Q3 2020 Acacia Research Corp Earnings Call

Greetings and welcome to Acacia research third quarter earnings results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If any whats you require operator assistance during the conference. Please press star zero on your telling.

Phone keypad. Please note this conference is being recorded.

Now I'll turn the conference over to your host Rob think with NK Investor Relations. Thank you may begin.

Thank you operator hosting the call today are different from Chief Executive Officer also be a chief investment officer, and Rick Rosen <unk> Chief Financial Officer.

Before beginning I would like to remind you that the 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.

Hi, Steve.

Forward looking statements generally relate to the company's plans.

Yes, and expectations for future operations and are based on the current estimates projections future results were trends.

Actual results may differ materially from those projected as a result, certain risk factors and uncertainties Burgess.

For a discussion of such risks and uncertainties. Please see the risk factors described in Acacia is annual report form 10-K quarterly reports on form 10-Q, both of which are filed with the FCC.

I'd like to remind everyone that a press release disclosing the company's financial results was issued this morning before the market open.

This release may be accessed on the company's website at Acacia research Dot com under the news and events yeah.

With all that said I would now like to turn the call over to Clifford.

Leopard the call's yours.

Thank you, Rob and good morning, everyone our.

During the third quarter Twentytwenty the process of transferring assets acquired from a former would fit.

Equity income fund continued.

As of September 30 up tragic trendy, all but four positions are being charged.

At present, two positions remain to be transferred we will provide an overview of the assets. We currently hold and also discuss transactions completed since this acquisition was about.

In addition, there had been some significant changes in valuations for holdings within the portfolio since September Thirtyth.

We will discuss those Greenfield school [noise].

With the work done transaction now largely behind us.

Just on executing the investment strategy that we adopted as the foundation of our strategic alliance with stop or bad.

We believe we have several important advantages Cody.

Ready access to committed capital is required to execute transactions that we develop.

Expertise in corporate governance operational restructuring, which can help us resolve structural impediments to value creation.

We are willing to invest in and outside of the industries companies would suffer from a complexity discount.

Even ability to resolve conflicts multifactor situations.

Important.

Take advantage of market inefficiencies.

We intend to acquire operating companies divisions or other assets, where we believe we can realize significant value following an operational strategic restructuring.

Probably focus is on companies operating in mature technologies how are you.

That's true and shop in financial services.

We've been working closely with stop work back into a badge investments and acquisitions based on the criteria I just stopped line. It is worth noting that our efforts to make just such an investment led us to the Woodford investment and what's a transaction would not have been possible without steps to support from a stop work too.

And then on the waiver in financial commitment during the dog because part of the global pandemic show, which is thankfully now well on its way to be able to sell out.

Al Tobia of Chief Investment Officer will now review the assets, we hold following what the transaction.

Thank you Clifford.

This acquisition, which was our first transaction with starboard value was announced on June 5th 2020.

It involved acacia acquiring 18.

Public and private life Sciences companies from the former Woodford equity income fund.

For a total consideration of $282 million or 224 million pounds.

As we have said this was an opportunistic acquisition and it was one that came to us as part of our process of identifying and evaluating another potential investments.

The assets within this portfolio fell into two categories 12 public positions six positions and private entities to date, we have sold out of our positions in seven public entities recovering 181 million in value.

We have also sold one private entity for a consideration of approximately $6 million in.

In aggregate. This means we have recovered 187 million out of the 282 million initial investment representing two thirds of our upfront capital.

Under GAAP, we recorded the value of the public holdings at market value as of the end of the quarter.

The remaining private assets are held at cost and would be modified in the event of an impairment.

If there is an observed transaction or similar that we update the value of the holding.

To date only one of our private holdings has had observable transactions since we acquired the portfolio.

We have been transferring the securities onto our balance sheet from the seller in a staged process.

As of September Thirtyth 2022 over the private assets had been.

