Q1 2022 Acacia Research Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the Acacia research first quarter 2022 earnings call.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.
It is not my pleasure to turn the floor over to your host Rob Fink, Sir the floor is yours.
Thank you operator hosting the call today are Clifford press, Chief Executive Officer, Rich Rosen, Chief Financial Officer, and MJ, Mcnulty, Chief operating officer and head of M&A before.
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 of 1995.
These forward looking statements generally relate to the company's plans objectives and expectations for future operation and 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.
For a discussion of such risks and uncertainties. Please see the risk factors described in <unk> annual report on Form 10-K, and quarterly reports on Form 10-Q that are both filed with the SEC.
I 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 Clifford Press Clifford the call is yours.
Thank you, Rob and good morning, everyone.
As we are all well aware.
Evaluations across the equity markets started compressing during the first quarter and there was a significant increase in volatility.
That volatility has continued and the disruptions are creating attractive opportunities for acacia.
With an expanded team of M&A professionals.
Had ready access to a strong base of permanent capital.
We are in a very good position to put our capital to work.
Our team is now in place.
Headed by MJ, Mcnulty and lays Colby.
We have also built and continue to expand our network of Likeminded investors and strategic executives, who engage with us on investment projects and could serve as partners and executing complex transactions the.
The hard work of the last year to build an infrastructure and a network. While we were realizing gains and increasing our base of capital is now aligned at an opportune time as valuations become more attractive trumpf.
Transaction activity is increasing across the range of companies that fit our criteria illustrating this in more detail, we have access to nearly $1 billion in capital and significant experience with complex transactions.
<unk> situations that are mispriced in the public market or where we see an opportunity to unlock value.
Established a dynamic strategic partnership with starboard value LTE with 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.
Discrete divisions of companies and we're able to participate in all lead consortium of investors to complete larger transactions.
Simultaneously, we are increasing our capital base during the quarterly realized an additional $59 $5 million in gains from monetization of the life Sciences portfolio as we continue to Opportunistically divest these positions to.
To date, we have realized $394 million from this portfolio, having invested $294 million to acquire it we continue to hold $163 7 million in assets at market value for the public companies and at cost for the private companies.
In April <unk> received approval from the U S.
Food and drug administration for its novel compounds for the treatment of recurring east infections.
This approval has triggered a milestone payment to acacia of $26 million due by the end of 2022.
More importantly sets the stage for commercialization of this important drug which will generate significant future royalties for acacia.
While our focus on acquisitions is on operating assets.
We also consider our stock to be an attractive investment with Acacia shares trading below book value. During the first quarter, we completed the $15 billion buyback program that we announced in December .
Purchasing 3.1 million shares at an average price of $4.80 per share. We subsequently announced an additional $40 million buyback authorization and we have been executing on that authorization since.
With that I'd like to ask Amgen Mcnulty, our chief operating officer and head of M&A to provide a brief update on our process for managing our acquisition pipeline M. J.
Thanks, Clifford and thanks to everyone for spending your time with US this morning.
As you May know I joined Acacia in mid March relate to lead our M&A initiatives.
I can spend a little bit of time. This morning, providing some additional details on our strategy and how we've established an organization to execute on our strategy.
Clifford and the team has spoken about the strong relationship with starboard and thus far for us, it's really a foundational piece of the strategy.
Together, we have a deep bench M&A.
M&A experts in personnel with multiple decades of sourcing executing and unlocking value in these opportunities create superior returns.
As well as having big headset investment acumen. Our team is built around our defined areas of interest, which we mentioned in the last call that.
Industrials mature technology health care and.
Consumer.
The team includes both deal professionals and former.
Accessible executives are working together on the execution as an expansion of our title efforts are our internal efforts.
We are also working closely with the starboard team to evaluate opportunities.
We've spoken about the rigor we employ when evaluating opportunities in determining an appropriate valuation we are willing to pay the recent economic volatility Clifford mentioned earlier has influenced relative valuation, creating a more robust environment.
I think for us to look at.
And with that I wanted to provide some additional detail and insights on how we view the market.
We approach M&A with two distinct strategies first we're looking for operating companies or divisions of operating companies, where we can deploy permanent capital and work side by side with the team to drive value. These targets are in the vertical dimension mature technology industrials health care and consumer.
Hi.
In some cases.
