ACACIA RESEARCH CORP quarterly report, Q2 FY2022

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Business context and reporting period

Acacia Research Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company operates in Intellectual Property Operations, licensing and enforcing patent portfolios, and Industrial Operations, which includes Printronix, acquired in October 2021. The life sciences investment portfolio and related equity investments are also significant to results.

Financial performance and position

  • Revenue: Second-quarter revenue was $16.7 million, down 4% year over year. IP revenue declined 54% to $8.1 million; Printronix contributed $8.7 million. First-half revenue was $30.2 million, up 30%, as Printronix contributed $19.5 million while IP revenue fell 54% to $10.7 million.
  • Profitability: Q2 operating loss was $5.7 million versus operating income of $1.6 million a year earlier; net loss attributable to Acacia was $61.5 million versus net income of $19.7 million. Diluted loss per share was $1.44 versus earnings of $0.23. For the first half, operating loss was $14.2 million versus $4.0 million; net loss attributable to Acacia was $134.8 million versus $144.8 million, and diluted loss per share was $3.06 versus $3.02.
  • Margins and segments: Q2 segment gross profit was $3.4 million for IP and $4.1 million for Industrial; six-month segment gross profit was $1.5 million and $10.8 million, respectively. First-half operating results included $2.0 million of IP segment loss and $0.6 million of Industrial segment income, before $12.7 million of parent general and administrative expense.
  • Cash flow: First-half operating cash flow was negative $17.6 million versus negative $8.0 million in 2021. Investing activities provided $78.5 million, mainly from net equity-security sales; financing activities used $106.4 million, including $65.0 million of note repayments and $39.5 million of share repurchases. Cash and cash equivalents ended at $263.9 million, down from $308.9 million at year-end.
  • Liquidity and debt: Current assets were $500.2 million and current liabilities $136.2 million at June 30. Cash plus equity securities at fair value totaled $390.3 million. Senior secured notes had $115.0 million principal outstanding at June 30 ($115.8 million carrying amount). On July 15, 2022, the company repaid $55.0 million and extended the remaining $60.0 million to July 14, 2023. Notes are secured and guaranteed as described in the filing.
  • Equity and investments: Equity securities at fair value were $126.3 million, down from $361.8 million at December 31; equity-method investments were $73.0 million, up from $30.9 million. Total assets were $561.7 million versus $798.9 million. Acacia repurchased 8.49 million shares for $39.5 million in the first half; common shares outstanding were 40.6 million at June 30.

Material changes and unusual items

  • Q2 included a $57.6 million unrealized loss on equity securities, compared with an $11.2 million gain a year earlier. First-half unrealized losses were $229.9 million, partly offset by $78.4 million in realized sale gains. The company attributed much of the current-period mark-down to one life sciences portfolio company.
  • Q2 included $42.1 million of earnings on an equity investment, principally milestone-related. Following FDA approval of a Viamet drug, a $40.0 million milestone was due to MalinJ1; Acacia’s share, approximately $26.7 million, was deferred until October 2022 and accrues interest at 8.5%. A further milestone related to an EU regulatory submission was paid to Acacia in July, approximately $1.2 million. The recorded earnings are not equivalent to cash received in the period.
  • First-half loss from remeasurement of Series A and B warrants and embedded derivatives was $7.0 million, compared with a $204.5 million loss in the prior-year period. These liabilities are valued using models with significant assumptions, including volatility and discount rates.
  • The first-half income tax benefit was $15.1 million, primarily reflecting decreases in deferred tax liabilities associated with unrealized investment losses. Management maintains a partial valuation allowance on deferred tax assets.
  • The company completed a $40 million repurchase authorization in July, buying 8.45 million shares in total under the program at an average $4.73 per share. The filing reports no obligation to continue repurchases.

Outlook, commentary and risks

No numerical earnings or revenue guidance is provided. Management said cash balances, anticipated operating cash flows and note availability should be sufficient for at least 12 months from the filing date, while cautioning that additional financing may not be available on favorable terms or at all. Management does not seek smooth period-to-period IP revenue: licensing outcomes depend on agreements, litigation, portfolio maturity and other factors. ARG acquired no new patent portfolios in the first half of 2022.

  • IP revenues are volatile and concentrated: three licensees represented 89% of Q2 IP revenue; one represented 50% of first-half IP revenue. Two licensees accounted for 79% and 14% of period-end receivables.
  • Acacia disclosed three patent infringement cases with trial dates scheduled within the next 12 months, while warning that dates and outcomes may change and litigation can be costly. The Slingshot dispute remains pending, with a liability trial scheduled for April 2023; no contingency accrual was recorded at June 30. The company disputes the allegations.
  • Printronix reported higher freight and raw-material costs, which it had generally been able to address through pricing. Foreign exchange, equity-market movements and portfolio-company performance remain material exposures.
  • The company states COVID-19 had not materially affected operations to date but could create future adverse effects. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Investor verification points

  1. Confirm collection timing and amounts for the Viamet/MalinJ1 milestone receivables, including the October 2022 payment and July receipt.
  2. Review the composition, valuation basis and subsequent performance of the life sciences and other equity-security holdings, especially the investment driving the period’s unrealized losses.
  3. Track the July note amendment, repayment, remaining secured debt, interest obligations and any future maturity changes.
  4. Assess whether Printronix can sustain revenue and margins amid cost pressures, and whether its contribution offsets declining and lumpy IP licensing revenue.
  5. Monitor licensee concentration, patent portfolio intake, litigation costs and outcomes, including the Slingshot case and scheduled patent trials.
  6. Evaluate the sustainability of cash resources after investment sales, debt repayments and substantial share repurchases, as well as the assumptions behind management’s liquidity assessment.