Q1 2023 Acacia Research Corporation Earnings Call
Speaker 1: The now.
Speaker 1: Wow.
Speaker 2: Good day and welcome to the ACACI Research First Quarter 2023 Earnings Conference Call. At this time, all participants are on the listen-only mode. After management's prepared remarks, there will be a question and answer session. I would now like to turn the call over to Rob Fink. Please go ahead. Rob Fink, ACACI Research First Quarter 2023
Speaker 3: Host and we call our MJ McNulty, Interim Chief Executive Officer, and Kirsten Hoover, Interim Chief Financial Officer.
Speaker 3: Before beginning, I would like to remind you that 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.
Speaker 3: These forward-looking statements generally relate to the company's plans, objectives and expectations for future operations, and are based on the current estimates, projections, future results, or trends. Actual results they differ materially from those projected as a result of certain risks of uncertainty.
Speaker 3: For discussion of such risks and uncertainties, please see the risk factors described in the cases and in the report on Form 10K and quarterly reports on Form 10Q that are filed with the SEC.
Speaker 3: I would also like to remind everyone that a press release disclosing the financial results was issued Saturday afternoon just after the market closed. This release may be accessed on the company's website at Akisharesearch.com under the news and events tabs. With all that said, I would now like to turn the call over to MJ. MJ, the call is yours.
Speaker 4: Thanks a lot Rob and thanks to everyone for taking some time to hear our update this afternoon. As you know, the first quarter comes up pretty quickly and having just spoken six weeks ago, providing a detailed update on the team and the processes we had put in place.
Speaker 4: First, we've largely cleaned up the business from its historical operating procedures and cost structure, which I think you'll see through the numbers. We're confident that the processes we began building and earnest in the second quarter of last year for identifying, qualifying, and executing acquisitions are sound.
Speaker 4: And we're applying those processes to a growing pipeline of acquisition opportunities with an increasing frequency in seeing attractive results.
Speaker 4: What we primarily been focused as we've said in the past on public opportunities and in that universe consists primarily of some of the parts opportunities and margin improvement stories. We're now beginning to also see pockets of similar opportunities in the private markets including
Speaker 4: the good business, challenge, balance, sheet types of opportunities.
Speaker 4: We think we'll continue to see those types of opportunities given where we are in the market cycle. Those evaluations for private assets remain.
Speaker 4: elevated relative to those in the public space.
Speaker 4: There are also several out of favor industries that were attracted to. And as we said in the past, our ability to be fast-sile on industries and on opportunities really is.
Speaker 4: in relationship to the relationships that we have with world-class operating partners.
Speaker 4: which continues to manifest in the opportunities we're actively pursuing.
Speaker 4: We're additionally excited to work with exceptional management teams, and we've identified opportunities where sound management is.
Speaker 4: For one reason or another, it's in Combird from unlocking the full potential of its business.
Speaker 4: of opportunities irrespective of the market conditions. And as a note, we remain cautious about excessive leverage in the system, and we don't anticipate leverage to be a material component of the returns for our shareholders.
Speaker 4: So that's where we are on the new opportunity side.
Speaker 4: We also continue to effectively manage and invest in our intellectual property portfolio, which generated strategically meaningful revenue for us in the first quarter, and we continue to see attractive opportunities with BlueChip partners for future intellectual property investment.
Speaker 4: In addition, printronics was acquired at Intertrack Devaluation as we mentioned in the past. In sticking with our processes, we have an excellent executive working with us to enhance the business.
Speaker 4: and will evaluate similar acquisitions of operating businesses or divisions of large organizations where we believe we can increase the value of the business.
Speaker 4: I now like to turn the call over to Kirsten to discuss our first quarter financial results.
Speaker 5: Thank you MJ.
Speaker 5: Thank you MJ. Let me start with the first quarter results.
Speaker 5: Total first quarter revenues were 14.8 million compared to 13.5 million in the same quarter last year.
Speaker 5: Brinconics generated 10.6 million in revenue in the quarter compared to 10.9 million last year.
Speaker 5: The intellectual property business generated 4.2 million in licensing and other revenue during the quarter compared to 2.6 million in the same quarter last year. General and administrative expenses, which includes GNA at our IP and industrial segments with 12 million compared to 11.1 million in the same quarter of last year.
