Acacia(ACTG) - 2025 Q2 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements - Forward-looking statements are identified by words such as "anticipate," "believe," "estimate," "expect," "may," "plan," and "will," covering areas including business strategies, acquisitions, financial results, litigation, and regulatory matters[7] - Substantial risks and uncertainties could cause future results to differ materially, including inability to acquire or integrate businesses, challenges in retaining employees, adverse developments in operating businesses, and various operational, market, and regulatory risks across its segments[7][11] Part I. Financial Information Item 1. Financial Statements Details the company's consolidated financial statements and notes for periods ending June 30, 2025, and December 31, 2024 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets Highlights (In thousands) | Metric | June 30, 2025 | December 31, 2024 | | :--------------------------------- | :------------ | :---------------- | | Total Assets | $775,546 | $756,394 | | Cash and cash equivalents | $316,721 | $273,880 | | Total Liabilities | $198,075 | $203,775 | | Total Stockholders' Equity | $577,471 | $552,619 | - Total assets increased by $19.2 million, primarily driven by a $42.8 million increase in cash and cash equivalents[14] Unaudited Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations Highlights (In thousands, except per share data) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :------------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Revenues | $51,237 | $25,838 | $175,659 | $50,158 | | Operating Income (Loss) | $(12,385) | $(4,758) | $25,920 | $(6,845) | | Net Income (Loss) attributable to Acacia Research Corporation | $(3,293) | $(8,446) | $20,994 | $(8,632) | | Basic Net Income (Loss) per Common Share | $(0.03) | $(0.08) | $0.22 | $(0.09) | - Total revenues for the six months ended June 30, 2025, increased by 250% year-over-year to $175.7 million, leading to a net income of $21.0 million, a significant improvement from a net loss of $8.6 million in the prior year[17][56] Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity Changes in Stockholders' Equity (In thousands) | Metric | Balance at Dec 31, 2024 | Net Income (6M 2025) | Other Comprehensive Income (6M 2025) | Share-based Awards (Net) | Balance at Jun 30, 2025 | | :----------------------------------- | :---------------------- | :--------------------- | :---------------------------------- | :----------------------- | :---------------------- | | Total Stockholders' Equity | $552,619 | $22,091 | $1,525 | $1,236 | $577,471 | - Total stockholders' equity increased by $24.8 million from December 31, 2024, to June 30, 2025, primarily due to net income and other comprehensive income[14][20] Unaudited Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (In thousands) | Metric | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change | | :------------------------------------------ | :--------------------------- | :--------------------------- | :----- | | Net cash provided by operating activities | $52,545 | $70,977 | $(18,432) | | Net cash used in investing activities | $(451) | $(109,833) | +$109,382 | | Net cash (used in) provided by financing activities | $(10,340) | $85,880 | $(96,220) | | Increase in cash and cash equivalents | $42,841 | $46,897 | $(4,056) | - Net cash provided by operating activities decreased by $18.4 million, while net cash used in investing activities significantly decreased by $109.4 million due to the absence of large asset acquisitions in 2025[21][297][302] Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Description of Business - Acacia is a value-oriented acquirer and operator of businesses in industrial, energy, and technology sectors, focusing on strong free cash flow generation and scalability[22][25] - The company's strategic relationship with Starboard Value, LP provides access to industry expertise and operating partners for acquisition sourcing and evaluation[26] - Acacia operates in four segments: Intellectual Property (patent licensing), Industrial (Printronix printers), Energy (Benchmark oil and gas, 73.5% interest), and Manufacturing (Deflecto specialty products, acquired Oct 2024)[27][32][33][36] Note 2. Summary of Significant Accounting Policies - The consolidated financial statements include Acacia and its wholly and majority-owned subsidiaries, with noncontrolling interests presented separately[39][40] - Revenue recognition varies by segment: IP (granting rights), Industrial (product shipment/service over time), Energy (product control transfer), and Manufacturing (product control transfer)[44][55][62][72] - The company follows the successful efforts method for oil and natural gas producing activities and evaluates goodwill for impairment annually or on an interim basis[86][88] - New accounting pronouncements (ASU 2023-09 and ASU 2024-03) are expected to enhance disclosures but will not materially impact the company's financial statements[106][107] Note 3. Acquisitions - In April 2024, Benchmark acquired upstream assets for $145 million, increasing Acacia's interest to 73.5%[109] - In October 2024, Acacia acquired Deflecto for $103.7 million, funded