Acacia Research Q2 2023 Earnings Call Transcript

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August 3, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Acacia Research Second Quarter 2023 Financial Results Call. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Rob Fink of FNK IR. Sir, you may begin.

Speaker 1

Thank you, operator. Hosting the call today are MJ Melty, Interim company, Chief Executive Officer and Kiersten Hoover, Interim Chief Financial Officer. Before beginning, I'd like to remind you that information provided during this call may contain forward looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward looking as defined in the Private Securities Litigation Reform Act of 1995. These forward looking statements generally relate to the company's plans, objectives and expectations for future operations are based on the current estimates and projections, future results or trends. Actual results may differ materially from those projected as a result of certain risk factors and uncertainties.

Speaker 1

For a discussion of such risks and uncertainties. Please see the risk factors described in Acacia's annual report on Form 10 ks and quarterly report on Form 10 Q filed with the I'd also like to remind everyone that a press release disclosing the financial results was issued this afternoon just after the close of market. This release may be accessed on the company's website under the Press Release section of the Investor Relations tab at acaciaresearch.com under the News and Events tabs. With all that said, I'd now like to turn the call over to MJ. MJ, the call is yours.

Speaker 2

Thanks, Rob, and thanks to everyone for Joining the call today. So in mid July and subsequent to the end of the second quarter, we completed our recapitalization transaction with our largest shareholder, Starboard Value. As you know, in many ways, this is this milestone signaled the completion of our larger transformation of come. Since we announced this transaction in late October, along with new senior leadership and new members of our Board of Directors, from the Q2 of 2019. We've significantly restructured and improved Acacia.

Speaker 2

We reorganized the team we have focusing on sourcing, evaluating and executing potential transactions. Putting in place a more defined methodology will significantly reducing headcount and associated costs. Like Printronix, our IP business is now managed as a division. And this means we'll consider allocating additional capital as appropriate, and we're finalizing an incentive structure for our IP division management as more aligned with their unique business. We reorganized Printronix under new leadership, reducing costs, improving efficiency And setting the stage for an evolution of the business model that we believe will generate more predictable cash flows.

Speaker 2

And importantly, we put a corporate incentive plan in place for employees our parent company that clearly aligns our team's incentives with those of our shareholders. I realize that many of these achievements are behind the scenes and I recognize that many Our pipeline of opportunities continues to grow and we're maintaining rigor in the evaluation of each of those opportunities. We have a number of late stage targets today and we have many other opportunities on deck. In some of these cases, we're working with people we partnered with in the past and we have confidence in their track record of success. That familiarity is accelerating our efforts.

Speaker 2

Our network of referral sources also continues to grow and improve. We're encouraged by our progress and we continue to collaborate closely with our largest shareholder. And through this relationship, we enjoy ready access to their executive network I'm reluctant to make any predictions about when a transaction will occur or the scope of any transaction, which we've talked about in the past. We continue to need willing counterparties to valuations that are accretive and attractive for our shareholders and discussing the status of various projects doesn't work to from anyone's benefit here, but I hope that you appreciate the progress that we've made. As part of this evolution of Acacia, we've significantly reduced our cost structure.

Speaker 2

As we mentioned previously, the element of our business for which we have the greatest control. Our annualized parent fixed costs have decreased by $6,000,000 come from an approximate 30% reduction from this time last year. The reduction is broad based and we're now positioned to cover our ongoing fixed corporate costs and interest earned from our cash and cash This is an important achievement safeguarding our dry powder for acquisitions. As we mentioned in the past, where we evaluate potential opportunities in the public markets, we will, from time to time, acquire stock in those companies. The positions that our New Deal team have taken public companies are up over 20% year to date, demonstrating the benefits of our targeting and evaluation process.

Speaker 2

Our legacy life sciences assets have been largely monetized as everyone is aware and we're anticipating monetization events with some of our remaining holdings in the not too distant future. Our intellectual property business continues to have expected quarter to quarter revenue fluctuations, but we have an important trial related to our Wi Fi 6 patents that is expected to start in the near future, and we're optimistic that a favorable outcome would accelerate licensing company. Additionally, we have a strong pipeline of potential opportunities to further invest in attractive IP assets. I'd now like to turn the call over to Kiersten to

Speaker 3

Thank you, MJ. Our GAAP book value at June 30, 2023 was $335,400,000 or $5.71 per basic share compared to $269,300,000 or $6.19 per share at December 31, 2022. This value reflects the rights offering that was completed in the Q1 and the impact of the outstanding warrant and embedded derivative liabilities. Total liabilities for warrants and convertible preferred stock to be eliminated upon the exercise or expiration of all such warrants and convertible preferred stock was $94,900,000 at June 30, 2023. As MJ said, we expect that interest income will cover Acacia's fixed parent costs.

Speaker 3

A key part of this is the elimination of approximately $6,000,000 in annualized parent G and A costs. We expect Printronix to generate free cash flows on an annual basis. Let me now turn to the 2nd quarter results. Total second quarter revenues were $7,900,000 compared to $16,700,000 in the same quarter last year. Printronix generated $7,500,000 in revenue in the quarter compared to $8,700,000 last year.

