Acacia Research Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparative period is Q1 2019. Financial amounts below are in U.S. dollars; unless stated otherwise, amounts are in millions.
Business context
Acacia invests in and licenses or enforces patent portfolios, sharing proceeds with patent owners. It reported acquiring two patent portfolios during the quarter, covering flash memory and voice activation/control technologies.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $3.815 | $3.387 |
| Operating loss | $(3.569) | $(6.905) |
| Net loss attributable to Acacia | $(11.291) | $(4.384) |
| Net loss per common share | $(0.24) | $(0.09) |
| Cash used in operating activities | $(2.211) | $(1.958) |
| Cash, cash equivalents and restricted cash | $93.678 at March 31 | $92.359 at December 31, 2019 |
| Cash, cash equivalents, trading securities and restricted cash | $193.1 at March 31 | $203.3 at December 31, 2019 |
| Working capital | $151.7 at March 31 | $160.1 at December 31, 2019 |
Revenue rose 13%. Paid-up license agreements contributed $3.3 million, while recurring revenue agreements contributed $0.5 million; in Q1 2019, all $3.4 million was recurring revenue. Net portfolio income was $1.309 million, versus a $3.250 million loss. The filing does not present a conventional gross-margin measure.
Operating costs and expenses were $7.384 million, down 28%, as patent litigation and licensing expenses fell to $1.037 million from $3.801 million. General and administrative expense increased 33% to $4.878 million. Other expense was $9.060 million, compared with $2.821 million of other income a year earlier; Q1 2020 included a $6.117 million loss from changes in trading-security fair values and a $4.382 million noncash loss from revaluing Starboard-related warrants and embedded derivatives. The company also recorded a $1.338 million income tax benefit.
Acacia reported no conventional borrowings on the balance sheet; it had $1.970 million of future minimum operating lease payments, including $1.395 million of long-term lease liabilities. Senior secured notes were contemplated under the Starboard agreement but had not been issued by quarter-end. The $35 million of long-term restricted cash relates to the Series A preferred financing and is subject to release conditions.
Material changes and unusual items
- Revenue increased mainly because of new licensing agreements, including four agreements executed in the quarter; recurring revenue declined by approximately $2.9 million.
- Acacia sold its remaining 298,450 Veritone common shares, recording a $3.316 million realized loss. It retained Veritone warrants valued at $1.387 million.
- On February 25, Acacia issued Starboard Series B warrants to purchase up to 100 million shares for $4.6 million. The warrants are liability-classified and had a $6.231 million fair value at quarter-end.
- Acacia repurchased 576,898 shares for $1.314 million, at an average $2.28 per share. The $10 million repurchase authorization was scheduled to expire July 31, 2020.
- Series A preferred stock has a $35 million liquidation preference and carries cumulative dividends. The filing recorded $0.263 million of dividends and $0.631 million of accretion during the quarter.
Outlook, commentary and risks
Management said cash and cash equivalents, together with anticipated operating cash flows, should meet cash requirements for at least 12 months from the report date. No specific revenue or earnings guidance was provided. Management cautioned that licensing revenue is irregular and depends on agreements, litigation outcomes, portfolio maturity and new portfolio intake.
The company said it did not expect COVID-19 to create direct business risks at that time and stated that it could operate remotely, while warning that pandemic-related risks could evolve. Key exposures include unpredictable patent litigation outcomes, legal costs or sanctions, difficulty sourcing quality patent portfolios, investment-market volatility, and reliance on a small number of licensees. Three licensees generated 52%, 33% and 9% of Q1 revenue, respectively. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the new paid-up agreements and newly acquired portfolios can offset falling recurring license revenue and support future cash generation.
- Whether cash and investment liquidity, including the $35 million restricted balance, is sufficient for operating needs and any preferred-stock obligations.
- The potential dilution, valuation effects and control implications of the Series A and Series B securities, including the Series B warrants for up to 100 million shares.
- How market movements, licensee concentration and pending patent litigation affect earnings, cash receipts and portfolio values.
- Whether the planned senior secured notes are issued and how that would affect preferred-stock terms, dividends and redemption rights.