Earnings Call Transcript - ACTG Q2 2023

Operator, Operator

Greetings, and welcome to the Acacia Research Second Quarter 2023 Financial Results Conference Call. At this time, all participants are placed on a listen-only mode, and a question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to your host, Mr. Rob Fink of FNK IR. Sir, if you may begin.

Rob Fink, Host

Thank you, operator. Hosting the call today are MJ McNulty, Interim Chief Executive Officer; and Kirsten Hoover, Interim Chief Financial Officer. Before beginning, I'd like to remind you that 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 and projections, future results or trends. Actual results may differ materially from those projected as a result of certain risk factors 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 report on Form 10-Q filed with the SEC. I'd also like to remind everyone that a press release disclosing the financial results was issued this afternoon, just after the close of the market. This release may be accessed on the company's website under the Press Release section of the Investor Relations tab at acaciaresearch.com under the News and Events tasks. With all that said, I'd now like to turn the call over to MJ. MJ, the call is yours.

MJ McNulty, Interim CEO

Thanks, Rob, and thanks to everyone for joining the call today. So, in mid-July, and subsequent to the end of the second quarter, we completed our recapitalization transaction with our largest shareholder, Starnberg Value. As you know, in many ways, this milestone signaled the completion of our larger transformation of Acacia. Since we announced this transaction in late October, along with new senior leadership and new members of our Board of Directors, we have significantly restructured and improved Acacia. We reorganized the team we had focusing on sourcing, evaluating, and executing potential transactions, putting in place a more defined methodology while significantly reducing headcount and associated costs. Like Printronix, our IP business is now managed as a division. This means we'll consider allocating additional capital as appropriate, and we're finalizing an incentive structure for our IP division management that's more aligned with their unique business. We reorganized Printronix and our new leadership, reducing costs, improving efficiency, and setting the stage for an evolution of the business model that we believe will generate more predictable cash flows. Importantly, we put a corporate incentive plan in place for employees of our parent company to clearly align our team's incentives with those of our shareholders. I realize that many of these achievements are behind the scenes, and I recognize that many shareholders are eager for us to deploy capital into our existing businesses as well as into new businesses. So let me take a second to speak to that initiative. Our pipeline of opportunities continues to grow, and we're maintaining rigor in the evaluation of each of those opportunities. We have a number of late-stage targets today, and we have many other opportunities on deck. In some of these cases, we're working with people we've partnered with in the past, and we have confidence in their track record of success. That familiarity is accelerating our efforts. Our network of referral sources also continues to grow and improve. We're encouraged by our progress, and we continue to collaborate closely with our largest shareholder. Through this relationship, we enjoy ready access to their executive network of industry executives, which helps us source and evaluate appropriate acquisition opportunities. I'm reluctant to make any predictions about when a transaction will occur or the scope of any transaction, which we've talked about in the past. We continue to need willing counterparties and valuations that are accretive and attractive for our shareholders. Discussing the status of various projects doesn't work to anyone's benefit here, but I hope that you appreciate the progress that we've made. As part of this evolution of Acacia, we significantly reduced our cost structure. As we mentioned previously, the element of our business for which we have the greatest control. Our annualized parent fixed costs have decreased by $6 million, approximately a 30% reduction from this time last year. The reduction is broad-based, and we're now positioned to cover our ongoing fixed corporate costs and interest earned from our cash and cash equivalents. This is an important achievement, safeguarding our dry powder for acquisitions. As we mentioned in the past, where we evaluate potential opportunities in the public markets, we will from time to time acquire stock in those companies. The positions that our new deal team has taken in public companies are up over 20% year-to-date, demonstrating the benefits of our targeting and valuation process. Our legacy life sciences assets have been largely monetized, as everyone is aware, and we're anticipating monetization events with some of our remaining holdings in the not-too-distant future. Our intellectual property business continues to have expected quarter-to-quarter revenue fluctuations, but we have an important trial related to our WiFi 6 patents that is expected to start in the near future, and we're optimistic that a favorable outcome would accelerate licensing activity. Additionally, we have a strong pipeline of potential opportunities to further invest and attract RP assets. I'd now like to turn the call over to Kirsten to discuss our second quarter financial results.

