patent infringement cases with scheduled trial dates in the next twelve months. Patent infringement trials are components of our overall patent licensing process and are one of many factors that contribute to possible future revenue generating opportunities for us. Scheduled trial dates, as promulgated by the respective court, merely provide an indication of when, in future periods, the trials may occur according to the court's scheduling calendar at a specific point in time. A court may change previously scheduled trial dates. In fact, courts often reschedule trial dates for various reasons that are unrelated to the underlying patent assets and typically for reasons that are beyond our control. While scheduled trial dates provide an indication of the timing of possible future revenue generating opportunities for us, the trials themselves and the immediately preceding periods represent the possible future revenue generating opportunities. These future opportunities can result in varying outcomes. In fact, it is difficult to predict the outcome of patent enforcement litigation at the trial level and outcomes can be unfavorable. It can be difficult to understand complex patented technologies, and as a result, this may lead to a higher rate of unfavorable litigation outcomes. Moreover, in the event of a favorable outcome, there is, in our experience, a higher rate of successful appeals in patent enforcement litigation than more standard business litigation. Such appeals are expensive and time consuming, resulting in increased costs and a potential for delayed or foregone revenue opportunities in the event of modification or reversal of favorable outcomes. Although we diligently pursue enforcement litigation, we cannot predict with reliability the decisions made by juries and trial courts. Refer to Item 1A "Risk Factors" of our Annual Report for additional information regarding trials, patent litigation and related risks.
Litigation and Licensing Expense
We expect patent-related legal expenses to continue to fluctuate from period to period based on the factors summarized herein, in connection with future trial dates, international enforcement, strategic patent portfolio prosecution and our current and future patent portfolio investment, prosecution, licensing and enforcement activities. The pursuit of enforcement actions in connection with our licensing and enforcement programs can involve certain risks and uncertainties, including the following: •Increases in patent-related legal expenses associated with patent infringement litigation, including, but not limited to, increases in costs billed by outside legal counsel for discovery, depositions, economic analyses, damages assessments, expert witnesses and other consultants, re-exam and inter partes review costs, case-related audio/video presentations and other litigation support and administrative costs, could increase our operating costs and decrease our profit generating opportunities;
•Our patented technologies and enforcement actions are complex and, as a result, we may be required to appeal adverse decisions by trial courts in order to successfully enforce our patents. Moreover, such appeals may not be successful;
44
--------------------------------------------------------------------------------
Table of Contents
•New legislation, regulations or rules related to enforcement actions, including any fee or cost shifting provisions, could significantly increase our operating costs and decrease our profit generating opportunities. Increased focus on the growing number of patent-related lawsuits may result in legislative changes which increase our costs and related risks of asserting patent enforcement actions;
•Courts may rule that our subsidiaries have violated certain statutory, regulatory, federal, local or governing rules or standards by pursuing such enforcement actions, which may expose us and our operating subsidiaries to material liabilities, which could harm our operating results and our financial position;
•The complexity of negotiations and potential magnitude of exposure for potential infringers associated with higher quality patent portfolios may lead to increased intervals of time between the filing of litigation and potential revenue events (i.e., Markman dates, trial dates), which may lead to increased legal expenses, consistent with the higher revenue potential of such portfolios; and •Fluctuations in overall patent portfolio related enforcement activities which are impacted by the portfolio intake challenges discussed above could harm our operating results and our financial position.
Investments in Patent Portfolios
With respect to our licensing, enforcement and overall business, neither we nor our operating subsidiaries invent new technologies or products; rather, we depend upon the identification and investment in patents, inventions and companies that own IP through our relationships with inventors, universities, research institutions, technology companies and others. If our operating subsidiaries are unable to maintain those relationships and identify and grow new relationships, then we may not be able to identify new technology-based patent opportunities for sustainable revenue and /or revenue growth. Our current or future relationships may not provide the volume or quality of technologies necessary to sustain our licensing, enforcement and overall business. In some cases, universities and other technology sources compete against us as they seek to develop and commercialize technologies. Universities may receive financing for basic research in exchange for the exclusive right to commercialize resulting inventions. These and other strategies employed by potential partners may reduce the number of technology sources and potential clients to whom we can market our solutions. If we are unable to maintain current relationships and sources of technology or to secure new relationships and sources of technology, such inability may have a material adverse effect on our revenues, operating results, financial condition and ability to maintain our licensing and enforcement business.
Patent Portfolio Intake
One of the significant challenges in the intellectual property industry continues to be quality patent intake due to the challenges and complexity associated with the current patent environment.