Had been bought apologize had been transferred to Acacia with one preempted for which we received the cash sale price in the weeks following the end of the quarter and additional two positions were transferred.

As of September 30, 2020, our balance sheet reflected the following remaining positions positions in six public entities, Eric Bio science position valued on September 30 at 37 million.

Sensodyne health positioned valued at 11.4 million.

In the aggregate these positions the public entities as of September 30, 2020 had a market value of $54.5 million.

We also have positions in five private companies, representing an aggregate value at September thirtyth of 139 million.

As a reminder, we carry these positions at cost net of any impairment.

They did only if there has been an observable transaction such as a primary or secondary sale of shares.

We had previously disclosed that one of our private holdings, Oxford.

Oxford Nanopore completed a secondary transaction in the second quarter.

And we are carrying value at $108 million as of September thirtyth.

For the remaining positions.

There have been thus far no observable events meeting. These holdings are still valued at cost, which was approximately 31 million as of September thirtyth. So in summary. After initially investing 282 million, we have recovered 187 million and hold public positions worth 54.5.

William and private positions worth approximately 139 million, we continue to work on realizing the addition of the additional value inherent in these holdings.

The largest of the private.

Company investments is a 6% stake in Oxford, Nanopore technologies, an exciting company with disruptive technology in genetic sequencing applicable to a broad range of applications in both research and commercial markets.

As we mentioned in the second quarter Conference call, Oxford, Nanopore announced a significant new contract with the UK government to provide precise detection of coated and other pathogens on a rapid basis.

We also hold the 5% position in immuno core a clinical stage T cell receptor bio technology company that is working to develop and commercialize a new generation of transformative medicines to address unmet user needs in cancer infection and auto immune disease immuno core has pivotal clinical trial.

<unk> currently underway for its lead program a potential treatment for metastatic you feel melanoma, a rare form of cancer.

The company also has a robust pipeline of programs spanning a broad range of cancer indications as well as infectious and auto immune diseases.

We will soon transfer a 26% position inviting that a royalty business in which we are one of the largest shareholders.

Our IP business had a very strong quarter generating more than 19 million in revenue and nearly 5 million in portfolio income.

Recently, we purchased an option on a very significant new portfolio that we believe represents an extremely rare opportunity.

The IP team has been hard at work with our four previously acquired portfolios and we are on track to deliver the returns that we anticipated when we acquired these assets earlier this year added late last year.

Rich Rosenstein, our CFO will now discuss our results in more detail rich.

Thank you al.

Book value at September Thirtyth was 202 million or $4.17 per basic share compared to 164.7 million or $3.36 per share at June thirtyth.

It's important to note that this book value reflects the GAAP treatment of warrant and embedded preferred liabilities associated with the warrants and convertible preferred outstanding.

Given the volatility in our share price during the quarter those warrant liabilities decreased in value during the quarter and are now recorded on our balance sheet.

At an aggregate value of 74 million. These liabilities reflect the GAAP value of all warrants outstanding as well as the embedded liability and our convertible preferred recognized as noncash liabilities for potential issuance of shares.

Upon exercise out or expiration these liabilities will be eliminated and reclassified to equity.

Given the warrants and preferred were in the money during the quarter. If these were converted to shares our fully diluted share count would rise to 90.6 million with the outstanding notes preferred and the liability of associated warrants and preferred eliminated on conversion, meaning book value would rise by nearly 200 million.

Cars pro.

Pro forma for conversion our book value would be in excess of $4.40 per diluted share.

Since the end of the September quarter, there has been substantial appreciation and the shares of both Rx and Sun sign health, which have risen in value by $34 million combined.

In addition, Oxford Nanopore completed another financing transaction subsequent to September thirtyth at a valuation that would imply an additional 19 million and value relative to our carrying value at September thirtyth.

Combined appreciation in these three positions reps.

Represents an additional 53 million in value since quarter end or more than 50 cents per share diluted share and additional book value compared with our September Thirtyth book value, which I just outlined.

