Acacia Research Corp (ACTG) 2018 Q3 法說會逐字稿

Good afternoon, and welcome ladies and gentlemen to the Acacia Research 2018 Third Quarter Earnings Release Conference. (Operator Instructions)

I would now like to turn the conference over to Mr. Rob Fink. Please go ahead.

Thank you, operator. Hosting the call today are board members, Al Tobia and Clifford Press.

Before beginning, I would like to remind everyone 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 the current estimates and projections of 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 as described in Acacia's annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC.

In addition, during the call, the company may present non-GAAP financial measures. Please refer to the disclosures regarding the presentation of non-GAAP financial measures and other notes that were included in today's press release as well as the 8-K filed with the SEC.

I would like to remind everyone that a press release disclosing the company's financial results was issued today at approximately 4:05 Eastern Time, and they can be accessed on the company's website at acaciaresearch.com under the News & Events tab.

With all that said, I now like to turn the call over to Al. Al, the call is yours.

Thank you, Rob, and good afternoon, everyone. This was a busy and important quarter for Acacia, as the new Board of Directors took immediate steps to safeguard and enhance Acacia's assets. I'll focus my comments today on what's been accomplished over the past quarter.

As most of you know, Clifford Press and I were elected to the board at the Annual Meeting of Shareholders in July. The business we inherited consisted of 3 core assets: cash, investments and IP. Our first order of business was to secure each of these assets. As part of this, we quickly verified and secured all the company's cash and consolidated it into a short-term liquidity program with Morgan Stanley.

As of September 30, we had approximately $143 million in cash and short-term investments or approximately $2.89 in cash per share that is now being appropriately managed. We also evaluated our investment portfolio, which includes both investments in Veritone and Miso Robotics. We took the first opportunity we could to reduce our concentration risk in Veritone by selling 1 million shares of stock at $10.44 per share. The remaining 3.1 million shares have been registered to provide us with maximum flexibility going forward.

We have worked with management of both organizations to appoint highly qualified independent directors to the boards of both Veritone and to Miso Robotics, and we set up processes for managing these investments more effectively going forward.

Turning to the IP side. We addressed time-sensitive pending issues in the portfolio, resulting approximately $13.7 million in third quarter revenue, with another $25 million that has already been recognized in the fourth quarter. The appointment of Marc Booth as the Chief Patent Officer was the first step taken in rebuilding what we believe to be a very viable IP business.

During the third quarter, we also focused on continuing our expense reduction efforts, assessing known and potential risks and liabilities and carefully examining the opportunities in Acacia's core IP and licensing business with respect to capital allocation.

Since July, we have cut overhead by more than 50% and are finalizing an operating expense budget for 2019 that is in the range of about $6 million. The corporate office in Newport Beach, which consisted of 17,800 square feet in the most expensive office tower in Orange County, was being used by 11 employees and is now in the process of being subleased and our operations are moving to more appropriate offices. Acacia is now a much more stable business with an appropriate cost structure.

We also reviewed the lit risks and liabilities in the company. In collaboration with our legal counsel and other experts, we carefully examined all known potential liabilities. We have recorded a reserve of $3 million net of litigation releases to cover known liabilities.

At this time, I'd like to turn the call over to Clifford Press.

Good afternoon. Marc Booth returned to Acacia in July as Chief Intellectual Property Officer and has played a key role in managing the IP business. Marc had spent 12 years at Acacia before departing last year, and he was able to come back and hit the ground running. Not only did he achieve $39 million in revenue that needed to be addressed quickly, but he helped us to carefully evaluate the business. We commend to him and his team for this excellent performance.

As most of you know, the IP industry has been going through a period of change and previous management had decided to abandon it. We evaluated the core business, excluding the marquee acquisitions based on results from 2012 onwards, which was subsequent to the legal decisions and regulatory changes, and found that the financial results were actually quite positive. We now believe that it operates in a severely dislocated market with pricing that has been significantly rationalized, one which, we believe, is capable of providing significant and correlated returns to tactical investors.

With the reduced cost structure and rebuild IP team, Acacia is well positioned to capitalize on this upside optionality. The opportunity consists of 2 parts. First is the existing patent portfolio. As I mentioned, we've rapidly addressed the opportunities within this portfolio and have recognized $38.7 million in immediate and time-sensitive transactions that have been piling up and not addressed. However, we do not expect this portfolio to continue to generate revenue on this scale without new additions. Second, there are attractive and viable opportunities for growth. To responsibly pursue these opportunities, here are the next steps. First, we're on the midst of assembling a well-qualified board with very specific and focused attributes and expertise in this area. We retained executive search firm Korn Ferry in August to help identify appropriate candidates. The search process is going well, and we expect to be announcing new board members in the coming months. Second, we are recruiting new operating executives to build out our team focusing on capitalizing on the uncorrelated asset classes with the IP strategies as the flywheel at the center.

