Good morning, ladies and gentlemen, and thank you for joining us for Acacia Research Third Quarter 2024 Earnings Conference Call. My name is Jenny, and I'll be your conference facilitator today. I would like to remind you that this conference is being recorded today and is also available through audio webcast on Acacia's website. Questions can also be directed to Acacia at ir@acaciares.com, which is a-c-a-c-i-a-r-e-s.com. I would now like to turn the conference over to Mr. Brent Anderson of Gagnier Communications. Mr. Anderson, you may begin the conference.

Thank you, operator. Leading today's call are MJ McNulty, Acacia's Chief Executive Officer; and Kirsten Hoover, Acacia's Interim Chief Financial Officer. Before MJ and Kirsten begin their prepared remarks, please be reminded that 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 the 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 Form 10-Q filed with the SEC. Acacia issued a press release disclosing its third quarter financial results earlier this morning. The press release may be accessed on the company's website under the Press Releases section of the Investor Relations tab at acaciaresearch.com. The company also posted its Q3 2024 Earnings presentation to its website, each of which can be found under the Events and Presentations tab. I would now like to turn the call over to Acacia's Chief Executive Officer, MJ McNulty.

Thanks, Brett, and thanks to everyone for joining us today for our third quarter Earnings Call. As many of you have heard me say, Acacia is a value-oriented acquirer and operator of businesses across the industrial, energy and technology sectors. Specifically, we're focused on acquiring and building companies that have stable cash flow generation, with an ability to scale while retaining the flexibility to make opportunistic acquisitions, with higher risk-adjusted return characteristics. With that in mind, I'd like to begin our call today by talking about our investment strategy and how [ Deflecto ], the newest addition to our stable of companies, fits our strategy to a team. After significant due diligence, negotiation and strategic planning, we signed and simultaneously closed on our purchase of Deflecto late last month. This transaction, like our acquisition of Benchmark almost a year ago, came about through adhering closely to our philosophy of building strong and like-minded relationships with business leaders. And importantly, finding opportunities to make our return owning a business, rather than through selling a business. I'd like to drill down a bit on that last point, because I think it's one of the key elements that differentiates us from others. We run several valuation models and metrics when we evaluate a business. One metric we rely heavily on is the durability and scalability of a target's annual earnings stream rather than its exit earnings, and the impact of these earnings on our income statement. Specifically, we underwrite to an acceptable range of unlevered and levered earnings yields, relative to the purchase price of the business and the related equity required to fund the acquisition. So why is this different? It's distinct from the "leverage buyout level, where the purchase price is heavily financed through a credit package, enabling small enhancements to…

Thank you, MJ. Our GAAP book value at September 30, 2024, was $578.6 million or $5.85 per share. Excluding the impact of $14.9 million related to nonrecurring legacy legal matters, the company's book value per share at September 30, 2024, would have been $6 per share. Total revenues were $23.3 million compared to $10.1 million in the same quarter last year. Our intellectual property business generated $0.5 million in licensing and other revenues during the quarter, compared to $1.8 million in the same quarter last year, due to no paid-up licensing agreements executed during the third quarter of 2024. Our industrial operations business generated $7 million in revenue during the quarter, compared to $8.3 million in the same quarter last year, due to a decrease in printer sales. Benchmark generated $15.8 million in revenue in the quarter as Acacia's initial investment in Benchmark closed on November 13, 2023, there is no comparable revenue in the same quarter of last year. General and administrative expenses were $11.1 million compared to $11.6 million in the same quarter of last year, with the decrease due to the decrease in parent legal fees, offset by an increase in G&A for the addition of our Energy segment. The company recorded an operating loss of $10.3 million, down 22%, compared to an operating loss of $13.2 million in the same quarter of last year due to higher revenues generated. Printronix contributed $0.1 million in operating loss which included $0.7 million of noncash depreciation and amortization expenses. Benchmark contributed $3.1 million in operating income, which included $4.3 million of noncash depreciation, depletion and amortization expenses, $0.3 million in onetime transaction costs and does not reflect $0.7 million of realized derivative gain. GAAP net loss attributable to Acacia Research Corporation in the third quarter was $14 million or…

Thanks, Kirsten. Before taking questions, I'd like to highlight that following the Deflecto acquisition, the company's cash reserves were approximately $280 million for potential future acquisitions. We also repurchased approximately 3 million common shares for about $14 million at an average execution price of $4.65 as of November 7, 2024, through our previously announced stock repurchase program. This program is a key component of the company's overall long-term strategy to deploy excess cash and increase total shareholder returns over time. As a reminder, Acacia's $20 million Board-approved repurchase program allows us to repurchase up to 5.8 million shares of Acacia common stock. We intend to continue to opportunistically complete share repurchases in the open market during the fourth quarter of '24 and into '25. I'd also like to point out that we posted our Q3 '24 earnings presentation to our website. With that, Kirsten and I would be pleased to take any questions. Jenny, I'll hand it back to you.