During the three months endedMarch 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 45
--------------------------------------------------------------------------------
Table of Contents
inked ribbons which are used withinPrintronix's printers.Printronix's products are primarily sold throughPrintronix's global network of channel partners, such as dealers and distributors, to endusers.
Recent Business Matters
In 2019, as part of our strategy to grow, we began evaluating a wide range of strategic opportunities that culminated in the strategic investment in the Company by certain funds and accounts, or the Buyers, affiliated with, or managed by,Starboard Value LP , or Starboard. OnNovember 18, 2019 , the Company entered into a Securities Purchase Agreement with Starboard and the Buyers, or the Securities Purchase Agreement, pursuant to which the Buyers purchased (i) 350,000 shares of the Company's newly designated Series A Convertible Preferred Stock, or Series A Preferred Stock, at an aggregate purchase price of$35.0 million , and warrants to purchase up to 5 million shares of the Company's common stock, or Series A Warrants. The Securities Purchase Agreements also established the terms of certain senior secured notes, or Notes, and additional warrants, or the Series B Warrants, which may be issued to the Buyers in the future. Refer to Note 8 to the consolidated financial statements elsewhere herein for additional information related to the Series A Preferred Stock, Series A Warrants and Series B Warrants. In connection with the Buyer's investment, Starboard was granted certain corporate governance rights, including the right to appointJonathan Sagal , Managing Director of Starboard, as a director of the Company and recommend two additional directors for appointment to our Board of Directors. The Series A Preferred Stock, Series A Warrants and Series B Warrants are referred to herein as, collectively, the "Starboard Securities ." OnFebruary 14, 2020 , the Company's stockholders approved, for purposes of Nasdaq Rules 5635(b) and 5635(d), as applicable, (i) the voting of the Series A Preferred Stock on an as-converted basis and (ii) the issuance of the maximum number of shares of common stock issuable in connection with the potential future (A) conversion of the Series A Preferred Stock and (B) exercise of the Series A and Series B Warrants, in each case, without giving effect to the exchange cap set forth in the Series A Preferred Stock Certificate of Designations and in the Series A Warrants, issued pursuant to the Securities Purchase Agreement datedNovember 18, 2019 . The Company's stockholders also approved an amendment to the Company's Amended and Restated Certificate of Incorporation to increase the total number of authorized shares of common stock by 200 million shares, from 100 million shares to 300 million shares. OnFebruary 25, 2020 , pursuant to the terms of the Securities Purchase Agreement with Starboard and the Buyers, the Company issued Series B Warrants to purchase up to 100 million shares of the Company's common stock at an exercise price of either (i)$5.25 per share, if exercising by cash payment, or (ii)$3.65 per share, if exercising by cancellation of a portion of Notes. The Company issued the Series B Warrants for an aggregate purchase price of$4.6 million . OnJune 4, 2020 , pursuant to the terms of the Securities Purchase Agreement with Starboard and the Buyers, the Company issued$115.0 million in Notes to the Buyers. Also onJune 4, 2020 , in connection with the issuance of the Notes, the Company entered into a Supplemental Agreement with Starboard, or the Supplemental Agreement, through which, the Company agreed to redeem$80.0 million aggregate principal amount of the Notes bySeptember 30, 2020 , and$35.0 million aggregate principal amount of the Notes byDecember 31, 2020 , resulting in the total principal outstanding being paid byDecember 31, 2020 . Per the Supplemental Agreement, interest is payable semiannually at a rate of 6.00% per annum, and in an event of default, the interest rate is increased to 10.00% per annum. In connection with the issuance of the Notes, the terms of certain of the Series B Warrants were amended to permit the payment of the lower exercise price of$3.65 through the payment of cash, rather than only through the cancellation of Notes outstanding, at any time until the expiration date ofNovember 15, 2027 . 