Q4 2023 Acacia Research Corp Earnings Call
Participants
Rob Fink; Investor Relations; Acacia Research Corp
MJ McNulty; Chief Executive Officer; Acacia Research Corp
Kirsten Hoover; Interim Chief Financial Officer; Acacia Research Corp
Anthony Stoss; Analyst; Craig-Hallum
Brett Reiss; Analyst; Janney Montgomery Scott
Presentation
Operator
Good afternoon, everyone, and welcome to the Acacia Research fourth-quarter and year-end 2023 financial results call. (Operator Instructions) Please note this conference is being recorded.
I will now turn the conference over to your host, Rob Fink, Investor Relations. Rob, you may begin.
Rob Fink
Thank you, operator. Thank you, everyone, for joining us for joining us today are MJ McNulty, the Chief Executive Officer and Kirsten Hoover, Interim 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 operations 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 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 close of market. This release may be accessed on the company's website under the Press Release section of the Investor Relations tab of acaciaresearch.com.
With that said, I would now like to turn the call over to MJ. MJ, the call is yours.
MJ McNulty
Thanks, Rob, and thanks to everyone for joining our call this afternoon. We're excited to share the details of 2023 with you all, we have very active year and 24 is starting out the same fashion. While the team focused in the first half of last year on rationalizing our cost structure and maximizing value in our legacy asset base.
Our focus for the second half was and continues to be on growing our business through acquisitions and identifying opportunistic situations where our research execution and operating partners can drive earnings and book value per share growth and disciplined in unique ways, both in our existing operating business and non-control positions we have on our balance sheet.
Let me speak to these achievements. Our new management team acquired our first business and approximately 50% and growing stake and benchmark energy, our intellectual property team had meaningful success in its WiFi six licensing initiatives. We believe there still additional opportunities to monetize these portfolios.
In the fourth quarter of '23, we agreed to the sale of our position in Arix Biosciences. We believe we achieved an attractive price for the sale of the shares. And last month we had set an oil and gas business benchmark signed an agreement to acquire a very attractive group of assets, further validating the strategy of partnering with The Benchmark team to build a larger oil and gas platform which we think gives us a nice complement to our acquisition initiatives in industrials, technology and healthcare sectors.
As a result of Acacia's recent business activity, we generated 82 million in gross proceeds from our intellectual property teams, WiFi six licensing initiatives, 57.1 million in cash from the sale of our Eric shares and additional income from our Public Markets activities and interest income from our substantial cash and equivalents balance. As you know, Acacia's business model is to allocate capital to increase book value per share for our investors. We acquire undervalued businesses and assets.
We apply disciplined operating and governance practices and grow earnings and cash flow to redeploy into the highest return opportunities, whether that's back into our existing businesses or putting acquisitions in line with this business model, we were able to deploy a portion of these proceeds into our existing businesses and expect to deploy additional cash to fund Benson benchmarks growth in connection with its recently signed purchase and sale agreement we mentioned earlier simultaneously with this increased cash. Our very experienced transaction team continues to evaluate acquisitions of additional operating businesses our pipeline of both public and private opportunities in our target industries continues to advance and mature under our new sourcing and acquisition evaluation process.
And finally, we continue to prudently manage our fixed costs to align with the interest we're generating on our cash and cash equivalents. The net amount of this activity was to increase book value per share for FY 23, which is a metric we watch closely from $5.18 at the end of 2022, adjusted for the transaction to clean up our balance sheet to $5.90 per share at the end of 2023. Recall that Acacia's corporate team's incentive compensation is tied to growth in book value per share, which we believe very closely aligns with our shareholders. As we think about sources and uses of funds, we can walk through each in more detail for 2023 and running into the first quarter of this year, we had two significant sources of cash. First and our last call, we announced that we'd signed an agreement to sell our stake in Eric's Biosciences. Our last publicly traded life sciences asset from the portfolio that we acquired in 2020. This transaction closed early in the first quarter of this year, delivering cash of approximately 57 million. I'd like to note that the gain on the sale is approximately equal to the expected second investment into benchmark. We have now generated more than 560 million in total proceeds from those life sciences from that life science portfolio and the assets in that portfolio after investing 301 billion in 2021, we continue to hold positions in three private life sciences companies, and we remain excited about their prospects, including ammo Pharma, a clinical-stage specialty biopharma company focused on rare childhood onset, neuro genetic disorders with limited or no treatment options. We believe there's still more value to unlock these remaining holdings.