[Operator Instructions] Your first question is coming from Anthony Stoss of Craig-Hallum.

Really a two-part question. Love to hear more on Deflecto. Congratulations on the transaction. Love to hear kind of their margin profile, what your plans are for synergies? And then I had one other follow-up after that.

Yes. I think it's a great question. I mean, to start off, I think this is kind of an exemplary deal for us. Deflecto has got three business segments, as we mentioned, all of which are kind of niche, very strong market share in each one of their core end markets. We mentioned a lot of their products are regulatorily required, and they have really strong market share. And so as we think about the business, we think there's -- the company had been going through a cost rationalization exercise. We think they're probably 5 or 6 innings through that with a strong team that can continue further cost rationalization, facility rationalization and margin enhancement. Today, they're kind of doing EBITDA margins in the mid-teens. We think there's opportunity there, from continued scaling and cost rationalization, as I mentioned. We think there's opportunity from a product set standpoint. If you dig into their products, there's some product expansion and product adjacencies that are pretty logical for them that are in kind of in flight already inside the company. And then we do think with three different segments, different end markets and different products that there's an ability to continue to grow those through acquisition, which will enhance the scale and help to enhance utilization of existing capacity or capacity of the acquired company. And so, we think it's a pretty interesting acquisition that provides a lot of levers to continue to grow and enhance margins.

Perfect. And then shifting gears to the Benchmark assets. You've got a couple of quarters under your belt now. When you look at both either revenues or adjusted EBITDA, is it living up to your expectations? And where do you think you could take it on the adjusted EBITDA side going forward?

Yes. I mean, as we mentioned in the past, we kind of underwrite -- this is operated oil and gas. So we're not really running drilling programs. And so we had the ability in oil and gas to look at the decline profile of each of the wells that we acquired, sensitize that decline profile and then put oil and gas liquids overlay pricing on that to determine what revenue looks like. I would say that, that is playing out the way we expected it to play out. We operate most of our production. Some of our production is operated by others, and we're a participant in those wells. We did see a little bit of a slowdown in some of the wells that we are participants in, but not the operator being completed. We think that's largely pushed forward as opposed to not an opportunity. So we do expect to see more revenue coming online from those. And the team is kind of in mid-innings of its operational enhancement of particularly the Revolution assets that we bought, where they're opening wells that were previously closed, and reworking wells that are not producing to optimization. And so I think the acquisition in total, to answer your question, Tony, is playing out exactly how we thought it would. We're very pleased with it. We still think there's a lot of opportunity there.

Your next question is coming from Brett Reiss of Janney Montgomery Scott.

Can you hear me, MJ and Ken?

Yes, pretty well.

Some questions also on Deflecto. In poking around the Internet, years ago, were their revenues much higher? And if I have that right, did they get out of some businesses? Or I just don't have the forensics on that right?

Yes. No, Brett, it's a great question. It's a very astute observation. The company that we bought is very different from the company that existed 5 years ago. It was really a mishmash of a lot of disconnected assets. It really was a family business, that then was acquired by a sponsor, and had grown into a lot of unattractive and unrelated business lines that didn't really have a Cogent focus. And so the existing sponsor and the team, the prior owner had really rationalized of the noncore product portfolio, and brought it down to this transportation safety, mud flaps and emergency warning triangles. Again, these things are kind of not the sexiest things in the world, but very attractive products, with very, very good market share and regulatorily required products into the HVAC space, and into the office end market. And so it was a larger business that has been pared back to the higher margin, highest margin product portfolio inside their suite of products. And then as we mentioned, cost rationalization alongside. So there has been a big transformation in the business, which is why I say we're kind of maybe 6 innings through that transformation, and we see a really clear path to finishing that transition and then continuing to grow the business organically and through acquisition.

Great. Great. So since they began the process of more concentrated focus, do you think you're going to stay in the three business segments or maybe choose one or two to really focus on, and maybe do something with the one that is tangential to the other 2? Or we're not far enough along on our analysis yet?