Kirsten Hoover, Interim CFO

Thank you, MJ. Our GAAP book value at June 30, 2023, was $335.4 million, or $5.71 per basic share, compared to $269.3 million, or $6.19 per share, at December 31, 2022. This value reflects the rights offering that was completed in the first quarter and the impact of the outstanding warrants and embedded derivative liabilities. Total liabilities for warrants and convertible preferred stock to be eliminated upon the exercise or expiration of all such warrants and convertible preferred stock was $94.9 million at June 30, 2023. As MJ said, we expect that interest income will cover Acacia's fixed parent costs. A key part of this is the elimination of approximately $6 million in annualized parent general and administrative costs. We expect Printronix to generate free cash flows on an annual basis. Let me now turn to the second quarter results. Total second-quarter revenues were $7.9 million compared to $16.7 million in the same quarter last year. Printronix generated $7.5 million in revenue in the quarter compared to $8.7 million last year. The intellectual property business generated $400,000 in licensing and other revenue during the quarter compared to $8.1 million in the same quarter last year. As MJ mentioned, given the nature of the IP business, we have expected fluctuations in revenues quarter-to-quarter. General and administrative expenses, which includes G&A at IP and Printronix, were $9.4 million compared to $10.7 million in the same quarter of last year, due to the decrease in personnel and compensation costs related to the reduced headcount and a reduction in Printronix G&A. The operating loss was $12.5 million compared to an operating loss of $5.7 million in the same quarter of last year, with the reduction due to lower revenue. The second-quarter 2023 GAAP net loss attributable to Acacia Research was $18.8 million, or $0.36 per diluted share, compared to a GAAP net loss of $61.5 million, or $1.44 per diluted share in the second quarter of last year. The net loss included $8 million in realized losses and $6.6 million in unrealized gains related to the increase in share price of certain holdings. We also incurred a noncash expense of $9.9 million related to the change in fair value of the Starboard Series B warrants and embedded derivatives. The change in fair value was primarily due to the increase in stock price. The second quarter also included $4.3 million in non-cash depreciation, amortization, and stock-based compensation expense, and $2.4 million in non-recurring charges related to severance, legal, and other professional fees associated with the separation of our former CEO and other nonrecurring charges. At the beginning of 2023, our net operating loss totaled approximately $63 million. Since that time, we have effectively sheltered most of our games. We will continue to evaluate the most efficient ways to maximize this asset. Turning to the balance sheet, cash, cash equivalents, and equity securities at fair value totaled $408 million at June 30, 2023, compared to $349.4 million at December 31, 2022. Equity securities without readily determinable fair value totaled $5.8 million at June 30, 2023, which amount was unchanged from December 31, 2022. The Investment securities representing equity method investments net of non-controlling interest totaled $19.9 million at June 30, 2023, unchanged from December 31, 2022. All milestone payments earned by MalinJ1 through with interest in Viamet have been received. Acacia owns 64% of MalinJ1, resulting in a beneficial ownership of 26% in Viamet. Total indebtedness, which represents the senior secured notes issued to Starboard, was $60.5 million at June 30, 2023. This debt was paid off on July 13. More details on these results have been made available in the press release issued this afternoon and in our quarterly report on Form 10-Q, which we will file with the SEC later today. Our GAAP book value, as discussed today, includes the impact of all 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 time. These liabilities were extinguished on July 13, 2023, with the completion of the recapitalization transaction with our largest shareholder. As a result of this recapitalization, Starboard purchased 15 million new shares in the rights offering at $5.25 per share for total proceeds of $78.8 million in the first quarter of 2023. $23.2 million of Series A preferred stock was eliminated, and 9.6 million shares of common stock were issued in Q3 2023. $60.5 million of liabilities attributable to the senior secured notes were canceled, and Starboard invested an additional $55 million in cash related to the Series B warrant exercise, with 31.5 million shares of common stock issued in Q3 2023. $94.9 million of total warrant and embedded derivative liabilities attributable to the Series B warrants and Series A preferred stock was eliminated in Q3 2023. Acacia paid Starboard a total of $66 million as consideration for early exercise of the Series B warrants and convertible preferred stock in Q3 2023. Acacia incurred approximately $250,000 in incremental transaction costs associated with the consummation of the recapitalization transactions. The completion of the recapitalization transactions resulted in an incremental $166.8 million increase in book value and an incremental $41.4 million increase in shares outstanding. Adjusted book value, as adjusted to give effect to the transaction as if it had been completed on June 30, 2023, rather than July 13, 2023, would be $502.2 million, and diluted shares outstanding would be $99.9 million, resulting in an adjusted book value per share of $5.03 at June 30, 2023. We continue to believe that cash per share is an important metric for measuring our progress. As of June 30, 2023, our cash per share stood at $6.05. On a pro forma basis, assuming completion as of June 30, 2023, of all phases of the Starboard transaction, our cash per share would be approximately $3.44 per share. With that, we'd be pleased to take your questions.

Operator, Operator

Thank you. At this time, we will be conducting a question-and-answer session. One moment please, while we pause for questions. Thank you. Our first question is coming from Anthony Stoss with Craig-Hallum. Your line is live.

Anthony Stoss, Analyst

Thanks. MJ, I just want to circle back to actually two questions. On your Wi-Fi 6 commentary, I'm curious if there's more than one potential licensee that you've been engaged with? And then the second question related on the M&A side, probably more big picture. Are you seeing potential prices come down, or are you still leaning towards doing a series of smaller deals or one larger one? I'd love to hear your thoughts on both subjects.

