Acacia Research Corporation Price & Performance (ACTG)

Actual results may differ materially from those projected as a result of certain risks and uncertainties. [indiscernible] discussion of such risks, uncertainties, please see the risk factors described in Acacia's most recent annual report on Form 10 ks and quarterly reports on Form 10 Q filed with the SEC. [indiscernible] [indiscernible] Earlier this morning, Acacia issued a press release disclosing its fourth quarter and year end 2024 financial results. The press release may be accessed on the company's website under the Press Releases section of the InvestorRelationstab@acaiaresearch.com. The company also posted its Q4 and year end 2024 earnings presentation to its website, which can be found under the Quarterly Results tab. On today's call, we will discuss certain non GAAP financial measures. Including adjusted EBITDA for the company and each of its operating segments. Information regarding the comparable GAAP metrics along with required definitions and reconciliations can be found in the press release disclosing fourth quarter and year end twenty twenty four financial results. Available under the Press Releases section of the Investor Relations tab at acaciaresearch.com. I would now like to turn the call over to Acacia's Chief Executive Officer, Anjay McDulty. Thanks, Brent. And thanks to everyone for joining us this morning. [indiscernible] I'd like to begin by briefly revisiting our approach to building Acacia.

First and foremost, we're disciplined and patient allocators of capital. Spent much of 2023 cleaning up the business and getting our house in order. We onboarding the right human capital, evaluating the assets we own and the most attractive ways to maximize their value.

And enhancing our internal processes to be in an optimal position to find, evaluate and execute on acquisition opportunities. 2024, those efforts bore fruit. [indiscernible] In April, this team made its first acquisition in partnership with Benchmark Energy and acquired the Revolution Asset Package, which we've talked about extensively on prior calls. In October, we acquired Deflecto and have been aggressively optimizing and integrating it into Acacia's operations. Finally, we monetized in an attractive transaction our stake in Eric's. We did all of this while continuing to manage the business, including our driving attractive results and we bought back $20,000,000 of stock. After a transformational year, I'm proud of our team's ability to successfully navigate the macro environment the integration processes for Benchmark and Deflecto to drive significant value. We're pleased to see the positive impacts of our strategy taking shape. We believe Benchmark and Deflecto are attractive additions to our growing portfolio companies. [indiscernible] They exhibit the characteristics we seek, significant operational and strategic optionality, stable and risk managed cash flows, and acquired at attractive valuations, which allows us to drive attractive risk adjusted returns for our shareholders. We continue to build on our momentum from 2024. [indiscernible] As of year end, we had approximately $274,000,000 of cash to deploy [indiscernible] thanks to existing cash on hand and cash generated from our operating businesses. [indiscernible] continue to see attractive opportunities within both the public and private markets and continue to see strong We've mentioned in the past, discussing the specifics of any one of these situations is disadvantageous to our strategy, but we believe 2024 illustrates that our process works.

We'll continue to follow and improve upon that process to acquire additional businesses benefit our shareholders. Pearson will provide additional financial for the fourth quarter and for the year. [indiscernible] For the fourth quarter, we generated consolidated revenue of $48,800,000 produced $4,900,000 of total company adjusted EBITDA and recorded $9,600,000 of operated segment adjusted EBITDA. Excluding our intellectual property operations, [indiscernible] have episodic cash flows. We delivered $12,400,000 in operating segment adjusted EBITDA for the quarter. [indiscernible] For the year, we generated consolidated revenue of $122,300,000 dollars total company adjusted EBITDA of $17,000,000 Operated segment adjusted EBITDA of $35,700,000 and dollars and operated segment adjusted EBITDA excluding our intellectual property business of $32,200,000 While the amortization of patents in our intellectual property portfolio combined with the costs associated with acquiring Deflecto including one time charges related to legal, compliance and accounting functions, led to an increase in our GAAP operating costs and a net loss of $13,400,000 on GAAP basis for the quarter, Our team remains diligent in our cost management strategy and I'm confident in our balanced and strategic approach to long term value creation. We've included a bridge from GAAP to adjusted EPS in our press release to provide further detail on these costs.

We recorded book value per share of $5.75 as of December 31, 2024 compared to $5.9 per share 12/31/2023.

