Acacia Research Corporation

Good morning, ladies and gentlemen, and welcome to the Acacia Research First Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. 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 M.J. 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 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 FDC. 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 and 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 continue 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 while 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 with complex transactions, including 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're 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?

Thanks, Clifford, and thanks to everyone for spending your time with us this morning. As you may know, I joined Acacia in mid-March really to lead our M&A initiative. I'd like to spend a little bit of time this morning providing some additional details on our strategy and how we've established an organization to execute on our strategy. I know Clifford and the team have spoken about the strong relationship with Starboard and thus far for us it's really a foundational piece of the strategy. Together we have a deep bench of M&A experts and personnel with multiple decades of sourcing, executing, and unlocking value in these opportunities to create superior returns. As well as having business and investment acumen, our team is built around our defined areas of interest, which we mentioned in the last call of industrials, mature technology, healthcare, and consumer. The team includes both deal professionals and former successful executives working together on the execution. As an expansion of our internal efforts, we are also working closely with the Starberg team to evaluate opportunities. We've spoken about the rigor we employ when evaluating opportunities and determining an appropriate valuation we're willing to pay. The recent economic volatility Clifford mentioned earlier has influenced relative valuations, creating a more robust environment of things for us to look at. And with that, I wanted to provide some additional detail and insights on how we view the market. We approach M&A with two distinct strategies. First, we're looking for operating companies or divisions of operating companies where we can deploy permanent capital. and work side by side with the team to drive value. These targets are in the verticals I mentioned, mature technology, industrials, healthcare, and consumer. In some cases, and together we have the collective experience of our acquisition team and our partnership with successful operating executives in both these scenarios. The situations tend to have business models tend to have business models that are relatively consistent and predictable, and our goal is to maximize operational efficiency, increase cash generation, and grow the business over time. Unlike PE funds, which have a defined exit timeline, or SPACs or other vehicles which seek to spin out businesses in an IPO, we can approach these opportunities with an owner mindset and with great flexibility, operating them indefinitely, improving profitability, and selling them or pursuing other transactions. As I mentioned, the strategy consists of predictable business models, and we're also willing to be opportunistic and participate in complex transactions both inside and potentially outside those stated verticals. In both cases, we've meaningfully enhanced our resources and relationships for identifying these opportunities. Simultaneously, We continue to build our network of senior operating executives with whom we work to identify, qualify, and execute against unlocking value. Starboard plays a valuable role in a variety of ways, including extending our operating executive network, augmenting our investment decision-making process, and identifying non-traditional acquisition opportunities. We've built a significant pipeline, and as you know, we have initiated efforts to acquire several companies.

Well, with that, Clifford, I'll turn it back over to you, or Rich, I'll turn it over to you. Thanks.

Thank you, MJ. First, I'd like to remind everyone that we closed on our acquisition of Printronics 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 gap 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 31st, 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 reflect the impact of the increase in the company 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, Printronics 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 Printronics 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, Printronics 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 and 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-Annapur, 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 gap 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 non-cash income related 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 of Acacia's share price during that same period. We ended 2021 with a net operating loss carry forward 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 carry forward plus a capital loss carry forward 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. Clifford?

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 multi-factor 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.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while we poll for questions. Your first question is coming from Tony Stoss from Craig Hallam. Your line is live.

Morning, guys. 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 lines, the Wi-Fi 6 patent portfolios paid dividends already. I'm curious if you care to share any updates on kind of new potential licensees going forward. Thanks.

I only had two, Tony. I thought you had several more. Okay.

I'll follow up with that.

Okay. On Mycovia, the significant milestone payment is $40 million, and it is triggered by the FDA approval. Our share of that is $26 million. There are some smaller milestone payments based on developments in Other geographies, Europe, for example, is a small one coming due. But I think that's pretty much the end of the fixed milestone payments. And after this, we're looking to the royalty stream driven by actual sales of the product. As with any owner of a royalty stream, you can hold it for future payments or you can monetize it at some point when it's value has been clarified or realized when it's reached a stabilized level of income. And that's always a consideration we can have in the future. In terms of the Wi-Fi 6 portfolio, I think that's a very significant portfolio. Mark Booth and his team are doing an excellent job of continuing to monetize it. But the fact that it has been as effective as it has is obviously a fact which is known to future potential licensees, and I think that will play a role in making those transactions easier to complete.

And then the Wi-Fi 6? That's what it is. That's the Wi-Fi 6.

That's what I was on.

