Aug 10, 2020
Operator
Greetings and welcome to Acacia Research Second Quarter Financial Results Conference Call. At this time all participants are in a listen-only mode.
A question-and-answer session will follow the formal presentation. [Operator Instructions].
I will now turn the conference over to your host Rob Fink with FNK IR. You may begin.
Rob Fink
Thank you, operator. Hosting the call today are Clifford Press, Chief Executive Officer and Al Tobia, Chief Investment Officer, and Richard Rosentein, Chief Financial Officer.
Before beginning, I would like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company's plans, objectives and expectations for future operations and are based on current estimates and projections, future results or trends.
Actual results may differ materially from those projected as a result of certain risks and uncertainties. For a discussion of such risks and uncertainties, please see the risk factors described in Acacia's annual report on Form 10-K and quarterly reports on 10-Q that are filed with the SEC.
I would like to remind everyone that a press release disclosing the company's financial results was issued this morning before the market opened. This release may be accessed on the company's website at acaciaresearch.com under the news and events tab.
With all that said, I would now like to turn the call over to Clifford Press. Clifford the call is yours.
Clifford Press
Thank you, Rob and good morning everyone. On June 5, a strategic alliance with Starboard Value got off to a flying start with the announcement about first approved transaction, the acquisition of a portfolio of investments.
In 18 Public and Private Life Sciences companies from the former Woodford Equity Income Fund, for a total consideration of £224 million or $282 million. This was an opportunity deposition, which we discovered during the due diligence process for another investment idea of a company that has several very large holders.
One of which was the former Woodford Fund then in liquidation. When the pandemic hit the potential secondary sales of the Woodford Fund store and we were in a position to consummate the transaction under extremely challenging circumstances.
I'm sure we all remember how the markets are acting in the first week of April. We were fortunate to be able to conduct due diligence on 18 different investments most of which were in the UK during the lockdown and complete the transaction by early June.
Before I turn the call over to Al to discuss details of the Woodford portfolio acquisition. Let me review our IP business.
During the second quarter we acquired Excalibur IP. A portfolio of more than 2500 patents spun off with Yahoo.
And a portfolio of nearly 150 Wi Fi and IoT patents from L3 Harris. As we have noted before, there continues to be a limited capital supply available in the IP market.
And we believe that we are able to obtain realistic pricing. Importantly, we have began to see soft licensing revenue from these acquisitions, Mark Goods and his team continue to evaluate additional acquisitions.
With that let me turn the call over to Al Tobia, our Chief Investment Officer. Al?
Al Tobia
Thank you, Clifford. Following the Woodford transaction, we reached out to many of our shareholders, and received inbound increase from other investors.
We recognize that this is a rather unique transaction with a high level of complexity. And we want to use this opportunity to go through the questions we have received and explain the details of the transaction.
Soon after closing the transaction, we sold our entire position in four of the public entities as well as portions of a few others. To date, we have recouped 185 million of our 282 million purchase price, having moved swiftly to derisk the transaction we are holding continuing positions in companies where we believe there are opportunities to create incremental value.
The largest of the private company investments is a 6% stake in Oxford Nanopore Technologies. An exciting company with disruptive technology in genetic sequencing, applicable to a broad range of applications in both research and commercial markets.
Interestingly, its company just announced a significant new contract with the UK government to provide precise detection of COVID and other pathogens on a rapid basis. We believe there is significant unrealized value in many of the assets we acquired, and we will work with Starboard to realize these opportunities.
Additionally, our combined strategic committee continues to meet regularly to identify and evaluate additional investments. We have a significant number of potential investment opportunities currently under review.
Let me now turn the call over to Rich Rosenstein, our CFO to discuss the financing for the transaction. The GAAP accounting methodologies that have been applied in bringing them onto our balance sheet and our quarterly financials.
Rich?
Rich Rosenstein
Thank you, Al. As noted we paid a total of $282 million for the public and private company assets.
We financed this with cash on hand in addition to utilizing 35 million in preferred stock which was previously held as restricted cash plus a $115 million in new notes issuance to Starboard, which made this our first approved investment under the terms of our Starboard agreement. The Woodford portfolio is a mix of public and private company securities, which we purchased at a discount based on prices in early April when markets were depressed.
