Acacia Research Corporation Aktie

Good morning, everyone. Thank you for joining Acacia Research's First Quarter 2026 Earnings Conference Call. My name is Jenny, and I will be your conference facilitator today. [Operator Instructions] I would also like to remind you today's conference call is being recorded and is also available through audio webcast on Acacia's website. [Operator Instructions] Questions can also be directed to Acacia [email protected]. I would now like to turn the conference over to Elizabeth Chaconas of Gagnier Communications. Elizabeth, you may begin the conference.

Thank you, operator. Leading today's call are MJ McNulty, Acacia's Chief Executive Officer; and Michael Zambito, Acacia's Chief Financial Officer. Before MJ and Mike begin their prepared remarks, please be reminded that certain 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 and 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 most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC. Earlier this morning, Acacia issued a press release disclosing its first quarter 2026 financial results. 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 Q1 2026 earnings presentation to its website, which can be found under the Quarterly Results section of the Investor Relations tab. On today's call, the team 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 first quarter 2026 financial results available under the Press Releases section of the Investor Relations tab at acaciaresearch.com. I will now turn the call over to Acacia's Chief Executive Officer, MJ McNulty.

Thank you, Lizzy, and thanks, everyone, for joining us this morning. Coming quickly off the back of our full year 2025 call. We're excited to share some updates with you as our business continues to progress. As we have been, we continue to work diligently on our execution strategies across our businesses. At Benchmark, we drilled our first meaningful well in the Cherokee play, which we brought online late in March. The drilling of that well and a constructive commodity price environment have opened additional attractive return opportunities in the Benchmark business. We're continuing to make progress at Deflecto and Printronix and we'll share some updates there.

Further, in our intellectual property business, we're seeing some interesting monetization opportunities, both in our Atlas portfolio of Wi-Fi 6 assets and our R2 portfolio. I believe this quarter is another example of Acacia demonstrating the resilience of our evolving business despite persistent volatility in the market. Our strategy continues to remain the same, acquiring and building businesses where our operational excellence can create stable long-term cash flow generation and scalability. Importantly, we've done this in a way that allows us to capitalize upon a diverse set of capital allocation and operational opportunities to create value for our shareholders. Through the combined strengths of each of our businesses, we aim to create meaningful enduring value.

Our successful execution of this strategy, combined with our disciplined cost control, stable cash yields and targeted operational initiatives enable Acacia to achieve Q1 revenue of $54.2 million and operated segment adjusted EBITDA of $6.8 million.

We look at these numbers before the impact -- if we look at these numbers before the impact of our intellectual property operations, operating segment adjusted EBITDA was stable sequentially at $10.3 million. I believe that our consistent execution across operating segments and the significant actions we've taken since our current team took over has created substantial intrinsic equity value in Acacia that is not yet reflected in our share price.

We feel very strongly about our ability to continue to generate value for our shareholders as we move further into the year. We continue to be laser-focused on growing EBITDA and free cash flow in each of our operating businesses while continuing to strategically grow our pipeline of acquisition opportunities.

Our strong balance sheet, $330 million in total cash, securities and loans receivable as of March 31 puts us in a strong position to pursue accretive organic and inorganic growth opportunities in each of our core verticals. I'd like to take a moment to give you more of an update on our operating segments. Starting with Benchmark, our energy operations performed ahead of our expectations for the first 3 months of the year. We achieved record quarterly revenue of $18.7 million and generated $7.7 million in adjusted EBITDA for the quarter. Over the last 12 months, the team at Benchmark has been working hard to assemble an attractive set of drilling units from the land package that we were blessed with from the original Revolution purchase. These actions consist of buying, selling and swapping acreage to maximize our monetizable units in what we felt were the most attractive parts of our basin. These efforts started to shine through in December when we spud our first well, which we are very excited about. The executive and land team at Benchmark continue to work hard to build our inventory of high-return projects, of which we now have many in the queue.

Our production and revenue were up, our extraction costs were down on a per barrel equivalent basis and our G&A was in line. Notably, we've continued to generate attractive cash flow at this asset, which enabled Benchmark to self-fund the drilling of our first Cherokee well with the cash flow the business has generated. As we indicated on our last call, this new well started producing in late March.

Initial results from this well are strong. Development costs of $11.5 million came in line with budget, and we are anticipating a greater than 2.5x MOIC or 60% plus IRR on the project. Investors should see the full impact of this project beginning in Q2 and Q3, and we're proud to say that we set a company record for production in April, selling over 63,000 barrels of oil in the month. We have many more of these high-return projects within our portfolio and are eager to monetize these in the medium term. We had strong production volumes in the quarter despite some severe winter weather. As I'm sure everyone has seen, we also had and continue to have a strong commodity price environment, specifically in oil.

While crude prices didn't really begin their ascent until the early part of March, the elevated price environment has continued into the second quarter, which, of course, is a benefit to us. I will remind everyone that we are 75% to 80% hedged for existing production, so it's not a one-for-one relationship. That said, we've been hedging volumes from our new Cherokee well into a more constructive environment and the rise in prices increases the value of our asset overall.

Based on the success we're seeing with our first drilled well, as well as with the current pricing environment, additional drilling, both in our Cherokee acreage as well as our Cleveland acreage has become more attractive, and we're in advanced stages of evaluating additional projects. As we've mentioned in the past, we approach drilling in a very deliberate way. The Cherokee well we just drilled was drilled with cash produced inside the company. We did not borrow money to drill the well. We're also actively evaluating capital and operating partnerships to drill additional wells that we believe could be attractive for our shareholders.

Before I move on, there's one thing I'd like to note around our hedging strategy. Mike will get into this in more detail when he walks through the numbers for the quarter. But given the significant rise in oil prices in the quarter and our large hedge position, which covers more than 2 years of future production, we recorded an unrealized loss from the mark-to-market impact of the hedge book, which adversely impacted GAAP net income, EPS and book value. Importantly, this is a noncash line item. Because of the multiyear duration of the hedge book, the mark-to-market swings can have a disproportionate impact on a single quarter's results, particularly given the magnitude of changes in commodity prices in the last quarter.

To put this into context, our oil hedges are struck at approximately $70 a barrel and the price of WTI at March 31 was $101 per barrel, up 77% from December 31. If oil prices were to stay flat at $101 per barrel through June 30, the unrealized gain or loss on the hedge book would be zero. The ultimate goal of our hedge book is to reduce the volatility of cash flows from the benchmark investment. The knock-on effect of this is in periods of price volatility, we may experience unrealized hedge gains or losses.

Today, as we look forward, we're earning more on our unhedged volumes, earning the hedge rate on our hedge volumes, and we're putting on additional hedges at elevated prices as we bring on new production. Turning now to our Manufacturing segment. Deflecto delivered another solid quarter, increasing revenue 4.6% and adjusted EBITDA 1.3% sequentially.

Since acquiring the business in the fourth quarter of 2024, we've made meaningful progress enhancing operational performance, reflecting the impact of several targeted initiatives, including price increases, the reshoring and consolidation of select manufacturing operations and a focus on reducing overhead and G&A expenses. These initiatives have greatly enhanced the future earnings potential of the business.

While tariff pressures and macroeconomic headwinds persist, Deflecto has been navigating this environment effectively under the world-class leadership of our operating partner, Clay Kiefaber. We're blessed to have talent like Clay on our team, which speaks to the capacity of this team's ability to scale a much larger business. Specifically, during the quarter, Deflecto successfully completed the consolidation of our Portland, Oregon facility into our Dover, Ohio facility. While we did incur restructuring costs and CapEx associated with this move, we believe the payback should be quick as we anticipate meaningful annualized cost savings beginning in the second half of the year. While early days, we believe that the improved absorption and efficiency from these initiatives could result in even greater earnings uplift, particularly when volumes return to more normalized levels.

Further, we completed the sale of a small unoccupied portion of our U.K. facility, the proceeds of which were used to pay down additional principal on our Deflecto term loan, which has a current balance today of $31.3 million. Deflecto's Transportation segment is primarily focused on selling essential nondiscretionary products such as mud flaps and emergency warning triangles that are mandated by key regulatory authorities. That said, since our initial acquisition, we've seen macroeconomic headwinds in the Class 8 market that have reduced overall demand for the product set.

During the quarter, we started to see an inflection in Class 8 order volumes, which has translated into a modest increase in demand for our products with revenue for the vertical increasing 3.6% sequentially and 3.8% year-over-year. This gives us confidence that our product set has retained and perhaps gained share during the market downturn, and we're hopeful that the positive macroeconomic trends driving these results continue.

Deflecto's Consumer Products segment focuses on essential everyday workplace and household items such as sign holders, wall pockets, storage and organization products, literature holders and desk accessories that are supported by reoccurring demand. Within this segment, ongoing tariff and global trade uncertainty have led some customers to delay purchasing decisions, creating some manageable near-term headwinds combined with significant channel disruption as certain partners have exited the space.

We appear to be reaching a steady state within this segment as revenue increased sequentially by 2.2% during the quarter and was flat year-over-year. We are enthusiastic about the months to come and are excited about the new channel opportunities that are emerging within e-commerce.

Lastly, in Deflecto's Building Products business, which includes products such as air ducts, dryer vents and vent deflectors, performance has been in line with the housing market and is going through a temporary pullback. While the segment was up 8.3% sequentially, we're still down 13.1% year-over-year. While still too early to call a recovery, we have full confidence in the essential and generally nondiscretionary nature of Deflecto's building products portfolio and retain our overall positive view on the long-term positive demand trends for housing in both the U.S. and Canada.

Now turning to our Industrial segment. Printronix continues to deliver consistent results and serves as a reliable source of cash flow for Acacia, having generated approximately $4.8 million of cash flow in the past 12 months, representing a 15% cash flow yield relative to the price we paid to acquire the business. Our ongoing efforts to evolve Printronix into a dual hardware and consumables model, supported by a more streamlined operating structure have expanded the product mix while driving meaningful cost efficiencies across the business. These initiatives are driving tangible results and reflect our broader approach to value creation, where we implement operational improvements across our portfolio to strengthen performance and position each of our businesses for long-term success rather than optimizing them for a near-term exit.

The business had a strong quarter in each of its products and geographies. As a reminder, the legacy Impact Pine business within Printronix is in structural decline, but we're excited about the pivot to a more consumables heavy model and new product growth. Lastly, to our Intellectual Property segment. We recorded total revenue and adjusted EBITDA of $700,000 and a negative $3.5 million, respectively, for the quarter.

As I've noted previously, this segment is inherently episodic in terms of its revenue generation given the unpredictable timing of settlements. This unpredictability in receipt of settlements is more noticeable in quarters where we do not have revenue to offset the ongoing operational costs of our team who have done a great job extracting value from the IP portfolio. While the confidential nature of our settlements limits the level of detail I can provide on a potential future activity for the IP business, we continue to see meaningful value in our IP monetization platform, which has delivered attractive returns over the past 12 months.

Of note, our R2 solutions portfolio, which was originally owned by Yahoo! -- and covers a broad array of innovative computing technologies in the database, Internet search, AI and big data analytics industries has been particularly active in recent months. R2 Solutions is currently enforcing the portfolio in the big data analytics space and anticipates further developments in the coming months.

Before passing it over to Mike to discuss our results in more detail, I'd like to reiterate that while I'm pleased with the improvement in execution of our operating segments, we're equally focused on acquiring and building businesses with stable long-term cash flow generation and scalability that can create compounding value over the long term. As you know, we put together a highly talented team that we believe, together with the strength of Acacia's value-oriented business model positions us to deliver across market cycles.

And while it may seem quiet on the M&A side of things, please trust that we continue to leverage our institutional approach to due diligence and valuation discipline to ensure that we're spending our time on acquisition opportunities that will deliver the most value to our platform and shareholders. I'm genuinely excited about the acquisition opportunity set emerging across our target universe over the next few fiscal quarters as financing conditions gradually improve, and sellers become more realistic around valuation.

For well-capitalized buyers such as Acacia, I believe this will open a window to pursue opportunities where operational improvement and focused integration can drive meaningful value. To that end, our leadership team and Board remain focused on evaluating both internal and external strategic capital allocation opportunities where we believe our experience and approach can help augment underappreciated businesses, creating lasting value for our shareholders and sustaining Acacia's long-term growth trajectory.

With that, I'd like to turn things over to Mike to walk through the quarter.

Thank you, MJ. MJ outlined, we delivered solid results for the first quarter despite persistent and in some cases, escalating macroeconomic and geopolitical headwinds. A few key highlights before moving to the details. Total operated segment revenue, excluding IP, was $53.5 million, a sequential increase of $3.7 million or 7% over Q4 2025. Benchmark delivered record revenue in Q1 and successfully completed its first Cherokee well at the end of the quarter, well in line with budgeted expenditures and with an on-time completion. You should see this well start to impact results in Q2 and Q3.

As MJ mentioned above at Deflecto, we completed the move and consolidation of our Portland manufacturing facility into our Dover facility effective at the end of April. We expect to see the benefits of this consolidation beginning at the end of Q2 and into the second half of the year. Additionally, our streamlining of the SG&A functions is well underway with benefits expected in the second half of the year. Lastly, we paid down $1.6 million of Deflecto debt in Q1 a net neutral cash event as we utilize proceeds from an unused portion of our U.K. building to make the payment.