As a reminder, this book value per share metric includes minority interest and is burdened by all of the one time items included in the add backs to adjusted EPS. Finally, during the latter part of 2024, we repurchased $20,000,000 of stock at an average price of $4.61 per share. Our year end versus our year end book value attributable to Acacia of $5.75 per share. We believe this was a good use of shareholder capital. This also represented the maximum amount we're comfortable Turning to a breakdown of our results by operations. For the three and twelve months ended December 3120 Acacia energy operations generated adjusted EBITDA of $8,400,000 and $25,200,000 respectively. Our industrial operations delivered adjusted EBITDA of $1,600,000 in the quarter and $4,500,000 for the year, while our intellectual property operations generated an EBITDA loss for the quarter of $2,700,000 and an EBITDA gain of $3,600,000 for the year. [indiscernible] Our newly formed manufacturing operations consisting entirely of the Deflecto acquisition generated EBITDA of $2,400,000 in the quarter reflecting a partial quarter of results In our energy vertical, since our investment in benchmark, the team is operated production front and our hedging strategy has proven to be an effective buffer for near term commodity price fluctuations.

This is now our fifth quarter owning benchmark and third quarter since the Revolution assets were acquired. Notably, this quarter, we reported benchmark highest ever revenue demonstrating our ability to drive significant returns on this investment. Following the Revolution acquisition, the Benchmark team has completed over 40 capital workover projects, which have helped bring unproductive wells back online and improve the production of wells that were underperforming. This is a core part of our strategy. The net impact of these investments is that we've been able to replenish the oil and gas produced since our acquisition, our reserve base is a key metric we measure in the success of this investment as offsetting the natural decline of the assets should allow us to meet and potentially outperform our underwriting expectations over the long term.

We also expect rising demand for industry, which we're poised to benefit from, particularly given our strategically important geographic location in the Mid Con and ability to sell gas in a variety of markets. This is an enviable position if you were to study our peers in place like the Permian the Marcellus. Our hedging strategy remains consistent since underwriting. Protecting approximately 70% of our operated net oil and gas production over the next three years. As a reminder, in line with last quarter, we've reported adjusted EBITDA in our financials including the impact of realized hedge gains, but they're not included in the quarter's top line revenue figure. Our manufacturing operations consisting of the newly acquired Diflecto business generated $23,300,000 in revenue during the partial quarter. Recall that we acquired Deflecto because of the significant operation in selling diversified and in many cases, regulatory mandated products, and the opportunity for strategic M and A in each operating vertical. Since closing the Deflecto acquisition, we've been working with the team to organize the company into three distinct business units to drive operational efficiencies, management accountability and to reduce overhead costs. While the transportation and office end markets are experiencing some cyclicality, we've begun to offset this with the process improvement initiatives mentioned above.

We remain opportunistic that these efforts within Deflecto should create more earnings leverage in a cyclical rebound Looking forward, the actions we are taking with Deflecto will allow us to better capitalize on the company's growth potential. Which combined with its substantial market share diversified customer and supplier base and moderate capital needs provides promising Frontronics continues to be a nice source of cash for Acacia. And I'm pleased with the work our team has done to date to transition this business to a dual hardware and consumables business model, with a streamlined operating structure. The Protronics team generated $7,300,000 in operating cash flow during the calendar year, representing 22% of our initial purchase price. We believe this is a good example of the value we can drive over the long term through improving the operations of the under managed assets we acquire. [indiscernible] Turning now to our intellectual property vertical. Our intellectual property operations generated $100,000 in licensing and other revenue during the quarter compared to 82 point $800,000 in the same quarter last year. The year over year decrease in revenue is primarily due to a decrease in the number of new life agreements in the quarter. We remain open to opportunistically deploying additional capital to capitalize on any attractive opportunities that might become available in this area.

Given our team's well regarded reputation as leaders in the IP space, intellectual property owners continue to actively seek us out as a partner. While our life sciences portfolio is not a core vertical, AMO and NovoBiotics represent $25,700,000 in book value at the end of last year. Net of non controlling interests. We're encouraged by the catalyst we see coming down the pike for our holdings in this sector and we continue to actively work these businesses to seek ways to maximize the value of our life sciences assets. I'd now like to turn the call over to Kirsten to provide additional detail on our fourth quarter and full year financial results.

Thank you, MJ.

