Q2 2022 Acacia Research Corp Earnings Call
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Good day, ladies and gentlemen, and welcome to the Acacia research second quarter 2022 financial results call. At this time, all participants have been placed on 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 of S. N K I R.
Sir the floor is yours.
Thank you operator hosting the call today are Clifford press, Chief Executive Officer, and Rich frozen Zhang Chief Financial Officer.
Before beginning I would like to remind everyone 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 operations and are based on current estimates and 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 describes indications annual report on Form 10-K, and quarterly reports on Form 10-Q that are filed with the SEC.
I would also like to remind everyone that a press release disclosing the company's financial results were 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 Clifford the call is yours.
Thanks, Rob.
Good morning, everyone.
Before discussing the results of the last quarter.
If I look back over what has been achieved over the past two and half years.
Come clear that our ongoing partnership with starboard.
Added immense value to Acacia.
Double its initial capital commitment.
The company to establish the acquisition platform and initiate key initial investments this relationship and the investments. It is facilitated has propelled.
Value creation at the company more importantly, it has allowed us to develop a differentiated approach to acquire operating entities and other assets.
An advantaged style unencumbered by the mandates and timelines that have constrained others.
Our collaboration with starboard value.
Has been built on the basis of contractual arrangements that have now matured the appreciation in value has highlighted the need to revisit and expand on the terms of that initial partnership in.
In particular, we believe that simplifying starboards ownership structure and Acacia with clarity on capital resources can better position. The company for the next phase of development. We are working with Starwood on simplifying this current ownership structure.
Our board of Directors has formed a special committee of directors not affiliated or associated with starboard.
The Special Committee has retained both financial and legal advisors to assist with evaluating and negotiating a resolution of these contractual arrangements given.
Given the complexity of our current capital structure and the fact that the derivative instruments are in the money. This will not be a simple transaction. It would be premature to provide an estimate regarding when or even if this new structure will be defined and there can be no assurance that the parties will be able to reach agreement on tons.
Our M&A program continues to be active and we are expanding our pipeline of potential opportunities recent changes in equity and credit markets have reduced valuations and given us the opportunity to reevaluate specific transactions in light of these changes we have significant experience with complex transactions, especially situations.
Where we see an opportunity to unlock value we have established a clear focus on the type of opportunities that we are seeking.
Simultaneously, we are increasing our base of capital during the quarter, we realized an additional $5 million and <unk>.
Gains from monetization of the life Sciences portfolio as we continue to realize these positions.
We've generated $408 million of cash proceeds from this transaction, we continue to hold $156 million in assets at market value for public companies and that cost of equity method accounting for private companies.
One of these holdings environment.
Which benefited from approval by the U S food and drug administration in April and April was a compound.
For the treatment of recurring east infections. This approval has triggered a milestone payment.
Acacia.
<unk> $6.7 million due by the end of this year 2022, and importantly sets the stage for commercialization of this novel product.
In addition, our intellectual property business continues to generate value during the quarter. This business generated $8 1 billion in revenue largely through licensing agreements related to recently acquired patent portfolios.
During the second quarter, we also repurchased $6 1 million shares of our own shares.
At an average price of $4.64 per share.
Subsequent to the end of the quarter, we completed the $40 million buyback program that we announced in April .
Coupled with a $15 billion buyback program initiated in late 2021, we have retired 11 6 million shares or 23% of shares outstanding.
With that I'd like to turn the call over to rich Rosenstein, our CFO to discuss the financial results rich.
Thank you Clifford.
GAAP book value at June 32022 was $268 2 million or $6 60 per basic share compared to $345 5 million or $7.42 per basic share at March 31st at 435 million or $8 80 per share as.
December 31 2021.
This GAAP book value includes the impact of all warrants had embedded derivative liabilities on our balance sheet, which in turn reflects the impact of the increase in the company's share price over time.
As these liabilities would be extinguished upon exercise or exploration of these warrants and 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 $911 3 million or $5 87 per share down from $952 2 million or $5 91 per share as of March 31 2022.
And 1.1 billion or $6 51 per share as of December 31, 2021.
The primary reason for the decline in book value year to date as the decline in share prices of our security holdings during the quarter and the year as equity markets have broadly been under pressure.
For the quarter highlights of our financial performance include the following Rev.
Revenues for the second quarter of 2022 were $16 7 million compared to $17 4 million a year ago, breaking that down first <unk> contributed $8 $7 million in revenue in the quarter with no contribution in the comparable period in the prior year.
