Q4 2021 Acacia Research Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the Acacia research fourth quarter financial results. At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments. After the presentation. It is now my pleasure to turn the floor over to your host Rob Fink.
F N K I R. Sir the floor is yours.
Thank you operator.
Hosting the call today are Clifford press, Chief Executive Officer, Chris <unk>, Chief Financial Officer.
J Mccarthy <unk> newly appointed Chief operating officer.
Yes.
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.
Forward looking defined in the private Securities Litigation Reform Act.
<unk>.
These forward looking statements generally relate to the company's plans objectives and expectations for future operations are based on the current estimates projections future results or trends.
Actual results may 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 section describing issued annual report on Form 10-K , and quarterly reports on Form 10-Q that are filed with the SEC.
We would also 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 Cliff.
Clifford the call is yours.
Thank you, Rob and good morning, everyone.
I'm very much looking forward to the year ahead, we.
We have built a strong foundation to execute our differentiated strategy.
We have developed a robust process for identifying and completing transactions on.
The acquisition is an advantaged buyer with permanent capital is starting to be recognized by market participants.
During the fourth quarter, we acquired from Phoenix.
Manufacturer and distributor of industrial impact printers and related consumables.
With a strong well developed position and its target market.
A range of customers across many industries, including health care, food and beverage manufacturing and logistics.
Reported operating income from <unk> was modest in the quarter, which included certain one time purchase accounting adjustments.
Excluding these nonrecurring expenses and noncash items for Tronox generated $2 5 million and operating income during the quarter, we paid $33 million in cash for this business or approximately three six times adjusted EBITDA in its latest fiscal yet for Tronox has generated consistently profitable.
Our results and it has the potential to grow well.
We are fortunate.
We're working with an experienced management team at <unk> to facilitate that growth.
And our engagement with this company is led by Kay play key father, and exceptional operating executives, who was introduced to us by style board.
In addition, we continued to generate value from our intellectual property business and Lifesciences holdings.
During the quarter, our intellectual property business generated more than $51 million in revenue, which benefited from one particularly large license agreement.
And this led to $14 million in operating income from the IP business for the quarter.
This transaction validates the strength of our recently acquired Wi Fi six patent portfolio.
And reinforces our confidence about achieving future licensing agreements.
Marc Booth, Chief intellectual property officer, whose.
His team identified this exceptionally valuable asset and they have proven very adept at monetizing it.
We also continue to realized gains in our life sciences portfolio with.
With a $63 million gain during the fourth quarter.
And a $115 2 million solid gains for the full year.
As we noted at the time of the portfolio acquisition.
This was an opportunity that we saw during a period of significant market uncertainties.
The remaining assets in this portfolio of companies, we believe have considerable value.
Yeah.
This acquisition demonstrates the benefit of our ability to deploy capital as required to match the underlying situation.
As well as our understanding of complex transactions and the ability to move decisively and quickly.
Since acquiring the life sciences portfolio, our transactional expertise has evolved today, we have a well defined and rigorous process for identifying evaluating and pursuing acquisitions.
Along with a robust team of experienced professionals and the care strategy.
Our M&A process continues to be active.
We have started the process of acquiring companies that fit our criteria.
Acacia is well capitalized with access to approximately $1 billion in capital we have significant experience with complex transactions.
<unk> situations that are mispriced in the public market.
Or where we see an opportunity to unlock value.
We have built and continued to develop a dynamic strategic partnership with starboard value L. P.
Together, we have established a clear focus on the type of opportunities. We are seeking and we are fortunate to be able to operate in a flexible fashion.
We can acquire public or private companies with discrete divisions of companies and we are also able to participate in or lead consortium of investors to complete larger transactions.
While our focus is on operating acquisitions at certain times, our own stock may be the most attractive investment we can make.
With Acacia shares trading well below book value, we announced a $15 million buyback program in December that we completed in early February today, we are announcing an additional $40 million buyback authorization.
We will continue to evaluate opportunities to make investments in businesses and to the extent that the market affords us the opportunity to acquire our own shares.
