Acacia Research Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Acacia operates Intellectual Property Operations and Industrial Operations; the latter consists of Printronix, acquired in October 2021. Accordingly, Q1 2021 did not include Printronix, limiting year-over-year comparability.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 or prior date |
|---|---|---|
| Revenue | $13.5 million | $5.8 million |
| Operating loss | $8.5 million | $5.7 million loss |
| Net loss attributable to Acacia | $73.3 million | $164.5 million |
| Basic and diluted loss per common share | $1.61 | $2.81 |
| Net cash used in operating activities | $3.2 million | $6.1 million |
| Cash and cash equivalents | $289.4 million | $308.9 million at Dec. 31, 2021 |
| Equity securities at fair value | $246.5 million | $361.8 million at Dec. 31, 2021 |
| Working capital | $402.3 million | $530.5 million at Dec. 31, 2021 |
| Senior secured notes principal | $165.0 million | $180.0 million at Dec. 31, 2021 |
Printronix generated $10.9 million of revenue and $1.6 million of segment operating income. Intellectual Property Operations generated $2.6 million of revenue and a $3.7 million segment operating loss. Consolidated operating loss also reflects $6.5 million of parent general and administrative expense.
Material changes and unusual items
- Revenue rose 133%, principally because Printronix contributed $10.9 million. IP revenue fell 55% to $2.6 million despite nine new license agreements, versus seven in Q1 2021.
- Acacia recorded a $172.2 million unrealized loss on equity securities, mainly reflecting a decline in one Life Sciences Portfolio holding, partly offset by a $66.9 million realized gain on securities sales. Net realized and unrealized investment loss was $105.3 million, compared with a $41.4 million gain a year earlier.
- Changes in fair value of Starboard-related warrants and preferred-stock embedded derivatives produced a $28.1 million gain, versus a $198.9 million loss in Q1 2021. These noncash fair-value movements materially affected reported earnings.
- The $14.9 million income tax benefit primarily reflected lower deferred tax liabilities associated with the unrealized investment loss. Acacia maintained a partial valuation allowance on deferred tax assets.
- Investing activities provided $9.9 million of cash, largely from equity-security sales exceeding purchases. Financing activities used $26.8 million, including $15.0 million of note repayment and $11.0 million of share repurchases.
Liquidity, outlook, risks, and subsequent events
Management stated that cash, expected operating cash flows, and availability under the Senior Secured Notes were expected to meet cash requirements for at least 12 months from the report date. This assessment should be considered alongside the notes’ repeated maturity extensions and the market sensitivity of Acacia’s investment portfolio. Management provided no specific revenue or earnings guidance and said IP revenue can be uneven and difficult to predict.
- On April 14, 2022, Acacia amended its notes, extended maturity to July 15, 2022, and agreed to repay $50.0 million, reducing principal outstanding to $115.0 million. The notes bear 6% interest.
- In April, a Life Sciences Portfolio company received FDA approval. Acacia expects approximately $25.6 million from a related milestone, payable in October 2022 as a deferred payment bearing 8.5% interest.
- The board authorized a new $40.0 million share repurchase program on March 31, 2022. By May 9, Acacia had repurchased 1,392,467 shares at an average $4.60 per share.
- Series A preferred stock has a $35.0 million aggregate liquidation preference and potential holder redemption rights during May–August 2022, subject to stated conditions. Series A and B warrants and embedded derivatives are liability-classified and valued using models with significant assumptions; the 100 million Series B warrants present potential dilution.
- Risks include volatile equity valuations, concentrated IP licensee revenue and receivables, patent litigation outcomes and expenses, difficulty sourcing new patent portfolios, and Printronix exposure to freight and raw-material costs. Acacia disclosed no material change to previously reported risk factors; its Slingshot litigation remained pending, with trial scheduled for April 2023.
Key facts investors should verify
- Whether the April note amendment and $50.0 million repayment were completed as planned, and how the July 15, 2022 maturity was addressed.
- Whether and when the approximately $25.6 million Viamet-related milestone payment is collected, including interest and payment terms.
- Subsequent fair values, sales, and concentration of the Life Sciences Portfolio, particularly the holding responsible for the Q1 unrealized loss.
- Printronix’s revenue, segment profitability, cash conversion, and ability to manage input-cost and supply-chain pressures.
- Potential preferred-stock redemption, warrant dilution, and the cash impact of ongoing repurchases and patent litigation.