6/06/2017

Unique Value, No Catalyst, Net Cash 64% of Market Cap, Insider Buying, 52 WK low: Acacia Research (ACTG)


Acacia Research (ACTG) is an intermediary in the patent market. It facilitates efficiency and delivers financial gains for patent owners by leveraging its legal and technology expertise.

"Acacia signed more licensing deals generated more revenue and has more experience analyzing, valuing and monetizing IP than just about anyone focused in the IP space. We have been challenged by the largest, smartest, best capitalized companies and law firms in the world and have a proven track record of success." 

Acacia only represents prejudiced patent owners that prove in courts to be valid and infringed. As a result, Acacia has returned over $750 million for patent partners. So far, over 1,530 license agreements executed across 192 patent portfolios. Up until now, Acacia generated near 1.40 billion in gross licensing revenue.

It's A+ financial position with no real direct competition, asset light business model and historical although uneven success can offer investors uncommon value. Acacia benefits from a low risk high reward service model where companies, inventors, or research labs use their expertise to fully monetize their IP licensing. The service is mutually beneficial. Customer include small companies, sole inventors, or research labs. Further, large corporations can and do use their expertise to fully license their IP business.

During the Q1 2017 earnings call management commented on recent subsequent Q1 wins.
Acacia subsidiary Saint Lawrence Communications received a 9.2M jury verdict against MOTOROLA. A second trial seeking additional damages because the infringement was found willful is scheduled within the next few weeks. 

Subsidiary Cellular Communications Equipment (CCE) patent trial against Apple begins on July 31 2017. CCE succeeded with its Apple litigation in Germany. Initially Apple asserted the suit was unjustified. The reason being the European counterparts is the same as US patent dispute lost during the September infringement verdict. The related German infringement trial against Apple occurs late this year. This win favorably impacts the new US Apple suit lost September of last year that crushed the stock price. Read below and immediately following John Rogers (Ariel) comments on the original lost trial.

"Acacia lost the first trial because the jury lacked intellectual patent knowledge. We believe a favorable verdict is merely delayed and not permanently lost. We have added to the shares because we remain confident in the original thesis." Rogers' January investor comments

Looking forward, Acacia subsidiary Limestone Memory Systems has infringement cases pending against Micron and other defendants. Saint Lawrence found success in Q1 with a patent action in Germany.  Specifically, Germany court granted an injunction and enforcement proceeding against both Motorola and ZTE. Saint Lawrence has a trial scheduled against Apple in February of 2018.



Quarter 1, 2017 conference call financial highlights;

Revenues declined 64% (8.9M versus 24.70M). The Q1 non-gaap net loss was 4.2m or .08. after eliminating non-cash charges for amortization and stock options. Average margins for the first quarter were 85% as compared to 77% in the comparable prior quarter. Fixed SGA expenses except non-cash charges, and severance expected to be between $11.5 million to $12 million for 2017. Even with the negative results cash totaled $156.8M or 2.88 per share and net cash per share is 2.55. Management's optimism focused on the current patent assets coupled with recent court victories post Q1 close.

Acacia focus is to leverage their IT expertise. They plan to employ their experience and proprietary data to increase business in areas of IP outside patent licensing. Patent licensing will continue to be an important part of their business. But, it's a tiny subset of the whole patent ecosystem and current opportunities. High growth technology companies can benefit from Acacia's patent expertise, skills and industry relationships

An example of the expanded business strategy, loans made to Veritone. Two loans for 20M in 2016 and an 8M bridge loan before the Veritone (VERI) IPO on 05/26/17. The principal and accrued interest under both Acacia's $20.0 million secured promissory note and Veritone's $8.0 million line of credit converted to equity. Per the 05/26/17 SEC form 4 filing ACTG owns 4,119,521 shares of VERI. The total shares owned include free shares, exercised warrants. I don't have the exact total average cost per share. But most shares purchased at 13.60 and likely an average closer to 10. VERI shares IPOed near 15. Since VERI IPOed on 05/24/17 details are sparse on the VERI future relationship. The current market price for VERI is 13.30. I hope the ACTG sold VERI shares during the IPO. Potential positive news on Veriton, selected as 2016 Red Herring Top 100 North America Award Winner http://prn.to/1XdtrOl. Veritone's proprietary technology protected by over 90 issued and pending patents. The patent technology is likely reason for the relationship.

"We will continue to seek high quality patent licensing opportunities, but we believe alternative IP opportunities will be larger, less risky, more predictable, and more profitable than IP licensing business alone. "




















Net cash is $2.55. Cash per share = $2.88, Current Liabilities = $0.33 with no long term debt.
























The total insider buys for 2016 and YTD 2017 is $6,029,529 or 1,310,235 shares(~2.31% of total shares outstanding).


































John Rogers from Ariel owns 3,413,174 shares at an average price of 12.85. $13,413,174 or 6.75% of TSO.

January 2016 John Rogers commented on Acacia Research. "Intellectual property and patent expert Acacia Research Corp. (ACTG) stock fell -52.14% when it lost a lawsuit that many had expected it to win. In our view, Acacia lost the first trial because the jury lacked intellectual patent knowledge. We believe a favorable verdict is merely delayed and not permanently lost; the lawsuit will be refiled in Germany, where it will be decided by a panel of judges who have technical expertise. We have added to the shares because we remain confident in the original thesis."


Negatives:

Equity Investment in Veritone is not supported by fundamentals. Its highly speculative. 

Stock option expense during Q1 2017 increased 23%. These stock options have market based performance conditions.

Another interim CEO after resignation of interim CEO Martin Key. Key was unwilling to relocate his family to California. Key replaced CEO Matthew Vella in 2016.

Poor visibility for the timing of revenues and profitability. This makes valuation speculative.



Long ACTG




5 comments:

Anonymous said...

I think the following ruling will further increase poor visibility for the timing of revenue and profitability (and make it harder/more expensive to recover).
https://www.nytimes.com/2017/05/22/business/supreme-court-patent-lawsuit.html?mcubz=0

Anonymous said...

my understanding of that court in east TX is a lot of commerce has been built around the patent suit “industry”. What will become of those ancillary merchants and their investments? IP seems to have strayed so far from it’s founding intent.

ShadowStock said...

Thanks for the NYT article!

Yes, I’m aware of federal court in East Texas and the change in patent litigation. I would like to think ACTG is not a patent troll. Today they announced a license agreement with Medtronic. This is part of their strategy going forward. License and avoid litigation.

Patents will always be an important part of capitalism along with defending against companies stealing the work of other inventors.

Foul Wall Street said...

Have you ever looked at AmBase?

ShadowStock said...

No, I have not looked into AmBase. But, the auditors put a going concern opinion in their audit report.