Our GAAP diluted EPS this quarter was impacted by the unprecedented run in oil prices, which resulted in a $9.7 million unrealized loss from the mark-to-market valuation of our energy hedge at Benchmark. The net impact attributable to Acacia's EPS was $0.10 per share. On a fully adjusted basis, excluding the unrealized hedge loss and other items, Acacia's adjusted diluted EPS loss was $0.07 per share. As discussed more fully below, Acacia's cash, equity securities and loans receivable decreased by $9.7 million during the quarter.

Cash generated from operations at our operated segments, excluding IP, was strategically reinvested in high ROI opportunities, notably the Cherokee -- we discussed above, a small investment in our IP business and the transformation at Deflecto. We are excited about the near-term returns from these investments. Our book value this quarter was primarily impacted by three drivers: the $9.7 million unrealized loss from the mark-to-market valuation of our energy hedge benchmark, a $1.6 million unrealized loss on our equity portfolio and a quarter with no major IP settlements. As discussed by MJ, the IP business' settlement revenue is episodic and unpredictable. In the first quarter, we did not have revenue to offset the ongoing operational costs of our team.

On to the numbers. Acacia recorded total revenue of $54.2 million during the first quarter. Our energy operations generated $18.7 million in revenue for the quarter, the strongest revenue quarter for Benchmark under our ownership compared to $18.3 million in the same quarter of last year. As mentioned, we hedged approximately 75% of our operated production at Benchmark. Realized hedge losses not included in revenue of $1 million in Q1 '26 versus a realized loss of $43,000 in Q1 '25.

Manufacturing operations generated $27.7 million in revenue for the quarter compared to $28.5 million in the first quarter of 2025 primarily driven by lower revenue in our air distribution business, where we're seeing some weakness in the Canadian housing market. Our industrial operations generated $70.2 million in revenue during the quarter, a slight decrease compared to $7.7 million in the same quarter of last year.

Our intellectual property operations generated $0.7 million in licensing and other revenue during the quarter compared to $70 million in the same quarter last year. The year-over-year decrease in the IP revenue is primarily due to the Atlas portfolio settlement that took place in the first quarter of 2025 with no comparable settlement in 2026.

Total consolidated G&A expense was $17.3 million during the first quarter compared to $17.3 million in the same quarter of last year. Deflecto reported G&A expense for the first quarter of 2026 was $4 million compared to $5.7 million in the prior quarter. Of the $4 million in Deflecto G&A expense, approximately $800,000 was related to depreciation of fixed assets and amortization of intangible assets and $800,000 was related to nonrecurring severance, restructuring and transaction-related costs.

The decline year-over-year is due to realization of our efforts to streamline SG&A. Our energy operations reported G&A expense was $1.7 million for the first quarter of 2026 compared to $1.6 million for the prior year quarter in 2025. The intellectual property business reported G&A expense decreased by $0.3 million for the first quarter going from $3.5 million to $3.2 million.

Printronix reported G&A expense decreased by $0.1 million in the first quarter from $1.7 million to $1.6 million. Reported G&A at the parent level for the first quarter increased by $1.9 million year-over-year from $4.8 million to $6.7 million. The increase was due to transaction-related costs in Q1 of 2026 that were not incurred in 2025 as well as certain timing-related adjustments impacting the comparability of Q1 in 2025. Parent G&A on an adjusted basis or our non-GAAP parent costs as shown in our adjusted EBITDA reconciliations increased to $5.2 million in the quarter ended March 31, 2026, versus $4.0 million in the prior year.

The company recorded a first quarter GAAP operating loss of $8.4 million compared to GAAP operating income of $38.3 million in the same quarter last year. This decline was primarily due to the lapping of the Atlas portfolio settlement. Total company adjusted EBITDA for the quarter ended March 31, 2026, was $1.6 million.

Given certain onetime and noncash charges, we believe adjusted EBITDA provides a clearer picture of our underlying performance. Energy operations contributed $5.3 million in GAAP operating income during the quarter, which included $3.4 million in noncash depreciation, depletion and amortization expense and does not reflect the realized hedge loss of $1 million we realized during the quarter, which is reported below operating profit.

Adjusted EBITDA for our energy operations was $7.7 million and free cash flow for our energy operations was negative $1.9 million in the quarter. This free cash flow included approximately $8.5 million of CapEx, primarily related to the development and completion of Benchmark's first well in the Cherokee play. Excluding this growth capital, free cash flow at Benchmark would have been over $6 million.

Manufacturing operations had a $0.5 million GAAP operating loss during the quarter, which included $800,000 in noncash depreciation and amortization expense and $800,000 in nonrecurring transaction-related expenses, restructuring costs and severance costs as part of our operational initiatives at Deflecto. As MJ mentioned above, while Deflecto continues to experience cyclical headwinds, our restructuring efforts are showing positive initial results.

We are utilizing the cyclical lows in the safety business to transform our safety manufacturing operations, having successfully closed the Portland facility effective April 30 and consolidated the operations into our existing footprint in Dover. As part of this transformation, we are also implementing new processes and creating a leaner, more efficient environment. While these efforts will have a modest negative impact on free cash flow in the first and second quarters, the execution of these activities will drive cost savings in the second half of 2026 and position Deflecto well when volumes return to incrementally add to EBITDA and cash flow.

Adjusted EBITDA for our manufacturing operations was $1.2 million and free cash flow was negative $0.2 million in the quarter, primarily due to the consolidation efforts just discussed. Industrial operations contributed $0.9 million in GAAP operating income during the quarter, which included $500,000 in noncash depreciation and amortization expense. Adjusted EBITDA for our industrial operations was $1.4 million and free cash flow was $3.1 million in the quarter, primarily due to working capital improvements. GAAP net loss attributable to Acacia Research Corporation in the fourth quarter was $15.7 million or negative $0.16 per share compared to net income of $24.3 million or $0.25 per share in the prior year period. Included in GAAP net loss for the first quarter was a $10.7 million loss on our derivative hedges from our energy operations. Of this amount, $1 million was realized and $9.7 million was unrealized, which significantly impacted our first quarter GAAP net loss.

As noted previously, we hedged approximately 75% of our operating production at benchmark. The unrealized loss associated with our hedging program reflects mark-to-market accounting on derivative positions that extend over a multiyear horizon and does not correspond to realized economic outcomes within the quarter. The charge is driven by changes in future price expectations and does not impact current period cash flows.

Additionally, included in GAAP net loss for the first quarter was $1.6 million in unrealized losses relating to changes in the fair value of equity securities and a realized loss of $600,000 on the sale of equity securities. Adjusted net loss attributable to Acacia in the first quarter of 2026 was negative $6.6 million or negative $0.07 per share. Among other items, our adjusted net loss attributable to Acacia excludes Acacia's portion of the unrealized loss on energy hedges discussed above.

Further detail on these adjustments can be found in our press release. Moving on to our balance sheet. Cash, cash equivalents and equity securities measured at fair value and loans receivable totaled $329.9 million at March 31, 2026, compared to $339.6 million at December 31, 2025. Our core operating segments, Benchmark, Deflecto and Printronix generated $10.2 million in operating cash flows, which was reinvested in high ROI activities.

Specifically, Benchmark used cash flows from operations and balance sheet cash to drill its first well during the quarter, while Deflecto invested its cash flow to complete the consolidation of its Portland facility into its Dover location. Remaining cash flow generation of Printronix plus interest income was offset by the acquisition of additional interest in the Wi-Fi 7 portfolio and cash flows to support parent level and IP operating costs.

We continually assess capital allocation priorities across our existing businesses while actively evaluating new investment opportunities to drive long-term value creation for shareholders. Through disciplined decision-making and strategic investment, we remain focused on strengthening our portfolio and positioning the company for sustainable growth and shareholder returns. The parent company's total indebtedness was 0 at March 31, 2026.

On a consolidated basis, Acacia's total gross indebtedness as of March 31, 2026, was $90.5 million, consisting of $59.5 million and $31 million in nonrecourse debt at Benchmark and Deflecto, respectively. Since closing the acquisition of the Revolution assets in April 2024, Benchmark has paid down approximately $23 million in total debt underscoring the strong free cash flow generation of the business. Additionally, since acquiring Deflecto in October 2024, the company has paid down approximately $17.3 million in total Deflecto debt. These capital allocation decisions have significantly reduced our consolidated debt and interest expense, providing further operational flexibility. For more information on Acacia's first quarter results, please see our press release issued this morning and our quarterly report on Form 10-Q, which we will file with the SEC later this week. I'll now turn the call back over to MJ.

Thanks, Mike. As you've heard today, Acacia continues to execute well across our operating segments, delivering on our strategy despite the challenges presented by the current market environment. I'm really proud of our team's hard work and our productive start to 2026. I firmly believe that one of Acacia's greatest strengths is our talented team, and I'm thrilled to work with this group as we continue to grow the business together.

With an excellent portfolio of assets here at Acacia, we're a diverse exposure across multiple industries and the strength of each of our businesses in the portfolio positions us to generate significant value for our shareholders moving forward. Our approach to managing the business has been and will continue to be measured, taking care not to let volatility across the market impact our objectives for organic and inorganic growth within each of our core verticals. I'm confident that our value-oriented and diligent management team will enable us to continue driving positive momentum throughout the year and beyond.

With that, I'll turn it back over to Jenny to open up for questions.

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

MJ, maybe can you lay out how many new wells at Benchmark are contemplated? And I guess, expected timing and when you think you can get those wells up? And then I have a follow-up after that.

Yes. Tony, great to talk. So we are evaluating several different locations. As I said, the team really spent the better part of the last 6 to 9 months, taking what we had and making it better. We bought, we swapped, we sold different acreages to put together units so that those units are then ready to be drillable. And we have several of those units that are at or close to that stage. I don't want to comment on the number of wells we're going to drill, but I am pretty excited about the units that we have and the opportunity set with some partnerships that we have as a potential operator of units to go ahead on some more drilling.

Okay. And shifting gears over to the Deflecto side. Now that you've closed the Portland facility, how much do you think you'll save or just remind us maybe over the next 12 months? And when will all the other actions be complete on Deflecto? It seems to be running about half of what you expected in terms of adjusted EBITDA. Yes. I mean, so when we look at the Portland facility, our team's initial estimates are kind of $2 million in annualized cost savings from the consolidation.

And with the consolidation, we've actually taken out excess capacity as well. And so as we see an uptick in volumes associated with Class A, we move more volume through those plants, we should see an enhanced margin as well. There's continued cost rationalization at the G&A level. So we continue to work through that. And as you probably remember, Tony, this is a complex business in the sense that it's both small relative to a lot of other businesses, international and has three different sets of businesses inside it. And so I wouldn't say that it's going slower. I would characterize it as we're making sure that we understand all the interoperability of those businesses, the facilities and the people so that we do it the right way for a long-term positive outcome -- long-term durable positive outcome.

Our next question is coming from Brett Reese of Janney Montgomery Scott.

A couple from me. The MOIC of 2.5x on Cherokee, can you share with us the timing and cadence of that 2.5 return, 2.5x return on capital?

Yes. So the way we -- I'll tell you how we think about it broadly. These wells, when they come on, come on at high volumes and over time, the volumes coming out of those wells decline as you would expect to see in any oil and gas well. And so cash flows from the well come out pretty quickly. And the 2.5x is an undiscounted number. So as you think about payback on the wells, we're kind of inside 2-year payback on the wells. So we think that's a pretty attractive return opportunity.

Yes, I should say so. MJ, I listened the other day to the Devon Energy conference call, and they're a very good operator of oil properties. And they focused a lot on their ability to use AI to crunch data and improve returns on their properties. Are we doing some of that on our end? And if so, the high double-digit returns, could they be greater in the future because of greater efficiencies?

So I love ChatGPT, and it's really helpful in my daily life. We, at Benchmark are evaluating different AI tools that can help us somebody like Devon is a significantly larger company with fields that are interconnected, not interconnected, is drilling wells all the time. I don't know exactly what they mean by using AI, but I would say that we're evaluating in the early stages, different tools that we can use, whether it's partnering with drilling partners as we drill wells that incorporate AI into their process of drilling the well, folks that frac the well, incorporating AI. We're using best-of-breed service providers. So we look for folks that are using the best technology, whether it's AI or not. to help enhance the performance and the cost profile and the time to depth.

And so we're kind of evaluating all opportunities. And we don't have a broad AI-related initiative that we are in a position to announce to the market that we're drilling wells with AI, but we are using AI in different places in our business to enhance the productivity.

Okay. And last one for me. Share buybacks. Did you buy back any stock this quarter? How much of a window do you have to buy back stock? And what's the existing authorization in place? I'll answer this question as I usually answer this question. We evaluate the buyback in the context of other capital allocation opportunities. As you heard Mike say, we invested capital in wells. We invest in capital in rationalization of Deflecto that we think we have a very attractive payback on. And we invested a little bit of capital in the IP business. And so that's where we invest capital in the quarter.

[Operator Instructions] Okay. We don't appear to have any further questions in the queue. So I will now turn the call back over to MJ for any closing comments.

Thanks, Jenny. Thanks for everyone joining us today. We look forward to talking to you after Q2.

