Q4 2020 Acacia Research Corp Earnings Call
Greetings and welcome to the Acacia research fourth quarter and full year 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 anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce Rob Fink of Investor Relations. Thank you you may begin.
Thank you operator.
Hosting the call today are Clifford press, Acacia as Chief Executive Officer, Al Tobia, Chief Investment Officer, and Rich Rosen's day, 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 Act on Daiichi 95.
These forward looking statements generally relate to the company's plans objectives and expectations for future operations and are based on the current estimates and projections future results or trends.
Actual results may differ differ materially from those projected as a result of certain risks and uncertainties.
For a discussion of such risks and uncertainties. Please see the risk factors described in Acacia annual report on form 10-K, and quarterly reports on form 10-Q that are filed with the SEC.
I would like to remind everyone that a press release disclosing the company's financial results was issued this morning before the market opened.
This release may be accessed on the company's website at Acacia research Dot com under the news and events tab.
With all that said I'd now like to turn the call over to Clifford Press Clifford the call is yours.
Thank you, Rob and good morning, everyone.
This has been a year of significant transformation for Acacia.
On the strength of an opportunistic life Sciences transaction, we added $117 5 million or approximately $2 per share dropped book value, an increase from 67% and position the company for a wide range of value creation opportunities we remain focus.
Just on executing the strategy that we adopted as the foundation of our strategic alliance with starboard value L. P with a strong balance sheet, including 165.5 million of cash and access to approximately $700 million in committed capital.
On the flexibility to pursue potential transactions.
Brasil directions.
We continue to believe that we have several important advantages including.
Radio access to significant committed capital, enabling us to rapidly execute transactions that we develop.
Expertise in corporate governance, and operational restructuring, which can help us to resolve structural impediments to value creation.
Our willingness to invest in out of favor industries or businesses that suffer from a complexity discount a proven ability to resolve complex multi factor situations can be important as we take advantage of market inefficiencies.
Finally, we have a very astute and nimble board of directors, our board members not anything relevant expertise to our company, but we have also created robust processes, which involved the board in transactions early when opportunities are identified each step of the way. The board is engaged at a price just of a proven.
The transaction is accelerated and streamlined as the board's oversight has been ongoing and all relevant questions had been on said by the time, we get to a point of a final decision.
As previously stated our business is to acquire operating companies divisions or other assets, where we believe we can realize significant value following an operational or strategic restructuring. Our primary focus is on companies operating in mature technology health care industrial insert in financial services.
Shipments will not turn the call over to Al Tobia, Chief investment Officer.
Thank you Clifford.
As a reminder, in the second quarter Acacia acquired 18 public.
Private life Sciences companies for a total consideration of $282 million or 224 million pounds.
Acquisition originated from our process identifying and evaluating potential acquisition candidate.
To date, we have recovered approximately $189 million and hold public positions worth an additional 104 8 million from private positions worth approximately $162 5 million representing holdings up $267 3 million.
This portfolio represents more than $450 million in cash and equity value on our balance sheet, which is a gain of approximately 60% over our initial investment.
Turning to our IP business subs.
Subsequent to the end of the fourth quarter, we acquired a portfolio from Newark from this portfolio consists of a broad range of foundational Wi Fi patents that cover various applications, including mobile devices Wearables digital home home automation health care and industrial automation.
Of particular importance during the year, we completed the build of our investment and operations team. This group consists of individuals with both public and private equity experience spanning our primary focus industries for targeting acquisitions as part of this we welcome Jason <unk>.
Our recently hired general counsel.
Our team is now at an appropriate scale to advance our acquisition strategy.
With that I would like to turn the call over to rich rosenstein, our CFO to discuss the results rich.
Thank you al our book value at December 31, 2020 was $292 5 million or $5 94 per basic share compared to $202 million or $4.17 per basic share.
At September 30th at $164 7 million or $3 36 per share at June 30th.
It's important to note that this book value reflects the GAAP treatment of our non cash warrant an embedded derivative liabilities given.
Given the volatility on our share price those warrant an embedded derivative liabilities increased in value during the quarter and are now recorded on our balance sheet on an aggregate value of in excess of $59 million or $1 22 per share.
