Acacia(ACTG) - 2023 Q4 - Annual Report

Part I This section outlines Acacia Research Corporation's business, strategic focus, operational structure, and key risks including legal proceedings Business Acacia Research Corporation focuses on acquiring and managing undervalued companies across industrial, energy, and intellectual property segments, supported by its strategic relationship with Starboard Value LP - The company focuses on acquiring and managing businesses across the industrial, energy, technology, and healthcare sectors, particularly targeting companies with market values of $1 billion or less[12][14] - A strategic relationship with controlling shareholder Starboard Value, LP provides access to industry expertise, operating partners, and assistance in sourcing and evaluating acquisition opportunities[17] - In July 2023, a recapitalization was completed, resulting in Starboard converting its preferred stock and exercising warrants. As of March 11, 2024, Starboard beneficially owns approximately 61.2% of the company's common stock[19] Our Operations The company's operations are diversified across Intellectual Property, Energy, and Industrial (Printronix) business segments - The Intellectual Property business has generated approximately $1.8 billion in gross licensing revenue to date, with over 1,600 license agreements executed[31] - In November 2023, the company invested $10.0 million to acquire a 50.4% equity interest in Benchmark Energy II, LLC, establishing its Energy Operations business[32] - In February 2024, Benchmark agreed to acquire certain assets from Revolution Resources for $145.0 million in cash, a transaction expected to close in Q2 2024 and increase Acacia's interest in Benchmark to approximately 73.1%[33][34][35] - The Industrial Operations business was established through the October 2021 acquisition of Printronix Holding Corp., a leading manufacturer of industrial impact printers[37] Risk Factors The company faces various risks including acquisition integration, reliance on Starboard, segment-specific challenges, and cybersecurity threats - The consummation of the Revolution Transaction is subject to conditions and its failure to close could adversely affect the company's business and stock price[50][51] - The company's growth strategy of acquiring operating businesses involves significant risks, including integration difficulties, potential for unknown liabilities, and diversion of management attention[54][55][56] - Due to Starboard's majority ownership (approx. 61.2%), Acacia is a "controlled company" under Nasdaq rules and may rely on exemptions from certain corporate governance requirements, such as having a majority of independent directors[83][84] - The Intellectual Property business is subject to risks from evolving patent laws, fluctuating legal expenses, and the inherent uncertainty of litigation outcomes[89][94][97] - The Energy Operations business is exposed to risks from volatile oil and gas prices, inflationary pressures on costs, and potential regulatory changes related to climate change and seismic activity[106][110][139] - The Industrial Operations business (Printronix) faces risks from its reliance on a limited number of customers, potential supply chain interruptions for key components, and the need to continuously develop new products[153][155][156] Cybersecurity Acacia integrates cybersecurity risk management into its enterprise framework, overseen by the Audit Committee, with no material incidents to date - The company has integrated cybersecurity risk management into its broader risk framework, aligned with standards from CIS and NIST[175][176] - The Audit Committee of the Board of Directors provides oversight for cybersecurity policies and risks[183] - To date, no cybersecurity incidents have materially affected the company's business strategy, results of operations, or financial condition[180] Properties The company maintains leased corporate and operational offices, with segment-specific facilities including manufacturing sites and energy assets - The company's corporate headquarters are in a leased space of approximately 8,600 square feet in New York, NY[184] - The Energy Operations business holds over 13,000 net acres and an interest in over 125 wells, primarily in Texas and Oklahoma[188] Legal Proceedings Acacia is subject to various legal actions, particularly in its Intellectual Property segment, including an ongoing lawsuit with Slingshot Technologies - The company is involved in a lawsuit with Slingshot Technologies, LLC, which alleges misappropriation of information related to a patent portfolio acquisition. The case was transferred to the Delaware Superior Court in September 2023[526] Part II This section covers the company's common stock market, dividend policy, MD&A of financial performance, liquidity, market risk, and internal controls Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Acacia's common stock trades on Nasdaq, with no expected dividends and a recently approved $20 million share repurchase program - The company's common stock trades on The Nasdaq Global Select Market under the symbol "ACTG"[195] - A stock repurchase program was approved in November 2023, authorizing up to $20 million in share buybacks. No shares were repurchased under this program as of December 31, 2023[197] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's 2023 financial performance, highlighting a 111% revenue increase, net income turnaround, liquidity, and critical accounting estimates Results of Operations Total revenues increased 111% to $125.1 million in 2023, driven by Intellectual Property, leading to a significant shift from loss to income before taxes Summary of Results of Operations (2023 vs. 2022) | | Years Ended December 