UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2006
Commission
File Number 0-26068
ACACIA
RESEARCH CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
|
95-4405754
|
(State
or Other Jurisdiction of Incorporation or
Organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
500
Newport Center Drive, Newport Beach, CA
|
|
92660
|
(Address
of Principal Executive Offices)
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|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (949)
480-8300
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to filing requirements for
the
past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨
|
|
Accelerated
filer þ
|
|
Non-accelerated
filer ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
As
of
August 2, 2006, 27,949,920 shares of Acacia Research-Acacia Technologies
common
stock were issued and outstanding. As of August 2, 2006, 39,816,001 shares
of
Acacia Research-CombiMatrix common stock were issued and
outstanding.
ACACIA
RESEARCH CORPORATION
Table
of Contents
Part
I.Financial Information
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|
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Item
1.
|
|
Financial
Statements
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Acacia
Research Corporation Consolidated Financial Statements
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|
|
|
|
|
|
|
Consolidated
Balance Sheets as of June 30, 2006, and December 31, 2005
(Unaudited)
|
1
|
|
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Income (Loss) for the
Three
Months and Six Months Ended June 30, 2006 and 2005
(Unaudited)
|
2
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Six Months Ended June 30, 2006
and 2005
(Unaudited)
|
3
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements (Unaudited).
|
4
|
|
|
|
|
|
|
*CombiMatrix
Group Financial Statements
|
|
|
|
|
|
|
|
Balance
Sheets as of June 30, 2006, and December 31, 2005 (Unaudited)
|
24
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|
|
|
|
|
|
Statements
of Operations for the Three Months and Six Months Ended June 30,
2006 and
2005 (Unaudited)
|
25
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|
|
|
|
|
|
Statements
of Cash Flows for the Six Months Ended June 30, 2006 and 2005
(Unaudited)
|
26
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|
|
|
|
|
|
Notes
to Financial Statements (Unaudited)
|
27
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|
|
|
|
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|
*Acacia
Technologies Group Financial Statements
|
|
|
|
|
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|
|
Balance
Sheets as of June 30, 2006, and December 31, 2005
(Unaudited)
|
31
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|
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|
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|
|
Statements
of Operations for the Three Months and Six Months Ended June 30,
2006 and
2005 (Unaudited)
|
32
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|
|
|
|
|
|
Statements
of Cash Flows for the Six Months Ended June 30, 2006 and 2005
(Unaudited)
|
33
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|
|
|
|
|
|
Notes
to Financial Statements (Unaudited)
|
34
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|
|
|
|
Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
39
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|
|
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|
Item
3.
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|
Quantitative
and Qualitative Disclosures About Market Risk
|
60
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|
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Item
4.
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Controls
and Procedures
|
60
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Part
II.Other Information
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|
Item
1.
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|
Legal
Proceedings
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61
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|
Item
1A.
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|
Risk
Factors
|
61
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|
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|
Item
4.
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|
Submission
of Matters to a Vote of Security Holders
|
61
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|
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|
Item
6.
|
|
Exhibits
|
62
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|
|
|
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Signatures
|
63
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|
Exhibit
Index
|
64
|
*NOTE:
We are presenting the Acacia Research Corporation consolidated unaudited
interim
financial statements and the separate unaudited interim financial statements
for
the CombiMatrix group and the Acacia Technologies group. The separate financial
statements and accompanying notes of the two groups are being provided as
additional disclosure regarding the financial performance of the two divisions
and to provide investors with information regarding the potential value and
operating results of the respective businesses, which may affect the respective
share values. The separate financial statements should be reviewed in
conjunction with Acacia Research Corporation’s consolidated financial statements
and accompanying notes. The presentation of separate financial statements
is not
intended to indicate that we have changed the title to any of our assets
or
changed the responsibility for any of our liabilities, nor is it intended
to
indicate that the rights of our creditors have been changed. Acacia Research
Corporation, and not the individual groups, is the issuer of the securities.
Holders of the two securities are stockholders of Acacia Research Corporation
and do not have a separate and exclusive interest in the respective
groups.
ACACIA
RESEARCH CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share information)
(Unaudited)
|
|
June
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
17,045
|
|
$
|
20,164
|
|
Short-term
investments
|
|
|
33,646
|
|
|
39,009
|
|
Accounts
receivable
|
|
|
4,847
|
|
|
5,332
|
|
Prepaid
expenses, inventory, and other assets
|
|
|
2,189
|
|
|
2,115
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
57,727
|
|
|
66,620
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
2,344
|
|
|
2,484
|
|
Patents,
net of accumulated amortization
|
|
|
28,526
|
|
|
31,712
|
|
Goodwill
|
|
|
17,039
|
|
|
18,980
|
|
Other
assets
|
|
|
3,049
|
|
|
1,638
|
|
|
|
|
|
|
|
|
|
|
|
$
|
108,685
|
|
$
|
121,434
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
4,027
|
|
$
|
3,924
|
|
Royalties
and legal fees payable
|
|
|
2,652
|
|
|
3,758
|
|
Current
portion of deferred revenues
|
|
|
529
|
|
|
804
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
7,208
|
|
|
8,486
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
2,701
|
|
Deferred
revenues, net of current portion
|
|
|
1,464
|
|
|
1,439
|
|
Other
liabilities
|
|
|
1,641
|
|
|
1,464
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
10,313
|
|
|
14,090
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
-
|
|
|
447
|
|
|
|
|
|
|
|
|
|
Redeemable
stockholders' equity:
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
|
|
|
|
|
Acacia
Research Corporation, par value $0.001 per share; 10,000,000
shares
authorized; no shares issued or outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock
|
|
|
|
|
|
|
|
Acacia
Research - Acacia Technologies stock, par value $0.001 per
share;
50,000,000 shares authorized; 27,899,920 and 27,722,242 shares
issued and
outstanding as of June 30, 2006 and December 31, 2005,
respectively
|
|
|
28
|
|
|
28
|
|
Acacia
Research - CombiMatrix stock, par value $0.001 per share; 50,000,000
shares authorized; 39,336,152 and 38,992,402 shares issued
and outstanding
as of June 30, 2006 and December 31, 2005,
respectively
|
|
|
39
|
|
|
39
|
|
Additional
paid-in capital
|
|
|
317,716
|
|
|
315,146
|
|
Deferred
stock compensation
|
|
|
-
|
|
|
(1,400
|
)
|
Accumulated
comprehensive income
|
|
|
(56
|
)
|
|
(2
|
)
|
Accumulated
deficit
|
|
|
(219,355
|
)
|
|
(206,914
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
98,372
|
|
|
106,897
|
|
|
|
|
|
|
|
|
|
|
|
$
|
108,685
|
|
$
|
121,434
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ACACIA
RESEARCH CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In
thousands, except share and per share information)
(Unaudited)
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
June
30, 2006
|
|
June
30, 2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$
|
14,371
|
|
$
|
2,682
|
|
$
|
19,088
|
|
$
|
4,545
|
|
Government
contract
|
|
|
574
|
|
|
1,281
|
|
|
838
|
|
|
2,012
|
|
Products
|
|
|
1,158
|
|
|
567
|
|
|
2,082
|
|
|
845
|
|
Service
contracts
|
|
|
60
|
|
|
9
|
|
|
117
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
16,163
|
|
|
4,539
|
|
|
22,125
|
|
|
7,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of government contract revenues
|
|
|
542
|
|
|
1,209
|
|
|
792
|
|
|
1,900
|
|
Cost
of product sales
|
|
|
340
|
|
|
190
|
|
|
561
|
|
|
353
|
|
Research
and development expenses (including non-cash stock compensation
expense of
$193 and $486 for the three and six months ended June 30,
2006)
|
|
|
2,182
|
|
|
1,415
|
|
|
4,561
|
|
|
2,555
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense of $1,169 and $2,619 for the three and six months
ended June 30,
2006 and $15 and ($111) for the three and six months ended
June 30,
2005)
|
|
|
6,670
|
|
|
4,276
|
|
|
14,169
|
|
|
8,039
|
|
Legal
expenses - patents
|
|
|
685
|
|
|
536
|
|
|
1,051
|
|
|
1,097
|
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
7,847
|
|
|
1,120
|
|
|
10,118
|
|
|
1,767
|
|
Amortization
of patents
|
|
|
1,600
|
|
|
1,610
|
|
|
3,217
|
|
|
2,800
|
|
Write-off
of patent-related intangible asset
|
|
|
297
|
|
|
-
|
|
|
297
|
|
|
-
|
|
Legal
settlement credits
|
|
|
-
|
|
|
(16
|
)
|
|
-
|
|
|
(195
|
)
|
Loss
from equity investments
|
|
|
294
|
|
|
63
|
|
|
533
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
20,457
|
|
|
10,403
|
|
|
35,299
|
|
|
18,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(4,294
|
)
|
|
(5,864
|
)
|
|
(13,174
|
)
|
|
(10,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and investment income
|
|
|
531
|
|
|
383
|
|
|
1,071
|
|
|
656
|
|
Loss
on sale of interest in subsidiary
|
|
|
-
|
|
|
-
|
|
|
(84
|
)
|
|
-
|
|
Warrant
gains (charges)
|
|
|
1,490
|
|
|
-
|
|
|
(250
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
2,021
|
|
|
383
|
|
|
737
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(2,273
|
)
|
|
(5,481
|
)
|
|
(12,437
|
)
|
|
(10,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision)
benefit for income taxes
|
|
|
(70
|
)
|
|
64
|
|
|
(4
|
)
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(2,343
|
)
|
|
(5,417
|
)
|
|
(12,441
|
)
|
|
(10,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
loss on disposal of discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(2,343
|
)
|
|
(5,417
|
)
|
|
(12,441
|
)
|
|
(10,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on short-term investments
|
|
|
4
|
|
|
(7
|
)
|
|
3
|
|
|
7
|
|
Unrealized
gains on foreign currency translation
|
|
|
-
|
|
|
14
|
|
|
4
|
|
|
22
|
|
Sale
of interest in subsidiary's cumulative translation
adjustment
|
|
|
-
|
|
|
-
|
|
|
(61
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
(2,339
|
)
|
$
|
(5,410
|
)
|
$
|
(12,495
|
)
|
$
|
(10,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable
to the Acacia Technologies group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
1,099
|
|
$
|
(1,760
|
)
|
$
|
(1,310
|
)
|
$
|
(3,424
|
)
|
Basic
and diluted income (loss) per share
|
|
|
0.04
|
|
|
(0.06
|
)
|
|
(0.05
|
)
|
|
(0.13
|
)
|
Loss
from discontinued operations
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(210
|
)
|
Basic
and diluted loss per share
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.01
|
)
|
Net
income (loss)
|
|
$
|
1,099
|
|
$
|
(1,760
|
)
|
$
|
(1,310
|
)
|
$
|
(3,634
|
)
|
Basic
and diluted income (loss) per share
|
|
|
0.04
|
|
|
(0.06
|
)
|
|
(0.05
|
)
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable
to the CombiMatrix group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,442
|
)
|
$
|
(3,657
|
)
|
$
|
(11,131
|
)
|
$
|
(6,733
|
)
|
Basic
and diluted loss per share
|
|
|
(0.09
|
)
|
|
(0.12
|
)
|
|
(0.29
|
)
|
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - Acacia Technologies stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,507,024
|
|
|
27,271,416
|
|
|
27,454,066
|
|
|
25,922,412
|
|
Diluted
|
|
|
30,324,732
|
|
|
27,271,416
|
|
|
27,454,066
|
|
|
25,922,412
|
|
Acacia
Research - CombiMatrix stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
39,018,844
|
|
|
31,200,984
|
|
|
39,005,696
|
|
|
31,200,742
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ACACIA
RESEARCH CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(12,441
|
)
|
$
|
(10,367
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,720
|
|
|
3,358
|
|
Non-cash
stock compensation
|
|
|
3,105
|
|
|
(111
|
)
|
Deferred
income taxes
|
|
|
(70
|
)
|
|
(140
|
)
|
Non-cash
warrant charges (gains)
|
|
|
250
|
|
|
-
|
|
Non-cash
legal settlement charges (credits)
|
|
|
-
|
|
|
(195
|
)
|
Loss
on disposal of discontinued operations
|
|
|
-
|
|
|
210
|
|
Write-off
of patent-related intangible asset
|
|
|
297
|
|
|
-
|
|
Loss
from equity investments
|
|
|
533
|
|
|
102
|
|
Loss
on sale of interest in subsidiary
|
|
|
84
|
|
|
-
|
|
Other
|
|
|
37
|
|
|
(56
|
)
|
Changes
in assets and liabilities, excluding effect of business
acquisition:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
468
|
|
|
(1,659
|
)
|
Prepaid
expenses, inventory and other assets
|
|
|
(479
|
)
|
|
(625
|
)
|
Accounts
payable and accrued expenses
|
|
|
415
|
|
|
(384
|
)
|
Royalties
and legal fees payable
|
|
|
(1,106
|
)
|
|
447
|
|
Deferred
revenues
|
|
|
(198
|
)
|
|
129
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities from continuing
operations
|
|
|
(5,385
|
)
|
|
(9,291
|
)
|
Net
cash provided by (used in) operating activities from discontinued
operations
|
|
|
222
|
|
|
(433
|
)
|
Net
cash used in operating activities
|
|
|
(5,163
|
)
|
|
(9,724
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(479
|
)
|
|
(512
|
)
|
Purchase
of available-for-sale investments
|
|
|
(12,953
|
)
|
|
(38,319
|
)
|
Sale
of available-for-sale investments
|
|
|
18,306
|
|
|
36,282
|
|
Business
acquisition (Note 7)
|
|
|
(16
|
)
|
|
(5,796
|
)
|
Purchase
of additional interests in equity method investee
|
|
|
(1,400
|
)
|
|
(600
|
)
|
Patent
acquisition costs
|
|
|
(1,020
|
)
|
|
(325
|
)
|
Sale
of interest in subsidiary
|
|
|
(369
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
2,069
|
|
|
(9,270
|
)
|
Net
cash used in investing activities from discontinued
operations
|
|
|
(353
|
)
|
|
-
|
|
Net
cash provided by (used in) investing activities
|
|
|
1,716
|
|
|
(9,270
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock, net of issuance costs
|
|
|
543
|
|
|
19,753
|
|
Prepaid
Standby Equity Distribution Agreement commitment fees (Note
6)
|
|
|
(550
|
)
|
|
-
|
|
Proceeds
from the exercise of stock options
|
|
|
335
|
|
|
53
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
328
|
|
|
19,806
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
|
-
|
|
|
21
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(3,119
|
)
|
|
833
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning
|
|
|
20,164
|
|
|
13,910
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending
|
|
$
|
17,045
|
|
$
|
14,743
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description
of Business. Acacia
Research Corporation (“we,” “us” and “our”) is comprised of two operating
groups.
