Acacia Research Corp Q1 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Acacia Research First Quarter 2022 Earnings Call. It is now my pleasure to turn the floor over to your host, Rob Fink. Sir, the floor is yours.

Thank you, operator. Hosting the call today are Clifford Press, Chief Executive Officer; Rich Rosenstein, Chief Financial Officer; and MJ McNulty, Chief Operating Officer and Head of M&A. Before beginning, I would like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts, and projections about future events that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company's plans, objectives and expectations for future operations and are based on the current estimates, projections, future results or trends. Actual results may differ materially from those projected as a result of certain risks and uncertainties. For a discussion of such risks and uncertainties, please see the risk factors described in Acacia's annual report on Form 10-K and quarterly reports on Form 10-Q that are both filed with the SEC. I would also like to remind everyone that a press release disclosing the company's financial results was issued this morning before the market opened. This release may be accessed on the company's website at acaciaresearch.com under the News & Events tab. With all that said, I'd now like to turn the call over to Clifford Press. Clifford, the call is yours.

Thank you, Rob, and good morning, everyone. As we are all well aware, valuations across the equity markets started compressing during the first quarter, and there was a significant increase in volatility. That volatility has continued, and the disruptions are creating attractive opportunities for Acacia. With an expanded team of M&A professionals and ready access to a strong base of permanent capital, we are in a very good position to put our capital to work. Our team is now in place, headed by MJ McNulty and Wes Golby. We have also built and continued to expand our network of like-minded investors and strategic executives who engage with us on investment projects and can serve as partners in executing complex transactions. The hard work of the last year to build an infrastructure and a network where we were realizing gains and increasing our base of capital is now aligned at an opportune time as valuations become more attractive. Our transaction activity is increasing across the range of companies that fit our criteria. Illustrating this in more detail. We have access to nearly $1 billion in capital and significant experience in complex transactions, including in situations that are mispriced in the public market or where we see an opportunity to unlock value. We have established a dynamic strategic partnership with Starboard Value LP with a clear focus on the type of opportunities we are seeking, and we are fortunate to be able to operate in a flexible fashion. We can acquire public or private companies or discrete divisions of companies, and we are able to participate in or lead consortia of investors to complete larger transactions. Simultaneously, we are increasing our capital base. During the quarter, we realized an additional $59.5 million in gains from monetization of the life sciences portfolio as we continue to opportunistically divest these positions. To date, we have realized $394 million from this portfolio, having invested $294 million to acquire it. We continue to hold $163.7 million in assets at market value for the public companies and at cost for the private companies. In April, Mycovia received approval from the U.S. Food and Drug Administration for its novel compound for the treatment of recurring yeast infections. This approval has triggered a milestone payment to Acacia of $26 million due by the end of 2022 and more importantly, sets the stage for commercialization of this important drug which will generate significant future royalties for Acacia. While our focus on acquisitions is on operating assets, we also consider our stock to be an attractive investment with Acacia shares trading below book value. During the first quarter, we completed the $15 million buyback program that we announced in December, purchasing 3.1 million shares at an average price of $4.80 per share. We subsequently announced an additional $40 million buyback authorization, and we have been executing on that authorization since. With that, I'd like to ask MJ McNulty, our Chief Operating Officer and Head of M&A, to provide a brief update on our process for managing our acquisition pipeline. MJ?

