Acacia Research - Q1 2023

Transcript

Kirsten Hoover (Interim CFO)

Good day, welcome to the Acacia Research First Quarter 2023 Earnings Conference Call. At this time, all participants are on the listen-only mode. After management's prepared remarks, there will be a question and answer session. I would now like to turn the call over to Rob Fink. Please go ahead.

Rob Fink (Managing Partner)

Thank you, operator. Thank you everyone for joining us today. Hosting the call are MJ McNulty, Interim Chief Executive Officer, and Kirsten Hoover, Interim Chief Financial Officer. Before beginning, I would 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, 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 filed with the SEC. I would also like to remind everyone that a press release disclosing the financial results was issued this afternoon just after the market closed. This release may be accessed on the company's website at acaciaresearch.com under the News and Events tabs. With all that said, I would now like to turn the call over to MJ. MJ, the call is yours.

MJ McNulty (Interim CEO)

Thanks a lot, Rob, and thanks to everyone for taking some time to hear our update this afternoon. As you know, the first quarter comes up pretty quickly, and having just spoken six weeks ago, providing a detailed update on the team and the processes we had put in place for our M&A initiative, let me just give you some updates on those first. We've largely cleaned up the business from its historical operating procedures and cost structure, which I think you'll see come through the numbers. We're confident that the processes we began building in earnest in the second quarter of last year for identifying, qualifying, and executing acquisitions are sound. We're applying those processes to a growing pipeline of acquisition opportunities, with an increasing frequency in seeing attractive results.

While we've primarily been focused, as we've said in the past, on public opportunities, and that universe consists primarily of some of the parts opportunities and margin improvement stories, we're now beginning to also see pockets of similar opportunities in the private markets, including the good business challenge balance sheet types of opportunities. We think we'll continue to see those types of opportunities given where we are in the market cycle, though the valuations for private assets remain elevated relative to those in the public space. There are also several out-of-favor industries that we're attracted to. As we said in the past, our ability to be facile on industries and on opportunities really is in relationship to the relationships that we have with world-class operating partners, which continues to manifest in the opportunities we're actively pursuing.

We're additionally excited to work with exceptional management teams, we've identified opportunities where sound management is, for one reason or another, encumbered from unlocking the full potential of its business. Given our strong relationships with talented executives, our screening and acquisition processes, and our broad sourcing network, we believe our platform can deliver attractive opportunities irrespective of the market conditions. As a note, we remain cautious about excessive leverage in the system, and we don't anticipate leverage to be a material component of the returns for our shareholders. That's where we are on the new opportunity side. We're enthusiastic about the population of deals in front of us, though we continually mention our goal is not to do deals, it's to do good deals, and we are patient, judicious towards this goal.

We also continue to effectively manage and invest in our intellectual property portfolio, which generated strategically meaningful revenue for us in the first quarter. We continue to see attractive opportunities with blue-chip partners for future intellectual property investment. In addition, Printronix was acquired at an attractive valuation, as we've mentioned in the past. In sticking with our processes, we have an excellent executive working with us to enhance the business. We'll evaluate similar acquisitions of operating businesses or divisions of larger organizations where we believe we can increase the value of the business. I'd now like to turn the call over to Kirsten to discuss our first quarter financial results.

Kirsten Hoover (Interim CFO)

Thank you, MJ. Let me start with first quarter results. Total first quarter revenues were $14.8 million, compared to $13.5 million in the same quarter last year. Printronix generated $10.6 million in revenue in the quarter, compared to $10.9 million last year. The intellectual property business generated $4.2 million in licensing and other revenue during the quarter, compared to $2.66 million in the same quarter last year. General and administrative expenses, which includes G&A at our IP and industrial segments, was $12 million, compared to $11.1 million in the same quarter of last year. The increase was due to non-recurring corporate legal expenses and other one-time charges. As an important reminder, we expect that interest income will cover Acacia's ongoing fixed parent costs.

A key part of this is the elimination of approximately $6 million from our run rate at December 31st, 2022 in annualized parent G&A costs. We also expect our IP monetization business and Printronix to generate free cash flow. Operating loss was $9.3 million compared to an operating loss of $8.5 million in the same quarter of last year. With the increase due to increased cost of sales from Printronix due to under absorption of overhead. Printronix contributed $560,000 in operating income. GAAP net income attributable to Acacia Research was $9.4 million, or $0.07 net loss per diluted share, compared to GAAP net loss of $73.3 million or $1.61 per diluted share in the first quarter of last year.