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

Good morning, everyone. Thank you for joining Acacia Research's Fourth Quarter and Full Year 2025 Earnings Conference Call. My name is Jenny, and I will be your conference facilitator today. [Operator Instructions] I would like to remind you today's conference call is being recorded and is also available through audio webcast on Acacia's website. [Operator Instructions] Questions can also be directed at any time to Acacia, [email protected]. I would now like to turn the conference over to Elizabeth Chaconas of Gagnier Communications. Elizabeth, you may begin the conference.

Thank you, operator. Leading today's call are MJ McNulty, Acacia's Chief Executive Officer; and Michael Zambito, Acacia's Chief Financial Officer. Before MJ and Mike begin their prepared remarks, please be reminded that certain 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 and 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 most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC. Earlier this morning, Acacia issued a press release disclosing its fourth quarter and year-end 2025 financial results. 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 Q4 2025 earnings presentation as well as its year-end 2025 corporate presentation to its website, both of which can be found under the Quarterly Results section of the Investor Relations tab.

On today's call, the team 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 2025 financial results available under the Press Releases section of the Investor Relations tab at acaciaresearch.com. I will now turn the call over to Acacia's Chief Executive Officer, MJ McNulty.

Thank you, Lizzy, and thank you all for joining us this morning. Before getting into the specifics of this past quarter's results, I'd like to zoom out and take stock of Acacia today versus 3 years ago when this team began our efforts. There are a few slides in our corporate overview deck, which we believe show our progression well. Since we're not all on video together, I'll point you to Slides 8 and 9 of our corporate presentation available on the top of our quarterly results tab of the Investor Relations section of our website at acaciaresearch.com.

To set the stage, 3 years ago, we had approximately $350 million of cash on our balance sheet. The parent company that was burning over $30 million annually, no operated segment cash flow to speak of, a large securities portfolio made up primarily of biotech assets left over from the Woodford investment and an extremely valuable intellectual property business that was receiving no public market enterprise value. When I became CEO in the fourth quarter of 2022, I told you that this team's vision and that of our Board was to build a portfolio of operating companies that can create compounding value over the long term. Inherent in this vision was our goal to preserve your capital while simultaneously building a durable enterprise.

So in our efforts to execute on this vision, we zero-based the parent budget, rightsized the organization and put in place the people, systems and processes necessary to succeed in our initial efforts. This reorganization positioned us to successfully monetize several of our legacy assets, continue nurturing our intellectual property portfolio, return capital to shareholders and acquire valuable operating businesses at attractive prices, all of which we believe will drive strong returns for you, our shareholders, over the long term. As a result of these initiatives, I am pleased to report that we sit today with $285.2 million in total 2025 revenue and $96.4 million in 2025 operated segment adjusted EBITDA, including our intellectual property operations.

We've extracted $187 million from our valuable IP portfolio, have monetized most of our legacy assets and have kept parent expenses relatively flat even as the organization has scaled. Through all of this and perhaps most importantly, in the current market environment, we preserved your capital and kept Parent level deployable cash consistent, having started with approximately $350 million of cash and securities at the end of '22 and ending our most recent fiscal year with about $340 million of cash and securities and short-term loans receivable. If you take a look at Page 9 of the corporate presentation, which we're particularly proud of, you can see how this happened numerically.

We used a combination of approximately $10 million of cash and $92 million of nonrecourse subsidiary level debt to add approximately $36 million of durable operated segment EBITDA, which now has nicely clipped our Parent costs. I expect that going forward, while we may need to add some incremental parent costs to support continued scaling of our business, continued improvements in our underlying stable of businesses, whether from increased revenue, improved margins or through continued acquisitions should result in a high degree of earnings flow through to Acacia's bottom line. So stepping back, I would say the first 3 years have been an operational success. And today, we're in a better position than ever to continue adding to our portfolio of value-generating and cash flowing assets.

With that, I'd like to take -- turn to a brief view of 2025. We're not alone in navigating the unpredictable and uncertain macroeconomic and geopolitical backdrops, we've made significant progress across each of our businesses and closed the year on a strong note, with full year revenue of $285.2 million, a record for Acacia as a public company, total adjusted EBITDA of $77.9 million and operating cash flow of $75.2 million, all higher year-over-year. While tariff-related headwinds as well as inflation continue to present challenges in certain aspects of our portfolio, we continue to prudently manage each of our operating segments and consistently execute against our value-oriented strategy to drive growth in asset value. Underpinning this strategy are our significant capital resources and experienced management team and an opportunistic approach to value-accretive opportunities.

During the year, we leveraged the resilience of our businesses. Recall, we like to acquire things people need, combined with targeted price increases and cost savings initiatives to help offset macroeconomic headwinds and position our companies for further growth. We also leveraged our strong cash generation to pay down debt in our Benchmark and Deflecto businesses and completed the acquisition of a portfolio of commercial loans collateralized by Bitcoin through our partnership with Build Asset Management. The parent organization, as always, remains focused on managing expenses while overseeing prudent capital allocation and deployment. Turning to our businesses. Deflecto posted a good quarter in its seasonally weakest period of the year with revenue of $26.4 million and adjusted EBITDA of $1.1 million.

While the business continues to experience cyclical headwinds, we are encouraged by the progress made during the quarter. We're trending well in the early part of Q1 and are encouraged about what we're seeing in our end markets. During Q4, we successfully began the consolidation of our Portland facility into our Dover, Ohio facility, divested a small segment of our office products business. And in Q1 of this year, we completed the sale of a portion of our U.K. facility, which we do not currently occupy. Taken together, these actions resulted in nearly $5 million of net proceeds from asset sales and the plant consolidation we expect will result in approximately $2 million of total annualized cost savings once complete, with additional benefits as volumes improve through the cycle.

I would note that this plant consolidation is not only positive for our earnings, but also for the community of Dover, Ohio, which now has a significantly more profitable, efficient factory, providing valuable employment for the area. With that said, and as we've mentioned before, the Deflecto business has experienced meaningful macroeconomic headwinds driven by uncertainty in the Class 8 trucking market, Canadian housing market, tariff-related demand and cost pressures as well as input cost pressures. Taking these one by one. The Class 8 market continues to be depressed relative to historical averages, primarily driven by macro factors. However, we've started to see green shoots emerge in recent months. Class 8 orders saw steady year-over-year improvement over the last 3 months with December through February up 23%, 25% and 156%, respectively, after 11 straight months of year-over-year declines.

Class 8 dealer inventories, which look like they peaked last summer, have finally begun to fall and freight rates appear to be improving. Finally, the OEMs continue to take a conservative stance relative to new builds and our commentary on the forward outlook of the market continues to improve. So taken in whole, all these indicators lead us to believe that trucking activity and new and used truck sales should begin to pick up over the coming quarters, all of which should help our safety business within Deflecto. Moving to the Canadian housing market. Our Air Distribution segment does business in both Canada and the United States. The Canadian housing market has experienced building cost pressures related to general inflation as well as a slowdown in the velocity of sales of both new and existing homes, a key driver for our business. The latter being a function of rates and economic uncertainty.

As we continue to enact our value creation plan, one of the paths we're exploring is augmenting both U.S. and Canadian sales teams with resources to attack underserved areas of the market, which we think could be a meaningful opportunity. On tariffs, Deflecto is a global business. And as a result, we've been exposed to cost pressures from the IEEPA tariffs as well as demand-related uncertainty that has caused certain customers in our Office Products and Safety segments to delay purchases. This pressure has been far greater than we anticipated. However, we have fared well, defending margins where possible through price increases and cost concessions and have most importantly, defended market share with our markets.

For context, Deflecto paid approximately $2.4 million in tariffs in 2025, $2 million of which impacted earnings. With the recent court ruling, we do expect a net benefit to our earnings, and while we likely will not be able to offset the full cost given the new Section 122 tariffs, we do expect relief in 2026. Tariffs from products imported from China have moved from a 20% tariff to a 10% tariff and products imported from Canada have moved from a 25% tariff to a 10% tariff. While still too early to quantify, directionally, we believe this is a positive for our earnings power at Deflecto. We also note that we have and continue to avail ourselves of the administrative rights we have to recoup from the U.S. Customs Agency, tariffs previously paid. While the tariff picture is changing rapidly, we have the processes in place to ensure that we're doing what's in our control to manage these changes.

We'll get to the specifics of oil prices in a second. While they've been a positive for Benchmark, they represent potential cost pressures in Deflecto and Printronix as shipping and input costs have upside price risk. In our Energy segment, Benchmark continued to perform well during the fourth quarter, delivering solid operating production and cash flow. Business posted record production during the quarter, bolstered by several non-operated projects that came online in Q4. We continue to see strong operator and investor interest in the Anadarko Basin, which has pushed the value of high-quality producing wells towards historically elevated valuations.

Our geographic position is a key source of strength in our energy operations given our exposure to some of the country's highest quality reserves. And while heightened valuations in this region have led to a more discerning approach to acquiring new producing assets, we continue to see a number of exciting ways to generate significant value in this segment in 2026. As I mentioned last quarter, we spent time last year deliberately building our position within the attractive Cherokee play, acquiring and trading land packages to assemble a portfolio of what we believe to be highly economic drilling locations. With that work complete, we selected an attractive location, assembled a top-notch team of service providers and began drilling our first Cherokee well, which was completed last week, and we anticipate we will begin producing this week.

We opportunistically funded this first new well from our balance sheet, which we believe will position us well to create partnership opportunities for future wells. We were deliberate in our approach to this well and believe we have several additional attractive opportunities, which we will evaluate conservatively with a view of continuing to grow our asset value within the means of our cash flows. In light of the recent price movements, particularly in oil, Benchmark's hedging strategy continues to perform as expected. As we've outlined previously, Benchmark hedges approximately 75% of its operated oil and gas production with hedges currently in place through the beginning of 2028, protecting a significant amount of cash flow from downside price risk. On the flip side, when oil runs as it has, we've traded that upside for downside protection. That said, we have been able to benefit from selling unhedged exposure as well as through sales of our natural gas liquids, which tend to track oil rather than gas prices.

As of the fourth quarter, approximately 54% of Benchmark's LTM commodity revenue and 78% of LTM production on a BOE basis was driven by gas and NGLs. Importantly, Benchmark is also in a fortunate geographic position to be able to sell our gas in a variety of markets. With the recent volatility in energy markets, we continue to remain nimble in our hedging strategy. In our Industrial segment, Printronix continues to be a great example of our team's diligent execution and ability to transform an asset's underlying operations and efficiencies to generate shareholder value. Our efforts over the past 2 years have led to a higher margin and optimized product mix for Printronix, which continues to generate consistent revenue and free cash flow.

Lastly, looking at our Intellectual Property segment, we recorded total revenue and adjusted EBITDA of $326,000 and $12.1 million for the quarter and $78.4 million and $56.3 million for the year, respectively. Our Q4 EBITDA benefited from a settlement that occurred during the quarter against which we incurred related costs in prior periods. While this area of our business is episodic in nature due to the variable timing of future settlements, our team continues to evaluate attractive opportunities in the space and remains open to opportunistically committing capital to investments that will maximize shareholder value.

Mike will provide additional financial details in a few minutes, but before his remarks, I'd like to highlight a few key metrics for the fourth quarter. In the fourth quarter, we delivered total revenue of $50.1 million, up 3% compared to the prior year period, primarily driven by our fourth full quarter of Deflecto. The company adjusted EBITDA was -- total company adjusted EBITDA was $17.4 million and operated segment adjusted EBITDA, including our intellectual property operations was $22.4 million. For the year, we generated record consolidated revenue of $285.2 million, up 133% year-over-year, total company adjusted EBITDA of $77.9 million and operated segment adjusted EBITDA of $96.4 million.

We reported book value per share of $6.05 at December 31 compared to $5.75 per share at December 31, 2024, an increase of 5% year-over-year. These results reflect our ability to successfully navigate through significant macroeconomic challenges, leveraging our value-oriented strategy and the underlying strength of our success. As I mentioned last quarter, while volatility creates headwinds, can also be a source of opportunity for our businesses as uncertain environments often create openings for us to swiftly implement operational changes at the companies we own. Looking ahead, I'm confident in the strength of our team and our ability to balance thoughtful cost management with consistent execution to drive revenue, EBITDA and free cash flow across our businesses.

While I believe there's still a gap between our intrinsic equity value and what is reflected in our share price, the fundamentals of our business and the inherent value of our assets are strong and continue to improve. Our management and Board are committed to exploring and executing appropriate capital deployment initiatives internally and externally that will support our continued momentum and generate long-term value for our shareholders. With that, I'll pass it over to Mike to discuss the details of our financial results.

Thank you, MJ. And echoing your sentiment, we remain enthusiastic about the results and progress at each of our businesses and our continued success in managing Parent costs. Let me start with a few financial highlights from the quarter. Acacia recorded total revenue of $50.1 million during the fourth quarter. Our energy operations generated $16 million in revenue for the quarter compared to $17.3 million in the same quarter last year, primarily reflecting a softer oil price environment year-over-year. Remember, we hedge approximately 75% of our operated production at benchmark. Realized hedge gains not included in revenue were $1.7 million in Q4 2025 versus $1 million in Q4 2024.