Second, turning to our IP monetization business and previously communicated, we had fair update. We had favorable licensing and settlement events related to our WiFi six patents. At the end of 2023, we entered into licensing and settlement agreements relating to this patent portfolio with aggregate revenue of approximately 82 million. The amount ultimately received was net of customary legal fees and other expenses. Importantly, these agreements establish a stronger foundation from which we can pursue further licensing agreements and settlements. Our Plantronics business is operating more efficiently, and we've been working diligently to reduce ongoing operating costs in the business to enable Plantronics to deliver sustainable cash flow. This effort will facilitate Protonix has ability to further sell its high margin reoccurring available consumables, so effectively Inc. with a streamlined operating structure. We believe that over time, this business will represent a nice source of cash flow for Acacia. We also generated cash from our Public Markets activities in 2023. We view public market investments as a catalyst for moving acquisition targets. Forward with the ability to monetize our public position often as a profit at a profit. If we are unsuccessful in acquiring business, we were successful in this way during the fourth quarter. As we have mentioned before, we are unable to publicly discuss the companies we have invested in in pursuit of acquisition targets, but investors should note that we have generated returns from this activity against this backdrop of significant source of cash.
Let me now turn to our uses of cash. In November, we acquired a majority stake in benchmark energy two, LLC an independent oil and gas company engaged in the acquisition, production and development of low decline oil and gas assets in mature resource plays in Texas and Oklahoma. As discussed on our prior call benchmark has a unique advantage in acquiring producing oil and gas reserves and then operating them to increase production over and above how we valued the underlying acquisition. And at the same time exercising prudent hedge hedging strategies. The net result is high return, predictable cash flows with a conservative risk management philosophy for attractive the oil and gas sector. And we believe there are significant opportunities to add here at attractive valuations. Before acquiring this stake, we evaluated several different opportunities. Our decision to partner with benchmark was borne out of the desire to work with successful teams and to own a majority stake in an actual operating business rather than viewing these as financial assets owning and controlling oil and gas assets enables our team to generate the most value from operating a better.
In February, we announced a significant acquisition as part of the benchmark platform. We entered into an agreement to acquire a group of upstream assets also in Texas and Oklahoma from a private seller. This acquisition once closed will significantly expand the benchmark portfolio, adding approximately 140,000 net acres of land and approximately 470 operated producing wells in West called the Western Anadarko basis throughout the Texas Panhandle and Western Oklahoma. These assets are liquids rich, which means they're predominantly oil-based with low decline profiles and include a production base of approximately 6,000 barrels oil a day equivalent. Further, the assets are a perfect fit for Benchmark strategy of acquiring mature cash flowing properties, improving operations, maximizing production, and most importantly, returning capital. The team at benchmark is deeply familiar with these assets and there is ample opportunity to deploy various field enhancements, including artificial lift optimization, a more active well maintenance program and opening up previously closed wells. Enhancing production is a key part of the benchmark strategy, and this is one of the reasons we decided to work with Kirk and his capable team of benchmarks. While the primary focus of benchmark and this acquisition is to maximize cash flow, the asset base we acquired also provides benchmark with meaningful exposure to the emerging Cherokee development play through both operated acreage and nonoperated arrangements with best-in-class operators. Benchmark will likely seek to monetize this value through partnerships rather than standing up its own drilling operations. This is an example of finding value where others didn't in the strategy that we're pursuing of producing existing producing wells upon closing benchmark will hedge a significant amount of production, mitigating a large part of the commodity risk. This is another key consideration that attracted us to benchmark a focus on improving the operation of wells and use hedges to mitigate as much of the commodity price fluctuation as practical, taking near-term price volatility out of the picture allows the operating team to focus on operating the business better. The assets we have acquired are prime targets for this approach. In November, Acacia invested 10 million in benchmark, resulting in a 50.4% ownership. The acquisition announced last month will include an incremental investment of approximately $57.5 million, which is expected to bring our total ownership to approximately 73%. The time line of the second opportunity illustrates our ability to scale a platform quickly. Transaction is expected to close in the second quarter of this year. Pro forma for the closing of this acquisition we anticipate having deployable cash and marketable securities at the parent level, the Acacia level of more than $400 million. We look forward to a bright future for our new larger benchmark.
