Acacia Research Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Acacia pursues acquisitions of businesses and assets, alongside its legacy patent licensing and enforcement operations. Results are unaudited. Unless otherwise stated, figures are in U.S. dollars.
Financial performance and liquidity
- Revenue: $5.8 million, up 52% from $3.8 million. Paid-up license revenue was $5.4 million; recurring revenue was $0.4 million.
- Operating results: Patent portfolio income was $0.5 million, versus $1.3 million a year earlier. Operating loss widened to $5.7 million from $3.6 million; operating costs and expenses rose 55% to $11.5 million. Patent litigation and licensing expense increased to $2.3 million, and G&A increased to $6.2 million.
- Net results: Net loss attributable to Acacia was $164.6 million, compared with $11.3 million in Q1 2020. Net loss attributable to common stockholders was $136.7 million, or $2.81 per share, versus $12.2 million, or $0.24 per share. The difference reflects preferred-stock and participating-security allocations.
- Major unusual earnings item: A $198.9 million net loss from remeasurement of Series A and B warrants and embedded derivatives drove the reported loss. This was substantially noncash. Acacia also recorded a $37.8 million unrealized gain on equity securities, $2.7 million of earnings on an equity-method investment, and a $0.8 million gain on sale of equity securities.
- Cash flow: Operating cash used was $6.1 million, versus $2.2 million used in Q1 2020. Investing cash used was $13.9 million, including $11.0 million for patent acquisitions and $9.2 million for equity-security purchases, partly offset by investment-sale proceeds. Financing cash used was $0.3 million. Cash and restricted cash decreased $20.3 million to $180.2 million.
- Balance sheet and liquidity: Cash and cash equivalents were $144.8 million and long-term restricted cash was $35.4 million. Current assets were $482.8 million and current liabilities $138.0 million; reported working capital was $344.8 million. Total assets were $569.0 million and total stockholders’ equity $128.1 million, down from $292.5 million at year-end 2020. Cash, cash equivalents, equity securities at fair value, and restricted cash totaled $360.5 million.
- Debt and capital structure: $115 million of senior secured notes were outstanding at March 31, classified as short-term; the company agreed to redeem the remaining principal on or before July 15, 2021. Notes bear 6% interest, and $1.5 million of interest was accrued and unpaid. Series A preferred stock had a $35 million aggregate liquidation preference. Series A and B warrant liabilities and the embedded derivative liability totaled $284.6 million at quarter-end.
- Margins: The filing does not present a conventional gross margin; patent portfolio income was $0.5 million on $5.8 million of revenue. Operating margin was approximately negative 98%, versus approximately negative 94% in Q1 2020.
Changes versus Q1 2020 and quarter-end
- Revenue rose by $2.0 million, primarily from new licensing agreements; Acacia reported seven new agreements versus four a year earlier. Paid-up revenue increased, while recurring revenue declined by $0.1 million.
- The reported net loss expanded sharply, primarily because fair-value remeasurement losses on Starboard-related instruments were far larger than in the prior-year quarter. Equity-security fair-value results also swung from a $6.1 million loss to a $37.8 million gain.
- From December 31, 2020 to March 31, 2021, cash and cash equivalents declined by $20.7 million, while equity securities at fair value rose from $109.1 million to $180.3 million. Patent assets rose from $16.9 million to $45.1 million, alongside new acquisitions and related accrued costs.
- Acacia paid down $50 million of notes in January and reissued $50 million in March; principal outstanding was therefore $115 million at quarter-end.
Outlook, risks, and other notable matters
- Management said cash and cash equivalents and anticipated operating cash flows should meet cash requirements for at least twelve months from the report date. The near-term $115 million note redemption is an important liquidity consideration; management cautioned that unforeseen needs or unavailable financing could affect plans.
- No quantitative revenue or earnings guidance was provided. Management noted that patent licensing revenue is uneven and depends on agreement timing, litigation outcomes, portfolio maturity, and other factors; quarterly results are not necessarily indicative of full-year results.
- Two patent infringement cases had scheduled trial dates within the next twelve months as of the report date. Trial timing and outcomes can change; litigation can be costly, appeals may delay or reverse outcomes, and adverse rulings or sanctions could be material.
- Revenue was concentrated: five licensees accounted for 61%, 9%, 8%, 8%, and 8% of Q1 revenue. Three licensees represented approximately 68%, 11%, and 10% of receivables at quarter-end. Foreign-domiciled licensees accounted for 90% of Q1 revenue.
- The company acquired one new patent portfolio in Q1, including Wi-Fi 6 standard-essential-patent technology. It had two pending cases with scheduled trials in the next twelve months.
- Acacia reported no material contingency accruals. In the Slingshot Technologies lawsuit, the court dismissed claims against Monarch for lack of personal jurisdiction and against a director for lack of subject matter jurisdiction; claims against the Acacia entities were described as disputed by the company.
- Management said COVID-19 had not materially affected the business to date, but warned that the pandemic could still adversely affect Acacia, licensees, and business partners. A further $9.8 million investment in a portfolio company was made on May 4, 2021.
- Fair-value changes in the warrants and embedded derivative depend on significant valuation assumptions. The company also changed its Series B warrant valuation methodology during the quarter, from Monte Carlo to a Black-Scholes model.
Important facts for investors to verify
- Whether Acacia redeemed the $115 million of notes by the July 15, 2021 deadline, and the resulting cash balance and financing position.
- The drivers and sensitivity of the $284.6 million fair-value liability, including warrant terms, valuation assumptions, and potential effects on reported earnings.
- Portfolio-company valuations, liquidity and potential monetization proceeds, given substantial equity-security exposure and reported unrealized gains.
- Whether licensee concentration, receivable collection, and the large foreign-revenue share persist in subsequent periods.
- Developments in the Slingshot matter and patent litigation, including trial timing, legal spending, and any potential sanctions or adverse rulings.
- Potential dilution from the Series A warrants for up to 5 million shares and Series B warrants for up to 100 million shares, subject to their terms and adjustments.