Acacia Research Corporation

Greetings, and welcome to the Acacia Research First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rob Fink of FNKIR. Thank you, sir. You may begin.

Thank you, operator. Hosting the call today are Clifford Press, Chief Executive Officer, Altobia, President and Chief Investment Officer, and Rich Rosenstein, Chief Financial Officer. 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 operation and are based on 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 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, both of which are filed with the FCC. I'd 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 Acacia Research under the News and Events tab. On today's call, Clifford is going to provide a business update. Rich will review the quarterly financial results. And Al, who's joining remotely, will participate in the Q&A session. With all that said, I'd like to now turn the call over to Clifford Press. Clifford, the call is yours.

Thank you, Rob, and good morning, everyone. We remain focused on executing the strategy that we adopted as the foundation of our strategic alliance with Starboard Value LP. This strategy leverages our strong balance sheet and ready access to committed capital. also benefits from the inherent flexibility we have created, enabling us to pursue a range of potential transactions. We continue to work with Starboard Value, evaluating potential acquisitions within the small cap value sector. Our primary opportunity set remains the sub $2 billion public equity market. As we have said in the past, we view this segment as the least efficient area of the market and one that favors our primary research approach. and permanent capital structure. Over the last year, the robust market performance has slowed our top of funnel idea flow. However, with volatility and interest rate concerns increasing, we are beginning to see an increase in the number of public market opportunities again. We have added two private equity executives to our team to assist us in public and select private transactions. Our goal is to acquire operating companies in mature technology, healthcare, industrial, and certain financial services segments. As we evaluate new opportunities, we continue to maximize the value and return on our existing holdings. There are two recent developments to highlight. On April 30th, Eric's Bioscience, one of our public assets, announced the outcome of its strategic implementation review, culminating in a number of immediate board changes. This review was part of a shareholder engagement, which we were heavily involved. As a result of this review, Rob Lyon, formerly Chief Operating Officer and General Counsel of ARICS, was named interim CEO and appointed to the board. ARICS is now recruiting a permanent CEO. In addition, two Acacia nominees, Maureen O'Connell and Isaac Kohlberg, were appointed to the board of ARICS as non-executive directors. Finally, Peregrine Moncrief joined the board as non-executive chairman. Peregrine has established a distinguished record as chairman of another listed investment company over an extended period, and we are very fortunate to have him as chairman of ARICS. We are very supportive of these corporate governance improvements and believe these changes ensure that the company is served by a board that is responsive to its shareholders. And earlier this month, Oxford Nanopore raised £195 million, or $275 million, in new investment at a valuation of $3.5 billion. As part of this transaction, Oxford Nanopore also announced plans to complete an initial public offering. This follows the successful IPO by Immunocore in the first quarter as well. All of these transactions increase the options for liquidity for us and can help us to deliver enhanced value realization. We continue working to maximize the value of all our life sciences portfolio. This can be a time-consuming exercise. As such, we will continue to evaluate the most efficient options to complete the realization of value for our shareholders. With respect to our IP business, investments made over the past year resulted in a properly sized and well-balanced portfolio including both soft licensing and litigation. Our team is actively advancing a number of opportunities. With that, I'd like to turn the call over to Rich Rosenstein, our CFO, and discuss our results. Rich?

Thank you, Clifford. Our book value at March 31, 2021, was $128 million, or $2.64 per basic share, compared to $292.5 million or 594 per share at December 31, 2020. The decrease is due to the $198.9 million in expense related to the change in fair value of the Series A and Series B warrants and embedded derivatives. This non-cash expense is the result of the substantial appreciation of Acacia's share price during the quarter from $3.94 at December 31st, 2020 to $6.65 at March 31st, 2021, which increased the potential liabilities for the warrants and derivatives we carry. It's important to note that this expense is entirely non-cash. As these liabilities will be eliminated upon either exercise or expiration of these warrants on preferred stock, we again believe it is useful to look at a calculation of book value as if all of these instruments were exercised. Pro forma, for full exercise of all warrants and preferred stock, Acacia's book value would rise to $5.62 per share, up from $5.39 per share on a comparable basis at December 31, 2020. For the quarter, our financial results included the following. We ended the quarter with cash and equity securities at fair value totaling $325.1 million compared to $274.6 million at December 31st. Debt was $116 million in senior secured notes issued to Starboard. And last, revenues for the first quarter of 2021 were $5.8 million. More detail on these results have been made available in the press release issued this morning and also in the upcoming 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. Clifford?