For the quarter, our financial results were as follows cash and short term investments totaled 303 million at September Thirtyth compared to 184 million at June Thirtyth 158 million at March 31st 2020, and 168.3 million at December 30, Onest 2019.

Debt was 115 million in senior secured notes issued to starboard fine.

Finally revenues in the third quarter were 19.5 million more detailing these results have been made available in the press release issued this morning and also on the upcoming quarterly report on form 10-Q, which we will file with the FCC later today.

As we discussed in the call after the June quarter during the process of transferring assets from the Woodford acquisition, we have line items for escrow and for derivative assets on our balance sheet.

The last of these transfers are expected to be completed shortly which means our December balance sheet should no longer reflect these line items going forward. Let me now turn the call back to Clifford for closing comments Clifford.

Thanks, rich or when we announced the strategic partnership the stop order, we indicated that we had retained the right to offer existing Acacia common stockholders the opportunity to purchase up to 100 million in senior secured notes and warrants.

To purchase and with warrants to purchase up to 27 million shares of common stock on substantially the same terms as stop board.

Facilitate this initiative we are fighting a shelf registration statement on form S. Three with the FCC to sort of take a rights offering and provides flexibility to the company.

In addition, Acacia continues to execute on its investment strategy.

We have.

Already created significant value from our IP assets and the Woodford transaction.

Remaining holdings in companies, where we believe there is additional value to be realized.

The result is a significant improvement in our book value and a strong balance sheet from which we can make additional investments.

Flexibility remains the key asset in today's challenging economy together to stop work, we are well positioned to pursue strategic transactions greater scale and flexibility we are not happy to answer questions.

Thank you I'd like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the class C. Kim.

You May press star two if he would like to remove your question for the kids and <unk>.

Participants using speaker equipment, it may be necessary to pick up the handset before pressing the start he is.

Our first question is from Anthony Stoss with Craig Hallum. Please proceed.

Good morning, guys.

A question, maybe you cant say too too much but clustered I'm curious if you could comment about just the activity level going on looking for an operational acquisition that you've had.

Got me that you've been outbid on or if there is you know X number of companies on the short list you just give us a sense of kind of what's been going on over the last six months and and maybe any sense of the timeline going forward.

Oh, Okay, we haven't talked about it. Unfortunately don't have anything that we can announce at the moment the nature of our business is that we look at public companies and need to make progress on the investment portfolio. We can't say anything publicly but I would say that this is an area where all this.

Our partnership with Starwood has been particularly helpful.

I have a number of very good projects in the queue.

They have to be quite busy in the coming yet.

Okay and then.

Yes. Another question that I'm not sure you can fully detailed that I'm curious if you've mentioned, Oxford here several times today again.

Have you been approached has there been a willingness for outsiders to to bid on any of these private companies that you guys have aside from the one you sold for 6 million.

These are average oxidant ticked it up a position stood up very well understood, even though that private sector in the UK market there.

There's a substantial amount of interest in Oxford, Nanopore, it's something of a British Unicom, we are confident in the value that you hold in that business and we think there's substantial additional outside the other companies are in various stages of that and.

Cheating commercial endpoints I think that what I would say about these things.

The.

Investments in this portfolio because of the nature of what we bought we bought.

Hi, there. This is in development for a long period of time.

Okay says jeez positions had been built by the wood 15, or the 10 or 12 years and what we acquired we're very late stage investments.

Most of them are within one or two years of commercial inflection points. So there are substantial opportunities to achieve liquidity on these in.

Relatively short sharp.

But also keep in mind about it.

It is one that is particularly in demand.

Right.

And then if I may you dropped a couple of questions just too rich on the.

On the 19 million IP revenue that you booked in the quarter can you share any more detailed what market was et cetera was that.

One deal more than one deal and then kind of your thoughts on operating expenses for the December quarter in and going forward.

Sure. So there are in the quarter, we had a we had a substantial settlement on one of our portfolios.

