Q2 2020 Acacia Research Corp Earnings Call
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Greetings.
Welcome to <unk> research second quarter financial results Conference call at this time all participants.
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A question answer session will follow the formal presentation.
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Now I'll turn the conference over to your host Rob.
Okay.
Maybe get.
Thank you operator hosting the call Tonight, or Clifford Chief Executive Officer will also be a chief investment Officer, Richard Rosenstein, Chief Financial Officer.
Before beginning I would like to remind you that the information provided during this call matrix <unk> forward looking statements related to current <unk> expectations.
Spore Catherine projections about future events that are forward looking to find in the private Securities Litigation Reform Act Nike 95.
Forward looking statements generally relate to the company's plans objectives expectations for future operations.
Based on the current estimates and projections of future results are trial.
Actual results may differ materially from those suggests that as a result certain risks uncertainties.
For a discussion of such risks and uncertainties. Please see the risks factors described the other cases annual report on form 10-K quarterly reports on form 10-Q.
You got to say.
I would like to remind everyone that a press release disclosing the Companys financial results was issued this morning before the market open.
Press release, maybe it's it may be accessed on the company's website at Acacia research Dot com.
The mid isn't a bad stuff with all that said I'd like to trying to pull over to Clifford perhaps left for the call is yours.
Thank you Raul and good morning, everyone.
Andrew.
A strategic alliance with Star Wars that you got all start flying stock with the announcement about first approved transaction the acquisition of a portfolio of investments in 18 public and private life Sciences companies from a pull my wouldn't <unk> equity income pod for total consideration of 200.
24 million hours or 282.
Yes.
This was an opportunistic acquisition, which we discovered during the due diligence process for another investment idea you bought a company with several very large holders one of which was the former Woodson frog then in liquidation.
In the pandemic yet.
Central secondary sales of the went to school and we were in a position to consummate a transaction under extremely challenging circumstances I'm sure. We all remember how the markets are acting in the first week of April.
Fortunate to be able to conduct due diligence on 18 different investments nice which were in the UK during the locked down and complete the transaction.
Yeah.
Before I turn the core of the to out to discuss details of the Woodford portfolio acquisition.
Let me review, our IP business during the second quarter got caught by Scott about IP.
More than 2500 happens spinoff of Yahoo.
Portfolio of nearly 150, why fraud and I had two patents from L. Three Harris.
As we've mentioned before there continues to be a limited capital supply available in the IP market. We believe that we are able to obtain realistic pricing.
Importantly, we have begun to see soft licensing revenue from these acquisitions, Bob and his team continues to evaluate additional acquisitions with that let me turn the call over to out to be a chief investment Officer Oh.
Thank you Clifford.
Following the Woodford transaction, we reached out to many of our shareholders and received inbound inquiries from other investors.
We recognize that this is a rather unique transaction with a high level of complexity and we want to use this opportunity to go through the questions. We have received and explain the details of the transaction.
Soon after closing the transaction, we sold their entire position in four of the public entities as well as portions of a few others to date, we have recoup the 185 million of our 282 million purchase price, having moved swiftly to de risk. The transaction, we are holding continuing positions encompass.
Cities, where we believe there are opportunities to create incremental value.
The largest private company investments is a 6% stake in Oxford, Nanopore technologies, and exciting company with disruptive technology in genetic sequencing applicable to a broad range of applications in both research and commercial Mark. It's interesting leads company just announced the significant new contract with the you.
Hey, government to provide precise detection of coated and other pathogens on a rapid basis.
We believe there is significant unrealized value in many of the assets, we acquired and we will work with star bar to realize these opportunities. Additionally, our combined strategic committee continues to meet regularly to identify and evaluate additional investments.
We have a significant number of potential investment opportunities currently under review.
Let me now turn the call over to rich Rosenstein, our CFO to discuss the financing for the transaction. The GAAP accounting methodology is that have been applied in bringing them onto our balance sheet and our quarterly financials rich.
Thank you al.
As noted we paid a total of $282 million for the public and private company assets, we financed us with cash on hand. In addition to utilizing 35 million and preferred stock, which was previously held is restricted cash plus $115 million a new notes issuance to star Board, which made this our first.