And together, we add the collective experience of our acquisition team and our partnership with successful operating executives in both these scenarios.
Situations tend to have business models.
And to have business models that are relatively consistent and predictable and our goal is to maximize operational efficiency increased cash generation and grow the business over time, Unlike p/e funds, which have a defined exit timeline or spacs or other vehicles, which seemed to spin out businesses.
IPO, we can approach these opportunities with an owner mindset and with great flexibility operating them indefinitely, improving profitability and selling them or pursuing other transactions.
As I mentioned the strategy consists of predictable business models, and we're also willing to be opportunistic.
And participate in complex transactions, both inside and potentially outside those data verticals.
In both cases, we meaningfully enhanced our resources and relationships for identifying these opportunities simultaneously. We continue to build our network of senior operating executives with whom we work to identify qualify and execute against unlocking value starboard plays a valuable role in a variety of ways, including extending our <unk>.
Operating executive network, augmenting, our investment decision, making process and identifying non traditional acquisition opportunities.
We built a significant pipeline and as you know we have initiated efforts to acquire several companies.
Well.
Clifford I'll turn it back over to you or rich I'll turn it over to you.
Thanks.
Thank you I'm Jay.
First I'd like to remind everyone that we closed on our acquisition of <unk> in early October and Accordingly. The results reported today include the contribution from this business with no comparable contribution in the prior year quarter.
Our GAAP book value at March 31, 2022 was $345 5 million or $7.42 per basic share compared to $435 million or $8.80 per basic share at December 31 2021.
As a reminder, our GAAP book value includes the impact of our warrant an 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 would be extinguished upon exercise or exploration of these warrants and convertible preferred stock. We think it's more useful to consider our book value should all of these instruments be converted.
On this basis, assuming full exercise of all issued derivatives acacias pro forma book value would rise to $952 million or $5 91 per share down from about $1 1 billion or $6 51 per share on the same basis as of December 31 2021.
The primary reason for the decline in book value is the decline in share prices of our securities holdings during the quarter.
For the quarter highlights of our financial performance include the following first revenue for the first quarter of 2022 was $13 5 million compared to $5 8 million a year ago.
Breaking that down.
<unk> contributed $10 9 million in revenue in the quarter with no contribution in the prior year and to our intellectual property business generated $2 6 million of revenue compared to $5 8 million in the first quarter last year.
General and administrative expenses were $11 1 million compared to $6 2 million in the first quarter last year due to the inclusion of <unk> operating expenses as well as increased business development and personnel expenses related to the company's expanding acquisition organization.
Operating loss was $8 5 million in the quarter compared to a loss of $5 7 million a year ago, breaking this down <unk> contributed positive 1.6 million and operating income offset by a $3 $6 million operating loss in our own intellectual property business in the quarter and G&A and our parent.
<unk> related to our business development and acquisition activities.
Next realized and unrealized loss on securities totaled $105 3 million in the quarter, a reflection of the decline in share prices of our security positions since year end. The single biggest driver of the unrealized loss in the quarter was the decline in share price of Oxford, not a poor who shares declined 43% during the quarter.
<unk>, we did realize $66 9 million and gains from sales of securities during the quarter of which $59 5 million were from the sales of shares in our life Sciences portfolio, which we continue to bring to realization. We now own just over 14 million shares of Oxford Gonopore down from nearly 39 million.
Shares prior to its IPO in September 2021, and sales to date have been made at an average price of four 486 P per share.
Our GAAP net loss in the quarter was $73 3 million or $1 61 per diluted share compared to a net loss of $164 5 million or $2.81 per diluted share in the first quarter of last year.
We recognized noncash income related of $28 $1 million related to the decline in the fair value of the star Port Barents and derivative liabilities during the quarter due to the decline of Acacia share price during that same period.
We ended 2021 with a net operating loss carryforward of approximately $170 million during the quarter. Our realized gains have brought that down so a little more than a $100 million recall that at the beginning of 2021 our net operating loss carryforward, plus a capital loss carryforwards.
Stood at $286 million, so we've been able to reduce that by nearly two thirds in just over a year largely through gains that we've been harvesting.
Cash and equity Securities at fair value totaled $535 9 million at March 31, 2022, compared to $670 7 million at December 31.
Debt at the end of the quarter was $168.7 million in senior secured notes issued to starboard value down from $181 2 million at December 31st 2021, as we paid down $15 million in notes during the quarter. We have since repaid an additional 15 $50 million of notes after the end of the <unk>.
