Acacia Research Corporation — Q3 2019 Form 10-Q
Business context and period. Acacia invests in patent portfolios and technology companies and earns revenue primarily by licensing and enforcing patent rights. This unaudited report covers the three and nine months ended September 30, 2019; comparisons are with the same periods in 2018. Results are highly variable because licensing revenue depends on agreements, litigation and enforcement outcomes.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1.7 million | $13.7 million | $10.6 million | $82.3 million |
| Operating loss | $5.1 million | $5.0 million | $16.1 million | $34.8 million |
| Net loss attributable to Acacia | $7.6 million | $33.2 million | $17.7 million | $93.7 million |
| Basic and diluted loss per share | $0.15 | $0.67 | $0.36 | $1.87 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $(65.7) million | $7.5 million |
- Balance sheet at September 30: cash and cash equivalents of $66.9 million; trading securities of $102.5 million; total assets of $186.9 million; total liabilities of $12.6 million; and stockholders’ equity of $174.3 million. Cash, cash equivalents and investments totaled $169.3 million, versus $165.5 million at year-end 2018.
- Liquidity: working capital was $162.9 million, down from $170.4 million at December 31, 2018. Management said cash and anticipated operating cash flows should meet requirements through at least November 2020. The filing reports no conventional borrowings; lease-related liabilities were approximately $2.0 million.
- Cash-flow context: reported nine-month operating cash use includes net purchases of trading securities; the cash-flow statement lists $103.7 million of purchases and $38.8 million of maturities and sales. Management reported operating cash outflows, excluding trading-security purchases and maturities, of $42.9 million, compared with $69.1 million in 2018.
Material changes versus prior comparable periods
- Revenue fell 88% in Q3 and 87% year to date. Management attributed the decline mainly to fewer new agreements in the nine-month period (four versus nine) and lower revenue from new agreements in Q3. Revenue-generating programs also declined to four from six in Q3 and to four from eight year to date.
- Despite lower revenue, net losses narrowed substantially, principally because 2018 included much larger losses on the Veritone investment and a $28.2 million patent-related impairment, as well as higher amortization and other costs. The lower 2019 losses do not reflect stronger licensing revenue.
- Veritone-related results remained volatile: Q3 included a $4.3 million unrealized loss and $0.9 million realized loss; year to date included a $9.6 million unrealized gain and $8.1 million realized loss. Acacia sold 1.0 million Veritone shares in the first nine months and held 401,000 shares and warrants valued at $2.7 million combined at quarter-end.
- Acacia recorded an $8.2 million impairment of its Miso Robotics investment in Q2 and sold the entire investment in September for $2.0 million, recognizing a gain on disposal of that amount in Q3.
- Acacia acquired five patent portfolios during the first nine months, including two in Q3; it acquired none in 2018. Patent acquisition costs were $4.4 million in the 2019 period.
Outlook, risks and notable items
- No revenue or earnings guidance was provided. Management cautioned that it does not manage for smooth sequential revenue growth and that licensing revenue may shift between periods. One patent infringement case had a trial scheduled within six months of the report date.
- Key risks include uncertain litigation and appeals, potential legal sanctions or fee awards, fluctuating enforcement costs, challenges sourcing quality patent portfolios, and substantial reliance on a small number of licensees. Three licensees generated 85% of Q3 revenue and 83% of nine-month revenue.
- A Celltrace dispute remained in ICC arbitration; the tribunal had extended its final-award deadline to November 29, 2019, and had not issued an award as of the filing. Acacia denied the allegations. Management said other ordinary-course claims were not expected to have a material effect.
- The board authorized a new share repurchase program of up to $10 million through July 31, 2020; the company was not obligated to repurchase shares. A tax-benefits preservation plan and charter provision seek to protect potential tax attributes by restricting certain ownership changes.
- Acacia adopted lease accounting standard ASC 842 in 2019, recognizing approximately $1.8 million of right-of-use assets and $2.0 million of lease liabilities at September 30; management expected no material effect on 2019 operating results. Management reported disclosure controls were effective and no material quarterly change in internal control.
Important facts for investors to verify
- Whether new portfolio acquisitions and enforcement activity produce new licensing agreements and improve the steep revenue decline.
- How much of the reported cash use reflects investment purchases versus the underlying operating cash needs, and whether management’s liquidity estimate remains supportable.
- Future Veritone investment valuation and realized/unrealized gains or losses, which materially affect reported results.
- Developments and potential financial exposure in the Celltrace arbitration and patent enforcement matters.
- Revenue concentration, licensee collections, and the terms and actual use of the $10 million repurchase authorization.