MJ McNulty, Interim CEO

Yes. Hey, Tony. How are you doing? So on the Wi-Fi 6, all of our tenants are working with multiple parties at all times, so there is a trial with one particular party that's upcoming. We can't really say anything about it, as I'm sure you can appreciate. But there's a lot of activity on the Wi-Fi 6 portfolio. We feel really confident about it. It's a great portfolio, standards essential. And so we have a trial that's upcoming. We are encouraged by it, and we still feel really confident about the value of the rest of the portfolio. So that's the Wi-Fi 6 piece. On the M&A side, it's a great question. When we've talked in the past, we talked a lot about seeing things on the public side, and we're still seeing things on the public side that are really attractive. Remember, on the public stuff, we're focused on some of the parts-type opportunities and deep margin improvement-type opportunities. We can work with the operating network that we have to drive value in the business that should again re-rate from the operating way that we believe we can have a work in. We still see a lot of those, and we're evaluating on those and we're kind of engaged in service at the moment. What’s interesting is that we’re starting to see valuations become a little more attractive on the private side, which is different from what I think we've talked about in the last couple of quarters, where the private equity guys still have unrealistic expectations and the ask is very wide. We're starting to see that clear a little bit. And we're still looking at opportunities on the private side. The sum of the parts is a little more challenging on the private side. We're expecting to see carve-out-type opportunities, which would be the private analogy to the public semi-part-type story. But we're seeing some things that I would characterize as mismanaged and balance sheet constrained, which we think are very attractive. Again, that operating network we have is very beneficial for us, because we will go into a situation like that with somebody that we trust and respect and has a plan to help us improve that business. We're also seeing things where we're meeting a lot of executives that want to go do five builds. That starts small but we can grow into a much larger business. And we're seeing a handful of things that we're lucky to have, with several proprietary things that we're looking at, which I’ve always noted, as a long-time private equity guy, nothing's really proprietary. But we're working on a handful of things that are really interesting with folks we've known for a long time. Where we do have an opportunity to partner with them to invest and acquire the business and continue to grow it. So I think I'm encouraged by valuations on the private side. There are definitely more presenting itself. When you look at the limited partner stats, which we look at a lot of, net inflows to outflows, limited partners are telling their GPs that they need to start selling businesses, and that's good for us generally. So in public markets, there are always pockets of value in the public markets, and finding them and having the right execution talent alongside us to write those ships and grow those businesses. On the private side, we're starting to see more attractive flow.

Anthony Stoss, Analyst

Got it. I don't have to tell you that shareholders are growing eager to see the outcome. I'm sure you are as well. Thanks, MJ.

MJ McNulty, Interim CEO

I'm probably more eager than anybody else, Tony. So I appreciate the encouragement.

Anthony Stoss, Analyst

Thanks, again.

MJ McNulty, Interim CEO

Of course.

Operator, Operator

Thank you. Our next question is coming from Brett Reiss with Janney Montgomery Scott. Your line is live.

Brett Reiss, Analyst

Hi MJ. Hi Kirsten. Hi Rob.

MJ McNulty, Interim CEO

Hey Brett.

Brett Reiss, Analyst

A question on the patent business. The company gets no credit for the patent side of the business, and it's frustrating because you own some good portfolios and the people who follow the industry think the Marc Booth team is top-notch. Would you consider, to help people focus and take an interest in the patent side of the business, making available as the company did years ago when it was solely a patent company, a spreadsheet of pending cases with, most importantly, any firm trial dates so that shareholders do not have to search on their own for these public record filings?

MJ McNulty, Interim CEO

Look, I think it's a good question. We're encouraged as we look at the patent business. One, we have a great team, and I appreciate you reiterating that, Brett, because we do believe we have a great team. It's always nice to hear third-party validation that the team has a really nice set of patents in this portfolio. The pipeline is actually pretty interesting there. The underlying economics of the individual portfolios are really attractive. A key metric there is the number of lines that we have any longer at any given time and the progress on those lines. I think we can take that into consideration. I don't know that I can give you an answer right now on that point, but I respect the question, and we can take it into consideration.

Brett Reiss, Analyst

Oh great, great. And one other question and it's probably for Kirsten. The June 30 cutoff date shows the cash at $355 million. So then subsequent to that, you paid off the $60 million in notes. So the cash, I have to take $60 million off the $355 million. What's the arithmetic on that?

Kirsten Hoover, Interim CFO

Brett, so in our 8-K that was just recently released, if you go to the final page of Attachment A, you'll see the walk from the June 30 cash balance of $355.2 million to post recap of 343.4%.

Brett Reiss, Analyst

Okay. You gave ...

Kirsten Hoover, Interim CFO

And that takes total effect of... Exactly. So that will walk you through each step of the recap transaction to give you the cash on a pro forma basis.

Brett Reiss, Analyst

Okay. Great. Thanks for taking my question.

Kirsten Hoover, Interim CFO

Sure.

Operator, Operator

Thank you, everyone. As we have no further questions in the queue at this time, I will hand it back to Mr. McNulty for any closing comments.

MJ McNulty, Interim CEO

Thanks, Ali. Nothing in particular, just to thank everyone for joining the call, and we look forward to talking to you in a quarter with further updates.

Operator, Operator

Thank you so much.

MJ McNulty, Interim CEO

Thanks so much.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.