Manufacturing operations generated $26.4 million in revenue for the quarter. Given we acquired Deflecto in October of last year, there is no full quarter prior year comparable. Our industrial operations generated $7.3 million in revenue during the quarter compared to $8.2 million in the same quarter last year. Our intellectual property operations generated $0.3 million in licensing and other revenue during the quarter compared to $0.1 million in the same quarter last year. Total consolidated G&A on a reported basis was $16.3 million during the fourth quarter compared to $21.5 million in the same quarter of last year. The decrease was primarily driven by third-party transaction costs in Q4 2024 associated with the Deflecto acquisition, which closed in October 2024.

Deflecto reported G&A expense for the fourth quarter of 2025 was $4.7 million compared to $4.6 million in the prior quarter. Of the $4.7 million in Deflecto G&A expense, approximately $1.2 million was related to depreciation of fixed assets and amortization of intangible assets and $0.4 million was related to nonrecurring severance and transaction-related costs. Our energy operations reported G&A expense was $0.6 million for the fourth quarter of 2025 compared to $1.1 million for the prior quarter in 2024. Q4 of 2024 included certain onetime fees and expenses that didn't recur in Q4 of 2025. Reported G&A at the parent level for the fourth quarter decreased by $5 million year-over-year from $12 million to $7 million. Q4 of 2024 included third-party transaction expenses associated with the Deflecto acquisition. Parent G&A on an adjusted basis or our non-GAAP parent costs, as shown in our adjusted EBITDA reconciliations remained relatively stable at $5 million in the quarter ended December 31, 2025, versus $4.8 million in the prior year.

The company recorded a fourth quarter GAAP operating loss of $13.1 million compared to a GAAP operating loss of $15.8 million in the same quarter last year. This improvement was primarily due to year-over-year increase in revenue, slightly offset by higher cost of goods sold within our manufacturing operations given the partial quarter in the prior year following the acquisition of Deflecto in October 2024. Energy operations contributed $3 million in GAAP operating income during the quarter, which included $3.4 million in noncash depreciation, depletion and amortization expense and does not reflect the realized hedge gain of $1.7 million we realized during the quarter. Adjusted EBITDA for our energy operations was $8.1 million and free cash flow for our energy operations was $1 million in the quarter.

This free cash flow included approximately $4.6 million of CapEx, primarily related to continued development in Cherokee. Manufacturing operations had a $0.4 million GAAP operating loss during the quarter, which included $1.2 million in noncash depreciation and amortization expense and $0.4 million in nonrecurring transaction-related expenses and severance costs as part of our operational initiatives at Deflecto. Adjusted EBITDA for our manufacturing operations was $1.1 million and free cash flow for our manufacturing operations was negative $1.8 million in the quarter, primarily due to timing of certain working capital items. Industrial operations contributed $0.5 million in GAAP operating income during the quarter, which included $0.5 million in noncash depreciation and amortization expense.

Adjusted EBITDA for our industrial operations was $1.1 million and free cash flow for our industrial operations was essentially flat in the quarter, primarily due to tariff-related payments, working capital items and negative impacts from FX fluctuations. GAAP net income attributable to Acacia Research Corporation in the fourth quarter was $3.4 million or $0.04 per share compared to a net loss attributable to Acacia of $13.4 million or a $0.14 loss per share in the prior year period, largely driven by our intellectual property operations results. Included in GAAP net income for the fourth quarter was $2.8 million in unrealized gains related to changes in the fair value of equity securities, offset by a realized loss of $3.5 million.

Adjusted net income attributable to Acacia in the fourth quarter of 2025 was $3.1 million or $0.03 per share. Further details on these adjustments can be found in our press release. Turning to the full year results. Total 2025 revenues were $285.2 million, a record for Acacia compared to $122.3 million in the prior year period. Our energy operations generated $63.8 million for the year compared to $49.2 million last year, reflecting a full year of results from the acquisition of the Revolution assets in 2024. Our manufacturing operations generated $114.8 million in revenue for the year. Our industrial operations generated $28.3 million in revenue compared to $30.4 million last year. And our intellectual property operations generated $78.4 million in licensing and other revenue compared to $19.5 million last year.

Reported G&A expenses were $65.1 million compared to $55.4 million last year, the increase primarily due to the full year impact of Deflecto compared to an approximate 3-month period in 2024, offset by lower transaction-related costs in 2025. GAAP operating income was $6.4 million compared to an operating loss of $32.9 million in the prior year period. Our energy operations contributed $10.2 million in operating income, which included $15.2 million of depreciation, depletion and amortization charges. Our industrial operations contributed $1.2 million in operating income, which included $2.2 million of depreciation and amortization charges, and our manufacturing operations contributed $0.3 million in operating income for the year, which included $5.4 million of depreciation and amortization charges and $1.7 million of nonrecurring severance costs and transaction-related expenses.

Consolidated GAAP net income was $21.7 million or $0.22 per diluted share in 2025 compared to a net loss of $36.1 million or negative $0.36 per diluted share last year. Net income in 2025 included $1.1 million in unrealized gains from the change in fair value of equity securities, offset by a $25,000 realized loss. Adjusted net income attributable to Acacia Research Corporation for the full year 2025 was $29.2 million or $0.30 per share. Further detail on these adjustments can be found in our press release. As MJ alluded to earlier, we're exceptionally proud that we have grown LTM operated segment adjusted EBITDA, excluding our episodic IP operations, from $4.3 million as of the fourth quarter of 2023 to over $40 million as of the fourth quarter of 2025, while maintaining relatively consistent parent costs to date as defined of $18 million to $19 million.

Turning to the balance sheet. Cash and cash equivalents, equity securities measured at fair value and loans receivable totaled $339.6 million at December 31, 2025, compared to $332.4 million at September 30, 2025, and $297 million at December 31, 2024. The increase of $42.6 million for the year was primarily due to cash generated from operating activities across all operating segments of $86.7 million, proceeds from the sale of the [Format] assets of $3 million and $1.2 million of working capital benefit from the Deflecto transaction. Cash was reduced by parent costs of $11.4 million and further by $9.7 million and $1.4 million of capital expenditures at Benchmark and Deflecto, respectively, as well as $6.1 million in spend at Benchmark for new oil and gas leasehold interests.

Additionally, cash used in financing activities reduced cash by $22.7 million primarily from $12 million of debt repayment on the Benchmark revolving credit facility and $15.1 million debt repayment on the Deflecto facility, offset by a $5 million draw on the Benchmark revolving credit facility for the purchase of additional leasehold interest. The parent company's total indebtedness was 0 at December 31, 2025. On a consolidated basis, Acacia's total indebtedness as of December 31, 2025, was $92.1 million, consisting of $59.5 million and $32.6 million in nonrecourse debt at Benchmark and Deflecto, respectively. Since closing the acquisition of the Revolution assets in April 2024, Benchmark has paid down approximately $23 million in total debt underscoring the strong free cash flow generation of the Benchmark business.

Additionally, since acquiring Deflecto in October 2024, the company has paid down approximately $16 million in total Deflecto debt. These capital allocation decisions have significantly reduced our consolidated debt and interest expense, providing further operational flexibility. 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-K, which we will file with the SEC later this week. And now I'll turn the call back over to you, MJ.

Thanks, Mike. As you've heard today, we're excited. We've executed well throughout the fourth quarter and the full year. Our diverse portfolio and targeted strategy allow us to consistently streamline operations, materially improve performance and drive long-term growth across each of our operating businesses. Looking ahead, we'll continue to appropriately balance prudent cost control initiatives with a deliberate approach to value generation across our platforms while continuing to build our pipeline of attractive opportunities for growth in 2026. With that, I'll hand it back over to Jenny.

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

You drilled your first well in Cherokee. I don't know if you can share kind of expectations. Do you think it's going to be 10%, 20%, whatever percent better than the rest of the benchmark wells? And what are your plans maybe over the next 3 months, let's say, on how many more drills or more wells you'll drill? And then I had a couple of follow-ups after that.

Look, I think -- that's a good question. I think it's difficult to compare the new well to the wells that we have in benchmark because as you remember, when we acquired the Wainwright assets and then subsequently, the Revolution assets, we were acquiring kind of mid-life, low decline, shallow decline wells that we thought were long-lived. And so when we drilled this new well, we spent a lot of time high-grading the acreage. Tony, we talked a lot about the acreage that we got for free from the Revolution acquisition and this kind of fit in that bucket. We did take some existing acreage we had that we didn't like as much, swapped it for acreage around positions that we did like, and we built a little bit around that.

In terms of the number of wells we might drill, I don't think we're ready to say that. I will say that we have several locations like this well that we just drilled that we've high graded and think are very attractive. But if you think about the production decline in a well, you will see an uptick in production for the rest of this year once this well comes online, which is imminent.

Got you. And I know you guys got this for a very attractive price and clearly you could sell it for more now. Is there any thought process on seeing what that first well will produce, take that and potentially sell all the Cherokee assets for shareholder value?

That is an option. It's one of many options. As you know, the oil and gas business is interesting that you have a team and you have assets and you tend to be able to keep the team and sell the assets. And there are different pieces of benchmark that have different profiles. For example, we have Cleveland wells. We have now a Cherokee well. We have wells in different counties within Texas and Oklahoma that fit with other people's production profiles. And so there are a lot of ways to monetize the package in pieces or as a whole. And as we see activity continuing to develop in our Little Basin, we'll evaluate opportunities around all of those.

Got it. And then maybe this isn't the right way of phrasing the question, but you've hedged away 75% of the oil. What's the average hedge price per barrel right now for you guys? And now with oil over $90 a barrel, you say you're going to continue to hedge that like in the next couple of quarters, what can that number move up to?

Yes. So our average hedge price is about $70 a barrel right now. If you look at the front end of the curve for the next, call it, 12 to 18 months, that front end has moved up pretty significantly. And as you know, if you're watching oil prices, it has bounced around in a pretty wide range over the last few days. But we are fully hedged for 2026. We will be hedging the volumes that come on from this new well. And so hopefully, you get the benefit of the curve, the front end of the curve right now. And then we'll continue to look at the curve out past '28 as we layer on new hedges, not only in oil, but in gas and to the extent that the liquidity in the market is their NGLs.

And so we think that we're in a pretty advantageous position. Now also recall that we're selling oil and gas into the market today that's unhedged. So the 25% of the exposure that's unhedged, we are taking advantage of market prices. And NGL hedging has less liquidity and less term on it or duration on it and NGLs tend to trade based on a ratio to oil. And so those NGLs, I think, will benefit from as well.

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

MJ, good show to you and the team on the quarterly and yearly results.

Yes. Thanks, Brett. We really appreciate it.

Just one question on Benchmark. If you do retain Cherokee and other acreage, based on what you think the intermediate and long-term pricing on hydrocarbons are, would your goal be to just kind of sustain your 6,000 barrels a day production or materially increase it?

I mean what we think about is being able to add and maintain production inside our current cash flows. And so we're not -- you're not going to see us go out and borrow a bunch of money in order to materially increase production. That's not our model. Our model is a production one. So where we can take existing cash flows and put them into high ROI projects, whether that's acquiring new businesses or it's drilling new wells, that's how we're going to evaluate it. But we are going to be very judicious and conservative in how we use cash flow to do that.

Okay. Pivoting to Deflecto, between the green shoots you talked about in your opening remarks plus the operational improvements that Clay Kiefaber brings to the table, what is your aspirations on operating margins and EBITDA? I mean the operating margins are at x right now and EBITDA is at x. Where do you think it can go 18 months to 2 years from now?

Look, I think without answering that question with guidance on margins and EBITDA, I think that we're in a very good position right now. I think we have taken our licks from tariff-related issues and some inflation, but we are well on our way of operational improvement from a margin standpoint, not only the consolidation of our Portland facility into Dover, but also general lean manufacturing initiatives on the shop floor. And so as those take root and volumes come back, you mentioned the green shoots in Class 8, that is a cyclical industry.

We are seeing positive data points, albeit 3, but 3 consistent after a long trend of down Class 8 sales. As volumes pick up, we anticipate that we'll benefit from the initiatives that have been put into it. The air distribution business has had a little bit of headwinds more recently on the Canadian housing market side, but it's held up pretty well, and it's a nice competitive business with good share in the markets in which it plays. And so as we see some of the cyclical rebound, A, B, our initiatives to drive growth through sales channels and the like and see the cost enhancement or margin enhancement opportunities that we're taking advantage of, we feel like we're kind of hitting on all cylinders in spite of where the market sits.

Okay. Could you just give me the thought process and thinking of the sale of the [indiscernible] business? Why that one and why at this time?

Yes. When we looked at the -- remember, when we bought Deflecto, it was a lot of different businesses. And we looked at what was most strategic for us within safety, air and office. And when we looked at the [format business] in particular, we thought it was subscale. And we thought that the owner -- the current owner, the group that bought it from us was a better owner for that business, and they offered us a fair price for it. And so we found that from a capital allocation standpoint, it was the right thing to do.

Okay. A question on the legacy patent business. There's been a lot of turmoil with AI impacting software and the protective moats everyone thought that would exist. Has that impacted negatively or positively our legacy patent portfolio?

Yes. I mean, look, our legacy patent portfolio is around -- the overwhelming majority of it is around Wi-Fi 6. And so we really haven't seen a negative impact from AI. In fact, I would think that AI would actually be a tailwind for the value of that portfolio in terms of connectivity and interconnectivity and how it is today and the continued evolution of that.