CombiMatrix
Group
Our
life
sciences business, referred to as the “CombiMatrix group,” a division of Acacia
Research Corporation, is comprised of our wholly owned subsidiary, CombiMatrix
Corporation and CombiMatrix Corporation’s wholly owned subsidiary, CombiMatrix
Molecular Diagnostics and includes all corporate assets, liabilities and
transactions related to Acacia Research Corporation’s life sciences business.
The
CombiMatrix
group develops proprietary technologies and products and services in the
areas
of drug development, genetic analysis, nanotechnology research, defense and
homeland security markets, and other markets where its products could be
utilized. Among the technologies being developed by the CombiMatrix group
is a
platform technology to produce customizable arrays, which are
semiconductor-based tools for use in identifying and determining the roles
of
genes, gene mutations and proteins. This technology has potential applications
in the areas of genomics, proteomics, biosensors, drug discovery, drug
development, diagnostics, combinatorial chemistry, material sciences and
nanotechnology. Other technologies include proprietary molecular synthesis
and
screening methods for the discovery of potential new drugs. CombiMatrix
Molecular Diagnostics, Inc., (“CMDX”), a wholly owned subsidiary located in
Irvine, California, is exploring opportunities for the CombiMatrix group’s
arrays in the field of molecular diagnostics. CombiMatrix K.K., a Japanese
corporation located in Tokyo, Japan, has existed for the purpose of exploring
opportunities for CombiMatrix Corporation’s array system with pharmaceutical and
biotechnology companies in the Asian market. In January 2006, CombiMatrix
Corporation sold 67% of its ownership interest in CombiMatrix K.K. to a third
party. Refer to Note 12.
Acacia
Technologies Group
The
Acacia Technologies group, a division of Acacia Research Corporation, develops,
acquires, licenses and enforces patented technologies. The Acacia Technologies
group is primarily comprised of certain of Acacia Research Corporation’s direct
and or indirect wholly owned subsidiaries and limited liability companies
including:
·
|
Acacia
Global Acquisition Corporation
|
|
·
|
Information
Technology Innovation LLC
|
·
|
Acacia
Media Technologies Corporation
|
|
·
|
InternetAd
LLC
|
·
|
Acacia
Patent Acquisition Corporation
|
|
·
|
IP
Innovation LLC
|
·
|
Acacia
Technologies Services Corporation
|
|
·
|
KY
Data Systems LLC
|
·
|
AV
Technologies LLC
|
|
·
|
Microprocessor
Enhancement Corporation
|
·
|
Broadcast
Data Retrieval Corporation
|
|
·
|
New
Medium LLC
|
·
|
Broadcast
Innovation LLC
|
|
·
|
Peer
Communications Corporation
|
·
|
Computer
Acceleration Corporation
|
|
·
|
Product
Activation Corporation
|
·
|
Computer
Cache Coherency Corporation
|
|
·
|
TechSearch
LLC
|
·
|
Computer
Docking Station Corporation
|
|
·
|
VData
LLC
|
·
|
Data
Encryption Corporation
|
|
·
|
Resource
Scheduling Corporation
|
·
|
Data
Innovation LLC
|
|
·
|
Software
Collaboration Corporation
|
·
|
Disk
Link Corporation
|
|
·
|
Soundview
Technologies, Inc.
|
·
|
Financial
Systems Innovation LLC
|
|
·
|
Spreadsheet
Automation Corporation
|
·
|
High
Resolution Optics Corporation
|
|
|
|
The
Acacia Technologies group also includes all corporate assets, liabilities,
and
related transactions of Acacia Research Corporation attributed to Acacia
Research Corporation’s intellectual property licensing and enforcement business.
Refer to “Business Acquisition” below for information on the Acacia Technologies
group’s 2005 business acquisition activity.
The
Acacia Technologies group currently controls 46 patent portfolios covering
technologies used in a wide variety of industries.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Business
Acquisition.
On
January 28, 2005, Acacia Global Acquisition Corporation acquired the assets
of
Global Patent Holdings, LLC, which owned 11 patent licensing companies (“GPH
Acquisition”). The acquisition provided the Acacia Technologies group ownership
of companies that control 27 patent portfolios, which include 120 U.S. patents
and certain foreign counterparts, and cover technologies used in a wide variety
of industries. Refer to Note 7 for a description of the acquisition
transaction.
Other
In
January 2006, Acacia Research Corporation’s board of directors approved a plan
for its wholly owned subsidiary, CombiMatrix Corporation, to become an
independent public company. The transaction is expected to be completed no
sooner than the fourth quarter of 2006, subject, however, to determination
that
there are no significant negative tax consequences to Acacia Research
Corporation or it’s shareholders and completing the required filings with the
Securities and Exchange Commission, or SEC. We have requested a private letter
ruling from the IRS and intend to proceed only after receiving the ruling.
If
the conditions are met, Acacia Research Corporation will redeem all of the
issued and outstanding shares of AR-CombiMatrix common stock for all of the
common stock of CombiMatrix Corporation, which will register its common stock
under the Securities and Exchange Act of 1934. Following the redemption,
CombiMatrix Corporation will apply to list its shares for trading on a national
exchange.
Capital
Structure.
On
December 11, 2002, our stockholders voted in favor of a recapitalization
transaction, which became effective on December 13, 2002, whereby we created
two
new classes of common stock called Acacia Research-CombiMatrix common stock
(“AR-CombiMatrix stock”) and Acacia Research-Acacia Technologies common stock
(“AR-Acacia Technologies stock”), and divided our existing Acacia Research
Corporation common stock into shares of the two new classes of common stock.
AR-CombiMatrix stock is intended to reflect separately the performance of
Acacia
Research Corporation’s CombiMatrix group. AR-Acacia Technologies stock is
intended to reflect separately the performance of Acacia Research Corporation’s
Acacia Technologies group. Although the AR-CombiMatrix stock and the AR-Acacia
Technologies stock are intended to reflect the performance of our different
business groups, they are both classes of common stock of Acacia Research
Corporation and are not stock issued by the respective groups.
Liquidity
and Risks
General.
To
date, we and our subsidiaries have relied primarily upon selling equity
securities and payments from our strategic partners and licensees to generate
the funds needed to finance the implementation of our plans of operation
for our
subsidiaries. Management believes that our cash and cash equivalent balances,
anticipated cash flow from operations and other external sources of available
credit will be sufficient to meet our cash requirements through at least
September 30, 2007. We may be required to obtain additional financing. There
can
be no assurance that additional funding will be available on favorable terms,
if
at all. If we fail to obtain additional funding when needed, we may not be
able
to execute our business plans and our businesses may suffer.
The
CombiMatrix Group.
The
CombiMatrix group is deploying
new and unproven technologies and continues to develop its commercial products.
The CombiMatrix group has several
ongoing long-term development projects that involve experimental technology
and
may require several years and substantial expenditures to complete. Management
believes that existing cash and cash equivalents and short-term investments
are
adequate to fund operations through at least September 30, 2007 (see
Note
6 for standby equity distribution agreement entered into in June
2006).
However, the ability to meet business objectives is dependent upon the
CombiMatrix group’s ability to raise additional financing, substantiate its
technology and ultimately to fund itself from continuing operations. There
can
be no assurance that such funding will be available at acceptable terms or
at
all. The CombiMatrix group has a history of incurring net losses and net
operating cash flow deficits.
The
CombiMatrix group’s business operations are also subject to certain risks and
uncertainties, including:
·
|
market
acceptance of products and services;
|
·
|
technological
advances that may make its products and services obsolete or less
competitive;
|
·
|
increases
in operating costs, including costs for supplies, personnel and
equipment;
|
·
|
the
availability and cost of capital; and
|
·
|
governmental
regulation that may restrict its
business.
|
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Historically,
the CombiMatrix group has been substantially dependent on arrangements with
strategic partners and has relied upon payments by its partners for a
significant component of its working capital. The CombiMatrix group intends
to
enter into additional strategic partnerships to develop and commercialize
future
products. However, there can be no assurance that the CombiMatrix group will
be
able to implement its future plans. Failure to achieve its plans would have
a
material adverse effect on the CombiMatrix group’s and on Acacia Research
Corporation’s ability to achieve their intended business objectives. The
CombiMatrix group also depends on its ability to protect its intellectual
property; the loss thereof or the CombiMatrix group’s failure to secure the
issuance of additional patents covering elements of its business processes
could
materially harm its business and financial condition. The patents covering
the
CombiMatrix group’s core technology begin to expire in 2018.
The
CombiMatrix group’s products and services are concentrated in a highly
competitive market that is characterized by rapid technological advances,
frequent changes in customer requirements and evolving regulatory requirements
and industry standards. Failure to anticipate or respond adequately to
technological advances, changes in customer requirements, changes in regulatory
requirements or industry standards, or any significant delays in the development
or introduction of planned products or services, could have a material adverse
effect on the CombiMatrix group’s business and operating results.
The
Acacia Technologies Group.
To date,
the Acacia Technologies group has relied upon the receipt of license fee
payments from the licensing of the Acacia Technologies group’s patented
technologies and the selling of Acacia Research Corporation equity securities
to
generate the funds needed to finance the operations of the Acacia Technologies
group. The Acacia Technologies group began to commercially license its DMT®
technology in 2003. The GPH Acquisition provided the Acacia Technologies
group
with ownership of companies that control 27 patent portfolios, which include
120
U.S. patents and certain foreign counterparts, and cover technologies used
in a
wide variety of industries. The GPH Acquisition, and other patent acquisitions
during 2005 and 2006, continue to expand and diversify the Acacia Technologies
group’s future potential revenue generating activities.
There
can
be no assurance that the Acacia Technologies group will be able to implement
its
future plans. Failure by management to achieve its plans would have a material
adverse effect on the Acacia Technologies group and on Acacia Research
Corporation’s ability to achieve its intended business objectives. The Acacia
Technologies group’s success also depends on its ability to protect its
intellectual property.
The
timing of the receipt of revenues by the Acacia Technologies group’s business
operations are subject to certain risks and uncertainties,
including:
·
|
market
acceptance of our patented technologies and services;
|
·
|
business
activities and financial results of our licensees;
|
·
|
technological
advances that may make our patented technologies obsolete or less
competitive;
|
·
|
increases
in operating costs, including costs for legal services, engineering
and
research and personnel;
|
·
|
the
availability and cost of capital; and
|
·
|
governmental
regulation that may restrict the Acacia Technologies group’s
business.
|
The
Acacia Technologies group relies on its proprietary rights and their protection.
Although reasonable efforts will be taken to protect the Acacia Technologies
group’s proprietary rights, the complexity of international trade secret,
copyright, trademark and patent law, and common law, coupled with limited
resources and the demands of quick delivery of technologies to market, create
risk that these efforts will prove inadequate. Accordingly, if the Acacia
Technologies group is unsuccessful with litigation to protect its intellectual
property rights, the future revenues of the Acacia Technologies group could
be
adversely affected.
Basis
of Presentation.
The
accompanying unaudited consolidated financial statements include the accounts
of
Acacia Research Corporation and its wholly owned and majority-owned subsidiaries
and investments accounted for under the equity method. Material intercompany
transactions and balances have been eliminated in consolidation.