There you know in connection with that revenue or there can be a revenue shares with either contingency fees or royalties that we share with the inventor owner the patents and that was the case may be so a part of the reason you may have seen our operating.

Expenses, our portfolio expenses increase in the quarter was in connection with that revenue.

I would say that excluding portfolio expenses that you sort of operating expense ex success based revenue and expense is running at about the same level as it has been it. It's it's not that's not changing substantially in the fourth quarter.

Perfect. Thanks, Thanks, guys. That's all for me.

Thank you.

As a reminder, this star one on your telephone keypad. If you would like to ask a question. Our next question is from Brett Reece with Janney Montgomery Scott. Please proceed.

Hi, gentlemen.

Yeah, Congrats on a a lot of progress.

Thanks, Brett.

Could you refresh.

My recollection, and and I think some people on the call what are the terms of the note.

Andy the warrants that ultimately will be able to participate in the rights offering.

Oh, Oh, there's an update you on that.

But they're 6% notes right convertible the warrants allow the nudge to be.

Exchanged for stock.

Exercise price of $3 and 65 a share.

Okay.

Now at some point will the warrant detached from the note and do you anticipate a a trading market in the warrant.

Well, it's hard to do it it's not a cash exercisable warrant income by it and as a separate instrument an exercise it for cash and Glenn exchanges for not so then it would make sense to separate says okay.

Okay. Okay.

You mentioned in your introductory comments that the IP port Folio is it.

Generating you know the anticipated returns you're looking for can you share with gosh, what you know.

Every dollar spent on IP what is what are the anticipated returns you're looking for.

Al why don't you take that one because.

The I P is you know when we got started again quite some time ago, you've been involved in the story since the beginning we felt that the IP environment was improving and improving substantially and we continue to see evidence of that I will describe some of it.

Right so.

I guess, Brett you know every every investment has to stand on its own merits. So there isn't really a hard and fast rule right if you're looking at.

A portfolio, that's litigation heavy and you're going to need to put capital into it.

And if it has fewer outcomes, you'll obviously look for a higher dollar per dollar invested return if you're buying a portfolio that is more of a soft licensing portfolio with a broader set of outcomes you may be.

Be able to risk adjust that and shoot and you know look for a lower return necessarily I would say that if you look at the portfolio and we we purchase there they're a broad group of portfolios. They have a blend of of.

Pretty good licensing opportunities as well as litigation opportunities and recent events that we've seen some very large awards given out and the level of activity in that business. We feel like we're well positioned now to to capitalize on those but I wouldn't want to get into specific amounts because each each one is different.

Okay I appreciate that now if ultimately.

Ultimately were able to sell the remaining a woodford portfolio you know a huge gain is the nature of that gain such that that will be sheltered by the net operating loss carry forward that the company enjoy.

Yeah I'll take that.

I'll take that.

Yeah, it would be sheltered by the the net operating loss carry forward as well as you have capital loss carry forwards as well.

But yes, you got that that's correct right.

Oh outlets in my ear and one final one with the chain.

Yeah, it looks like.

Biden it is going to be the president do you see that changing the tone and regulatory landscape with respect to the P. tab Boyd and you know the interplay between what happens with the P. tabloid and.

Cases that go through the regular channels in the quarter.

That's a very complicated question, Brent and probably not one that we got into it yet I think we'll be doing it.

A shareholder presentation in general.

And shortly and we'll have some updates on our view of the progress in the IP protection market.

<unk> well I guess one final one you know because so many good good things are happening.

<unk>.

What will we see more kind of outreach to the investment community to.

You know how the the price of the stock.

Well, we've always said, we really very open to expanding everything in the company to our investors in terms of.

Boxing.

We will be more visible I think on some conferences whatever decisions going forward and as soon as we have more of a story to tell we'll be happy to do that.

Great. Thank you for taking my question.

Thank you Brett.

There appears to be no more additional questions. We have read said that today's call. You may disconnect. Your lines at this time and thank you for your participation.

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