Speaker 5: The increase was due to non-recurring corporate legal expenses and other one-time charges.
Speaker 5: As an important reminder, we expect that interest income will cover occasions on going fixed parent costs. A key part of this is the elimination of approximately 6 million from our run rate at December 31, 2022 in annualized parent GNA costs.
Speaker 5: We also expect our IP monetization business and patronics to generate free cash flow.
Speaker 5: Operating loss with 9.3 million compared to an operating loss of 8.5 million in the same quarter of last year.
Speaker 5: with the increase due to increased cost of sales from printronics due to underabsorption of overhead. Printronics contributed 560,000 in operating income. GapNet income attributable to Acacia Research was 9.4 million, or $0.7 net loss for diluted share, compared to GapNet loss of $73.3 million.
Speaker 5: or $1.61 for deluded chair in the first quarter of last year.
Speaker 5: the Looted Earnings for Share adjusts the numerator used in the basic earnings for share computation for the fair value adjustments on warrant and embedded derivative liabilities resulting in a deluded net loss attributable to common stockholders. Net income included 1.4 million in realized losses and 3.3 million in unrealized games.
Speaker 5: related to the increase in share price of certain holdings. The company recognized non-cash income of 16.7 million related to the change in fair value of the Starboard Warns and Embedded Derivatives Liabilities.
Speaker 5: At the beginning of 2023, our NOL totaled approximately 63.8 million. And since that time, we have effectively sheltered most of our gains. We will continue to evaluate the most efficient ways to maximize this asset. Turning to the balance sheet. Cash and equity securities at fair value totaled 425 million at March 31st, 2023. Compared to 349.4 million at December 31st, 2022.
Speaker 5: Equity securities without readily determinable fair value totaled $5.8 million at March 31, 2023. Which amount was unchanged from December 31, 2022?
Speaker 5: Investment securities, representing equity method investments, net of non-controlling interest totaled $19.9 million at March 31, 2023, unchanged from December 31, 2022.
Speaker 5: All payments tied to milestones that have already been achieved and earned by Malin J1 through its interest in Biomet have been received. Akasha owns 64% of Malin J1, resulting in a beneficial ownership of 26% in Biomet. Total indebtedness
Speaker 5: which represents the senior secured notes issued to Starboard with $61.4 million at March 31, 2023.
Speaker 5: Now for review of a book value. Our GAP book value at March 31, 2023 was $355.7 million, or $6.07 for basic share, compared to $269.3 million, or $6.19 per share at December 31, 2022. This value reflects the rights offering that was completed in the first quarter. Total Liabilities for Warrants and Convertible Preferred Stock to be eliminated on exercise or expiration of all such Warrants and Convertible Preferred Stock.
Speaker 5: with $85 million at March 31, 2023.
Speaker 5: Our GAP book value has discussed today includes the impact of all warrant and embedded derivative liabilities on our balance sheet, which in turn reflects the impact of the changes in the company's share price over time.
Speaker 5: As these liabilities would be extinguished upon exercise or expiration of these warrants and convertible preferred stock, we think it's more useful to consider how both values should all of these instruments be converted.
Speaker 5: The press release issued earlier today includes a detailed breakdown of our capital structure and the explanations of how our capital structure will change as a result of the ongoing steps of a process of starboard. In summary, upon completion of the recapitalization transactions with starboard, starboard purchased 15 million new shares in the recently completed rights offering at $5.25 per chair, for total proceeds of $78.8 million in the first quarter of 2023.
Speaker 5: $35 million in face value of Series A birdstock will be eliminated, and 9.6 million shares of common stock would be issued at $3.65 per share.
Speaker 5: in Q3 2023 following Acacia's annual meeting of stockholders.
Speaker 5: 31.5 million shares of common stock would be issued at $3.65 per share in Q2 and Q3 of 2023. 85 million of total warrant and embedded derivative liabilities attributable to the Series V Warrants and Series A preferred stock would be eliminated in Q2 and Q3 of 2023. Acacia would paste out a board of total of 66 million as consideration for early exercise of the Series V Warrants and comparable preferred stock in Q3 of 2023.
Speaker 5: And, Acacia will incur transaction costs associated with the negotiation and consummation of the recapitalization transactions. The expected impact of the completion of the recapitalization transactions would be an incremental 153 million in book value.
Speaker 5: and an incremental 41.1 million of shares outstanding.