The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnotes required by generally accepted
accounting principles in annual financial statements have been omitted or
condensed in accordance with quarterly reporting requirements of the SEC.
These
interim consolidated financial statements should be read in conjunction with
the
consolidated financial statements and notes thereto for the year ended December
31, 2005, as reported by us in our Annual Report on Form 10-K.
The
year-end consolidated balance sheet data was derived from audited financial
statements but does not include all disclosures required by accounting
principles generally accepted in the United States of America.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
consolidated financial statements of Acacia Research Corporation include
all
adjustments of a normal recurring nature which, in the opinion of management,
are necessary for a fair statement of our financial position as of June 30,
2006, and results of operations and cash flows for the interim periods
presented. The results of operations for the three and six months ended June
30,
2006, are not necessarily indicative of the results to be expected for the
entire year.
Separate
Group Presentation.
AR-CombiMatrix stock and AR-Acacia Technologies stock are intended to reflect
the separate performance of the respective division of Acacia Research
Corporation. The CombiMatrix group and the Acacia Technologies group are
not
separate legal entities. Holders of AR-CombiMatrix stock and AR-Acacia
Technologies stock are stockholders of Acacia Research Corporation. As a
result,
holders of AR-CombiMatrix stock and AR-Acacia Technologies stock continue
to be
subject to all of the risks of an investment in Acacia Research Corporation
and
all of its businesses, assets and liabilities. The assets Acacia Research
Corporation attributes to one of the groups could be subject to the liabilities
of the other group. The group financial statements have been prepared in
accordance with generally accepted accounting principles in the United States
of
America, and taken together, comprise all the accounts included in the
corresponding consolidated financial statements of Acacia Research Corporation.
The financial statements of the groups reflect the financial position, results
of operations, and cash flows of the businesses included therein. The financial
statements of the groups include the accounts or assets of Acacia Research
Corporation specifically attributed to the groups and were prepared using
amounts included in Acacia Research Corporation’s consolidated financial
statements.
Minority
interests represent participation of other stockholders in the net equity
and in
the division earnings and losses of the groups and are reflected in the caption
“Minority interests” in the group financial statements. Minority interests
adjust group net results of operations to reflect only the group’s share of the
division earnings or losses of non-wholly owned investees.
Financial
effects arising from one group that affect Acacia Research Corporation’s results
of operations or financial condition could, if significant, affect the results
of operations or financial condition of the other group and the market price
of
the class of common stock relating to the other group. Any division net losses
of the CombiMatrix group or of the Acacia Technologies group, and dividends
or
distributions on, or repurchases of, AR-CombiMatrix stock or AR-Acacia
Technologies stock, will reduce the assets of Acacia Research Corporation
legally available for payment of dividends on AR-CombiMatrix stock or AR-Acacia
Technologies stock.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates. The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management
to
make estimates and assumptions that affect the reported amount of assets
and
liabilities and disclosure of contingent assets and liabilities at the date
of
the consolidated financial statements and the reported amounts of revenues
and
expenses during the reporting period. Actual results could differ from these
estimates.
Revision
in the Classification of Certain Securities.
In
connection with the preparation of the 2005 consolidated financial statements,
Acacia Research Corporation concluded that it was appropriate to classify
its
annuity investments as current investments. Prior to 2005, such
investments had been classified as cash and cash equivalents. Accordingly,
we
have made adjustments to our consolidated statement of cash flows for the
six
months ended June 30, 2005, to reflect the gross purchases of these securities
as investing activities rather than as a component of cash and cash equivalents.
This change in classification does not affect previously reported cash
flows from operations or from financing activities in our previously reported
statements of cash flows, and it does not affect our previously reported
statements of operations for any period.
As
of
June 30, 2005, before this revision in classification, $4,896,000 of these
current investments were classified as cash and cash equivalents on our
consolidated balance sheet. There were no material purchases or sales
of annuity investments during any of the periods presented, as such, the
impact
of the revision in classification on consolidated cash flows from investing
activities was not material for any of the periods presented.
Stock-Based
Compensation. Effective
January 1, 2006, Acacia Research Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”
(“SFAS No. 123R”), which sets forth the accounting requirements for
“share-based” compensation payments to employees and non-employee directors and
requires that compensation cost relating to share-based payment transactions
be
recognized in the statement of operations. In March 2005, the SEC published
Staff Accounting Bulletin No. 107 (“SAB 107”), which requires stock-based
compensation to be classified in the same expense line items as cash
compensation (i.e. marketing, general and administrative and research and
development expenses). The compensation cost for all stock-based awards is
measured at the grant date, based on the fair value of the award, and is
recognized as an expense over the employee’s requisite service period (generally
the vesting period of the equity award).
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In
addition, SFAS No. 123R requires stock-based compensation expense to be recorded
only for those awards expected to vest using an estimated forfeiture rate.
As
such, SFAS No. 123R requires Acacia Research Corporation to estimate pre-vesting
option forfeitures at the time of grant and reflect the impact of estimated
pre-vesting option forfeitures on compensation expense recognized. Acacia
Research Corporation considers several factors in connection with our estimates
of pre-vesting forfeitures including types of awards, employee classification,
and historical pre-vesting forfeiture data. Estimates of pre-vesting forfeitures
must be periodically revised in subsequent periods if actual forfeitures
differ
from those estimates. To the extent that actual results differ from our
estimates, such amounts will be recorded as cumulative adjustments in the
period
the estimates are revised. Prior to the adoption of SFAS No. 123R, Acacia
Research Corporation accounted for forfeitures as they occurred under the
pro
forma disclosure provisions of Statement of Financial Accounting Standards
No.
123, “Accounting for Stock-Based Compensation.” All references to stock-based
compensation expense in these notes, upon adoption of SFAS No. 123R, refers
to
stock-based compensation net of estimated forfeitures, as required by SFAS
No.
123R.
We
adopted SFAS No. 123R using the modified prospective transition method. Under
this transition method, compensation cost recognized for the six months ended
June 30, 2006 includes: (i) compensation cost for all stock-based awards
granted prior to, but not yet vested as of January 1, 2006 (based on the
grant-date fair value estimated in accordance with the original provisions
of
SFAS No. 123 and previously presented in the pro forma footnote
disclosures), and (ii) compensation cost for all stock-based awards granted
subsequent to January 1, 2006 (based on the grant-date fair value estimated
in accordance with the new provisions of SFAS No. 123R). The cumulative
effect of applying an estimated forfeiture percentage to stock-based payments
granted prior to, but not yet vested as of, January 1, 2006 was not
material.
Prior
to
January 1, 2006, Acacia Research Corporation accounted for share-based
compensation to employees in accordance with Accounting Principles Board
Opinion
No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related
interpretations. Acacia Research Corporation also followed the disclosure
requirements of Statement of Financial Accounting Standards No. 123, “Accounting
for Stock-Based Compensation” (“SFAS No. 123”), as amended by Statement of
Financial Accounting Standards No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure.” Because Acacia Research Corporation
previously adopted only the pro forma disclosure provisions of SFAS No. 123,
we
will recognize compensation cost relating to the unvested portion of awards
granted prior to the date of adoption using the same estimate of the grant-date
fair value and the same attribution method used to determine the pro forma
disclosures under SFAS No. 123, except that forfeiture rates will be estimated
for all awards, as required by SFAS No. 123R. In accordance with the
requirements of the modified prospective transition method of adoption of
SFAS
No. 123R, the financial statement amounts for prior periods presented in
this
Form 10-Q have not been restated to reflect the fair value method of recognizing
compensation cost relating to stock-based awards.
The
fair
value of each option award is estimated on the date of grant using a
Black-Scholes option valuation model that uses the assumptions noted in the
table below. Expected volatility is based on the separate historical volatility
of the market prices of the AR-CombiMatrix stock and AR-Acacia Technologies
stock. Volatilities of peer companies were also considered, when applicable,
to
address the lack of extensive historical volatility data for Acacia Research
Corporation’s classes of common stock. The risk-free rate for the expected term
of the option is based on the U.S. Treasury yield curve in effect at the
time of
grant. The expected term assumption was determined in accordance with guidance
set forth in SAB 107, which provides a “simplified method” for estimating the
expected term for stock options, granted prior to December 31, 2007, that
1) are
granted at-the-money, 2) have exercisability conditioned only on completion
of a
service condition through the vesting date, 3) require that employees who
terminate their service prior to vesting must forfeit the options, 4) provide
that employees who terminate their service after vesting are granted limited
time to exercise their stock options (typically 30-90 days), and 5) are
nontransferable and nonhedgeable. The simplified method is based on the vesting
period and the contractual term for each grant, or for each vesting-tranche
for
awards with graded vesting. The mid-point between the vesting commencement
date
and the expiration date is used as the expected term under this method. For
awards with multiple vesting-tranches, the times from grant until these
mid-points for each of the tranches were averaged to provide an overall expected
term.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
fair
value of restricted stock awards is determined by the product of the number
of
shares granted and the grant date market price of the AR-Acacia Technologies
stock or AR-CombiMatrix stock.
The
fair
value of share-based awards is expensed on a straight-line basis over the
requisite service period (generally the vesting period of the award), which
is
generally two to four years.
The
fair
value of stock options was estimated using the Black-Scholes option-pricing
model based on the following weighted average assumptions:
|
|
Risk
Free Interest Rate
|
|
Term
|
|
Volatility
|
|
Dividends
|
|
For
the Three Months Ended June 30, 2006 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
AR-CombiMatrix
stock
|
|
|
4.92%
|
|
|
6
years
|
|
|
82%
|
|
|
0%
|
|
CMDX
stock
|
|
|
5.08%
|
|
|
6.25
years
|
|
|
82%
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Six Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AR-CombiMatrix
stock
|
|
|
4.37%
|
|
|
5.6
years
|
|
|
82%
|
|
|
0%
|
|
AR-Acacia
Technologies stock
|
|
|
4.30%
|
|
|
6
years
|
|
|
75%
|
|
|
0%
|
|
CMDX
stock
|
|
|
5.08%
|
|
|
6.25
years
|
|
|
82%
|
|
|
0%
|
|
______________________________________________
(1)No
AR-Acacia Technologies stock options were granted during the three months
ended
June 30, 2006.
The
following table illustrates the impact of share-based compensation expense
on
reported amounts (in thousands, except for per share data):
|
|
For
the Three Months Ended June 30, 2006
|
|
For
the Six Months Ended June 30, 2006
|
|
|
|
|
|
Impact
of Stock
|
|
|
|
Impact
of Stock
|
|
|
|
As
Reported
|
|
Based
Compensation
|
|
As
Reported
|
|
Based
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
$
|
(2,273
|
)
|
$
|
(1,201
|
)
|
$
|
(12,437
|
)
|
$
|
(2,479
|
)
|
Net
loss
|
|
|
(2,343
|
)
|
|
(1,201
|
)
|
|
(12,441
|
)
|
|
(2,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AR-Acacia
Technologies stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
$
|
-
|
|
$
|
(685
|
)
|
$
|
-
|
|
$
|
(1,370
|
)
|
Basic
and diluted
|
|
$
|
0.04
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AR-CombiMatrix
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
$
|
-
|
|
$
|
(516
|
)
|
$
|
-
|
|
$
|
(1,109
|
)
|
Basic
and diluted
|
|
$
|
(0.09
|
)
|
$
|
(0.01
|
)
|
$
|
(0.29
|
)
|
$
|
(0.03
|
)
|
Stock-based
compensation expense for the three and six months ended June 30, 2006 and
2005
is included in research and development expenses and marketing, general and
administrative expenses, as disclosed in the accompanying consolidated statement
of operations and comprehensive income (loss).
Awards
granted prior to Acacia Research Corporation’s implementation of SFAS No. 123R
were accounted for under the recognition and measurement principles of APB
No.
25 and related interpretations. Accordingly, no stock-based employee
compensation cost was reflected in net loss in the accompanying unaudited
consolidated statements of operations for the three and six months ended
June
30, 2005, because all options granted under Acacia Research Corporation’s plans
had exercise prices equal to the market value of the underlying common stock
on
the date of grant.