Those liabilities reflect the GAAP value of all warrants outstanding recognized as noncash charges for potential issuance of shares.
Upon exercise on our exploration these liabilities will be eliminated and reclassified to equity.
For the quarter, our financial results included cash and short term investments totaling $274 6 million at December 31st compared to $168 3 million at December 31, 2019.
That was $115 million in senior secured notes issued to starboard and then the fourth quarter, we had revenue of $4 $4 million.
Let me spend a moment discussing our current capital structure. We currently have $49 2 million diluted shares outstanding book value. At December 31, 2020 was $5 94 per share as I mentioned a moment ago.
We have issued 115 million in notes to starboard value and we have $35 million and series a preferred shares outstanding.
These notes and preferred shares can each be converted into common shares at $3 65 per share.
If all of these notes and preferred shares were converted it would add 41 million share so our share count.
Net result of this as we would have a total of 90 million shares.
But we would eliminate $150 million in notes liability and preferred stock and the liabilities associated with those on instruments.
Additionally, starboard holds.
Additional warrants that if exercised would result in more cash coming into the company, let me break those out.
First starboard holds in other $68 5 million series B warrants that can be exercised at $5 25 per share even if we never issued additional notes those expire in August of 2020 child.
If exercised that would add $360 million in cash and 68 5 million shares.
Second Store-bought holds 5 million series, a warrants that are exercisable at $3 65 per share on cash if exercised these would add another $18 million in cash and 5 billion shares in aggregate. These would add an additional 73 and a half million shares but bring in 370.
8 million in cash relative to our current book value and shares outstanding we would have the following in total if all of these were exercised.
Diluted shares outstanding of 163 million shares comprised of our current 49 million diluted shares plus 41 million shares from existing notes and preferred plus 73 on a half million dollars from the remaining warrants.
Under this scenario if all of these instruments were exercised our book value would increase by $590 million, which includes the following first $378 million in additional cash second a reduction in notes liabilities and preferred stock of $150 million and third the elimination of 62.
$2 million of warrant and other derivative liabilities associated with these notes and preferred stock.
In aggregate the impact of exercise on all of these warrants and conversion of the preferred would result in our book value per share of $5.39 versus $5 94 on a non dilutive basis.
One last point, while this analysis discusses the impact of potential exercise by starboard value of all of its warrants and preferred stock. It is important to remember that consistent with our net operating loss preservation policies. The terms of the preferred stock and warrants prevent starboard value from converting our exercising such securities to the.
Extent, such conversion or exercised because starboard value together with affiliates the beneficially owned or in excess of $4 eight 9% of the company's outstanding shares of common stock following such conversion or exercise more.
Or detail on these results have been made available on the press release issued this morning and also on the upcoming annual report on form 10-K, which we will file with the SEC later today.
Let me now I'll turn the call back to Clifford for closing comments Clifford.
Thanks Rich income.
Kuzan Acacia continues to execute on its investment strategy.
As always.
Our focus continues to be on improvement in our book value.
And a strong balance sheet.
With which we can make additional investments.
<unk> ability remains a key asset in today's economy together with starboard, we are well positioned to pursue strategic transactions of greater scale and flexibility.
We are now happy to answer questions operator.
Okay.
Thank you we will now be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad.
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You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
Our first questions come from the line of Anthony Stoss with Craig Hallum. Please proceed with your questions.
Good morning, guys I.
I think I have three questions in total.
And maybe this is for rich rescue lay out what the book value would be as of maybe the close on Friday with with public Securities.
Et cetera bolt on a basic share basis and on a fully diluted basis.
And then I guess, maybe for Clifford any thoughts on the Oxford net import potential filing for an IPO, what you've heard or any thoughts on the timeline on that.
And then lastly, if somebody wants to field this one as well.
Maybe more difficult to talk about but any update on where you stand with starboard in terms of finding a operating business acquisition. Thanks.
Rich do you want to answer the first part of that question and then I'll answer the other two.
Sure. So the the only total sense, a 12 31 would be the change in stock price.
Sure.
Eric Sunshine and.
Uh huh.
And on immuno court, which is now trading publicly so I'd have to look at precisely how much that's increased in value but immune.