Thanks, Rich. In conclusion, Acacia continues to execute its investment strategy. As always, our focus continues to be on improvement in our book value and a strong balance sheet with which we can make additional investments. We are focused and working hard to identify an appropriate acquisition and collaboration with Starboard. That said, as stewards of shelter capital, valuation, fit, and a variety of other diligence factors are important, we will not make an acquisition for expedience. We are evaluating a large number of potential opportunities carefully. We are now happy to answer questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Anthony Stoss with Craig Hallam. Please proceed with your question.

Hey Clifford, Al and Rich. Thanks, Clifford, for the detail on just the pipeline of potential acquisition targets in the industries that you're in. The fact that you hired two private equity execs on board the Keisha team, I presume that that's going to speed up things. Is there anything to be said on just the level of interaction with Starboard? Is it still the same kind of high level? Is it slowing? Is it a result you needed to hire these two people? Anything you can tell us on kind of the targeted pipeline would be helpful and add a couple follow-ups after that.

Okay, thanks, Tony. So we hired these two very capable additions because we were reaching the point where deal execution and analysis was becoming relevant and they'd been very helpful in that regard. We had a very good research program going, but As we were getting ready to take the next steps, we thought that these two additions would help on implementation, and that is as it has worked out. So we're further along towards completing transactions now than we had been before. In terms of when we will be able to announce completed acquisitions, we will, of course, announce those upon execution, and we expect... to be able to complete transactions, certainly this year.

Okay. And then maybe for Rich, if you wouldn't mind, if you had the total NOLs still available number, I'd love to hear that. And then also maybe back to you, Clifford, in the prior several quarterly press releases, if you will, you guys list out kind of a position update. There wasn't one in today's press release. Can you give us any kind of update on that? on what positions you're still holding?

The changes to the positions are as described. We did not want to establish a precedent of listing ongoing holdings on a regular basis. We thought it was important to explain to investors what we had purchased in the Woodford portfolio. From now on, we'll give an update, as we have done, on realization. Rich, do you want to take the question on the NOL?

Sure. So, Tony, at the end of the year, our net operating loss carry forward was approximately $275 million. We had a small amount of capital loss carry forward as well, and those are the latest figures for the two of those.

Okay, and then my last question, Rich. I understand that the Oxford recent raise happened post-March 31st, unless I'm mistaken, at the $3.5 billion valuation. Is that accurate? And if so, kind of what would you mark up your position from where it was in March? Thanks.

So what Clifford described, which was the $3.5 billion valuation, that's the valuation implied by the latest round. The increase in value relative to what we had been carrying it at previously is in excess of 40%.

Okay. That's it for me. Thanks, guys.

As a reminder, if you would like to ask a question, press star one on your telephone keypad. Our next question comes from the line of David Hoff with IP Hawk Newsletter. Please proceed with your question.

Hi, good morning. Focusing on the patent side, is there a materiality threshold, I guess floor, that you can disclose? Quarter one, quarter two has seen a lot of really good developments on the package patent documents. a bunch of settlements coming in. Is there a floor where an AK might be triggered?

Rich, do you want to think about that one?

Yeah. We, I mean, look, as you saw in the current quarter, we had approximately $6 million in revenue. You know, for all of last year, we had approximately $30 million in revenue. We haven't disclosed individual settlements unless they're particularly large, so I would say there is a threshold, but we haven't crossed it yet. I don't want to say what that is because I don't want to necessarily suggest that you should expect regular press releases on settlements, but let's just say that we're optimistic about the pipeline that we have and the progress that our IP team has been making with the portfolios that we've acquired recently, including NeuroCom, which we closed on just a few months ago.

Are there any additional defendants you expect to be adding to some of these portfolios that have been winning Markman Hearings IPRs? I know the Orange slash France Telecom is doing very well. It's heading to trial for Cisco. The Harris portfolio is also doing pretty well. And I know the semiconductor, the first semiconductor portfolio is also doing very well. Is there a number of defendants still out there or might be in negotiating discussions?

As you know, I think in keeping with most other IP investment firms, we're very reluctant to discuss details of particular licensing campaigns. So I know you follow public developments, and I think that's probably your best source of information.

Okay, thank you very much.

Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Thank you very much for attending the Acacia Research earnings call, and we look forward to speaking next quarter.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.