Acacia Research Corporation (NASDAQ:ACTG) Q4 2021 Earnings Conference Call March 31, 2022 11:00 AM ET
Company Participants
Rob Fink – IR
Clifford Press – CEO
Martin D. McNulty – COO and Head of M&A
Rich Rosenstein – CFO
Conference Call Participants
Anthony Stoss – Craig-Hallum
Brett Reiss – Janney Montgomery Scott
Operator
Good day, ladies and gentlemen, and welcome to the Acacia Research Fourth Quarter Financial Results At this time all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host, Rob Fink of FNK IR. Sir, the floor is yours.
Rob Fink
Thank you, operator. Hosting the call today are Clifford Press, Chief Executive Officer; Rich Rosenstein, Chief Financial Officer; and MJ McNulty, Acacia’s newly appointed Chief Operating Officer and Head of M&A.
Before beginning, I’d 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, 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 section described in Acacia’s annual report on Form 10-K and quarterly reports on Form 10-Q that are filed with the SEC.
We’d also like to remind everyone that a press release disclosing the company’s financial results was issued this morning before the market open. This release may be accessed on the company’s website at acaciaresearch.com under the News and Events tab.
With all that said, I’d now like to turn the call over to Clifford Press. Clifford, the call is yours.
Clifford Press
Thank you, Rob, and good morning, everyone. I am very much looking forward to the year ahead. We have built a strong foundation to execute our differentiated strategy. We have developed a robust process for identifying and completing transactions, and our position as an advantaged buyer with permanent capital is starting to be recognized by market participants. During the fourth quarter, we acquired Printronix, a manufacturer and distributor of industrial impact printers and related consumables with a strong well-developed position in its target market serving a range of customers across many industries, including healthcare, food and beverage, manufacturing and logistics.
Reported operating income from Printronix was modest in the quarter, which included certain onetime purchase accounting adjustments. Excluding these non-recurring expenses and noncash items, Printronix generated $2.5 million in operating income during the quarter. We paid $33 million in cash for this business or approximately 3.6 times adjusted EBITDA in its latest fiscal year. Printronix has generated consistently profitable results and it has the potential to grow.
We are fortunate that we’re working with an experienced management team at Printronix to facilitate that growth. And our engagement with this company is led by Clay Kiefaber, an exceptional operating executive, who was introduced to us by Starboard.
In addition, we continue to generate value from our intellectual property business and life sciences holdings. During the quarter, our intellectual property business generated more than $51 million in revenue, which benefited from one particularly large license agreement, and this led to $40 million in operating income from the IP business for the quarter. This transaction validates the strength of our recently acquired Wi-Fi 6 patent portfolio and reinforces our confidence about achieving future licensing agreements.
Marc Booth is our Chief Intellectual Property Officer. His team identified this exceptionally valuable asset, and they have proven very adept at monetizing it. We also continue to realize gains in our life sciences portfolio, with a $63 million gain during the fourth quarter and a $115.2 million gain for the full year. As we noted at the time of the portfolio acquisition, this was an opportunity that we saw during a period of significant market uncertainty. The remaining assets in this portfolio are companies we believe have considerable value.
This acquisition demonstrated the benefit of our ability to deploy capital as required to match the underlying situation as well as our understanding of complex transactions and ability to move decisively and quickly. Since acquiring the life sciences portfolio, our transactional expertise has evolved. Today, we have a well-defined and rigorous process for identifying, evaluating and pursuing acquisitions, along with a robust team of experienced professionals and a clear strategy.
Our M&A process continues to be active. We have started the process of acquiring companies that fit our criteria. Acacia is well-capitalized with access to approximately $1 billion in capital. We have significant experience with complex transactions, including situations that are mispriced in the public market or where we see an opportunity to unlock value. We have built and continue to develop our dynamic strategic partnership with Starboard Value LP. Together, we have established 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 also able to participate in or lead a consortia of investors to complete larger transactions. While our focus is on operating acquisitions, at certain times, our own stock may be the most attractive investment we can make. With Acacia shares trading well below book value, we announced a $15 million buyback program in December that we completed in early February. Today, we are announcing an additional $40 million buyback authorization. We will continue to evaluate opportunities to make investments in businesses, and to the extent that the market affords us the opportunity to acquire our own shares.