<unk>.
More details on these results have been made available in the press release issued this morning and in our quarterly report on Form 10-Q, which we will file with the SEC later today now let me turn the call back to Clifford for closing comments Clifford.
Thanks Rich in conclusion, the volatility that we're seeing in the market is creating opportunities and Acacia is well positioned with an experienced team.
As to capital and our growing network.
Our willingness to pursue complex multifactor transactions.
Without the.
Requirements of either a narrow mandate or restricted time horizon makes acacia a unique and advantaged buyer of businesses. The process of acquiring companies is not linear and is there a hard to predict when transactions will close but I believe our hard work to build an infrastructure that enables us to identify to sue.
And clothes appropriate transactions is aligning.
Well with the rationalization of evaluations twin.
2022 has the potential to be another transformative year for Acacia.
With that we would be very pleased take your questions.
Certainly ladies and gentlemen, the floor is now opened for questions. If you have any questions or comments. Please press star one on your phone at this time, we do ask that while posing a question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Please hold while we poll for questions.
Your first question is coming from Tony Stoss from Craig Hallum. Your line is live.
Good morning, guys.
Couple of them actually Clifford just following up on your comments on my Kobe and the milestone payment can you help us understand if theres additional milestone payments along the way.
If there's additional royalties or any thoughts you have on maybe monetizing this asset down the road and then along the same lines Wi Fi six patent portfolios paid dividends already I'm curious if you'd care to share any updates on kind of new potential licensees going forward. Thanks.
I don't either to Tony I thought you had.
More.
Will follow up with that.
Okay.
Yep.
The.
Significant milestone payment is $40 million.
It is triggered by the F D a.
Approval.
Our share of that is $26 million.
There are some smaller milestone payments.
Based on <unk>.
Developments in either.
The geographies Europe for example is a small one coming due.
But I think that's pretty much the end of the fixed milestone payments and after this with.
Looking to the royalty stream driven by actual sales of the product.
As with any I don't know of a royalty stream you couldnt.
Hold it.
To fulfill future payments or you can monetize it at some point when it's.
Value has been clarified or realized.
When it's reached a stabilized level of.
Income and that's always a consideration that we can have in the future.
In terms of the Wi Fi six portfolio I think that's a very significant portfolio.
Marc Booth and his team are doing an excellent job.
Continuing.
To monetize it.
The fact that it has.
Being as effective as it has.
Obviously.
That effect, which is known to future license potential licensees and I think that will play a role in.
Okay.
Making those transactions.
<unk> to complete.
And then Wi Fi six.
But that's what is it that's just that's the Wifi six.
I thought I was out.
Okay.
Okay, maybe if I could follow up with M. J sure just with asset prices coming down.
I'm curious I think other.
Shareholders and love to hear.
Maybe the areas of expertise as you've built out your team is it predominantly tack industrial is there some health care and just curious your thoughts on what might be too big or whether or not it's even worth it going after smaller acquisitions.
I mean, so so first part first we continue to build out the team where we're getting to critical mass.
We have substantial experience.
Operating executives working with us.
And all of those areas industrials and technology in particular, our focus <unk> seen the market come off I think a lot of things in the technology space seem to be coming off more and so we're spending a lot of time there.
In terms of sizing I don't really want to comment on sizing we have the capability to do things.
Things across the spectrum, it's really going to come down to value and the contribution to acacia as a whole on a risk adjusted basis.
You've seen us look at very large things you've seen us do very small things, we're going to be very thoughtful about where we spend our time small deals take as much time as large deals and a lot of cases.
So it's a.
Kind of a real time.
Analysis.
Patients, who have time span on opportunities available.
Okay.
Then my final question I guess for rich can't leave you out you've been paying down debt rather quickly the last couple of quarters.
Is that kind of the expected plan to pay down debt each quarter going forward versus keeping some powder dry for M&A.
Yeah that that's right Tony I mean as you recall, we've we've felt that the data has enabled us to have some liquidity for what were increasingly large securities positions and as we've been selling those down we've had the resources to pay down that debt, but we continue to have <unk>.
Significant capital resources available to us so leaving that that outstanding are paying interest on it didn't seem to be the best use of capital. So it continues to be available to us, but if we can manage with less of it than than we will.
