Acacia Research Corporation (Nasdaq: ACTG) (“Acacia” or the “Company”) today reported financial results for the three and six months ended June 30, 2022.

Key Business Highlights

• Generated $16.7 million in consolidated revenue for the quarter, down from $17.4 million in revenue in the second quarter of 2021.
• Recorded $11.5 million in realized gains during the quarter, including $5.2 million from the Life Science Portfolio.
• Repurchased 6.1 million shares at an average price of $4.64 as part of $40.0 million repurchase authorization. The Company completed this buyback subsequent to the end of the quarter.
• In April 2022, Mycovia Pharmaceuticals received FDA approval on its drug VIVJOA™ (otesecanazole) for the treatment of recurrent vulvovaginal candidiasis, triggering a $26.7 million milestone payment to Acacia for its share of ownership of Viamet Pharmaceuticals, anticipated to be received later in 2022.
• Repaid $50 million in debt owed to Starboard Value LP, during the quarter.
• Realized and unrealized gains from the Life Science portfolio totaled $267 million at June 30, 2022, based on the value of public holdings and the carrying value of the Private Securities.

Clifford Press, Chief Executive Officer, stated, “Our strategic partnership with Starboard Value LP has generated significant value since it was initiated two and a half years ago. We have formed a Special Committee of the Board of Directors that is being advised by independent advisors to review the Starboard relationship with the objective of establishing a simplified capital structure with increased capital resources for the next phase of the Company’s growth.”

“Recent economic conditions, including rising interest rates, have increased the quantity and quality of companies in our pipeline,” added Mr. Press. “We evaluate ongoing transactions in light of changing business conditions and adjusted valuations and maintain a strong capital base to act on opportunities.”

Second Quarter 2022 Financial Summary:

• Total revenues were $16.7 million, compared to $17.4 million in the same quarter last year.
  • Printronix generated $8.7 million in revenue in the quarter.
  • The Intellectual Property business generated $8.1 million in licensing and other revenue during the quarter, compared to $17.4 million in the same quarter last year.
• General and administrative expenses were $10.7 million, compared to $6.5 million in the same quarter of last year due to the inclusion of Printronix operating expenses, as well as increased business development and personnel expenses related to the Company’s transaction organization. Deal costs are expensed as incurred, and not capitalized.
• Operating loss of $5.7 million, compared to operating income of $1.6 million in the same quarter of last year, primarily as a result of the Company’s acquisition infrastructure buildout.
  • Printronix contributed $1.1 million in operating loss, a reflection of seasonality.
• GAAP Net loss of $61.5 million, or $1.44 per diluted share, compared to net income of $19.7 million, or $0.23 per diluted share, in the second quarter of last year.
  • Net loss included $11.5 million in realized gains, offset by $57.6 million in unrealized losses, related to the decline in share price of certain holdings, as well as the reversal of unrealized gains previously recorded for shares sold during the quarter for realized gains.
  • The Company recognized a non-cash expense of $35.1 million related to the change in fair value of the Starboard warrants and embedded derivative liabilities due to the appreciation in Acacia’s stock price during the quarter.

Balance Sheet and Capital Structure

• Cash, cash equivalents and equity investments measured at fair value totaled $390.3 million as of June 30, 2022 compared to $670.7 million as of December 31, 2021.
• Equity securities without readily determinable fair value totaled $5.8 million at June 30, 2022, compared to $5.8 million at December 31, 2021.
• Investment securities representing equity method investments totaled $48.0 million at June 30, 2022 (net of noncontrolling interests), compared to $19.9 million at December 31, 2021. The increase relates to milestone payments during the quarter earned by MalinJ1 through its interest in Viamet, but not yet received. Acacia owns 64% of MalinJ1.
• Total indebtedness, which represents the Senior Secured Notes issued to Starboard Value LP, was $115.8 million at June 30, 2022. During the second quarter, the Company repaid $50 million in Starboard Notes. Subsequent to the end of the quarter, the Company repaid an additional $55 million in Starboard Notes.
• The Company’s current book value totaled $268.2 million, or $6.60 per share, as of June 30, 2022, compared to $345.5 million, or $7.42 per share, as of March 31, 2022, and $430.5 million, or $8.80 per share, as of December 31, 2021. Acacia’s current book value reflects the impact of the outstanding warrant and the embedded derivative liabilities. Assuming full exercise of all issued derivatives, Acacia’s pro forma book value would rise to $911.3 million, or $5.87 per share, down from $952.2 million, or $5.91 per share, as of March 31, 2022, and $1.1 billion, or $6.51 per share, as of December 31, 2021. Pro forma book value per share has declined by 10% during the first half of the year primarily due to the decline in the value of the Company’s Oxford Nanopore Technologies holding.

Acacia has generated $407.9 million in proceeds from sales and royalties of the Life Science Portfolio through June 30, 2022, which was purchased for an aggregate price of $297 million. The remaining positions in the Life Science Portfolio represent $155.9 million in book value as shown below:

Pro Forma Book Value and Changes to Derivative Valuations

As of June 30, 2022, book value was $268.2 million and there were 40.6 million shares of common stock outstanding, for a book value per share of $6.60, down from $7.42 as of March 31, 2022, and $8.80 as of December 31, 2021. The decrease since December 31, 2021 is due to the decrease in our asset values, primarily cash and equity securities at fair value. Total liabilities for warrants and preferred stock to be eliminated upon exercise or expiration of all such warrants and preferred stock were $115.3 million as of June 30, 2022. All of these derivative liabilities would be eliminated upon exercise or expiration of all such warrants and preferred stock.