Let me now spend a few minutes briefly providing an overview of the third quarter financial results. More detail is available in the press release issued today and also in the quarterly report on Form 10-Q we will file with the SEC.

Cash and short-term investments totaled $143.4 million as of September 30, 2018, as compared to $136.6 million as of December 31, 2017. GAAP and non-GAAP results for the third quarter of 2018 included a realized and unrealized loss on the equity investment in Veritone, totaling $28 million (sic) [$22.4 million] as compared to a net unrealized gain of $159 million in the comparable year quarter. During the quarter, Acacia sold 1 million shares of Veritone for $10.5 million and realized a loss of $5.5 million on that sale.

In summary, as newly elected Directors, our first duty was to establish clear, direct and appropriate priorities to stabilize the company. As a result of the work done during the quarter, Acacia now -- is now a clean, attractive asset with a revived legacy business, which will soon have a board comprised of highly talented and capable directors.

We are extremely grateful to the current team at Acacia led by our Chief IP Officer, Marc Booth, for rising to the occasion and professionally operating the business along with our valued partners. Acacia's long-standing corporate counsel at Stradling has been exceptional, providing comprehensive legal support and guidance, while the team at Morgan Stanley quickly helped us establish appropriate cash management facilities and facilitate complex trades.

With that, we'd now like to open the call for questions.

(Operator Instructions) We'll hear first from Ted Moreau with Terrace Research.

You talked a little bit about the -- some cost reductions that you've undertaken. Just kind of curious, are you -- do you have further cost reductions to go yet? Or in order to get to the run rate you're talking about for 2019? Or are you all done and then the actions you've already taken just have to flow through the P&L?

So thanks, Ted. The actions that we've taken will start to flow through the P&L. As of now, we're in the process of transitioning to a lower cost lease. So that's a bit of a gradual process. But we did give a example of the magnitude of the lease that we had for such a small number of employees, so that will be a significant cost savings. And on the headcount side, we obviously had parted company with the prior management team, so there was a fair amount of reallocation of resources that occurred. So that was some absolute cost-cutting and also just repositioning into more productive employees, meaning employees who rather than being cost areas are functional IP areas that are capable of generating business either through business development or licensing and that will be an ongoing process led by Marc Booth.

Okay, great. And then, there was some discussion about adding several members to the board. Just curious, what was the time line of all that? Is that -- do you expect to add board members by the end of the year? And how many members of the board do you expect to have once finalized?

This is Clifford Press. We started, obviously, as soon as the legacy board members resigned, we started working on the search for new board members. But it was important to figure out what the company was and make sure that it was transparent because otherwise, it would be difficult for directors to come into a situation that was uncertain. So I think it's now very clear. We've got a great pool of highly qualified candidates, and I would expect we should have the board pretty much reconstituted by the end of the year. And Korn Ferry is well along in that task with us.

Sounds good. And then, also -- and then kind of turning to the patent business. Can you kind of give some details on the current state of the patent business? And also, what kind of deal flow you're reviewing? And that's all from me.

Thanks, Ted. Let me take this at a high level, and then Clifford can add some commentary as well. Obviously, this is a market that is in a severe state of dislocation, having gone through the boom period leading up to 2011/'12 when many regulatory changes impacted the market negatively. Leading up to that period, lots of capital was raised and aggressively deployed. And now we're seeing the unwinding of those capital allocation decisions that were made at the peak of the market. They seem to be aggressively unwinding at the bottom. So I would categorize this as a heavily dislocated market, that's one in which you could theoretically generate uncorrelated returns. And given the fact that we're looking at a reduced cost structure for this business, we would hope to retain the optionality in the business going forward. We believe that given that what we've seen from a deal intake, there are lots of opportunities that will be coming our way from a capital allocation decision process, and we will looking at lot of deals. So Clifford, you have anything more to say about the market?

There's a lot of opportunity out there. Once people realized that Acacia was seriously back in business, there's been a great deal of interest in getting involved.

We'll hear next from Gary Mobley with Benchmark.

I apologize in advance if my questions seem uninformed, if they may be. But I wanted to start with some questions about the license. I'm assuming this was licensing revenue recognition of the third quarter as well. $25 million, you've mentioned you recognized so far in the fourth quarter. Is this the patent value realization here for the patent portfolio? And then as well as you're structuring these deals, are you -- how are you trying to balance the puts and takes with selling the future in order to generate near-term cash flows from the patent portfolio?