As you can see, our strategy is coming into focus. We look to acquire valuable businesses at attractive valuations and deployed disciplined operating and capital allocation methods to create value our book value per share has grown. And in the last quarter, this growth was significant. We have meaningful optionality across our portfolio, giving us access to innovative strategies, financing structures and collaborations that can leverage our expertise. Our network of highly talented and successful operating executives and our capital base to grow our portfolio scale drives incremental scale. Our pipeline of opportunities is growing and our existing cash flows are growing as well, bolstering our capital positions we're just getting started here. I'd now like to turn the call over to Kirsten to discuss the fourth quarter financial results. Kirsten, the call is yours.
Kirsten Hoover
Thank you, MJ. We ended 2023 with $340 million of cash and cash equivalents and reported GAAP net income of 67.1 million or $0.58 per diluted share for the year. Our GAAP book value at December 31st, 2023 was 589.6 million or $5.90 per share. Our book value reflects the exercise of the Series B warrants through a combination of no cancellation and limited cash exercise and the conversion of the preferred stock, which occurred on July 13th, 2023 as part of the recapitalization transaction.
Let me now turn to the fourth quarter results. Total revenues were $92.3 million compared to 13.1 million in the same quarter last year. Let me break this down. Intellectual property business generated 82.8 million in licensing and other revenues during the quarter compared to $2.5 million in the same quarter last year, reflecting the licenses and subsequent payments. M Jay has mentioned, print SaRonix generated $8.6 million in revenue during the quarter compared to $10.6 million in the same quarter of last year. Benchmark generated $0.8 million in revenue in the quarter. Subsequent the completion of the acquisition, which closed on November 13th, 2023, general and administrative expenses were 10.6 million compared to $15.9 million in the same quarter of last year, with the 33% decrease due to the decrease in costs related to the Starboard recap transaction and a decrease in severance expense, operating income of $55.9 million compared to an operating loss of 14.5 million in the same quarter of last year. With the increase due to higher revenues. Generated print tronic contributed 0.5 million in operating income, which included $0.7 million of noncash depreciation and amortization expense. Benchmark contributed 0.1 million operating loss, which included $0.2 million of noncash depreciation and depletion expense, as well as $0.1 million of other non-cash charges. Gaap net income of 74.8 million or $0.75 per diluted share, compared to GAAP net loss of $18.4 million, or $0.5 per diluted share in the fourth quarter of last year, net income included $12.6 million in unrealized gains related to the increase in the share price of certain holdings and the Aerex forward sale contracts.
Turning to the full year results, total 2023 revenues were 125.1 million compared to $59.2 million in the prior year period from Chronix generated 35.1 million in revenue compared to $39.7 million last year. Intellectual property business generated 89.2 million in licensing and other revenue compared to $19.5 million last year.
General and administrative expenses decreased to 43.7 million compared to 52.7 million last year due to the decrease in compensation costs related to reduced headcount and a decrease in legal and other fees related to the Starboard recap agreements. Operating income was 20 points 9 million compared to operating loss of $40.1 million in the prior year period. Gaap net income was 67.1 million, or $0.58 per diluted share compared to GAAP net loss of 125.1 million or $3.13 per diluted share last year. Net income included 10.9 million in realized losses offset by $31.4 million in unrealized gains related to the increase in the share price of certain holdings and the ARX forward sale contract company recognized noncash income of 8.2 million related to the changes in the fair value of the warrants and embedded derivatives and gain on exercise of the Series B warrants for the year, including the AERx forward sale contract, Acacia generated $19 million in gains from the Life Sciences portfolio. As of December 31st, 2023, our NOL totaled approximately 18 million. We will continue to evaluate the most efficient ways to maximize this asset.
Turning to the balance sheet, cash, cash equivalents and equity securities at fair value totaled $403.2 million at December 31st, 2023, compared to EUR349.4 million at December 31st, 2022 Of note, during the quarter, we paid 10 million for the acquisition of Benchmarx. All of our receivables related to the license agreements executed in the fourth quarter of 2023 were received in 2024.
Equity securities without readily determinable fair value totaled $5.8 million at December 31st, 2023, which amount was unchanged from December 31st, 2022. Investment securities representing equity method investments totaled 19.9 million at December 31st, 2023, net of non-controlling interests, which amount was unchanged from December 31, 2020 to Acacia owns 64% of mall and J. one, which results in a 26% ownership stake in Biomet pharmaceuticals for Acacia, correct. We continue to believe that cash per share is an important metric for measuring our progress.
As of December 31, 2023, our cash per share stood at $3.40 more details on these results have been made available in the press release issued this afternoon and in our annual report on Form 10 K, which we will file with the SEC later today.
