Acacia Research Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Acacia’s operating subsidiaries invest in, license and enforce patent rights; revenue is irregular and depends on licensing agreements and litigation outcomes.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $16.5 million | $41.4 million | $25.3 million | $66.1 million |
| Operating loss | $7.9 million | $34.9 million | $19.5 million | $44.6 million |
| Net loss attributable to Acacia | $14.3 million | $40.6 million | $26.1 million | $50.5 million |
| Loss per share, basic and diluted | $0.28 | $0.81 | $0.52 | $1.01 |
| Operating cash flow | Not separately presented by quarter | $6.2 million | $37.8 million |
Gross margin is not separately reported. Revenue declined 60% in Q2 and 62% for the six-month period. For the first half, the company cited fewer agreements and lower average revenue per agreement; in Q2, the primary driver was lower average revenue per agreement. Acacia signed 9 agreements across 8 licensing programs in Q2, versus 7 agreements across 13 programs in Q2 2016.
At June 30, cash and cash equivalents were $63.2 million and short-term investments were $55.1 million, totaling $118.3 million. Current assets were $136.6 million and current liabilities $18.7 million. The company reported no long-term debt. Operating cash flow was positive, but down from the prior-year period; investing activities used $71.1 million, including $31.5 million of investee investments and $4.0 million of advances. Cash and cash equivalents fell by $64.3 million during the first half. The $11.5 million restricted cash balance was released after a German enforcement matter was resolved.
Material changes and unusual items
- Lower revenue was partly offset by reduced operating costs. Patent amortization fell 48% year over year, and the prior-year period included $40.2 million of patent impairment charges, primarily related to the Adaptix portfolio.
- Q2 and first-half 2017 results included a net $5.4 million unrealized loss related to Veritone: gains on conversion of loans and exercise of a warrant were more than offset by a $12.7 million fair-value loss. Acacia reported its Veritone investment at fair value of $49.8 million at June 30, including $45.1 million of common stock and $4.7 million of warrants.
- Acacia invested $2.25 million in Miso Robotics for a 22.6% interest and a board seat, and entered an intellectual-property services agreement. Its equity-method loss for the quarter was $14,000.
- Veritone’s IPO converted Acacia’s loans and accrued interest into shares and triggered exercise of the Primary Warrant. Acacia reported a 20% ownership interest, excluding warrants, following the transactions.
- Revenue remains highly concentrated: one licensee accounted for 85% of Q2 revenue; two accounted for 55% and 26% of first-half revenue. One licensee represented approximately 98% of receivables at June 30.
Outlook, commentary and risks
Management said cash and cash equivalents and anticipated operating cash flows should meet cash requirements through at least August 2018. No revenue or earnings guidance was provided. Management cautioned that results can vary significantly between periods and that revenue not realized in one period may be delayed rather than permanently lost.
- Patent intake remains a key concern: Acacia obtained control of one new portfolio in the first half of 2017, versus two in 2016 and three in 2015. Management warned that continued difficulty sourcing suitable portfolios could reduce future revenue and threaten the sustainability of the licensing business.
- Litigation outcomes, appeals, legal-cost increases, changes in patent law and potential sanctions or fee awards create uncertainty. A Saint Lawrence verdict against Motorola awarded nearly $9.2 million in past damages; enhanced damages and attorneys’ fees and final judgment remained pending. Post-trial motions remained pending in CCE’s Apple case, including Apple’s patent-exhaustion motion. A Saint Lawrence trial against Apple was scheduled for early fiscal 2018.
- Acacia said Veritone and Miso Robotics were not profitable and had limited financial resources; the company may lose some or all of its strategic investments, and securities restrictions may limit its ability to sell holdings.
- The Veritone valuation depends in part on Level 3 assumptions, including a marketability discount; management estimated that a one-percentage-point increase in that discount would reduce fair value by $0.5 million.
- Management stated disclosure controls were effective and that the material weakness identified in 2016 concerning accounting for certain stock options had been remediated as of March 31, 2017.
Important facts for investors to verify
- Whether the pending Motorola and Apple litigation results in final judgments, appeals, settlements or additional costs, and when related cash is received.
- Whether Acacia can improve patent-portfolio intake and diversify licensing revenue and receivables away from concentrated counterparties.
- Veritone’s subsequent share price, investment valuation assumptions, potential restrictions on selling shares and the remaining vesting terms of warrants.
- Collections of the $14.2 million in receivables and payment timing for $9.4 million of royalties and contingent legal fees payable.
- Whether operating cash generation and liquidity remain consistent with management’s stated runway through August 2018, given continued investment and uneven licensing revenue.