The
following table illustrates the pro forma effect on net loss and loss per
share,
if Acacia Research Corporation had applied the fair value recognition provisions
of SFAS No. 123 (in thousands, except per share data):
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
AR-Acacia
Technologies Stock
|
|
AR-Acacia
CombiMatrix Stock
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30, 2005
|
|
June
30, 2005
|
|
June
30, 2005
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations, as reported
|
|
$
|
(1,760
|
)
|
$
|
(3,634
|
)
|
$
|
(3,657
|
)
|
$
|
(6,733
|
)
|
Deduct:
Pro forma stock-based compensation fair value method (2)
|
|
|
(620
|
)
|
|
(1,218
|
)
|
|
(818
|
)
|
|
(1,679
|
)
|
Loss
from operations, pro forma
|
|
$
|
(2,380
|
)
|
$
|
(4,852
|
)
|
$
|
(4,475
|
)
|
$
|
(8,412
|
)
|
Basic
earnings (loss) per share from operations, as reported
|
|
$
|
(0.06
|
)
|
$
|
(0.14
|
)
|
$
|
(0.12
|
)
|
$
|
(0.22
|
)
|
Basic
earnings (loss) per share from operations, pro forma
|
|
$
|
(0.09
|
)
|
$
|
(0.19
|
)
|
$
|
(0.14
|
)
|
$
|
(0.27
|
)
|
Diluted
earnings (loss) per share from operations, as reported
|
|
$
|
(0.06
|
)
|
$
|
(0.14
|
)
|
$
|
(0.12
|
)
|
$
|
(0.22
|
)
|
Diluted
earnings (loss) per share from operations, pro forma
|
|
$
|
(0.09
|
)
|
$
|
(0.19
|
)
|
$
|
(0.14
|
)
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Assumptions used (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
free interest rate
|
|
|
3.90%
|
|
|
3.71%
|
|
|
3.83%
|
|
|
3.82%
|
|
Volatility
|
|
|
94%
|
|
|
94%
|
|
|
88%
|
|
|
88%
|
|
Expected
term
|
|
|
5
years
|
|
|
5
years
|
|
|
5
years
|
|
|
5
years
|
|
___________________________
(1)
|
The
fair value of stock options was determined using the Black-Scholes
option-pricing model. The fair value calculations assume no expected
dividends.
|
(2)
|
The
previously reported 2005 pro forma income (loss) from operations
and
related pro forma earnings (loss) per share amounts have been revised
for
a computational error in the amortization of stock compensation
expense
and to reflect amounts with a 0% effective tax rate due to the
full
valuation allowance recoded by the company for all periods presented
and
to exclude stock compensation expense related to
non-employees.
|
SFAS
No.
123R does not require the recording of deferred stock compensation charges
in
stockholder’s equity on the grant date of a stock based award. As such, in
accordance with SFAS No. 123R, all deferred stock compensation charges recorded
under APB No. 25, totaling $1,400,000 at December 31, 2005, have been reversed
upon adoption of SFAS No. 123R, with a corresponding reduction being recorded
in
consolidated additional paid-in capital.
3.
EARNINGS PER SHARE
Earnings
Per Share. Basic
earnings per share for each class of common stock is computed by dividing
the
income or loss allocated to each class of common stock by the weighted average
number of outstanding shares of that class of common stock. Diluted earnings
per
share is computed by dividing the income allocated to each class of common
stock
by the weighted average number of outstanding shares of that class of common
stock including the dilutive effect of potential common shares, computed
using
the treasury method. Potential common shares primarily consist of employee
stock
options and unvested restricted stock grants.
The
earnings or losses allocated to each class of common stock are determined
by
Acacia Research Corporation’s board of directors. This determination is
generally based on the net income or loss amounts of the corresponding group
determined in accordance with accounting principles generally accepted in
the
United States of America. Acacia Research Corporation believes this method
of
allocation is systematic and reasonable. The Acacia Research Corporation
board
of directors can, at its discretion, change the method of allocating earnings
or
losses to each class of common stock at any time.
Weighted
average share information for the periods presented was as follows:
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
June
30, 2006
|
|
June
30, 2005
|
|
Acacia
Research - Acacia Technologies stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average number of common shares outstanding
|
|
|
27,507,024
|
|
|
27,271,416
|
|
|
27,454,066
|
|
|
25,922,412
|
|
Effect
of dilutive stock options and restricted stock awards
|
|
|
2,817,708
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Diluted
weighted average number of common shares outstanding
|
|
|
30,324,732
|
|
|
27,271,416
|
|
|
27,454,066
|
|
|
25,922,412
|
|
Outstanding
stock options and restricted stock excluded from the computation
of
diluted loss per share because the effect of inclusion would
have been
anti-dilutive
|
|
|
1,831,746
|
|
|
5,918,443
|
|
|
6,533,008
|
|
|
5,918,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - CombiMatrix stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average number of common shares
outstanding
|
|
|
39,018,844
|
|
|
31,200,984
|
|
|
39,005,696
|
|
|
31,200,742
|
|
All
outstanding stock options excluded from the computation of
diluted loss
per share because the effect of inclusion would have been
anti-dilutive
|
|
|
6,861,499
|
|
|
6,951,209
|
|
|
6,861,499
|
|
|
6,951,209
|
|
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Outstanding
stock options under the CombiMatrix
Molecular Diagnostics 2005 Stock Award Plan, as disclosed at Note 9, have
also
been excluded from the computation of diluted loss per share because the
effect
of inclusion would have been anti-dilutive.
4.
GOODWILL AND INTANGIBLES
The
Acacia Technologies group had $121,000 of goodwill at June
30,
2006,
and
December 31, 2005. The CombiMatrix group had $16,918,000 and $18,859,000
of
goodwill at June
30,
2006,
and
December 31, 2005, respectively.
Acacia
Research Corporation’s identifiable intangible assets at June
30,
2006,
and
December 31, 2005, are comprised of patents and patent rights. The gross
carrying amounts and accumulated amortization as of June
30,
2006,
and
December 31, 2005, related to patents and patent rights, by segment, are
as
follows (in thousands):
|
|
Acacia
Technologies Group
|
|
CombiMatrix
Group
|
|
Consolidated
|
|
|
|
June
30,
|
|
December
31,
|
|
June
30,
|
|
December
31,
|
|
June
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
carrying amount - patents
|
|
$
|
30,307
|
|
$
|
30,392
|
|
$
|
12,095
|
|
$
|
12,095
|
|
$
|
42,402
|
|
$
|
42,487
|
|
Accumulated
amortization
|
|
|
(9,159
|
)
|
|
(6,606
|
)
|
|
(4,717
|
)
|
|
(4,169
|
)
|
|
(13,876
|
)
|
|
(10,775
|
)
|
Patents,
net
|
|
$
|
21,148
|
|
$
|
23,786
|
|
$
|
7,378
|
|
$
|
7,926
|
|
$
|
28,526
|
|
$
|
31,712
|
|
The
Acacia Technologies group and the CombiMatrix group’s patents have remaining
estimated economic useful lives up to 2013 and 2020, respectively. The weighted
average remaining estimated economic useful life of the Acacia Technologies
group’s patents is 5 years. The weighted average remaining estimated economic
useful life of the CombiMatrix group’s patents is 9 years. Annual aggregate
amortization expense for each of the five fiscal years through December 31,
2010
is estimated to be $5,272,000 in 2006, $5,235,000 in 2007, $3,912,000 in
2008,
$3,461,000 in 2009 and $3,270,000 in 2010 for the Acacia Technologies group
and
$1,095,000 per year for the CombiMatrix group. At June 30, 2006, and December
31, 2005, all of our acquired intangible assets other than goodwill were
subject
to amortization.
For
the
six months ended June 30, 2006, the Acacia Technologies group incurred patent
acquisition costs totaling $1,020,000 in connection with the acquisition
of the
rights to several additional patent portfolios. The acquired patents and
patent
rights have estimated economic useful lives ranging from five to seven years.
Refer to Note 7 for additions to patent related intangibles during the six
months ended June 30, 2005.
During
the three months ended June 30, 2006, the Acacia Technologies group recorded
a
non-cash charge of $297,000, related to the write-off of a patent-related
intangible asset. We
review
long-lived assets and intangible assets for potential impairment annually
and
when events or changes in circumstances indicate the carrying amount of an
asset
may not be recoverable. In the event the sum of the expected undiscounted
future
cash flows resulting from the use of the asset is less than the carrying
amount
of the asset, an impairment loss equal to the excess of the asset’s carrying
value over its fair value is recorded. During
the second quarter of 2006, pursuant to the terms of the respective license
agreement, management elected to terminate its rights to exclusively license
and
enforce the patent, resulting in the write-off of the remaining carrying
value
of the patent-related intangible asset as of June 30, 2006.
As
of
March 31, 2006, the CombiMatrix group reduced its goodwill and deferred tax
liability balances by $1,941,000 which were initially recorded in fiscal
2000,
to properly reflect the reduction in its income tax valuation allowance after
consideration of the deferred tax liability. As of March 31, 2006, the Acacia
Technologies group reduced its patents and deferred tax liability by $691,000,
which were initially recorded in fiscal 2002, to properly reflect the reduction
in its income tax valuation allowance after consideration of the deferred
tax
liability.
5.
RECENT ACCOUNTING PRONOUNCEMENTS
In
February 2006, the Financial Accounting Standards Board
(“FASB”) issued FAS No. 155, “Accounting for Certain Hybrid Financial
Instruments,” an amendment of FAS No. 133 and FAS No. 140. FAS No. 155
simplifies accounting for certain hybrid instruments under FAS No. 133 by
permitting fair value remeasurement for financial instruments that otherwise
would require bifurcation and eliminating FAS No. 133 Implementation Issue
No. D1, “Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets,” which provides that beneficial interests are not
subject to the provisions of FAS No. 133. FAS No. 155 also eliminates
the previous restriction under FAS No. 140 on passive derivative
instruments that a qualifying special-purpose entity may hold. FAS No. 155
is effective for all financial instruments acquired, issued, or subject to
a
remeasurement event occurring after the beginning of an entity’s fiscal year
that begins after September 15, 2006. We do not expect the adoption of this
statement to have a material impact on the Acacia Research Corporation, Acacia
Technologies group or CombiMatrix group results of operations, financial
position or cash flows.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In
March 2006, the FASB issued FAS No. 156, “Accounting for Servicing of
Financial Assets,” an amendment of FASB Statement No. 140. FAS No. 156
permits entities to choose to either subsequently measure servicing rights
at
fair value and report changes in fair value in earnings or amortize servicing
rights in proportion to and over the estimated net servicing income or loss
and
assess to rights for impairment or the need for an increased obligation.
FAS
No. 156 also clarifies when a servicer should separately recognize
servicing assets and liabilities, requires all separately recognized assets
and
liabilities to be initially measured at fair value, if practicable, permits
a
one-time reclassification of available-for-sales securities to trading
securities by an entity with recognized servicing rights and requires additional
disclosures for all separately recognized servicing assets and liabilities.
FAS
No. 156 is effective as of the beginning of an entity’s fiscal year that
begins after September 15, 2006. We do not expect the adoption of this
statement to have a material impact on the Acacia Research Corporation, Acacia
Technologies group or CombiMatrix group results of operations, financial
position or cash flows.
In
July 2006, the FASB issued Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for
uncertainty in income taxes recognized in the financial statements in accordance
with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 provides
guidance on the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting
in
interim periods, disclosures, and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. We are currently evaluating the
impact of this standard on our consolidated and separate operating group
financial statements.
On
June
14, 2006, Acacia Research Corporation entered into a standby equity distribution
agreement (the “SEDA”) with Cornell Capital Partners, LP (“Cornell”). Under the
terms of the SEDA, Acacia Research Corporation can require Cornell to purchase
up to $50.0 million of AR-CombiMatrix common stock, or up to 13,024,924 shares,
over a two-year period following the effective date of the SEDA. Such shares
will be in the form of registered securities drawn from Acacia Research
Corporation’s current shelf registration statement. All proceeds from each
advance will be contributed to the CombiMatrix group. Acacia Research
Corporation can request advances under the SEDA in up to $5.0 million
increments. At the closing of each advance, which will take place six days
after
the initial notification to Cornell, Acacia Research Corporation will issue
to
Cornell a number of shares of AR-CombiMatrix common stock equal to the amount
of
the advance divided by the lowest daily volume weighted average price (“VWAP”)
of AR-CombiMatrix common stock during the five trading days following the
advance notice to Cornell, which will purchase the shares at 97.5% of the
VWAP.
Management can also specify a floor price whereby shares that trade below
this
price during the five-day trading period will be excluded from determining
the
VWAP. At each closing, Acacia Research Corporation will pay an underwriting
fee
of 4% of the gross amount of each advance on the first $20.0 million and
5% of
the gross proceeds of each advance on the remaining $30.0 million of the
SEDA to
Cornell. Acacia Research Corporation is not obligated to request any advances
under the agreement and will not pay any additional fees to Cornell so long
as
no advances are requested. The SEDA is also cancelable by Acacia Research
Corporation at any time, without penalty. Acacia Research Corporation may
not
request advances if the shares to be issued in connection with such advances
would result in Cornell owning more than 9.9% of the outstanding AR-CombiMatrix
common stock. A total of 13,024,924 shares of AR-CombiMatrix common stock
are
authorized to be issued under the SEDA.
Upon
closing of the SEDA, the CombiMatrix group paid Cornell a one-time commitment
fee of $550,000 and an additional $20,000 in due diligence and other
closing-related costs. The $550,000 fee was recorded as a long-term asset
and
will be amortized against future advances as costs of equity issuances. On
June
23 2006, Cornell purchased 343,750 shares of AR-CombiMatrix common stock
at
$1.60 per share, based on the fair value of AR-CombiMatrix stock on June
12,
2006. The shares of AR-CombiMatrix stock were offered pursuant to an effective
registration statement previously filed with the Securities and Exchange
Commission. As of July 26, 2006, Acacia Research Corporation had completed
one
advance under the SEDA, selling a total of 429,849 shares of AR-CombiMatrix
common stock for gross proceeds of approximately $500,000, resulting in net
proceeds attributed to the CombiMatrix group of approximately $480,000. As
of
June 30, 2006, $49,450,000, or up to 12,681,174 shares of AR-CombiMatrix
common
stock are available under the SEDA.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In
February 2005, Acacia Research Corporation raised gross proceeds of $19,600,000
through the sale of 3,500,000 shares of AR-Acacia Technologies stock at a
price
of $5.60 per share in a registered direct offering. Net proceeds raised of
approximately $19,532,000, which are net of related issuance costs, were
attributed to the Acacia Technologies group. The shares of AR-Acacia
Technologies stock were offered pursuant to an effective registration statement
previously filed with the Securities and Exchange Commission.