We've been fortunate to significantly enhance our senior leadership team.
And I'm very pleased to have MJ Mcnulty joining me is.
As our Chief operating officer and head of M&A.
Additionally, with Dolby was named Chief investment Officer.
M. J. Most recently served as the managing director of starboard value L. P.
He was the Chief Executive Officer, and a member of the board of directors that starboard value acquisition Corp.
Where he led the transaction through which S V. A C combined with <unk> Technologies, Inc.
Deal valued at approximately $3 4 billion and.
In his new role at Acacia.
Jay will direct all aspects of our M&A activities.
Boston M J to join me on the call today, and I'd like to invite him to speak next.
Thank you Clifford.
First we appreciate everyone for joining us this morning.
We're really proud of the platform that we're building and I'm very excited to be a part of it is Clifford mentioned, we really are an advantage.
<unk> businesses.
We have the transactional flexibility with the advantages of both private and public market investors and the flexibility to initiate our acquisition either in whole or beginning its shareholder.
We also have the operational flexibility with operating executive expertise to navigate complex situations and find values, where others may not.
We believe that complement is highly differentiated to other folks in the market.
Importantly, though we view all our acquisition through the lens of a long term owner and a partner, which our capital base affords us.
We're going to focus on doing this in the industrial technology consumer and health care segments in partnering with excellent senior executives are working alongside us we.
We have multiple pathways to fund these acquisitions, we have a strong balance sheet, we continue to build our strategic partner with starboard value as we develop new models can transactions.
Finally, we're positioned well to partner with other buyers also.
We will evaluate opportunistic situations as well as alternative funding structures, where accretion can generate fee revenue.
I'm very excited to continue building a world class M&A function with a group of World class operating talent and with that I'll turn the call back to Cleveland.
Thanks M. J, we are excited to benefit from your experience and leadership on our team.
As I mentioned, we also recently promoted with golf to the position of Chief investment Officer.
<unk> has served as director of research to cases since August of 2020.
He joined US from seven Kenyans advisors, where he was a co founder and portfolio manager.
Kenyans is an investment firm that specializes in small cap investing.
Earlier in his career.
<unk> was a patent portfolio to manage it as square technology, a small cup technology focused investment advisor.
The wisdom to ship we continue.
Identify actionable opportunities and disappointment is in recognition of the vital role that the such serves in our organization.
With an enhanced research and execution team and the strategy that provides maximum flexibility for wide mandate for value creation. We believe that we are uniquely positioned.
We can have an innovative approach to capital deployment, creating our own catalysts and positioning Acacia as an advantage.
With that I'd like to turn the call over to rich resin Steen, our chief financial officer to discuss the results rich.
Thank you Clifford first I'd like to note that the acquisition of print Tronox closed in early October Accordingly. The results reported today include nearly three months of contribution from this new business. As a result of this edition. We are now providing segment reporting along two segments intellectual property and industrial operations I will turn.
To our operations in a moment.
As we continue to build our operating businesses. Acacia currently has very substantial asset value in the form of cash and marketable securities for this reason we believe our book value is a very useful measure of value.
Our GAAP book value at December 31, 2021 was 435 billion or $8 at 80 cents per basic share compared to $5 94 per basic share at December 31, 2020.
Our cat book value includes the impact of our warrant and embedded derivative liabilities on our balance sheet, which in turn reflect the impact of the increase in the company's share price over the last year.
As these liabilities will be extinguished upon exercise our exploration of these warrants or convertible preferred stock. We think it is more useful to consider our book value should all of these instruments be converted.
On this basis, assuming full exercise of all issue derivatives Acacias pro forma book value would rise to 1.1 billion or $6 51 per share up from $535.38 per share on the same basis as of December 31 2020.
For the quarter highlights of our financial performance include the following.
Revenues for the fourth quarter of 2021 were $63 3 million compared to $4 4 million a year ago.
