Acacia Research Corporation — Q1 2018 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2018. Acacia licenses and enforces patent rights and makes strategic investments in technology companies. It reported no newly controlled patent portfolios in the quarter.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $62.1 million | $8.9 million; up $53.2 million (about 601%) |
| Operating income (loss) | $9.0 million; 14.5% operating margin | $(11.6) million |
| Net loss attributable to Acacia | $(32.0) million; $(0.63) per diluted share | $(11.8) million; $(0.24) per diluted share |
| Cash provided by (used in) operations | $50.0 million | $(1.0) million |
| Cash, cash equivalents and short-term investments | $179.6 million at March 31 | $136.6 million at December 31, 2017 |
| Total liabilities | $50.8 million | $13.1 million at December 31, 2017 |
| Debt | No long-term debt reported |
Revenue consisted of $60.1 million from paid-up agreements and $2.0 million from recurring agreements. One licensee generated 96% of Q1 revenue. Operating cash flow benefited substantially from a $36.6 million increase in royalties and contingent legal fees payable; these obligations were largely scheduled for payment in Q2 and Q3. Investing cash outflow was $36.3 million, including $7.0 million invested in investees and $29.3 million net purchases of available-for-sale investments.
Material changes and notable items
- Revenue rose sharply, primarily because the average revenue per agreement increased. The company executed four new agreements versus six a year earlier, and four licensing programs generated revenue versus eight.
- Despite operating income, Acacia recorded a $41.1 million unrealized loss on its Veritone investment, principally reflecting the decline in Veritone’s share price since December 31, 2017. The investment was valued at $63.7 million at quarter-end; its cumulative net unrealized gain since Veritone’s IPO remained $8.4 million.
- Cost of revenue rose with licensing revenue: inventor royalties were $21.7 million, contingent legal fees $15.8 million, and other direct costs $4.0 million. Litigation and licensing expense declined 57% to $2.7 million.
- Acacia adopted ASC 606 using the modified retrospective method. The adoption increased reported Q1 revenue by $2.0 million and affected related royalties and receivables; prior-year comparative results were not adjusted.
- In February 2018, Acacia invested an additional $6.0 million in Miso Robotics, taking its preferred-stock ownership to approximately 30%. The Miso investment was recorded at cost and is subject to impairment assessment.
- Acacia and Apple settled all outstanding litigation involving the Saint Lawrence subsidiaries in February. A Motorola patent case remained unresolved, with post-trial motions pending; no revenue had been recognized for those actions.
Outlook, risks and contingencies
Management said cash and cash equivalents, together with anticipated operating cash flows, should meet cash requirements through at least May 2019. No specific revenue or earnings guidance was provided. Management plans to continue monetizing existing patent assets, while reporting significant difficulty sourcing quality new portfolios. It warned that continued intake challenges could reduce future licensing revenue and threaten the sustainability and profitability of the licensing business.
Revenue is inherently uneven and dependent on agreement timing, litigation and negotiation outcomes, and portfolio maturity. Further risks include adverse court decisions, appeals, litigation costs or sanctions, changes in patent-enforcement rules, and investment volatility. A 10% adverse change in Veritone’s market price would have reduced the fair value of Acacia’s Veritone equity and warrant investments by approximately $6.8 million. Management also disclosed an activist stockholder proxy contest, which could consume resources and disrupt operations. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of Q1’s exceptional revenue came from the dominant licensee, and whether related receivables were collected as scheduled.
- Timing and amount of the $39.9 million in royalties and contingent legal fees payable, and the resulting effect on operating cash flow.
- Veritone’s share-price performance, the valuation assumptions for its Level 3 investment, and any potential sales subject to Rule 144 restrictions.
- Progress in acquiring quality patent portfolios, monetizing existing portfolios, and resolving the pending Motorola litigation.
- Potential effects of the activist proxy contest and any subsequent developments in the Apple settlement or Miso Robotics investment.