We've learned a lot about that subject recently. And we would not be interested in any kind of transaction that inhibited Acacia's activity in the future. That has been a characteristic of certain transactions in the past. And we are not -- because the -- because of the intention to sunset the business, but we are not interested in proceeding on that basis. So the revenue that's been generated, it's been generated by the existing patent portfolio. And as I said in the prepared remarks, it was addressing some urgent contractual issues that needed to be dealt with. Then we do not expect that the existing patent portfolio will be able to generate revenue on that scale going forward.

Okay. As you dug into the patent portfolio, did you discover some fully paid-up license -- patent license deals in the past? And are you structuring the current deals as recognized in the quarter and, as well, the fourth quarter that we're in as fully paid-up license deals?

For this particular -- there are a number of transactions here. I'd rather not get into the nature of the transactions at the moment. But it has been Acacia's practice in the past to generally do fully paid-up license deals. There is a certain amount of ongoing relative revenue, but not very significant. As I -- as we said, I think there's a lot to be done now, but the industry looks very different than it did in the past. And I'm not sure that, that type of structure will be prevalent going forward. But the transactions that we’ve seen are primarily paid-up deals.

Okay. This change in environment that you speak of, does this relate to general tort reform? Or is this relating to regulation on nonpractice entities?

Primarily, what Al referred to, which was the dislocation in the capital allocation to this field. There was a very large amount of purchasing activity and accumulation, which is now getting unwound. So to put it bluntly, there are lot more sellers than buyers. Acacia is one of the very, very few entities in this market that is capitalized well enough and is interested in a transacting. So it's -- for us, it looks like a very desirable market in which to be a buyer.

We'll hear now from Janney Montgomery Scott's Brett Reiss.

Since we're going to stay in the patent business, there's a need to keep a fair amount of cash on the balance sheet to show strength with the opposing side. But of the $143 million, what will you have to keep on the balance sheet to show strength versus having the cash available for share buybacks with the stock at these depressed levels?

So we look at the stock and then add up the cash in investments and then the NOL value, and then the patent assets on the books, and we can see that it's significantly below a very liquid asset level. And we also feel like with the cost structure down that we will be building book as opposed to historically where maybe book wasn't being built. So we view that we have some excess cash, but we have to weigh the buybacks versus potentially other uses of cash. But I hear the question, it does not make sense to us for the stock to be trading at this steep a discount to its liquid asset value.

Right. Could you tell us what is the value of the -- how much is the NOL at this point?

Yes. It's in the -- it's approximately $4 a share.

Okay. The patent portfolio that you're going to look to acquire because the -- it's such a buyers' market, are you going to be able to in effect get them without having to layout any money and just front-load the filing fee and legal costs to get a portion of the reward if you're successful?

I think the market has restructured itself and the top of transactions have restructured themselves in the aftermath of the bursting of the active bubble. So this -- I think there seems somewhat different structures going forward than there were in the past. Let's wait till we get some on the books and then we'll be able to comment about them. But obviously, the question is, how much of the back end can we buy out upfront? And what is the risk reward on that? And we'll be hopefully announcing some of those. And when we have some real ones to talk about, we can discuss it.

Oh, that's great. Now the patents that you're looking at, are you going to look at anything you can get at the right price? Or are you going to focus on certain niche areas in the patent area where you want to focus your expertise?

No, I think that's probably a question we can answer more accurately once we have the new board in place. We are talking to people that have significantly wide-ranging expertise in various parts of the IP space, and I think that will come together when we have them.

Okay. Now the reserve of $3 million for legacy liabilities, what is that going to cover? Can you give us some more color on that?

There had been -- prior management had on a number of occasions referred to the fact that they believed that one reason to exit the patent, the IP business was because it attracted very substantial liabilities with it. So when we became involved, we did a very comprehensive review of all litigation, controversies and claims of any kind asserted against the company. And disposed of what was able to be disposed of and then made an assessment of what remained, and that number is the net result of some reserves and some releases of other litigation reserves, and we think it's more than enough to cover the liabilities as they are now.

All right. May I ask you one more because I've asked a number and I'll get back in queue. The valuation of the Miso Robotics, is that in the investment at fair value area in the balance sheet? Or is that investment other?

I'm not sure where that is. Let me change it, if it cost, so...

We can get back to you on that...

We can get back to you on that.

It's -- in the investment, it's held at cost.

And ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. You may now disconnect.