Under GAAP we account for the value of the components of the portfolio at initial fair value as follows. The public securities which are level one assets were valued at market value with the fair value of the private securities representing the balance of the portfolio purchase price.
As a result, our cost basis in the private securities reflects the bulk purchase discount for the whole portfolio with the public securities valued at market value. At the end of each quarter, we mark the public assets to market.
For the private securities, we adjust our carrying value based on observed primary or secondary transactions in those companies’ shares or recognize any impairment. If there are no observable transactions or impairments, we will not adjust our carrying value for these positions.
As a result, our carrying value at the end of the second quarter reflected market value of our public securities and largely cost for our private securities. To follow all of this on our balance sheet, note that we paid the full purchase price of £223.9 million or $282 million into escrow at closing in early June.
Funds are released from escrow as securities are transferred. While nearly all securities have been or are now in the final stages of transferring as of today.
On June 30, not all securities had been transferred. For this reason, our June 30 balance sheet includes an asset called prepaid investment, totalling $94 million.
That represents the balance of the purchase price for the remaining shares to be transferred at cost at June 30. There are also two items totalling $83 million on our balance sheet at June 30 called equity securities forward contract and equity securities derivatives.
These represent the embedded gain versus our attributed cost for the remaining public stakes at market value first any fair value adjustment on any of the private shares that remain to be transferred at June 30. Note again, that most of the private securities continue to be carried at cost not reflecting any embedded gain at this point.
Once these securities transferred to us, you will see these prepaid forward contract and derivative assets to eliminated and replaced by the securities themselves moving on to our balance sheet. You will see this in our September financials.
The original Starboard funding agreement have not contemplated using these notes for short term funding, which is what this financing represented. So in collaboration with Starboard we modified our agreement to permit us to repay the notes by year-end and return the preferred stock proceeds to restricted cash.
Through this modification we will no longer pay interest on the notes following repayment and our preferred dividend rate will revert back to 3% from 8% when the $35 million and preferred funds are returned to escrow. In return for this modification, Starboard has retained the 7-year exercise right of notes related to this $115 million of funding so that it may exercise $31.5 million warrants of $3.65 per share in cash even after the notes have been repaid.
This does not add any additional warrants beyond the $100 million series B warrants already issued to Starboard and upon repayment of the notes we will retain the opportunity to draw on the full agreed amount of $365 million of notes in the future. Investors have asked about the impact of dilution should all of the warrants be exercised.
First no warrants have been exercised to date. Accordingly, we've recorded a number of liabilities as of June 30, all of which are reflected in our book value.
First, $115 million of notes to be repaid, two, $35 million in preferred stock, three, warrant liabilities and four, the derivative value of the conversion potential and the preferred stock. Each of these instruments are exercisable or convertible at $3.65 per share meaning these were in the money as of June 30.
A book value at June 30 is $164.7 million or $3.36 on a per share basis based on 49 million shares. It is important to note that this book value reflects the GAAP treatment of warrant liability associated with the warrants outstanding.
Given the significant appreciation in our share price, those warrant liabilities increased substantially during the quarter and are now reported on our balance sheet at an aggregate value of $95 million or $1.93 per share. Those liabilities reflect the GAAP value all warrants outstanding recognized as non-cash charges potential future issuance of shares.
Upon exercise and our expiration, these liabilities will be eliminated and reclassified to equity. As I mentioned, our book value today is $3.36 per share which includes the $95 million of these warrant liabilities.
If the notes were to be used to exercise 31.5 million warrants at $3.65 a share, and the preferred were to be converted to 9.6 million shares and the 5 million Series A warrants were all exercised, our book value would rise by more than $200 million and our share count would increase to roughly 95 million. On this increased share count book value will be approximately $4 per share.
Note that this still reflects the carrying value of most of the private securities at cost in our recent acquisition, meaning any future observation or realization of value will be accretive to that book value. Now I will discuss our financial results for the quarter.
Cash and short term investments totaled 184 million at June 30th, compared to 158 million at March 31st and 168.3 million at December 31st. Debt was 115 million in senior secured notes issued to Starboard.