Right. There's been a lot of stress in private credit and private equity. Has that stress risen to a point where pricing of some things in that space you might want to purchase is closer to fruition?

Yes, that's a great question, and this is really an evolving scenario. I think we've talked about this for the past couple of quarters that the valuations at which private equity funds are holding assets and their ability to hold assets for a longer period of time without a daily mark-to-market has given them a little bit of a place to hide. In the area of the market that we look at sort of mid-market, lower middle market private businesses and not commenting on the public businesses right now because I think there's a lot of opportunity there as well.

On the private businesses, the great assets, the assets that are hitting on all cylinders are able to be sold. And there's a bid for them, and there's a very good bid for them. As we've talked about many times in the past, we kind of like the B and C quartile assets. And that area is starting to see a freeze up in deal activity where it's not necessarily to bid ask, which had been in the past, now is people showing up to buy those assets. And so if we believe in our operating capabilities, which we do, we become a very logical buyer and solution to these private equity funds that are now 2021, maybe early '22 acquisitions that are 4 to 5 years through a hold period, where we can be a buyer at a reasonable price with an operating partner that can help us really take advantage of the situation and build that business and fix that business. So I'm encouraged by what we're seeing, albeit at the cost of our...

Great. Last one for me, had any of the potential sellers of things you're looking at wanted instead of just all cash, a part of the consideration for the sale of their assets to be in your company's stock. We get that question all the time, and the answer is we'll pay you cash.

Our next question is coming from Adam Eagleston of Formidable Asset Management.

Again, echo the comments from everyone else. Nice to see the execution this quarter. You guys touched on it a little bit in terms of Brett's call on what's happening in the private equity markets. But if I heard you correctly, despite the headlines we see on private equity, private credit, it sounds like it's not yet a buyer's market yet, at least for the good assets. So just kind of confirm that, A. And then B, just overall capital allocation-wise, how are you guys thinking right now?

Yes. So -- and I'm glad you brought it back up, Adam, because -- and Brett, I apologize, I didn't address the point on private credit. I think it's too early in private credit. I think the issue in private credit, I think, is predominantly around the software businesses that are in there, and there are a lot of private equity funds that have borrowed from private credit funds and on software businesses. And so we are very cautious on software businesses. We are trying to -- when we look at them, look for systems of record, compliance-related interconnectivity where there's less risk of displacement. But I think what's going on in the private credit market is a generalization because I don't think people know all the details yet of software businesses losing seat licenses and what that does to earnings and the flow-through on earnings for these software businesses.

So I'm not sure that we know yet what the impact for our types of businesses is in the private credit markets. In the private equity markets, we are again seeing opportunities where B and C quartile assets just are not moving despite a desire by a sponsor to move those assets. They've gone through over the last several years and quarters, they've gone through pruning their best assets, taking their cash off the table and making the return, and they will need to clean up the rest of those portfolios, which we think is an opportunity for us.

Got it. Okay. And then capital allocation-wise, I know you're coming up on some milestones here, I think, at least that might open up opportunities for buybacks. How do you balance that with putting capital to work in operating businesses versus any disruptions you're seeing in the public equity space?

Yes. Look, I think there's a lot of disruption and opportunity on the public and private space. I also -- we and our Board are looking at all alternatives all the time in terms of how we best allocate capital for you all. When you look at the slides in our deck and you see where we are on earnings from our segments relative to our Parent costs, we think there's new acquisitions and any improvement in the underlying portfolio drive a lot of flow-through to the bottom line of Acacia. And so it's balancing that and the opportunity set, which I think is pretty robust right now with the net impact of buyback. And we evaluate that on a consistent basis.

And our next question is coming from Todd [indiscernible] of 88 Management LLC.

Congratulations on a strong 2025. I noticed a somewhat de minimis revenue number on the IP this quarter and a very robust EBITDA number. Can you kind of give us a better understanding of that?

Yes. No, that's a good question. And I tried to address it in the script, but I'm happy to address it here as well. So we had a settlement with a service provider that dates back to 2017, 2018 time frame, and we were pursuing that settlement over the course of 2025. We had costs burning our EBITDA in prior quarters and the fourth quarter associated with that. And so we recorded from a matching standpoint, the settlement that we received as part of that, not IP monetization related in EBITDA, which is what drives that difference.

Got you. Got you. Well, MJ, first of all, I want to give you some additional credits on eyeballing Benchmark and making that acquisition. I know you had a lot of experience in that complex. So what a great purchase that was. Guys, I hate to hark on this one last issue again. But considering the way the markets are right now, our balance sheet and the fact that the currency still trades at a significant discount to the underlying book value. What was the thought process in not considering putting forth some sort of a buyback announcement?

I think when -- let's take a step back and let's put that in 2 pieces. One, the conversations we have at the management and Board level about a buyback and capital allocation versus an announcement of a potential buyback. I think we're thinking about it and considering all the alternatives all the time. And when we think it's appropriate or if we think it's appropriate, we'll put something in place. But we don't want to put one in place without intending to use it. And so if we get to the capital allocation decision that we intend to use it and we want to buy back shares, that's when you'd see an announcement.

Great. And is that something that we would have to wait another 3 months for? Or do you guys have the flexibility and the ability to execute on that during the quarter?

We still have some constraints that we're monitoring, and we're working with our tax advisers on a regular basis to monitor those constraints. And when we're in a position where we feel like we have the cushion to do it, then we will evaluate that with the other uses of capital that we're evaluating.

Got you. I knew there was a period of time that a case was precluded based upon the acquisition, and that was about 3 years. Do you have -- could you kindly share with us when that period gets sunsetted and when you would be unencumbered in seeing cleared to purchase if you wanted to?

Yes. It becomes -- we start to become unencumbered towards the end of this quarter, beginning of next quarter, and then we have a little bit of a roll-off period on that.

And what was that last time? You have a little bit of a what period?

There's a little bit -- so it starts to become unencumbered towards the end of this quarter, beginning of next quarter. And then there's a little bit of a roll-off to be completely unencumbered.

Got you. And is that months? Or is that for a longer period of time that roll off?

It's probably a couple of quarters.

Got you. And would that mean you're precluded during that couple of quarter period from making any purchases or just limit the amount that you could purchase?

There are limits on it.

Got you. Got you. Well, listen, keep up the good work. I appreciate it, and thank you very much.

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

Thanks, Jenny. Thanks to everyone for taking the time this morning, for following us, for asking good questions. We'll talk to you pretty shortly on Q1 and looking forward to it. Take care, everyone.

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

Good morning, everyone. Thank you for joining Acacia Research's Third Quarter 2025 Earnings Conference Call. My name is Kelly, and I will be your conference facilitator for today. [Operator Instructions] I would like to remind you that this conference call is being recorded today and also is available through audio webcast on Acacia's website. [Operator Instructions]

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 Michael Zambito, Acacia's Chief Financial Officer.

Before MJ and Mike begin their prepared remarks, please be reminded that certain 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, and 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 most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC.

Earlier this morning, Acacia issued a press release disclosing its third-quarter 2025 financial results. 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 2025 earnings presentation to its website, which includes detailed GAAP and non-GAAP financial disclosures and can be found under the Quarterly Results tab.

On today's call, the team 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 third quarter 2025 financial results available under the Press Releases section of the Investor Relations tab at aaciaresearch.com.

I'll now turn the call over to Acacia's Chief Executive Officer, MJ McNulty.

Thanks, Brent, and thank you to everyone for joining us for our third quarter 2025 earnings call. Acacia delivered good results in the third quarter with significant increases sequentially and year-over-year across many key metrics. Despite persistent macroeconomic and geopolitical headwinds, our team executed well against our disciplined and operationally focused strategy. While our businesses are not immune to these headwinds, we're using this as an opportunity to accelerate our value creation plans swiftly and decisively across our portfolio. These include the implementation of pricing strategies, cost savings initiatives, operational efficiencies, and plant consolidations to mitigate tariff pressures and to position our companies for continued growth.

These ongoing initiatives and the team's consistent execution drove our strong quarterly results with Acacia delivering total revenue of $59.4 million, up 16% sequentially and up 155% compared to the prior year quarter, the year-over-year comparison primarily driven by our third full quarter of Deflecto. The company's total company adjusted EBITDA was $8 million, and Operated segment adjusted EBITDA was $12.6 million, while free cash flow for the quarter was $7.7 million, with the net result being a GAAP loss of $0.03 a share or a loss of $0.01 per share on an adjusted basis.

Book value per share at the end of the third quarter was $5.98, and book value per share to Acacia, excluding our noncontrolling interests, was $5.57, both essentially flat versus last quarter. Acacia's performance in context, in spite of the macroeconomic and geopolitical headwinds, the businesses we own are still delivering attractive return characteristics. As you've heard me say before, Acacia is focused on identifying and acquiring underloved, under-managed, and undervalued businesses where we believe we can leverage our significant capital base and experienced leadership teams to streamline operations, materially improve performance, and drive long-term growth.

As a result of our actions on a year-to-date annualized basis, Benchmark is generating a roughly high teens free cash flow yield. Deflecto is generating a high single-digit free cash flow yield prior to the impact of our in-flight operational improvement initiatives, and Printronix is generating a high teens free cash flow yield. With strong and improving cash yields at each of our operating companies and disciplined cost control at the parent, we believe we're creating significant equity value, which is not yet reflected in our share price.

As we approach the end of the year, we remain focused on driving revenue, EBITDA, and free cash flow growth at each of our operating businesses, while at the same time, growing our extensive pipeline of actionable M&A opportunities. With approximately $332 million in total cash, equity securities, and loans receivable at September 30, our strong balance sheet positions us well to pursue accretive organic and inorganic growth opportunities across our businesses to create differentiated value for our shareholders.

I'd now like to discuss our operating segments. Within our energy operations, we continue to view Benchmark as an attractive platform to allocate capital within the oil and gas industry. As you may recall, we acquired the business in 2 steps. First, through our partnership in November 2023 with McArron and the company on a small package of wells; and second, through the acquisition, the Revolution assets in Q2 of 2024. At that time, we underwrote the business based on acquiring existing flowing production at a high teens discount rate, and we continue to evaluate comparable opportunities within our existing geographies.

Since our acquisition of Revolution, the Western Anadarko Basin has seen a meaningful increase in investor interest. As a result of the renewed interest in the basin, we've seen high-quality, well-capitalized operators enter the basin with rig counts increasing despite declining rig count activity in many other plays. This has pushed the value of high-quality producing assets in the basin back towards historical evaluation metrics. While this is positive for the value of our business, it does mean that we need to be more cautious on valuations for additional producing assets we may want to acquire, and we have focused those efforts on asset packages where we can maximize strategic overlap with our existing fields.

To that end, as you may remember, in addition to the large producing acreage we acquired as part of the Revolution acquisition, the deal came with a significant undeveloped acreage position in an emerging play called the Cherokee, which you've heard us discuss in the past. This year, we've continued to strategically develop this position within the Cherokee, most recently highlighted by 2 small but very strategic acreage acquisitions. As we continue to build our undeveloped acreage position, we're actively considering additional monetization opportunities as well as potential capital partnerships to finance a targeted drilling program for our acreage in this play.

During the quarter, Benchmark continued to perform well with stable operated production and strong cash flow. While oil and natural gas prices remain at low levels, Benchmark's hedging strategy continues to perform as expected. As a reminder, benchmark hedges over 70% of its operated oil and gas production with hedges currently in place through the beginning of 2028, protecting a significant amount of our cash flow from downside price risk. Further, our diversified production profile provides us with significant optionality as we're able to prioritize projects that are more gas and NGL focused in a weaker oil price environment.

As of the third quarter, approximately 52% of Benchmark's LTM commodity revenue and 78% of LTM production on a BOE basis was driven by gas and natural gas liquids, which have remained much more resilient from a pricing perspective. Looking ahead, we see a variety of ways to create significant value in expanding our oil and gas platform, and we're fortunate that our operations in the Anadarko Basin provide us with access to some of the highest quality reserves and management team in the country. We remain excited about the value generation opportunities at Benchmark, and I look forward to keeping you updated as we continue to scale this business.

In our Manufacturing segment, Deflecto delivered another quarter of sequential revenue growth and improved adjusted EBITDA versus last quarter. We're continuing to progress our operational initiatives at Deflecto, including strategic price increases across each business unit, reshoring and consolidation of certain manufacturing operations, overhead and G&A cost reductions, and improving go-to-market motions, all of which are aimed at creating a more streamlined business positioned for future growth. While the current tariff and macroeconomic environment has impacted several of Deflecto's end markets, I'm encouraged by the strong progress and significant improvements we have made across the business.

To address some of the trends we're seeing across Deflecto's business units, I'll start with the Class 8 truck market, which continued to experience demand headwinds throughout the third quarter. Recent industry data indicates that Class 8 net orders for September represented the weakest September since 2019. We expect the Class 8 market to remain under pressure in the near term. Further tariff and macro clarity, along with lower interest rates and gradual fleet capacity normalization into 2026, should support a rebound in activity. Moreover, Deflecto remains focused on selling essential nondiscretionary products such as mud flaps and emergency warning triangles that are mandated by key regulatory authorities, which puts the business in a strong position when the cycle turns.