Approved investment under the terms of our Star Board agreement.
The Woodford portfolio is a mix of public and private company Securities, which we purchased at a discount based on prices in early April when markets were depressed.
Under GAAP, we account for the value of the components of the portfolio at initial fair value as follows the public securities, which are level, one assets were valued at market value with the fair value of the private securities representing the balance of the portfolio purchase price.
As a result, our cost basis and the private securities reflects the bulk purchase discount for the whole portfolio with the public securities valued at market value.
At the end of each quarter, we mark the public assets to market for the private securities we adjust our carrying value based on observe primary or secondary transactions in those companies shares were recognize any impairment.
If there are no observable transactions or impairment, we will not adjust our carrying value for these positions.
As a result are carrying value at the end of the second quarter reflect at market value of our public securities and largely cost for our private securities.
To follow all of this on our balance sheet note that we paid the full purchase price of 223.9 million pounds or $282 million into escrow at closing in early June.
Funds are released from escrow a securities are transferred well nearly all securities have been or are now in the final stages of transferring as of today on June Thirtyth, not all securities had been transferred.
For this reason our June Thirtyth balance sheet includes an asset called prepaid investments totaling $94 million.
That represents the balance of the purchase price for the remaining shares to be transferred at cost at June Thirtyth.
There are also two items totaling $83 million on our balance sheet at June Thirtyth called equity Securities forward contracts and equity securities derivatives. These represent the embedded gain verse our versus our attributed cost for the remaining public steaks at market value plus any fair value adjustment on any of.
The private chairs that remains to be transferred at June Thirtyth.
Note again that most of the private securities continued to be carried a cost not reflecting any embedded gain at this point.
Once these securities transferred to US you will see these prepaid forward contract and derivative assets be eliminated and replaced by the securities themselves moving onto our balance sheet.
See this in our September financials.
The original Starboards funding agreement had not contemplated using these notes for short term funding, which is what this financing represented so in collaboration with Star Board, we modified our agreement to permit us to repay the notes by yearend and returned the preferred stock proceeds to restricted cash.
Through this modification, we will no longer pay interest on the notes following repayment at our preferred dividend rate will revert back to 3% from 8% when the $35 million and preferred funds are returned to escrow.
In return for this modification Star Board has retained the seven your exercise right of notes related to this $115 million a funding. So then they exercise 31.5 million warrants at $3.65 per share on cash even after the notes have been repaid. This does not had any additional warrants beyond the 100.
Millions series B warrants already issued to Star Board and upon repayment of the notes, we will retain the opportunity to draw on the full agreed amount of $365 million and notes in the future.
Investors have asked about the impact of dilution should all of the warrants being exercised.
First no warrants have been exercise to date Accordingly, we recorded a number of liabilities as of June Thirtyth, all of which are reflected in our book value first $115 million of notes to be repaid to $35 million and preferred stock three warrant liabilities and four.
For the derivative value of the conversion potential and the preferred stock each of these instruments are exercisable, our convertible at $3.65 per share meeting. These were in the money as of June Thirtyth.
Book value at June Thirtyth, it's $164.7 million or $3.36 on a per share basis based on 49 million shares.
It is important to note that this book value reflects the gap treatment of warrant liability associated with the warrants outstanding.
Given the significant appreciation in our share price those warrant liabilities increased substantially during the quarter and are now recorded on our balance sheet at an aggregate value of $95 million were $1.93 per share.
Those liabilities reflect the gap value of all warrants outstanding recognize this noncash charges for potential future issuance of shares upon exercise on or expiration. These liabilities will be eliminated and reclassified to equity.
As I mentioned, our book value today is $3.36 per share, which includes the 95 million of these warrant liabilities gets the notes were to be used to exercise 31.5 million warrants at $3.65 a share.
And the preferred were to be converted to 9.6 million shares and the 5 million series a warrants were all exercised our book value would rise by more than $200 million and our share count would increase to roughly 95 million.
On this increased share count book value would be approximately $4 per share.
Note that this still reflects the carrying value of most of the private securities a cost in our recent acquisition, meaning any future observation or realization of value would be accretive to that book value.
Now I will discuss our financial <unk> results for the quarter.
