Acacia Research Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparison is the three months ended March 31, 2022. Acacia is an opportunistic acquisition platform with two reportable segments: Intellectual Property Operations and Industrial Operations, which includes Printronix. Unless noted otherwise, amounts below are in millions of dollars.
Financial results and position
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $14.8 | $13.5 |
| Operating loss | $(9.3) | $(8.5) |
| Net income (loss) attributable to Acacia | $9.4 | $(73.3) |
| Operating cash flow | $(4.3) | $(3.2) |
- Revenue grew 10%. IP revenue rose 60% to $4.2 million, including four new license agreements versus nine a year earlier. Printronix revenue declined 2% to $10.6 million.
- Consolidated gross profit was $4.8 million, about 32.7% of revenue. IP operations had a $0.6 million gross loss; Industrial Operations generated $5.4 million of segment gross profit, about 50.9% of segment revenue.
- Net income was driven by non-operating items, including a $16.7 million fair-value gain on Series A and B instruments and a $2.0 million net realized and unrealized gain on equity securities. The operating loss increased by $0.8 million.
- Basic EPS was $0.12; diluted EPS was $(0.07), reflecting the filing’s diluted-share calculation, including assumed conversion/exercise effects. Investors should review the EPS reconciliation.
- Cash and cash equivalents were $364.2 million at March 31, up from $287.8 million at year-end. Current assets were $505.2 million and current liabilities $90.2 million. Cash, cash equivalents and equity securities totaled $425.0 million.
- Senior secured notes had $60.0 million principal outstanding and were due July 14, 2023; the balance sheet reports $61.4 million of current notes payable. Series B warrant liabilities were $73.2 million and Series A embedded derivative liabilities were $11.8 million.
Material changes and capital structure
- Q1 2022’s $73.3 million net loss included a $172.2 million unrealized loss on equity securities; Q1 2023 had a $3.3 million unrealized gain. The year-over-year earnings swing therefore does not reflect a comparable change in operating performance.
- Acacia raised approximately $79.1 million gross through its February–March 2023 rights offerings: approximately $78.8 million from Starboard’s concurrent private offering and $0.36 million from the public rights offering. The offerings issued about 15.1 million common shares.
- Under the recapitalization agreement, Starboard is expected to convert 350,000 Series A preferred shares and exercise 31.5 million Series B warrants by July 14, 2023, subject to conditions and, for specified amendments, stockholder approval. The remaining Series B warrants were cancelled after the rights offering.
- At closing of the Series B exercise, Acacia is to make a $66.0 million recapitalization payment through a reduction in the warrant exercise price; that amount falls by $12.7 million if specified stockholder approval is not obtained. The preferred-stock conversion and warrant exercise would materially affect share count and capital structure.
Outlook, commentary and risks
- Management said cash, expected operating cash flows and recapitalization transactions should be sufficient to meet requirements for at least 12 months from the report date. It expected to meet the notes maturity and recapitalization payment with cash on hand. No numerical earnings or revenue guidance was provided.
- Management reported higher Printronix freight and raw-material costs, generally offset to date by selling-price adjustments. Printronix cost of sales rose, partly due to under-absorption of overhead.
- IP revenue is inherently uneven and depends on licensing agreements, litigation timing and outcomes, portfolio maturity and new portfolio intake. Acacia acquired no new patent portfolios in Q1 2023 or during 2022.
- The company disclosed five pending patent infringement cases with scheduled trial dates in the following 12 months; dates and outcomes may change. In the Slingshot matter, the court heard summary-judgment arguments on April 19, 2023 and had not yet ruled as of the filing.
- Other risks include reliance on acquisitions and retaining operating teams, market-value volatility in equity investments, potential litigation costs or sanctions, changes in leadership (the CEO was interim), and execution and approval conditions under the Starboard recapitalization. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Key facts for investors to verify
- Completion, conditions and final economics of the Series B warrant exercise, Series A conversion and $66.0 million recapitalization payment, including required stockholder approval and the July 2023 notes maturity.
- Fully diluted share count and the resulting ownership and dilution after the recapitalization transactions.
- Cash generation excluding noncash fair-value movements, and the company’s liquidity after debt repayment and recapitalization obligations.
- Sustainability of IP licensing revenue, patent portfolio intake, litigation spending and outcomes, and Printronix demand, margins and cost pressures.
- Valuation sensitivity of equity investments and Level 3 warrant and embedded-derivative liabilities; the filing notes these valuations depend on significant assumptions.