Diluted earnings per share adjusts the numerator used in the basic earnings per share computation for the fair value adjustments on warrant and embedded derivative liabilities, resulting in a diluted net loss attributable to common stockholders. Net income included $1.4 million in realized losses and $3.3 million in unrealized gains related to the increase in share price of certain holdings. The company recognized non-cash income of $16.7 million related to the change in fair value of the Starboard warrants and embedded derivative liabilities. The decrease in the liability is primarily due to the decrease in share price at March 31st, 2023, compared to December 31st, 2022, and a decrease in liability for the shortened term. At the beginning of 2023, our NOL totaled approximately $63.8 million, and since that time, we have effectively sheltered most of our gains.

We will continue to evaluate the most efficient ways to maximize this asset. Turning to the balance sheet. Cash and equity securities at fair value totaled $425 million at March 31st, 2023, compared to $349.4 million at December 31st, 2022. Equity securities without readily determinable fair value totaled $5.8 million at March 31st, 2023, which amount was unchanged from December 31st, 2022. Investment securities representing equity method investments, net of non-controlling interest, totaled $19.9 million at March 31st, 2023, unchanged from December 31st, 2022. All payments tied to milestones that have already been achieved and earned by MalinJ1 through its 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 $61.4 million at March 31st, 2023.

More detail on these results have been made available in the press release issued earlier today and in our quarterly report on Form 10-Q, which we will file with the SEC later today. For a review of our book value. Our GAAP book value at March 31st, 2023 was $355.7 million or $6.07 per basic share, compared to $269.3 million or $6.19 per share at December 31st, 2022. This value reflects the rights offering that was completed in the first quarter. Total liabilities for warrants and convertible preferred stock to be eliminated upon exercise or expiration of all such warrants and convertible preferred stock was $85 million at March 31st, 2023.

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 changes in the company's share price over time. 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. The Starboard transaction should convert or extinguish these transactions, with the final step being the exercise of our Series B warrants in Q3 of this year. The press release issued earlier today includes a detailed breakdown of our capital structure and the explanations of how our capital structure will change as a result of the ongoing steps of our process with Starboard.

In summary, upon completion of the recapitalization transactions with Starboard purchased 15 million new shares in the recently completed rights offering at $5.25 per share for total proceeds of $78.8 million in the first quarter of 2023. $35 million in face value of Series A preferred stock will be eliminated, 9.6 million shares of common stock would be issued at $3.65 per share in Q3 2023, following Acacia's annual meeting of stockholders. $61.4 million of liabilities attributable to the senior secured notes will be converted into common equity, Starboard will invest an additional $55 million in cash related to the Series B warrant exercise. 31.5 million shares of common stock would be issued at $3.65 per share in Q2 and Q3 of 2023.

$85 million of total warrant and embedded derivative liabilities attributable to the Series C warrants and Series A preferred stock would be eliminated in Q2 and Q3 of 2023. Acacia would pay Starboard a total of $66 million as consideration for early exercise of the Series B warrants and convertible preferred stock in Q3 of 2023. Acacia will incur transaction costs associated with the negotiation and consummation of the recapitalization transactions. The expected impact of the completion of the recapitalization transactions would be an incremental $153 million in book value and an incremental 41.1 million of shares outstanding. Assuming such completion, pro forma book value would be $508.7 million, and diluted shares outstanding would be 99.6 million, resulting in pro forma book value per share of $5.10 at March 31st, 2023.

Over the next few months, the transaction agreed to with Starboard will result in the streamlining of our capital structure and the strengthening of our capital base. This should be complete by the time we report our second quarter results in mid-August. We continue to believe that cash per share is an important metric for measuring our progress. As of March 31st, 2023, our cash and equity securities per share stood at $7.26. On a pro forma basis, assuming completion of all phases of the Starboard transaction, our cash and equity securities per share would be approximately $4.12. With that, we'd be pleased to take your questions.

Operator (participant)

Certainly. The floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your questions, you please pick up your handset if listening on a speakerphone to provide optimum sound quality. Please hold just a moment while we pull for questions. Brett Reiss from Janney Montgomery Scott, has your first question. Please pose your question. Your line is live.

Brett Reiss (SVP)

Yeah. Hello? Can you hear me?

MJ McNulty (Interim CEO)

Hey, Brett. How are ya?

Brett Reiss (SVP)

I'm good, MJ. Hi, Kirsten.

Kirsten Hoover (Interim CFO)

Hi.

Brett Reiss (SVP)

Hi. The discipline that you're, you know, maintaining in your approach, you know, before consummation of a deal, is part of that discipline a macroeconomic inhibition to pull a trigger on a deal right now because you feel we may be in the early innings of a credit contraction that'll result in more distressed, you know, prices and a better deal at some point in the future?