31,506,849 of the Series B Warrants are subject to this adjustment with the remaining balance of 68,493,151 Series B Warrants continuing under their original terms. The Notes outlined certain financial and non-financial covenants. Additionally, all or any portion of the principal amount outstanding under the Notes may, at the election of the holders, be surrendered to the Company for cancellation in payment of the exercise price upon the exercise of the Series B Warrants. OnJune 30, 2020 , the Company entered into an Exchange Agreement, or the Exchange Agreement, withMerton Acquisition HoldCo LLC , aDelaware limited liability company and wholly-owned subsidiary of the Company, or Merton, and Starboard, on behalf of itself and on behalf of the Buyers, including the holders of the Notes. Pursuant to the Exchange Agreement, the holders of the Notes exchanged the entire outstanding principal amount of the Notes for new senior notes, or the New Notes, issued by Merton and having an aggregate outstanding original principal amount of$115.0 million . The New Notes bear interest at a rate of 6.00% per annum and had a maturity date ofDecember 31, 2020 . The New Notes are fully guaranteed by the Company and are secured by an all-assets pledge of the Company and Merton and non-recourse equity pledges of each of the Company's material subsidiaries. Pursuant to the Exchange Agreement, the New Notes (i) are 46
--------------------------------------------------------------------------------
Table of Contents
deemed to be "Notes" for purposes of the Securities Purchase Agreement, (ii) are deemed to be "June 2020 Approved Investment Notes" for purposes of the Supplemental Agreement, and with the Company agreeing to redeem$80.0 million principal amount of the New Notes bySeptember 30, 2020 and$35.0 million principal amount of the New Notes byDecember 31, 2020 , and (iii) are deemed to be "Notes" for the purposes of the Series B Warrants, and therefore may be tendered pursuant to a Note Cancellation under the Series B Warrants on the terms set forth in the Series B Warrants and the New Notes. Delivery of notes in the form of the New Notes will satisfy the delivery of Exchange Notes pursuant to Section 16(i) of the Certificate of Designations of the Company's Series A Convertible Preferred Stock, par value$0.001 per share. The New Notes will not be deemed to be "Notes" for the purposes of the Registration Rights Agreement, dated as ofNovember 18, 2019 , by and between the Company, Starboard and the Buyers. OnJanuary 29, 2021 , the Company redeemed$50.0 million of the New Notes and onMarch 31, 2021 , the Company reissued$50.0 million of the New Notes. OnJune 30, 2021 , the Company issued$30.0 million in additional New Notes (the "June 2021 Merton Notes") and amended the maturity date of the New Notes toOctober 15, 2021 . OnSeptember 30, 2021 , the Company issued$35.0 million in additional New Notes (the "September 2021 Merton Notes") and amended the maturity date of the New Notes toDecember 1, 2021 . TheJune 2021 Merton Notes and theSeptember 2021 Merton Notes cannot be used to exercise Series B Warrants issued to Starboard. OnNovember 30, 2021 , the Company amended the maturity date of the New Notes toJanuary 31, 2022 . OnJanuary 31, 2022 , the Company amended the maturity date of the New Notes toApril 15, 2022 , and agreed to repay an aggregate of$15.0 million principal amount of the New Notes, resulting in a principal amount outstanding of$165.0 million . The total principal amount outstanding of New Notes as ofMarch 31, 2022 andDecember 31, 2021 was$165.0 million and$180.0 million , respectively. OnApril 14, 2022 , the Company amended the New Notes to extend the maturity date toJuly 15, 2022 , permit the investment in certain types of derivative instruments and permit certain guarantees in connection with such derivative instruments, each as defined therein, and agreed to repay an aggregate of$50.0 million principal amount of the New Notes, resulting in a principal amount outstanding of$115.0 million . Refer to Note 8 to the consolidated financial statements elsewhere herein for additional information.
OnApril 3, 2020 , the Company entered into an Option Agreement with Seller to purchase equity securities in the "Life Sciences Portfolio", for an aggregate purchase price of £223.9 million, approximately$277.5 million at the exchange rate onApril 3, 2020 . OnJune 4, 2020 , the Company executed the Transaction Agreement betweenLink Fund Solutions Limited , or Link, Seller, and the Company. Pursuant to the Transaction Agreement, the Company will purchase from Seller and Seller will transfer to the Company the specified equity securities of all companies in the Life Sciences Portfolio at set prices at various future dates. In accordance with the Transaction Agreement, the Company transferred the total purchase price of £223.9 million into an escrow account. Upon the transfer of equity securities in the Life Sciences Portfolio to the Company, the associated funds were released from the escrow account to Seller based on the consideration amount assigned to the equity securities for such Life Sciences Portfolio company in the Transaction Agreement. As ofDecember 31, 2020 , all of the equity securities in the Life Sciences Portfolio were transferred to the Company pursuant to the Transaction Agreement. Refer to Note 3 to the consolidated financial statements elsewhere herein for additional information.