Second our intellectual property business generated $8 1 million of revenue related to patent assertion compared to $17 4 million in the second quarter last year. This is a reflection of the uneven nature of revenue timing in this business.
General and administrative expenses were $10 7 million compared to $6 5 billion in the second quarter last year due to the inclusion of <unk> operating expenses as well as increased business development personnel expenses related to the company's transaction organization.
Operating loss was $5 7 million in the quarter compared to operating income of $1 6 million a year ago breaking.
Breaking this down for Tronox contributed $1 1 million in operating loss, primarily due to the seasonality in that business.
Realized and unrealized loss on securities totaled $46 1 million in the quarter.
A reflection of the decline in share prices of our security positions over the last three months. We did however, realize 11 5 billion in gains from sales of securities during the quarter of which $5 2 million was from the sales of shares in our life Sciences portfolio, which we continue to bring to realizations.
Our largest public position from this portfolio remains Oxford not a poor.
As of the end of June we owned approximately $13 8 million shares of Oxford, not a poor down from nearly 39 million shares prior to its IPO in September .
Also while not a real not a realized gain we did earned 28 million in milestone income for our share of volume in the quarter, bringing our total milestone income from that investment to date to $30 million with the prospect of additional milestone and royalty income in the future.
This investment was carried at approximately $20 million at the time of the acquisition of the portfolio.
Our GAAP net loss was $61 5 million or $1.44 per diluted share compared to net income of $19 $7 million or 23 cents per diluted share in the second quarter last year.
We did recognize noncash expense of $35 1 million related to the change in the fair value of the starboard warrants and derivative liabilities due to the appreciation in acacia share price during the quarter.
We ended 2021 with a net operating loss carryforward of approximately $170 million during the quarter. Our realized gains have brought that down to just over $100 million recall that at the beginning of 2021 our NOL plus our capital loss carryforwards stood at $286 million.
Meaning we've been able to realize nearly two thirds of the NOL in just over a year largely through harvested gains.
Cash and securities at fair value totaled $390 3 million at June 30th compared to $670 7 million at December 31, 2021.
That was $115 8 million in senior secured notes issued to starboard value down from $181 2 million at December 31st as we paid down 50 million of notes during the quarter.
Subsequent to the end of the quarter, we repaid another 55 billion of notes in the month of July and the balance outstanding now stands at $60 million.
More detail more detail 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 remarks Clifford.
Thanks Rich in conclusion, we are pleased the way our partnership with Starwood has developed enabling us to establish a platform.
Isn't that the pro forma book value per share declined by 10% year to date.
Primarily attributable to decline in the value of our Oxford Nano technologies holdings in reviewing overall market volatility. During this period, we continued to direct our investment strategy to the types of opportunities that have embedded value realization potential to withstand these events in the future.
And with that we would be pleased to take your questions.
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we ask that while posing your question you. Please pickup your handset of listening on speaker phone to provide optimum sound quality.
Thats Star one at this time, please hold while we poll for questions.
And our first question comes from Anthony Stoss from Craig Hallum.
Good morning, guys.
Liberty Rich in Peru.
Thank you.
Just the.
I wanted to dig in a little bit if I could on the comments on pay.
Paydown starboard independent committee looking to restructure that does that signal in any way less.
Activity between yourselves and star, where they effectively no longer involved are helping out.
Also Clifford if you wouldn't mind I know you've done in the past like give us the total access to capital that you think you have both internal and external.
And then a couple of follow ups after those too.
Okay.
I'll take the starboard relationship first and then rich will go through the.
The total capital.
Tony I thought I was pretty clear that we regard the starboard relationship is.
Very strategic for US and then we will be expanding that.
I think that we have.
Learned a lot during this period.
How we can how it would operate I think we should have something.
Interesting to announce if we can get this.
Transaction done as you can.
They invested.
In the company, but an earlier time when values are much lower.
Derivative instruments have obviously come significantly into value. So those have to be resolved I think there's enough value to go round.
We will then be focusing on what we've learned over the last two and a half years, which I think is extremely valuable for the future development of the company.
So.
That's how I would think.
Think about it.
As I said there is no assurance that a transaction can happen it's complex, but we are working on it.
With regard to capital availability, which can give you the numbers.
Sure, Thanks, Clifford and thanks, Tony.
