Acacia Research Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unless noted otherwise, figures below are in millions of dollars. Acacia operates Intellectual Property Operations, focused on patent licensing and enforcement, and Industrial Operations, which includes Printronix, an industrial printer business. The filing was signed August 3, 2023.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $7.9 | $16.7 | $22.7 | $30.2 |
| Operating loss | $(12.5) | $(5.7) | $(21.9) | $(14.2) |
| Net loss attributable to Acacia | $(18.8) | $(61.5) | $(9.3) | $(134.8) |
| Basic and diluted loss per common share | $(0.36) | $(1.44) | $(0.26) | $(3.06) |
- Revenue and segment economics: Q2 total cost of revenue exceeded revenue, producing a gross loss of $1.0 million, versus gross profit of $7.5 million a year earlier. IP Operations recorded a $4.6 million segment gross loss in Q2, compared with $3.4 million gross profit; Industrial Operations generated $3.6 million gross profit, versus $4.1 million. For the first half, IP Operations had a $5.2 million gross loss and Industrial Operations had $9.0 million gross profit.
- Cash flow: First-half operating cash use was $19.1 million, compared with $17.6 million used in the prior-year period. Investing activities provided $9.2 million, versus $78.5 million provided; financing activities provided $77.3 million, versus $106.4 million used. The 2023 financing inflow primarily reflected $79.1 million from the rights offerings.
- Liquidity and balance sheet at June 30: Cash and cash equivalents were $355.2 million, up from $287.8 million at December 31, 2022. Cash plus equity securities was approximately $408 million. Current assets were $485.8 million and current liabilities $77.8 million. Total assets were $534.7 million and stockholders’ equity $335.4 million.
- Debt and capital structure: The balance sheet included $60.5 million of current senior secured notes payable; principal outstanding was $60.0 million. Series A preferred stock was recorded at $23.2 million, and Series B warrant liabilities at $82.0 million. These balances were affected by transactions completed after quarter-end, described below.
- Other results: First-half interest income and other, net was $7.7 million, versus $1.9 million. First-half changes in equity-security fair value produced a $10.0 million gain, while sales of equity securities produced a $9.4 million loss. The prior-year period included a $229.9 million fair-value loss, a $78.4 million realized gain, and $42.1 million of joint-venture earnings.
Material changes versus prior periods
- Q2 revenue fell 53%, and first-half revenue fell 25%. IP revenue declined 95% in Q2 and 57% for the first half, reflecting fewer and smaller licensing agreements. Acacia executed one new license agreement in Q2 and five in the first half, versus three and twelve, respectively, in 2022.
- Printronix revenue declined 13% in Q2 and 7% for the first half, mainly because fewer printer units were sold. First-half cost of sales increased despite lower revenue, partly due to under-absorption of overhead.
- Operating losses widened as lower revenue outweighed lower expenses. IP litigation and licensing expense rose to $2.3 million in Q2 and $3.6 million for the first half, primarily due to litigation support and technical consulting.
- Net losses were substantially lower than 2022, largely because prior-year results included significant investment fair-value losses. The improvement in net loss does not indicate improved operating performance: operating losses increased in both reported comparisons.
- First-half common shares issued and outstanding rose to 58.8 million from 43.5 million at year-end, principally following the rights offering, which issued 15.1 million shares for approximately $79.1 million in gross proceeds.
Outlook, notable events, and risks
- Post-quarter recapitalization: On July 13, 2023, Starboard converted all 350,000 Series A preferred shares into approximately 9.6 million common shares and exercised 31.5 million Series B warrants. The transactions cancelled the remaining $60.0 million of senior secured notes and generated approximately $55.0 million in gross proceeds. The filing describes a negotiated $66.0 million recapitalization payment through a reduction in the warrant exercise price. No Series A preferred shares, Series B warrants, or senior secured notes remained outstanding after the transactions. Starboard held approximately 61.2% of common stock based on 99.9 million shares outstanding as of July 13, 2023.
- Management said cash, operating cash flows, and recapitalization-related transactions should be sufficient to meet cash requirements for at least 12 months from the filing date. Acacia intends to pursue further operating-business and IP acquisitions, which could require cash, debt, or equity financing; no formal financial guidance was provided.
- IP revenue is inherently uneven and depends on licensing agreements, litigation outcomes, and timing. Acacia reported no new patent portfolio acquisitions in the first half of 2023 or in 2022, and expects patent-related legal expenses to fluctuate. Eight patent infringement cases had trial dates scheduled within the following 12 months, though courts may reschedule them.
- Investment values are exposed to market volatility: a hypothetical 10% decline in publicly traded common-stock holdings would reduce their value by approximately $5.3 million. Other risks include acquisition and integration execution, Printronix demand and supply-chain conditions, litigation costs and outcomes, and changes in tax rules or valuation assumptions.
- Starboard’s majority voting control makes Acacia a Nasdaq “controlled company”; the company said it had not elected to use the related governance exemptions as of the filing. The Slingshot patent-portfolio litigation remained unresolved: in July 2023 the court granted Transpacific’s summary-judgment motion and deferred ruling on Acacia’s motion pending further briefing on jurisdiction.
Important facts for investors to verify
- Reconcile the July recapitalization’s cash and settlement mechanics, including the approximately $55 million gross proceeds, $60 million debt cancellation, and $66 million negotiated payment reflected through the exercise-price reduction.
- Track post-transaction share count, Starboard ownership and control, and the effect of the recapitalization on per-share value and future governance.
- Assess whether licensing activity and patent portfolio intake recover, and monitor litigation costs, scheduled trials, and eventual outcomes.
- Monitor Printronix printer volumes, cost absorption, margins, and inventory and supply conditions.
- Evaluate operating cash burn and the performance and volatility of the remaining investment portfolio; the filing provides no formal earnings or revenue forecast.