Speaker 5: Assuming such completion, pro forma book value would be $508.7 million and diluted shares outstanding would be $99.6 million, resulting in pro forma book value per share of $5.10 March 31, 2023.
Speaker 5: Over the next few months, the transaction agreed to with Starboard will result in the streamlining of our capital structure and the strengthening of our capital base.
Speaker 5: This should be complete by the time we report our second quarter results in mid-August.
We continue to believe that Cash for Chair is an important metric for measuring our progress.
As of March 31, 2023, our cash and equity securities first share so that $7.26. On a performative basis, assuming completion of all phases of the Starboard transaction, our cash and equity securities first share would be approximately $4.12.
of March 31, 2023, our cash and equity securities first share so that $7.26 on a performance basis, assuming completion of all phases of the Starboard transaction, our cash and equity securities first share would be approximately $4.12. With that, we'd be pleased to take your questions.
We ask that while posing your questions you please pick up your hands up if listening on a speaker phone to provide optimum sound quality Please hold just a moment while we pull for questions Maurice from Janie wants to get gum riscaught has your first question. Please pose your question your vine is life Hello, can you hear me? Hey Brad, how are you? I'm good MJ and hi Kirshen. Hi
The discipline that you're maintaining in your approach before our consummation of a deal is part of that discipline.
a macroeconomic inhibition to pull a trigger on a deal right now because you feel we may be in the early innings.
of a credit contraction that will result in more distressed prices and a better deal at some point in the future?
So, a guy appreciate the question. I would say this is not a broad application, but generally we don't have inhibitions. So in terms of investing, I wouldn't say it's an inhibition around the macro environment, though we do have our eye on the macro environment.
We don't have a crystal ball. And so we're looking at each company as a business in and of itself and how we think it will perform in the market. What we can do with that company with the operating executives that we bring in to sit on the board and advise us on those companies. And there are a lot of businesses that were seeing that have counter-cyclical elements to them that said.
cash and cash very valuable right now with the outlook or the widely held outlook. And so we do think about how and when we wanted to play that cash, but we are not generalizing saying in this macro environment, we just want to wait because we are seeing interesting opportunities that we think their respective of the macro environment will perform to the
types of estimates that we're making for those businesses. Okay. Now, when you say in the release, one of the speed bumps to a deal, you know, the timing of a deal, you say there are several factors.
outside your control. What factors are we talking about in this M&A space we're talking about?
We could love a business. We could have a price that we love a business that we should think that clears. But it takes two parties to come together on a bilateral basis to get a transaction done. And there are going to be times when that happens and there are going to be times when we have a great deal and the other part isn't willing to transact where we think.
to great deal and we'll work through those. But that's probably the factor. It is our ability to do a deal is not unilaterally in our control, Brett. And that's probably the key point to take away from that comment.
you will bring in our management team that we're more comfortable with and substitute it for the thing that we're buying. Is that why you're talking to all these different management teams?
that we have the best possible viewpoint on the diligence, the execution, and then the operations of the business after our ownership. And so that could mean probably in most cases that the executives that we're working with and looking more like board members or strategic advisors.
to the teams that are actually running those businesses day to day. There are instances of businesses that we've seen and could likely acquire in the future and other instances in the future where it's a corporate car about, for example, and there is not a natural team that has been running the business.
and we can drop executives into there. Or there could be true, you know, turnaround situations where we, you know, we may need to drop somebody in. I would say that our preference is not to upset the apple cart and drop in a new team to run a business unless it's absolutely necessary because it does increase.
operational risk around buying and running these businesses. I'm so I guess the key takeaway there is we want to be as smart as we possibly can and we view very smart people who understand their industries and business models as a key driver for that and we want to be prepared if we need somebody.
you know, we might ultimately want to control. If so, how many and is that included in the balance sheet and the equity securities portion in the balance sheet? So you're going to see equity securities on the balance sheet. It is included in the balance sheet and the equity securities section. There are securities in there that are legacy securities. There are securities in there that are new securities.
But yes, we will acquire positions in businesses that we have done the fundamental research on that we believe are very interesting for a month. It doesn't mean that every one of those businesses ultimately will be acquired going back to your question earlier, Brad, about what's in and what's out of our control.