MJ McNulty (Interim CEO)

Look, I appreciate the question. I would say this is not a broad application, but generally we don't have inhibitions. In terms of investing, I wouldn't say it's an inhibition around the macro environment, though we do have our eye on the macro environment. We though don't have a crystal ball, and so we're looking at each company as a business in and of itself and how we think it'll perform in the market, what we can do with that company, with the operating executives that we bring in to sit on the board and advise us on those companies. There are a lot of businesses that we're seeing that have countercyclical elements to them.

That said, you know, we're in a really, really good position right now where we are sitting on cash, and cash is very valuable right now with the outlook or the widely held outlook. We are not generalizing, saying, "In this macro environment, we just wanna wait," because we are seeing interesting opportunities that we think irrespective of the macro environment will perform to the types of estimates that we're making for those businesses.

Brett Reiss (SVP)

Okay. Now when you say in the release one of the speed bumps to a deal, you know, the timing of a deal, you say there are several factors outside your control. What factors are we talking about in this M&A, you know, space we're talking about?

MJ McNulty (Interim CEO)

Yeah, I mean, look, the factors it's effectively a consensual partnership. I would say first and foremost, we could love a business, we could have a price that we love a business at, we should think that clears. But it takes two parties to come together on a bilateral basis to get a transaction done. There are gonna be times when that happens, and there are gonna be times when we have a great deal and the other party isn't willing to transact where we think it's a great deal, and we'll work through those. That's probably the factor. Our ability to do a deal is not unilaterally in our control, Brett, and that's probably the key point to take away from that comment.

Brett Reiss (SVP)

Okay. When you say you're working with management teams because you envision if and when we consummate a deal, you will bring in our management team that we're more comfortable with and substitute it for the thing that we're buying. Is that why you're talking to all these different management teams?

MJ McNulty (Interim CEO)

We could do that. Why we're talking to outstanding executives is so that we have the best possible viewpoint on the diligence, the execution, and then the operations of the business after our ownership. That could mean probably in most cases that the executives that we're working with end up looking more like board members or strategic advisors to the teams that are actually running those businesses day-to-day. There are instances of businesses that we've seen and could likely acquire in the future and other instances in the future where it's a corporate carve-out, for example, and there is not a natural team that has been running the business, and we can drop executives into there.

There could be true, you know, turnaround situations where we, you know, may need to drop somebody in. I would say that our preference is not to upset the apple cart and drop in a new team to run a business unless absolutely necessary because it does increase operational risk around buying and running these businesses inside Acacia. I guess, the key takeaway there is we wanna be as smart as we possibly can, and we view very smart people who understand their industries and business models as a key driver for that. We wanna be prepared if we need somebody to augment a business in a way that, you know, that helps us maximize the value.

Brett Reiss (SVP)

Okay. One last one for me, and I'll drop back in queue. Do we own small amounts of publicly traded equity securities in companies we think, you know, we might ultimately want to control? If so, how many and Is that included in the balance sheet in the equity securities, you know, portion in the balance sheet?

MJ McNulty (Interim CEO)

You're gonna see equity securities on the balance sheet. It is included in the balance sheet in the equity security section. There are securities in there that are legacy securities. There are securities in there that are new securities. Yes, we will acquire positions in businesses that we have done the fundamental research on that we believe are very interesting for our model. It doesn't mean that every one of those businesses ultimately will be acquired, going back to your question earlier, Brett, about what's in and what's out of our control.

Brett Reiss (SVP)

Right.

MJ McNulty (Interim CEO)

It is part of our business model to acquire securities in companies that we like after having done the fundamental research on those companies.

Brett Reiss (SVP)

Are you at liberty to say how many of these small positions that are, you know, fish hooks in the pond of possible acquisitions do you have right now? eight, 10, 12, six?

MJ McNulty (Interim CEO)

Let me take that question apart. The answer to that question is not instructive to the number of things that we're working on. There are more things that we're working on in earnest than the number of positions that we have out there. I just wanna make sure that doesn't become a marker for what our pipeline looks like.

Brett Reiss (SVP)

Okay.

MJ McNulty (Interim CEO)

It's not.

Brett Reiss (SVP)

Right.

MJ McNulty (Interim CEO)

The second piece of that question is, given the size of our equity trading portfolio last year, we were put over a $100 million threshold for a four consecutive quarterly reporting requirement under Form 13F. I'm not gonna tell you what they are now, but there is a Form 13F that's gonna come out next week, so you can figure it out there.

Brett Reiss (SVP)

Okay. I will drop back. I always appreciate you taking my questions.

MJ McNulty (Interim CEO)

Anytime, Brett. Anytime.

Operator (participant)

Once again, if there are any remaining questions or comments, please press star one on your phone at this time. Please hold a moment while we poll for any additional questions or comments. Your next question is coming from Adam Eagleston with Formidable AM. Please pose your question. Your line is live.

