Acacia Research Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Acacia invests in intellectual property and licenses and enforces patent rights. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $2.1 | $5.5 | $5.9 | $8.8 |
| Operating loss | $(6.7) | $(4.0) | $(10.3) | $(10.9) |
| Net income (loss) attributable to Acacia | $6.1 | $(5.8) | $(5.1) | $(10.1) |
| Net income (loss) attributable to common stockholders | $4.2 | $(5.8) | $(7.1) | $(10.1) |
| Operating cash flow | Not separately provided | Not separately provided | $(7.1) | $(2.3) |
- Q2 revenue fell 61% year over year, principally because of fewer revenues from newly executed licensing agreements. Paid-up license revenue was $1.8 million and recurring revenue $0.3 million.
- Six-month revenue declined 33%. Lower recurring revenue and fewer receipts from licensees were partly offset by higher paid-up revenue.
- Q2 operating expenses totaled $8.9 million. General and administrative expense rose 47% to $5.5 million, while patent litigation and licensing expense declined. No standardized gross-margin metric is presented.
- Q2 net income included volatile investment and derivative fair-value items: an $81.6 million gain on equity securities derivatives and forward contracts was substantially offset by a $62.9 million loss on Series A and B warrants and embedded derivatives. The six-month figures include an $81.6 million gain on the former and a $67.3 million loss on the latter.
- Cash and cash equivalents were $164.3 million at June 30, 2020, versus $57.4 million at year-end 2019. Working capital was $240.6 million, compared with $160.1 million. Cash, cash equivalents, trading securities and restricted cash totaled $184.0 million, down from $203.3 million at year-end.
- At June 30, total assets were $394.1 million and total liabilities $220.1 million. Current liabilities included $113.4 million of senior notes. The $115 million notes bear 6% interest, mature December 31, 2020, and are secured and guaranteed by Acacia; the company agreed to redeem $80 million by September 30 and the remaining $35 million by year-end.
- Investing cash flow was $(30.9) million for the half year, including $13.8 million of patent acquisitions and substantial portfolio-investment transactions. Financing cash flow was $109.9 million, principally reflecting the notes issuance. Share repurchases used approximately $4.0 million.
Material changes and notable transactions
- Acacia acquired control of four new patent portfolios in the first half of 2020. Net patents increased to $19.2 million from $7.8 million at year-end, and patent amortization rose.
- In June, Acacia entered into an agreement to purchase a portfolio of public and private life-sciences equity securities for £223.9 million, approximately $277.5 million at the stated exchange rate. Funds were placed in escrow; securities transfer over time subject to terms and approvals. At quarter-end, the balance sheet included $94.0 million of prepaid investment and $75.5 million of equity securities forward contract. The company recorded a $4.9 million foreign-exchange loss related primarily to this transaction.
- Acacia issued 100 million Series B warrants to Starboard in February and issued $115 million of senior secured notes in June. The warrants can create substantial potential dilution; their fair value and the Series A embedded derivative are material, Level 3 liabilities subject to valuation assumptions.
- The company repurchased 1.68 million shares during the half year at an average $2.37 per share. Shares issued and outstanding were 49.3 million at June 30; treasury shares increased.
Outlook, risks and contingencies
- Management stated that cash and anticipated operating cash flows should be sufficient for at least twelve months from the report date, while warning that unforeseen cash needs or inability to obtain financing could impair business plans. The filing provides no revenue or earnings guidance.
- Management expects licensing revenue and legal costs to remain uneven. Patent litigation outcomes, appeals, trial timing, legal expense, patent portfolio intake and licensee willingness to settle may materially affect results. One pending patent infringement case had a trial scheduled within the next twelve months as of the report date.
- Three licensees represented 96% of Q2 revenue; four represented 96% of first-half revenue. This concentration makes results sensitive to a small number of agreements and counterparties.
- Slingshot Technologies’ Delaware lawsuit alleges misuse of confidential information in acquiring a patent portfolio and seeks damages and equitable relief. Acacia disputes the allegations. The company reported $1.4 million of contingency accruals at June 30.
- Acacia said it did not expect COVID-19 to present direct business risks at that time, but acknowledged pandemic-related risks could evolve. Investment-market volatility, foreign exchange, fair-value estimation and potential patent-litigation sanctions are additional risks.
Most important facts for investors to verify
- Progress and final cash cost of the £223.9 million portfolio purchase, including transfers, approvals, foreign-exchange exposure and the value of securities received.
- Repayment of the $115 million secured notes on the stated schedule, and compliance with their covenants and collateral terms.
- Underlying operating performance apart from large, non-cash or market-sensitive fair-value movements; reconcile those movements to reported earnings and cash flows.
- Whether Acacia can sustain patent portfolio intake and generate licensing revenue despite lower reported revenue and significant licensee concentration.
- Potential dilution and valuation sensitivity associated with 100 million Series B warrants, 5 million Series A warrants and convertible preferred stock; also monitor the Slingshot litigation.