We have been fortunate to significantly enhance our senior leadership team, and I’m very pleased to have MJ McNulty joining me as our Chief Operating Officer and Head of M&A. Additionally, Wes Golby was named Chief Investment Officer. MJ most recently served as a Managing Director of Starboard Value LP and was the Chief Executive Officer and a member of the Board of Directors at Starboard Value Acquisition Corp., where he led the transaction through which SVAC combined with Cyxtera Technologies, Inc., a deal valued at approximately $3.4 billion. In his new role at Acacia, MJ will direct all aspects of our M&A activity.
I’ve asked MJ to join me on the call today, and I’d like to invite him to speak now.
Martin D. McNulty
Thank you, Clifford. First, we appreciate everyone for joining us this morning. We’re really proud of the platform that we’re building, and I’m very excited to be a part of it. As Clifford mentioned, we really are an advantaged owner of businesses.
We have the transactional flexibility, with the advantages of both private and public market investors and the flexibility to initiate our acquisitions either in whole or beginning as a shareholder. We also have the operational flexibility with operating executive expertise to navigate complex situations and find values where others may not. We believe this complement is highly differentiated to other folks in the market.
Importantly, though, we view all our acquisitions through the lens of a long-term owner and a partner which our capital base affords us. We’re going to focus on doing this in the industrial, technology, consumer and healthcare segments and partnering with excellent senior executives working alongside us.
We have multiple pathways to fund these acquisitions. We have a strong balance sheet. We continue to build our strategic partner with Starboard Value as we develop new models to execute transactions. Finally, we’re positioned well to partner with other buyers also. We will evaluate opportunistic situations, as well as alternative funding structures where Acacia can generate fee revenue.
I’m very excited to continue building a world-class M&A function with a group of world-class operating talent. And with that, I’ll turn the call back to Clifford.
Clifford Press
Thanks, MJ. We are excited to benefit from your experience and leadership on our team.
As I mentioned, we also recently promoted Wes Golby to the position of Chief Investment Officer. Wes has served as Director of Research at Acacia since August of 2020. He joined us from Seven Canyons Advisers where he was a Co-Founder and Portfolio Manager. Seven Canyons is an investment firm that specializes in small cap investing. Earlier in his career, Wes was a partner and portfolio manager at S-Squared Technology, a small cap technology-focused investment adviser.
Under Wes’ leadership, we continue to identify actionable opportunities and this appointment is in recognition of the vital role that research serves in our organization. With an enhanced research and execution team and a strategy that provides maximum flexibility for a wide mandate, for value creation, we believe that we are uniquely positioned. We can have an innovative approach to capital deployment, creating our own catalysts and positioning Acacia as an advantaged buyer.
With that, I’d like to turn the call over to Rich Rosenstein, our Chief Financial Officer, to discuss the results. Rich?
Rich Rosenstein
Thank you, Clifford. First, I’d like to note that the acquisition of Printronix closed in early October. Accordingly, the results reported today include nearly three months of contribution from this new business. As a result of this addition, we are now providing segment reporting along two segments, Intellectual Property and Industrial Operations.
I will turn to our operations in a moment. As we continue to build our operating businesses, Acacia currently has very substantial asset value in the form of cash and marketable securities. For this reason, we believe our book value is a very useful measure of value. Our GAAP book value at December 31, 2021 was $430.5 million or $8.80 per basic share compared to $5.94 per basic share at December 31, 2020.
Our GAAP book value includes the impact of our warrant and embedded derivative liabilities on our balance sheet, which in turn, reflect the impact of the increase in the company’s share price over the last year. As these liabilities will be extinguished upon exercise or expiration of these warrants and convertible preferred stock, we think it is 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 $1.1 billion or $6.51 per share, up from $5.38 per share on the same basis as of December 31, 2020.