Industrial Operations Acquisition
Refer to "General - Industrial Operations" 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;
47
--------------------------------------------------------------------------------
Table of Contents
•fluctuations in the total number of agreements executed each period;
•the number of, timing, results and uncertainties associated with patent licensing negotiations, mediations, patent infringement actions, trial dates and other enforcement proceedings relating to our patent licensing and enforcement programs;
•the relative maturity of licensing programs during the applicable periods;
•other external factors, including the periodic status or results of ongoing negotiations, the status or results of ongoing litigations and appeals, actual or perceived shifts in the regulatory environment, impact of unrelated patent related judicial proceedings and other macroeconomic factors; •the willingness of prospective licensees to settle significant patent infringement cases and pay reasonable license fees for the use of our patented technology, as such infringement cases approached a court determined trial date; and
•fluctuations in overall patent portfolio related enforcement activities which are impacted by the portfolio intake challenges discussed above.
Our management does not attempt to manage for smooth sequential periodic growth in revenues from period to period, and therefore, periodic results can be uneven. Unlike most operating businesses and industries, licensing revenues not generated in a current period are not necessarily foregone but, depending on whether negotiations, litigation or both continue into subsequent periods, and depending on a number of other factors, such potential revenues may be pushed into subsequent annual periods.
Revenues for the three months ended
• Bone Wedge technology(1)(2) • Wireless Mesh Networking technology(1) • Flash Memory technology(2) • Wi-Fi 6
standard essential patents
technology(1)(2)
• Internet search, advertising and cloud computing • Semiconductor and Memory-Related technology(1)
technology(1)(2)
• Speech codecs used in wireless and wireline • Computer-Aided Design technology(1)
systems technology(1)(2) • Wireless Infrastructure and User Equipment Technology(2) ____________________
(1)Licensing and enforcement program generating revenue in 2022. (2)Licensing and enforcement program generating revenue in 2021.
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.
48
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Summary of Results of Operations
Three Months Ended March 31, 2022 2021 $ Change % Change (In thousands, except percentage change values) Total revenues $ 13,507$ 5,803 $ 7,704 133 % Total costs and expenses 22,015 11,479 10,536 92 % Operating loss (8,508) (5,676) (2,832) 50 % Total other expense (79,636) (157,879) 78,243 (50 %) Loss before income taxes (88,144) (163,555) 75,411 (46 %) Income tax benefit (expense) 14,878 (10) 14,888 n/a Net loss attributable to Acacia Research Corporation (73,266) (164,465) 91,199 (55 %)
Results of Operations - three months ended
Total revenues increased$7.7 million to$13.5 million for the three months endedMarch 31, 2022 , as compared to$5.8 million for the three months endedMarch 31, 2021 , due to the net revenues contributed fromPrintronix of$10.9 million . Acacia executed nine new license agreements during the first quarter of 2022 for an increase of two over the comparable prior period, however Acacia's revenues decreased by$3.2 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. Refer to "Revenues" below for further discussion. Loss before income taxes was$88.1 million for three months endedMarch 31, 2022 , as compared to a loss of$163.6 million in the comparable prior period. The net decrease was comprised of the increase in revenues described above and other changes in operating expenses and other income or expense as follows: •Inventor royalties increased$75,000 , from$95,000 to$170,000 in 2022, primarily due to the new license agreements and related revenues generated with inventor royalty obligations. Refer to "Cost of Revenues - Intellectual Property Operations" below for further discussion. •Contingent legal fees decreased$545,000 , from$1.1 million to$549,000 in 2022, primarily due to the decrease in Acacia's revenues described above. Refer to "Cost of Revenues - Intellectual Property Operations" below for further discussion. •Litigation and licensing expenses decreased$1.0 million , from$2.3 million to$1.2 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$739,000 , from$1.9 million to$2.6 million in 2022, due to an increase in scheduled amortization resulting from the new portfolio acquired in 2021. •Printronix cost of sales, engineering and development expenses, and sales and marketing expenses for the first quarter of 2022 added a total of$6.4 million to our consolidated operating expenses. Refer to "Cost of Revenues - Industrial Operations" below for further discussion. •General and administrative expenses increased$4.9 million , from$6.2 million to$11.1 million in 2022, primarily due to higher parent company and Intellectual Property Operations legal and business development related expenses, compensation expense for share-based awards, and$2.9 million from our Industrial Operations general and administrative costs and amortization expense for the first quarter of 2022. Refer to "General and Administrative Expenses" below for further detail and discussion. 49
--------------------------------------------------------------------------------
Table of Contents
•Compensation expense for share-based awards, included in general and administrative expenses above, increased$724,000 , from$450,000 to$1.2 million in 2022, primarily due to restricted stock and option grants issued to employees and the Board of Directors 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$172.2 million in 2022, as compared to an unrealized gain of$37.8 million in the comparable prior period. The unrealized loss and gain were primarily derived from our Life Sciences Portfolio. The current period unrealized loss primarily relates to one Life Sciences Portfolio company's valuation decrease. Refer to "Equity Securities Investments" below for further discussion. •Realized gain from the sale of our equity securities increased$66.1 million , from$819,000 to$66.9 million in 2022. The realized gains were primarily derived from our Life Sciences Portfolio. The current period realized gain primarily relates to the partial sale of one Life Sciences Portfolio security. Refer to "Equity Securities Investments" below for further discussion.