Acacia recorded total revenue of $48,800,000 during the fourth Our energy operations generated $17,300,000 in revenue for the quarter.

Compared to $800,000 in the same quarter last year. The increase in revenue was primarily driven by the addition of the Revolution assets that Benchmark acquired earlier in 2024. Manufacturing operations generated $23,200,000 in revenue for the quarter, which reflects a partial quarter following the acquisition of Deflecto in October and the seasonally weakest time of the year for the business. Our industrial operations generated $8,200,000 in revenue during the quarter. A slight decrease compared to $8,600,000 in the same quarter last year, but an increase of $1,200,000 compared to the prior quarter. Our intellectual property operations generated $100,000 in licensing and other revenue during the quarter, compared to $82,800,000 in the same quarter last year. The quarter over quarter decrease in revenue was primarily due to a decrease in the number of new license agreements in the quarter and a decrease in average license fees. [indiscernible] General and administrative expenses were $21,500,000 during the fourth quarter. Compared to $10,800,000 in the same quarter of last year. The increase in G and A was primarily due to the addition of the company's new manufacturing operations, and an increase in one time acquisition related charges for legal, compliance and accounting functions.

The fourth quarter included $5,200,000 in non recurring parent G and A charges, which can be seen in the adjusted EBITDA tables provided in the earnings release. The company recorded fourth quarter operating loss of 15,800,000.0 compared to operating income of $55,900,000 in the same quarter last year. Primarily due to lower revenues generated and higher costs and expenses. Which included $4,400,000 of non cash depreciation, depletion and amortization expenses. And does not reflect $1,000,000 of realized derivative gains. These figures include the impact of the Revolution assets, that Benchmark acquired earlier in 2024. Adjusted EBITDA for energy operations dollars Industrial operations contributed $900,000 in operating income which included $700,000 in non cash depreciation amortization expenses.

Adjusted EBITDA for Acacia's industrial operations was $1,600,000 dollars dollars Net loss attributable to Acacia Research Corporation in the fourth quarter was $13,400,000 or $0.14 per share compared to net income attributable to Acacia of $74,800,000 or $0.75 per share in the fourth quarter of twenty twenty three. This was primarily due to the patent amortization expense in our IP business combined with limited IP revenues which as a reminder is episodic as well as one time non recurring costs associated with the acquisition and integration of Deflecto and Benchmark. Net loss included $4,100,000 in unrealized gains related to the fair value of equity securities at December 31, 2024. Adjusted net loss attributable to Acacia Research Corporation in the fourth quarter of twenty twenty four was 6,800,000.0 or $0.07 per share.

Further details on these adjustments can be found in our press release. Turning to the full year results. Total 2024 revenues 122,300,000.0 compared to $125,100,000 in the prior year period. Our energy operations generated $49,200,000 for the year. Compared to $800,000 last year while our manufacturing operations generated $23,200,000 in revenue for the year following the completion of the Deflecto acquisition on 10/18/2024. [indiscernible] Our industrial operations generated $30,400,000 in revenue, compared to $35,100,000 last year. And our intellectual property operations generated $19,000,000 in licensing and other revenue compared to $89,200,000 last year.

General and administrative expenses were $55,400,000 compared to $44,400,000 last year due to the addition of the company's manufacturing segment operations. And full year results for the energy segment. Operating loss was $32,900,000 compared to operating income of $20,900,000 in the prior year period.

Our energy operations contributed $9,500,000 dollars in operating income, which included 12,600,000.0 of depreciation, depletion and amortization charges. [indiscernible] Our industrial operations contributed $1,800,000 in operating income, which which included $2,700,000 of depreciation and amortization charges. Net loss 36,100,000.0 or $0.36 per diluted share.

Compared to net income of $67,100,000 or $0.58 per diluted share last year. Net loss included $28,900,000 in realized gains from the sale of the equity securities. Offset by $31,400,000 in unrealized loss. [indiscernible] The 2024 period unrealized loss primarily relates to the reversal of unrealized gains previously recorded for Eric's shares that were sold in January 2024 for realized gains.