by a $48.0 million secured term loan and cash on hand[112][113] - The Deflecto acquisition resulted in $16.8 million in goodwill, which was subsequently decreased by $3.8 million due to measurement period adjustments in Q1 2025[114][116] Note 4. Equity Securities Equity Securities Fair Value (In thousands) | Metric | June 30, 2025 | December 31, 2024 | | :--------------------------------- | :------------ | :---------------- | | Equity securities - other common stock | $21,467 | $23,135 | - The company fully exited its Arix Bioscience PLC position in January 2024, selling shares for $57.1 million[122] - For the six months ended June 30, 2025, the company reported a net realized and unrealized gain of $0.95 million from equity securities, a significant improvement from a $2.6 million net loss in the prior year[17][278] Note 5. Inventories Inventories (In thousands) | Category | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Raw materials | $6,737 | $8,575 | | Subassemblies and work in process | $1,171 | $1,481 | | Finished goods | $17,816 | $17,429 | | Total inventories | $25,724 | $27,485 | - Total inventories decreased by $1.8 million from December 31, 2024, to June 30, 2025, primarily due to reductions in raw materials and subassemblies/work in process[124] Note 6. Property, Plant and Equipment, Net Property, Plant and Equipment, Net (In thousands) | Category | June 30, 2025 | December 31, 2024 | | :--------------------------------- | :------------ | :---------------- | | Total Property, Plant and Equipment | $29,572 | $28,791 | | Accumulated depreciation and amortization | $(6,821) | $(4,926) | | Property, plant and equipment, net | $22,751 | $23,865 | - Total depreciation and amortization expense for property, plant and equipment increased from $0.6 million for the six months ended June 30, 2024, to $2.5 million for the same period in 2025, with Manufacturing Operations contributing $2.1 million[125] Note 7. Oil and Natural Gas Properties, Net Oil and Natural Gas Properties, Net (In thousands) | Category | June 30, 2025 | December 31, 2024 | | :--------------------------------- | :------------ | :---------------- | | Proved oil and gas properties | $202,838 | $199,559 | | Unproved oil and gas properties | $4,786 | $4,786 | | Accumulated depletion and depreciation | $(20,529) | $(12,665) | | Oil and natural gas properties, net | $187,095 | $191,680 | - Total depletion and depreciation expense for oil and natural gas properties increased from $3.9 million for the six months ended June 30, 2024, to $7.9 million for the same period in 2025, reflecting the full impact of the Revolution Transaction assets[126] Note 8. Goodwill and Other Intangible Assets, Net Goodwill (In thousands) | Segment | Beginning Balance (Dec 31, 2024) | Effect of FX Translation | Measurement Period Adjustments | Ending Balance (Jun 30, 2025) | | :----------------------- | :------------------------------- | :----------------------- | :----------------------------- | :----------------------------- | | Industrial Operations | $7,541 | — | — | $7,541 | | Energy Operations | $1,449 | — | — | $1,449 | | Manufacturing Operations | $20,349 | $272 | $(3,829) | $16,792 | | Total | $29,339 | $272 | $(3,829) | $25,782 | Other Intangible Assets, Net (In thousands) | Category | June 30, 2025 | December 31, 2024 | | :--------------------------------- | :------------ | :---------------- | | Patents | $25,845 | $21,024 | | Customer relationships | $23,885 | $22,785 | | Trade name and trademarks | $10,659 | $10,248 | | Developed technology | $930 | $980 | | Favorable leases | $324 | $392 | | Total other intangible assets, net | $61,643 | $55,429 | - Total other intangible asset amortization expense increased from $7.5 million for the six months ended June 30, 2024, to $11.7 million for the same period in 2025[130] - During the six months ended June 30, 2025, Intellectual Property Operations capitalized $15.0 million in patent and patent rights costs by exercising an exclusive option[132] Note 9. Accrued Expenses and Other Current Liabilities Accrued Expenses and Other Current Liabilities (In thousands) | Category | June 30, 2025 | December 31, 2024 | | :------------------------------------ | :------------ | :---------------- | | Accrued consulting and other professional fees | $1,367 | $2,602 | | Income taxes payable | $6,069 | $3,832 | | Sales and tax and fees payable | $5,217 | $4,818 | | Interest accrual | $1,585 | $1,162 | | Short-term lease liability | $4,081 | $3,563 | | Total | $22,677 | $20,575 | - Accrued expenses and other current liabilities increased by $2.1 million, primarily due to increases in income taxes payable, sales and tax and fees payable, interest accrual, and short-term lease liability[133] Note 10. Asset Retirement Obligations Asset Retirement Obligations (In thousands) | Metric | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------------------- | :--------------------------- | :--------------------------- | | Beginning balance | $32,616 | $294 | | Liabilities acquired | — | $28,713 | | Accretion of discounts | $867 | $254 | | Ending balance | $33,399 | $29,261 | - Asset retirement obligations increased by $4.1 million year-over-year, primarily due to liabilities