With us, we'd be pleased to take your questions.
Question and Answer Session
Operator
(Operator Instructions) Anthony Stoss, Craig-Hallum.
Anthony Stoss
Good afternoon, Andrew. The question I get asked from investors. The most is whether or not you guys are still open and actively looking for kind of non-oil and gas related potential acquisitions, Industrial Technology, or if you're going to go headlong into oil and gas oil and gas. And then I have a couple of follow-ups.
MJ McNulty
Yes, hey, nice to Nice to hear your voice. So so so we are not becoming an oil and gas company as we've always said, we're opportunistic and we're seeing a lot of opportunities in oil and gas right now. We really like this revolution acquisition, we think are a lot of interesting elements one.
It enables the team to do what they do really well is take existing producing reserves and manage them better in order to increase the earnings from those reserves.
And it's very similar to the way we look at companies outside of oil and gas. So the team philosophically is aligned on this also has this, I'll call it an option and debt that was included with the deal and on this Cherokee play, which we think is really interesting. And so we were very enthusiastic to do this. We will take some portion of our capital and continue to invest it in this strategy where we see really good deals and but not with the intent of necessarily becoming oil and gas business with the intent of being opportunistic. And we we mentioned we have a really strong pipeline of other opportunities outside of oil and gas does include we don't have as much healthcare IT, but we do have a reasonable number of things that we're spending time on in the industrial space and the technology space.
So we're going to we'll continue to pursue those and hopefully acquire some of those businesses.
Anthony Stoss
And then just one question, oil and gas, and they've got another one after that. The new benchmark investment closes in Q2. What's an expected either quarterly or kind of annual revenue that you think you can drive off that investment?
MJ McNulty
I mean, we kind of look at it as as cash flow. And I think we said 45 at the asset level, which is kind of before G&A. Now we're rolling that into the benchmark platform, which had some G&A against it. I think we need to add a little bit to it, but then there, there's not much the investment into that business. And so from a cash flow standpoint, we own it. We consolidate all of it because of our ownership position.
We own 73% of it.
So I think you can take that number and kind of you can it's pretty consistent. So you can kind of divide it by four and look at the quarterly number.
And then on the WiFi six, congrats on the new license. I think that makes two substantial licensees today. How many more do you have on that list that you could target?
We think so we we we think there's a lot of opportunity left in that portfolio on the strength that we have coming off of that, the TP. link jury award was public. And then we've had a couple few substantial agreements that two came subsequent to that one came early in the life of the portfolio from both. We still think there's a material amount of incremental capital that we can generate from from that WiFi portfolio. And and recall we own four other portfolios that don't have the same magnitudes associated with them, but have a very consistent set of settlements and licenses that generate a nice level of base cash flow data are
Anthony Stoss
That's all for my questions and best of luck, guys. Thank you.
MJ McNulty
Yes, thanks, Tony.
Operator
Brett Reiss, Janney Montgomery Scott.
Brett Reiss
Yes, hi, MJ. Hi, Kirsten. If we're at a good, good, good work. Keep it up. Yes.
Piggybacking on on on Tony's questions, you've tried to get a sense of how much juice is left to be squeezed from the right bar and you have that WiFi six portfolio in the third quarter, you mentioned there was seven trial dates are they still on the calendar or did or with some of those part of the 82 million settlement.
So I currently Go Go, go ahead, care.
Kirsten Hoover
So yes, sir, currently we have one trial date within the next year. So bridging from the seven that we reported for the Q. three earnings, some of those were settled in Q4 and some were settled in Q1, but the current number is one.
MJ McNulty
Okay.
So Brett, but it's important to remember there that not all settlements happen, you know, in a trial process there there are kind of settlements that happen outside of the legal process as well.
Okay.
Brett Reiss
And the gorilla in the room, Apple, are they still a defendant or would they text their part of the settlement?
Yes. I mean, look, I we can't we can't comment on that, Brett. I appreciate the nature of the question. We just can't comment on that.
Okay.
Now the NOL was $85 million last quarter. And we are and how much is left out?
Kirsten Hoover
It's around 18 million.
Brett Reiss
Okay.
And I noticed an eight K was filed. Are you gone to the protocol of being able to buy back stock on a 10 B. five, we should increase your flexibility and not having these narrow windows constrict, your being able to buybacks, stock Is that true?
MJ McNulty
Yes, Brett, you're right there.
The Board did authorize a buyback, which which was press release and we we're looking at executing on that.
