Acacia Research Corp (ACTG) 2021 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Acacia Research Second Quarter Financial Results Conference. (Operator Instructions) As a reminder, today's call is being recorded.

At this time, it is my pleasure to turn the floor over to your host, Jeff Stanlis, with FNK IR. Sir, the floor is yours.

Thank you, Melinda. Hosting the call today are Clifford Press, Chief Executive Officer; Al Tobia, Chief Investment Officer; and Rich Rosenstein, Chief Financial Officer.

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 operation and are based on the current estimates and 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 filed with the SEC.

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 acaciaresearch.com, under the News and Events tab. Clifford and Al will provide a business update, and Rich will review the quarterly financial results.

With all that said, I would now like to turn the call over to Clifford Press. Mr. Press, the call is yours.

Thank you, Jeff, and good morning, everyone. At the end of the second quarter, our capital base, consisting of cash, private and public investments, and availability pursuant to our partnership with Starboard Value LP, stood at $770 million. We continue to pursue acquisitions of operating businesses through a tightly coordinated research process, leveraging our team's experience in public and private markets. We focus on mature technology, life sciences, health care and industrials and certain segments of financial services, including insurance. Our primary opportunity set remains with companies that are sub $2 billion in equity market cap. As we have said in the past, we view this segment as the least efficient area of the public markets, and one that favors our primary research approach and permanent capital structure.

We've now positioned Acacia in an opportune part of the market. Specifically, we operate at the interface between private and public market valuations, making us an ideal partner for a variety of sellers and investors. We are able to deploy permanent capital to navigate complex multifactor transactions.

We are a corporate acquirer and are positioned to be an attractive path to counterparties such as private equity funds and large enterprises. This approach leverages our rigorous investment process with Starboard, strong balance sheet and ready access to committed capital. We have active relationships with private equity investors who may find underperforming public companies where our involvement can be constructive and will continue to build this network. In summary, we remain committed to our strategy, which benefits from the inherent flexibility we have created, enabling us to pursue a range of potential transactions.

I'll now turn the call over to Al Tobia, our Chief Investment Officer, to speak to our existing holdings. Al?

Thank you, Clifford. As we evaluate new opportunities, we continue to maximize the value and return of our existing holdings. Our goal is to monetize our life sciences portfolio expeditiously. During the second quarter, we exited our position in Sensyne. And to date, we have now recovered $212 million of our original $282 million life science portfolio investment.

As a reminder, immediately following the acquisition of this portfolio, we recovered approximately $145 million through the sale of certain public equities from the portfolio. We have continued to monetize this portfolio. And as of June 30, we held positions in 2 public companies, Arix Biosciences and Induction Healthcare Group, and these positions represented approximately $66.7 million in value.

Immunocore recently completed an IPO, though our class of shares did not yet trade publicly as of June 30. Importantly, we continue to hold meaningful positions in 4 additional private life sciences companies, including Oxford Nanopore Technologies. Oxford Nanopore disclosed earlier this year that it started the process of preparing for an IPO. And that while the timing of a potential IPO is dependent on market conditions and other matters not fully within its control, Oxford Nanopore expects that the IPO would occur in the second half of '21 on the London Stock Exchange. In addition to Oxford Nanopore, we remain enthusiastic about the prospects for our other private holdings.

With respect to our IP business, investments made over the past year have resulted in a balanced portfolio, including both soft licensing and litigation. We generated more than $17 million in revenue this year, up from $2 million in the second quarter last year. This growth was driven by a few licenses and settlements, including 1 large settlement. Our policy is not to comment publicly on the specifics of any individual settlement, including identifying counterparties given confidentiality agreements and other considerations. Our team is actively advancing a number of opportunities to monetize our existing IP assets and to acquire additional portfolios.

With that, I'd like to turn the call over to Rich Rosenstein, our CFO, to discuss the results. Rich?

Thank you, Al. Our book value at June 30, 2021, was $147.1 million, or $3.02 per basic share compared to $128.1 million, or $2.64 per basic share at March 31, and $292.5 million, or $5.94 per basic share at December 31, 2020.

Our book value reflects the impact of the increase in the company's share price over the last year on our warrant and embedded derivatives liabilities, which stood at $290.2 million, at June 30. As these liabilities will be extinguished upon exercise or expiration of these warrants and preferreds, we consider their impact should all derivatives be converted.

Assuming full exercise of all issued derivatives, Acacia's pro forma book value would rise to $942.8 million or $5.70 per share, up from $882.5 million or $5.39 per share on the same basis as of December 31, 2020.

For the quarter, highlights of our financial performance include the following: Revenues for the second quarter of 2021 were $17.4 million, up from $2.1 million a year ago; operating income was $1.6 million in the quarter, reversing a loss of $6.7 million a year ago; realized and unrealized gains totaled $25.8 million in the quarter; cash and equity securities at fair value totaled $320.6 million at June 30, 2021, compared to $274.6 million at December 31; debt was $145.5 million in senior secured notes issued to Starboard Value. More detail 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 filed with the SEC this morning.

Let me now turn the call back to Clifford for closing comments. Clifford?

Thanks, Rich. In conclusion, Acacia continues to execute on its investment strategy. As always, our focus continues to be on improvement in our book value and executing our acquisition strategy, which we are focused on doing in collaboration with Starboard. As stewards of shareholder capital, we view valuation fit and a variety of other factors and important factors as important and we will not rush to make an acquisition for experience. We are now happy to answer questions.

(Operator Instructions) And first, we go to the line of Anthony Stoss with Craig-Hallum.

A couple of quick questions for you. Most recently, you settle a patent litigation with a network equipment supplier. Can you confirm that your June revenues were impacted by this settlement? And could we expect kind of monies going forward? And then I had a couple of other questions after that.