acquired in 2024 and accretion of discounts[134] Note 11. Revolving Credit Facility and Term Loan - Benchmark's Revolving Credit Facility balance decreased to $58.0 million at June 30, 2025, from $66.5 million at December 31, 2024, following $8.5 million in paydowns[135] - The Deflecto Term Loan balance decreased to $46.4 million at June 30, 2025, from $47.5 million at December 31, 2024, with $1.2 million in paydowns[143] - Both Benchmark and Deflecto were in compliance with their respective loan covenants as of June 30, 2025[137][142] Note 12. Starboard Investment - The Recapitalization Agreement in October 2022 simplified the capital structure, resulting in Starboard owning approximately 61.2% of common stock as of July 13, 2023[146] - The Services Agreement with Starboard provides trade execution, research, and due diligence on an expense reimbursement basis, with no reimbursements made during the six months ended June 30, 2025[151] Note 13. Fair Value Measurements - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (significant observable inputs), and Level 3 (unobservable inputs)[155] Financial Assets Measured at Fair Value (In thousands) | Asset Type | Level 1 (Jun 30, 2025) | Level 2 (Jun 30, 2025) | Level 3 (Jun 30, 2025) | Total (Jun 30, 2025) | | :-------------------------- | :----------------------- | :----------------------- | :----------------------- | :--------------------- | | Equity securities | $21,467 | — | — | $21,467 | | Commodity derivative instruments | — | $2,902 | — | $2,902 | - Benchmark's commodity derivative activities resulted in a realized gain of $0.83 million and an unrealized gain of $0.79 million for the six months ended June 30, 2025[157] Note 14. Related Party Transactions - The company has a Loan Facility with a related private portfolio company, with a balance of $4.3 million (including interest receivable) at June 30, 2025, bearing an interest rate of 9.5% per annum[160] - Interest income from this related party loan was $0.19 million for the six months ended June 30, 2025[160] Note 15. Commitments and Contingencies - The company is subject to inventor royalties and contingent legal fees based on future net revenues from patent licensing and enforcement activities[162][163] - The AIP Matter, a dispute involving former executives' profit interests, was settled on August 2, 2024, resulting in a $14.5 million payment by Acacia during 2024[167] - The company is involved in ongoing patent enforcement litigation, which consumes significant financial and management resources, with potential for monetary sanctions or attorney's fees[165][324] Note 16. Stockholders' Equity - The $20.0 million stock repurchase program, approved in November 2023, was completed in 2024 with the purchase of 4,358,361 shares, and no further repurchases occurred under this program during the six months ended June 30, 2025[171] Note 17. Equity-Based Incentive Plans - The 2024 Acacia Research Corporation Stock Incentive Plan is the exclusive plan for granting stock options, restricted stock units (RSUs), and performance-based stock awards (PSUs)[173] Stock Option Activity Summary | Metric | Outstanding at Dec 31, 2024 | Exercised (6M 2025) | Outstanding at Jun 30, 2025 | | :--------------------------------- | :-------------------------- | :-------------------- | :-------------------------- | | Options | 1,001,520 | (8,333) | 993,187 | | Weighted Average Exercise Price | $4.16 | $3.58 | $4.16 | Compensation Expense for Share-Based Awards (In thousands) | Award Type | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :--------------------------------- | :---------------------------- | :---------------------------- | | Options | $149 | $252 | | RSAs | $194 | $242 | | RSUs | $1,093 | $1,255 | | PSUs | $440 | — | | Total | $1,876 | $1,749 | Note 18. Income (Loss) Per Share Income (Loss) Per Share (Except share data) | Metric | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :------------------------------------------ | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Basic net income (loss) per common share | $(0.03) | $(0.08) | $0.22 | $(0.09) | | Diluted net income (loss) per common share | $(0.03) | $(0.08) | $0.22 | $(0.09) | - Basic and diluted net income per common share for the six months ended June 30, 2025, was $0.22, a significant improvement from a loss of $0.09 per share in the prior year[188] Note 19. Segment Reporting - The company operates in four reportable segments: Intellectual Property Operations, Industrial Operations, Energy Operations, and Manufacturing Operations[189] Segment Revenues (In thousands) | Segment | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :-------------------------- | :---------------------------- | :---------------------------- | | Intellectual Property | $70,234 | $18,956 | | Industrial | $14,266 | $15,176 | | Energy | $33,623 | $16,026 | | Manufacturing | $57,536 | — | | Total Revenues | $175,659 | $50,158 | Segment Operating Income (Loss) (In thousands) | Segment | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :-------------------------- | :---------------------------- | :---------------------------- | | Intellectual Property | $30,895 | $1,029 | | Industrial | $376 | $978 | | Energy | $6,094 | $3,405 | | Manufacturing | $(355) | — | Note 20. Subsequent Events - On July 4, 2025, the "One Big Beautiful Bill Act" (H.R. 1) was enacted, introducing significant amendments to the U.S. tax code with multiple effective dates[208][289] - The company is currently evaluating the impact of this new tax legislation on its consolidated financial statements[208][289] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, results of operations, business strategy, and segment performance General Business Overview - Acacia's core strategy is to acquire and operate businesses with strong free cash flow generation and scalability, focusing on unique and complex situations[211][212][213][214] - The company defines value through free cash flow generation, book value appreciation, and stock price growth[211] - Key differentiators include an experienced management team, a disciplined focus on advantageous acquisitions, a deep operating executive network, and flexibility in transaction structuring and long-term commitment[215][217][220][221] Business Segments Overview - Intellectual Property Operations invests in and licenses patented technologies, with over 1,600 license agreements and $1.9 billion in gross licensing revenue as of June 30, 2025[218][223] - Industrial Operations (Printronix) manufactures and distributes industrial impact printers and consumables, aiming to transition to higher-margin consumable sales[226][227] - Energy Operations (Benchmark), 73.5% owned by Acacia, acquires and develops oil and gas assets in Texas and Oklahoma, expanding significantly with the $145 million Revolution Transaction in April 2024[229][230][231] - Manufacturing Operations (Deflecto), acquired in October 2024 for $103.7 million, is a specialty manufacturer for commercial transportation, HVAC, and office markets[233] Recent Business Developments and Trends - The company's growth strategy involves acquiring additional operating businesses, energy assets, and intellectual property assets, acknowledging potential costs and risks[235] - Recent acquisitions include a 50.4% equity interest in Benchmark Energy II in November 2023, Benchmark's $145 million Revolution Transaction in April 2024 (increasing Acacia's interest to 73.5%), and the $103.7 million acquisition of Deflecto in October 2024[236][237][238] - The Life Sciences Portfolio, acquired in June 2020 for $282.0 million, has generated $564.1 million in proceeds through June 30, 2025, with the Arix Bioscience PLC position fully exited in January 2024 for $57.1 million[239] - Inflation has not historically had a significant impact, but Manufacturing and Industrial Operations may adjust prices, and Energy Operations could face pressures from rising oil/gas prices and supply chain disruptions[240] - Intellectual Property Operations' revenues fluctuate based on licensing agreements and litigation outcomes; the segment acquired one new patent portfolio (Wi-Fi 7) in Q1 2025 and has three pending patent infringement cases with scheduled trial dates[241][242][247] Operating Activities - Intellectual Property Operations revenues historically fluctuate quarterly based on the dollar amount and terms of agreements, litigation outcomes, and external factors, with potential revenues sometimes shifting to subsequent periods[251][255] Results of Operations Summary of Results of Operations (In thousands, except percentage change) | Metric | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | $ Change | % Change | | :------------------------------------------ | :--------------------------- | :--------------------------- | :------- | :------- | | Total revenues | $175,659 | $50,158 | $125,501 | 250% | | Total costs and expenses | $149,739 | $57,003 | $92,736 | 163% | | Operating income (loss) | $25,920 | $(6,845) | $32,765 | (479%) | | Income (loss) before income taxes | $28,719 | $(17,188) | $45,907 | (267%) | | Net income (loss) attributable to Acacia Research Corporation | $20,994 | $(8,632) | $29,626 | (343%) | - For the three months ended June 30, 2025, total revenues increased by 98% to $51.2 million, and loss before income taxes improved from $15.9 million to $0.9 million, driven by new acquisitions and the absence of non-recurring legal expenses[55][257][258] - For the six months ended June 30, 2025, total revenues surged by 250% to $175.7 million, and income before income taxes dramatically improved from a $17.2 million loss to a $28.7 million income, primarily due to growth in Intellectual Property, Energy, and new Manufacturing Operations[260][261] - Intellectual Property Operations revenues for the six months ended June 30, 2025, increased by 271% to $70.2 million, while Energy Operations revenues increased by 110% to $33.6 million, reflecting the full impact of the Revolution Transaction[260][262][270] - Manufacturing Operations, acquired in October 2024, contributed $57.5 million in revenues for the six months ended June 30, 2025[260][273] - Total operating expenses increased by 55% to $39.6 million for the six months ended June 30, 2025, largely due to the inclusion of Manufacturing Operations expenses and increased Energy Operations G&A[275] - Total other income for the six months ended June 30, 2025, was $2.8 million, a