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Edited Transcript of ACTG earnings conference call or presentation 12-Mar-20 3:00pm GMT

Q4 2019 Acacia Research Corp Earnings Call

NEWPORT BEACH Mar 16, 2020 (Thomson StreetEvents) -- Edited Transcript of Acacia Research Corp earnings conference call or presentation Thursday, March 12, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alfred Victor Tobia

Acacia Research Corporation - President, CIO & Director

* Clifford Press

Acacia Research Corporation - CEO & Director

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Conference Call Participants

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* Brett Reiss

Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor

* Sam Rebotsky;SER Asset Management;Portfolio Manager

* Rob Fink;FNK IR;Managing Partner

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Presentation

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Operator [1]

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Good day, and welcome, ladies and gentlemen, to the Acacia Research 2019 Fourth Quarter and Year-End Earnings Call. At this time, I would like to inform you that this conference is being recorded (Operator Instructions)

I will now turn the conference over to Rob Fink with FNK IR. Please go ahead, sir.

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Rob Fink;FNK IR;Managing Partner, [2]

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Thank you, operator. Hosting the call today are Clifford Press, Chief Executive Officer; and Al Tobia, Chief Investment 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 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 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 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 Press Release tab. In addition, the company has prepared an investor presentation to accompany this call that can be accessed on Acacia's website under the Events & Presentations tab.

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

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Alfred Victor Tobia, Acacia Research Corporation - President, CIO & Director [3]

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Thank you, Rob, and good morning, everyone. We recently announced shareholder approval of the Starboard investment, completing the second phase of our strategic transformation. This partnership established in November provides Acacia with access to up to $500 million of new capital to pursue a wide range of capital deployment options. We entered 2020 with the processes, cost structure and resources necessary to create and sustain value for our shareholders.

We continue to make progress on reinvigorating our patent assertion business, focusing our business development efforts in the void that exists between litigation finance and loan-to-own lenders. We are working to partner with businesses to unlock the value hidden in their IP portfolios.

On the corporate development front, we have made several important patent acquisitions and continue to believe that we are well positioned to be a consolidator of the public IP companies. Clifford will detail these developments later in the presentation.

At present, it may be helpful to describe our business by detailing what we are not. We are not a typical publicly traded, undercapitalized, subscale IP monetization company. These companies often lack the balance sheet to be an effective litigant against larger counterparties, and as such, often struggle to maximize the value of their IP assets. Additionally, they often have a narrow portfolio of patents with too few options for monetizing them, which leads to a lack of outcome diversity. We are also not a special-purpose acquisition company, a strategy with inherent governance deficiencies that also lacks outcome diversification.

We have built the new Acacia to be remarkably flexible. We are not tied strictly in investments in IP. We can pursue investments in various revenue streams. We can buy entire companies or acquire assets. We believe that, together with Starboard, we are well positioned to pursue opportunities of greater scale and flexibility. Starboard is an ideal partner given their historical investment track record and research-driven focus on operational, strategic and governance-oriented investment. Jonathan Sagal of Starboard has joined our Board, and our new Strategic Committee meets regularly, researching a wide range of investment opportunities.

As we evaluate these potential opportunities, we remain focused on preserving shareholder value. Our stock is trading at a steep discount to intrinsic value, which is $3.55 a share as represented by cash plus invested assets as of year-end 2020. Based on our current operating plan, we would expect to use no more than 5% of our current cash balance on operating expenses and investment due diligence between now and the completion of an approved investment or the commencement of our first redemption test period in August 2021, as outlined in the proxy.

Our net operating loss carryforwards are a significant shareholder asset and can position us as price-advantaged acquirer. With our newfound scale, we are evaluating opportunities to acquire assets, which will enable us to utilize these NOLs before they expire.

I would now like to turn the call over to Cliff for a review of our fourth quarter results.

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Clifford Press, Acacia Research Corporation - CEO & Director [4]

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Good morning. I will provide an overview of the fourth quarter financial results, but more detail is available in the press release issued today and also in the upcoming annual report on Form 10-K, which we will file with the SEC later today.

