Acacia Research Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are to the same periods in 2020. Amounts are in U.S. dollars unless stated otherwise.
Business context
Acacia acquires businesses and assets it believes are undervalued, while continuing its legacy business of investing in, licensing and enforcing patent rights. During the first half of 2021, it acquired one patent portfolio, covering Wi-Fi 6 standard-essential patents. It also continued to hold and monetize investments acquired in a life-sciences portfolio; one investee is consolidated because Acacia controls it.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $17.4m | $2.1m | $23.2m | $5.9m |
| Operating income (loss) | $1.6m | ($6.7m) | ($4.0m) | ($10.3m) |
| Net income (loss) attributable to Acacia | $19.5m | $6.1m | ($145.1m) | ($5.1m) |
| Basic earnings (loss) per common share | $0.31 | $0.09 | ($3.03) | ($0.14) |
| Operating cash flow | Not separately presented | Not separately presented | ($6.2m) | ($7.1m) |
- Q2 revenue increased 722%; first-half revenue increased 291%. Growth primarily reflected newly executed paid-up license agreements. Paid-up revenue was $16.6m in Q2; recurring revenue was $0.8m.
- Q2 operating margin was approximately 9.4%; the first-half operating margin was approximately negative 17.4%. Patent portfolio expenses rose with contingent legal fees, litigation activity and amortization; general and administrative costs also increased.
- Q2 net income included $18.4m of total other income, including realized and unrealized investment gains, partly offset by a $5.6m fair-value loss on Series A and B warrants and embedded derivatives. For the first half, the $204.5m fair-value loss on those instruments drove much of the reported net loss, despite investment gains.
- At June 30, cash and cash equivalents were $185.7m; current assets were $544.5m and current liabilities were $171.4m. Working capital was $373.1m. Cash, cash equivalents, equity securities at fair value and long-term restricted cash totaled approximately $356.1m, as reported by management.
- Cash and restricted cash increased $21.5m in the first half. Investing activities used $1.9m and financing activities provided $29.6m; operating activities used $6.2m.
- Senior secured note principal outstanding was $145m at June 30, with the notes due October 15, 2021. The balance sheet reports $145.5m of short-term notes payable. Interest is 6% annually, rising to 10% upon default.
Material changes and notable items
- Equity-security fair-value gains were $11.2m in Q2 and $49.0m for the first half; realized gains on equity-security sales were $14.6m and $15.4m, respectively. These gains are market-dependent and contributed materially to reported earnings.
- The fair value of Series B warrant liabilities increased to $230.5m; Series A warrant liabilities were $18.5m and the Series A embedded derivative liability was $41.2m. The aggregate fair value of these liabilities was $290.2m at June 30. The filing attributes substantial noncash income-statement volatility to remeasurement.
- Two licensees accounted for 72% and 17% of Q2 revenue; one licensee represented approximately 98% of accounts receivable at June 30.
- Accrued patent acquisition costs totaled $15m: $10m due in December 2021 and $5m due in February 2023.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance was provided. Management said cash and cash equivalents and anticipated operating cash flows should meet requirements for at least twelve months from the report date, while warning that unforeseen needs or unavailable financing could affect plans.
- Revenue can fluctuate significantly with licensing agreements, litigation outcomes and timing; management does not seek smooth period-to-period growth. One patent infringement case had a scheduled trial within the following twelve months, but trial dates and outcomes may change and are difficult to predict.
- Patent enforcement entails legal-cost, appeal, adverse-ruling, sanctions and fee-shifting risks. The company reported a $1.6m contingency accrual. In the Slingshot matter, certain defendants’ motions to dismiss were granted; claims against the Acacia entities remained described in the filing.
- Acacia disclosed investment-market and valuation risks, customer concentration, challenges securing quality patent portfolios, and potential COVID-19 effects on licensees and partners. It said the pandemic had not had a material impact to date but could still adversely affect operations.
- Series A preferred stock has a $35m aggregate liquidation preference and potential redemption rights. Series B warrants cover up to 100m common shares, creating potential dilution; warrant fair-value changes are sensitive to valuation assumptions.
- Management reported disclosure controls and procedures were effective as of June 30, 2021, and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the October 15, 2021 note maturity, repayment or refinancing arrangements, and associated covenants and collateral.
- Review the valuation assumptions and potential dilution or cash-settlement implications of the Series A and B warrants and embedded derivative.
- Assess whether Q2 licensing revenue and investment gains are repeatable, given revenue concentration and the company’s volatile licensing model.
- Track collections from the concentrated receivable, payment of patent acquisition costs, and the cash requirements of ongoing litigation and portfolio investment.
- Review the latest status and possible exposure in the Slingshot litigation and other patent-enforcement matters.