Acacia Research Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing was signed March 10, 2017. Acacia’s operating subsidiaries invest in, license and enforce patent rights; revenue is uneven and depends substantially on license agreements, litigation and collections.
Financial results and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $152.7 million | $125.0 million |
| Operating loss | $37.4 million | $152.6 million |
| Net loss attributable to Acacia | $54.1 million; $1.08 per diluted share | $160.0 million; $3.25 per diluted share |
| Operating cash flow | $34.1 million | Cash used of $9.9 million |
| Cash, cash equivalents, restricted cash and short-term investments | $158.5 million | $145.9 million |
| Working capital | $160.3 million | $150.7 million |
| Total liabilities | $28.6 million | $33.7 million |
Revenue rose 22%, although new agreements fell to 39 from 63; average revenue per agreement increased to approximately $3.9 million from $2.0 million. Patent-related costs classified as cost of revenue totaled $111.3 million, implying an approximate 27% gross margin. Reported operating margin was approximately negative 24.5%. The filing reports no long-term debt or committed credit lines.
Net loss included $42.3 million of noncash patent impairments. Patents, net, declined to $86.3 million from $162.6 million. Foreign licensees generated 79% of revenue. Three licensees accounted for 26%, 23% and 11% of 2016 revenue.
Fourth-quarter results
Unaudited fourth-quarter 2016 revenue was $22.0 million, compared with $37.5 million in fourth-quarter 2015. Acacia reported a fourth-quarter 2016 net loss of $10.6 million, versus a $115.9 million loss in the prior-year quarter. The 2015 quarter included $74.7 million of patent impairment and $30.1 million of goodwill impairment; fourth-quarter 2016 included $2.2 million of patent impairment.
Material changes and unusual items
- Revenue improved in 2016, but agreement volume and the number of revenue-generating programs declined: 28 programs generated revenue versus 30 in 2015.
- Patent impairment charges were $42.3 million, primarily including the remaining write-off of the Adaptix portfolio following adverse litigation outcomes and management’s decision to stop allocating resources to certain portfolios. There was no goodwill impairment in 2016; the prior year included $30.1 million.
- Patent litigation and licensing expense decreased 29% to $27.9 million. General and administrative expense decreased 14% to $32.9 million, reflecting lower personnel and stock-compensation costs. Court-ordered attorney fees and settlement or contingency accruals were $0.5 million, versus $4.1 million in 2015.
- Income tax expense was $18.2 million despite a pretax loss, largely reflecting $17.9 million in foreign tax withholding. Acacia maintained a full valuation allowance against net deferred tax assets.
- Acacia ended its $0.50 annual dividend policy in February 2016 and does not expect to pay cash dividends in the foreseeable future.
Outlook, risks and contingencies
- Management said available cash, investments and anticipated operating cash flows should meet cash requirements through at least March 2018. No specific revenue or earnings guidance was provided.
- Patent intake remains a key concern: Acacia controlled two new portfolios in 2016, compared with three in 2015, six in 2014 and 25 in 2013. Management warned that continued intake challenges could reduce future revenue opportunities and threaten the sustainability of the licensing business.
- More than six patent infringement cases had trial dates scheduled within six months of the report, but trial dates can change and litigation outcomes, appeals and collections are uncertain. Legal costs, adverse rulings, sanctions and fee awards could materially affect results.
- In August 2016, Acacia funded $20 million of secured convertible loans to Veritone at 6% interest, due November 25, 2017, and received warrants. The broader agreement allows for up to $30 million of additional investment; the filing also lists a contingent $30 million Primary Warrant put-right obligation in contractual commitments.
- At year-end, $11.5 million of cash was restricted to support a German patent injunction guarantee. Ordinary-course litigation liabilities were not considered material by management, but adverse patent litigation sanctions or fee awards could be material.
- Management identified a material weakness in controls over accounting for infrequent, unusual or complex transactions, following an error in accounting for market-based stock options. Management and the auditor concluded internal control over financial reporting was ineffective at year-end; the auditor issued an adverse opinion on internal controls. The financial statement audit opinion was unqualified. Remediation was implemented in the fourth quarter, with effectiveness testing and remediation targeted by the end of first-quarter 2017.
Key facts for investors to verify
- Whether revenue growth can continue despite fewer agreements, concentrated licensee revenue and low portfolio intake.
- Cash collection, receivable concentration and the timing and outcome of the scheduled patent trials and appeals.
- Recoverability of the remaining patent assets and the potential for further impairment charges.
- Veritone loan repayment, conversion and warrant terms, as well as the contingent additional investment and put-right exposure.
- Whether the material weakness was remediated and internal controls were demonstrated to operate effectively after year-end.
- Availability and usability of tax attributes, including NOLs and foreign tax credits, given valuation allowances and potential ownership-change limits.