Acacia Research Corporation

of the starboard warrants and embedded derivatives liabilities. The decrease in the liability is primarily due to the decrease in share price at March 31, 2023, compared to December 31, 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 sold 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 31, 2023, which amount was unchanged from December 31, 2022. Investment securities representing equity method investments net of non-controlling interest totaled $19.9 million at March 31, 2023, unchanged from December 31, 2022. All payments tied to milestones that have already been achieved and earned by Malin J1 through its interest in Viamet have been received. Acacia owns 64% of Malin J1, 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 31, 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. Now for a review of our book value. Our GAAP book value at March 31st, 2023 was $355.7 million, or $6.07 for 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. 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 and 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, and 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. Eighty-five million of total warrant and embedded derivative liabilities attributable the Series B 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. And 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 31, 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 31, 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.

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 poll for questions. Brett Reese from Janie Montgomery Scott has your first question. Please pose your question. Your line is live.

Yeah. Hello. Can you hear me?

Hey, Brad. How are you?

I'm good, MJ. And hi, Kirsten. Hi. Hi. The discipline that you're maintaining in your approach 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 prices and a better deal at some point in the future?

I appreciate the question. I would say This is not a broad application, but generally we don't have inhibitions. So 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 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 will 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. And there are a lot of businesses that we're seeing that have countercyclical elements to them. That said, you know, we're sitting, 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. And so we do think about how and when we want to deploy that cash. But we are not generalizing, saying, in this macro environment, we just want to 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.

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 space we're talking about?

Yeah, I mean, look, the factors, it's effectively a consensual partnership. So 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. And there are going to be times when that happens, and there are going to 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. But 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.

Okay. Okay. Now, 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?

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. And so 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. Or there could be true turnaround situations where we 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 it's absolutely necessary because it does increase operational risk around buying and running these businesses inside Acacia. So I guess the key takeaway there is we want to 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. And we want to be prepared if we need somebody to augment a business in a way that helps us maximize the value.

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

So you're going to 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. But, 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, Brad, about what's in and what's out of our control. But it is part of our business model to acquire securities in companies that we like after having done the fundamental research on those companies.

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

So let me take that question apart. The answer to that question is not instructive to the number of things that we're working on. So there are more things that we're working on in earnest than the number of positions that we have out there. I just want to make sure that that doesn't become a marker for what our pipeline looks like, because it's not. And the second piece of that question is, given the size of our equity trading portfolio last year, we were put over $100 million threshold for a forward four-quarter reporting requirement under 13F. So I'm not going to tell you what they are now, but there is a 13F that's going to come out next week, so you can figure it out there.

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

Any time, Fred. Any time.

Once again, if there are any remaining questions or comments, please press star 1 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 Eagleson with Formidable AM. Please pose your question. Your line is live.

MJ Kirsten, thanks so much for taking some time today. Hey, Adam. So the 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?

Look, we get that question a lot. You and I may have talked about this in the past also. We're inherently capital allocators, and so we are evaluating all the options we have for allocating capital. I understand the perspective. We also have a very attractive pipeline of opportunities that 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. And so, 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.

Okay, fair enough. Thank you. Yep.

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 Seltzer with 88 Management. Please pose your question. Your line is live.

You know what? Adam just asked the question, so I can't 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? not really buying back any more stock?

I mean, look, we had bought back a reasonable amount last year. And we, like I said, Todd, it's really, it's 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. And, you know, we have a pretty fulsome pipeline that's, you know, fell in excess of the cash that we have on the balance sheet. And so, you know, we do talk about it. We do deliberate on it. And right now we're, you know, we're looking towards the opportunities that we have as a way to deploy capital. But we, you know, this is, they're fluid discussions.

Reflecting on a question that Brett asked, as of the end of the last quarter, we had investments in three public companies and aggregate $20 million invested. I know 45 days after the end of the week, a light will be shined on your current position. Did I, did I see something in the earnings release that reflected investments in those types of target 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, uh, visibility given on that?

Yeah, I mean, so first point is that 13Fs are a point in time, and by the time they're reported, they're 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. And so we continue, as always, to work the portfolio I think you'll see the 13Fs over the next few quarters until it sunsets out because our portfolio is below $100 million. And I wouldn't read too much into what's in the 13F.

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?

Well, Tony Stoss is looking at us, and we appreciate his coverage. And, 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 going to do a deal? And you know what our answer is, because we've answered it several times. But, 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. And so if people want to cover us, we're not going to stop them from covering us. But the story continues to evolve, and we want to show you all that we're going to do what we say we're going to do, and then the coverage should be much more logical conversations.

And 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?

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 and they're really excited about what we're building and we're seeing that roll through the shareholder register.

Thank you. Thanks, Todd.

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.

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.

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.