Acacia Research Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Acacia’s subsidiaries invest in, license and enforce patent rights; revenue is largely generated by license agreements and can be uneven from quarter to quarter.
Key financial results
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Revenue | $8.9 million | $24.7 million; down 64% |
| Operating costs and expenses | $20.4 million | $34.4 million; down 41% |
| Operating loss | $11.6 million | $9.7 million |
| Loss before income taxes | $10.9 million | $9.7 million |
| Income tax provision | $1.2 million | $0.2 million |
| Net loss attributable to Acacia | $11.8 million, or $0.24 per share | $10.0 million, or $0.20 per share |
| Operating cash flow | $(1.0) million | $11.1 million |
| Cash, cash equivalents and short-term investments, excluding restricted cash | $145.2 million | $147.0 million at Dec. 31, 2016 |
| Working capital, including restricted cash | $154.9 million | $160.3 million at Dec. 31, 2016 |
| Total liabilities | $15.2 million | $28.6 million at Dec. 31, 2016 |
Acacia reported no long-term debt. Restricted cash of $11.5 million secures a German patent-enforcement guarantee. Patent amortization was $5.5 million, down 49% year over year, primarily reflecting portfolio impairment charges recorded in 2016. The filing does not provide a conventional gross-margin measure.
Material changes and cash position
- Revenue fell by $15.9 million, reflecting both fewer agreements (6 versus 12) and lower average revenue per agreement ($1.5 million versus $2.1 million).
- Two licensees generated 85% of Q1 2017 revenue (73% and 12%); two licensees represented approximately 94% of period-end receivables. Foreign-domiciled licensees accounted for 92% of revenue.
- Operating cash flow turned negative as operating outflows exceeded receipts and royalty and contingent legal-fee payables declined. Receivables fell to $7.8 million from $26.8 million, while royalties and contingent legal fees payable fell to $3.1 million from $13.9 million.
- Investing cash outflow was $72.5 million, mainly reflecting purchases of available-for-sale investments net of maturities and sales; Acacia also advanced $1.0 million to Veritone. Cash and cash equivalents ended the quarter at $54.3 million, versus $127.5 million at year-end, alongside increased short-term investments.
Outlook, management commentary and risks
- Management said cash and cash equivalents and anticipated operating cash flows should meet cash requirements through at least May 2018. No specific revenue or earnings guidance was provided.
- Management described continued difficulty sourcing suitable patent portfolios: Acacia acquired control of one portfolio in Q1, versus two in 2016. It warned that continued intake challenges could reduce future revenue opportunities and threaten the sustainability of the licensing business.
- Acacia is seeking to expand beyond patent licensing and enforcement through IP-related partnerships. Its Veritone investment includes secured convertible loans, warrants and a further bridge facility. At March 31, Veritone loan receivables had a $19.7 million carrying value; warrants and shares were valued at $2.2 million. The loans were due November 25, 2017, subject to conversion provisions.
- Veritone’s business and Acacia’s investment carry material risks: Veritone was not profitable and had limited financial resources, and Acacia cautioned it could lose some or all of its investment. Potential additional funding and conversion terms depend on specified financing, IPO and other conditions.
- Litigation outcomes remain uncertain and can affect both revenue timing and legal costs. Acacia reported a nearly $9.2 million jury damages award against Motorola, subject to final judgment, and a prior award exceeding $22 million against Apple with post-trial motions pending. More than five patent cases had trial dates scheduled within six months; dates and outcomes may change.
- A German injunction-related guarantee is secured by $11.5 million of restricted cash and may be renewed automatically. Acacia also disclosed possible material sanctions or fee awards in patent-enforcement matters, though management said other ordinary-course claims were not expected to materially affect the company.
- Management reported effective disclosure controls and stated that it believed a previously identified material weakness in stock-option accounting had been remediated as of March 31, 2017.
Important facts for investors to verify
- Whether the steep revenue decline and concentration in a small number of licensees continue, and how dependent future results are on settlements, trials and appeals.
- Collections of period-end receivables and payment timing for royalties and legal fees, and whether cash generation supports management’s liquidity outlook.
- Veritone’s financial condition, IPO or financing progress, loan repayment or conversion, and the potential value and dilution implications of the associated warrants and shares.
- Developments in the Motorola, Apple and German proceedings, including final judgments, appeals, enforcement guarantees and potential legal costs.
- Whether Acacia can obtain new, commercially valuable patent portfolios and develop revenue sources beyond its core licensing and enforcement business.