Speaker 3

The intellectual property business generated $400,000 in licensing and other revenue during the quarter compared to $8,100,000 in the same quarter last year. As MJ mentioned, given the nature of the IP business, we have expected fluctuations in revenues quarter to quarter. General and administrative expenses, which includes G and A at IP and Printronix were $9,400,000 compared to $10,700,000 in the same quarter of last year due to the decrease in personnel and compensation costs related to the reduced headcount and a reduction in Printronix G and A. Operating loss was $12,500,000 compared to an operating loss of $5,700,000 in the same quarter of last year, with the reduction due to lower revenue. 2nd quarter 2023 GAAP net loss attributable to Acacia Research was 18,800,000 up or $0.36 per diluted share compared to GAAP net loss of $61,500,000 or $1.44 per diluted share in the Q2 of last year.

Speaker 3

Net loss included $8,000,000 in realized losses and $6,600,000 in unrealized gains related to the increase in share price of certain holdings. We also incurred in non cash expense of $9,900,000 related to the change in fair value of the Starboard Series B warrants and embedded derivatives. The change in fair value was primarily due to the increase in stock price. From the Q2. The Q2 also included $4,300,000 in non cash depreciation, amortization and stock based compensation expense and $2,400,000 in non recurring charges related to severance, legal and other professional fees associated with the separation of our former CEO and other non recurring charges.

Speaker 3

At the beginning We will continue to evaluate the most efficient ways to maximize this asset. Turning to the balance sheet. Cash, cash equivalents and equity securities at fair value totaled $408,000,000 at June 30, 2023, compared to $349,400,000 at December 31, 2022. Equity securities without readily determinable fair value totaled $5,800,000 at June 30, 2023, Which amount was unchanged from December 31, 2022? Investment Securities representing Equity Method Investments, net of non controlling interests, totaled $19,900,000 at June 30, 2023, unchanged from December 31, 2022.

Speaker 3

All milestone payments earned by Mallin J1 through its interest in ViaMet have been received. Acacia owns 64% of Mallin J1, resulting in a beneficial ownership of 26% in Viomet. Total indebtedness, which represents the senior secured notes issued to Starboard, was 60 point More details on these results have been made available in the press release issued this afternoon and in our quarterly report on Form 10 Q, which we will file with the SEC later today. Our GAAP book value as discussed today includes the impact of all warrant and embedded derivative liabilities on our balance sheet, which in turn reflects the impact of the increase in the company's share price over time. These liabilities were extinguished on July 13, 2023, with the completion of the recapitalization transactions with our largest shareholder.

Speaker 3

As a result of this recap, Starboard purchased quarter of 2023. Dollars 23,200,000 of Series A preferred stock was eliminated and 9,600,000 shares of common stock were issued in Q3 2023. $60,500,000 of liabilities attributable to the senior secured notes were canceled and Starboard invested in an additional $55,000,000 in cash related to the Series B warrant exercise and 31,500,000 shares of common stock were issued in Q3 2023. Dollars 94,900,000 of total warrant and embedded derivative liabilities attributable to the Series B warrants and Series A preferred stock was eliminated in Q3 2023. Acacia paid Starboard a total of $66,000,000 as consideration for early exercise of the Series B warrants and convertible preferred stock in Q3 2023.

Speaker 3

And Acacia incurred approximately $250,000 in incremental transaction costs associated with the consummation of the recapitalization transactions. The completion of the recapitalization transactions resulted in an incremental $166,800,000 increase in book value and an incremental from $41,400,000 increase in shares outstanding. Adjusted book value as adjusted to give effect to the transaction as if it had been completed on June 30, 2023 rather than July 13, 2023, would be 502,200,000 and diluted shares outstanding would be 99,900,000 in, resulting in an adjusted book value per share of $5.03 at June 30, 2023. We continue to believe that cash per share is an important metric for measuring our progress. As of June 30, Assuming completion as of June 30, 2023, of all phases of the Starboard transaction, our cash per share would be approximately $3.44 per share.

Speaker 3

With that, we'd be pleased to take your questions.

Operator

Thank you. Our first question is coming from Anthony Stoss with Craig Hallum. Your line is live.

Speaker 4

Thanks. MJ, I just want to circle back to actually two questions. On your Wi Fi 6 commentary, I'm curious if there's more than one potential licensee that you've been engaged with. And then the second question related on the M and A side, Probably more bigger picture. Are you seeing potential prices come down?

Speaker 4

Are you still leaning towards doing a series of Smaller deals or 1 larger one? I'd love to hear your thoughts on both subjects.

Speaker 2

Yes. Hey, Tony. How are you doing? Hi. So on the WiFi 6, so we're all of our patents, we're working with multiple parties and all the time, like all the time.

Speaker 2

So there is a trial with one particular party that's upcoming. We can't really say anything about it as I'm sure you can appreciate. There's a lot of activity on the Wi Fi 6 portfolio. We feel really confident about it. It's a great portfolio.