7.
ACQUISITION
On
January 28, 2005, Acacia Global Acquisition Corporation, a wholly owned
subsidiary of Acacia Research Corporation, acquired substantially all of
the
assets of Global Patent Holdings, LLC, a privately held patent holding company
based in Northbrook, Illinois, which owned 11 patent licensing companies.
The
acquisition provided the Acacia Technologies group 100% ownership of companies
that control 27 patent portfolios, which include 120 U.S. patents and certain
foreign counterparts, and cover technologies used in a wide variety of
industries. As a result of the acquisition, we have expanded and diversified
the
Acacia Technologies group’s potential revenue generating
activities.
The
acquisition was accounted for in accordance with the purchase method of
accounting. Under the purchase method of accounting, the purchase consideration
is allocated to the assets acquired, including tangible assets, patents and
other identifiable intangibles and liabilities assumed, based on their estimated
fair values at the date of acquisition. The consolidated statement of operations
includes the results of the acquired companies beginning on January 28, 2005,
the date of acquisition. The aggregate purchase consideration was approximately
$25,105,000, including $5.0 million of cash, the issuance of 3,938,832 shares
of
AR-Acacia Technologies stock valued at $19,293,000 (net of estimated common
stock registration costs of $228,000) and acquisition costs, including
registration costs, of $812,000. The value of the common shares issued was
determined based on the average market price of AR-Acacia Technologies stock,
as
reported on NASDAQ, over the 5-day period (December 13 - December 17, 2004)
before and after the terms of the acquisition were agreed to and
announced.
The
following table summarizes the total purchase consideration and the allocation
of the consideration paid to the estimated fair value of the assets acquired
and
liabilities assumed (in thousands):
Purchase
Consideration:
|
|
|
|
|
Cash
paid
|
|
$
|
5,000
|
|
Fair
value of AR-Acacia Technologies stock issued
(1)
|
|
|
19,293 |
|
Acquisition
and registration costs
|
|
|
812
|
|
Total
purchase consideration
|
|
$
|
25,105
|
|
|
|
|
|
|
Purchase
Price Allocation:
|
|
|
|
|
Estimated
fair value of net tangible assets acquired at January 28, 2005
|
|
$
|
(26
|
)
|
Intangible
assets acquired - patents and patent rights(1)
|
|
|
25,131
|
|
Total
|
|
$
|
25,105
|
|
____________________________________________
(1)
Reflects non-cash investing activity.
Management
was primarily responsible for determining the fair value of the tangible
and
identifiable intangible assets acquired and liabilities assumed at the date
of
acquisition. Management considered a number of factors in estimating the
fair
value of the intangible assets acquired, including reference to an independent
valuation. The
patents and patent rights acquired were valued using a discounted cash flow
model on a patent portfolio by portfolio basis, which estimated the future
net
cash flows expected to result from the licensing of each portfolio, taking
into
account potential infringers of the patents, usage of the underlying
technologies, estimated license fee revenues, contingent legal fee arrangements,
royalties due to former patent holders, other estimated costs, tax implications
and other factors. A discount rate consistent with the risks associated with
achieving the estimated net cash flows was used to estimate the present value
of
future estimated net cash flows. Management’s
valuation resulted in an estimated fair value of patent related assets acquired
of approximately $27,000,000, resulting in approximately $1,900,000 of excess
fair value over the cost of net assets acquired, which has been allocated
as a
pro rata reduction to the amounts that otherwise would have been assigned
to the
assets acquired, in accordance with the purchase method of accounting.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts
attributable to patents and patent rights acquired are amortized using the
straight-line method over the estimated economic useful lives of the underlying
patents which range from two to seven years. At the date of acquisition,
the
estimated weighted average useful life of amortizable patent related intangibles
acquired was approximately 6 years.
In
connection with the acquisition described above, Acacia Global Acquisition
Corporation entered into a consulting agreement with the former CEO of Global
Patent Holdings, LLC who, as a result of the acquisition transaction, is
also a
shareholder of Acacia Research Corporation. The agreement requires the payment
of $2,000,000 in consulting fees over a two-year period, and certain
reimbursable consulting related expenses, commencing on the date of acquisition.
Marketing,
general and administrative expenses for the three and six months ended June
30,
2006 include $271,000 and $544,000, respectively, in expenses related to
the
consulting agreement.
Marketing, general and administrative expenses for the three and six months
ended June 30, 2005 include $271,000 and $466,000, respectively, in expenses
related to the consulting agreement. Consulting services to be performed
consist
primarily of consultation on intellectual property matters associated with
the
patents and patent rights acquired in the transaction. The consulting fees
are
being expensed in the consolidated statement of operations as the consulting
services are rendered during the two-year term of the consulting agreement.
Acacia Global Acquisition Corporation may terminate the consulting agreement
for
cause as provided for in the agreement. The consulting agreement also contains
certain automatic termination provisions, including; the failure by Acacia
Global Acquisition Corporation to make timely consulting payments in accordance
with the agreement; a significant decrease in working capital of Acacia Research
Corporation, as defined in the agreement; material breach of the agreement
by
Acacia Global Acquisition Corporation; and the death of the consultant. Any
occurrence of these conditions may require the payment of all remaining
consulting fees outstanding under the agreement within thirty days of the
occurrence of the termination event. Acacia Research Corporation also executed
an agreement guaranteeing Acacia Global Acquisition Corporation’s performance of
its obligations under the consulting agreement.
The
acquisition was treated for tax purposes as a taxable asset acquisition and,
as
such, Acacia Research Corporation did not record any book/tax basis differences
and thus, no deferred income taxes were recorded in connection with the
application of the purchase method of accounting. Differences between the
book
and tax amortization period for amounts allocated to patented related
intangibles give rise to deferred tax assets.
8.
COMMON STOCK PURCHASE WARRANT LIABILITY
Acacia
Research Corporation’s classes of common stock are subject to certain redemption
provisions in the event that Acacia Research Corporation sells, transfers,
assigns or otherwise disposes of, in one transaction or a series of related
transactions, all or substantially all of the properties and assets attributed
to either group.
Acacia
Research Corporation adopted FASB Staff Position No. 150-5 (“FSP No. 150-5”),
effective July 1, 2005, which requires that warrants for shares that are
redeemable be classified as liabilities, based on the fair values of the
warrants, which are required to be marked to market at each balance sheet
date.
The fair value of contingently redeemable AR-CombiMatrix stock purchase warrants
outstanding at June 30, 2006 and December 31, 2005 was $1,631,000 and
$1,381,000, respectively. Net warrant
gains (charges) for the three and six months ended June
30,
2006,
reflected in other income (expense), related to changes in the fair value
of the
warrant liability totaled $1,490,000 and ($250,000), respectively.
The
fair
value of AR-CombiMatrix stock purchase warrants was determined using the
Black-Scholes option-pricing model, assuming weighted average risk free interest
rates over the remaining term of the warrants of approximately 4.35% in December
2005 and 5.16% (two-year) and 5.10% (four year) in June 2006, volatility
over
the remaining term of the warrants of 84% in December 2005 and 77% and 82%
in
June 2006, and remaining terms of two to four years.
9.
STOCK BASED COMPENSATION PLANS
The
2002
Acacia Technologies Stock Incentive Plan (the “AR-Acacia Technologies Group
Plan”) and the 2002 CombiMatrix Stock Incentive Plan (the “AR-CombiMatrix Group
Plan”) were approved by the stockholders of Acacia Research Corporation in
December 2002. The AR-Acacia Technologies Group Plan authorizes grants of
stock
options, stock awards and performance shares with respect to AR-Acacia
Technologies stock. The AR-CombiMatrix Group Plan authorizes grants of stock
options, stock awards and performance shares with respect to AR-CombiMatrix
stock. Directors and certain officers and key employees with responsibilities
involving both the Acacia Technologies group and the CombiMatrix group may
be
granted awards under both incentive plans in a manner which reflects their
responsibilities. The board of directors believes that granting participants
awards tied to performance of the group in which the participants work and,
in
certain cases the other group, is in the best interest of the Acacia Research
Corporation and its stockholders. The terms of the AR-Acacia Technologies
Group
Plan and the AR-CombiMatrix Group Plan are identical
except that AR-Acacia Technologies stock may be issued only under the
AR-Acacia
Technologies Group Plan
and
AR-CombiMatrix stock may be issued only under the AR-CombiMatrix
Group Plan.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Acacia
Research Corporation’s compensation committee administers the discretionary
option grant and stock issuance programs. This committee determines which
eligible individuals are to receive option grants or stock issuances under
those
programs, the time or times when the grants or issuances are to be made,
the
number of shares subject to each grant or issuance, the status of any granted
option as either an incentive stock option or a non-statutory stock option
under
the federal tax laws, the vesting schedule to be in effect for the option
grant
or stock issuance and the maximum term for which any granted option is to
remain
outstanding. The exercise price of options is generally equal to the fair
market
value of the AR-CombiMatrix stock or AR-Acacia Technologies stock on the
date of
grant. Options generally begin to be exercisable six months to one year after
grant and generally expire ten years after grant. Stock options generally
vest
over three to four years and restricted shares generally vest in full after
two
years (represents the requisite service period under SFAS No. 123R).
The
authorized number of shares of common stock subject to the AR-Acacia
Technologies Group Plan is 7,208,000 shares. The authorized number of shares
of
common stock subject to the AR-CombiMatrix Group Plan is 10,910,000 shares.
The
number of shares of common stock available for issuance under the AR-Acacia
Technologies Group Plan and the AR-CombiMatrix Group Plan automatically
increases on the first trading day of January each calendar year during the
term
of the Plan by an amount equal to three percent (3%) of the total number
of
shares of common stock outstanding on the last trading day in December of
the
immediately preceding calendar year, but in no event shall any such annual
increase exceed 500,000 shares for the AR-Acacia
Technologies Group Plan and 600,000 shares for the AR-CombiMatrix Group
Plan.
The
aggregate number of shares of common stock available for issuance under either
Plan shall not exceed 20,000,000 shares. At
June
30,
2006,
shares
available for grant are 105,510 and 2,734,930 under the AR-Acacia
Technologies Group Plan and the AR-CombiMatrix Group Plan,
respectively.
The
AR-Acacia Technologies Group Plan and the AR-CombiMatrix Group Plan do not
segregate the number of securities remaining available for future issuance
among
stock options and other awards. The shares authorized for future issuance
represents the total number of shares available through any combination of
stock
options or other awards. Upon the exercise of stock options or the granting
of
restricted stock, it is Acacia Research Corporation’s policy to issue new shares
of the respective class of common stock.
A
summary
of option activity under our stock option plans for the six months ended
June
30,
2006 is
as
follows:
AR-CombiMatrix
Stock:
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average Remaining Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
6,925,000
|
|
$
|
6.82
|
|
|
|
|
|
|
|
Granted
|
|
|
88,000
|
|
$
|
1.46
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(63,000
|
)
|
$
|
3.45
|
|
|
|
|
|
|
|
Expired
|
|
|
(89,000
|
)
|
$
|
7.13
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2006
|
|
|
6,861,000
|
|
$
|
6.78
|
|
|
6
years
|
|
$
|
29,000
|
|
Vested
and Exercisable at June 30, 2006
|
|
|
6,032,000
|
|
$
|
7.21
|
|
|
5.6
years
|
|
$
|
10,000
|
|
The
weighted average grant date fair value of stock options granted during the
three
and six months ended June
30,
2006 was $1.49 and $1.03, respectively, and during the three and six months
ended June, 30,
2005
was $2.09 and $2.14, respectively. No AR-CombiMatrix options were exercised
during the three and six months ended June
30,
2006.