For the quarter, highlights of our financial performance include the following, revenues for the fourth quarter of 2021 were $63.3 million compared to $4.4 million a year ago. This is broken down as follows. First, our intellectual property business generated $51.3 million in licensing and related patent revenue compared to $4.4 million in the fourth quarter of last year. The successful licensing of our newly acquired Wi-Fi 6 portfolio drove much of this performance.
Second, Printronix contributed $12 million in revenue in the quarter with no contribution in the comparable period a year ago. General and administrative expenses were $12.7 million compared to $6.4 million in the fourth quarter of last year.
Printronix represented $2.4 million of this, with Intellectual Property G&A of $1.1 million, up $0.3 million over the last year and then $8.7 million of parent G&A, which was up $3.1 million over the last year. The parent G&A increase is due to increased business development, deal activity and personnel expenses related to the company’s acquisition initiatives. It’s important to note that we do not capitalize deal expenses, but rather expense as incurred.
Operating income was $31.3 million in the quarter compared to a loss of $6.4 million a year ago, driven by $40 million of operating income from our intellectual property business. On a GAAP basis, Printronix contributed $62,000 in reported operating income, which reflected the impact of the $2.5 million of purchase accounting and other onetime items that Clifford mentioned.
Realized and unrealized gains totaled $35.8 million in the quarter, and our diluted net income to common stockholders was $42.4 million or $0.45 per diluted share compared to $1.30 per diluted share and $1.31 per basic share in the fourth quarter last year. For the year, total revenues were $88 million compared to $29.8 million last year. Again, Printronix acquired in early October contributed $12 million of revenue for the year.
Our IP business generated $76 million in revenue compared to $29.8 million a year ago. General and administrative expenses for the year were $35.7 million compared to $24.5 million last year. Of the $11.2 million increase, $2.4 million was due to the inclusion of Printronix, $0.2 million positive variance was related to the IP business and $8.5 million was due to growth in our parent expense, reflecting the expanded team and discretionary deal expenses, which again are not capitalized.
Operating income was $14.5 million compared to a loss of $19.5 million last year, a $34 million improvement over last year. And GAAP net income was $149.2 million or $1.91 per diluted share compared to net income of $109.2 million or $1.48 per diluted share last year. The current year’s net income included $115 million in realized gains related to the life science portfolio and another $87.5 million in unrealized gains. We recognized a noncash expense during the year of $40.4 million related to the increase in fair value of the Starboard warrant and derivative liabilities due to the increase in Acacia’s share price during the year.
I would note that our net operating loss carryforwards at December 31, 2021 were approximately $172 million. Over the past year, we have reduced our NOLs and capital loss carryforwards by more than 40%. This NOL remains available to shield future operating income and realized gains from taxes.
Cash and marketable securities at fair value totaled $670.7 million at December 31, 2021 compared to $274.6 million at December 31, 2020. And last, our debt at year-end was $181.2 million in senior secured notes issued to Starboard Value LP. We are also preannouncing results for the first quarter, which will close today. We expect to report revenue of $13 million to $14 million, reflecting a full quarter of Printronix ownership and a modest contribution from our IP business. General and administrative expenses are expected to be in the $12.5 million to $13.5 million range, reflecting development of our acquisition organization and deals that we’re working on.
We anticipate an operating loss of $8.2 million to $9.2 million during the quarter. And then last, as of today, we currently hold $538.7 million in cash and marketable securities. Total indebtedness today is $168.4 million, reflecting the notes issued to Starboard Value. More detail on these results have been made available in the press release issued this morning and our annual report on Form 10-K, which we will file with the SEC later today.
One comment on the 10-K, you will see we corrected our presentation of certain financing fees in 2020, specifically related to the amortization period of the financing fee we incurred upon first issuing notes to Starboard Value in June 2020. The result of this change was a less than 1% reduction in asset value in 2020, which actually resulted in a benefit to earnings in 2021 and will have a similar benefit going forward. As of the end of 2021, this adjustment represented a 0.5% reduction in what our asset value would have otherwise been.
Last, as Clifford mentioned, we completed the $15 million share repurchase program that we launched in December and early February and are now announcing a new $40 million share buyback program. With our shares trading at an approximately 36% discount to pro forma book value per share, repurchases represent an accretive and attractive use of our capital.
