Acacia Research Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Business context and reporting period
Acacia invests in intellectual property assets and licenses and enforces patented technologies through operating subsidiaries. It also makes investments in technology companies. Revenue is largely generated through one-time, paid-up patent licenses, alongside recurring, sales-based license fees. Management emphasizes that licensing revenue is uneven and may shift between periods as negotiations and litigation proceed.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $5.46 | $6.49 | $8.85 | $68.58 |
| Operating loss | $(4.02) | $(38.84) | $(10.97) | $(29.87) |
| Net loss attributable to Acacia | $(5.76) | $(28.43) | $(10.14) | $(60.47) |
| Basic and diluted loss per share | $(0.12) | $(0.57) | $(0.20) | $(1.20) |
- Portfolio operations: Net portfolio loss was $0.21 million in Q2 and $3.46 million for the first half, compared with losses of $3.71 million and income of $8.56 million, respectively, in 2018. Q2 2019 portfolio costs included $2.62 million of inventor royalties, $0.38 million of contingent legal fees, $1.86 million of litigation and licensing expenses, and $0.82 million of patent amortization.
- Cash flow: First-half operating cash flow was negative $66.03 million, versus positive $9.63 million in 2018. The 2019 figure included $75.15 million of purchases of trading securities, classified as operating cash flow; excluding purchases and maturities of those securities, the company reported operating cash outflows of $29.4 million. Investing cash flow was positive $0.63 million and financing cash flow positive $0.08 million.
- Liquidity and balance sheet: Cash and cash equivalents were $63.49 million at June 30, 2019; trading securities totaled $101.42 million. Management reported cash and short-term investments of $164.9 million, versus $165.5 million at year-end 2018. Working capital was $163.5 million, down from $170.4 million. Total liabilities were $22.15 million, including $10.52 million of royalties and contingent legal fees payable. The balance sheet reports no debt.
- Equity and other assets: Total assets were $203.76 million and total stockholders’ equity was $181.62 million. Patent assets, net, were $9.53 million. The company recorded an $8.20 million impairment of its Miso Robotics investment, writing off its remaining carrying value.
- Margins: The filing does not present a conventional operating-margin measure; operating results are affected by highly variable licensing revenue and portfolio-related costs.
Material changes versus the prior comparable period
- Revenue fell 16% in Q2 and 87% in the first half. The first-half comparison was especially affected by $63.25 million of paid-up license revenue in the first half of 2018, versus $4.86 million in 2019. Management attributed the decline primarily to fewer new agreements: one agreement in the first half of 2019 versus six in 2018.
- First-half net loss improved to $10.14 million from $60.47 million. The prior-year period included a $28.21 million patent impairment and a $29.75 million net loss from changes in the fair value of investments; 2019 included gains in Veritone’s fair value, partly offset by realized losses on share sales and the Miso Robotics impairment.
- Cash and cash equivalents declined $65.32 million from year-end 2018, while trading securities increased substantially. Accounts receivable declined to $15.31 million from $32.88 million, and royalties and contingent legal fees payable declined to $10.52 million from $22.69 million.
- Acacia acquired three new patent portfolios during the first half of 2019; it acquired none in 2018. Patent acquisition costs were $4.42 million in the first half.
Outlook, commentary, risks and unusual items
- Management stated that cash and cash equivalents and anticipated operating cash flows should meet cash requirements through at least August 2020 and for the foreseeable future. This is management’s assessment, not formal revenue or earnings guidance; the filing provides no specific financial forecast.
- Management highlighted difficulty sourcing quality patent portfolios and dependence on inventors, universities, research institutions, technology companies and other partners. Patent licensing revenue depends on agreement timing, portfolio maturity, litigation outcomes and other factors, and can fluctuate significantly.
- Revenue concentration was high: one licensee accounted for 89% of Q2 revenue; two licensees represented 55% and 27% of first-half revenue. Two licensees also represented approximately 82% and 14% of accounts receivable at quarter-end.
- Patent enforcement entails uncertain trial and appeal outcomes, potentially rising legal costs, and possible sanctions or awards of defendants’ legal fees. One patent infringement case had a trial scheduled within the next six months. The filing also describes a Canadian invalidity ruling and related costs in a separate matter.
- A Celltrace arbitration concerning alleged breach of contract, unjust enrichment and fraud remained unresolved. Acacia disputes the claims; the tribunal extended its expected final-award deadline to August 30, 2019, after the quarter-end, and had not issued an award as of the filing.
- Veritone holdings generated $13.89 million of first-half unrealized gains, offset by $7.23 million of realized losses on share sales. At June 30, Acacia held Veritone shares and warrants with a combined fair value of approximately $9.07 million. Such investment values are exposed to market volatility.
- The company adopted lease accounting standard ASC 842 and recognized approximately $2.1 million of right-of-use assets and $2.5 million of lease liabilities. It expected no material impact on 2019 results of operations.
- After quarter-end, the board authorized a new stock repurchase program of up to $10 million through July 31, 2020. The company also disclosed an existing tax-benefits preservation plan intended to protect its ability to use tax assets.
Important facts for investors to verify
- Whether Acacia can convert its new patent portfolios and ongoing enforcement activity into sustained licensing revenue, given the steep first-half revenue decline and limited new agreements.
- The sustainability and composition of reported liquidity, including the liquidity and market exposure of the $101.42 million trading-securities portfolio and the drivers of negative operating cash flow.
- How concentrated future revenue and collections remain among a small number of licensees.
- Developments in the Celltrace arbitration and patent litigation, including potential costs, sanctions, adverse judgments or delays to licensing proceeds.
- Whether further impairments or valuation changes affect investments, particularly given the Miso Robotics write-off and volatility in Veritone-related gains and losses.
- Management’s liquidity-through-August-2020 assessment and the planned $10 million repurchase, including their impact on capital available for patent acquisitions and operations.