Acacia Research Corporation — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report. Acacia operates a patent licensing and enforcement business, invests in securities, and is building a permanent-capital acquisition platform. In October 2021 it acquired Printronix, its first operating company.
Financial performance and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $88.0 million | $29.8 million |
| Operating income (loss) | $14.5 million | $(19.5) million |
| Income before tax | $174.7 million | $108.1 million |
| Income tax expense (benefit) | $24.3 million expense | $1.2 million benefit |
| Net income attributable to Acacia | $149.2 million | $109.2 million |
| Operating cash flow | $13.3 million | $(19.6) million |
| Cash and cash equivalents at year-end | $308.9 million | $165.5 million |
| Equity securities at fair value at year-end | $361.8 million | $109.1 million |
| Working capital at year-end | $530.5 million | $332.9 million |
- Revenue rose 196%. Intellectual property revenue was $76.0 million; Printronix contributed $12.0 million from its October 7 acquisition through year-end.
- Patent licensing revenue increased to $76.0 million from $29.8 million, largely from a new portfolio’s initial fourth-quarter licensing revenue and additional agreements. Two licensees accounted for 66% and 16% of 2021 revenue.
- Net income included $207.2 million of net realized and unrealized gains on equity securities, primarily from the Life Sciences Portfolio. The $116.1 million realized gain was partly offset by $87.5 million of unrealized gains. Accordingly, net income substantially exceeded operating income.
- Acacia reported $13.3 million of cash provided by operations, $35.8 million from investing activities and $59.7 million from financing activities. Year-end cash, cash equivalents and equity securities totaled approximately $670.7 million; this excludes restricted cash.
- Senior secured notes had $180.0 million principal outstanding at year-end, with $181.2 million reported as current notes payable including related accounting amounts. The notes bear 6% interest. In January 2022, maturity was extended to April 15, 2022, and Acacia agreed to repay $15.0 million, leaving $165.0 million principal outstanding.
- The filing does not provide a consolidated gross margin percentage. Printronix reported $12.0 million revenue and $7.4 million cost of sales for its post-acquisition period.
Material changes versus 2020
- The business expanded beyond patent licensing through the Printronix acquisition for approximately $37.1 million of consideration. Printronix generated $62,000 of segment operating income during the reported post-acquisition period; Acacia’s Intellectual Property Operations segment generated $41.2 million before $26.7 million of parent general and administrative expenses.
- Operating results improved from a $19.5 million operating loss to $14.5 million operating income, while operating cash flow improved from an outflow to an inflow.
- Equity-security gains remained a major source of reported earnings, but their composition changed: realized gains rose to $116.1 million from $7.4 million, while unrealized gains declined to $87.5 million from $176.2 million.
- Acacia acquired one patent portfolio in 2021, compared with five in 2020. Patent amortization increased to $9.9 million from $4.7 million.
- Net notes principal increased from $115.0 million at year-end 2020 to $180.0 million at year-end 2021. The filing also revised 2020 results for an immaterial deferred debt issuance-cost amortization error: interest expense increased by $4.2 million and net income decreased from $113.4 million to $109.2 million.
Outlook, risks and unusual items
- Management outlook: No quantified revenue or earnings guidance is provided. Management believes available cash, anticipated operating cash flows and note availability are sufficient for at least twelve months from the filing date, while cautioning that unexpected needs or limited access to financing could affect plans.
- Portfolio and litigation exposure: Patent licensing revenue is uneven and depends on settlements, litigation outcomes and timing. Four patent infringement cases had trial dates scheduled within the twelve months after the filing date; dates and outcomes may change. Legal costs, appeals, sanctions or adverse rulings could reduce or delay revenue.
- Investment valuation: Equity securities are exposed to market volatility. A hypothetical 10% adverse price change in publicly traded investments would reduce their value by approximately $36.2 million. Private holdings and derivative liabilities also depend on valuation assumptions.
- Acquisition and operating risks: Integration, customer concentration, suppliers, competition, product demand and execution at Printronix could affect performance. Management estimated supplies would contribute about 48.8% of Printronix fiscal 2022 revenue and international sales about 58%. The filing notes uncertainty from Russia’s invasion of Ukraine, including operational changes and higher transportation costs.
- Financing and dilution: Starboard-related preferred stock and warrants carry redemption, dividend and voting rights. The preferred dividend rate increased to 8% after the acquisition, and outstanding warrants could substantially dilute common shareholders if exercised. The notes’ repeated maturity extensions and near-term repayment requirements merit attention.
- Tax and reporting matters: 2021 tax expense was $24.3 million, including foreign withholding taxes and deferred tax effects; Acacia retained a $40.6 million valuation allowance against deferred tax assets. Management reported effective disclosure controls and internal control over financial reporting, but the auditor did not provide an internal-control attestation.
- Capital returns: Acacia repurchased 784,104 shares in December 2021 at an average $5.12 per share. It completed the $15.0 million repurchase program in February 2022, purchasing 3,125,819 shares in total. The company does not expect to pay common dividends in the foreseeable future.
Important facts for investors to verify
- How much of future earnings and cash generation comes from recurring operations versus realized or unrealized investment gains.
- The terms, maturity and repayment status of the Starboard-related notes after the January 2022 amendment, as well as preferred-stock dividends and redemption rights.
- The concentration and collectability of patent licensing revenue: two licensees generated 82% of 2021 revenue, and two accounted for all year-end accounts receivable.
- The current status and potential financial exposure of patent litigation, including scheduled trials and the Slingshot dispute, and whether any material contingencies have changed.
- Printronix’s post-acquisition operating performance, customer and supplier concentration, supply-chain exposure, and actual contribution from consumables and international markets.
- The composition, liquidity and valuation of remaining Life Sciences Portfolio holdings, including the distinction between publicly traded and private investments.
- The effects of warrant exercise, preferred-stock conversion or redemption, and future share issuance on common-share dilution and liquidity.