Acacia Research Corporation — Q3 2018 Form 10-Q
Business context and period: The filing covers the quarter and nine months ended September 30, 2018. Acacia licenses and enforces patent rights and also invests in technology companies. Results are unaudited and can vary significantly with licensing agreements, litigation outcomes, and investment valuations.
Financial highlights
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $13.7 million | $36.6 million | $82.3 million | $61.9 million |
| Operating income (loss) | $(5.0) million | $(0.4) million | $(35.8) million | $(19.9) million |
| Net income (loss) attributable to Acacia | $(33.2) million | $158.5 million | $(93.7) million | $132.4 million |
| Basic EPS | $(0.67) | $3.13 | $(1.87) | $2.62 |
| Operating cash flow | Not separately stated for the quarter | $7.5 million | $34.9 million |
Margins: Operating margin was approximately (36%) in Q3 and (44%) for the nine-month period, calculated from reported revenue and operating loss. Gross margin is not presented as a standalone measure in the filing.
- Revenue mix: Q3 revenue included $7.3 million from paid-up agreements, $3.0 million from recurring agreements, and $3.5 million from other settlements. Nine-month paid-up agreement revenue was $70.5 million.
- Liquidity: Cash and cash equivalents were $109.6 million; short-term debt and equity investments totaled $33.8 million. Cash plus these short-term investments was approximately $143.4 million, versus $136.6 million at year-end 2017. Working capital was $140.8 million.
- Debt and obligations: The company reported no long-term debt. Operating lease obligations totaled $1.7 million, including $0.2 million due within one year. Total liabilities were $18.1 million.
- Balance sheet: Total assets were $220.3 million, including $18.1 million of net patents; total stockholders’ equity was $202.1 million.
Material changes versus comparable periods
- Q3 revenue fell 63% year over year, primarily due to lower average revenue per agreement. Nine-month revenue rose 33%, primarily due to higher average revenue per agreement, despite fewer agreements: 9 versus 18 in the prior-year period.
- Acacia reported a Q3 net loss versus substantial prior-year income. The main swing was the Veritone investment: a $22.4 million unrealized loss in Q3 2018 versus a $159.0 million unrealized gain in Q3 2017.
- For the nine months, the Veritone investment generated a $52.1 million net fair-value loss and a $5.5 million realized loss on share sales. The prior-year period included a $146.3 million fair-value gain, as well as gains related to conversion of loans and exercise of a warrant.
- Nine-month operating expenses included $28.2 million of patent impairment and $1.0 million of other impairment, versus $2.2 million of impairment in the prior-year period. The patent charge followed litigation developments that reduced expected future cash flows.
- Acacia sold 1 million Veritone shares in August for $10.44 per share. At September 30, it held 3.12 million Veritone shares and warrants with reported fair values of $32.5 million and $4.1 million, respectively; its fully diluted ownership was approximately 15%.
Outlook, commentary, risks, and unusual items
- Management said cash and cash equivalents and anticipated operating cash flows should meet cash requirements through at least November 2019. No specific revenue or earnings guidance was provided.
- Management cited continuing challenges in sourcing high-quality patent assets. Acacia acquired no new patent portfolios during the first nine months of 2018 and warned that continued intake challenges could reduce revenue and impair the sustainability of its licensing business.
- Revenue is highly concentrated and uneven: one licensee accounted for 73% of nine-month 2018 revenue; three licensees accounted for 44%, 25%, and 17% of Q3 revenue. Patent enforcement and licensing outcomes, timing, and collections remain uncertain. Acacia had no patent infringement case with a trial scheduled in the next six months as of the report date.
- Celltrace’s contract, unjust enrichment, and fraud claims against Acacia were in ICC arbitration; briefing was scheduled to conclude December 7, 2018, with an evidentiary hearing expected in February 2019. Acacia disputes the claims. The filing also notes potential sanctions or fee awards in patent enforcement matters.
- Q3 operating expenses included $2.2 million of settlement and contingency accruals, net of prior accruals. General and administrative costs excluding noncash compensation increased, in part due to proxy-contest costs and severance.
- Adoption of ASC 606 reduced reported 2018 revenue by $2.1 million for Q3 and $1.3 million for the nine-month period compared with legacy GAAP; prior-year figures were not adjusted. Management reported effective disclosure controls and no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether Acacia can replenish its patent portfolio and sustain licensing revenue, given the lack of new portfolio acquisitions in the first nine months of 2018.
- How much future reported earnings may fluctuate with Veritone’s share price and warrant valuation, and the company’s plans for its remaining holdings.
- Cash conversion and collection timing, including concentrated licensee exposures and the payment timing for royalties and contingent legal fees.
- Developments and potential financial exposure in the Celltrace arbitration and ongoing patent enforcement matters.
- The assumptions supporting the $28.2 million patent impairment and any further impairment risk to the remaining patent assets.