This is broken down as follows first our intellectual property business generated $51 3 million in licensing and related patent revenue compared to $4 4 million in the fourth quarter of last year. The successful licensing of our newly acquired Wi Fi six portfolio drove much of this performance.
Second <unk> contributed $12 million in revenue in the quarter with no contribution in the comparable period a year ago.
General and administrative expenses were $12 7 million compared to $6 4 million in the fourth quarter of last year for.
<unk> represent a 2.4 million of this with intellectual property G&A of $1 1 million up.
0.0 point 3 million over the last year, and then 8.7 million of parent G&A, which was up $3 1 million over the last year.
The parents G&A increase is due to increased business development deal activity and personnel expenses related to the company's acquisition initiatives. It's important to note that we do not capitalize deal expenses, but rather expense as incurred.
Operating income was $31 3 million in the quarter compared to a loss of $6 4 million a year ago, driven by $40 million of operating income from our intellectual property business.
On a GAAP basis, <unk> contributed 62000 and reported operating income, which reflected the impact of the 2.5 billion of purchase accounting and other one time items that Clifford mentioned.
Realized and unrealized gains totaled $35.8 million in the quarter.
And our diluted net income to common stockholders was 42.4 million or <unk> 45 cents per diluted share compared to $1 30 per diluted share.
And $1 31 per basic share in the fourth quarter last year.
For the year total revenues were $88 million compared to $29.8 billion last year again contracts acquired in early October contributed $12 million of revenue for the year, our IP business generated $76 million in revenue compared to $29 8 million a year ago.
General administrative general and administrative expenses for the year were 35.7 million compared to $24 5 million last year of.
Of the $11.2 million increased 2.4 million was due to the inclusion of print products.
Point 2 million positive variance was related to the IP business and $8 5 million was due to growth in our parent expense, reflecting the expanded team and discretionary deal expenses, which again are not capitalized.
Operating income was $14.5 million compared to a loss of $19 $5 billion last year, a $34 million improvement over last year.
And GAAP net income was $149 2 million or $1.91 per diluted share compared to net income of $109 2 million or $1 48 per diluted share last year.
The current year's net income included $115 million in realized gains related to the life science portfolio and another $87 5 million in unrealized gains.
We recognized a noncash expense during the year of $40 4 million related to the increase in fair value of the starboard warrant and derivative liabilities due to the increase in Acacia share price during the year.
I would note that our net operating loss carryforwards at December 31, 2021 were approximately $172 million.
Over the past year, we have reduced our Nols and capital loss carryforwards by more than 40%.
This NOL remains available to shield future operating income and realized gains from taxes.
Cash and marketable securities at fair value totaled $670.7 million at December 31, 2021, compared to $274 6 million at December 31, 'twenty 'twenty.
And last our debt at year end was 181.2 million in senior secured notes issued to starboard value L. P.
We are also pre announcing results for the first quarter, which will close today, we expect to report revenue of $13 million to $14 million, reflecting a full quarter plantronics ownership and a modest contribution from our IP business General and administrative expenses are expected to be in the 12 five to $13 $5 billion range.
<unk> development of our acquisition of organization and deals that we're working on.
We anticipate an operating loss of 8.2 to $9 2 million during the quarter and then last as of today. We currently hold $538 7 million in cash and marketable securities total indebtedness today is $168 4 million, reflecting the notes issued to starboard value.
More detail on these results have been made available in the press release issued this morning, and our annual report on Form 10-K , which we will file with the SEC later today one comment on the 10-K, you will see we corrected our presentation of certain financing fees in 'twenty 'twenty, specifically related to the amortization period of the financing fee we incurred upon.
First issuing notes the starboard value in June 'twenty 'twenty. The result of this change was a less than 1% reduction in asset value in 'twenty 'twenty.
Which actually resulted in a benefit to earnings in 2021 and will have a similar benefit going forward.
As of the end of 'twenty 'twenty. One this adjustment represented a 0.5% reduction in what our asset value would have otherwise been.