•Earnings on equity investment in joint venture was zero in 2022, as compared to
•We recognized an unrealized loss of
•We recognized a realized gain on sale of
•We recognized an unrealized gain of$28.1 million from the fair value measurements of the Series A and Series B warrants and the embedded derivative in 2022, as compared to an unrealized loss of$198.9 million in the comparable prior period. Refer to Note 8 to the consolidated financial statements elsewhere herein for additional information regarding theStarboard Securities . •Loss on foreign currency exchange increased$789,000 , from$24,000 to$813,000 in 2022. The increase, was primarily derived from our transactions related to our Life Sciences Portfolio investment. Refer to "Equity Securities Portfolio Investment " above and Note 3 to the consolidated financial statements elsewhere herein for additional information. •Interest expense on Senior Secured Notes increased$1.4 million , from$1.2 million to$2.6 million in 2022, primarily due to increased interest expense from recent Note issuances. Refer to Note 8 to the consolidated financial statements elsewhere herein for additional information regarding the Starboard Senior Secured Notes. •Interest income and other was$1.0 million in 2022, as compared to an expense of$26,000 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. 50
--------------------------------------------------------------------------------
Table of Contents
Revenues
Intellectual Property Operations
Acacia's revenue for the periods presented included the following:
Three Months Ended March 31, 2022 2021 $ Change % Change Revenues (in thousands, except percentage change values)$ 2,615 $ 5,803 $ (3,188) (55 %) New license agreements executed 9 7 2 29 % Licensing and enforcement programs generating revenues 7 6 1 17 % Licensing and enforcement programs with initial revenues - 1 (1) (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$3.2 million from seven new license agreements executed during the quarter related to four programs generating revenues. Recurring revenue, that provides for quarterly sales-based license fees, increased$29,000 from various on-going license arrangements including two new license agreements executed during the quarter related to three programs generating revenues.
Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our revenue arrangements and related concentrations for the periods presented herein.
Refer to "Investments in Patent Portfolios" above for information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues.
Industrial Operations
Printers and parts$ 4,254 Consumable products 5,384 Services 1,254 Total$ 10,892 Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regardingPrintronix's revenue arrangements and related concentrations. Refer to "Industrial Printing Solutions" above for additional information related toPrintronix's operating activities. 51
--------------------------------------------------------------------------------
Table of Contents
Cost of Revenues
Intellectual Property Operations
Three Months Ended March 31, 2022 2021 $ Change % Change (In thousands, except percentage change values) Inventor royalties $ 170$ 95 $ 75 79 % Contingent legal fees 549 1,094 (545) (50 %) Litigation and licensing expenses 1,244 2,262 (1,018) (45 %) Amortization of patents 2,601 1,862 739 40 % Total$ 4,564 $ 5,313 $ (749) (14 %)
For the three months ended
The economic terms of patent portfolio related partnering agreements and contingent legal fee arrangements, if any, including royalty obligations, if any, royalty rates, contingent fee rates and other terms and conditions, vary across the patent portfolios owned or controlled by our operating subsidiaries. In certain instances, we have invested in certain patent portfolios without future patent partner royalty obligations. The costs associated with the forementioned obligations fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of revenue agreements executed each period and the mix of specific patent portfolios, with varying economic terms and conditions, generating revenues each period. Litigation and licensing expenses include patent-related litigation, enforcement and prosecution costs incurred by law firms and external patent attorneys engaged on either an hourly basis or a contingent fee basis. Litigation and licensing expenses also includes third-party patent research, development, patent prosecution and maintenance fees, re-exam and inter partes reviews, consulting and other costs incurred in connection with the licensing and enforcement of patent portfolios. Litigation and licensing expenses decreased for the periods presented due to a net decrease in patent maintenance fees and consulting fees. Refer to "Investments in Patent Portfolios" above for additional information regarding the impact of portfolio acquisition trends on current and future licensing and enforcement related revenues.