Adjusted net income attributable to Acacia Research Corporation for the full year of 2024 was $14,200,000 dollars or $0.14 per diluted per share. Further details on these adjustments can be found in our press release. Acacia has generated $564,100,000 in proceeds, from sales and royalties of its life sciences portfolio. Which was purchased for an aggregate price of $301,400,000 in 2020. At 12/31/2024, Acacia's remaining positions in its life sciences portfolio represented $25,700,000 in book value. Now turning to the balance sheet. [indiscernible] Cash, cash equivalents and equity securities at fair value totaled $297,000,000 at 12/31/2024. Compared to $403,200,000 at 12/31/2023. [indiscernible] The decrease in cash was primarily due to $60,000,000 paid to acquire Deflecto dollars $60,000,000 paid to acquired the Revolution assets, and approximately $20,000,000 in repurchases of common stock. Offset by cash provided by operating activities. Equity securities without readily determinable fair value totaled $5,800,000 at 12/31/2024. Unchanged from 12/31/2023.

In Investment securities representing equity method investments totaled $19,900,000 at 12/31/2024, net of non controlling interest. Unchanged from 12/31/2023. [indiscernible] Acacia owns 64% of Mallin J1, which results in a 26% indirect ownership stake in Biomet Pharmaceuticals for Acacia. [indiscernible] The parent company's total indebtedness was zero at 12/31/2024. On a consolidated basis, Acacia's total indebtedness as of 12/31/2024 was 114,000,000 consisting of $66,500,000 in non recourse debt at benchmark and Deflecto respectively.

Since closing the acquisition of the Revolution assets in April, Benchmark has paid down $15,000,000 in total debt. For more information on Acacia's fourth quarter and full year results, please see our press release issued this morning. And our annual report on Form 10 ks, which we will file with the SEC next week. With that, I'd like to turn the call back over to you, MJ.

Thanks, Kirsten. [indiscernible] I'm incredibly proud of our team's accomplishments in 2024. [indiscernible] Looking ahead, integration, particularly with Deflecto, remains key priority for us as we aim to diligently maximize the value of our investments through integration synergies, process improvements and targeted cost reductions. At the same time, we'll continue to evaluate potential acquisition targets in both the private and public markets. [indiscernible] have a disciplined capital allocation strategy and our strong balance sheet enables us to be select [indiscernible] We have the optionality to grow and reinvest free cash flow or look to monetize and building platform. Regard to future acquisitions, we continue to consider various value adding opportunities but will only act when the timing and opportunity is right. And the potential target is aligned with our long term objectives. While macroeconomic conditions are creating uncertainties in the market in 2025, I'd like to point out the relative stability we believe Acacia offers to our investors. We have exposure across a wide range of industries, our current group of assets were acquired at attractive valuations with a margin of safety providing investors potential upside even in times of broader uncertainty. [indiscernible] Further, our substantial cash balance allows us to continue to be opportunistic during these uncertain times.

As we look to 2025 and beyond and confident in our strategy and our ability to continue to successfully unlock value for shareholders. Through organic growth opportunities within each of our platforms, we retaining the optionality to be a strategic acquirer and consolidator within their respective industry. With that, I'll turn the call back over to Holly.

Thank you. At this time, we will be conducting a question and answer session. Your first question for today is from Anthony Stoss with Craig Hallum.

Good morning, team. Let me start by saying this is nice to see consistent execution, especially in this rougher environment.

Speaking of which, MJ, I'm curious your thoughts on just the economy overall, especially on the tariff side. Maybe that's having an impact on Deflecta or any thoughts on just tariff in general on your business?

Yes. I mean, it's a great question, Tony. Look, we have been following the tariffs since probably the election cycle. There are There is some information out there The information changes every morning when I turn on the TV.

To hear the update. I would say on the oil and gas side of things, we're pretty insulated. Our position in the Mid Con allows us to sell our hydrocarbons to multiple markets. So we're not beholden to Canada or the Gulf Coast or any particular area that might be tariffed. I think you will see some impact of tariffs on oil and gas companies that focus on drilling. Because of the steel costs. But if you recall, [indiscernible] So the steel costs don't impact us as much. So that's that's the benchmark piece of it. On Deflecto, we do have manufacturing operations in Canada. We have manufacturing operations in The U. S. The team has been very focused on this issue. We have optionality to move manufacturing or pieces of manufacturing depending upon the ultimate impact of tariffs. We have plans in place to be able to do that. We don't want to start executing on those plans until we kind of have a better understanding of where this is going, just given the back and forth and the fast moving pace of that back and forth. But we feel pretty confident that we can insulate ourselves from most, if not, all the impact.