So as I as I mentioned before we have approximately 400, but we had approximately $400 million of cash and marketable securities at the end of the at the end of the quarter.
There's still an additional 250 million available under the starboard notes facility arrangement.
And as Clifford mentioned, we're in discussions with starboard about a simplification of our capital structure and a path forward that would include a very clear capital availability. So I would say that it's.
It's approximately $650 million to $700 million, even before it.
<unk> the impact of that.
Gotcha, Thanks, Rich and then maybe for Clifford I'd Love to hear an update you've been successful in Wi Fi patent portfolio any near term opportunity that you think could shake out of that and then just following up on your comments about <unk>.
This overall reduction in valuations public and private companies.
You guys have been smartly patient over the last year or so.
Is the number of potential deals coming your way speeding up now as a result.
Cool.
The patents have been very interesting.
That was a distressed asset class when we first got involved.
And.
Marc Booth and his team has done an excellent job.
They're not looking at somewhat larger.
Portfolios.
We found.
That is strength in numbers, if you are a vey deep broad portfolio.
Yeah.
Better potential.
And it's been a while since we were able to buy something that we really liked where really.
Looking hard now and I think we have some attractive opportunities out there.
In terms of transactions, yes values did reset somewhat.
The type of transactions that we do can take a long time others approach.
I have a similar business model to us.
Experienced the same thing I think with regard to complete the transactions. It's obviously based talk about those when they happen, but we do tend to have.
Significant transactions that we can discuss.
Yes.
In the near future.
Great. Thanks for all the color guys best of luck.
Thanks, a lot.
Our next question comes from Jeff Henriksen from Thorpe Abbott's capital.
Hey, guys, how you doing.
Couple of questions from me, maybe a couple for cliff.
Then one for rich.
It's a little more color maybe on how you're thinking about opportunities in both.
Public markets, given where we are but then also private market opportunity than <unk>.
C financing kind of dry up in that area. So any color on how you kind of think about the balance between public and private right.
And then I know you completed the buyback given where the share price is and I think how woefully inadequate. It is reflecting your intrinsic value any more interest on doing another one of those and then find out of them rich.
Well I think yes.
Rightly or wrongly a market just never really grasped that.
Current structure of the Star Board financing the warrants.
Do you have any color on how you think you can restructure this really get the true economics to shine through in a way that the market could better understand and then I assume that that would also include on the on the two thirds of the warrants at a certain speed at one comment.
Primarily converted to 355 cash burden.
I mean can we assume that there's going to be a conversation about restructuring a strike right.
On those and that's it thanks guys.
Okay Jeff.
Say on your first question in.
In terms of opportunities and where we think we are competitive.
Interestingly.
Between public and.
Private.
We think we can take they carefully about where we can be competitive and generally.
Situations, where we.
We are not.
Forced into it.
Kind of an auction.
Yeah.
And I think the most interesting opportunities theyre oddly enough.
Often in public situations.
So this is something we.
Discuss in detail a lot internally and we've concluded really the best way to explain to the market. What we're talking about is to complete some of these transactions.
I think it will be clear then when we when we do so.
Good.
And so that's what I would say about it now in terms of.
The type of transactions that we're looking at.
In terms of the buyback we bought back.
Nearly a quarter of the shares we have no open.
Oh authority for any more buyback at the moment and since with.
Clearly announced we're in the process of talking about.
Recapitalizing with starboard it would not be appropriate for us to be in the market at the moment.
And.
Yeah.
I will say.
On those.
Instruments.
Rich will answer it in more detail.
The way.
You have a conversation with you and others.
The issue with them is that complex and they're not small they're large so when you go through the pro forma for them.
Significantly changes.
The solution and we've said this before is to simplify I think.
Oh, we got to have starboard and all shareholders.
On an exactly identical basis, so that in earnest. So hopefully we can eliminate the difference between primary and diluted.
Uh huh.
C S a much simplified capital structure, which I think.
We can get to and that would be.
Enabled the stock to trade in a much more consistent way with its intrinsic value.
Rich do you want to add anything to that.
I know I think you I think you've covered it actually Clifford.
Lessors or is there something more you'd like us to add.
Okay.
The 365 strike.
Two thirds of this.
Permanently.
Brent.
Yeah, we were in the middle of the negotiations now just to revisit anything I can really say, but I will tell you change the strike the strike prices.
Set and with voted on by shareholders instruments issued we cannot unilaterally changed the terms of the instruments.
