Acacia Research Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Acacia invests in and licenses or enforces patent portfolios, and also invests in technology companies. Results are unaudited and quarterly results may not indicate full-year performance.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $3.4 million | $62.1 million; down 95% |
| Operating income (loss) | $(6.9) million | $9.0 million |
| Net loss attributable to Acacia | $(4.4) million; $(0.09) per share | $(32.0) million; $(0.63) per share |
| Operating cash flow | $(58.8) million | $50.0 million |
| Cash and cash equivalents | $73.3 million at March 31 | $128.8 million at December 31, 2018 |
| Cash and short-term investments | $167.9 million at March 31 | $165.5 million at December 31, 2018 |
| Working capital | $164.2 million | $170.4 million at December 31, 2018 |
| Total liabilities | $32.3 million | $32.7 million at December 31, 2018 |
Acacia reported no borrowings in the supplied filing. Liabilities include operating lease obligations; adoption of the new lease standard resulted in approximately $1.2 million of lease-related liabilities and $628,000 of right-of-use assets as of March 31. The filing says cash and cash equivalents, together with anticipated operating cash flows, are expected to meet cash requirements through at least May 2020.
Material changes and drivers
- Revenue fell by $58.7 million year over year. Q1 2019 revenue consisted of recurring license agreements; there were no paid-up license agreements or new agreements executed. Q1 2018 included $60.1 million of paid-up revenue and four new agreements.
- Three licensing and enforcement programs generated revenue in Q1 2019, compared with four in Q1 2018. Two licensees represented 70% and 21% of current-quarter revenue, respectively.
- Despite the steep revenue decline, the net loss narrowed from $32.0 million to $4.4 million, largely reflecting a $6.9 million unrealized gain on the Veritone investment in Q1 2019 versus a $41.1 million unrealized loss in Q1 2018. Q1 2019 also included a $5.6 million realized loss on Veritone share sales.
- Patent litigation and licensing expense increased 27% to $3.8 million, while patent amortization fell 88% to $656,000, partly because of prior-year patent impairment charges. Inventor royalties and contingent legal fees declined with revenue.
- Operating cash flow was negative, in part because the cash-flow statement classifies $60.2 million of trading-security purchases in operating activities. Excluding purchases and maturities of trading securities, management reported operating cash outflows of $14.3 million, versus $12.1 million a year earlier. Cash receipts from licensees were $12.3 million, down 80% year over year.
- Acacia acquired two patent portfolios during the quarter, covering enterprise networking/residential gateways and customization of ad insertion for Internet radio streaming. It acquired none in 2018.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management emphasizes that licensing revenue is uneven and depends on agreements, litigation and negotiation timing, portfolio intake, and other factors; revenue not realized in one quarter may be delayed, but is not assured.
- Management identifies quality patent intake and maintaining relationships with inventors, universities, research institutions and technology companies as significant challenges. Failure to source suitable portfolios could adversely affect revenue and the business.
- Patent enforcement entails uncertain outcomes, appeal risk, potentially rising legal costs, and possible sanctions or fee awards. No pending patent infringement case had a trial scheduled in the six months following the report date.
- Veritone holdings expose earnings and asset values to market volatility. At quarter-end Acacia held 791,473 Veritone shares and warrants valued together at approximately $5.5 million. Revenue concentration and concentrated receivables also create counterparty exposure.
- Celltrace’s claims against Acacia were in arbitration; an evidentiary hearing occurred in February 2019 and post-hearing briefing concluded in April. Acacia disputes the allegations. The filing does not provide a clear estimate of potential exposure.
- Q1 operating expenses included $650,000 for settlement and contingency accruals. Acacia also adopted a tax-benefits preservation plan intended to protect tax attributes by discouraging certain ownership changes, including specified acquisitions at or above 4.9%; the company cautions the plan cannot guarantee prevention of an ownership change.
Most important facts for investors to verify
- Whether licensing activity and revenue recover after the absence of new paid-up agreements in Q1, and how much current revenue depends on the two leading licensees.
- Portfolio pipeline quality and the ability to convert the two newly acquired portfolios into sustainable licensing cash flows.
- Cash generation apart from trading-security purchases, and the liquidity impact of legal expenses, royalties, contingent fees and lease obligations.
- Veritone’s share and warrant valuations, sale proceeds, and the effect of future investment-price changes on reported earnings.
- Developments and potential outcomes in the Celltrace arbitration and other patent litigation or contingencies.
- Whether the tax-benefits preservation plan affects share ownership or stockholder rights, and whether Acacia can realize its tax attributes.