Under GAAP, book value reflects the impact of the liabilities associated with potential issuance of shares related to the exercise of the Company’s warrants and conversion of the Company’s convertible preferred stock. As the value of those liabilities varies with fluctuations in the Company’s stock price, management believes a presentation of book value assuming full exercise of all warrants and conversion of all preferred stock presents a useful measure of book value for investors. However, this calculation has its limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of book value calculated in accordance with GAAP.

Book value as of June 30, 2022 reflects the impact of the following:

• $115.8 million of face value of Notes issued to Starboard Value LP, all of which may be used to exercise Series B warrants at $3.65 per share;
• $35.0 million in face value of Series A preferred stock issued to Starboard Value LP; and
• $115.3 million of warrants and embedded derivative liabilities associated with all preferred stock and warrants held by Starboard Value LP, to be eliminated upon exercise or expiration of all such warrants and preferred stock.

Assuming Starboard Value LP converted all preferred stock and exercised all warrants:

• $115.0 million of liabilities attributable to the Notes would be eliminated, and 31.5 million shares of common stock would be issued;
• $35.0 million in face value of preferred stock would be eliminated, and 9.6 million shares of common stock would be issued;
• $115.3 million of embedded derivative liabilities attributable to the warrants and preferred stock would be eliminated; and
• $377.8 million of cash would be added upon exercise of the remaining Series B warrants and Series A warrants, and 73.5 million shares of common stock would be issued.

The expected impact of this would be an incremental $643.1 million in book value, and an incremental 114.6 million of shares outstanding. Assuming such conversion and exercise, pro forma book value would be $911.3 million, and diluted shares outstanding would be 155.2 million, resulting in book value per share of $5.87, as compared to $5.91 as of March 31, 2022, and $6.51 as of December 31, 2021. The $5.25 per share cash exercise feature of 68.5 million Series B warrants will expire on August 25, 2022.

Share Repurchase Program

As previously reported, effective March 31, 2022, the Company’s Board of Directors approved a new stock repurchase program for up to $40.0 million of shares of common stock. During the quarter, the Company repurchased 6.1 million shares at an average price of $4.64 per share, for a total of $28.5 million. Subsequent to the end of the quarter, the Company completed the $40 million authorization. As of August 8, 2022, the number of shares outstanding was 38.3 million. The Board will continue to evaluate uses of capital in the future.

Investor Conference Call:

The Company will host a conference call today, August 11, 2022 at 11 a.m. Eastern Time (8 a.m. Pacific Time).

To access the live call, please dial 888-506-0062 (U.S. and Canada) or 973-528-0011 (international) and if requested, reference conference ID 536777. The conference call will also be simultaneously webcasted on the investor relations section of the Company’s website at http://www.acaciaresearch.com under Events & Presentations. Following the conclusion of the live call, a replay of the webcast will be available on the Company's website for at least 30 days.

About the Company

Acacia is a permanent capital platform with a strategy to purchase businesses based on the differentials between public and private market valuations. Acacia leverages its (i) access to flexible capital that can be deployed opportunistically as a result of its strategic partnership with Starboard Value LP, (ii) disciplined focus on identifying opportunities where it can be an advantaged buyer, initiate a transaction opportunity spontaneously, avoid a traditional sale process and complete the purchase of a business, division or other asset at an attractive price, (iii) willingness to invest across industries and in off-the-run, often misunderstood assets that suffer from a complexity or multi-factor discount, (iv) relationships and partnership abilities across functions and sectors, and (v) strong expertise in corporate governance and operational transformation. Acacia seeks to identify opportunities where it believes it is an advantaged buyer, where it can avoid structured sale processes and create the opportunity to purchase businesses, divisions and/or assets of companies at an attractive price due to Acacia’s unique capabilities, relationships or expertise, or Acacia believes the target would be worth more to it than to other buyers. Additional information about Acacia and its subsidiaries is available at www.acaciaresearch.com.

Safe Harbor Statement

This news release contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are based upon the Company’s current expectations and speak only as of the date hereof. The Company’s actual results may differ materially and adversely from those expressed in any forward-looking statements as a result of various factors and uncertainties, including the Company’s ability to successfully implement its strategic plan, the ability of the Company to renegotiate the terms of its relationship with Starboard Value LP, the ability to successfully identify and complete strategic acquisitions of businesses, divisions, and/or assets, the ability to successfully develop licensing programs and attract new business, changes in demand for current and future intellectual property rights, legislative, regulatory and competitive developments addressing licensing and enforcement of patents and/or intellectual property in general, general economic conditions, including the impact of the COVID-19 pandemic and the success of the Company’s investments. The Company’s Annual Report on Form 10-K, and other SEC filings discuss some of the important risks and uncertainties that may affect the Company’s business, results of operations and financial condition. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

The results achieved by the Company in prior periods are not necessarily indicative of the results to be achieved by us in any subsequent periods. It is currently anticipated that the Company’s financial results will vary, and may vary significantly, from quarter to quarter.

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