Industrial Operations
Operating Expenses Three Months Ended March 31, 2022 2021 $ Change % Change (In thousands, except percentage change values) Engineering and development expenses - industrial operations $ 190 $ -$ 190 n/a Sales and marketing expenses - industrial operations 2,016 - 2,016 n/a General and administrative costs - intellectual property operations 1,716 1,005 711 71 % General and administrative costs - industrial operations 2,855 - 2,855 n/a Parent general and administrative expenses 6,482 5,161 1,321 26 % Total general and administrative expenses 11,053 6,166 4,887 79 % Total $ 13,259$ 6,166 $ 7,093 115 % 52
--------------------------------------------------------------------------------
Table of Contents
The operating expenses table above includes the Company's general and administrative expenses andPrintronix's engineering and development expenses and sales and marketing expenses. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regardingPrintronix's operating expenses.
General and Administrative Expenses
A summary of the main drivers of the change in general and administrative expenses is as follows: Three Months Ended March 31, 2022 vs. 2021 (In thousands) Personnel costs and board fees $ 256 Variable performance-based compensation costs 257 Other general and administrative costs 849 General and administrative costs - industrial operations 2,422 Amortization of industrial operations intangible assets 433 Compensation expense for share-based awards 724 Non-recurring employee severance costs (54) Total change in general and administrative expenses $ 4,887 General and administrative expenses include employee compensation and related personnel costs, including variable performance based compensation and compensation expense for share-based awards, office and facilities costs, legal and accounting professional fees, public relations, stock administration, business development, fixed asset depreciation, amortization of Industrial Operations intangible assets, state taxes based on gross receipts and other corporate costs. The increase in personnel cost and board fees for the periods presented was primarily due to an increase in headcount and related costs. The change in variable performance-based compensation costs was primarily due to fluctuations in performance-based compensation accruals. The increase in other general and administrative costs, which relates to our parent company and Intellectual Property Operations business, was primarily due to higher legal and business development related expenses. Compensation expense for share-based awards increased primarily due to restricted stock and option grants issued to employees and the Board of Directors 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$2.9 million of the increased expenses. Refer to additional general and administrative change explanations above. Other (Expense) Income
Equity Securities Investments
Three Months Ended March 31, 2022 2021 $ Change % Change (In thousands, except percentage change values) Change in fair value of equity securities$ (172,203) $ 37,849 $ (210,052) (555 %) Gain on sale of equity securities 66,876 819 66,057 8,066 % Earnings on equity investment in joint venture - 2,730 (2,730) (100 %) Net realized and unrealized (loss) gain (105,327) 41,398 (146,725) (354 %) 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$ (105,327) $ 42,237 $ (147,564) (349 %)
Our equity securities investments, including the Life Sciences Portfolio and other equity securities, are recorded at fair value at each balance sheet date.
53
--------------------------------------------------------------------------------
Table of Contents
Our year-to-date results included a significant unrealized loss from the change in fair value of our equity securities as compared to a 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 primarily derived from our Life Sciences Portfolio, in which, our sales activity of certain investments increased relative to securities that were held with unrealized gains in the prior year. The current period unrealized loss primarily relates to one Life Sciences Portfolio company's valuation decrease. During 2021, we began to recognize earnings on our equity investment in joint venture, which is part of the Life Sciences Portfolio. Refer to additional 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 prior year-to-date results included an unrealized loss on the fair value investment in Veritone, while we recognized a realized gain on sale of the equity investment in Veritone. Acacia no longer has an investment in Veritone common stock and warrants. Refer to additional change explanations above. Refer to Note 2 to the consolidated financial statements elsewhere herein for additional information regarding our former investment in Veritone. Income Taxes Three Months Ended March 31, 2022 2021 $ Change % Change (In thousands, except percentage change values) Income tax benefit (expense) $ 14,878$ (10) $ 14,888 n/a Effective tax rate 17 % - % n/a 17 %
Our effective tax rate for the three months ended
The provision for income taxes is determined using an effective tax rate. For the three months endedMarch 31, 2022 , the Company's estimated annual effective tax rate of 17% was lower than theU.S. federal statutory rate primarily due non-taxable income, expiration of foreign tax credits and changes in valuation allowance. 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. For the three months endedMarch 31, 2021 , the Company recorded a provision for income taxes of$10,000 , which was primarily comprised of state income taxes. Inflation Historically, inflation has not had a significant impact on us or any of our subsidiaries. While insignificant to our consolidated enterprise, during the three months endedMarch 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 been impacted by these inflationary pressures, up to this pointPrintronix has generally been able to adjust selling prices in response to these higher costs.