Very good best of luck guys. Thank you.
So I'm going to turn it.
Thank you. Your next question is coming from Adam Eagleson from a formidable asset management. Your line is live.
Good morning, gentlemen.
Hello, Madam good morning, Hello.
So a couple of questions here so one.
A M a pharma has.
In the past week or so with regards to an additional price.
Private investment just wanted to see given your position in that company, if that was something in which.
You participated.
So that was on the second part of the previously negotiated equity investment that was milestone driven.
Dave obviously made significant.
Progress and said that invest to put in the rest of the capsules.
It was not got it okay.
Okay great.
Terrific investor by the way it's.
Dermot Desmond company I argue.
Great. Thank you and then second I know that.
You talked a little bit earlier about Oh, my Covia. So obviously, there's more clarity there now with the milestone payment and royalty getting ready to start.
Any idea when you might change that valuation from cost to something that would reflect more of that present value of the royalty stream slash the milestone payments.
And I think I can take that.
Okay go ahead rich okay.
So.
Our ownership in volume it is actually through a joint venture that we consolidate in that joint venture is called now on day one.
And so the accounting for it is a consolidation of our of our joint ownership and environment and that ownership is just over 40%.
So and that we're that we're accounting for on the equity method. It just so happens that we've we've captured it on our books at cost.
So we we are not fair valuing it, but we as we receive payments and dividends, etc. Royalties I should say youll see that cash coming in in bolstering our value overall, we could certainly provide more clarity over time once once it starts to generate royalties of what that stream, maybe looking like but we want.
To give some more color today around what that represents in terms of the immediate milestone payment that we see later this year.
I'll add to that for you Adam I think you are that's a technical explanation of how we're accounting for it.
And then I think it will actually also asking what the outlook for it is.
And.
The approval that it has is still I would characterize it is it's somewhat limited approval.
There's further work to be done to get a more broad based.
Approval and we'll have to see how that develops over the next year to 18 months because that will be the determinant of the ultimate scale of the revenues.
Understood. Thank you for clarifying that.
Thank you. Your next question is coming from Calgary Levine from <unk>. Your line is live.
Hi, Jeff Sorry, my questions have all been taken already so thanks and good luck.
Thank you. Your next question is coming from Brett Reiss from Janney Montgomery Your line is live.
Hi, Cliff, Hi, Richard Hi M J.
I, Brett Hi, Hi, Brett.
Just a question the operative language sales to date on the Oxford nine a poor position 14 million is is that as of the quarter ended March 31st or is it today you know the date of the release.
Rich that runs for you there, yes, they're one and the same so we're our current position.
Our current position as of.
March 31st was 14 million shares and that's where we are today.
Okay. So we haven't sold more stock at these low levels.
After the March 31st a cutoff date of the of this quarter.
Right as I as we shared we've we've sold approximately 24 million shares a 25 million shares from AR.
At an average price of four pounds 86 per share.
Yes, well good good show on that I guess this one is for M. J M J D.
Comtech bespoke the.
Kohl's Oh, we have we abandon ship on on you know looking at doing something there or we are still circling the waters on those situations in the bathroom compared to read that comment.
We've had this discussion before it's difficult for us to talk about live deals and so if you don't mind, we went comment on announced transactions. We will if there's new since we're a public issue if there's a.
On material developments, we will of course make appropriate.
Disclosures.
Okay, Alright fair enough and one last one I.
I mean with go ahead.
Really you've done such a fantastic job.
Why haven't we seen.
Some institutional buying of the stock whats holding some of these folks back.
Okay.
You know the complicated question.
I think there are what I would say is.
We have a sense of.
What.
Would make the stock more attractive institutionally.
Scale being one of them and the capital structure.
And I think we're well aware of the issues and will seek to address them.
In the future.
Okay.
Thank you all for taking my questions.
Always thanks.
Thanks, Brett.
Thank you that concludes our Q&A session I will now hand, the conference back to Clippard pressed for closing remarks. Please go ahead.
Oh, well as most of our investors know this is a moment we've been waiting for we were fortunate and proud dislocations in the markets to be able to make.
By attractive assets and we intend to do the same now and the team is working extremely hard.
Two.
Complete.
Those objectives and we.
Very much look forward to being able to.
Announce our progress.
As we get transactions done.
Thank you gentlemen.
Thank you.
Okay.
Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.