Speaker 2

It's standard essential. And so we have a trial that's upcoming. We are encouraged by it and We still feel really confident about the value of the rest of the portfolio. So that's the WiFi 6 piece. On the M and A, so it's a great question.

Speaker 2

When we've talked in the past, we talked a lot about seeing things on the public side and we're still seeing things on the public side that are really attractive. And remember, we're kind of on the public stuff, we're focused on some of the parts type opportunities and deep margin improvement type opportunities, Where you can we can work with the operating network that we have to really drive value in the business that should get a re rate from actually operating away that we believe we can have at work. And we still see a lot of those and we're evaluating a lot of those and we're kind of engaged in some of those at the moment. What's interesting is that We're starting to see valuations become a little more attractive on the private side, which is different than what I think we've talked about in the last quarters, which was the private equity guys still have unrealistic expectations and the bid ask is very wide. We're starting to see that clear a And we're still in on the private side, we're still looking at opportunities.

Speaker 2

Some of the parts is a little bit more challenging on the private side. They just don't exist that much. I guess you can We're seeing some carve out type opportunities, which I guess would be the private analogy to the public stem and the parts type story. But we're seeing some things that are I I would characterize as mismanaged and balance sheet constrained, which we think is very attractive. And again, that operating network we have It's very beneficial for us there because we will go into a situation like that with somebody that we trust and respect and has a plan to help us improve that business.

Speaker 2

We're also seeing things where we're meeting a lot of executives that want to go do buy builds. And that's interesting and that starts small but can grow into a much larger business. And we're seeing a handful of things that we're lucky we kind of have an embarrassment of riches of having Several proprietary truly proprietary things that we're looking at, which I always having been a long time private equity guide, nothing's really proprietary. But we are working on a handful of things that are really interesting with folks that we have known for a long time, where we do have an opportunity to partner with them to invest and acquire the business and continue to grow So I think I'm encouraged by valuations on the private side. I think there is definitely more presenting itself.

Speaker 2

When you look at the limited partner stats, Which we look at a lot of net inflows to outflows. Limited partners are telling their GPs that they need to start selling businesses and that's good for us generally. So public markets, there are always pockets of value in the public markets. It's finding them to having the right execution talent alongside us Right those ships and grow those businesses and on the private side we're starting to see more attractive flow.

Speaker 4

Got it. I don't have Tell you that shareholders are growing eager to see the outcome. I'm sure you are as well. Thanks, MJ.

Speaker 2

I'm probably more eager than anybody else, Tony. So I appreciate the encouragement. Thanks again. Of course.

Operator

Thank you. Our next question is coming from Brett Reiss with Janney Montgomery Scott. Your line is live.

Speaker 5

Hi, MJ. Hi, Kirsten. Hi, Rob. Question on the patent business. The company Gets no credit for the patent side of the business and it's frustrating because you own some good portfolios and the people who follow the industry, think the Markboof team is top notch.

Speaker 5

Would you consider to help people focus and take an interest in the patent side of the business, making available as the company did Years ago, when it was solely a patent company, a spreadsheet of pending cases With most importantly, any firm trial dates so that shareholders do not have to search on their own for these public record

Speaker 2

filings? Look, I think it's a good question. We were encouraged by If we look at the patent business, 1, we have a great team. And I appreciate you reiterating that, Brad, because We do believe we have a great team, but it's always nice to hear third party validation of that. The team as a really nice set of patents in its portfolio and the pipeline is actually pretty interesting there.

Speaker 2

The underlying economics of the individual portfolios are really attractive. And there as you a key metric there is The number of lines that we have in the water at any given time and the progress on those lines. Look, I think we can take that into consideration. I don't know that I can give you an answer right now on that point, but I respect the question and we can take it into consideration.

Speaker 5

Great, great. And one other question, and it's probably for Kirsten. The June 30 cut off date shows the cash at 355,000,000 So then subsequent yes, hi. So subsequent to that, you paid off the $60,000,000 in notes. So the cash, Yes, I have to take $60,000,000 off the $355,000,000 What's the arithmetic on that?

Speaker 3

Correct. So In our 8 ks that was just recently released, if you go to the final page of Attachment A, you'll see the walk from The June 30 cash balance of $355,200,000 to post recap of 343.4

Speaker 5

Okay. I'll give you some

Speaker 3

homework for that. Exactly. So that will walk you through each step of the recap transaction to give you the cash on a pro form a basis.

Speaker 5

Okay, great. All right. Thanks for taking my questions.

Speaker 3

Sure.

Operator

Thank you, everyone. As we have no further questions in queue at this time, I will hand it back to Mr. McNulty for any closing comments.

Speaker 2

Thanks, Ali. Nothing in particular, just to thank everyone for joining the call. We look forward to talking to you in a quarter with

Operator

Thank you so much. This concludes today's conference and you may disconnect your lines at this time. And we thank you for your participation.

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Earnings Conference Call
Acacia Research Q2 2023
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