The
total intrinsic value of options exercised during the three and six months
ended
June 30, 2005 was not material. The fair value of options vested during the
three and six months ended June
30,
2006 was $527,000
and $1,664,000, respectively, and during the three and six months ended June
30,
2005 was $698,000 and $1,641,000, respectively. As of June
30,
2006,
the
total unrecognized compensation expense related to nonvested stock option
awards
was $1,843,000, which is expected to be recognized over a weighted average
term
of approximately 1.3 years.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AR-Acacia
Technologies Stock:
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average Remaining Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
5,977,000
|
|
$
|
7.64
|
|
|
|
|
|
|
|
Granted
|
|
|
465,000
|
|
$
|
7.75
|
|
|
|
|
|
|
|
Exercised
|
|
|
(151,000
|
)
|
$
|
2.22
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(93,000
|
)
|
$
|
6.11
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2006
|
|
|
6,198,000
|
|
$
|
7.81
|
|
|
6
years
|
|
$
|
44,732,000
|
|
Vested
and Exercisable at June 30, 2006
|
|
|
4,706,000
|
|
$
|
8.47
|
|
|
5.4
years
|
|
$
|
32,249,000
|
|
The
weighted average grant date fair value of stock options granted during the
six
months ended June
30,
2006 was $5.35 (no AR-Acacia Technologies stock options were granted during
the
three months ended June 30, 2006) and for the three and six months ended
June,
30,
2005
was $3.83 and $4.12, respectively. The total intrinsic value of options
exercised during the three and six months ended June
30,
2006 was $1,353,000
and $1,397,000, respectively, and during the three and six months ended
June
30,
2005 was
$16,000 and $90,000, respectively. The fair value of options vested during
the
three and six months ended June
30,
2006 was $854,000
and $1,875,000, respectively, and during the three and six months ended June
30,
2005 was $479,000 and $757,000, respectively. As of June
30,
2006,
the
total unrecognized compensation expense related to nonvested stock option
awards
was $4,159,000, which is expected to be recognized over a weighted average
term
of approximately 2.3 years.
A
summary
of the status of AR-Acacia Technologies nonvested restricted shares as of
June
30,
2006,
and
changes during the six months ended June
30,
2006,
is as
follows:
AR-Acacia
Technologies Stock:
|
|
Nonvested
Restricted Shares
|
|
Weighted
Average
Grant Date Fair Value
|
|
|
|
|
|
|
|
Nonvested
restricted stock at December 31, 2005
|
|
|
338,000
|
|
$
|
5.07
|
|
Granted
|
|
|
50,000
|
|
$
|
8.33
|
|
Vested
|
|
|
(30,000
|
)
|
$
|
7.16
|
|
Forfeited
|
|
|
(23,000
|
)
|
$
|
6.75
|
|
Nonvested
restricted stock at June 30, 2006
|
|
|
335,000
|
|
$
|
5.26
|
|
As
of
June
30,
2006,
the
total unrecognized compensation expense related to nonvested restricted stock
awards was $1,035,000, which is expected to be recognized over a weighted
average period of approximately 1.3 years. The total fair value of shares
vested
during the three and six months ended June
30,
2006 was
$0
and $215,000, respectively. There are no restricted share grants outstanding
under the AR-CombiMatrix Group Plan.
At
June
30,
2006,
Acacia
Research Corporation and its separate operating groups continue to record
a full
valuation allowance against its deferred tax assets due to management’s
determination that the criteria for recognition have not been met. As such,
the
implementation and subsequent accounting for stock based awards under SFAS
No.
123R did not have an impact on Acacia Research Corporation’s or the separate
group’s deferred taxes or related tax provisions for the periods
presented.
CombiMatrix
Molecular Diagnostics 2005 Stock Award Plan
CombiMatrix
Corporation’s wholly owned subsidiary, CMDX, executed the CombiMatrix Molecular
Diagnostics 2005 Stock Award Plan (the "CMDX Plan") with plan provisions
and
terms similar to that of the AR-CombiMatrix Group Plan, as described above.
The
authorized number of shares of common stock subject to the CMDX Plan is
4,000,000 shares. At June
30,
2006,
shares
available for grant under the CMDX Plan are 2,038,000. A summary of option
activity under CMDX Plan for the six months ended June
30,
2006 is
as
follows:
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CMDX
Stock:
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average Remaining Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
1,692,000
|
|
$
|
0.10
|
|
|
|
|
|
|
|
Granted
|
|
|
810,000
|
|
$
|
0.50
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(540,000
|
)
|
$
|
0.10
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2006
|
|
|
1,962,000
|
|
$
|
0.27
|
|
|
9.5
years
|
|
$
|
454,000
|
|
Vested
and Exercisable at June 30, 2006
|
|
|
120,000
|
|
$
|
0.11
|
|
|
9
years
|
|
$
|
47,000
|
|
The
weighted average grant date fair value of stock options granted during the
three
and six months ended June
30,
2006 was $0.37, and during the three and six months ended June, 30,
2005
was $0.07. As of June
30,
2006, the
total
unrecognized compensation expense related to nonvested stock option awards
was
$246,000 which is expected to be recognized over a weighted average term
of
approximately 3 years. Total stock compensation expense recognized and the
fair
value of options vested for the three and six months ended June
30,
2006 were
not
material.
10.
COMMITMENTS AND CONTINGENCIES
Collaborative
and Research Agreements
On
February 8, 2006, the CombiMatrix group executed a one-year, $2.1 million
contract with the Department of Defense (“DoD”) to further the development of
the CombiMatrix group's array technology for the detection of biological
and
chemical threat agents. Under the terms of the CombiMatrix group’s one-year
contract with the DoD, the CombiMatrix group will perform research and
development activities, as described under the contract, and will be reimbursed
on a periodic basis for actual costs incurred to perform its obligations,
plus a
fixed fee, of up to $2.1 million. The CombiMatrix group expects to incur
approximately $991,000 in research and development costs for the remainder
of
2006 to complete its obligations to the DoD under this contract. As of
June
30,
2006,
the
biological threat detection contract with the DoD was approximately 38%
complete. In March 2004, the CombiMatrix group was awarded a two-year, $5.9
million contract with the DoD to further the development of the CombiMatrix
group’s array technology for the detection of biological and chemical threat
agents. The two-year $5.9 million contract was completed in December
2005.
In
October 2004, the CombiMatrix group entered into an agreement to acquire
up to a
one-third ownership interest in Leuchemix, Inc. (“Leuchemix”), a private drug
development firm, which is developing several compounds for the treatment
of
leukemia and other cancers. In accordance with the terms of the purchase
agreement, the CombiMatrix group will purchase 3,137,500 shares of Series
A
Preferred Stock of Leuchemix for a total purchase price of $4,000,000. The
ownership interest will be acquired and paid for quarterly over the two-year
period commencing with the fourth quarter of 2004. In accordance with the
terms
of the purchase agreement, the CombiMatrix group made an additional $750,000
investment in Leuchemix during the three months ended June 30, 2006, resulting
in an ownership interest of approximately 29% as of June 30, 2006. The
CombiMatrix group will make a final contractual investment in Leuchemix of
$750,000 in the third quarter of 2006 in accordance with the terms of the
agreement. The CombiMatrix group’s investment is being accounted for under the
equity method.
Litigation
and Patent Enforcement
Acacia
Research Corporation is subject to claims, counterclaims and legal actions
that
arise in the ordinary course of business. Management believes that the ultimate
liability with respect to these claims and legal actions, if any, will not
have
a material effect on our financial position, results of operations or cash
flows. Companies comprising the Acacia Technologies group are often required
to
engage in litigation to enforce their patents and patent rights.
On
September 30, 2002, CombiMatrix Corporation and Dr. Donald Montgomery entered
into a settlement agreement with Nanogen, Inc. to settle all pending litigation
between the parties. During the six months ended June 30, 2005, the CombiMatrix
group recorded a net non-cash credit totaling $195,000 in connection with
certain anti-dilution provisions of the settlement agreement. The related
liability reflected management’s estimate, as of each balance sheet date, of the
fair value of AR-CombiMatrix stock potentially issuable to Nanogen, Inc.
as a
result of certain options and warrants exercised during the period, if any,
and
the fair value of AR-CombiMatrix stock potentially issuable to Nanogen, Inc.
as
of each balance sheet date pursuant to the anti-dilution terms of the agreement.
The liability was adjusted at each balance sheet date for changes in the
market
value of the AR-CombiMatrix stock and was reflected as long-term until settled
in equity. The anti-dilution provisions of the settlement agreement expired
in
September 2005 and thus, there is no liability recorded as of September 30,
2005, or in any future periods, and there were no charges or credits recognized
during the three and six months ending June
30,
2006.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In
addition to other terms of the settlement agreement, CombiMatrix Corporation
is
also required to make quarterly payments to Nanogen, Inc. equal to 12.5%
of
payments to CombiMatrix Corporation from sales of products developed by
CombiMatrix Corporation and its affiliates and based on the patents that
had
been in dispute in the litigation, up to an annual maximum of $1,500,000.
The
minimum quarterly payments under the settlement agreement are $25,000 per
quarter until the patents expire in 2018. Royalties recognized under the
agreement during the six months ended June
30,
2006,
and
2005, were $161,000 and $53,000, respectively.
Inventor
Royalties and Contingent Legal Expenses
In
connection with the acquisition of certain patents and patent rights, certain
companies included in the Acacia Technologies group executed related agreements
which grant to the former owners of the respective patents or patent rights,
the
right to receive inventor royalties based on future net license fee revenues
(as
defined in the respective agreements) generated by the Acacia Technologies
group
as a result of licensing the respective patents or patent portfolios. Inventor
royalties paid pursuant to the agreements are expensed in the consolidated
statement of operations and comprehensive loss in the period that the related
license fee revenues are recognized.
In
connection with the Acacia Technologies group’s licensing and enforcement
activities, the Acacia Technologies group may retain the services of law
firms
that specialize in intellectual property licensing and enforcement and patent
law. These law firms may be retained on a contingent fee basis in which the
law
firms are paid on a scaled percentage of any negotiated license fees,
settlements or judgments awarded based on how and when the license fees,
settlements or judgments are obtained by the Acacia Technologies group. In
instances where the Acacia Technologies group does not recover license fees
from
potential infringers, no contingent legal fees are paid; however, the Acacia
Technologies group is generally liable for certain out of pocket legal costs
incurred pursuant to the underlying legal services agreement.
Guarantees
and Indemnifications
Acacia
Research Corporation has made guarantees and indemnities under which it may
be
required to make payments to a guaranteed or indemnified party, in relation
to
certain transactions, including revenue transactions in the ordinary course
of
business. In connection with certain facility leases Acacia Research Corporation
has indemnified its lessors for certain claims arising from the facility
or the
lease. Acacia Research Corporation indemnifies its directors and officers
to the
maximum extent permitted under the laws of the State of Delaware. However,
Acacia Research Corporation has a directors and officers insurance policy
that
may reduce its exposure in certain circumstances and may enable it to recover
a
portion of future amounts that may be payable, if any. The duration of the
guarantees and indemnities varies and, in many cases is indefinite but subject
to statute of limitations. The majority of guarantees and indemnities do
not
provide any limitations of the maximum potential future payments Acacia Research
Corporation could be obligated to make. To date, we have made no payments
related to these guarantees and indemnities. Acacia Research Corporation
estimates the fair value of its indemnification obligations as insignificant
based on this history and has therefore, not recorded any liability for these
guarantees and indemnities in the accompanying consolidated balance
sheets.
11.
DISCONTINUED OPERATIONS
Results
for the six months ended June 30, 2005, include a $210,000 charge, net of
minority interests, related to estimated additional costs to be incurred
in
connection with the discontinued operations of Soundbreak.com (originally
ceased
operations in February 2001), related primarily to certain noncancellable
lease
obligations and a reduction in estimated amounts recoverable from existing
sublease arrangements. The related lease obligations, which were guaranteed
by
Acacia Research Corporation, expired in August 2005. At June 30, 2006, assets
consisted of cash and cash equivalents. At December 31, 2005, assets consisted
of cash and cash equivalents and lease deposits. At June 30, 2006, liabilities
related to miscellaneous accounts payable. At December 31, 2005, liabilities
related primarily to miscellaneous payables and accrued lease termination
costs.
In April 2006, a final distribution to Soundbreak.com’s minority shareholders
was paid totaling $353,000. Refer to Note 13 for additional information on
assets and liabilities related to discontinued operations for the periods
presented.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
12.
SALE OF INTEREST IN SUBSIDIARY
In
January 2006, the CombiMatrix group expanded its relationship with one of
its
existing distributors, InBio, for the Asia Pacific region. Major components
of
the expanded relationship included the transfer of day-to-day operational
responsibility and majority ownership of CombiMatrix K.K. to InBio, along
with
an expanded distribution agreement that encompasses Japan. InBio obtained
67% of
the voting interests in CombiMatrix K.K. for a nominal amount of consideration.
As a result, InBio assumed all operational and financial responsibilities
of
CombiMatrix K.K. The net loss on the sale of 67% of the voting interest in
CombiMatrix K.K. recorded in the statement of operations in the first quarter
of
2006 was $84,000. CombiMatrix Corporation continues to own a 33% interest
in
CombiMatrix K.K. Subsequent to the sale, the CombiMatrix group’s investment in
CombiMatrix K.K. was accounted for under the equity method. The deconsolidation
of CombiMatrix K.K. did not have a material impact on the consolidated balance
sheets as of June 30, 2006.
13.
CONSOLIDATING SEGMENT INFORMATION
Acacia
Research Corporation has adopted the provisions of SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information.” Our chief
operating decision maker is considered to be Acacia Research Corporation’s Chief
Executive Officer (“CEO”). The CEO reviews and evaluates financial information
presented on a group basis as described below. Management evaluates performance
based on the profit or loss from continuing operations and financial position
of
its segments. Acacia Research Corporation has two reportable segments as
described earlier in Note 1.