Thank you, Clifford, and thank you all for joining us this morning. As you may know, I started at Acacia in mid-March to lead our M&A initiative. I want to take a moment to provide more details on our strategy and how we have organized ourselves to implement it. I understand both Clifford and the team have discussed our strong relationship with Starboard, which is a crucial element of our strategy. We have a robust team of M&A experts with extensive experience in sourcing, executing, and enhancing value in these opportunities to generate superior returns, along with solid business and investment expertise. Our team focuses on specific areas of interest such as industrials, mature technology, health care, and consumer sectors, which we mentioned in our last call. This team comprises deal professionals and successful former executives collaborating on execution. Alongside our internal efforts, we are working with the Starboard team to assess opportunities. We have emphasized the thoroughness we apply in evaluating opportunities and deciding on suitable valuations. The recent economic volatility that Clifford referred to has affected relative valuations, providing us with a more dynamic landscape to explore. I want to share additional insights on how we perceive the market. We approach M&A with two distinct strategies. First, we seek operating companies or divisions where we can invest permanent capital and collaborate with the team to enhance value. These targets align with the sectors I previously mentioned: mature technology, industrials, health care, and consumer. In these scenarios, our collective experience, bolstered by our partnership with successful operating executives, contributes to our effectiveness. These cases typically involve stable and predictable business models, allowing us to focus on maximizing operational efficiency, increasing cash flow, and growing the business over time. Unlike private equity funds that have set exit timelines or SPACs that aim to spin off businesses through IPOs, we can adopt an owner mentality and operate these ventures flexibly, improving profitability and choosing when to sell or pursue other transactions. Our strategy revolves around predictable business models, but we are also open to being opportunistic and engaging in complex deals both within and possibly outside our specified sectors. In both areas, we have significantly bolstered our resources and networks for identifying such opportunities. At the same time, we continue to expand our network of senior operating executives who assist in identifying, evaluating, and executing strategies to unlock value. Starboard plays a vital role in several ways, including enhancing our network of operating executives, improving our investment decision-making, and uncovering nontraditional acquisition prospects. We have developed a strong pipeline, and as you know, we have begun efforts to acquire multiple companies. Now, Clifford, I'll pass it back to you, or Rich, I'll turn it over to you. Thank you.

Thank you, MJ. First, I'd like to remind everyone that we closed on our acquisition of Printronix in early October, and accordingly, the results reported today include the contribution from this business with no comparable contribution in the prior year quarter. Our GAAP book value at March 31, 2022, was $345.5 million or $7.42 per basic share compared to $430.5 million or $8.80 per basic share at December 31, 2021. As a reminder, our GAAP book value includes the impact of our warrant and embedded derivative liabilities on our balance sheet, which in turn reflects the impact of the increase in the company's share price over the last year. As these liabilities would be extinguished upon exercise or expiration of these warrants and convertible preferred stock, we think it's more useful to consider our book value should all of these instruments be converted. On this basis, assuming full exercise of all issued derivatives, Acacia's pro forma book value would rise to $952 million or $5.91 per share, down from about $1.1 billion or $6.51 per share on the same basis as of December 31, 2021. The primary reason for the decline in book value is the decline in share prices of our securities holdings during the quarter. For the quarter, highlights of our financial performance include the following. First, revenue for the first quarter of 2022 was $13.5 million compared to $5.8 million a year ago. Breaking that down, Printronix contributed $10.9 million in revenue in the quarter with no contribution in the prior year. And two, our Intellectual Property business generated $2.6 million in revenue compared to $5.8 million in the first quarter last year. General and administrative expenses were $11.1 million compared to $6.2 million in the first quarter last year due to the inclusion of Printronix operating expenses as well as increased business development and personnel expenses related to the company's expanding acquisition organization. Operating loss was $8.5 million in the quarter compared to a loss of $5.7 million a year ago. Breaking this down, Printronix contributed positive $1.6 million in operating income, offset by a $3.6 million operating loss in our intellectual property business in the quarter and G&A in our parent organization related to our business development and acquisition activities. Next, realized and unrealized loss on securities totaled $105.3 million in the quarter, a reflection of the decline in share prices of our security positions since year-end. The single biggest driver of the unrealized loss in the quarter was the decline in share price of Oxford Nanopore whose shares declined 43% during the quarter. We did realize $66.9 million in gains from sales of securities during the quarter, of which $59.5 million were from the sales of shares in our life sciences portfolio, which we continue to bring to realization. We now own just over 14 million shares of Oxford Nanopore, down from nearly 39 million shares prior to its IPO in September 2021, and sales to date have been made at an average price of 486p per share. Our GAAP net loss in the quarter was $73.3 million or $1.61 per diluted share compared to a net loss of $164.5 million or $2.81 per diluted share in the first quarter of last year. We recognized noncash income of $28.1 million related to the decline in the fair value of the Starboard warrants and derivative liabilities during the quarter due to the decline in Acacia's share price during that same period. We ended 2021 with a net operating loss carryforward of approximately $170 million. During the quarter, our realized gains have brought that down to a little more than $100 million. Recall that at the beginning of 2021, our net operating loss carryforward plus capital loss carryforward stood at $286 million. So we've been able to reduce that by nearly two-thirds in just over a year largely through gains that we've been harvesting. Cash and equity securities at fair value totaled $535.9 million at March 31, 2022, compared to $670.7 million at December 31. Debt at the end of the quarter was $168.7 million in senior secured notes issued to Starboard Value, down from $181.2 million at December 31, 2021, as we paid down $15 million in notes during the quarter. We have since repaid an additional $50 million of notes after the end of the quarter. More details on these results have been made available in the press release issued this morning and in our quarterly report on Form 10-Q, which we will file with the SEC later today. Now, let me turn the call back to Clifford for closing comments.