Without getting back to shareholders said that this is the technical answer to.
That can be it.
Changed comps.
But I would add I would add to that if I may. So you may recall when when when this structure was put in place in this financing arrangement was put in place the stock was meaningfully lower than it is today.
Separate mentioned before and so.
So we have sort of outgrown that facility.
Stock was approximately 265 or 270 a share when when these instruments were put in place and so.
The 365 exercise on the $68 5 million remaining warrants.
Would be triggered upon issuance of notes that would that would convert at that price and so we would have to take a look at.
What would be more appropriate financing given the growth in asset value and growth in our share price since that time.
Right Okay.
Well thank you.
Thank you.
We now hear from Brett Reiss with Janney.
Can you guys hear me.
Yes, you can at Brit.
Great great great.
In terms of who what is the name of the firm that you retained in you know in helping us simplify the capital structure and Istar Board.
Retained a third party firm to help them as well.
Okay, so dependent.
We'll be making an announcement at the appropriate time of the advisers, but dependent.
Got to it just yet.
Star Board, it's up to them as to whether they retain advisors.
I would say I'm not sure that any advisors up there could add any sophistication to what starwood has internally. So I think the public capable of handling this on their own.
Okay.
Thank you for taking my question.
Express our next question comes from David Hoff from Cuba Harris Enterprises.
Hi, Good morning, I'm, just looking back at the newer com portfolio with the license that was signed in quarter, four 2021 and kind of projecting it for the I guess, the universe of defendants or potential licensees.
In the past says executed lease a license with RPX to kind of get everyone. At once is there any thoughts of doing another kind of license.
Instead of mitigating for 10 years kind of taking the quarter for license and projecting it into kind of a lump sum payment.
It's an interesting question.
<unk>.
RPX is still out there.
Yeah I know.
Got it.
<unk>.
A very viable participant in the market.
But in the case and we do talk to RPX site.
Are those two when we have items.
To transact.
But in.
In the case of that portfolio and others as we explained last time the initial license was with a.
A single <unk>.
So you'd say very very large.
Universe.
Of users out there and I think we have a long way to go in terms of monetizing that I'd say that acacia.
Bill.
Built up over many years.
A.
Very significant reputation is it determined.
And committed actor for its property interests.
And I think that.
Tens to preclude what you were referring to its companies to get into sort of opinion legal battles I think when people.
Talking to Acacia.
It's an organization that is very seasoned and this knows what it's doing.
And is perfectly capable of getting the whole distance.
And that generally tends to contract the.
Timing of getting to our results.
Okay great.
Can you confirm if theres any pending litigation in Germany, or Europe . Currently there's a lot of plaintiffs have been very successful in foreseeing defendants to license through injunctions.
And basically sales bans is there any current litigation in Germany.
We have this one I can tell you we have litigation going all over the place including.
Sure.
Novel.
Territories as well.
Yes.
Well familiar with the benefits of European litigation, but China is making a determined effort.
To establish.
Establish.
And intellectual property.
Yeah.
Our system the Soc India.
But significant resources into ensuring that contract rights can be enforced in these jurisdictions theres actually oddly enough.
A lot of jurisdictions now that made themselves attractive for the assertion of intellectual property.
Okay. Thank you place and many of them.
Alright last question any thoughts on possibly spinning out the intellectual property kind of division. After some of these transactions are made I know experienced getting close to spinning out there's.
Just curious any thoughts on possibly spinning it out.
But I think we've made any decisions in that regard.
We'll say that.
Subject, which is much discussed it's obviously in an asset class that is difficult to value on an ongoing earnings of revenue stream and so there's been long.
Long been debates as to what the correct ownership structure for that as well.
Well aware, we have made no plans of any kind with regard to that division.
Okay. That's it for me thank you.
Sir there are no further questions in the queue do.
Do you have any closing comments you would like to finish with.
We appreciate everyone's support we think that the.
The stock is now now that we've executed the buyback.
We've.
Created a very good opportunity and with tensely engaged and something which has been coming for a while.
The next phase, we sometimes refer to it as a case at two point out we've built a great platform without partnership with starboard and we would very much like to take it to the next level, we hope to have something to.
To announce on that as I said, there can be no assurance that there will be a transaction completed but I can tell you that we would very much like to achieve.
Achieved the next phase of development of that relationship.
I think that's it for the cold Yahoo.
Okay. Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day.
You for your participation.