Now let me turn the call back to Clifford for closing comments. Clifford?
Clifford Press
Thanks, Rich. In conclusion, we have built out a seasoned team of research, execution and operating professionals, and we continue to work closely with our strategic partners at Starboard Value to identify and pursue acquisitions aligned with our stated strategic goal.
You have seen us do the following. First, extract value from our life sciences portfolio, a onetime opportunity that has enabled us to add nearly $400 million in value to the company. Two, deliver strong and improving performance from our intellectual property assets. And three, closed the first of what we expect to be several operating company acquisitions. We are steadily growing our capital base to expand this strategy and the recent additions to our M&A team will help us grow our pipeline.
As I said, I’m very much looking forward to the coming year. With that, we will be pleased to take questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question today is coming from Anthony Stoss at Craig-Hallum. [Operator Instructions] Mr. Stoss, your line is live. You may begin.
Anthony Stoss
Thank you. Good morning, everybody, and welcome aboard, MJ. Clifford, perhaps we can get a little bit more detail on the licensing deal in Q4 on the Wi-Fi 6 patents. For starters, congrats on that pretty sizable deal. Can you confirm that that’s with one customer? If so, what percentage of the market did that one customer represent? And have you notified other players in the space? And then I have several follow-ups.
Clifford Press
Yes. Well, you’re on to the important points there, Tony. That was considered to be a foundational transaction. And I think it was extremely important in validating the importance of the portfolio and the value of it.
That initial transaction, I think will carry forward, obviously, into future discussions, particularly since — for it to be that large of a transaction was a very significant counterparty and I think it bodes well for the future. I do not have a calculation of what percentage of the total market, I think, this represents, but it is by no means a majority or anything like that.
As you know, Wi-Fi is — and particularly Wi-Fi 6 is very broadly deployed. And virtually no technology providers in this area used — almost all technology providers used this particular version of Wi-Fi 6. And I think there’s a very broad application of these patents.
Anthony Stoss
Clifford, have you reached out to other potential licensees already? Also is there any chance that, sometime in calendar 2022 that you could get a license or some kind of resolution or additional monies coming in off the same patents?
Clifford Press
It’s very difficult to make predictions about absolute return assets of this type. I think and I just look at it on the basis that it’s well validated now, and I’ll leave it to Mark and his team to monetize it as they see fit. It will — this is not the kind of business that you can value on a recurring revenue or earnings basis. We’re just pleased to be able to recover a very good return on the investments we’ve made and to keep going with it. It’s a strong portfolio. So we’ll be letting you know, Tony, as it plays out, how it does.
Anthony Stoss
Okay. And then maybe a question for MJ or you, Clifford. Going forward, how do you guys source deals? Are any of the kind of publicly disclosed companies that you’ve gone after, are you still interested in each and every one of those? And any kind of further comments you might make towards Kohl’s would be helpful. Thanks.
Clifford Press
Sorry, I wasn’t able to hear, operator, at the beginning of Tony’s question, it faded out there. Could you just repeat it, Tony?
Anthony Stoss
Absolutely. The question is, how are you going to continue to source deals with MJ? Is there a new strategy, what expertise or different segments does he bring in? And maybe he could comment about that. And then Clifford, if you could comment about some of the other publicly disclosed or rumored companies that you guys have made overtures towards, are you still interested in every one of those? Have any fallen off? And any comments you can make regarding Kohl’s would be helpful.
Clifford Press
Okay. So I’d say our strategy has evolved. We’ve developed more focus on the type of transaction where we think we can be most advantaged. MJ comes from a long career in a transactional environment, primarily in private equity. So that’s the reason — the basis on which he joins Starboard and that is absolutely the reason why we said pleased to have him here with us at Acacia now.
And with regard to ongoing transactions, I think the best time for us to discuss those is when they’re completed. So if you don’t mind, we’ll leave it like that for now and we do very much look forward to discussing transactions once they’ve taken place.
MJ, would you like to talk a little bit about your past roles and how you’re seeing the outlook here for Tony?