Immuno car alone has increased in value since 12 31.
Approximately $32 million.
Sunshine on Eric's I would need to check call. It in total about 40 million.
Or so.
So on our on our current share count that will be another 80 cents a share.
And on a fully diluted basis that would be about 25 cents a share.
Okay.
Two men a pool.
That's a very dynamic company with a lot of options available to it we are extremely supportive shareholders.
We will see what you know what they decided to do.
But there are a lot of options and I don't know anything more than that.
With regard to potential transactions with Star Board, there's a range of things that we're looking at.
On the particular type of transaction, we would like to do is going to probably be best illustrated when we do one which I hope to do shortly and then I think that'll clarify.
But what we're looking at.
Thank you.
Thank you. Our next question is coming from the line of Brett Reiss with Janney Montgomery Scott. Please proceed with your question.
Good morning, gentlemen.
Thanks for a well crafted press release with all the information you know good good job on that.
I guess the first question.
You know until you run through the tax loss Carryforward Star Board.
So that you don't jeopardize the the net operating loss carry forward will not convert the notes and preferred into common you know for the time being.
Yes, Brendan these documents are public.
And so.
The other.
Available for people to see.
The restriction on Starboards conversion is in the documents.
Okay.
Okay. All all on thank you for your compliment on the press release, we've had very explicit requests from you and others on a number of these subjects and we tried to make sure that it was all in there.
Yes, Yeah, no no good show on that.
And.
Just on on the $68 5 million warrants.
At five in a quarter.
I.
I thought in the past.
Yes.
For Starbucks to be entitled to that day.
I would have had to you know provide the additional 350 million or so in stopgap financing that that's.
Is that still the case or or not.
I'm a little unclear on that.
Yeah, I'll I'll take that so these warrants are exercisable in two ways. One is if we issue notes and starboard word on finance and.
On approved transaction.
But something we would do.
Then those notes could be exchangeable through the warrants into equity at $3 65, a share.
If we do not issue those notes those warrants still have an exercise feature at $5 25, a share independent of any note issuance and those that feature is available until August 2022.
So up until August 'twenty to 'twenty, two if we havent issued.
On the additional notes star.
Starboard could exercise the 68 and a half million warrants for 525 in cash which would be the $360 million of cash from another company.
Okay I appreciate that.
You know with all of this back to issuance I mean, there are just so many competitors in the market looking for the operating company that that Youre looking for.
Suppose in a year or so you cant find something.
Would you with all the available cash would you get more aggressive in the patent intake Ah you know portfolio business would you consider declaring a special dividend.
What happens if we can't find an operating company add at a decent price.
Well, that's a highly hypothetical question I think so far we've shown on that.
We are.
Able to find assets that have good value.
And we do not intend to change that approach now we will not be relaxing on disciplined on these things, but I also think that the mandate that we have it's very very different than than specs and these other.
Vehicles that are out there.
<unk> can only buy cannot by public companies. We can buy we have a whole range of transactions, we can do I would say.
Brett.
I think it's highly unlikely that Tom will come a year from now we havent found constructive ways to invest on capital.
Okay. Thank you for taking my questions I'll drop back in queue.
Yeah.
Yeah.
Thank you. Our next question is coming from the line of Dominic Marshall with Pacific Ridge Capital. Please proceed with your question.
Good morning.
Just most of my questions have already been asked but wanted to follow up kind of on the last one just I guess ask a little bit different way I was hoping you could kind of just talk about.
To the extent that you can what youre seeing.
You know both on on the operating company front.
What is your <unk>.
Due diligence pipeline look like there obviously, we all know what's happening with valuations, but as you've just got done describing.
You guys are maybe looking at.
Little different space, but if you kind of just talk about where you're at on that front.
And then secondly on the IP business, hoping you could just maybe give a little bit more color there kind of what your expectations are for intake and then.
With what you already have over the course of the next year or two just a little more detail on on that side of the business.
Thanks, Dominic so.
I'll take the beginning of the question.
Rich can talk a little bit about that.
IP business.
What I would say is that.
Well, we've always looked at this as day.
The market where we.
Doing our research to look at public companies in the whatever you want on called micro cap range. So we've said at the time sub $2 billion, it's probably it could it be more like sub $1 billion.