Book value totaled 164.7 million as of June 30th, compared to 175 million at December 31st. Revenues for the second quarter of 2020 were $2.1 million in line with our expectations.
We are just beginning to see contributions from our recently acquired IP portfolios. More detail on these results have been made available in the press release issued this morning and also in the upcoming quarterly report on Form 10-Q, which we will file with the SEC later today.
Now, let me turn the call back to Clifford for closing comments, Clifford?
Clifford Press
Thanks, Rich. When we announced the strategic partnership at Starboard, we indicated that we have retained the rights to offer existing Acacia common stockholders the opportunity to purchase up to 100 million in senior secured notes and warrants and up to of notes and warrants purchase up to 27 million of shares of common stock on substantially the same terms as Starboard, we reaffirm this goal today, and intend to commence an initial offering of 31.5 million in senior secured notes and warrants to purchase common stock as soon as reasonably practicable.
In conclusion, we have taken a significant step to build out Acacia’s asset base with the strategic acquisition of a portfolio of life science assets, immediately works to reduce the inherent risks of this portfolio by selling liquid assets. Taking advantage of the market fluctuations between the date we price the assets and the date we acquire them.
The remaining assets allocated on our books inclusive of many of the private security still a cost offering meaningful upside potential ahead. We believe Acacia is strategically well positioned in this environment through a highly motivated management team adept at navigating complicated transactions.
Acacia is designed to be extremely flexible. It can pursue investments in multiple ways, including acquiring public or private entities or acquiring assets directly.
You believe that together with Starboard, we are well positioned to pursue corporate development opportunities of greater scale and flexibility. We are now happy to answer any questions that you have.
Operator
Thank you. At this time, we will be conducting a question-and-answer session.
[Operator Instructions] And our first question is from Anthony Stoss with Craig-Hallum. Please proceed with your question.
Anthony Stoss
Good morning, guys. I have a couple of questions.
I'm curious the level of interest in the private companies that you hold. Also you think that all the private entities will be transferred over this quarter?
And I'm curious to hear your philosophy if there's any of them that you think are just jewels that you want to hang on to even if there's interest in selling them. Why don't we start with that then at a follow up afterwards?
Rob Fink
Thanks, Tony. Clifford, would you like to talk about the private companies and our process for looking for liquidity in the future?
Clifford Press
Yes. So we view it as a portfolio trade, we intend to realize cash for all of the assets as soon as practically possible.
We've established with the board, a waterfall timetables to do that, but we do believe that several these assets have substantial upside. And we have the process for getting through now to realize on that.
And we will be shortly providing details any of the assets that we continue to hold and provide some outlooks on what we expect for them.
Anthony Stoss
I'm sorry. Continue, please,
Clifford Press
As an overview matter because of the nature of buying a portfolio that was in liquidation after operating for a long period of time. What we have here, our late stage Life Sciences investments, most of which are within 12 to 24 months of a commercial inflection point.
And I think that's a very important factor to remember about these assets. They're not early stage assets on the whole.
So that realizable in the near term.
Anthony Stoss
Thank you for that. And then if you wouldn't mind commenting about the engagement or how active Starboard is, with you folks I know out of the gate has been very active.
And I know there's no deal until there's a deal. I'm just curious if you can comment on operating businesses.
Clearly you're highlighting them in your press release. So perhaps that you're maybe getting closer than before.
Any thoughts kind of on timelines or goals, you have to try to secure an operating business acquisition.
Clifford Press
So Tony, what I would say is that if you looked at our original timeline that we laid out, this transaction occurred fairly quickly. And it was a difficult transaction in terms of complexity and the amount of work we put into it.
We're not -- we are flexible in our mandate, as you can see. And we are continuing to progress as rapidly as possible.
I understand that the markets have moved dramatically hit rates are low. And so we continue to work as expeditiously as possible.
And that's kind of what I would say along that. We're in constant contact with Starboard and collaborating as aggressively as you would expect.
Anthony Stoss
Maybe a question for Rich here in the press release, Al and Clifford and Rich you're talking about hiring more professionals? What should we think of in terms of OpEx going forward?
Is it a small bump up or -- I know it's tough to say ahead of an operating business acquisition, but I'm just curious, whatever detail you can give.