Last as Clifford pension, we completed the $15 million share repurchase program that we launched in December and early February and are now announcing a new $40 million share buyback program with our shares trading at approximately 36% discount to pro forma book value per share repurchases represent an accretive and attractive use.
Our capital now.
Now, let me turn the call back to Clifford for closing comments Clifford.
Thanks Rich.
In conclusion, we have built out a seasoned team of research execution and operating professionals and we continue to work closely with our strategic partners at Starwood value to identify and pursue acquisitions aligned with our stated strategic goals.
You have seen us do the following.
First extract value from our life Sciences portfolio.
One time opportunity that has enabled us to add nearly 400 million in.
Value to the company.
To deliver strong and improving performance from our intellectual property assets and.
And three closed the first of what we expect to be several operating company acquisitions.
We are steadily growing our capital base to expand this strategy.
And the recent additions to our M&A team will help us rollout pipeline.
As I said.
I'm very much looking forward to the coming year.
With that we will be pleased to take questions.
Thank you ladies and gentlemen, the floor is now open for questions.
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Okay.
First question today is coming from Anthony Stoss at Craig Hallum. If you have any questions or comments. Please press star one on your phone at this time.
If youre listening via Speakerphone, please pick up your handset for optimal sound quality.
Mr. <unk>. Your line is live you may begin.
Thank you good morning, everybody and welcome aboard MJ.
Clifford, perhaps we can get a little bit more detail on.
On the licensing deal in Q4 on Wi Fi six patents for starters, congrats on that pretty pretty sizeable deal.
Can you confirm that that's with one customer and if so what percentage of the market did that one customer represent and have you notified other players in the space and then I have several follow ups.
Yes, well you're onto the important points that tiny that was a.
Considered to be a foundational transaction.
And I think it was extremely important in validating.
The importance of the portfolio and the value of it.
The that initial transaction I think.
We'll carry forward, obviously into future discussions, particularly.
Since for it to be that large of a transaction was a very significant.
Counterparty and I think it bodes well for the future I do not have a calculation of what percentage of the total market I think this represents but it.
Is by no means.
The majority of anything like that as you know Wi Fi is and.
Particularly life ethics is very broadly deployed.
And virtually.
No Ted.
Knowledge providers in this area.
Used used almost all technology providers use this.
The version of Wi Fi six.
It does.
A very broad application of these patents.
Clifford have you reached out to other potential licensees already is also is there any chance that some time in calendar 2022 that you could get a.
Our license or some kind of resolution or additional monies coming in off the same patents.
You know, it's very difficult to.
To make predictions about absolute return on assets of this type I think and I just look at it on the basis that it's well validated now and I'll leave it to mark and his team to monetize it.
They see fit.
It will this is not the kind of business that you can.
Value on that recurring revenue or.
Earnings basis.
Pleased to be able to.
Recover.
A very.
Good return on the investment we've made into to keep going with it. It's a strong portfolio. So you know we'll be letting you know Tony as it plays out how it does.
Okay.
And then maybe a question for MJ or you Clifford.
Going forward, how do you guys source deals or any of the kind of publicly disclosed companies that you've gone after youre still interested in each and every one of those and any kind of further comments you might make towards.
Cole to would be helpful. Thanks.
Sorry, I wasn't able to hear operated at the beginning of Tony's question. It faded out there could you just repeat it Tony.
Totally.
The question is how are you going to continue to source deals with MJ is there a new strategy.
When expertise our different segments does he bring in and maybe he could comment about that and then Clifford. If you can comment about some of the other publicly disclosed a rumored companies that you guys have made overtures towards are you still interested in every one of those have any fallen off and any comments you can make regarding kohl's would be helpful.
Okay. So I'd say our strategy has evolved.
We've.
Developed more focus on the top of transaction.
Where we think we can.
The most advantaged.
M J comes from.
A long career in a.
Transactional environment, primarily in private equity so.
That's the reason the basis on which he joined <unk> Board and that is absolutely. The reason why we said pleased to have him here with us at vacation now.
