Business context and reporting period
Acacia Research Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2018. The company licenses and enforces patent rights and also invests in technology businesses. It obtained no new patent portfolios in the first half of 2018.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $6.5 million | $16.5 million | $68.6 million | $25.3 million |
| Operating loss | $39.8 million | $7.9 million | $30.9 million | $19.5 million |
| Net loss attributable to Acacia | $28.4 million | $14.3 million | $60.5 million | $26.1 million |
| Basic and diluted loss per share | $0.57 | $0.28 | $1.20 | $0.52 |
Revenue comprised paid-up agreements of $3.2 million in Q2 and $63.2 million for the first half, and recurring agreements of $3.3 million and $5.3 million, respectively. The filing does not provide a clear gross-margin figure.
For the first half, operating cash flow was positive $9.6 million, investing cash flow was negative $41.5 million, and financing cash flow was negative $4.6 million. Cash and cash equivalents were $100.2 million at June 30; short-term investments were $34.7 million. Management reported cash, cash equivalents and investments totaling $134.8 million. Working capital was $130.4 million. Total liabilities were $16.1 million; the company reported no long-term debt.
Material changes versus the prior comparable period
- Q2 revenue fell 61% year over year, primarily because fewer agreements were executed: two versus nine. First-half revenue rose 171%, primarily due to higher average revenue per agreement, despite six agreements versus 15 in the prior-year period.
- First-half results included a $29.2 million impairment charge for patent-related intangible and other assets; $28.2 million related to patents. Management attributed the patent impairment to lower expected cash flows following developments in ongoing litigation.
- The Veritone investment generated an $11.3 million unrealized gain in Q2 but a $29.8 million unrealized loss for the first half, reflecting fair-value changes. Veritone shares and warrants were valued at $75.0 million at June 30.
- Acacia repurchased 1.19 million shares during the reported period at an average $3.89 per share, spending approximately $4.6 million. The $20 million authorization had approximately $15.4 million remaining at May 30.
- Adoption of the new revenue standard increased reported first-half revenue by $2.0 million compared with the amount that would have been reported before adoption; prior-year comparatives were not restated.
Outlook, commentary, risks and unusual items
Management said existing cash and anticipated operating cash flows should meet requirements through at least August 2019. No specific revenue or earnings guidance was provided. Management expects patent-related legal expenses to fluctuate and said they would continue to decrease relative to comparable prior periods as enforcement activity declines.
- Management highlighted ongoing difficulty sourcing quality patent portfolios and warned that continued weak intake could reduce future licensing revenue and undermine the sustainability of the business.
- Revenue is uneven and concentrated: one licensee generated 87% of first-half 2018 revenue; two licensees generated 48% and 42% of Q2 revenue. Two licensees represented about 90% of period-end receivables.
- Three patent infringement cases had trial dates scheduled within the next six months as of the filing. Trial outcomes, appeals, delays, legal expenses and potential court sanctions or fee awards are uncertain.
- Veritone shares were subject to a lock-up expiring August 15, 2018, after which sales remained subject to Rule 144 and other restrictions. Acacia’s Veritone investment was exposed to market volatility and valuation assumptions.
- After quarter-end, three directors resigned and the president, executive vice president/general counsel, and chief financial officer/treasurer were transitioning out of their roles. The filing disclosed $2.5 million in related severance payments.
Important facts for investors to verify
- Whether Acacia can sustain licensing revenue given the absence of new portfolio acquisitions and its reliance on a small number of licensees.
- The litigation developments underlying the $28.2 million patent impairment and the prospects and timing of the pending cases.
- Subsequent market value, sale restrictions and realized proceeds from the Veritone shares and warrants after the lock-up expiration.
- The financial and operational effects of the leadership changes, severance payments and ongoing share repurchases.
- Whether operating cash flows support management’s liquidity outlook through August 2019, considering the company’s investment commitments and volatile licensing receipts.