Thanks, Rich. In conclusion, the volatility that we are seeing in the market is creating opportunities, and Acacia is well positioned with an experienced team, access to capital, and a growing network. Our willingness to pursue complex multifactor transactions without the requirements of either a narrow mandate or a restricted time horizon makes Acacia a unique and advantaged buyer of businesses. The process of acquiring companies is not linear, and it is therefore hard to predict when transactions will close. But I believe our hard work to build an infrastructure that enables us to identify, pursue and close appropriate transactions is aligning well with a rationalization of valuations. 2022 has the potential to be another transformative year for Acacia. With that, we would be very pleased to take your questions.

Your first question is coming from Tony Stoss from Craig-Hallum.

A couple of them actually. Clifford, just following up on your comments on Mycovia and the milestone payment. Can you help us understand if there's additional milestone payments along the way, if there's additional royalties? Or any thoughts you have on maybe monetizing this asset down the road? And then along the same line, the WiFi 6 patent portfolio has paid dividends already. I'm curious if you care to share any updates on kind of new potential licensees going forward.

Only the two, Tony? I thought you had several more. Okay.

I'll follow up with that.

On Mycovia, the significant milestone payment is $40 million, triggered by the FDA approval, with our share being $26 million. There are smaller milestone payments tied to developments in other geographies, such as a minor one in Europe. However, this is likely the end of the fixed milestone payments. Moving forward, we will focus on the royalty stream generated by actual product sales. As with any royalty stream owner, we have the option to hold it for future payments or monetize it once its value is clearly established or reaches a stabilized income level, which is something we can consider in the future. Regarding the WiFi 6 portfolio, it is quite significant, and Mark Booth and his team are doing an excellent job of continuing to monetize it. Its effectiveness is well known to potential future licensees and should facilitate the completion of those transactions.

And then, the WiFi 6 new potential...

That's the WiFi 6 I thought I was on.

Okay. I would like to follow up with MJ. With asset prices decreasing, I believe other shareholders would appreciate hearing about the areas of expertise you've developed in your team. Is it mainly focused on technology or industrial sectors? Is there also some involvement in healthcare? Additionally, I'm interested in your opinion on what acquisitions may be too large or if pursuing smaller acquisitions is even worthwhile.

We're continuing to expand our team and are approaching a critical mass. We have significant experience with operating executives in various sectors, particularly in industrial and technology, which are our main focus. The market has softened, especially in technology, and we're dedicating considerable effort there. As for the size of potential opportunities, I prefer not to comment specifically. We have the capacity to engage with a wide range of projects, but our decisions will depend on the value and contribution to Acacia as a whole, assessed on a risk-adjusted basis. We've looked at both large and small projects, and we will be very strategic about our time investment. Often, small deals can require as much time as large ones, so we are analyzing the efficiency of our time spent on the opportunities we have.