Adam Eagleston (Chief Investment Officer)

MJ, Kirsten, thanks so much for taking some time today.

MJ McNulty (Interim CEO)

Hey, Adam.

Adam Eagleston (Chief Investment Officer)

Hey. Question is with regard to, capital allocation and thinking about the structure here. Obviously, you've got a lot of dilution that's coming down the pipe. Any thoughts from the board about offsetting some of that with a buyback given the disconnect between the current share price and the book value?

MJ McNulty (Interim CEO)

Look, we get that question a lot. You and I may have talked about this in the past also. We're, you know, we're inherently capital allocators, and so we're evaluating all the options we have for allocating capital. I understand the perspective. We also have a very attractive pipeline of opportunities that, you know, have coefficients against them as to success of getting them done, but well in excess of the cash that we have on the balance sheet. As we look at potential opportunities and weigh those against other capital allocation opportunities, or options rather, we have that conversation on a regular basis.

Adam Eagleston (Chief Investment Officer)

Okay, fair enough. Thank you.

MJ McNulty (Interim CEO)

Yep.

Operator (participant)

Once again, if there are any remaining questions or comments, please press star one on your phone at this time. Please hold while we pull for questions. Your next question is coming from Todd Retter with Eighty-eight Management. Please pose your question. Your line is live.

Todd Retter (Company Representative)

You know what? Adam just asked the question, so I can say I appreciate MJ's response. You know, MJ, have you guys given a lot of thought to not pulling the trigger on a potential buyback? Was that something you guys gave serious consideration to, or you just preferred not really buying back any more stock?

MJ McNulty (Interim CEO)

I mean, look, we had bought back a reasonable amount last year. Like I said, Todd, it's really a weighting of the pipeline of opportunities that we have and what we think the, you know, the outcome of those will be and the accretion associated with those relative to buying back stock. You know, we have a pretty fulsome pipeline that's, you know, well in excess of the cash that we have on the balance sheet. You know, we do talk about it. We do deliberate on it. Right now we're, you know, looking towards the opportunities that we have as a way to deploy capital. You know, they're fluid discussions.

Todd Retter (Company Representative)

Reflecting on a question that Brett asked, as of the end of the last quarter, we had investments in three public companies, in aggregate, $20 million invested. I know 45 days after the end of the quarter, which is last week, a light will be shined on your current position. Did I see something in the earnings release that reflected investments in those types of potential target companies are still a number in that neighborhood of what it was last quarter, just under $20 million, or I was mistaken? There was no visibility given on that.

MJ McNulty (Interim CEO)

Yeah, I mean. First point is that 13Fs are a point in time, and by the time they're reported are inherently outdated. As you saw in the last 13F, there was a large position in one particular name, that made up the bulk of two particular names, really that make up the bulk of the portfolio. We continue, as always, to work the portfolio. I think you'll, you know, you'll see the 13Fs over the next few quarters, until it sunsets out because our portfolio is below $100 million. I wouldn't read too much into what's in the 13F.

Todd Retter (Company Representative)

Mm-hmm. I understand. Hey, one other question. Sell side coverage. Are you guys having any meaningful conversations with any analysts out there to potentially look at Acacia as a special situation, undervalued play?

MJ McNulty (Interim CEO)

Well, Anthony Stoss is looking at us, and we appreciate his coverage. You know, we have conversations with folks on a periodic basis. I think one of the things that the question I keep getting from you all is, when are you gonna do a deal? You know what our answer is because we've answered it several times. You know, I think the time to start talking to sell side analysts is when we've started to put some points on the board and are showing that we have a good pipeline, that we're getting deals done. If people wanna cover us, we're not gonna stop them from covering us. The story continues to evolve, and we wanna show you all that we're gonna, you know, do what we say we're gonna do, the coverage should be much more logical conversation.

Todd Retter (Company Representative)

How about on the buy side? Is there not a few vehicles out there that might migrate towards investing in what they perceive to be a very undervalued play with a great management team, or you're just finding that the majority have no interest?

MJ McNulty (Interim CEO)

I wouldn't generalize it. I would say that we have a lot of conversations with folks like you and other institutional investors that really understand what we're building here. They're really excited about what we're building. We're seeing that roll through the shareholder register.

Todd Retter (Company Representative)

Mm-hmm. Thank you.

MJ McNulty (Interim CEO)

Thanks, Todd.

Operator (participant)

There appear to be no further questions in queue at this time. I would now like to turn the floor back over to MJ for any closing remarks.

MJ McNulty (Interim CEO)

Thanks, Kelly. You know, appreciate everyone's time here this afternoon and the good questions and continuing to follow us and look forward to this coming quarter, or finishing out this coming quarter and talking to you all at the next quarterly conference call and in between.

Operator (participant)

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.