Got it. And then if I could throw two more questions. I'm curious on Benchmark, if there's a larger number of wells being targeted and then it's just wanted to point to your press release talking about Cherokee play and Cleveland formations. That you see potential upside I'd love to hear more color related to that.

Just on the first piece, when you say wells being I just want to make sure I understand the question.

To acquire more wells. [indiscernible] Kirk and the team and we continue to look for different asset packages to acquire.

There are There is activity. And there are asset packages that are out there. We're pretty disciplined on the valuations that we that we acquire those asset packages for. The market has appears to be moving up in valuation ranges. And so we're being pretty patient there. We have when we bought the we partnered on the original benchmark acquisition, in 2023. We have a small asset package and we liked it and it's a great package to win right field. It does really well. When we ended up then acquiring in April, the the Revolution asset package, it really increased the scale of the business. And it gave us a fantastic position in the MidCon in the Anadark Basin and the team, I think we noted this in the press release, is built to services organization which helps us to control and optimize costs. And so as we look, we're really thinking about acquisitions that we can tuck in around our existing position as opposed to trying to expand and add another geography. So we're really looking for pretty tight tack ons so that we can increase the production with a lot of scalability in our operations. So that's kind of point one.

When we see them and we can do them at attractive valuations, we will. But we're not growing for growth sake from an acquisition strategy. On the Cherokee, So So when we acquired Benchmark assets, there was a little bit of chatter about the Cherokee. And if you remember, we paid for the existing production, the PDPs.

And then what they call pods proved undeveloped wells in future Acacia. We didn't really assign any value in our purchase price to those. We had a view that the Cherokee was attractive and the team under that area is become or appears to be becoming an area of interest for more players. And so we're evaluating the best way to monetize those assets. It's a little bit early in kind of the ballgame of that area growing and gaining interest, but we're pretty enthusiastic about the well results that we see out there. And what it means for future growth in the Cherokee And And Others Are Seeing What We Saw Which Is The Mid Con is a really good place to be producing oil and gas because of the optionality of the takeaway and the markets that you can that you can sell to.

Got it. Thanks for all the color. And then last question for me. First quarter with Deflecto and the targeted gross margin of 15% they came in a little bit below that. I'm curious was that just a function of the weaker seasonal quarter as you highlighted on the prepared remarks or is there something else going on and where do you think that is 15% still the goal?

Yes, it's still the goal. The fourth quarter is seasonally weak in that business. We can't isolate the impact of the election and and buyer behavior around that, but that could be playing a piece of it. But we do we do keep to the goal And as we've gotten into the business, we found more opportunity from an operational perspective to improve how the business runs. We look at businesses that have historically been under managed where there's opportunity and we're finding that with Deflecta.

Got it. Thanks, MJ. And again, congrats on the consistent execution.

Yes. Thanks, Tony. Appreciate you taking the time.

Your next question is from Brett Reiss with Janney Montgomery Scott.

Good morning, MJ. Good morning, Kirsten.

Hey, Brent. Good morning. Hi. [indiscernible] Yes.

I'll help you with that because it's yes.

Is he the guide from Danaher that's helping us with Deflecto? Yes. So Clay has been working with us for a while as an operating partner. We have a pretty deep relationship with him. And Clay has been helping us both with Printronics and with [indiscernible] And he's kind of he's an integral member of our team. Right, right. But he's from Danaher.

Correct.

Okay. I have a great deal of respect for the talent that's come out of Danaher Could you give me one or two examples of something that he saw with Deflecto that you're doing that's going to improve the operations?

Yes. I mean, I'll give you a couple examples. We've We've restructured the cost pretty significantly. Since we acquired the asset. And from an operating standpoint, we own a lot of plants. We have three different business units. One of the first things we wanted to do was to kind of cut the the combined oversight of those businesses as one business and divisionalize those businesses. And so our view is that decisions, alignment of interests, alignment of comp, performance, accountability, all happen at the local level. Not at the global level. And so step one is let's make these locally run and have the teams be compensated for that and be accountable to the results as opposed to one team being accountable for the results three different businesses. So that's kind of one piece. Two, we've identified significant areas where we can improve the operations of those business. And it stings from mundane or maybe not so mundane plant floor layouts, consolidation of facilities, trading of folks on optimizing processes, a lot of Brett what you might recall from Danaher's playbook, the business system, that Danaher puts in place in the businesses that they acquire, That's kind of part of our playbook and what we strive to do.