Rich Rosenstein
I'll start on and then Clifford may want to jump there. And so we have research and investment team in place and we've all been working very hard.
We're adding to that team, as mentioned, but we're doing it deliberately. So we're not ramping up our operating expense significantly.
We're doing it through deliberate hires, where we have specific needs around both our research and execution process. If you want to add anything to that, Clifford.
Clifford Press
Yes, thank you, Rich. And I would say look Acacia as is now configured, is an exceptional platform.
And we've been stretched very thin, executing on the transactions we've been doing. We do need to add some particularly execution capability.
We have increased our research team as well. And we have a very dynamic interaction with our strategic committee, with our Starboard representatives, which also generates potential activity for us.
So we definitely need to improve at increasing the throughput capacity of the team.
Anthony Stoss
Thanks, Clifford, best of luck, guys.
Rob Fink
Thanks.
Operator
[Operator Instructions] Our next question is from Brett Reiss from Janney Montgomery Scott. Please proceed with your question.
Brett Reiss
Good morning gentlemen. Got a couple of them, how does the acquisition pipeline with patents look going forward?
What’s more, how many guys?
Al Tobia
So, Brett, I would say that the two date patents that we acquired we were very impressed with Mark's diligence on those and the ability to bring in what we think are high quality patents. One is in partnership with a very substantial company and one was at the tail end of wind down of a company.
But both we think are, were very well vetted and very positive developments to Clifford's point about the market pricing, there's been, hopefully some rationality in the market after years of sort of a dislocation. And we continue to evaluate a pretty active pipeline from Mark's group, we have a process in place now for the Board to vet very formally the requests that Mark puts in front of us for capital, and we're allocating the way, you would hope we would allocate to any platform that we develop.
Brett Reiss
Okay.
Al Tobia
Clifford, do you want to add anything to that?
Clifford Press
No, I think that's correct. We continue to believe Brett that there are opportunities available as realistic prices that are worth pursuing.
Brett Reiss
Okay. I noted the other day, there was a Biohaven Pharmaceutical did a royalty deal with Royal Farmer for 450 million.
Is that the type of thing because I know we were looking at, doing farmer royalty deals, is that something the kind of thing you've looked at, passed on, you’re familiar with that one?
Al Tobia
Clifford, may want to jump in here Brett, I wouldn't comment on it was sort of one specific deal. We obviously in researching and ending up with the Woodford portfolio there are some royalty type of companies in that portfolio.
A royalty stream is similar to an IP, licensing stream, so it's something that we're relatively familiar with. And that's just one piece of our ongoing research efforts.
I wouldn't overly dwell on that. Any one specific investment within that segment of business.
Brett Reiss
Okay. And can you just give us a rundown on where we -- I've gotten a number of questions on this.
On the remaining warrants with Veratone, did we monetize some of them and what do we have left there?
Rich Rosenstein
So I can answer that. We have a number of tranches of those warrants.
And in the June quarter, we exercised some of those warrants and sold the shares the warrants were in the money and so we took advantage of that market opportunity. There will be more detail of this in our 10-Q but we sold portion of them already about 15%.
Brett Reiss
Okay. Richard, I may circle back to you offline, because I need a little bit more understanding on the accounting on the non-cash liabilities warrants and the embedded derivative.
But I'll circle back to you on that. And then one final one, the $31.5 million in notes and the warrants to purchase common that ultimately your shareholders will be given the right to share parity actual with Starboard.
The warrants will be at 365 and what will the interest rates on that instrument paid with the notes.
Rich Rosenstein
So, they'll be on the same term. So the same interest rate, the 6% interest rate on the note.
And the warrants will also be at the same stroke.
Brett Reiss
Which is 365.
Rich Rosenstein
Correct.
Brett Reiss
Okay. And when will we even doing the filing and when are the milestone dates on that.
Rich Rosenstein
So we've said as soon as reasonably practicable which is to say we will have more to report to when we report. So, we're working quickly to do this.
Brett Reiss
Alright. Fair enough.
Thank you for taking the questions. And good show on that portfolio.
Rob Fink
Thank you, Brett.
Operator
And we have reached the end of the question and answer session. And with that this concludes today's conference.
And you may disconnect at this time. Thank you for your participation.