And with regard to ongoing transactions I think the best time for us to discuss those is when they're completed.
So.
If you don't mind, we'll leave it like that for now and we do very much look forward to discussing.
Transactions once their.
But they have taken place.
And Jay would you like to talk a little bit about your past roles and how youre seeing the outlook here for tiny.
Yeah, Clifford absolutely happy to do that and Tony nice to speak with you.
As Clifford mentioned my background is private equity.
I've worked for three funds over the last 20 years, and then it starboard where I ran it back in sourcing with the question of the day as I'm sure you can imagine in the snack market.
As we think about sourcing deals I mentioned it in my comments, but we're really focusing on a handful of industries, where we believe that we can bring something differentiated to the companies, but also differentiated to the owners of those companies.
And B when.
<unk> are a reason when our spot.
To be able to buy that business and make it part of Acacia.
And there are several ways, we're doing that I mean, we historically have worked with operators and we're continuing to build out our bench of operating executives industry executives are world class C suite.
Looks that naturally bring opportunities to us because they see a lot from the seats that theyre in.
We have our strategic partnership with starboard and starboard sees a lot of opportunities, but importantly, we're building.
Dysfunction op internally and we've hired an individual with whom I've worked in the past.
Solely focused on sourcing and building those executive relationships and building those business owner and company relationships.
We've done this in a couple of different places it's been very successful I think.
It's not finding deals at finding good deals and the focus and the process that we're putting around that.
Focus.
And the industries that we're going after.
US coal through the opportunities to really rise and prioritize the best opportunities for us to execute against.
Perfect. Thanks for the color MGA and best of luck guys. Thank you.
Thanks Danny.
Thank you. Our next question today is coming from Brett Reiss at Janney Montgomery Scott. Your line is live you may begin.
Good morning, gentlemen.
Great interesting quarter hats off to you.
Our first question.
G&A our run rate.
Is is 50 to 52 million kind.
Kind of an annual run rate.
I'll take that good morning, Brett.
<unk>.
So to be clear that the <unk>.
Yeah that the G&A is across our businesses. So it's that it's the G&A for our intellectual property business, it's the G&A for <unk> and its a G&A apparent.
There's.
Obviously, there's a proportion of the parent G&A, that's fixed but as I said, we're very active in pursuing deals and acquisitions and some are opportunities and so we expense those items as incurred so if we're particularly active then it'll run higher and if we're in a period, where we're not seeing so many opportunities.
<unk> and are not as active it'll be lower.
<unk>.
We're very mindful of return on investment and so we're not just out spending money to just pursue deals were factoring these costs into our overall assessment of the attractiveness of the acquisitions. We're looking at so it will vary but we happened to be particularly active right now and so we're our current we're incurring a bit more.
Our goal as you know is to acquire one or more operating companies. So for a period of time that may be running a little higher while where we're quite active in that pursuit.
And then.
So that's really what I can say about it.
Right I'll add something for you break.
The way GAAP treats all kind of activity.
The cost of the.
The transaction is.
In all expense or capital is not a capitalized into the cost of the assets its all expensed as incurred so.
Ironically, if you are successful and do a lot of transactions.
You run a very high level of G&A, because all the cost.
Lawyers that will the transaction costs.
Oh, all Expensed nothing gets added to the basis of the assets I. Just I think you should look at it on that basis. If we were not doing much. The G&A would go down because it's very variable as rich said and if we were doing a lot there'd be hygienic, if we're getting deals done.
Okay I appreciate that.
One.
You land.
Now another operating business or two.
Do you have any plans to spin off the the patent business and may be rename that part of the company.
No.
It's a very good business.
When we came to Acacia.
It.
It didn't have much going on the market was such.
There's very good asset value available at realistic prices.
And that's something which we.
I appreciate and.
We are fortunate enough to have.
Mark boots, leading an excellent team.
So we like the business.
Okay.
Richard the $15 million worth of stock we bought back how many shares did we buyback and what was the average price.
It was just over 3 million shares and the average price was just under $5 a share.
Okay.