Within the office products business, tariff and global trade uncertainty has caused many customers to pause or delay purchasing decisions. While we expect these headwinds to persist in the coming quarters, our operational initiatives are helping to mitigate these impacts and position the business for future growth as macroeconomic conditions normalize. As a reminder, the Deflecto office products business sells basic necessities for everyday use, such as sign holders, document organizers, and flomats for the home and commercial office markets.

Within the Air Distribution business, our sales have remained resilient in the face of a soft construction market, largely a result of interest rate pressures, which we believe will subside in the coming quarters. We continue to work to offset tariff cost pressures in this segment through product line relocations, pricing actions, and working with our distribution partners to optimize delivery routes. Within this business unit, Deflecto's core product offerings include dryer vents, air ducts, and air vent deflectors, all of which are essential in nature. Very excited about Deflecto's long-term growth potential, supported by its substantial market share, diversified customer base, and industry-leading products.

Turning now to our Industrial segment. Printronix continues to deliver strong performance, and we're seeing positive momentum across the business. Our operational improvements over the last 12 to 18 months have resulted in an attractive mix of hardware and higher-margin consumable revenue streams that generate consistent free cash flow. The team continues to use our advantageous channel position and market share to add new product lines, which we expect to provide incremental contributions over the coming quarters.

Now to our Intellectual Property segment. We recorded $7.4 million in total paid-up revenue from multiple settlements and licenses during the third quarter, which resulted in total revenue and adjusted EBITDA of $7.8 million and $3 million for the quarter, respectively, a significant increase sequentially and year-over-year. In the year-to-date period through September, our IP business generated $78 million in revenue and $44.2 million in adjusted EBITDA versus $19.4 million in revenue and $6.3 million in adjusted EBITDA in the prior year period. As a reminder, the quarterly fluctuations within the IP business are largely the result of the episodic nature of the business and timing of future settlements.

With that, I'll pass it over to Mike to discuss the details of our financial results.

Thank you, MJ, and hello, everyone. Acacia recorded total revenue of $59.4 million during the third quarter. Our energy operations generated $14.2 million in revenue for the year -- revenue for the quarter compared to $15.8 million in the same quarter last year, reflecting a softer oil price environment year-over-year. Manufacturing operations generated $30.8 million in revenue for the quarter, representing a third consecutive sequential increase compared to $29 million in the second quarter.

Given we acquired Deflecto in October of last year, there is no comparable prior year period. Our industrial operations generated $6.7 million in revenue during the quarter compared to $7 million in the same quarter last year. Our intellectual property operations generated $7.8 million in licensing and other revenue during the quarter compared to $0.5 million in the same quarter last year. Total consolidated G&A expenses were $16 million during the third quarter compared to $11.2 million in the same quarter of last year. The increase was primarily driven by the addition of Deflecto as part of the company's new manufacturing operations.

Deflecto G&A expense for the third quarter of 2025 was $4.6 million, which declined from $5.1 million in the prior quarter. Of the $4.6 million of Deflecto G&A expenses, approximately $1.1 million was related to depreciation of fixed assets and amortization of intangibles. Our energy operations G&A expense was $1.2 million for the third quarter of 2025, compared to $1 million for the prior year quarter in 2024. G&A at the parent level increased by $0.5 million year-over-year from $6.1 million to $6.6 million in the quarter ended September 30, 2025.

Parent G&A on an adjusted basis decreased by $0.6 million year-over-year from $5.2 million to $4.6 million in the quarter ended September 30, 2025. The company reported a third-quarter GAAP operating loss of $6.4 million compared to a GAAP operating loss of $10.3 million in the same quarter last year. This was primarily due to the inclusion of Deflecto in 2025 with no comparable operating income in 2024, along with a lower GAAP operating loss in the IP business in 2025 compared to the prior year.

Energy operations contributed $1.1 million in GAAP operating income during the quarter, which included $3.8 million in noncash depreciation, depletion, and amortization expense, and does not reflect the realized hedge gain of $1.2 million during the quarter. Adjusted EBITDA for our energy operations was $6.1 million in the quarter and $21 million year-to-date. Free cash flow for our energy operations was $4.3 million in the quarter and $11.9 million year-to-date. Manufacturing operations contributed $1.1 million in GAAP operating income during the quarter, which included $1.1 million in noncash depreciation and amortization expense and $0.3 million in nonrecurring transaction-related expenses and severance costs as part of our operational initiatives at Deflecto.

Adjusted EBITDA for our manufacturing operations was $2.6 million in the quarter and $6.3 million year-to-date. Free cash flow for our manufacturing operations was $2 million in the quarter and $3.7 million year-to-date. Industrial operations contributed $0.3 million in GAAP operating income during the quarter, which included $0.5 million in noncash depreciation and amortization expense. Adjusted EBITDA for our industrial operations was $0.8 million for the quarter and $2.5 million year-to-date. Free cash flow for our industrial operations was $0.7 million in the quarter and $4.1 million year-to-date.

GAAP net loss attributable to Acacia Research Corporation in the third quarter was $2.7 million or $0.03 loss per share, compared to a net loss attributable to Acacia of $14 million or a $0.14 loss per share in the prior year period. This decline in net loss was primarily due to the significant year-over-year increase in revenue and EBITDA, in addition to gains from our public equity portfolio and lapping the legacy legal fees from the prior year period.

Included in GAAP net loss for the third quarter was $0.9 million in unrealized gains related to changes in the fair value of equity securities at September 30, 2025. Adjusted net loss attributable to Acacia in the third quarter of 2025 was $1.1 million, or a $0.01 loss per share. Further details on these adjustments can be found in our press release.

Now turning to the balance sheet. Cash and cash equivalents, equity securities measured at fair value and loans receivable totaled $332.4 million at September 30, 2025, compared to $297 million at December 31, 2024. The parent company's total indebtedness was 0 at September 30, 2025. On a consolidated basis, Acacia's total indebtedness as of September 30, 2025, was $94 million, consisting of $58.5 million and $35.5 million in nonrecourse debt at Benchmark and Deflecto, respectively. Since closing the acquisition of the Revolution assets in April 2024, Benchmark has paid down approximately $24 million in total debt, underscoring the strong free cash flow generation of the business.

Additionally, since acquiring Deflecto in October 2024, the company has paid down approximately $13 million in total debt. These capital allocation decisions have significantly reduced our consolidated debt and interest expense, providing further operational flexibility. More information on Acacia's third quarter results, please see our press release issued this morning and our quarterly report on Form 10-Q, which we will file with the SEC later this week.

I'll now turn the call back over to MJ.

Thanks, Mike. Just as a reminder, we've got a Q3 earnings presentation and an investor presentation on the website that goes through the reconciliations that Mike just talked through, and I think is helpful disclosure. But just in conclusion here, as you've heard, despite ongoing tariff headwinds, Acacia delivered solid financial and operating results in the third quarter and for the first 9 months of the year. Looking ahead, our near-term focus remains on leveraging our diverse portfolio and developing targeted pricing strategies and cost savings to mitigate the ongoing impact of tariffs and related uncertainties and drive value creation for our shareholders.

While our approach remains measured and thoughtful, we're not letting volatility in the market stand in the way of building our pipeline and identifying opportunities for organic and inorganic growth across our businesses. The inherent value of our assets is strong, and I'm confident that our value-oriented strategy and experienced management team will enable us to continue to build our momentum across our business through year-end and into next year as we continue to generate long-term value for our shareholders.

With that, I'll turn it back over to you, Kelly.

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

I wanted to focus on -- Deflecto was a bit better than what we were modeling, even in a tougher environment. MJ, when you look at a so-called normal environment down the road, what percent of free cash flow do you think you'll use to pay down debt? And where do you think those EBITDA margins can go to?

I mean in terms of the amount of free cash flow that we use to pay down debt, we paid off some debt this quarter as a capital allocation decision, really to bring the leverage down, create more -- even more flexibility as we look at a handful of initiatives, and also to reduce the interest drag. We like to have leverage in our underlying businesses; just given our cash balance, it's not entirely necessary, but there is some strategic benefit to having credit facilities in place there. And so we decided to bring that down a little bit.

In terms of EBITDA target percentages, I would think about it in like kind of a low to mid-teens type margin. We are going through a lot of operating initiatives in all 3 of those selective businesses that should help to drive that. But look, we're in a pretty tough part of the cycle in the safety business. It's still performing. But with the changes that are being made there as that cycle normalizes and kind of runs back up, the margins there should be really attractive. Our air distribution business is doing well. And then the office products business, kind of the same type of target.

And then on the benchmark side of the business, especially on the Cherokee properties, can you maybe update everybody where you stand on that? How -- I guess, how many oil heads have been tapped? And what are your plans going forward over the next year or so?

Yes. I mean -- so if we look at the base business, it's performing -- our operated production is performing how we want it to perform. Commodity prices could be stronger, but we've got the hedges in place, which is exactly why we did that. So we are protected to a large extent from the hedges. In terms of the Cherokee, what I can say is that we have not yet drilled any wells. We have spent a considerable amount of time optimizing our acreage position through, as I mentioned earlier, 2 small but really strategic acquisitions and some land swaps and non-op working interest swaps that get us to great blocks that we think are very attractive to monetize.

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

Very impressive, the increase in the free cash flow on Deflecto in a challenging environment. But just another free cash flow question. In Printronix, the first quarter, you had $2.5 million of free cash flow. Is that a seasonality thing? Or that seemed kind of an aberration?

Yes, it is a seasonality thing.

I have a question. The valuation of the AMO Pharma, when you poke around their website, they have a Phase III drug in trial, Phase II. Can you refresh my recollection? What do we -- what is our carrying value on that? And when you look at the total addressable markets that AMO Pharma talks about on their website, it just seems that could, in the future, be a possible positive potential surprise for us?

Yes. I mean, so we don't disclose the carrying value of it. We do think that -- it's attractive. The company has -- just as a reminder, this is a drug for myotonic dystrophy. It's actually a pretty novel drug. There's a reasonable amount of interest in this space right now. There's a couple of research reports out there and some commentary on 2 companies, Dyne and Avidity, that target a similar end market. Those are probably worth taking a look at, Brett. We continue to work with the company. They're making good progress with the regulatory authorities in terms of working towards an approval. We inherited these businesses, and so we continue to work them. But these are early-stage biotech companies. And so we're pretty -- we're cautiously optimistic, I would say.

TP Link systems seems to be in some sort of embroglio with the United States government. Does anything that's going on between them and the U.S. impact the value of our patent portfolio in that area? And also, does that change the timing on collecting our judgment we have against them?

Yes. So that's a great question. Obviously, there's a lot of geopolitical tension around -- not that in particular, but around the nations. I would say one thing, the U.S. appears to be more IP-friendly in the new administration than it was previously. So I think that's a positive. We are -- we have been awarded the judgment in the TPLink case. The next step there is that the Federal Circuit wants to hear some oral arguments because TPLink is trying to exercise all of their legal rights here. And so we still feel really good about it. I think the process is a little bit longer than we had hoped, but it doesn't change our views on the prospective outcome here.

Last one for me. There were some pretty high-profile bankruptcies recently in the private equity space. Do you think these are canaries in the coal mine with more to follow, or these are one-offs? And I ask that because if there are canaries in the coal mine, you may hold off on buying anything in the private equity space, or if they're one-offs, will you be more aggressive in pursuing acquisition opportunities in private equity?

Yes. I mean I think you're talking about First Brands and Tricolor, which they are certainly one-offs for different reasons. I think it's drawing more attention to the private credit space than it is in the private equity space. We are seeing different developments in the private equity space, for example, and a handful of other industries. But this is why we keep our leverage low at Acacia. We come from private equity backgrounds. We've all put significant amounts of leverage on businesses. And this type of an environment is exactly why we are very cautious and judicious with leverage.

We are seeing an increasing number of private equity businesses being marketed because they have high levels of debt. We are starting to see multiples come down relative to the highly elevated multiples that sponsors were buying assets at 4 in, call it, 2021, 2022. So I think the price discovery is getting better. We still have a lot -- there's still a lot of uncertainty. Interest rates are still high for guys that are putting 5, 6, 7 turns of leverage on businesses. And it's still unclear for a lot of these companies what the current administration and some of the trade policies mean for those businesses. So we are being very cautious about what we evaluate and how we evaluate it. We're seeing a lot of deal flow, and we've kind of dug in on a handful of deals that maybe we're not fully there on price discovery, but where our expectations and sellers' expectations were 4 to 5 turns a year, 18 months ago, maybe we're within a turn, 1.5 turns, maybe 2. So it does feel like it's getting to a more normalized environment.

Your next question is coming from Todd Selter with 88 Management LLC.

Well done in Q3. Leveraging off Brett's question, in terms of the IP portfolio, we noticed a settlement after Q3 on Vantiva. I think it happened somewhere in Q2 in the second week of October. Would that number be reflected in our Q3 patent $7 million to $8 million top line or no?

Yes, that's part of that $7.4 million settlement, Todd, that I mentioned earlier.

I thought it might be. Great. So Brett did expound on a couple of thoughts that I had. And what I really want to discuss with you, gentlemen, now is really proud of the operating job everyone is doing, but so disappointed and disturbed at the lack of any reach out from the IR team to try to generate some interest in what we all consider a very attractive undervalued equity. Why has there been such little initiative put forward in that area? And what do you guys plan on doing moving forward to try to raise Acacia's profile amongst the appropriate buy-side vehicles out there that might be involved or interested in investing in microcap value?