No, I think it's a good question, and we spent a lot of time talking about it. We like all 3 segments for different reasons. But we do like all 3 segments, and they have -- they each have very attractive characteristics associated with them. I think that the transportation business and the HVAC business have logical paths to be platforms in and of themselves to grow through acquisition. And so we -- as we've said in the past, we are looking to create platforms where we can. And I think we have definitely two there that we can grow into independent large businesses in and of themselves.

Okay. And this is very back of the envelope, but assuming the EBITDA is the midpoint, $18 million, and your cost of the secured loan and revolving credit facility is 7.5% to 8% because it's SOFR plus that spread. So your interest costs are going to be a little over $4 million. So the cash flow on our $50 million investment is upwards of 25%, 27%. Is that back of the envelope, what we own here? Because if so, that's very nice.

Yes. No, we -- look, this is -- this was kind of the point I was trying to make at the beginning of the call, Brett, which is we're targeting pretty nice returns, while we own the business. And so we put a very moderate amount of leverage. So there is some interest cost. That interest cost will in part offset the taxes. We will have some notional taxes. We do have some NOL left, but we don't really take our NOL into account and underwrite the return of an underlying business looks like. And so there is some tax against that, Brett, but we still think that the yield on both a levered and an unlevered basis, while we own the business is attractive. So we're getting paid to own this business as opposed to the leverage buyout model, where you're making a little bit to own the business, but you're really making your money on exiting the business. And so we really look to underwrite deals like this where we all collectively as shareholders are being paid a really nice return just to own the business.

Right, right. One last one because I've asked a lot of questions, and I don't want to hog the phone here. I did get a couple of comments from shareholders. We thought that the revenue flow from the IP business would have been a little higher this quarter. I know it's lumpy, but can you just talk to that a little bit?

Yes. I mean it is very difficult to determine on a quarter-by-quarter basis what the intellectual property business is going to deliver in revenue. We, as a management team, have the luxury of knowing what we own and what's going on under the covers with those portfolios. And we -- as we've said, we view this as a very attractive asset class. And the month-to-month, quarter-to-quarter revenue from that asset class, will vary. But ultimately, the portfolio, we believe, is very attractive from a monetizing cash flow perspective.

Good show on the Deflecto acquisition.

[Operator Instructions] Your next question is coming from Adam Eaglston of Formidable Asset Management.

I just wanted to echo what Tony said, really nice work on the execution then in terms of what Brett said, nice ROIC, it seems like we're going to have on Deflecto. All great stuff. I'm thinking about more from a sentiment perspective. also like seeing the buyback turned on there. We've talked about that in the past. You've got $280 million in cash. And I think that the future term, MJ, maybe this wasn't the sexiest acquisition. But stocks right now are trading on narrative. You've got a stack of cash. You've got now a derivatives team in place. Have you considered any type of entry into the crypto space given the further we're seeing if you compare the NAV discount where you trade versus the ridiculous, in my opinion, premium at which some of these crypto shares trade. Have you thought about a slightly different approach to cash management versus treasuries?

I'm fascinated by crypto, Adam. I'm a little scared of the volatility of crypto. Have we evaluated using crypto as cash management, not seriously, to be honest with you, not that we've determined we wouldn't, but that we haven't spent a lot of time thinking about that as an alternative to cash management. Have we looked at things around the crypto space from an operating -- a business operating model perspective? We have. I think it's been a little academic on our side. I think that the new administration is very pro-crypto. So I think it warrants an evaluation. We historically have been much more conservative as we're inherently value investors. And so we have been cautious on our evaluation of crypto.

Understood. No, that's fair. Again, value investors seem to be a dying breed and we're kind of one of them, too. In terms of being scared of the volatility, that's why bringing the derivatives piece and maybe you can harvest some of that volatility with your derivatives team there. So yes, that was my question for the day.

Okay. No, it's an interesting question. Maybe we can talk offline about it a little bit.

Well, we appear to have reached the end of our question-and-answer session. I will now turn the call back over to MJ for closing remarks.

I appreciate it, Jenny. Thanks for leading us in the conference today. Thank you for joining us, everyone. Hopefully, we gave a fulsome update on kind of the portfolio, the suite of assets that we have and a little bit more disclosure on how we think about the business and the operated segment adjusted EBITDA. So we look forward to talking to you next quarter, and we're continuing to put our heads down and execute against the plan that we put forward.

Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.