31, | | | | :--- | :--- | :--- | :--- | | (In thousands, except percentage change values) | 2023 | 2022 | $ Change | % Change | | Total revenues | $ 125,102 | $ 59,223 | $ 65,879 | 111 % | | Total costs and expenses | 104,166 | 99,315 | 4,851 | 5 % | | Operating income (loss) | 20,936 | (40,092) | 61,028 | (152 %) | | Total other income (expense) | 46,490 | (87,058) | 133,548 | (153 %) | | Income (loss) before income taxes | 67,426 | (127,150) | 194,576 | (153 %) | | Income tax benefit | 1,504 | 16,211 | (14,707) | (91 %) | | Net income (loss) attributable to Acacia Research Corporation | 67,060 | (125,065) | 192,125 | (154 %) | - Intellectual Property Operations revenues increased by $69.6 million (357%) in 2023, primarily due to a single patent portfolio generating significant license revenue in the fourth quarter[238][247] - Industrial Operations (Printronix) revenue decreased by $4.6 million (12%) due to lower sales of printer units[238][251] - There was a significant positive change in the valuation of equity securities, from a $263.7 million unrealized loss in 2022 to a $31.4 million unrealized gain in 2023[242] Liquidity and Capital Resources The company maintains strong liquidity with $403.2 million in cash and equity securities, bolstered by Starboard's warrant exercise, sufficient for future needs - Consolidated cash, cash equivalents, and equity securities totaled $403.2 million at December 31, 2023, up from $349.4 million at year-end 2022[270] Cash Flow Summary | | Years Ended December 31, | | :--- | :--- | :--- | | (In thousands) | 2023 | 2022 | | Net cash provided by (used in): | | | | Operating activities | $ (22,506) | $ (37,336) | | Investing activities | 16,178 | 184,464 | | Financing activities | 58,632 | (166,137) | | Increase (decrease) in cash and cash equivalents | $ 52,305 | $ (21,575) | - The company received approximately $55.0 million in gross proceeds and cancelled $60.0 million in Senior Secured Notes as part of the Series B Warrants exercise by Starboard in July 2023[265] Critical Accounting Estimates Management's critical accounting estimates involve revenue recognition, asset valuation, financial instrument fair value, oil and gas reserves, and income taxes - Key critical accounting estimates include revenue recognition, valuation of assets (long-lived, goodwill, intangibles), valuation of financial instruments (warrants, derivatives), estimation of oil and gas reserves, and accounting for income taxes[280] Quantitative and Qualitative Disclosures About Market Risk The company faces market risk from equity investments and foreign currency fluctuations, with potential impacts on its financial position - The company's equity investments in public and private companies had a carrying value of $99.8 million as of December 31, 2023[298] - A hypothetical 10% adverse change in foreign exchange rates would have an approximate $5.7 million effect on the company's financial position and results of operations as of December 31, 2023[300] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective[303] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023[305] Part III This section incorporates information on corporate governance, executive compensation, security ownership, and accountant fees by reference from the 2024 proxy statement Directors, Executive Officers, Corporate Governance, Compensation, Security Ownership, and Accountant Fees Information on directors, executive compensation, security ownership, and accountant fees is incorporated by reference from the 2024 proxy statement - Detailed information regarding directors, executive compensation, security ownership, and related party transactions is incorporated by reference from the forthcoming 2024 proxy statement[310][312][313][314][315] Part IV This section contains exhibits and the complete consolidated financial statements, including the independent auditor's report and detailed notes Exhibits and Financial Statement Schedules This item lists exhibits and includes the full consolidated financial statements with Grant Thornton LLP's unqualified auditor's report Financial Statements Audited consolidated financial statements for 2023 and 2022 are presented, showing total assets of $633.5 million and net income of $67.1 million in 2023 Key Financial Position Data (December 31, 2023) | Metric | Amount (in thousands) | | :--- | :--- | | Assets | | | Cash and cash equivalents | $ 340,091 | | Total current assets | $ 554,512 | | Total assets | $ 633,545 | | Liabilities & Equity | | | Total current liabilities | $ 27,636 | | Total liabilities | $ 43,936 | | Total stockholders' equity | $ 589,609 | Key Operational & Per-Share Data (Year Ended Dec 31, 2023) | Metric | Amount (in thousands, except per share) | | :--- | :--- | | Total revenues | $ 125,102 | | Operating income | $ 20,936 | | Net income attributable to Acacia | $ 67,060 | | Basic net income per common share | $ 0.73 | | Diluted net income per common share | $ 0.58 | Notes to Consolidated Financial Statements Notes provide detailed disclosures on accounting policies, acquisitions, equity, goodwill, Starboard recapitalization, fair value, and segment reporting - Note 10 details the comprehensive recapitalization with Starboard, which resulted in the conversion of all Series A Preferred Stock, exercise/cancellation of all warrants, and cancellation of all Senior Secured Notes, simplifying the capital structure[472][473] - Note 19 provides a breakdown of revenues and operating results by the three segments: Intellectual Property, Industrial, and the newly formed Energy Operations[574][579][583] - Note 3 details the acquisition of a 50.4% interest in Benchmark Energy for $10.0 million in November 2023, which established the Energy Operations segment[451][452]