Cash and short term investments totaled 184 million at June Thirtyth compared to 158 million at March 31st at a 168.3 million at December 30 Onest.
That was 115 million in senior secured notes issued to Star Board.
Book value totaled 164.7 million as of June Thirtyth compared to 175 million at December 31st.
Revenues for the second quarter of 2020 were $2.1 million inline with our expectations. We're just beginning to see contributions from our recently acquired IP portfolios.
More detailing these results have been made available in the press release issued this morning and also in the upcoming quarterly report on form 10-Q, which we will file with the FCC later today.
Now, let me turn the call back to Clifford for closing comments Clifford.
Thanks Rich.
When we announced the strategic partnership and stop or.
We indicated that we had retains the right off the existing Acacia common stockholders the opportunity to purchase up to 100 million.
Senior secured notes and warrants.
Up to a.
Knives and wants to purchase up to 27 million.
Oh shares of common stock.
Substantially the same times and stop or we reaffirmed this goal today and intend to commence on initial offering.
31.5 million in senior secured notes and wants to purchase common stock.
As a reasonably practical.
In conclusion.
We have taken a significant step to build out the cases asset base at the strategic acquisition of a portfolio of life science assets.
Immediately works to reduce the inherent risks of this portfolio by selling liquid assets, taking advantage of the market fluctuations between that they priced yes.
They have quiet.
The remaining assets located on our books inclusive of many of the private security.
So the cost, meaning all pretty meaningful upside potential ahead.
We believe it kit Acacia is strategically well positioned in this environment.
I didn't motivated management team debt navigating complicated transactions. The case is designed to be extremely flexible we can pursue investments in multiple ways getting acquired public or private entities or acquiring assets directly.
We believe that together would stop.
We are well positioned to pursue corporate development opportunities greater scale and flexibility. We are now happy to answer any questions that you have.
Thank you at this time, we will be conducting a question answer session. If you would like to ask your question. Please press star one on your telephone keypad economies in total indicate your line is in the question Q.
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One moment, please lobby pull for questions.
My first question is from Anthony's goes with Craig Hallum. Please proceed with your question.
Good morning, guys I've, a couple of questions I'm curious the level of interest in a private companies that you hold.
Also do you think that all of the private and Steve will be transferred over this quarter and I'm curious your your philosophy, if theres any of them that you think are just jewels that you want to hang onto even if there is interest in a in selling them.
Well it was our that than at a follow up afterwards.
Thanks, Tony.
Clifford would you like to talk about the private companies in our process for I'm looking for liquidity in the future.
Yes.
So we know.
We view this is a portfolio trade and we intend to realize cash for all of the assets as soon as practically possible.
Established with the board a waterfall timetable to do that.
We do believe that.
Several of these assets of substantial upside and we hope.
The prices were going through now could realize on that and they will be shortly providing details how many of the assets that we continued to hold and provide some outlook on what we expect.
Okay, I'll just be as an overview.
Okay.
I'm sorry clever continue please.
But other than method.
Because of the nature of bond.
A portfolio or there was in liquidation off the appraising for a long period of time.
What we have automated stage life sciences investments most of which all within 12 to 24 months of commercial inflection point and I think that's a very important factor to remember about these assets, they're not early stage assets Oh, so that realizable.
And again John.
Thank you for that and then if you wouldn't mind, commenting about the engagement or how active starboard as with you folks I know out of the gate, it's been very active.
And I know, you're there's no deal until there's a deal I'm. Just curious if you can comment on operating businesses clearly you're highlighting them in your press release, so perhaps that you're maybe getting closer than a than before any thoughts kind of on timelines or goals you have to try to secure an operating business acquisition.
So.
Tony what I would say is that if you looked at our original timeline that we laid out this transaction occurred fairly quickly and it was a difficult transaction in terms of complexity in the amount of work we put into it.
We're not.
We are flexible it our mandate as you can see and we are continuing to progress as rapidly as possible I understand that the markets have moved dramatically hit rates are low and so we continue to work you know as expeditiously as possible and that's kind of.
What I would say along that were constant contact with star Board and collaborating.
As aggressively as you would expect.
Okay, then maybe a question for rich you're in the press release, Alan and calibrated right you're talking about.
