Acacia Research Corporation — FY2020 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2020; quarterly figures below identify the fourth quarter where relevant. Acacia combines patent licensing and enforcement with a newer strategy of acquiring undervalued businesses and assets. In June 2020, it acquired a portfolio of life-sciences company securities, later selling part while retaining stakes in several businesses, including a controlling interest in one portfolio company.
Key financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $29.8 million | $11.2 million |
| Operating loss | $19.5 million | $23.4 million |
| Net income (loss) attributable to Acacia | $113.4 million | $(17.1) million |
| Net cash used in operating activities | $19.6 million | $2.3 million |
| Working capital at year-end | $332.9 million | $160.1 million |
- Revenue and operations: Revenue grew 165%, with 17 new agreements executed versus 7 in 2019. Paid-up license agreements contributed $28.4 million of 2020 revenue; recurring agreements contributed $1.4 million. Acacia remained loss-making at the operating level.
- Fourth quarter: Revenue was $4.4 million and net income attributable to Acacia was $80.2 million. The quarter’s income included substantial investment-related gains; quarterly results are volatile and should not be treated as a run rate.
- Investment-driven earnings: Net income primarily reflects non-operating, largely unrealized gains, including $175.9 million from portfolio-company securities. Other income also included a $58.2 million fair-value loss on Series A and B warrants and embedded derivatives. Reported profitability therefore did not translate into positive operating cash flow.
- Cash and liquidity: Cash and cash equivalents plus trading securities were $274.6 million at year-end, versus $168.3 million a year earlier. Cash, trading securities and restricted cash totaled $309.6 million; $35 million was long-term restricted cash. Management said cash and anticipated operating cash flows should meet requirements through at least March 2022.
- Debt and capital structure: Year-end current liabilities included $115.7 million of senior secured notes payable. The notes bear 6% interest and are secured, with guarantees and asset pledges. On January 29, 2021, Acacia redeemed $50 million; it agreed to redeem the remaining $65 million by July 15, 2021. The company also has $35 million stated value of Series A redeemable convertible preferred stock, with cumulative dividends and preferential rights.
- Other balance-sheet items: Year-end investment securities included $109.1 million of public equity trading securities, $143.3 million of private equity securities and $30.7 million of equity-method investments. Total assets were $515.5 million; accumulated deficit was $326.7 million.
Material changes versus FY2019
- Revenue increased by $18.5 million, while operating loss narrowed by $3.9 million. General and administrative expense rose 49% to $24.5 million, partly reflecting business-development costs and $2.9 million of legal and advisory fees related to the portfolio investment.
- The life-sciences portfolio acquisition materially expanded investment assets and drove a $175.9 million unrealized gain. Acacia paid approximately $277.5 million for the portfolio and had monetized only a portion by year-end.
- Operating cash use increased to $19.6 million from $2.3 million. Investing activities provided $18.6 million, and financing activities provided $109.2 million, including proceeds associated with the senior secured notes and Series B warrants.
- Year-end liabilities included newly issued Series B warrant liabilities of $52.3 million. The fair-value changes in warrants and the preferred-stock embedded derivative contributed materially to earnings volatility.
Outlook, risks and unusual items
- No quantitative revenue or earnings guidance is provided. Management says licensing revenue is irregular and depends on agreement timing, litigation outcomes, portfolio quality and licensee activity. It expects patent-related legal expenses to continue fluctuating and said they may decrease as existing patent assets are monetized.
- Three patent infringement cases had trial dates scheduled within the 12 months following the report date. Litigation can be lengthy and costly, and outcomes, appeals, sanctions or adverse patent rulings could delay or reduce revenue.
- Investment valuations pose significant risk: public securities are market-sensitive, while private-company valuations depend on estimates and observable transactions. The filing identifies fair-value measurements of the Series B warrants and preferred-stock embedded derivative as a critical audit matter. The auditor issued an unqualified opinion on the financial statements.
- Acacia disclosed significant potential dilution from Starboard securities, including Series A warrants for up to 5 million shares and Series B warrants for up to 100 million shares, subject to their terms. Series A preferred stock has voting, dividend, redemption and liquidation-preference rights. These instruments may affect liquidity, voting power and common-stock value.
- The company reported an accumulated deficit and a history of losses, and may incur further losses as operating expenses continue. It also faces risk that ownership changes could limit use of tax attributes; deferred tax assets carry a full valuation allowance. The filing reports approximately $274.3 million of federal NOL carryforwards and $51.0 million of foreign tax credits.
- Acacia said COVID-19 had not materially affected licensing efforts or litigation schedules to date, while warning that further public-health disruption could affect operations and business partners.
- In the Slingshot Technologies lawsuit, Slingshot seeks damages and relief related to a patent portfolio acquisition. Acacia denies the allegations and management does not expect the matter to materially affect the company. In March 2021, the court dismissed Monarch for lack of personal jurisdiction and a director for lack of subject-matter jurisdiction; the claims against the Acacia entities remained described in the filing.
- Management concluded disclosure controls and internal control over financial reporting were effective as of year-end. The independent auditor did not attest to internal-control effectiveness because Acacia was a non-accelerated filer.
Important facts for investors to verify
- Whether the retained life-sciences investments generate cash returns consistent with their carrying values, and how much of the portfolio remains unsold or subject to valuation uncertainty.
- Completion and terms of the planned repayment of the remaining $65 million of secured notes, including any effects on cash, collateral or covenants.
- Potential dilution, dividend and redemption obligations arising from the Series A preferred stock and Series A and B warrants.
- How much recurring, sustainable licensing revenue the patent business can produce, given customer concentration and dependence on settlements and litigation.
- Developments in the Slingshot case and patent enforcement matters, including possible legal costs, sanctions or delays.
- Whether reported earnings and liquidity remain strong after separating noncash fair-value gains and restricted cash from recurring operating performance and freely available cash.