Liquidity and Capital Resources
General
Our material cash requirements as ofMarch 31, 2022 , are recognized as liabilities or are otherwise described in Note 11, "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 11 to the consolidated financial statements. Historically, we have not entered into off-balance sheet financing arrangements. AtMarch 31, 2022 , we had unrecognized tax benefits, as further described in Note 2 to the consolidated financial statements. 54
--------------------------------------------------------------------------------
Table of Contents
Certain of Acacia's operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. In connection with any of Acacia's operating subsidiaries' patent enforcement actions, it is possible that a defendant may request and/or a court may rule that an operating subsidiary has violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or Acacia's operating subsidiaries or award attorney's fees and/or expenses to a defendant(s), which could be material. Our primary sources of liquidity are cash and cash equivalents on hand generated from our operating activities, and as deemed appropriate by management from our availability of Senior Secured Notes (discussed above under the caption "Recent Business Matters -Starboard Securities and Senior Secured Notes"). Our management believes that our cash and cash equivalent balances, anticipated cash flows from operations and our availability of Senior Secured Notes will be sufficient to meet our cash requirements through at least twelve months from the date of this report and for the foreseeable future. We may, however, encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated, including those set forth under Item 1A, "Risk Factors" of our 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, equity securities at fair value and long-term restricted cash totaled$535.9 million atMarch 31, 2022 , compared to$671.1 million atDecember 31, 2021 .
Cash Flows Summary
The net change in cash and cash equivalents and restricted cash for the periods presented was comprised of the following:
Three Months Ended March 31, 2022 2021 (In thousands) Net cash (used in) provided by: Operating activities$ (3,163) $ (6,120) Investing activities 9,931 (13,940) Financing activities (26,760) (260)
Decrease in cash and cash equivalents and restricted cash
Cash Flows from Operating Activities
Cash receipts from Acacia's licensees totaled$2.7 million and$1.9 million for the three months endedMarch 31, 2022 and 2021, respectively. Cash receipts fromPrintronix's customers totaled$11.2 million for the three months endedMarch 31, 2022 . 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 three months endedMarch 31, 2022 decreased to$3.2 million , as compared to a$6.1 million in the comparable prior period, due to the positive impact from the net changes in working capital cash flows (further discussed below), most notably from account receivable, which was partially offset by the total change in net loss (described above) and related noncash adjustments. Working Capital
Our working capital at
55
--------------------------------------------------------------------------------
Table of Contents
Accounts receivable decreased to$9.1 million atMarch 31, 2022 , compared to$9.5 million atDecember 31, 2021 .Printronix's inventories increased to$10.0 million atMarch 31, 2022 , compared to$8.9 million atDecember 31, 2021 . Prepaid expenses and other current assets increased to$5.0 million atMarch 31, 2022 , compared to$4.8 million atDecember 31, 2021 . Accounts payable, accrued expenses and other current liabilities, accrued compensation and accrued patent investment costs increased to$22.0 million atMarch 31, 2022 , compared to$15.4 million atDecember 31, 2021 , primarily from accrued patent investment costs becoming currently due. Royalties and contingent legal fees payable decreased to$2.3 million atMarch 31, 2022 , compared to$2.5 million atDecember 31, 2021 . The royalties and contingent legal fees payable are generally scheduled to be paid in the subsequent quarter upon our receipt of the related fee payments from licensees, in accordance with the underlying contractual arrangements.Printronix's deferred revenue increased to$1.5 million atMarch 31, 2022 , compared to$1.1 million atDecember 31, 2021 .
Cash Flows from Investing Activities
Cash flows from investing activities were comprised of the following for the periods presented: Three Months Ended March 31, 2022 2021 (In thousands) Patent acquisition $ -$ (11,000) Sale of investment at fair value - 3,591 Purchases of equity securities (92,877) (9,200) Sales of equity securities 102,842 2,702 Purchases of property and equipment (34) (33) Net cash provided by (used in) investing activities$ 9,931
Cash flows from investing activities for the three months endedMarch 31, 2022 increased to$9.9 million , as compared to an outflow of$13.9 million in the comparable prior period, primarily due to net cash inflows from our Life Sciences Portfolio equity securities transactions in 2022. Refer to "Recent Business Matters -Equity Securities Portfolio Investment " above, and Note 3 to the consolidated financial statements elsewhere herein for additional information related to the Life Sciences Portfolio.