Material
intercompany transactions and transfers have been eliminated in consolidation.
The accounting policies of the segments are the same as those described in
the
summary of significant accounting policies.
Presented
below is consolidating financial information for our reportable segments
reflecting the businesses of the CombiMatrix group and the Acacia Technologies
group. Earnings attributable to each group has been determined in accordance
with accounting principles generally accepted in the United States.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidating
Balance Sheets
(In
thousands)
(Unaudited)
|
|
At
June 30, 2006
|
|
At
December 31, 2005
|
|
|
|
Acacia
|
|
|
|
|
|
|
|
Acacia
|
|
|
|
|
|
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
|
|
|
|
Group
|
|
Group
|
|
Eliminations
|
|
Consolidated
|
|
Group
|
|
Group
|
|
Eliminations
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
16,115
|
|
$
|
930
|
|
$
|
-
|
|
$
|
17,045
|
|
$
|
14,498
|
|
$
|
5,666
|
|
$
|
-
|
|
$
|
20,164
|
|
Short-term
investments
|
|
|
24,600
|
|
|
9,046
|
|
|
-
|
|
|
33,646
|
|
|
24,462
|
|
|
14,547
|
|
|
-
|
|
|
39,009
|
|
Accounts
receivable
|
|
|
3,725
|
|
|
1,122
|
|
|
-
|
|
|
4,847
|
|
|
4,421
|
|
|
911
|
|
|
-
|
|
|
5,332
|
|
Prepaid
expenses, inventory and other assets
|
|
|
1,385
|
|
|
804
|
|
|
-
|
|
|
2,189
|
|
|
1,406
|
|
|
709
|
|
|
-
|
|
|
2,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
45,825
|
|
|
11,902
|
|
|
-
|
|
|
57,727
|
|
|
44,787
|
|
|
21,833
|
|
|
-
|
|
|
66,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
116
|
|
|
2,228
|
|
|
-
|
|
|
2,344
|
|
|
121
|
|
|
2,363
|
|
|
-
|
|
|
2,484
|
|
Patents,
net of accumulated amortization
|
|
|
21,148
|
|
|
7,378
|
|
|
-
|
|
|
28,526
|
|
|
23,786
|
|
|
7,926
|
|
|
-
|
|
|
31,712
|
|
Goodwill
|
|
|
121
|
|
|
16,918
|
|
|
-
|
|
|
17,039
|
|
|
121
|
|
|
18,859
|
|
|
-
|
|
|
18,980
|
|
Other
assets
|
|
|
79
|
|
|
2,970
|
|
|
-
|
|
|
3,049
|
|
|
78
|
|
|
1,560
|
|
|
-
|
|
|
1,638
|
|
|
|
$
|
67,289
|
|
$
|
41,396
|
|
$
|
-
|
|
$
|
108,685
|
|
$
|
68,893
|
|
$
|
52,541
|
|
$
|
-
|
|
$
|
121,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,537
|
|
$
|
2,490
|
|
$
|
-
|
|
$
|
4,027
|
|
$
|
1,441
|
|
$
|
2,483
|
|
$
|
-
|
|
$
|
3,924
|
|
Royalties
and legal fees payable
|
|
|
2,652
|
|
|
-
|
|
|
-
|
|
|
2,652
|
|
|
3,758
|
|
|
-
|
|
|
-
|
|
|
3,758
|
|
Current
portion of deferred revenues
|
|
|
432
|
|
|
97
|
|
|
-
|
|
|
529
|
|
|
639
|
|
|
165
|
|
|
-
|
|
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
4,621
|
|
|
2,587
|
|
|
-
|
|
|
7,208
|
|
|
5,838
|
|
|
2,648
|
|
|
-
|
|
|
8,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
726
|
|
|
1,975
|
|
|
-
|
|
|
2,701
|
|
Deferred
revenues, net of current portion
|
|
|
-
|
|
|
1,464
|
|
|
-
|
|
|
1,464
|
|
|
-
|
|
|
1,439
|
|
|
-
|
|
|
1,439
|
|
Other
liabilities
|
|
|
10
|
|
|
1,631
|
|
|
-
|
|
|
1,641
|
|
|
83
|
|
|
1,381
|
|
|
-
|
|
|
1,464
|
|
Total
liabilities
|
|
|
4,631
|
|
|
5,682
|
|
|
-
|
|
|
10,313
|
|
|
6,647
|
|
|
7,443
|
|
|
-
|
|
|
14,090
|
|
Minority
interests
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
443
|
|
|
4
|
|
|
-
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AR
- Acacia Technologies stock
|
|
|
62,658
|
|
|
-
|
|
|
-
|
|
|
62,658
|
|
|
61,803
|
|
|
-
|
|
|
-
|
|
|
61,803
|
|
AR
- CombiMatrix stock
|
|
|
-
|
|
|
35,714
|
|
|
-
|
|
|
35,714
|
|
|
-
|
|
|
45,094
|
|
|
-
|
|
|
45,094
|
|
Total
stockholders' equity
|
|
|
62,658
|
|
|
35,714
|
|
|
-
|
|
|
98,372
|
|
|
61,803
|
|
|
45,094
|
|
|
-
|
|
|
106,897
|
|
|
|
$
|
67,289
|
|
$
|
41,396
|
|
$
|
-
|
|
$
|
108,685
|
|
$
|
68,893
|
|
$
|
52,541
|
|
$
|
-
|
|
$
|
121,434
|
|
___________________________________________
NOTE:
Segment information for the Acacia Technologies group includes discontinued
operations related to Soundbreak.com. Total assets related to discontinued
operations totaled $38,000 and $741,000 at June 30, 2006, and December 31,
2005,
respectively. Total liabilities related to discontinued operations totaled
$45,000 and $144,000 at June 30, 2006, and December 31, 2005,
respectively.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidating
Statements of Operations
(In
thousands)
(Unaudited)
|
|
For
the Three Months Ended June 30, 2006
|
|
For
the Six Months Ended June 30, 2006
|
|
|
|
Acacia
|
|
|
|
|
|
Acacia
|
|
|
|
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
|
|
Group
|
|
Group
|
|
Consolidated
|
|
Group
|
|
Group
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
contract
|
|
$
|
-
|
|
$
|
574
|
|
$
|
574
|
|
$
|
-
|
|
$
|
838
|
|
$
|
838
|
|
License
fees
|
|
|
14,371
|
|
|
-
|
|
|
14,371
|
|
|
19,088
|
|
|
-
|
|
|
19,088
|
|
Products
and service contracts
|
|
|
-
|
|
|
1,218
|
|
|
1,218
|
|
|
-
|
|
|
2,199
|
|
|
2,199
|
|
Total
revenues
|
|
|
14,371
|
|
|
1,792
|
|
|
16,163
|
|
|
19,088
|
|
|
3,037
|
|
|
22,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of government contract revenues
|
|
|
-
|
|
|
542
|
|
|
542
|
|
|
-
|
|
|
792
|
|
|
792
|
|
Cost
of product sales
|
|
|
-
|
|
|
340
|
|
|
340
|
|
|
-
|
|
|
561
|
|
|
561
|
|
Research
and development expenses (including non-cash stock compensation
expense)
|
|
|
-
|
|
|
2,182
|
|
|
2,182
|
|
|
-
|
|
|
4,561
|
|
|
4,561
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense)
|
|
|
3,441
|
|
|
3,229
|
|
|
6,670
|
|
|
6,978
|
|
|
7,191
|
|
|
14,169
|
|
Legal
expenses - patents
|
|
|
685
|
|
|
-
|
|
|
685
|
|
|
1,051
|
|
|
-
|
|
|
1,051
|
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
7,847
|
|
|
-
|
|
|
7,847
|
|
|
10,118
|
|
|
-
|
|
|
10,118
|
|
Amortization
of patents
|
|
|
1,326
|
|
|
274
|
|
|
1,600
|
|
|
2,669
|
|
|
548
|
|
|
3,217
|
|
Write-off
of patent-related intangible asset
|
|
|
297
|
|
|
-
|
|
|
297
|
|
|
297
|
|
|
-
|
|
|
297
|
|
Loss
from equity investments
|
|
|
-
|
|
|
294
|
|
|
294
|
|
|
-
|
|
|
533
|
|
|
533
|
|
Total
operating expenses
|
|
|
13,596
|
|
|
6,861
|
|
|
20,457
|
|
|
21,113
|
|
|
14,186
|
|
|
35,299
|
|
Operating
income (loss)
|
|
|
775
|
|
|
(5,069
|
)
|
|
(4,294
|
)
|
|
(2,025
|
)
|
|
(11,149
|
)
|
|
(13,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and investment income
|
|
|
394
|
|
|
137
|
|
|
531
|
|
|
753
|
|
|
318
|
|
|
1,071
|
|
Loss
on sale of interest in subsidiary
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(84
|
)
|
|
(84
|
)
|
Warrant
gains (charges)
|
|
|
-
|
|
|
1,490
|
|
|
1,490
|
|
|
-
|
|
|
(250
|
)
|
|
(250
|
)
|
Total
other income (expense)
|
|
|
394
|
|
|
1,627
|
|
|
2,021
|
|
|
753
|
|
|
(16
|
)
|
|
737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations before income taxes
|
|
|
1,169
|
|
|
(3,442
|
)
|
|
(2,273
|
)
|
|
(1,272
|
)
|
|
(11,165
|
)
|
|
(12,437
|
)
|
(Provision)
benefit for income taxes
|
|
|
(70
|
)
|
|
-
|
|
|
(70
|
)
|
|
(38
|
)
|
|
34
|
|
|
(4
|
)
|
Net
income (loss)
|
|
$
|
1,099
|
|
$
|
(3,442
|
)
|
$
|
(2,343
|
)
|
$
|
(1,310
|
)
|
$
|
(11,131
|
)
|
$
|
(12,441
|
)
|
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidating
Statements of Operations
(In
thousands)
(Unaudited)
|
|
For
the Three Months Ended June 30, 2005
|
|
For
the Six Months Ended June 30, 2005
|
|
|
|
Acacia
|
|
|
|
|
|
Acacia
|
|
|
|
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
|
|
Group
|
|
Group
|
|
Consolidated
|
|
Group
|
|
Group
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
contract
|
|
$
|
-
|
|
$
|
1,281
|
|
$
|
1,281
|
|
$
|
-
|
|
$
|
2,012
|
|
$
|
2,012
|
|
License
fees
|
|
|
2,682
|
|
|
-
|
|
|
2,682
|
|
|
4,545
|
|
|
-
|
|
|
4,545
|
|
Products
and service contracts
|
|
|
-
|
|
|
576
|
|
|
576
|
|
|
-
|
|
|
914
|
|
|
914
|
|
Total
revenues
|
|
|
2,682
|
|
|
1,857
|
|
|
4,539
|
|
|
4,545
|
|
|
2,926
|
|
|
7,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of government contract revenues
|
|
|
-
|
|
|
1,209
|
|
|
1,209
|
|
|
-
|
|
|
1,900
|
|
|
1,900
|
|
Cost
of product sales
|
|
|
-
|
|
|
190
|
|
|
190
|
|
|
-
|
|
|
353
|
|
|
353
|
|
Research
and development expenses (including non-cash stock compensation
expense)
|
|
|
-
|
|
|
1,415
|
|
|
1,415
|
|
|
-
|
|
|
2,555
|
|
|
2,555
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense)
|
|
|
1,759
|
|
|
2,517
|
|
|
4,276
|
|
|
3,369
|
|
|
4,670
|
|
|
8,039
|
|
Legal
expenses - patents
|
|
|
536
|
|
|
-
|
|
|
536
|
|
|
1,097
|
|
|
-
|
|
|
1,097
|
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
1,120
|
|
|
-
|
|
|
1,120
|
|
|
1,767
|
|
|
-
|
|
|
1,767
|
|
Amortization
of patents
|
|
|
1,336
|
|
|
274
|
|
|
1,610
|
|
|
2,252
|
|
|
548
|
|
|
2,800
|
|
Legal
settlement credits
|
|
|
-
|
|
|
(16
|
)
|
|
(16
|
)
|
|
-
|
|
|
(195
|
)
|
|
(195
|
)
|
Loss
from equity investments
|
|
|
-
|
|
|
63
|
|
|
63
|
|
|
-
|
|
|
102
|
|
|
102
|
|
Total
operating expenses
|
|
|
4,751
|
|
|
5,652
|
|
|
10,403
|
|
|
8,485
|
|
|
9,933
|
|
|
18,418
|
|
Operating
loss
|
|
|
(2,069
|
)
|
|
(3,795
|
)
|
|
(5,864
|
)
|
|
(3,940
|
)
|
|
(7,007
|
)
|
|
(10,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and investment income
|
|
|
279
|
|
|
104
|
|
|
383
|
|
|
450
|
|
|
206
|
|
|
656
|
|
Total
other income
|
|
|
279
|
|
|
104
|
|
|
383
|
|
|
450
|
|
|
206
|
|
|
656
|
|
Loss
from continuing operations before income taxes
|
|
|
(1,790
|
)
|
|
(3,691
|
)
|
|
(5,481
|
)
|
|
(3,490
|
)
|
|
(6,801
|
)
|
|
(10,291
|
)
|
Benefit
for income taxes
|
|
|
30
|
|
|
34
|
|
|
64
|
|
|
66
|
|
|
68
|
|
|
134
|
|
Loss
from continuing operations
|
|
|
(1,760
|
)
|
|
(3,657
|
)
|
|
(5,417
|
)
|
|
(3,424
|
)
|
|
(6,733
|
)
|
|
(10,157
|
)
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
loss on disposal of discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(210
|
)
|
|
-
|
|
|
(210
|