8, 10, 12, 6. So, let me take that question apart. It's the, the answer to that question is not instructive to the number of things that we're working on. So, there are more things that we're working on in earnest than the number of positions that we have out there. So. I just want to make sure that that that doesn't become a marker for what our pipeline looks like. Because it's not and the 2nd piece of that question is. Given the size of our equity trading portfolio. Last year, we were put over a 100Million dollar threshold for a 4 quarter. Reporting requirement under 13 F, so I'm not going to tell you what they are now, but there's a 13 F that's going to come out.
MJ Kyrsten, thanks so much for taking any time today.
and taking some time today. Hey Adam.
So the question is with regard to capital allocation and thinking about the structure here, obviously you've got a lot of dilution that's coming down the pipe. Any thoughts from the board about offsetting some of that with a buyback given the disconnect between the current share price and the book value?
Look, we get that question a lot. You and I may have talked about this in the past also. We're inherently capital allocators and so we're evaluating all the options we have for allocating capital. I understand the perspective. We also have a very attractive pipeline.
of opportunities that have had coefficients against them is to success of getting them done, but well, and access to the cash that we have on the balance sheet. And so as we look at potential opportunities and weigh those against other capital allocation opportunities or options rather, we have that conversation on a regular basis.
Okay, fair enough. Thank you. Yep. Once again, if there are any remaining questions or comments, please press star 1 on your phone at this time. Please hold while we poll for questions.
Your next question is coming from Todd Seltzer with 88 Management. Please pose your question. Your line is live. Your line is live.
You know what, Adam just asked the question, so I can't say I appreciate MJ's response. You know, MJ, have you guys given a lot of thought to not pulling the trigger on a potential buyback? Was that something you guys gave serious consideration to, or?
You just preferred not really buying back in the stock. I mean, look, we had bought back a reasonable amount last year. And we, like I said, it's really, it's a waiting of the pipeline of opportunities that we have. And what we think the, you know, the outcome of those will be and the accretion associated with those.
relative to buying back stock. And we have a pretty fulsome pipeline that's.
Well, in excess of the cash that we have on the balance sheet and so. You know, we, we do talk about it, we do deliberate on it and right now we're. You know, we're, we're looking towards the, the opportunities that we have. As a way to deploy capital, but we, you know, it, this is. It's a fluid discussions.
Reflecting on a question that Brett asked, at the end of the last quarter.
We had investments in three public companies and aggregate $20 million invested. I know 45 days after the end of the quarter last week, a light will be shined on your current position. Did I see something in the earnings release that reflected cash into stock market that went against cash Rising stock
investments in those types of target potential target companies are still a number in that neighborhood of what it was last quarter just under 20 million or I was mistaken there was no visibility given on that.
Yeah, I mean, so first point is that 13S are a point time and by the time they're reporting on air and they're outdated. As you saw in the last 13S there was a large position in one particular name that made up the bulk book to particular names really that make up the bulk of the portfolio. And so we continue as always to work with them.
Hey, one other question, sell-side coverage. You guys having any meaningful conversations with any analyst out there to potentially look at a case here as a special situation, undervalued play?
Well, Tony Stocks is looking at us and we appreciate his coverage.
And, you know, we have conversations with folks on a periodic basis. I think one of the things that the question I keep getting from you all is when are you going to do a deal? And you know what our answer is, because we've answered it several times. But it, you know, I think the time to start talking to sell side analysts.
Is when we started to put some points on the board and are showing that we have a good pipeline that we're getting deals done. And so if people want to cover us, we're not going to stop them from covering us, but the story continues to evolve and we want to show you all that. We're going to do what we say we're going to do and then the coverage should be.
Much more logical conversation and how bad on the buy side is there not a few vehicles out there that might migrate towards investing in what they perceive to be a. A very undervalued play with a great management team, or you just finding that. The majority of no interest.
I wouldn't generalize it. I would say that we have a lot of conversations with folks like you and other institutional investors that really understand what we're building here and they're really excited about what we're building and we're seeing that roll through the shareholder register.
Thank you.
Thank you.
There appear to be no further questions and cue at this time. I would now like to turn the floor back over to MJ for any closing remarks. Thanks Kelly. You know appreciate everyone's time here this afternoon and the good questions and continuing to follow us and look forward to.
This coming quarter are finishing out this coming quarter and talking to you all at the next quarterly conference call and in between. Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.