Cash Flows from Financing Activities
Cash flows from financing activities included the following for the periods presented: Three Months Ended March 31, 2022 2021 (In thousands) Repurchase of common stock $ (10,988) $ - Issuance of Senior Secured Notes, net of lender fee - 50,000 Paydown of Senior Secured Notes (15,000) (50,000) Dividend on Series A Redeemable Convertible Preferred Stock (700) (260)
Taxes paid related to net share settlement of share-based awards
(72) - Net cash used in financing activities $
(26,760)
Cash outflows from financing activities for the three months endedMarch 31, 2022 increased to$26.8 million , as compared to$260,000 in the comparable prior period, primarily due to activity related to our Senior Secured Notes and our common stock repurchases (refer to Note 12). Refer to "Recent Business Matters -Starboard Securities and Senior Secured Notes," above, and Note 8 to the consolidated financial statements elsewhere herein for additional information related to the Senior Secured Notes. 56
--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted inthe United States of America . In preparing these financial statements, we make assumptions, judgments and estimates that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that of the significant accounting policies discussed in Note 2 to the consolidated financial statements included elsewhere herein, the following accounting policies require our most difficult, subjective or complex assumptions, judgments and estimates:
•revenue recognition;
•valuation of long-lived assets and other intangible assets;
•valuation of Series A Warrants and Series B Warrants;
•valuation of embedded derivatives; and
•accounting for income taxes.
We discuss below the critical accounting assumptions, judgements and estimates associated with these policies. Historically, our critical accounting estimates relative to our significant accounting policies have not differed materially from actual results. For further information on the related significant accounting policies, refer to Note 2 to the consolidated financial statements.
Revenue Recognition
As described below, significant management judgment must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue recognized or deferred for any period, if management made different judgments.
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 and Other Intangible Assets
The Company reviews long-lived assets, patents and other intangible assets for potential impairment annually (quarterly for patents) and when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss is recorded in an amount equal to the excess of the asset's carrying value over its fair value. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. For additional information regarding Acacia's patent portfolio valuation estimates, refer to Note 2 to the consolidated financial statements. The Company did not record any long-lived asset, patent or other intangible asset impairment charges for the three months endedMarch 31, 2022 and 2021. 57
--------------------------------------------------------------------------------
Table of Contents
Valuation of Series A Warrants and Series B Warrants
The fair value of the Series A and B Warrants are estimated using a Black-Scholes option-pricing model. Refer to Note 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 ofMarch 31, 2022 , a hypothetical 10% increase in the volatility would have resulted in an increased liability balance of approximately$1.5 million and$15.6 million , in our Series A and B Warrants, respectively.
Valuation of Embedded Derivatives
Embedded derivatives that are required to be bifurcated from their host contract are valued separately from the host instrument. A binomial lattice framework is used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock. Refer to Note 9 to the consolidated financial statements for detailed information related to this fair value measurement. Of the assumptions used in the binomial lattice framework, volatility and discount rate changes would have the most significant impact on the fair value. As ofMarch 31, 2022 , a hypothetical 10% increase in the volatility and 1% increase in the discount rate would have resulted in an increased liability balance of approximately$476,000 and$1.3 million , respectively.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the estimating of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statements of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and our valuation allowance. Due to uncertainties related to our ability to utilize certain deferred tax assets in future periods, we have recorded a partial valuation allowance against our net deferred tax assets as ofMarch 31, 2022 andDecember 31, 2021 . These assets primarily consist of foreign tax credits, capital loss carryforwards and net operating loss carryforwards. Refer to Note 2 to the consolidated financial statements for additional information. In assessing the need for a valuation allowance, management has considered both the positive and negative evidence available, including but not limited to, estimates of future taxable income and related probabilities, estimates surrounding the character of future income and the timing of realization, consideration of the period over which our deferred tax assets may be recoverable, our recent history of net income and prior history of losses, projected future outcomes, industry and market trends and the nature of existing deferred tax assets. In management's estimate, any positive indicators, including forecasts of potential future profitability of our businesses, are outweighed by the uncertainties surrounding our estimates and judgments of potential future taxable income, primarily due to uncertainties surrounding the timing of realization of future taxable income and the character of such income in particular future periods (i.e. foreign or domestic). In the event that actual results differ from these estimates or we adjust these estimates should we believe we would be able to realize these deferred tax assets in the future, an adjustment to the valuation allowance would increase income in the period such determination was made.
Any changes in the judgments, assumptions and estimates associated with our analysis of the need for a valuation allowance in any future periods could materially impact our financial position and results of operations in the periods in which those determinations are made.
Recent Accounting Pronouncements
Refer to Note 2 to consolidated financial statements included elsewhere herein.
58
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source