Yes. Look, Todd, it's a great question, and we were actually very deliberate in the way that we approached this. When -- roll back a year ago, we didn't want to put our hands up in the air and say, "Hey, look at us, look at us. Here's what we're going to do." And so we held off on IR, admittedly, so that we didn't look like Carnival Barkers. Subsequent to now Benchmark with some quarters under our belt, Deflecto with some quarters under our belt, Printronix having been turned around, showing you all that we can manage the parent company G&A to a level that allows us, with each incremental acquisition, to really scale that and scale the earnings over the parent company G&A, we have started reaching out.

So we're having a lot of conversations with new investors. We presented at a couple of conferences. We're continuing to get scheduled on the conference circuit to go tell the story and meet people. And we found that having conversations in person, even more so than over Zoom, really engages people. And like you, people are interested in the story. It just takes a little bit of time with them in person to help them understand it. So we've been allocating a lot of time to that initiative, not just through conferences, but through Todd, folks that you know that you think would be interested in the story, other shareholders. And so we do talk to existing shareholders a lot. We actually spent a lot of time talking about ideas with them for new acquisition opportunities. And we've gone on a pretty good outreach journey here to tell the story to new shareholders.

That's encouraging. Now how about on the sell side? How far are we away from maybe onboarding 1 or 2 other analysts from other firms to try to get a better sense of who we are, so they could also communicate our story and gain some more momentum in this direction?

Yes. We're -- we've talked to several research groups about the story. What we don't want to do is force it because we want to make sure that it's a natural fit. People are excited to pick us up. But there are -- there are a handful of folks that we're talking to about that. As you know, with research, there's -- our stock has some volume in it, which is great. I think our volume is bigger on an average daily basis than it was certainly a year or 18 months ago. But those guys want to get paid just like anybody else. And so we're working through that.

Yes. The ace in the hole that we have, MJ is the Starboard relationship since they own 60-plus percent. You would think that some of these sell-side firms would want to maybe engender some goodwill, and the Acacia Starboard Association should serve our best interest in that area.

We're arm and arm with our brothers over at Starboard on that point.

MJ, you guys are doing a great job on the operating side, but as shareholders, we're suffering.

We're working on that for you, Todd.

Your next question is coming from Shelley Anthony with Formidable Asset Management.

I'm filling in for Adam this morning. So we actually have a somewhat tangential question about your stake in AMO Pharma. The company AMO has recently announced several positive advancements and results in the last few months. And in light of that, can you tell me if that has changed your estimated valuation in any way or prompted any interest from outside buyers?

That's a good question. Great. So we've not changed our valuation as a result of the news. I agree with you that AMO has been active publicly on helping people understand the positive developments in the company. We have not changed our valuation. As I mentioned earlier, I think we're cautiously optimistic. We've been around the biotech space, and we've seen things work, and we've seen things not work. I think AMO has a really interesting and necessary drug for a patient group that doesn't have a lot of other options, and both safety and efficacy of their product are great. There -- as I mentioned earlier, there's some news out there around Dyne and Avidity, which have similar solutions. And so that makes us cautiously optimistic as well. But all in all, we share the excitement, but we're not marking our asset up as a result of that excitement.

And so can you tell me if there's been any interest from potential outside buyers?

No, I can't.

There are no questions in the queue at this time. I would now like to turn the floor back over to MJ McNulty for closing remarks.

Thanks, Kelly. Thanks again to everyone for joining us this morning. We look forward to talking to everyone after Q4.

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

Good morning, everyone. Thank you for joining Acacia Research Second Quarter 2025 Earnings Conference Call. My name is Jenny, and I'll be your conference facilitator today. I would like to remind you that this conference call is being recorded today and is also available through audio webcast on Acacia's website. [Operator Instructions] Questions can also be directed to Acacia [email protected].

I would now like to turn the conference over to Mr. Brent Anderson of Gagnier Communications. Mr. Anderson, you may begin.

Thank you, operator. Leading today's call are MJ McNulty, Acacia's Chief Executive Officer; and Michael Zambito, Acacia's Chief Financial Officer. Before MJ and Mike begin their prepared remarks, please be reminded that certain 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 and trends. Actual results may differ materially from those projected as a result of certain risks and uncertainties. For discussion of such risks and uncertainties, please see the risk factors described in Acacia's most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC.

Earlier this morning, Acacia issued a press release disclosing its second quarter 2025 financial results. 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 Q2 2025 earnings presentation to its website, which can be found under the Quarterly Results tab. On today's call, the team 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 second quarter 2025 financial results available under the Press Releases section of the Investor Relations tab at acaciaresearch.com.

I'll now turn the call over to Acacia's Chief Executive Officer, MJ McNulty.

Thank you, Brent, and thank you, everyone, for joining us this morning for our second quarter 2025 earnings call. I'd like to begin today's call by introducing and welcoming Mike Zambito, who joined the Acacia team in June as our Chief Financial Officer. I'll let Mike give a more formal introduction, but quickly, most recently, he worked as a partner in Ernst & Young's EY-Parthenon practice and brings more than 30 years of finance, accounting and M&A expertise to our team.

I speak for the entire Acacia team when I say we're thrilled to have Mike on board. Mike's breadth and depth of industry experience and his finance and accounting skill sets are already driving expanded reach for us in our long-term approach of identifying and executing value creation strategies across our business. I've worked with Mike in different capacities over the past 15 years, and we're very excited to have him as part of the team.

I also want to thank Kirsten Hoover for the instrumental role she's played in Acacia's success over the past 2 years as our interim CFO. Kirsten is a dedicated and valued part of our team and not surprisingly, she's continued to excel as a key member of our finance team. She's been a valuable resource for Mike as he's gotten up to speed in his new role.

As we discussed in more detail in our press release, this morning, we announced a partnership with Unchained Capital, a leader in financial services tailored for Bitcoin holders and Build Asset Management, an investment adviser focused on the Bitcoin space. As Bitcoin increasingly becomes a strategic treasury reserve for companies, both large and small, a growing number of commercial borrowers are seeking ways to access dollar-based liquidity without selling their Bitcoin. We believe this has created a compelling opportunity for secured lending solutions that allow businesses to unlock the value of their Bitcoin while maintaining long-term exposure.

In our view, Unchained has built a market-leading platform designed to meet this need, offering fully collateralized U.S.-based commercial loans backed by Bitcoin. Loans are originated at a conservative 50% loan-to-value ratio and secured through a 3-party multi-signature cold storage vault with servicing provided by an affiliate of Unchained. The underlying infrastructure is engineered for institutional-grade security with key safeguards such as no rehypothecation and controlled liquidation rates.

We are initially committing $20 million to acquire a portfolio of these fully recourse loans, which we believe offer an attractive risk-adjusted return profile, supported by high-quality collateral and our hedging risk management strategy. As Bitcoin continues to institutionalize, we see potential for this investment to grow over time for additional strategic opportunities to emerge alongside trusted partners like Unchained and Build.

Turning now to our quarterly results. We continued in the second quarter to pursue our value-oriented strategy, including opportunities within our existing stable of businesses, while at the same time growing our pipeline and evaluating several actionable M&A situations in an uncertain macroeconomic environment. We've made significant progress in both these initiatives, all while maintaining a focus on free cash flow and our strong balance sheet. Mike will get into more detail on the numbers, but from a high level, we generated total company revenue of $51.2 million, total company adjusted EBITDA of $1.9 million and free cash flow of $47.9 million, reflecting the cash collection around the previously announced settlement in our IP business.

The net result was a diluted earnings per share loss of $0.03 a share, which when adjusted was a loss of $0.06 a share. Book value per share at the end of the second quarter was $5.99 per share and book value to Acacia, excluding noncontrolling interests, was $5.58 a share, essentially flat versus last quarter. To give a little more color on our subsidiaries. In the second quarter, Benchmark showed slight sequential improvement in operated production, and we lapped significant weather events in Q1.

During Q2, we slowed the pace of workovers relative to Q1 in an effort to preserve resource and reduce operating costs during the volatile commodity price environment. Importantly, our hedging strategy continues to perform as expected, mitigating some of the pressure from lower commodity prices. As a reminder, we've hedged over 70% of our operated oil and gas production through the end of 2027, which protects a substantial amount of our cash flow from downside pricing risk. During the quarter, Benchmark also paid down an incremental $3.5 million of debt, bringing our total debt reduction at Benchmark to $24 million over the last 12 months.

We continue to see value in growing our oil and gas exposure. Our team continues to evaluate new acquisition opportunities, though it does appear valuation multiples are increasing in our geographies. We'll continue to evaluate M&A where we believe it is strategic, but we'll maintain our valuation discipline. We've also continued to strategically build around our existing assets, specifically the Cherokee position we acquired as part of the Revolution deal.

As we accumulate attractive acreage in the core of this play, we'll be considering additional monetization opportunities, including potential alternative capital partnerships to finance a targeted drilling program. We remain very excited about the value generation opportunities ahead of us at Benchmark, and I look forward to updating you on our progress in the second half of the year.

Moving now to our Deflecto business. During the quarter, Deflecto grew revenue sequentially, and our team continues to progress on our integration efforts. While early days, we're pleased with the improvements we have made to optimize operations across Deflecto's 3 distinct business units. The changes that we have made and will continue to make are improving accountability, reducing overhead costs, streamlining product offerings, improving business systems processes, optimizing our global production footprint and improving go-to-market motions across all 3 businesses.

The strategy is based on our long-term view of how best to capitalize on Deflecto's growth potential, substantial market share and diversified customer and supplier base. While global trade flow uncertainty impacted Deflecto's end markets during the quarter, which we expect to continue in the near and medium term, we remain confident in the long-term value and compelling opportunity set that Deflecto presents. We maintain a global production footprint, and we've been reshoring certain manufacturing functions and exploring sourcing alternatives to help mitigate the impact of tariffs.

While these mitigation efforts have allowed us to partially offset recent cost volatility, we did feel the effects of tariff-specific demand headwinds in Deflecto's business. Most notably, we're seeing demand pressure in our Transportation Safety business, which sells products into the Class 8 truck market as well as our Consumer Products business for which manufacturing industry-wide is heavily geared towards China.

Weak Class 8 truck market that we saw during the latter part of 2024 has persisted into 2025, which we believe is largely a result of tariff-related purchasing delays. Current data indicates new Class 8 orders are now at their lowest level since 2010 and fleet CapEx levels remain well below replacement rates, a dynamic that can only persist so long.

On the Consumer Products side, we've seen customers who typically source our products and our competitors' products out of China pause purchasing until they receive more clarity on the global trade situation. We are managing our businesses prudently to navigate these considerations. Looking ahead, we will continue to invest to optimize these businesses while maintaining our typical disciplined approach to cost management and capital allocation as this market cycle normalizes.

Many businesses that we evaluate require a lift to position them under our ownership to achieve their full potential. Our team has shown skill in transforming underlying operations and efficiencies in this situation, for example, our turnaround of Printronix. While our strategic countermeasures, including operational improvement and cash flow initiatives at Deflecto are in full swing, and we feel confident in them, we're subject to the prevailing macro environment, specifically tariffs.

As we mentioned above, tariff-related demand headwinds resulting in delayed purchasing in the case of consumer products and aging fleets in the case of transportation safety can only endure so long. The fundamental changes under our watch are making these businesses stronger and more competitive, and we would anticipate this to drive attractive outcomes as the macroeconomic environment stabilizes and our customers have more certainty around purchasing cycles.

Turning now to our Industrial segment. Printronix continued to demonstrate its resiliency during the quarter and is now performing ahead of plan. We acquired Printronix, we have -- since we acquired Printronix, we've streamlined its operating structure to improve free cash flow on an annual basis. We've added new product lines, and we've transitioned its business mix from lower-margin printer sales to higher-margin consumable products. We're confident in the integrity of the dual hardware and consumables business model moving forward, and I'm pleased with the turnaround the team has made with this business.

Now to touch a little bit on our Intellectual Property operations. Aside from the cash collection from our large settlement in Q1, it was a quiet quarter for our Intellectual Property business. Recall that in Q1, we generated $69.9 million in revenue, primarily related to our Wi-Fi 6 portfolio. The quarter-over-quarter decrease in revenue from IP is largely the result of the episodic nature of this business where value can be generated at sporadic intervals throughout the life cycle of each investment. As attractive opportunities become available in the IP space, our team remains open to opportunistically committing capital in this business, consistent with our priorities of maximizing shareholder value.

Acacia is a well-regarded leader in the IP space, and intellectual property owners continue to actively seek us out as a trusted partner. We also continue to actively track, monitor and analyze the evolving regulatory landscape related to our IP business, particularly with respect to the potential for new regulations and/or fees that would impact patent holders. The landscape continues to change in real time. And to date, we do not see any of the currently discussed changes to would materially impact us.

I'd now like to turn the call over to Mike to provide additional details on our first quarter financial results.

Thank you, MJ, and hello, everyone. It's a pleasure to be here today to report on Acacia's second quarter financial results and my first quarter as CFO. I'm genuinely thrilled to be here and to be part of the Acacia team. I also want to echo MJ's comment on how instrumental Pearson has been to Acacia's success and continues to be in my onboarding. Acacia recorded total revenue of $51.2 million during the second quarter. Our Energy operations generated $15.3 million in revenue for the quarter compared to $14.2 million in the same quarter last year.

