Acacia Research Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Acacia operates in Intellectual Property Operations and Industrial Operations (Printronix), while pursuing acquisitions as an opportunistic capital platform. Financial statements are unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $10.1m | $15.9m | $32.8m | $46.1m |
| Operating loss | $(15.4)m | $(11.4)m | $(37.3)m | $(25.5)m |
| Net income (loss) attributable to Acacia | $1.6m | $28.1m | $(7.7)m | $(106.7)m |
| Operating cash flow | Not separately provided for the quarter | $(18.0)m | $(13.6)m |
- Revenue and operating results: Q3 revenue fell 36%; nine-month revenue fell 29%. Intellectual Property Operations revenue declined 72% in Q3 and 63% year to date, primarily due to lower paid-up licensing revenue. Printronix revenue declined 13% in Q3 and 9% year to date, mainly from lower printer unit sales.
- Profitability: Q3 gross profit was $0.2m (about 2% of revenue), versus $5.9m in Q3 2022; nine-month gross profit was $4.0m (about 12% of revenue), versus $18.2m. Intellectual Property Operations had gross losses of $3.7m in Q3 and $8.9m year to date; Industrial Operations generated gross profit of $3.9m and $12.9m, respectively. Higher patent litigation and licensing costs contributed to the IP segment’s losses.
- Other income and earnings quality: Q3 included an $8.8m unrealized gain on equity securities and $3.4m in joint-venture earnings, partly offset by the operating loss. Nine-month results included an $18.8m unrealized securities gain, a $9.4m realized securities loss and $3.4m in joint-venture earnings. Results are materially affected by investment valuations, transactions and milestone timing; the year-over-year improvement in net loss does not reflect improved operating performance.
- Per-share results: Basic and diluted loss per common share were $(0.02) and $(0.03) for Q3, respectively; both were $(0.23) for the nine-month period. Acacia-attributable net income differs from income available to common stockholders because of warrant-related and other preferred-stock accounting effects.
- Cash, liquidity and debt: Cash and equivalents were $344.7m at September 30, 2023, versus $287.8m at year-end 2022. Current assets were $484.4m and current liabilities $21.4m. Cash, cash equivalents and equity securities totaled $409.2m. No Senior Secured Notes remained outstanding at quarter-end; the $60.0m balance was cancelled in July. Management said cash and expected operating cash flows should meet requirements for at least 12 months, while noting that acquisitions could require cash, equity or debt financing.
- Cash flow: Nine-month investing activities provided $8.6m, while financing activities provided $66.4m, including $79.1m from the rights offerings and $49.0m from Series B warrant exercises. Cash increased $56.9m to $344.7m.
Material changes and transactions
- Recapitalization completed July 13, 2023: Starboard converted all Series A preferred stock into 9.6m common shares and exercised 31.5m Series B warrants. The transactions cancelled $60.0m of notes and brought in approximately $55.0m of gross proceeds from the warrant exercise. No Series A preferred shares, Series B warrants or secured notes remained outstanding. Starboard owned approximately 61.2% of common stock following the transactions.
- Share count increased substantially: Common shares outstanding rose from 43.5m at December 31, 2022 to 99.9m at September 30, 2023, including shares issued in the recapitalization and rights offering. The rights offerings generated approximately $79.1m in gross proceeds.
- Investment and receivable items: In September, Acacia settled $2.0m of an Adaptix note and wrote off the remaining note balance, approximately $2.3m; management also cited a one-time $2.3m bad-debt expense. In November, the company agreed, subject to UK regulatory approval, to sell its Arix shares for approximately $57.1m.
- Post-quarter acquisition: On November 13, Acacia invested $10.0m for a 50.4% interest in Benchmark Energy II, an oil and gas company, and said it would evaluate further growth and acquisitions through the business.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance was provided. Management intends to pursue acquisitions of operating businesses and IP assets, but cautions that acquisitions may be costly, dilutive or unsuccessful. It describes IP licensing revenue as uneven and dependent on agreements, litigation outcomes, portfolio quality and timing; no new patent portfolios were obtained in 2023 through the reporting date.
- Management expects patent-related legal expenses to fluctuate. Seven patent infringement cases had trial dates scheduled within the following 12 months, but dates and outcomes may change. Litigation can consume substantial resources and may result in adverse rulings, sanctions or legal fees. The Slingshot case was transferred to Delaware Superior Court; the Acacia entities’ summary-judgment motion remained pending.
- Other disclosed risks include volatility in equity investments, foreign exchange exposure, Printronix customer demand and supply-chain/inventory management, and the ability to source, integrate and manage acquisitions. A hypothetical 10% decline in public equity holdings would reduce their value by approximately $6.5m; a hypothetical 10% foreign-exchange change affecting at-risk foreign-denominated equity securities would have an approximately $5.0m effect.
- The former CEO’s claims were settled in September for a $770,000 payment plus $480,000 of counsel-fee and expense reimbursement. The New York office lease was amended, including surrender of part of the premises and an extension of the remaining space through July 2027.
- On November 9, the board authorized a share repurchase program of up to $20.0m, capped at 5.8m shares; the filing reports no purchases under that program. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the proposed Arix sale receives regulatory approval and closes by the agreement’s deadline, and how proceeds would be used.
- Benchmark Energy II’s financial position, operating performance and future funding or acquisition needs following Acacia’s $10.0m investment.
- The sustainability of liquidity given recurring operating cash outflows, acquisition plans and the volatility of investment values.
- Progress and potential costs or outcomes of patent litigation, including the Slingshot matter and the seven scheduled patent trials.
- The impact of the increased share count and Starboard’s approximately 61.2% ownership on dilution, governance and minority shareholders.
- The composition, valuation sensitivity and monetization prospects of the remaining equity and equity-method investments.