One of Acacia Research Corp.’s largest shareholders is waging a proxy battle to oust the company’s chairman and another director up for re-election.
New York-based hedge fund manager Sidus Investment Management LLC and BLR Partners LP in Houston, which own a combined 4.1% of outstanding Acacia shares, plans to replace G. Louis Graziadio, who became chairman in 2016, and Frank Walsh, who took a board role the same year, at Acacia’s annual shareholder meeting.
The activist investors have nominated Clifford Press and Alfred Tobia to replace them.
Acacia, as of press time, hadn’t announced the meeting date.
Press, a co-owner of New York investment advisory firm Oliver Press Partners LLC, is a director at several public companies, including Stewart Information Services Corp., Quantum Corp. and Drive Shack Inc.
Tobia, who co-founded Sidus and serves as its equity portfolio manager, is a director at San Antonio-based marketing agency Harte Hanks Inc.
Sidus and BLR in a March 20 letter to Acacia shareholders laid out several issues with the firm’s governance and shifting business model since Graziadio’s appointment as chairman, a period during which Acacia’s share price has dropped 38% to $3.35, with a recent market cap of about $169 million.
“The market is unimpressed by the company’s prospects under Mr. Graziadio’s leadership and we believe that he must be held accountable for the destruction of stockholder value,” the letter said.
The new model, focused on investment in high-growth and potentially game-changing technologies in artificial intelligence and machine learning, robotics and blockchain applications, deviated from Acacia’s core business of monetizing patents primarily through litigation, an increasingly costly and challenging endeavor due to recent changes in intellectual property law and jurisdiction limitations.
Tech giants, such as Google and Apple, have devoted endless resources to tie up patent lawsuits in courts.
Blockchain, steeped in mathematical engineering, coding and third-party authentications, holds potential for reliably tracking property titles; precious goods’ provenance or authenticity; art and intellectual property ownership; and securing of supply chains for software and other critical areas.
“It does not appear that either management or the board of Acacia has any demonstrated record of success in technology investing that gives us confidence in the company’s ability to execute this particular strategy,” the letter stated.
Acacia President Rob Stewart dismissed those claims, highlighting the company’s strong run during the recession, when revenue peaked at $250 million in 2012 and the company posted $59.4 million in net income. Acacia was on its way to dispelling critics’ pejorative image of a “patent troll” or “nonpracticing entity,” as its market value eclipsed $1.9 billion in the heady days of September 2011.
“We created the largest third-party patent licensing and outsourcing company in the world,” Stewart told the Business Journal last week. “Call me crazy, but that’s pretty successful.”
Sidus also took issue with last year’s appointment of James Sanders as an independent director, citing his role as secretary and general counsel of Boss Holdings Inc., where Graziadio serves as chairman and chief executive. Boss is an Illinois-based importer, marketer and distributor of gloves, boots, rainwear, pet supplies, cellphone accessories and other products.
“We question whether Mr. Sanders is truly independent,” the companies said in the letter.
Sidus and BLR also alleged that Acacia failed to respond to their mounting concerns since it stopped holding analyst calls last year after quarterly reports.
Acacia denied those claims in a March 21 response letter to shareholders.
Veritone Investment
The challenges facing Acacia have also been fueled by a weakening balance sheet, a shrinking portfolio of quality patents, a closing window to monetize them, and other underperforming IP assets.
The company shifted its business model in the third quarter of 2016 when it made two convertible $10 million loans and took an equity stake in Newport Beach-based startup Veritone Inc. The investment ballooned to $54 million when Veritone unlocked nearly $30 million in warrants held by Acacia after its May initial public offering.
Acacia is Veritone’s largest shareholder, with about 31% of capital stock, and has significant control over business operations and matters requiring stockholder approval, such as directors, corporate transactions and securities rights. Acacia exercised some of its influence last year, nominating two of its three board members: Acacia General Counsel Edward Treska and Walsh, vice president of Jupiter Capital Management Partners LLC in New York.
Shares of Veritone, which is trying to crack into the hot AI segment, have skyrocketed and plummeted for the better part of a year, trading at $13.82 as of press time with a market value of $224 million—miles from its intraday high of $74.92 and a $1.1 billion market value on Sept. 27.
Last year Veritone increased revenue 62% to $14.4 million, while operating losses hit $46.8 million, up from a $23.8 million loss in 2016. Its media-buying business accounts for the vast majority of revenue.
The Veritone investment led to a gain of $159 million in the third quarter for Acacia and a loss of $104 million in the fourth quarter.
“We are concerned that Acacia has such a high level of exposure to such a volatile stock, which has traded between $7.76 and $74.92 during the past year,” Sidus and BLR said in the letter.
Acacia’s revenue declined 57.1% last year to $65.4 million. It posted net income of $22.1 million compared to loss of $54 million in 2016. The gain was primarily tied to its Veritone investment, which more than offset an operating loss of $27.2 million.
Acacia led a $10 million Series B funding round in February for Miso Robotics, a Pasadena-based company that makes robots for the restaurant industry. It plans to debut one, Flippy, at a Pasadena location of Seattle-based CaliBurger LLC.
Acacia has invested $8.2 million in Miso, according to its 10-K filing.
In January it developed a joint venture with Bitzumi Inc. and invested $1 million in the New York-based company, which is developing a decentralized exchange for digital currencies. The company also holds a short-term warrant to purchase $4 million in Bitzumi common shares if it goes public, and can acquire an additional $9 million in Bitzumi common stock.
Sidus and BLR have a history of waging successful proxy battles.
Harte Hanks reached a deal last year with Sidus, which owned about 2.5% of outstanding shares at the time, appointing Tobia and consultant Melvin Keating to its board. The appointments averted a looming proxy fight.
In February Harte Hanks announced governance changes to reduce executive and director compensation.