Okay. Maybe if I could follow up with MJ. Sure. Just with asset prices coming down, I'm curious. I think other shareholders would love to hear maybe the areas of expertise as you've built out your team. Is it predominantly tech, industrial? Is there some healthcare issues? And just curious your thoughts on what might be too big or whether or not it's even worth it going after smaller acquisitions.

I mean, so first part first, we continue to build out the team. We're getting to critical mass. We have substantial experience and operating executives working with us in all of those areas, industrials and technology in particular. are a focus. You've seen the market come off. I think a lot of things in the technology space seem to be coming off more, and so we're spending a lot of time there. In terms of sizing, I don't really want to comment on sizing. We have the capability to do things across the spectrum. It's really going to come down to value and the contribution to Acacia as a whole on a risk-adjusted basis. You've seen us look at very large things. You've seen us do very small things. We're going to be very thoughtful about where we spend our time. Small deals take as much time as large deals in a lot of cases. So it's a kind of a real-time analysis of the efficiency of time spent on opportunities available.

Okay. And then my final question, I guess for Rich, 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?

Yeah, that's right, Tony. I mean, as you recall, the debt has enabled us to have some liquidity for what were increasingly large securities positions. And as we've been selling those down, we've had the resources to pay down the debt. But we continue to have significant capital resources available to us, so leaving that debt outstanding and paying interest on it didn't seem to be the best use of capital. So it continues to be available to us, but if we can manage with less of it, then we will.

Very good. Best of luck, guys. Thank you.

Thanks, Tony. Thanks, Tony. Thank you. Your next question is coming from Adam Eagleston from Formidable Asset Management. Your line is live. Good morning, gentlemen.

Hello, Adam. Good morning. Hello. 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. Thank you. 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 evaluation from cost to something that would reflect more of that present value of the royalty stream slash the milestone payment?

I think I can take that.

Okay, go ahead, Rich.

Okay, so... our ownership environment is actually through a joint venture that we consolidate. And that joint venture is called Malin J1. And so the accounting for it is a consolidation of our, of our joint ownership and environment. And that ownership is just over 40%. So, and that we're, we're, we're accounting for on the equity method. It just so happens that we've, we've, we've captured it on our books at cost and, So we are not fair valuing it, but as we receive payments and dividends, et cetera, royalties, I should say, you will see that cash coming in and bolstering our value overall. We could certainly provide more clarity over time once it starts to generate royalties of what that stream may be looking like, but we wanted to give some more color today around what that represents in terms of the immediate milestone payment that we see later this year.

I'll add to that for you, Adam. I think that's a technical explanation of how we're accounting for it. And then I think you were actually also asking what the outlook for it is. And the approval that it has is still, I would characterize it as a somewhat limited approval. There's further work to be done to get a more broad-based approval. And we'll have to see how that develops over the next year to 18 months. because that'll be the determinant of the ultimate scale of the revenues.

Understood. Thank you for clarifying that. Thank you.

Your next question is coming from Calgary Levine from Inaga. Your line is live.

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

Thank you. Your next question is coming from Brett Rice from Jene Montgomery. Your line is live.

Hi, Clifford. Hi, Richard. Hi, MJ. Hi, Brett. Hi. Hi, Brett. Just a question. The operative language sales to date on the Oxford Nanopore position, you know, 14 million, is that as of the quarter end March 31st? or is it today, you know, the date of the release?

Rich, that runs for you.

Yeah, they're one and the same. So our current position as of March 31st was 14 million shares, and that's where we are today.

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

Right. As we shared, we've sold approximately 24 million shares, 25 million shares at an average price of £4.86 per share.

Yes, well, you know, good show on that. I guess this one is for MJ. MJ, the ComTech, the Spoke, the Coles, have we abandoned ship on, you know, looking at doing something there, or are we still circling the waters on those situations?

Yeah. But we don't comment. We had this discussion before. It's difficult for us to talk about live deals. And so if you don't mind, we won't comment on announced transactions. Since we're a public issuer, if there are material developments, we will, of course, make appropriate disclosures.

Okay. All right. Fair enough. And one last one. Go ahead. Really, you've done such a fantastic job. Why haven't we seen some institutional buying of the stock? What's holding some of these folks back?

It's a complicated question. I think what I would say is we have a sense of what would make the stock more attractive institutionally, scale being one of them, and the capital structure. And I think we're well aware of the issues and will seek to address them in the future.

Okay. Thank you all for taking my questions.

Always.

Thanks, Brett. Thank you. 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 a 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, ladies and gentlemen. 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.