Brett Reiss
Right.
Right up. Did you buy back any stock in this last quarter?
MJ McNulty
No, we didn't buy any stock in the last quarter.
Brett Reiss
Okay.
From the the remaining private equity positions from the UK biotech portfolio, can you give us just a little bit more color on what remains and could there be any kind of hidden positive surprises that we could enjoy in the near to intermediate term?
Future on the remaining portfolio, I yes.
So when when you look at the remaining positions, it's really and I think we've disclosed this in the past, it's ammo on which we're enthusiastic about, which is a drug for pediatric myotonic dystrophy. I know there's there's some news out there on the drug and some of the developments on that drug, which I'm sure you found.
MJ McNulty
So we're enthusiastic about that.
And there's this ownership share we have in biomass and the best way our shareholders usually figure, I can kind of kind of get more color on why that is mail-in Pharmaceuticals, which is an Irish company actually publishes on this there, and they're an owner and the cap table with us as well.
On look, we're enthusiastic about that one as well.
So I can't make any promises on and surprises, but we certainly think that they're both very attractive businesses and assets.
It's up.
Brett Reiss
Great.
Thanks for taking my questions. I'm going to drop back in queue, but good show on the quarter.
Yes, no, thanks.
MJ McNulty
We appreciate it.
Operator
(Operator Instructions) Todd South, 88 Management LLC.
Todd, your line is you congratulations on a very robust Q4 and you made reference items settlement on the WiFi patent in Q one. And am I to assume those numbers are not reflected in the 82 million that you referenced for Q4?
Yes, yes. Sorry, data. And working with the good delineation we were trying to make was this settlements that we made in Q4. We received the cash for those in February and early March. So we just wanted to be clear, this settlement was at 23 events.
MJ McNulty
The receipt of proceeds from that sentiment was 24 events.
Nokia Nokia, on just trying to I'm someone who's very involved in this name takes me this question of what makes this company uniquely positioned to create shareholder value in energy.
And as a follow-up, what is the market not seeing or believing with this strategy? And I guess it's because of the somewhat ephemeral bumps and the total giveback that we noticed over the last some couple of weeks subsequent the announcement?
MJ McNulty
Yes.
I think that the two-part question I'll take the second part first, which is I don't want to speculate on that. They take, you know, you may have a view and others that are around the table and shareholders in here may have a view that they can share with your friends on the first question, as you know, our our model is to partner with really excellent operating executives and accomplished operating executives to pursue these opportunities and that's exactly what we've done in benchmark. We've partnered with somebody that we've known for a long time that has been long-term successful in the oil and gas space. And there they are kind of our eyes and ears on the ground in the oil and gas space where we allocate capital. So that's kind of piece one piece to come. Unlike in general oil and gas. We are not pursuing a acquiring land drilling wells business model, which means we're looking at harvesting cash flow from these assets. And so it's really operating the wells better than the prior owners and operated them and the wells and the packages of wells that we're acquiring with benchmark our legacy kind of under a loved undermanaged under work fields where the team and we have as very successfully over a long period of time, been able to run those wells better. It was on a less expensive basis in order to generate more cash from them and the valuations that we're buying them at are Gary attractive.
Great.
Last question or sell-side coverage, we appreciate Tony covering the stock at what point do you think we could start shining a light and trying to attract down other analysts or potentially be more aggressive at pursuing the buy side to them?
Look at this undervalued very attractive investment?
Yes, I think that's a great question. And it's one that we ask ourselves the log. We for those that have been with us for the last year and been on their earnings calls. We told you what we were going to do and you said, okay, go do it. And now we've started to do it. And so we're getting to the point where we can start having those conversations about how people view us now that we're a business that's executing against the strategy and sort of telling you what strategy we're going to execute against. And so we are reluctant to pound the table and wave our arms in the air from people that cover us until three, we have to earn the right to be covered and for the market to pay attention to us.
Understood. Thank you.
Rob Fink
Continued the good work.
MJ McNulty
Thanks. I appreciate the questions.
Operator
Thank you very much. Well, that appears to be the end of our question-and-answer session. I will now hand back over to MJ for any closing.
MJ McNulty
Jenny, thanks very much, everyone. Thank you for joining us this afternoon. Following us, believing in us. We look forward to talking to you next quarter. Thank you very much.
Operator
And that does conclude today's conference. You may now disconnect your phone lines and have a wonderful rest of the day. Thank you for your participation.
