Acacia Research Corp (ACTG) Q2 2021 Earnings Call Transcript

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Acacia Research Corp (ACTG 0.20%)
Q2 2021 Earnings Call
Aug 16, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to your Acacia Research Second Quarter Financial Results Conference. [Operator Instructions] And the floor will be open for your questions and comments following the presentation. [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.

Jeff Stanlis -- Investor Relations

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 Form -- 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.

Clifford Press -- Chief Executive Officer

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, Healthcare 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 have 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 multi-factor transactions. We are a corporate acquirer and are positioned to be an attractive packet 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 will now turn the call over to Al Tobia, our Chief Investment Officer to speak to our existing holdings. Al?

Alfred V. Tobia -- Chief Investment Officer

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 30th, we held positions in two 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 30th. Importantly, we continue to hold meaningful positions in four additional private Life Sciences companies, including Oxford Nanopore Technologies.

Oxford Nanopore disclosed earlier this year that it state -- started the process of preparing for an IPO and that while the timing of the potential IPO is dependent on market conditions and other matters not fully within its control, Oxford Nanopore expects that the IPO would occur on the second half of 2021 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 one 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?

Richard Rosenstein -- Chief Financial Officer

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 31st, 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 30th.

As these liabilities would be extinguished upon exercise or exploration of these warrants and preferreds [Phonetic], 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 31st. Debt was $145.5 million in senior secured notes issued to Starboard Value. More detail on these results have been made available on 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?

Clifford Press -- Chief Executive Officer

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 with the valuation fit and a variety of other factors and important -- factors as important and we will not rest to make an acquisition for expedience.

We are now happy to answer questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And first we go to the line of Anthony Stoss with Craig-Hallum. Please go ahead.

Anthony Stoss -- Craig-Hallum -- Analyst

Hi, gentlemen. A couple of quick questions for you. Most recently you sell a patent litigation with a network equipment supplier. Can you confirm that your June revenues were impacted by the settlement and could we expect kind of monies going forward? Then I have a couple other questions after that?

Clifford Press -- Chief Executive Officer

Rich, why don't you take that one?

Richard Rosenstein -- Chief Financial Officer

Yeah. Yeah, 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 one 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.

Anthony Stoss -- Craig-Hallum -- Analyst

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

Richard Rosenstein -- Chief Financial Officer

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 payment, some do have recurring revenue characteristics to them, but by and large, our transactions are typically upfront payments.

Anthony Stoss -- Craig-Hallum -- Analyst

Okay.

Clifford Press -- Chief Executive Officer

Tony, 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.

Anthony Stoss -- Craig-Hallum -- Analyst

Meaning with other companies Clifford or with the same existing...

Clifford Press -- Chief Executive Officer

With other licensees.

Anthony Stoss -- Craig-Hallum -- Analyst

Okay. And then shifting gears, 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 and what they're currently valued at versus what you are and why you guys aren't? I guess maybe why you are valuing it more conservatively?

Clifford Press -- Chief Executive Officer

Yeah. There is two --

Richard Rosenstein -- Chief Financial Officer

Yeah. I can...

Clifford Press -- Chief Executive Officer

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

Richard Rosenstein -- Chief Financial Officer

Yeah. Thank you, Clifford. So, Tony, you're right, we -- as we indicated at 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 or shares, whether they'd 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 has been no observed transactions environment per se and so we're -- we continue to carry that as at cost and you can see in our release the -- three 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 of $25.4 million. So we're not adopt -- we have not adopted a fair value approach to each of our private holdings.

Anthony Stoss -- Craig-Hallum -- Analyst

Okay. And then, shifting gear --

Clifford Press -- Chief Executive Officer

And I will say -- just to finish on your question about the difference in evaluation, Rich explained why, we do not disagree with the Malan's valuation, that product is a pretty significant advance for in women's health, that drug and we do think that Malan have a viable basis for recording their valuation.

Anthony Stoss -- Craig-Hallum -- Analyst

Okay. Hey Clifford, kind of 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 a year and a half, with no acquisitions to show yet. I know you guys have been working hard. Any color either you've been out bid or you -- you're very active now or you think you're getting closer now, anything would be helpful, because I continue to get lots of calls from shareholders wondering, a year and a half in, while we still don't have anything to show yet?

Clifford Press -- Chief Executive Officer

Sure. It's a legitimate question and the -- anyway 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, because Starboard were extremely instrumental in doing the Woodford portfolio acquisition, which is -- 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 still 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.

Anthony Stoss -- Craig-Hallum -- Analyst

Okay. Thanks for that. Thanks, guys.

Operator

[Operator Instructions] And next we go to the line of Brett Reiss with Janney. Please go ahead.

Brett Reiss -- Janney -- Analyst

Good morning, gentlemen.

Clifford Press -- Chief Executive Officer

Hello, Brett.

Brett Reiss -- Janney -- Analyst

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?

Clifford Press -- Chief Executive Officer

Not sure where that, where you got those numbers from, Brett. We don't generally refer to that type of investment in terms of revenue. We refer to it in terms of where we expect to build book value over time and we will continue to emphasize that.

Brett Reiss -- Janney -- Analyst

Okay.

Richard Rosenstein -- Chief Financial Officer

Brett, just, I think, maybe what you -- 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.

Brett Reiss -- Janney -- Analyst

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?

Clifford Press -- Chief Executive Officer

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

Brett Reiss -- Janney -- Analyst

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

Clifford Press -- Chief Executive Officer

Brett, you have 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.

Brett Reiss -- Janney -- Analyst

Thank you for taking my questions.

Operator

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

Kevin Sami -- Sami Capital -- Analyst

Good morning. Thanks for taking my question. 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?

Clifford Press -- Chief Executive Officer

No, we've not been diluted.

Kevin Sami -- Sami Capital -- Analyst

Okay. So you've participated in the raise?

Clifford Press -- Chief Executive Officer

Yeah.

Kevin Sami -- Sami Capital -- Analyst

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

Clifford Press -- Chief Executive Officer

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

Kevin Sami -- Sami Capital -- Analyst

Understood. Thank you.

Operator

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

Clifford Press -- Chief Executive Officer

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.

Operator

[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

Jeff Stanlis -- Investor Relations

Clifford Press -- Chief Executive Officer

Alfred V. Tobia -- Chief Investment Officer

Richard Rosenstein -- Chief Financial Officer

Anthony Stoss -- Craig-Hallum -- Analyst

Brett Reiss -- Janney -- Analyst

Kevin Sami -- Sami Capital -- Analyst

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