ACTG - NASDAQ

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

Thank you, operator, and 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 operation 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.

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 6 weeks ago, providing a detailed update on the team and the processes we have 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 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. And then we're applying those processes to a growing pipeline of acquisition opportunities with an increasing frequency and seeing attractive results. What 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 challenged 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. And as we've said in the past, our ability to be facile on industries and 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 traditionally excited to work with exceptional management teams, and 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. And 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. So 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, and 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 mentioned in the past. And sticking with our processes, we have an excellent executive working with us to enhance the business. And we'll evaluate similar acquisitions of operating businesses or divisions of large 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.

Thank you, MJ. Let me start with the 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 $2.6 million in the same quarter last year. General and administrative expenses, which includes G&A at our IT and industrial segments was $12 million compared to $11.1 million in the same quarter of last year. The increase was due to nonrecurring corporate legal expenses and other onetime 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 31, 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 adjust 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 air price of certain holdings. The company recognized noncash 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 31, 2023 compared to December 31, 2022, and a decrease in liability for the shorter 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 31, 2023 compared to $349.4 million at December 31, 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 noncontrolling 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 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 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 31, 2023, was $355.7 million or $6.07 per basic share compared to $269.3 million or $6.19 per share at December 31, 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 31, 2023. On 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 to 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 decks 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 $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. $85 million of total warrant and embedded derivative liabilities attributable to 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 proforma 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 Instructions] Brett Reiss from Janney Montgomery Scott. Please proceed with your question. Your line is live

The discipline that you're maintaining in your approach before consummation of the 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 will result in more distressed prices and a better deal at some point in the future?

So 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 that 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 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, 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.

Now when you say in the release, one of the speed bumps to a deal -- the timing of the 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?

Yes. I mean, look, the factors there -- this is a -- it's effectively a consensual partnership. So I would say, first and foremost, we could love a business. We can have a price that we love a business that 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 part is we're willing to transact where we think it's a great deal, and we'll work through those. But that's probably the factor. It is -- 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.

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. While 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 advisers 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, in 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 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.

And 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 we might ultimately want to control. If so, how many? And is that included in the balance sheet and 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 securities 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, Brett, about what's in and what's out of our controlling. But it is part of our business model to acquire securities in companies that we like after having done the fundamental research at 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. 8, 10, 12, 6?

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. So 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 4 quarter reporting requirement under 13F. So I'm not going to tell you what they are now, but there's a 13F that's going to come out next week, so you can figure it out there.

[Operator Instructions] Your next question is coming from Adam Eagleston with Formidable AM. Please proceed with your question. Your line is live.

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 co-efficiency 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.

[Operator Instructions] Your next question is coming from [Tod Salter] with 88 Management.

You know what, Adam just asked the question. So I appreciate MJ's response. MJ, have you guys given a lot of thought to not pulling the trigger on a potential buyback? Was that something you guys give serious consideration to? Or you just preferred 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 outcome of those will be and the accretion associated with those relative to buying back stock. And we have a pretty fulsome pipeline that's following in excess of the cash that we have on the balance sheet. And so we do talk about it. We do deliberate on it. And right now, we're looking towards the opportunities that we have as a way to deploy capital. But we -- this is -- these are fluid discussions.

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 [Indiscernible] 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 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 visibility given on that.

Yes. I mean, so first point is that 13Fs are a point in time and by the time they're reported, they're inherently outdated. There -- as you saw in the last 13F, there was a large position in 1 particular name that made up the bulk -- 2 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. One other question, sell-side coverage. Are you guys having any meaningful conversations with any analysts out there to potentially look at Acacia's special situation, undervalued play?

Well, Tony Stocks is looking at us, and we appreciate his coverage. And 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. We've answered it several times. But I think the time to start talking to sell-side analysts is when we 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 are 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 conversation.

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.

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. I 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.