And one last one for for Mr. Mcnulty.
When looking at the responses from F. P O K an E M T L.
Is it in our kind of corporate.
DNA to where appropriate.
You know maybe half to go you know Carl Icahn on or no management that rebuffs you know our initial overtures and intentions.
Well as I think I said, well put a M. J is a little new for that kind of question.
[laughter] very colorful.
There yeah.
Uh huh.
Maybe not as colorful web vary.
Deliberate.
And careful.
The transactions that we initiate.
And as to what happens after that I think will net history writes itself.
Okay. One last one forgive me and you may not.
Be able answer it the 30 million dollar investment securities, which I assume is divided between.
S. P O K C M T O N N K S F.
Are you at Liberty to break that down.
Probably not a good idea for us to go the breadth.
Alright.
We report what we can.
Fair enough. Thank you for taking my questions, Yes, yes, I'm, sorry, Bret just to just to be clear I think when you say the 30 billion.
And the investment Securities. That's that's an equity method investment of one.
One position, it's a it's a.
So it's actually a royalty business.
But the investments that we have as shown as equity securities at fair value on our balance sheet, which is just under 362 million includes the remainder of the life science portfolio and then some of the other positions that you've mentioned.
And another outside of life science investments.
Great Great quarter. Thank you for taking all my questions I'm going to drop back in queue. Thank you.
A pleasure as always Brett keep them coming thanks, Brett.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone.
Our next question today is coming from David Siebert. Your line is live you may begin.
Thank you very much and congratulations on an amazing quarter and I think you guys did an amazing job outlining the business and the.
The future of of your future plans. My question is surrounding my Covia I know that you guys have a significant interest in that from a royalty perspective on.
One of their drugs that was supposed to be approved I believe about a month and a half ago.
And it.
<unk> said on the FDA website that it was.
Just delayed for a packaging issues, which to me seems like.
A very you know.
A positive signal and something that can be wrapped up relatively quickly on the website of microbial. They also indicate that there is still good for a second quarter launch of this drug.
You have a 26% interest in the in the royalty of that this could be a billion dollar drugs can.
Can you give us an update on that.
Yes, so as you said, where royalty holdup with the largest of the royalty holders in that drug it's an exceptional drug that drug.
Is.
There's going to be able to treat very effectively.
A condition that.
Afflicts.
Many many women at the moment and is not effectively treated.
The process of completing its FDA approval getting the packaging agreed upon.
And various other things is complex, we do expect it will proceed and other than that we wait we hear from Mike Covey as to their progress. So we're not really at the front lines of that process to the extent that we would be able to provide any more color.
Yeah.
Understood, but it's still it's a it seems to me that that's a very significant value within for Acacia provided this drug gets approval and they do a launch as they indicated on their website theyre still comparable to second quarter launch that could be a a very positive thing for for your stock price question as well.
Is there any royalty that you receive off that after approval I mean, not royalty upfront payment after approval.
Or is it just the royalty that you are receiving.
Based on the current structure of the <unk>.
So that's been outlined.
There are milestone payments tied to approval.
Hum and a very substantial royalty thereafter, so once it gets clarified we'll be in a much better position to understand the launch.
This particular compound and the likely.
Market.
Penetration.
That's great I really appreciate that color that's very helpful and congratulations I think you did an amazing job outlining.
The business today, and I and I I would expect the stock should have a nice reaction to that because you guys really laid it out properly. Thank you very much.
Thank you David.
Thank you.
No further questions in queue at this time I would now like to turn the floor back to Clifford press for closing remarks.
I think we've pretty much said everything we could say about this it's a pleasure to finally be at the point, where we can report.
The results that to disease, we are extremely grateful to all of our shareholders who've been.
So supportive.
As we went through the period of transition to create the future of the business here and we look forward to continuing to report as we proceed.
And provide updates whenever we possibly can.
So thank you very much and look forward to speaking next quarter.
Yeah.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect. Your lines at this time and have a wonderful day.
Thank you for your participation.