Manufacturing operations generated $29 million in revenue for the quarter. Our Industrial operations generated $6.6 million in revenue during the quarter compared to $6.3 million in the same quarter last year. Our Intellectual Property operations generated $0.3 million in licensing and other revenue during the quarter compared to $5.3 million in the same quarter last year. Total consolidated G&A expenses were $15.5 million during the second quarter compared to $10.1 million in the same quarter of last year, with $5.1 million of the increase related to the addition of Deflecto as part of the company's new Manufacturing operations.

Of the $5.1 million in Deflecto G&A expense, approximately $1.5 million is related to depreciation and amortization of intangible assets. Our Energy operations G&A expense was flat year-over-year, while G&A at the parent level increased by $0.8 million year-over-year. The company recorded a second quarter GAAP operating loss of $12.4 million compared to a GAAP operating loss of $4.8 million in the same quarter last year. This was primarily due to a $5 million year-over-year revenue decline in the IP business and incremental IP business amortization.

Energy operations contributed $2.1 million in operating income during the quarter, which included $4 million in noncash depreciation, depletion and amortization expense and does not reflect the hedge gain we realized during the quarter. Adjusted EBITDA for our Energy operations was $7 million. Free cash flow for the Energy operations was $4.1 million in the quarter and $7.6 million year-to-date.

Manufacturing operations had a $0.6 million GAAP operating loss during the quarter, which included $1.5 million in noncash depreciation and amortization expense and $0.4 million in nonrecurring transaction-related expenses and severance costs as part of our operational initiatives at Deflecto. Adjusted EBITDA for our Manufacturing operations was $1.3 million. Industrial operations contributed $0.1 million in operating income during the quarter, which included $0.5 million in noncash depreciation and amortization expense.

Adjusted EBITDA for our Industrial operations was $0.6 million. GAAP net loss attributable to Acacia Research Corporation in the second quarter was $3.3 million or $0.03 per share compared to a net loss attributable to Acacia of $8.4 million or $0.08 per share in the prior year period. This increase was primarily due to gains from our Benchmark hedge book and our public equity portfolio. Included in GAAP net loss was $2.2 million in unrealized gains and $1.9 million in realized gains related to the fair value of equity securities at June 30, 2025. Adjusted net loss attributable to Acacia in the second quarter of 2025 was $5.9 million or $0.06 per share. Further details on these adjustments can be found in our press release.

Turning to the balance sheet, cash, cash equivalents and equity securities at fair value totaled $338.2 million at June 30, 2025, compared to $297 million at December 31, 2024. The parent company's total indebtedness was 0 at June 30, 2025. On a consolidated basis, Acacia's total indebtedness as of June 30, 2025, was $104.4 million, consisting of $58 million and $46.4 million in nonrecourse debt at Benchmark and Deflecto, respectively.

Since closing the acquisition of the Revolution assets in April 2024, Benchmark has paid down approximately $24 million in total debt, underscoring the strong free cash flow generation of the Benchmark business. For more information on Acacia's second quarter results, please see our press release issued this morning and our quarterly report on Form 10-Q, which we will file with the SEC later this week.

I'd like to now turn the call back over to MJ.

Thanks, Mike. As you've heard today, our business continues to generate value amid a volatile market. While no business is immune to macroeconomic headwinds we are all currently experiencing, I'm confident in the inherent value of our assets and our ability to consistently execute our strategy for long-term value creation. Looking ahead, we'll continue to focus on growing our platforms organically and through M&A to deliver significant value for our shareholders. We have exciting opportunities in the pipeline, and I look forward to updating you on our progress in due course.

With that, I'll turn the call back over to Jenny for questions.

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

Welcome aboard, Mike.

Thank you.

MJ, I wanted to maybe drill in a little bit on the Bitcoin commercial loans. Can you maybe share with us a range of expected interest that you would receive from these? And do you view these as a little bit more risky than a typical commercial loan or similar? And then I had a couple of follow-ups.

Yes. Tony, I hope you're well. So your first question, are you talking about kind of what we're thinking of sizing or -- I just want to make sure I have your question.

No, just see, if you're taking on these loans, what's the expected return to Acacia in terms of interest rate?

Yes. Great question. So the loans are originated at pretty attractive rates, call it, low teens type rates of return. We're going to hedge the loans. So we have a little bit of cost against that, and there's some origination costs. But think about it in kind of they're in excess of 10% net to Acacia type returns.

And when you think about these, these are loans originated to U.S. commercial borrowers at a 50% loan-to-value ratio collateralized by Bitcoin that these commercial borrowers hold in a cold storage unit where we have the ability with Unchained to manage the loan-to-value ratio through either calls to the borrowers of the loan to add more Bitcoin or cash into their account to maintain that loan-to-value ratio or ultimately the ability to liquidate that borrower's Bitcoin in order to maintain the loan-to-value ratio.

And so when you think about the risk, these are like -- I guess it's like an ABL type loan, which when you look at historical loss rates on ABL, they're very low, but rather than holding AR and inventory as collateral that takes time to liquidate if you need to, this Bitcoin is in our control as a lender. So I view the risk to be very minimal risk relative to other loans and the return on the loan to be very attractive. So we actually really like these loans. We also are going to hedge some Bitcoin exposure. So in the event there is a big gap down in Bitcoin, we're going to protect ourselves from that as a kind of outside risk.

Got it. And then just drilling in a little bit on Deflecto. You guys did a great job turning around Printronix. So I trust you guys will step in if there's something that needs to be done specific to Deflecto versus the macro. Is there any kind of light at the end of the tunnel you're seeing from any industry guys in the Class A truck market? Or do you think this could extend on for a period of time? If it's not just tariff, if it's more macro related?

Yes. I mean, it's really -- I think the tariff surprised us all. I think the magnitude of the tariffs surprised us even further. I don't think we're alone in that. And so we -- it's early to tell. What we're hearing from customers is that their buying patterns have changed, while the uncertainty of where this will shake out it sits. And so I think when we get through some of the uncertainty, some of the purchasing -- the typical purchasing cycles may return.

I think pricing and cost for buyers could change. We're doing a lot around our business in terms of price increases to react to tariffs as well as we've done it with the Printronix business, cost rationalization, optimization, improving processes, all the things that I mentioned in the call. And so we're monitoring the market. We're constantly talking to customers. We're encouraged by the fact that fleets are aging past kind of refresh rates. And so we do think that there is going to be a good outcome here. I think we just need to clear some of this uncertainty in order to have -- for the market to have a better view on what that looks like.

Got it. And the last question from me. Your comments related to Cherokee, very positive. It seems like there's a step forward maybe being taken by Acacia. Can you kind of lay out your plans over the next 1 to 2 years, what you think you'll do and how many wells can be drilled, et cetera?

Yes. I mean I can't get into the number of wells that can be drilled. We are evaluating ways to partner with third-party capital in order to pursue a drilling strategy in the Cherokee. And that's kind of on the back of a lot of work that we and the team have done to identify the right blocks and the right wells and high-grade those wells to go after a strategy.

And so we're kind of in the -- kind of past the planning stage and into kind of the middle part of that process. And so I think we'll be hopefully in a position to take advantage of some of that Cherokee acreage, which came with the PDPs that we bought as part of that Revolution deal.

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

Welcome aboard, Michael, and thank you to Kirsten for answering all my questions over the years. I appreciate it. I just want to make sure we drill down a little bit on the risk on these loans. I mean, you're basically going to be a margin department like in a brokerage firm almost. Are the markets mature enough so that you can put hedges in? And if you get a multi-standard deviation event where Bitcoin really drops dramatically in price that the hedges will protect our loans?

Yes. So we've done a lot of work around that, Brett. And the Bitcoin market is very large. And we're talking about Bitcoin here, not other cryptocurrencies just to be clear. So we are looking solely at Bitcoin. The depth of the market and the breadth of the market is substantial for us to be able to put these hedges in place.

Okay. And can you just talk to me a little bit this cold storage unit? I mean, we'll be able to, with metaphysical certainty, know that these assets are segregated and there's a lot of neutering of regulation with the crypto markets with the Trump administration. So it's kind of the responsibility to protect ourselves rests on us. Can you just talk to that a little bit?

Yes, yes. And maybe just to take a step back, there are increasing number of companies that as a treasury strategy are holding Bitcoin. We at Acacia as a treasury strategy are holding cash and treasuries, not Bitcoin. But for those companies that are holding Bitcoin, they have a handful of ways to hold that Bitcoin. They can hold it on a key or [indiscernible] or something like that and put it in the drawer, not very safe, not very smart.

We all read the stories about Bitcoin being lost because a key was thrown out and people lost several hundred thousand Bitcoin. So that's not a prudent way to manage people's capital. There are things like Coinbase where it is a claim on a pool of Bitcoin as opposed to holding an actual physical Bitcoin. What Unchained has created is cold storage, an ability for an actual holder of a physical Bitcoin to have a custodian maintain that Bitcoin for them.

So Unchained, Brett, if you hold physical Bitcoin, you can go to Unchained and you can pay Unchained to hold that Bitcoin in cold storage. So what does that mean? It means that they have a software and a third-party, effectively a bank that holds that key for you in a safe and controlled storage environment where it can be accessed in the case of our loans by a holder of 2 of 3 keys. And the only way that Bitcoin can come out of storage is if 2 of the 3 key holders present those keys and ask for that Bitcoin to come out of storage.

And so one of the reasons we really like this is that in the case of our loans, we and our custodian hold the key and can only unlock it at the direction of we and our custodian which we think provides a lot of security. So that's kind of the cold storage piece of it. On the lending and the security piece of it, so the standard or typical UCC process, Bitcoin actually presents a really unique piece of collateral because the UCC goes in the chain of the actual Bitcoin so you can go on and see who the holders are and you can ensure that there's no other holder in the chain before you.

So it becomes even more clear than with a physical piece of equipment or a building or so on and so forth that Unchained Acacia are the owners or have a claim, have the most senior claim on that Bitcoin. So we actually think it's a really elegant piece of collateral and in a lot of ways, more superior than most other collateral.

Incredible. So the UCC lien is actually flagged in the Bitcoin, wow.

It's in the coding of the Bitcoin.

Right, right. Incredible. Different subject. Because we're hedged 70% with the Benchmark resolution business, if we go into a recession and oil and natural gas prices continue to decline, is it almost impossible for that business through 2027 to go cash flow negative?

Nothing is impossible, but I would say, it would be highly improbable for it to go cash flow negative because of the hedges. We do have a little bit of unhedged exposure, primarily to non-operated and some of our -- a small amount of our operated production. But so far, our hedges have worked as we have expected them to work. And so we feel pretty comfortable that in spite of the recent price volatility that we will be cash flow positive.

Right. Now the 30% on the oil and natural gas that you're not hedged, is there a breakeven price of oil and natural gas below which you just don't make any money?

Theoretically, there is a breakeven. I don't have that number in front of me, Brett, but we can follow up with that.

Okay. Different subject. There's a lot of stress in the private equity markets. Has it risen to a level such that the private equity potential sellers are finally going to come to the table with lower price so that we can get some deals done in that space?

Yes. I mean this is an interesting question and one that we watch quite a bit because we're pretty plugged into what's going on in private equity. I would say, there are multiple answers depending upon asset quality. So in the, call it, B and C quartile assets where we like to play because we like the ability to go in and have a reason to be a buyer usually around operational improvement, margin improvement, sales motion, so on and so forth, we're seeing a reasonable number of opportunities in that space.

For the A quartile assets, the private equity funds are just going to hold those or they'll put them into a continuation vehicle or find another way to continue to manage those assets. We are starting to see the bid-ask spread close a little bit, and we're starting to see price discovery create some opportunities. But private equity funds have a long time horizon and until their LPs really push on them for liquidity, they're not inclined to reduce their fee-paying base of assets. But we are seeing more opportunities in that space.

Okay. On the Legacy Patent business, I think we're both in agreement. The market really doesn't give us any value for that business, which has been under your stewardship, quite good. Is there any kind of information disclosure that you can give the market so that they feel comfortable on putting a valuation on that business without compromising your negotiating positions with defendants on the other side?

This is a question I ask myself a lot, Brett. I think we -- there are public cases out there, but we also have a lot of private discussions going on in kind of bilateral negotiations. It's difficult for us to disclose what all those discussions are and what the potential outcome of those might be because it just tips our hand to those counterparties and we want to keep those private.

And so aside from what you can see in the market and unfortunately, having to extrapolate the value of, say, TP-Link, for example, and applying it to other potential parties out there in similarly situated situations, it's difficult for us to give a lot of information around what we believe the value of RF patents is.

[Operator Instructions] Our next question is coming from Adam Eagleston from Formidable.

Michael, welcome. Kirsten, thanks for all of your work over the years. Quick question. Congrats on the Build/Unchained deal. With building out your in-house capabilities around hedging that, et cetera, does that increase the likelihood that we may see Acacia adopt some type of Bitcoin treasury strategy?

We are not currently considering a Bitcoin treasury strategy. It doesn't mean that we wouldn't do that in the future, but it's not something that we're actively considering, Adam.

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

Thanks, everyone as usual, for joining the call. It's good to talk to everybody, and we look forward to talking to you after the end of the third quarter.

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