Rich, why don't you take that one?

Yes. Yes, I can. So, Tony, as we mentioned, our revenues in the quarter were just over $17 million and did include a number of license agreements and settlements, including 1 large settlement. And so that you'll see on our balance sheet as accounts receivable that we would have collected in the beginning of the third quarter.

Do you expect that to continue, Rich? Or is it a kind of one-and-done settlement?

As Al had mentioned, we can't comment on the specifics of individual settlements, but many of our licensing agreements and settlements are often upfront -- involved upfront payments. Some do have recurring revenue characteristics to them. But by and large, our transactions are typically upfront payments.

Ben, it's Clifford. I'll just add on that, that we've got some new portfolios that are coming to realization now. We regard that settlement as an auspicious start for that portfolio, and we expect a substantial follow-on for that portfolio.

Meaning with other companies, Clifford, or with the same existing licensee?

With other licensees.

Okay. And then shifting gears getting your Viamet JV, your partner is valuing their ownership in Viamet at a much higher valuation than you guys are. Can you discuss why and maybe the differences in and what they're currently valued at versus what you are and why you guys aren't? I guess, why you are valuing it more conservatively?

Rich will describe the aspect of it first, and I'll talk about the underlying investment.

Yes, Clifford. So Tony, you're right. We -- as we indicated in our press release, we value several of our private company positions, Viamet included on cost -- on the basis of cost. And we have adopted an approach to valuing our private securities using what's called the measurement alternative under ASC 321, and that involves valuing the privates at initial cost. We then adjust for any impairment that might be -- that might have taken place. And then we will also adjust for any observed transactions, either primary or secondary transactions in the underlying issue with shares, whether they be the same shares that we hold, different class of shares, different size of amount that we own, we'll take all of that into consideration.

There have been no observed transactions in Viamet per se, and so we continue to carry that as a cost. And you can see in our release, the -- 3 of our private positions, Viamet Pharmaceuticals, AMO Pharma and NovaBiotics. We're carrying at, on a GAAP basis. We're carrying at a value combined with $25.4 million. So we're not -- we have not adopted a fair value approach to each of our private holdings.

Okay. And then on specific...

And on -- just to finish on your question about the difference in evaluation, which explain why we do not disagree with the Mallon valuation. That product is pretty significant advance in women's health, that drug. And we do think that Mallon have a viable basis for recording their valuation.

Okay. I think Clifford, can have a bigger picture one. And I know you -- and I applaud the fact that you don't want to rush into just any acquisition. But the partnership with Starboard is going on almost 1.5 years with no acquisitions to show yet. I know you guys have been working hard. Any color, either you've been outbid or you're very active now? Or do you think you're getting closer now? Anything would be helpful, because I continue to get lots of calls from shareholders wondering 1.5 years in, while we still don't have anything to show yet.

Sure. It's a legitimate question. And the only way we really like to answer it is with some transactions, which we're getting close to. But in terms of where we've been so far, of course, Starboard were extremely instrumental in doing the Woodford portfolio acquisition, which -- and we've recently spent a substantial amount of time in due diligence on a public company of significant size, and decided at the end that it did not meet our criteria. However, we have a very robust pipeline of late-stage prospects at the moment. And I'd be surprised, as I've said before, if we don't have some significant transactions and completed by the end of the year.

(Operator Instructions) And next, we go to the line of Brett Reiss with Janney.

First question, is it still the company's aspiration to generate $3 to $4 of revenue on the $42.4 million patent net of accumulated amortization?

I'm not sure where that -- where you've got those numbers from, Brett. We don't generally refer to that type of investment in terms of revenue. We referred to it in terms of where we expect to book value over time, and we would continue to emphasize that.

Brett, just I think maybe when you're referring to that, I think that may be if we decide to partner with someone and there's a back end. When you look at some of these transactions, there's a larger kind of revenue component and then there's a profit share. Maybe that's where the $3 to $4 came from. But to Clifford's point, each one of these deals has its own criteria. So we're not that prescriptive on $3 to $4 per book value. We look at things in terms of their ability to generate a targeted return that we believe is acceptable.

Okay. There's all sorts of estimates all over the map on what the IPO value of the Oxford Nanopore might be. What do you think the IPO value of Oxford Nanopore is going to be?

Brett, I don't think it will surprise you if I tell you that it's an active IPO. We're a top 5 shareholder and it just would not be appropriate for us to make any comment whatsoever in that regard.

Okay. Fair enough. One last one, and it's really just asking the question again from the prior caller. In terms -- on a scale of 1 to 10, 10 being metaphysical certainty and 1 being it's just not going to happen. What is the probability of a deal being consummated for on an operating company before calendar year 2021 is up?

Brett, you've been around for a long time and you know deals. So I think it's -- it would be nobody would feel comfortable predicting with certainty any transaction until it's happened. But what we can tell you with certainty is that we're working very hard. We have a tremendous research collaboration with Starboard, and there are a number of transactions that we're looking at very closely.

Next, we go to the line of Kevin Sami with Sami Capital.

I just had one on your ownership stake in Oxford Nanopore. Your stake has been 6% since you last disclosed it at year-end 2020, and yet they've raised capital. Has your stake been diluted by that raise?

No, we've not been diluted.

Okay. So you participated in the raise?

Yes.

Okay. Can you add some color to what that hasn't been disclosed to my knowledge? And what would you...

I think we have to consider where that company is in its -- we -- the transaction was done in such a way where existing shareholders could maintain their shareholding, and we did do so.

This concludes our question-and-answer session. We turn to Clifford Press for closing remarks.

Thank you, everyone, for your participation on today's call. We very much look forward to our next earnings call, and hopefully, we'll have further news to report at that time.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.