Acacia Research Corporation
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

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.

[Rob Fink:]

Thank you, operator. Hosting the call today our 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 relates 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 report on Form 10-K that were 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

[Al Tobia:]

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 three core assets

[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 command 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, pricing that has been significantly rationalized, one which, we believe, is capable of providing significant and correlated returns to tactical investors. With a reduced cost structure and rebuild IP team, Acacia is well positioned to capitalize on this upside optimality. The opportunity consists of two parts

[Operator:]

Thank you. [Operator Instructions] We’ll hear first from Ted Moreau with Terrace Research.

[Ted Moreau:]

Yes. Thank you. Good afternoon, guys. 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.

[Al Tobia:]

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 or functional IPP areas that are capable of generating business either through business development or licensing and that will be an ongoing process led by Marc Booth.

[Ted Moreau:]

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?

[Clifford Press:]

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.

[Ted Moreau:]

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.

[Al Tobia:]

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 2011/2012 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?

[Clifford Press:]

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

[Ted Moreau:]

Okay, great. Good luck, gentlemen.

[Operator:]

We’ll hear next from Gary Mobley with Benchmark.

[Gary Mobley:]

Hi, gentlemen. 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?

[Clifford Press:]

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.

[Gary Mobley:]

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?

[Clifford Press:]

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 seen are primarily paid-up deals.

[Gary Mobley:]

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

[Clifford Press:]

Primarily, what I’ll refer 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.

[Gary Mobley:]

Okay. All right, thank you guys for answering my questions.

[Operator:]

We’ll hear now from Janney Montgomery Scott with Brett Reiss.

[Brett Reiss:]

Hi, gentlemen. Can you hear me? Yes, hi. 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 we 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?

[Al Tobia:]

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 may be 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 steeper discount to its liquid asset value.

[Brett Reiss:]

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

[Clifford Press:]

Yes. It’s in the – it’s approximately $4 a share.

[Brett Reiss:]

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 kept 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?

[Clifford Press:]

I think the market has restructured itself on the top of the 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 they 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 backend can we buyout 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.

[Brett Reiss:]

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?

[Clifford Press:]

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.

[Brett Reiss:]

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?

[Al Tobia:]

There had been – prior management had on a number of occasions referred to the fact that they believed that one reason to accept the patent, the IP business was because it attracted very substantial liabilities with it. So when we became involved, these are 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 there are now.

[Brett Reiss:]

All right. May I ask you one more because I’ve asked the 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?

[Clifford Press:]

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

[Al Tobia:]

We can get back to you on that…

[Clifford Press:]

We can get back to you on that.

[Al Tobia:]

We can get back to you on that, because the investment is held the costs.

[Brett Reiss:]

Okay. Thank you for answering all my questions. I appreciate grabbing the bull by the horns and getting control of cart and giving us hope. Thank you.

[Operator:]

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