Business context and reporting period
Acacia Research Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021. The company combines patent licensing and enforcement with investments and acquisitions of businesses and operating assets. Its reported results are highly affected by investment valuation changes and episodic licensing revenue.
Subsequent event: On October 8, 2021, Acacia acquired a printing technology company for $37.0 million, including an initial $33.0 million payment and a $4.0 million working-capital adjustment. The acquisition released $35.0 million of escrowed funds.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1.6 million | $19.5 million | $24.8 million | $25.4 million |
| Operating loss | $12.7 million | $2.8 million | $16.8 million | $13.1 million |
| Net income (loss) attributable to Acacia | $89.6 million | $38.3 million | $(55.5) million | $33.2 million |
| Basic / diluted EPS | $1.49 / $0.86 | $0.63 / $0.32 | $(1.21) / $(1.21) | $0.51 / $0.36 |
- Revenue and operating performance: Q3 revenue fell 92%, primarily because licensing and enforcement revenue was lower; the number of new agreements was unchanged at three. Nine-month revenue declined 2%. Nine-month operating costs and expenses rose 8% to $41.5 million, including higher G&A and patent amortization.
- Drivers of reported earnings: Q3 net income included $66.5 million of unrealized equity-security gains and $37.7 million of realized gains on equity sales. For the nine-month period, $115.5 million of unrealized equity gains and $53.1 million of realized gains were more than offset by a $203.9 million noncash loss from remeasurement of Series A and B warrants and embedded derivatives, contributing to the net loss.
- Cash flow: Nine-month operating cash flow was negative $7.6 million, investing cash flow negative $3.2 million, and financing cash flow positive $64.4 million. Cash and restricted cash increased $53.6 million to $254.1 million at period end.
- Assets and liquidity: Cash and cash equivalents were $218.0 million; reported cash, equity securities at fair value and long-term restricted cash totaled $640.5 million. Equity securities at fair value were $387.1 million, versus $109.1 million at December 31, 2020. Working capital was $465.0 million, compared with $332.9 million at year-end.
- Debt and other obligations: Senior secured notes had $180.0 million principal outstanding at September 30, 2021, with a reported balance-sheet carrying amount of $182.9 million. The notes were classified as current and had a December 1, 2021 maturity after amendments. Total liabilities were $500.3 million. Series A redeemable convertible preferred stock was reported separately as mezzanine equity at $13.7 million.
- Margins: The filing reports operating losses; a conventional profit margin is not a useful summary given the large, volatile investment and derivative fair-value items.
Material changes versus comparable periods
- Q3 revenue dropped sharply from the prior-year quarter, while nine-month revenue was broadly flat. Management attributed period-to-period variation to the timing, amount and mix of license agreements and enforcement outcomes.
- Nine-month net results swung from $33.2 million income in 2020 to a $55.5 million loss in 2021. The main unusual factor was the $203.9 million noncash fair-value loss on Starboard-related warrants and embedded derivatives; equity investment gains partly offset it.
- Acacia’s Life Sciences Portfolio fair value increased substantially, with a portfolio company’s IPO-related valuation increase contributing to gains. The company also sold portions of the portfolio and held a $21.5 million receivable for a late-September security sale settled in October.
- Debt principal increased from $115.0 million at December 31, 2020 to $180.0 million at September 30, 2021. Patent amortization and G&A also increased year over year for the nine-month period.
Outlook, commentary, risks and unusual items
- Management stated that cash, anticipated operating cash flows and available note proceeds were expected to meet requirements for at least 12 months from the report date. No specific revenue or earnings guidance was provided.
- The October acquisition advances the company’s strategy of acquiring undervalued businesses and assets. The filing does not provide post-acquisition operating results or a quantified outlook for the acquired company.
- Management reported nine patent infringement cases with trial dates scheduled within the next 12 months, while cautioning that dates and outcomes can change and litigation outcomes are difficult to predict. Patent enforcement can consume substantial resources and may result in adverse judgments, appeals, sanctions or delayed revenue.
- Revenue and receivables were concentrated among a small number of licensees: four licensees accounted for all Q3 2021 revenue, and two accounted for all September 30 receivables.
- Investment values and derivative liabilities are volatile; $289.6 million of warrant and embedded-derivative liabilities were Level 3 fair-value measurements at September 30. The filing cites sensitivity to valuation assumptions and market movements.
- The Slingshot Technologies lawsuit remained in discovery against the Acacia entities; the company disputes the allegations. Management said ordinary-course legal matters were not expected to materially affect consolidated results, but patent enforcement litigation can produce material costs or sanctions.
- COVID-19 had not materially affected the company to date, according to management, but could adversely affect the company, licensees or business partners. The company also identified foreign-exchange exposure; a hypothetical 10% exchange-rate change was estimated to affect financial position and results by approximately $32.4 million.
Important facts for investors to verify
- How the October 2021 printing technology acquisition performs, including the final working-capital adjustment and use of the released escrow funds.
- How the $180.0 million note principal was refinanced, repaid or otherwise addressed around its December 1, 2021 maturity.
- Whether Life Sciences Portfolio valuation gains can be realized in cash, and the sensitivity of the remaining portfolio to market and company-specific changes.
- Potential dilution and future accounting volatility from Series B warrants exercisable for up to 100 million shares, alongside the Series A securities and associated liabilities.
- Future licensing receipts, trial schedules and outcomes, legal spending, and the outcome of the Slingshot matter.
- Whether licensee concentration and the limited number of newly acquired patent portfolios affect recurring revenue and longer-term cash generation.