Martin D. McNulty
Yes. Clifford, absolutely, happy to do that. And Tony, nice to speak with you. As Clifford mentioned, my background is private equity. I’ve worked for three funds over the last 20 years, and then at Starboard where I ran SPAC end [ph] sourcing with the question of the day, as I’m sure you can imagine, in the SPAC market.
As we think about sourcing deals, I mentioned it in my comments, but we’re really focusing on a handful of industries where we believe that we can bring something differentiated to the companies, but also differentiated to the owners of those companies and be win a reason, win a spot to be able to buy that business and make it part of Acacia. And there are several ways we’re doing that. I mean, we historically have worked with operators, and we’re continuing to build out our bench of operating executives, industry executives, world-class C suite, folks that naturally bring opportunities to us because they see a lot from the seats that they’re in.
We have our strategic partnership with Starboard, and Starboard sees a lot of opportunities. But importantly, we’re building this function up internally, and we’ve hired an individual with whom I’ve worked in the past, solely focused on sourcing and building those executive relationships and building those business owner and company relationships.
We’ve done this in a couple of different places. It’s been very successful. I think — it’s not finding deals, it’s finding good deals and the focus and the process that we’re putting around that focus and the industries that we’re going after will help us pull through the opportunities to really rise and prioritize the best opportunities for us to execute against.
Anthony Stoss
Perfect. Thanks for the color, MJ and best of luck, guys. Thank you.
Clifford Press
Yes, thanks, Tony.
Operator
Thank you. Our next question today is coming from Brett Reiss at Janney Montgomery Scott. Your line is live. You may begin.
Brett Reiss
Good morning, gentlemen. Great interesting quarter. Hats off to you. First question, the G&A run rate, is $50 million to $52 million kind of an annual run rate?
Rich Rosenstein
I’ll take that. Good morning Brett. So to be clear, yes, the G&A is across our businesses. So it’s the G&A for our intellectual property business, it’s the G&A for Printronix, and it’s the G&A of parent. Obviously, there’s a proportion of the parent G&A that’s fixed. But as I said, we’re very active in pursuing deals and acquisitions and similar opportunities. And so we expense those items as incurred.
So if we’re particularly active, then it will run higher. And if we’re in a period where we’re not seeing so many opportunities, and are not as active, it will be lower. We’re very mindful of return on investment. And so we’re not just out spending money to just pursue deals. We’re factoring these costs into our overall assessment of the attractiveness of the acquisitions we’re looking at. So it will vary. But we happen to be particularly active right now. And so we’re incurring a bit more.
Our goal, as you know, is to acquire one or more operating companies. So for a period of time, it may be running a little higher while we’re quite active in that pursuit. And so that’s really what I can say about it.
Brett Reiss
Right.
Clifford Press
I’ll add something for you, Brett. The way GAAP treats our kind of activity, the cost of the transaction is not expensed or cap — it is not capitalized into the cost of the asset. It’s all expensed as incurred. So ironically, if you’re successful and do a lot of transactions, you run a very high level of G&A because all the cost, the lawyers, all the transaction costs are all expensed, nothing gets added to the basis of the asset.
I think you should look at it on that basis. If we were not doing much, the G&A would go down because it’s very variable, as Rich said. And if we were doing a lot, it’d be high G&A if we were getting deals done.
Brett Reiss
Okay. I appreciate that. Once you land another operating business or two, do you have any plans to spin off the patent business and maybe rename that part of the company?
Clifford Press
No. It’s a very good business. When we came to Acacia, it didn’t have much going on, but the market was such that there’s very good asset value available at realistic prices. And that’s something which we appreciate. And I think we are fortunate enough to have Marc Booth leading an excellent team. So we like the business.
Brett Reiss
Okay. Richard, the $15 million worth of stock we bought back, how many shares did we buy back? And what was the average price?
Rich Rosenstein
It was just over 3 million shares and the average price was just under $5 a share.
Brett Reiss
Okay. And one last one for Mr. McNulty, in looking at the responses from SPOK and CMTL, is it in our kind of corporate DNA to, where appropriate, maybe have to go call icon [ph] on a management that rebuffs our initial overtures and intentions?