And I guess if I'll add a third to round it out, a key focus on cash flow and cash flow management. So it's earnings growth, but it's also rightsizing capital, capital Acacia, in working capital, in inventory, improving AR collect, [indiscernible] And one, we we have the opportunity to acquire businesses that are good businesses. They have good products. Deflecto has products that people need. They're not just lot of cases are mandated to have. And when you got a portfolio of products like that, where there's been historical under management, of most or all the aspects of the business we like those opportunities because we can go in and fix those things and really create scale and leverage in the business. Great, great. I've got a question just trying to get a handle on on cash levels Before you started to make these acquisitions under your stewardship We start at $4.00 3,000,000 and then we spent $60,000,000 on Revolution, 60,000,000 on Deflecto, dollars $15,500,000 debt repayment, dollars 20,000,000 on share buybacks, I guess this is for Kirsten. So that's $155,500,000 I subtract that from the $4.00 3 that's 247.7%. We're at $2.97 The only thing I don't have is how much came in from the monetization of of ARIKAYCE?

ARIKS was $37,000,000 Okay. So I add back the $37,000,000 so $247.7 plus $37,000,000 Yeah, I mean, you've basically done all of this stuff and have more cash in the corporate coffers than you started with. Am I missing something here or do I have it right?

No, Brett, that's I don't think you're missing anything. I mean that's what we've kind of have said and it's starting to to bear through, which is we're moving cash from a cash and securities account on the balance sheet to assets that are generating cash. And that's the plan, which is the businesses we buy are cash flow generating businesses combined with the conversation we just had about the operational improvement, so that we're effectively creating more cash through owning these businesses.

Great, great. Now I know you're looking at things in in private equity. Between the private equity has to monetize some of their assets. Between that and the stress in the [indiscernible] price wise on on private equity maybe letting some things go at realistic prices? So that we can get more deal flow I mean, I kind of think about it as like buying as a public investor on the buy side buying the market versus single names. There are always opportunities in single names. And I don't think it's dissimilar to private equity. Private equity is incentivized to get the most for their assets. I think there are exceptions to that when they're high volume private equity shops that are happy to exchange businesses at reasonable valuations because they buy and sell a lot of businesses. I think in this space and size in the market that we're looking at, remember we're looking at like B and C quartile assets not the As. I mean we see the A quartile assets and we love them, but but we're not the right buyer for those.

And so where it's more challenging for private equity sellers to sell a business because there's a story, maybe there's a little bit of hair, is some work that needs to be done. Think there are less buyers of those assets generally. I think a lot of private equity buyers want to buy pristine assets. Potentially high prices because they just take less work.

We have our own views. On that. So I would say it's not necessarily a market driven phenomenon. That's generating deal flow for us as much as it is really being in the flow and understanding who owns what, how long they've been in it, where they maybe have it marked, and what their goals are for it. And so we're seeing a good amount of private equity businesses where we think we can go in and change trajectory of that business. We are also seeing in broadly the private markets, we're also seeing businesses that private equity we think is not seeing. And so having been in private equity for a long time, you kind of see what you see because it's coming to private equity as a potential buyer. We're seeing a lot of opportunities that that don't want to go to private equity as a buyer. And so the business model that we have and the team that we have is an attractive option for a lot of folks. Who have excluded for one reason or another private equity as a potential source of capital. In the partner in their future.

Great.

And benchmark is percent hedged, the 30% where you're not hedged Do you have a metric that indicates that if oil prices go up $10 a barrel or down $10 a barrel, what that does to the cash flow from our benchmark Revolution investment So we monitor it. And we watch it, but it's an item metric that we publish.

For sure. Okay. That's it for me. Good show on continued execution.

Thanks Brett.

We have reached the end of the question and answer session I will now turn the call over to MJ for closing remarks.

Thanks everyone for joining us. We're looking forward to a productive 2025 both with our existing assets and optimizing those existing assets and then towards future deal opportunities. As they present themselves. And we look forward to talking to everyone in a few weeks for Q1.

Thanks, Ali.