We've seen often when companies come public.
As a pressure on them to grow revenue and often times you find companies that have been public for a while that maybe.
If the gas too much on the on the inorganic growth versus actually the return on equity side at Boston, We find that this theme continues.
In all markets up down and sideways.
But it just depends on which sector you are looking at and so back to Clifford point before versus specs are mandated to try to operate at the intersection of sort of public and private equity and used it a.
The array of instruments, whether it's looking.
Looking at the division of the company, whether it's a recapitalization of the balance sheet or it just a straight uptake private and so those are the those are the kind of tools, where we're looking at in terms of utilizing them and we will see opportunities in all markets. We just have to look at in different sectors and different areas book.
We will stay focused on that sort of micro cap public marketplace.
Dominic I'll I'll add a little bit to what.
All is described one thing is.
As I said earlier, it's a difficult type of transaction to describe.
Conceptually it'll be much clearer I think once we start doing these transactions.
And secondly.
We have a very active working collaboration with Star Board.
This is a day.
Interesting type of format that we have here and I am quite I feel very excited about what we have in the pipeline even in the small because obviously a lot of things we were looking at before it's gone away, but there are new things now so we're seeing.
We still have a lot that we're working on and it'll I think speak for itself. When it comes out I think the point that I'll make is we're very different than the spec with very different than a lot of other.
Entities out there and we intend to prove that out.
Yeah.
Thank you that's a helpful. Before you move on to the IP question, just following up on that a little bit more.
I think he used the term there acquisitions, so that kind of goes to my other question, which is you.
Al you talked about the high end, maybe 1 billion or 2 billion, but I guess, how small are you willing to go at it and you know how many companies might you'd be willing to go after on the operating front.
Is it multiple is the answer how many small deals might you potentially do and over what timeframe. Obviously, you don't have an exact answer but if you can kind of just.
We'll park it a little bit.
So.
Do you want on obviously maximize your opportunities and also be efficient right. We don't we don't want to do a lot of tiny deals and what I mean by tiny.
Looking at probably on the low end you're talking about.
$100 million to $200 million would be a small deal and I think the sweet spot is probably $5 million to $600 million is sort of where we would I.
I think like the operating I think that's where we'll probably see the most.
Opportunity with that said if something comes along that's larger.
We have the ability to scale up and we can also work collaboratively with starboard to do that as well so.
The sweet spot is going to be I think in net sort of half a billion plus or minus range and.
We have we're going to have to process a lot of business on the front end because your hit rates are obviously not could it be extremely high so.
We're looking at utilizing our overhead as efficiently as possible.
It sounds good that makes sense given that sweet spot size, then it sounds like.
One or two over the course of the next year or two is probably more likely than a number much bigger than that.
Yes, I'll tell you that sweat on incentive comp are parameters have been drawn by the board and that type of range and just to answer your question on the IP environment, that's been very interesting.
You may recall, when we first became involved here.
Said that is it.
To the.
On the IP.
Business appeared to gone through essentially a distressed business with very little capital being provided and with.
Had gone through a period of declining outcomes that has gone 100% underneath degrees. The other way there've been some astounding IP settlements and judgments recently that have been upheld I'd say that.
It's almost transformed in terms of the outlook.
The our group seems to be doing a very good job in a in a.
Yeah me too.
Wind in their sales and I think we'll see some interesting opportunities there.
Great well, certainly would love more detail, but I appreciate that and appreciate all your answers.
Thank you. Our next question is coming from the line of Calgary Levine with and hang on investment partners. Please proceed with your questions.
Hi, Thank you for taking the question the starboard deal had a rights offering component in it I just wanted to hear your thoughts from you guys on any potential timing of other Reits operating strength.
It is something that we.
Particularly the.
<unk> to have available for our shareholders and I think that's an important feature and when we get the first what I consider to be true.
Stop or type of transaction, we very much look forward to making distributing those rights and giving existing acacia shareholders an opportunity to invest in the transaction on exactly the same terms as starboard.
Thank you very much.
Thank you there are no further questions at this time, we appreciate your participation. This does conclude today's teleconference. You may disconnect your lines at this time.
Have a great day.
Yeah.