Hiring more professionals, what should we think of in terms of Opex going forward is that a small bump up or.
Yeah, I know, it's tough to stay ahead of an operating business acquisition, but I'm just curious whatever detail you can give.
I'll start on an Clifford may want to jump and so we have a.
Research and investment team in place and we've all been working very hard we're adding.
We're adding to that team as mentioned.
But we're doing it deliberately so we're not you know, we're not ramping up or operating expense significantly we're doing it through deliberate hires where we have specific needs around both our research and execution process I don't know if you want to add anything to that Clifford.
Yes. Thank you rich I would say, though Acacia has its now configured is an exceptional platform.
And we've been stretched very thin executing on the transactions, we've been doing or we do need to add some particularly execution capability we have.
Increase our research team as well and we have a very dynamic.
Direction through our strategic Comanche without Sabal Representatives, which also generates potential activity for us, but we definitely need to improve that to increase the throughput capacity of the team.
Thanks, Cluttered best of luck guys.
Thanks.
And again, if we have any questions you May press star, one and telephone keypad doing so ensuring each year in the question Q.
Our next question is from right race from Janney Montgomery Scott. Please proceed with your question.
20, gentlemen.
I've got a couple of them.
How does the acquisition pipeline with patent you know look going forward, what what Mark Booz Allen you guys.
So Brett I would say that.
The.
To date patents that we acquired we were we're very impressed with with marks diligence on those and the ability to bring in what we think our high quality patents. One is in partnership with the very substantial company and one was at the tail end of a wind down of a company, but both we think our we're very well.
That it didnt very positive developments.
Clifford's point about the market pricing theres been hopefully some rationality in the market after years of sort of a dislocation and you know we continue to evaluate.
A pretty active pipeline from marks group, we we have a process in place now for the board to to vet very formally the request that mark puts in front of us for capital and we're allocating the way you know you would hope we would allocate to any platform that we develop.
Okay live or do you want to add anything to that.
No I think that's correct.
We continue to believe Brad that there are opportunities available realistic prices that are worth pursuing.
Okay.
I noted the other day they were they.
Bio Haven pharmaceutical you know did a a royalty deal with Royal pharma 450 million.
It is that the type of thing.
You know because I know we were looking at you know doing.
Form a royalty deals is that something you the kind of thing you've looked at passed on are you familiar with that one.
Clifford may want to jump in here Rapida I wouldn't comment on it sort of one specific deal. We obviously you know in in researching and ending up with the Woodford portfolio. There are some royalty type of companies in that.
Portfolio.
A royalty stream is similar to an IP.
Licensing stream so its something were relatively familiar with and that's just one piece of our ongoing research efforts I wouldn't overly dwell on that any one specific investment within that within that segment of business. Okay.
And can you just give us a a run down on where we I've gotten a number questions on that.
On the remaining warrants with with Veritone why did we monetize some of them and you know what do we have left there.
Yeah, I can answer that we we have a number of tranches of those warrants and and the June quarter. We we exercised some of those warrants and and sold the shares the the the warrants were in the money.
And so we took advantage of that market opportunity they'll be more detail of the center in our 10-Q, but we sold.
Oh portion of them already about 15%.
Okay, Richard I May circle back to you offline, because I I need a little bit more understanding on you know the accounting on the non cash liability the warrants in the embedded a.
Sure you relative but you know I'll circle back to what you on that and then one final one.
You know the 31 and a half million and note and the warrants to purchase common that ultimately you know shareholders will be given a you know the right the share Perry path to with with Star Board.
The warrants will be 365, and you know what will be interest rate.
On that instrument be within <unk>.
[noise], so they'll they'll be on the they'll be on the same terms. So this the same interest rate on the 6% interest rate on the <unk> okay.
And the the warrants will also be at the same strike.
With the free 65 correct.
Okay and when when will we you know we you'd be doing the filing and you know when are the milestone dates on that.
So we've set as a as soon as reasonably practicable, which has to say we will have more to report to you. When we have border report the okay working quickly to do that.
Fair enough. Thank you for taking the question and good showing that that portfolio.
Thank you Brett.
And we have reached the end of the question answer session and also was that this concludes today's conference and you may disconnect you lines at this time thinking for your participation.
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