Clifford Press
I think it’s — MJ is a little new for that kind of question.
Martin D. McNulty
Very colorful, very colorful analogy.
Clifford Press
Yes, but we are — maybe not as colorful. We’re very deliberate and careful about the transactions that we initiate. And as to what happens after that, I think we’ll let history write itself.
Brett Reiss
Okay. One last one, forgive me. And you may not be able to answer it. The $30 million investment securities, which I assume is divided between SPOK, CMTL and KSS. Are you at liberty to break that down?
Clifford Press
Probably not a good idea for us to go there, Brett.
Brett Reiss
All right.
Clifford Press
We report what we can.
Brett Reiss
Fair enough. Thank you for taking all my questions. Yes.
Rich Rosenstein
I’m sorry, Brett, just to be clear, I think when you say the $30 billion in investment securities, that’s an equity method investment of one position. It’s actually a royalty business. But the investments that we have, is shown as equity securities at fair value on our balance sheet, which is just under $362 million, includes the remainder of the life science portfolio and then some of the other positions that you mentioned, and other outside of life science investments.
Brett Reiss
Great. Great quarter. Thank you for taking all my questions. I’m going to drop back in queue. Thank you.
Clifford Press
Pleasure, as always, Brett. Keep them coming.
Operator
[Operator Instructions] Our next question today is coming from David Seeburk [ph]. Your line is live. You may begin.
Unidentified Analyst
And congratulations, Cliff, on an amazing quarter. And I think you guys did an amazing job outlining the business and the future of your future plans. My question is surrounding Mycovia. I know that you guys have a significant interest in that from a royalty perspective on one of their drugs that was supposed to be approved, I believe, about 1.5 months ago. And it said on the FDA website that it was just delayed for packaging issues, which, to me, seems like a very a positive signal and something that could be wrapped up relatively quickly.
On the website of Mycovia, they also indicate that they’re still good for a second quarter launch of this drug. I think you have a 26% interest in the royalty of that. This could be a $1 billion drug. Can you give us an update on that?
Clifford Press
Yes. So as you said, we’re a royalty holder. We’re the largest of the royalty holders in that drug. It’s an exceptional drug. That drug is going to be able to treat very effectively a condition that afflicts many, many women at the moment and is not effectively treated. The process of completing its FDA approval, getting the packaging agreed upon and with other things is complex. We do expect it will proceed. And other than that, we wait, we hear from Mycovia as to their progress.
So we’re not really at the front lines of that process to the extent that we would be able to provide any more color than that.
Unidentified Analyst
Understood. But it’s still — it seems to me that that’s a very significant value within for Acacia provided this drug gets approval and they do launch, as they indicated on their website, they’re still comfortable with a second quarter launch. That could be a very positive thing for your stock price.
Question as well, is there any royalty that you receive off that after approval? I mean not royalty — upfront payment after approval? Or is it just the royalty that you’re receiving based on the current structure of — the structure that’s been outlined?
Clifford Press
There are milestone payments tied to approval and a very substantial royalty thereafter. So once it gets clarified, we’ll be in a much better position to understand the launch of this particular compound and the likely market penetration.
Unidentified Analyst
That’s great. I really appreciate that color. That’s very helpful. And congratulations, I think you did an amazing job outlining the business today. And I would expect the stock should have a nice reaction to that because you guys really laid it out properly. Thank you very much.
Clifford Press
Thank you, David.
Operator
Thank you. We have no further questions in queue at this time. I would now like to turn the floor back to Clifford Press for closing remarks.
Clifford Press
I think we’ve pretty much said everything we could say about this. It’s a pleasure to finally be at the point where we can report the results of our activities. We’re extremely grateful to all of our shareholders who’ve been so supportive as we went through the period of transition to create the future of the business here. And we look forward to continuing to report as we proceed and provide updates whenever we possibly can. So thank you very much, and look forward to speaking next quarter.
Operator
Thank you, ladies and gentlemen. This does conclude today’s event. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation.
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