Acacia Research Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context
Acacia operates intellectual property licensing and enforcement businesses and, since acquiring Printronix in October 2021, industrial printer manufacturing and distribution operations. Its investment portfolio also includes public and private life sciences companies. The 2021 comparison does not include Printronix, so consolidated revenue comparisons are not fully like-for-like.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $15.9 | $1.6 | $46.1 | $24.8 |
| Operating loss | $(11.4) | $(12.7) | $(25.5) | $(16.8) |
| Net income (loss) attributable to Acacia | $28.1 | $89.8 | $(106.7) | $(55.0) |
| Basic earnings (loss) per share | $0.54 | $1.49 | $(2.63) | $(1.20) |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $(13.6) | $(9.3) |
Q3 revenue included $6.3 million from intellectual property operations and $9.6 million from Printronix. Q3 segment gross profit was $5.9 million (about 37% of revenue): $1.0 million for intellectual property operations and $4.9 million for industrial operations. The consolidated operating loss reflects substantial parent-company and corporate costs.
For the first nine months, industrial operations contributed $29.1 million of revenue and intellectual property operations $17.0 million. Segment gross profit was $18.2 million, or about 39% of revenue. The filing does not provide a comparable 2021 industrial-segment result because Printronix was acquired in October 2021.
Quarterly net income was highly affected by non-operating fair-value changes, including a $41.6 million gain on Starboard-related warrants and embedded derivatives. Nine-month results included a $266.2 million unrealized loss on equity securities, $114.4 million in gains on equity-security sales, $42.9 million in equity-method investment earnings, and a $34.6 million gain from remeasurement of Starboard-related instruments. These items make reported earnings volatile and do not represent operating performance alone.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $241.9 million; equity securities at fair value were $81.4 million. Management reported these combined balances at $323.3 million.
- Current assets were $427.2 million and current liabilities $85.4 million. The balance sheet therefore implies working capital of about $341.8 million; MD&A separately reported $1.9 million of “working capital related to cash flows,” a distinct measure.
- Senior secured notes had $60.0 million principal outstanding at September 30, down from $180.0 million at December 31, 2021; the notes’ maturity was extended to July 14, 2023. The balance sheet classified $61.4 million as current notes payable.
- Nine-month investing cash flow was $124.3 million, principally reflecting $236.2 million of equity-security sales against $107.5 million of purchases. Financing cash outflow was $174.6 million, including $120.0 million of note repayments and $51.0 million of share repurchases.
- Cash and cash equivalents declined $67.5 million over the nine months, to $241.9 million. Operating cash use was $13.6 million.
- Series A and B warrant and preferred-stock embedded-derivative liabilities totaled $91.5 million at September 30; their fair-value movements can materially affect reported earnings.
Changes, outlook and material matters
- Revenue rose 904% in Q3 year over year, reflecting both a $4.7 million increase in intellectual property revenue and Printronix’s $9.6 million contribution. For the nine months, revenue increased 86% primarily because of Printronix, while intellectual property revenue declined $7.8 million.
- Management says intellectual property revenue can fluctuate substantially by period and does not manage for smooth sequential growth. ARG executed 13 new license agreements in the first nine months, versus 16 a year earlier, and acquired no new patent portfolios during the period. Three pending patent infringement cases had trial dates scheduled within the following 12 months; dates and outcomes are uncertain.
- Management stated cash, expected operating cash flows, available notes and transactions contemplated by the recapitalization were expected to fund requirements for at least 12 months from the report date. No specific revenue or earnings guidance was provided.
- Acacia recorded a $4.5 million accrual for a disputed third-party fee and damages claim relating to the Life Sciences Portfolio. The parties had not filed claims as of the report date; settlement discussions or arbitration were contemplated. The Slingshot patent-portfolio dispute also remained pending, with trial scheduled for April 2023.
- On October 30, 2022, after quarter-end, Acacia agreed to a Starboard recapitalization. It included conversion of the Series A preferred stock, exercise of 31.5 million Series B warrants, a rights offering at $5.25 per share, and a $66 million negotiated settlement of foregone time value through a reduction in Series B warrant exercise price. Some steps depend on stockholder approval and other conditions; the agreement may be terminated if closing conditions are not met by July 31, 2023.
- After quarter-end, Starboard exercised all Series A warrants; Acacia issued 5.0 million shares for $9.25 million of cash proceeds under adjusted exercise terms. CEO and President Clifford Press resigned effective November 1, 2022; COO Martin D. McNulty Jr. became interim CEO. The board planned a search for a permanent successor.
Most important facts for investors to verify
- Progress, conditions, timing, dilution and settlement economics of the Starboard recapitalization and rights offering, including required stockholder approvals.
- Whether the anticipated Viamet milestone proceeds—Acacia’s portion of a $40 million milestone was expected before year-end 2022—were received, and the related cash conversion.
- Portfolio valuation sensitivity and concentration: two licensees each represented 47% of Q3 intellectual property revenue; equity-security values declined materially during the nine-month period.
- Resolution and potential additional exposure from the $4.5 million accrued dispute, Slingshot litigation, and patent-enforcement risks.
- Printronix’s operating performance, inventory levels and ability to manage higher freight and raw-material costs; the filing notes inventory rose to $13.8 million.
- Debt repayment and liquidity after the recapitalization, alongside the company’s continuing operating cash use and planned capital needs.