Okay. And then my final question, I guess for Rich, I can't leave you out. You've been paying down debt rather quickly the last couple of quarters. Is that kind of the expected plan, pay down debt each quarter going forward versus keeping some powder dry for M&A?

Yes, that's correct, Tony. As you know, we've used the debt to maintain liquidity for our growing securities positions, and as we've been reducing those positions, we've had the means to pay off the debt. However, we still have substantial capital resources at our disposal. Therefore, keeping that debt and paying interest on it doesn't seem to be the most effective use of our capital. It remains an option for us, but if we can operate with less of it, we will.

Your next question is coming from Adam Eagleston from Formidable Asset Management.

So a couple of questions here. So one, AMO Pharma had some news in the past week or so with regard to an additional private investment. Just wanted to see, given your position in that company, if that was something in which you participated.

So that was the second part of a previously negotiated equity investment that was milestone driven. They've obviously made significant progress, and so that investor put in the rest of the capital. It was not us.

Got it. Okay. It was not you, okay. Great.

It's a terrific investor, by the way. It's Dermot Desmond's company, IIU.

Great. And then second, I know that you talked a little bit earlier about Mycovia. So obviously, there's more clarity there now with the milestone payment and the royalty getting ready to start. Any idea when you might change that valuation from cost to something that would reflect more of that present value of the royalty stream/the milestone payments?

I can take that.

Okay. Go ahead, Rich.

Our ownership in Viamet comes through a joint venture called MalinJ1, which we consolidate. We have just over 40% ownership in Viamet, and we are accounting for it using the equity method. Currently, we have recorded it on our books at cost rather than fair value. As we receive payments and royalties, you will see that cash contributing to our overall value. We can provide more clarity over time as royalties start to be generated and will share insights on what that revenue stream might look like. Today, we wanted to give more detail about the immediate milestone payment we anticipate later this year.

I'll add to that for you, Adam. That's a technical explanation of how we're accounting for it. I think you're also asking about the outlook for it. The approval it has is still somewhat limited. There's further work needed to secure a broader approval, and we'll have to see how that unfolds over the next year to 18 months, as that will determine the ultimate scale of the revenues.

Your next question is coming from Calgary Leveen from Anhinga.

Sorry, my questions have all been taken already. So thanks, and good luck.

Your next question is coming from Brett Reiss from Janney Montgomery.

Just a question. The operative language 'sales to date' on the Oxford Nanopore position, $14 million, is that as of the quarter end March 31? Or is it today, the date of the release?

Rich, that one's for you.

Yes, they are the same. Our current position as of March 31 was 14 million shares, and that is where we are today.

Okay. So we haven't sold more stock at these low levels after the March 31 cutoff date of the quarter?

We have sold approximately 24 million to 25 million shares at an average price of GBP 4.86 per share.

Yes. Good job on that. I guess this question is for MJ. Regarding Comtech, Spok, and Kohl's, have we completely moved away from exploring opportunities there, or are we still considering those situations?

We haven't provided any comments as we've discussed this previously. It's challenging for us to discuss ongoing deals, so we will refrain from commenting on announced transactions. Since we are a public company, if there are significant developments, we will make the necessary announcements.

Okay. Fair enough. One last question. You've done a fantastic job, so why haven't we seen institutional buying of the stock? What is preventing some of these investors?

It's a complicated question. We have an understanding of what could make the stock more appealing to institutional investors, with scale and capital structure being key factors. We recognize the issues and will work to address them in the future.

That concludes our Q&A session. I will now hand the conference back to Clifford Press for closing remarks. Please go ahead.

Well, as most of our investors know, this is the moment we've been waiting for. We were fortunate in prior dislocations in the markets to be able to buy attractive assets, and we intend to do the same now. And the team is working extremely hard to complete those objectives. And we very much look forward to being able to announce our progress as we get transactions done.

Thank you.

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.