significant improvement from a $10.3 million expense in the prior year, driven by reduced unrealized losses on equity securities and derivative gains[261][264][278] - The company recorded an income tax expense of $6.6 million for the six months ended June 30, 2025, compared to a benefit of $8.2 million in the prior year, primarily due to year-to-date earnings and foreign withholding taxes[282][283] Liquidity and Capital Resources - Primary liquidity sources are cash and cash equivalents and cash generated from operating activities; future acquisitions are expected to be financed through cash on hand or equity/debt financing[293] - Consolidated cash, cash equivalents, and equity securities increased to $338.2 million at June 30, 2025, from $297.0 million at December 31, 2024[295] Net Cash Flows Summary (In thousands) | Activity | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :--------------------------------- | :--------------------------- | :--------------------------- | | Operating activities | $52,545 | $70,977 | | Investing activities | $(451) | $(109,833) | | Financing activities | $(10,340) | $85,880 | | Increase in cash and cash equivalents | $42,841 | $46,897 | - Net cash provided by operating activities decreased to $52.5 million, while net cash used in investing activities significantly decreased to $0.5 million due to the absence of large asset acquisitions in 2025[297][302] - Net cash used in financing activities was $10.3 million, a shift from an $85.9 million inflow in the prior year, primarily due to debt paydowns on the Benchmark Revolving Credit Facility and Deflecto Term Loan[297][304] - Critical accounting estimates include revenue recognition, oil and gas reserves, valuation of long-lived assets, goodwill and other intangibles, and income taxes, with no material changes from the 2024 Annual Report[306][308] Item 3. Quantitative and Qualitative Disclosures about Market Risk Discusses market risks from equity investments and foreign currency, highlighting potential impacts of volatility and currency fluctuations - The company is exposed to investment risks from changes in the financial condition of its equity investments and market price volatility[310] - As of June 30, 2025, the carrying value of equity investments in public and private companies was $58.2 million; a hypothetical 10% adverse change in public equity investments would decrease their value by approximately $2.1 million[311][312] - The company is exposed to foreign currency exchange rate fluctuations, primarily between the U.S. dollar and the British Pound, Canadian Dollar, Chinese Yuan, and Euro, related to foreign cash accounts[313] Item 4. Controls and Procedures Management concluded disclosure controls were ineffective as of June 30, 2025, due to a material weakness, with remediation efforts ongoing - Disclosure controls and procedures were not effective as of June 30, 2025, due to a material weakness and control deficiencies reported in the 2024 Annual Report[315] - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2025, other than planned remediation efforts[316] - Management acknowledges that control systems provide only reasonable, not absolute, assurance against error or fraud due to inherent limitations and the possibility of controls becoming inadequate over time[318] Part II. Other Information Item 1. Legal Proceedings Intellectual Property Operations routinely engages in patent enforcement litigation, which is resource-intensive and carries risks of monetary sanctions or adverse effects - Intellectual Property Operations is often required to engage in litigation to enforce its patents and patent rights[322] - Litigation matters consume significant financial and management resources, often against large, well-financed companies, and may result in monetary sanctions or attorney's fees[324] Item 1A. Risk Factors Investors should consider all risks in this report and prior filings, as no material changes to reported risk factors have occurred - Investors should carefully review all disclosures, including risk factors in this 10-Q, the 2024 Annual Report, and prior 10-Q filings[325] - No material changes to the risk factors previously reported have occurred[325] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report during the period - No unregistered sales of equity securities or use of proceeds occurred[326] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report during the period - No defaults upon senior securities occurred[327] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Mine Safety Disclosures are not applicable to the registrant[328] Item 5. Other Information No director or officer adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement in Q2 2025 - No director or officer adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2025[329] Item 6. Exhibits Lists exhibits filed with the Quarterly Report, including corporate documents, an employment agreement, officer certifications, and iXBRL financial statements - Exhibits include the Fourth Amended and Restated Certificate of Incorporation, Employment Agreement, officer certifications (Rule 13a-14(a)/15d-14(a) and 18 U.S.C. Section 1350), and iXBRL formatted financial statements[330]