As a reminder, our focus is on growing Acacia's book value over time. Cash and short-term investments totaled $168.3 million at December 31, 2019, as compared to $165.5 million as of December 31, 2018. Revenues for the fourth quarter of 2019 were $688,000. For the year, our total revenue was $11.2 million.

Of note, we made significant progress in rationalizing our operating expenses. In particular, our G&A costs decreased 14.3% for the year, largely related to lower rent and the elimination of duplicative salaries.

Subsequent to the fourth quarter, we acquired IP assets in 2 key areas: flash storage, speech recognition and voice control. These investments are in emerging areas of opportunity, and many of the patents we acquired have a 7- to 10-year lifespan, providing us with long and promising runway for monetization.

The first asset we acquired is 2 groups of flash disk drive patents. One group contains patents that originated from Fusion-io, and the other group contains patents that originated from Samsung. These patents relate to manufacturers of flash drives and flash drive controller ICs. The second asset we acquired is a fundamental patent family related to speech recognition and voice control. The patents covered devices and systems that use voice commands to provide configuration and control. In aggregate, we invested approximately $6 million to acquire these patents.

One of the advantages of our structure is that we can acquire assets in either the private or the public markets. As Al mentioned earlier, there are significant challenges for IP portfolios operated as stand-alone public companies with inadequate capital structures.

In August of last year, we purchased a position in Immersion Corp., a holder of fundamental patents relating to haptics technology. We began an engagement that, that comes in regard of the inappropriate makeup of the Board and the strategic misdirection of the business, particularly under the newly appointed CEO. The company recently announced that 2 directors have resigned and have been replaced by 3 direct shareholder nominees pursuant to a settlement with another large holder, and the company has commenced a strategic review process.

We will continue to harden our assets carefully as we build out our investment team to increase our ability to pursue a broad range of public and private transactions. With regard to the current population health issues, we have not seen risks to our business. Apart from commercial banking accounts, our cash and investments are held at Morgan Stanley, predominantly in government instruments and high-quality, short-term bonds. Our workforce is provided ample paid sick leave, and we have in place both a disaster recovery and business continuity policy that have been revised to account for a widespread health matters such as this. We have also encouraged employees to self-isolate or self-quarantine as need be, and employees are both encouraged and fully equipped to work from home, wherever possible.

I'd now like to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question, and that is from Brett Reiss with Janney.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [2]

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A couple of questions. With the dislocations in the market, does that improve the probability of you being able to find at a good price a transformative acquisition?

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Alfred Victor Tobia, Acacia Research Corporation - President, CIO & Director [3]

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So Brett, thanks for the question. Logically, sure. We are, as Clifford said, very liquid right now. And we are looking for acquisitions, obviously. And so with the price dislocations, it may make the diligence period a little bit hectic. But clearly, we're a buyer with liquidity in a market right now that's getting shaky, so it's a good time to have liquidity.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [4]

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Right. Right. And I was thinking also that some of the private equity funds that you compete with for acquisitions might have problems in other parts of their portfolio, so that they'd be less of a competitor for attractive acquisitions.

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Alfred Victor Tobia, Acacia Research Corporation - President, CIO & Director [5]

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This falloff has happened so quickly. I don't know how to speculate on that, but I do think you're right. We will obviously be competing to some extent with private equity, and private equity has been an aggressive buyer, and anything that makes them a less aggressive buyer should benefit us.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [6]

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Right. The $35 million in restricted cash, is that from the -- preferred to Starboard? And why is it restricted cash? And can you use it?

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Alfred Victor Tobia, Acacia Research Corporation - President, CIO & Director [7]

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Clifford, do you want to take that question?

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Clifford Press, Acacia Research Corporation - CEO & Director [8]

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Sure. Yes. That is the initial investment from Starboard. It is restricted in the sense that we could use it for an approved investment, and we would expect to get Starboard's consent to do so.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [9]

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Okay. Now this you may want to do off-line. I still don't have it straight. If you find a transformative acquisition -- you've already issued 100 million in warrants to Starboard. And if they exercise -- they do a cash exercise. It's at $5.25. But over and above that, Starboard in tranches will issue 365 million in notes at 6%, which if they convert those notes gets converted into 3.25. Is that in addition to the warrants -- the interrelationship between the warrants and the note? If you could give me a brief pictorial on that.

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Clifford Press, Acacia Research Corporation - CEO & Director [10]

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I can -- it won't take long, but we can do it right now. The 100 million warrants are issued and approved, and they have 2 exercise features. They can be exercised for cash for a limited period of time at a $5.25 exercise price. Alternatively, they can be exercised for a longer period of time at $3.65 exercise price, provided the exercise is executed with notes, not cash. Therefore, if Starboard -- if we issue notes to Starboard, Starboard owns the notes and wishes to convert them into stock, they can exchange the notes for stock effectively by using them to exercise the warrants and purchase stock at $3.65 using notes as the medium of exchange.

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Operator [11]

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We'll take our next question, and that is from Sam Rebotsky with SER Asset Management.

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Sam Rebotsky;SER Asset Management;Portfolio Manager, [12]

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I had the pleasure of attending the annual meeting and meet Cliff in person and the gentleman from Starboard. And I have a suggestion. With the stock trading at a 40% discount from your net asset value or cash, a lot of people are not able to buy the stock. I would suggest you consider a reverse split that it's above 5, creating an opportunity for other people to buy the stock. And being at a very good investment, I would like to see some of the Board members enter the market and buy the stock and show they understand the value. I'd like to hear your response.

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Alfred Victor Tobia, Acacia Research Corporation - President, CIO & Director [13]

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So -- sure. So Sam, your point is well taken, and we obviously are not pointing out our discount to our intrinsic value and our commitment to maintaining that without believing it ourselves. We have been blacked out from buying back, either as individuals or corporation, since we announced the buyback in August because of several transactions we've been working on. We expect that after this earnings release to be clear of any MMPI.

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Sam Rebotsky;SER Asset Management;Portfolio Manager, [14]

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Okay. And what about the thought about a reverse split? Has there some -- given some thought that their individual institutional investors who cannot buy the stock because it trades under 5 for your ability if it traded above 5 for them to participate in the stock?

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Alfred Victor Tobia, Acacia Research Corporation - President, CIO & Director [15]

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So I take your point that, that is an issue at times. I don't necessarily know that our business model has been developed to the point where the reverse split would make sense, meaning, I don't know that we'd broaden out our audience of potential buyers so much by doing it. But it is a point to consider when we get a business model that would maybe be broader -- attract a broader audience of institutions.

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Sam Rebotsky;SER Asset Management;Portfolio Manager, [16]

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Okay. Looking forward for transaction or something to occur so you bring more shareholders in. Good luck.

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Alfred Victor Tobia, Acacia Research Corporation - President, CIO & Director [17]

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Thank you, Sam.

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Operator [18]

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We do have a follow-up question from Brett Reiss with Janney.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [19]

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The -- on the patent portfolios that you've taken in, do all of them have a long gestational lead time between a potential settlement or ultimate trial? Or are some of them -- do you think would their revenue flow at a quicker timetable?

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Clifford Press, Acacia Research Corporation - CEO & Director [20]

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There is some expectation of more immediate revenue with some of them, and the balance between shorter-term and longer-term revenue is hard to predict. It depends on the reactions of the counterparties, but we do expect some revenue within the first year.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [21]

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Okay. And any movement forward on any of these pharma royalties that is one of the tools in your toolbox to get revenues into the company?

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Clifford Press, Acacia Research Corporation - CEO & Director [22]

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We obviously haven't announced anything yet, but we are looking at a number of significant transactions in that asset class.

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Operator [23]

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Thank you. This now ends our question-and-answer session. Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All participants may now disconnect.