)
|
Net
loss
|
|
$
|
(1,760
|
)
|
$
|
(3,657
|
)
|
$
|
(5,417
|
)
|
$
|
(3,634
|
)
|
$
|
(6,733
|
)
|
$
|
(10,367
|
)
|
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consolidating
Statements of Cash Flows
(In
thousands)
(Unaudited)
|
|
For
The Six Months Ended June 30, 2006
|
|
For
The Six Months Ended June 30, 2005
|
|
|
|
Acacia
|
|
|
|
|
|
|
|
Acacia
|
|
|
|
|
|
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
|
|
|
|
Group
|
|
Group
|
|
Eliminations
|
|
Consolidated
|
|
Group
|
|
Group
|
|
Eliminations
|
|
Consolidated
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,310
|
)
|
$
|
(11,131
|
)
|
$
|
-
|
|
$
|
(12,441
|
)
|
$
|
(3,634
|
)
|
$
|
(6,733
|
)
|
$
|
-
|
|
$
|
(10,367
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,704
|
|
|
1,016
|
|
|
-
|
|
|
3,720
|
|
|
2,279
|
|
|
1,079
|
|
|
-
|
|
|
3,358
|
|
Non-cash
stock compensation
|
|
|
1,937
|
|
|
1,168
|
|
|
-
|
|
|
3,105
|
|
|
-
|
|
|
(111
|
)
|
|
-
|
|
|
(111
|
)
|
Deferred
income taxes
|
|
|
(36
|
)
|
|
(34
|
)
|
|
-
|
|
|
(70
|
)
|
|
(71
|
)
|
|
(69
|
)
|
|
-
|
|
|
(140
|
)
|
Non-cash
warrant charges (gains)
|
|
|
-
|
|
|
250
|
|
|
-
|
|
|
250
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Non-cash
legal settlement charges (credits)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(195
|
)
|
|
-
|
|
|
(195
|
)
|
Loss
on disposal of discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
210
|
|
|
-
|
|
|
-
|
|
|
210
|
|
Write-off
of patent-related intangible asset
|
|
|
297
|
|
|
-
|
|
|
-
|
|
|
297
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Loss
from equity investments
|
|
|
-
|
|
|
533
|
|
|
-
|
|
|
533
|
|
|
-
|
|
|
102
|
|
|
-
|
|
|
102
|
|
Loss
on sale of interest in subsidiary
|
|
|
-
|
|
|
84
|
|
|
-
|
|
|
84
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
(87
|
)
|
|
124
|
|
|
-
|
|
|
37
|
|
|
-
|
|
|
(56
|
)
|
|
-
|
|
|
(56
|
)
|
Changes
in assets and liabilities, excluding effect of business
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
696
|
|
|
(228
|
)
|
|
-
|
|
|
468
|
|
|
(457
|
)
|
|
(1,202
|
)
|
|
-
|
|
|
(1,659
|
)
|
Prepaid
expenses, inventory and other assets
|
|
|
(346
|
)
|
|
(133
|
)
|
|
-
|
|
|
(479
|
)
|
|
(387
|
)
|
|
(206
|
)
|
|
(32
|
)
|
|
(625
|
)
|
Accounts
payable and accrued expenses
|
|
|
175
|
|
|
240
|
|
|
-
|
|
|
415
|
|
|
(869
|
)
|
|
453
|
|
|
32
|
|
|
(384
|
)
|
Royalties
and legal fees payable
|
|
|
(1,106
|
)
|
|
-
|
|
|
-
|
|
|
(1,106
|
)
|
|
447
|
|
|
-
|
|
|
-
|
|
|
447
|
|
Deferred
revenues
|
|
|
(207
|
)
|
|
9
|
|
|
-
|
|
|
(198
|
)
|
|
153
|
|
|
(24
|
)
|
|
-
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities from continuing
operations
|
|
|
2,717
|
|
|
(8,102
|
)
|
|
-
|
|
|
(5,385
|
)
|
|
(2,329
|
)
|
|
(6,962
|
)
|
|
-
|
|
|
(9,291
|
)
|
Net
cash provided by (used in) operating activities from discontinued
operations
|
|
|
222
|
|
|
-
|
|
|
-
|
|
|
222
|
|
|
(433
|
)
|
|
-
|
|
|
-
|
|
|
(433
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
2,939
|
|
|
(8,102
|
)
|
|
-
|
|
|
(5,163
|
)
|
|
(2,762
|
)
|
|
(6,962
|
)
|
|
-
|
|
|
(9,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(29
|
)
|
|
(450
|
)
|
|
-
|
|
|
(479
|
)
|
|
(59
|
)
|
|
(453
|
)
|
|
-
|
|
|
(512
|
)
|
Purchase
of available-for-sale investments
|
|
|
(11,932
|
)
|
|
(1,021
|
)
|
|
-
|
|
|
(12,953
|
)
|
|
(26,367
|
)
|
|
(11,952
|
)
|
|
-
|
|
|
(38,319
|
)
|
Sale
of available-for-sale investments
|
|
|
11,786
|
|
|
6,520
|
|
|
-
|
|
|
18,306
|
|
|
12,150
|
|
|
24,132
|
|
|
-
|
|
|
36,282
|
|
Business
acquisition
|
|
|
(16
|
)
|
|
-
|
|
|
-
|
|
|
(16
|
)
|
|
(5,796
|
)
|
|
-
|
|
|
-
|
|
|
(5,796
|
)
|
Purchase
of additional interests in equity method investee
|
|
|
-
|
|
|
(1,400
|
)
|
|
-
|
|
|
(1,400
|
)
|
|
-
|
|
|
(600
|
)
|
|
-
|
|
|
(600
|
)
|
Patent
acquisition costs
|
|
|
(1,020
|
)
|
|
-
|
|
|
-
|
|
|
(1,020
|
)
|
|
(325
|
)
|
|
-
|
|
|
-
|
|
|
(325
|
)
|
Sale
of interest in subsidiary
|
|
|
-
|
|
|
(369
|
)
|
|
-
|
|
|
(369
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(1,211
|
)
|
|
3,280
|
|
|
-
|
|
|
2,069
|
|
|
(20,397
|
)
|
|
11,127
|
|
|
-
|
|
|
(9,270
|
)
|
Net
cash used in investing activities from discontinued
operations
|
|
|
(353
|
)
|
|
-
|
|
|
-
|
|
|
(353
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
cash provided by (used in) investing activities
|
|
|
(1,564
|
)
|
|
3,280
|
|
|
-
|
|
|
1,716
|
|
|
(20,397
|
)
|
|
11,127
|
|
|
-
|
|
|
(9,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash attributed to the Acacia Technologies group
|
|
|
242
|
|
|
-
|
|
|
-
|
|
|
242
|
|
|
19,479
|
|
|
-
|
|
|
-
|
|
|
19,479
|
|
Net
cash attributed to the CombiMatrix group
|
|
|
-
|
|
|
86
|
|
|
-
|
|
|
86
|
|
|
-
|
|
|
327
|
|
|
-
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
242
|
|
|
86
|
|
|
-
|
|
|
328
|
|
|
19,479
|
|
|
327
|
|
|
-
|
|
|
19,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
21
|
|
|
-
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
1,617
|
|
|
(4,736
|
)
|
|
-
|
|
|
(3,119
|
)
|
|
(3,680
|
)
|
|
4,513
|
|
|
-
|
|
|
833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning
|
|
|
14,498
|
|
|
5,666
|
|
|
-
|
|
|
20,164
|
|
|
10,925
|
|
|
2,985
|
|
|
-
|
|
|
13,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending
|
|
$
|
16,115
|
|
$
|
930
|
|
$
|
-
|
|
$
|
17,045
|
|
$
|
7,245
|
|
$
|
7,498
|
|
$
|
-
|
|
$
|
14,743
|
|
COMBIMATRIX
GROUP
(A
Division of Acacia Research Corporation)
BALANCE
SHEETS
(In
thousands)
(Unaudited)
|
|
June
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
930
|
|
$
|
5,666
|
|
Available-for-sale
investments
|
|
|
9,046
|
|
|
14,547
|
|
Accounts
receivable
|
|
|
1,122
|
|
|
911
|
|
Inventory,
prepaid expenses and other assets
|
|
|
804
|
|
|
709
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
11,902
|
|
|
21,833
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
2,228
|
|
|
2,363
|
|
Patents,
net of accumulated amortization
|
|
|
7,378
|
|
|
7,926
|
|
Goodwill
|
|
|
16,918
|
|
|
18,859
|
|
Other
assets
|
|
|
2,970
|
|
|
1,560
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,396
|
|
$
|
52,541
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND ALLOCATED NET WORTH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
2,490
|
|
$
|
2,483
|
|
Current
portion of deferred revenues
|
|
|
97
|
|
|
165
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,587
|
|
|
2,648
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
1,975
|
|
Deferred
revenues, net of current portion
|
|
|
1,464
|
|
|
1,439
|
|
Other
liabilities
|
|
|
1,631
|
|
|
1,381
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
5,682
|
|
|
7,443
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
-
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
net worth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
allocated by Acacia Research Corporation
|
|
|
171,474
|
|
|
169,723
|
|
|
|
|
|
|
|
|
|
Accumulated
net losses
|
|
|
(135,760
|
)
|
|
(124,629
|
)
|
|
|
|
|
|
|
|
|
Total
allocated net worth
|
|
|
35,714
|
|
|
45,094
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,396
|
|
$
|
52,541
|
|
The
accompanying notes are an integral part of these financial
statements.
COMBIMATRIX
GROUP
(A
Division of Acacia Research Corporation)
STATEMENTS
OF OPERATIONS
(In
thousands)
(Unaudited)
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
June
30, 2006
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
contract
|
|
$
|
574
|
|
$
|
1,281
|
|
$
|
838
|
|
$
|
2,012
|
|
Products
|
|
|
1,158
|
|
|
567
|
|
|
2,082
|
|
|
845
|
|
Service
contracts
|
|
|
60
|
|
|
9
|
|
|
117
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
1,792
|
|
|
1,857
|
|
|
3,037
|
|
|
2,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of government contract revenues
|
|
|
542
|
|
|
1,209
|
|
|
792
|
|
|
1,900
|
|
Cost
of product sales
|
|
|
340
|
|
|
190
|
|
|
561
|
|
|
353
|
|
Research
and development expenses (including non-cash stock compensation
expense of
$193 and $486 for the three and six months ended June 30,
2006)
|
|
|
2,182
|
|
|
1,415
|
|
|
4,561
|
|
|
2,555
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense of $280 and $682 for the three and six months ended
June 30, 2006
and $15 and ($111) for the three and six months ended June
30,
2005)
|
|
|
3,229
|
|
|
2,517
|
|
|
7,191
|
|
|
4,670
|
|
Amortization
of patents
|
|
|
274
|
|
|
274
|
|
|
548
|
|
|
548
|
|
Legal
settlement credits
|
|
|
-
|
|
|
(16
|
)
|
|
-
|
|
|
(195
|
)
|
Loss
from equity investments
|
|
|
294
|
|
|
63
|
|
|
533
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
6,861
|
|
|
5,652
|
|
|
14,186
|
|
|
9,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(5,069
|
)
|
|
(3,795
|
)
|
|
(11,149
|
)
|
|
(7,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and investment income
|
|
|
137
|
|
|
104
|
|
|
318
|
|
|
206
|
|
Loss
on sale of interest in subsidiary
|
|
|
-
|
|
|
-
|
|
|
(84
|
)
|
|
-
|
|
Warrant
gains (charges)
|
|
|
1,490
|
|
|
-
|
|
|
(250
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
1,627
|
|
|
104
|
|
|
(16
|
)
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations before income taxes
|
|
|
(3,442
|
)
|
|
(3,691
|
)
|
|
(11,165
|
)
|
|
(6,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
for income taxes
|
|
|
-
|
|
|
34
|
|
|
34
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Division
net loss
|
|
$
|
(3,442
|
)
|
$
|
(3,657
|
)
|
$
|
(11,131
|
)
|
$
|
(6,733
|
)
|
The
accompanying notes are an integral part of these financial
statements.
COMBIMATRIX
GROUP
(A
Division of Acacia Research Corporation)
STATEMENTS
OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Division
net loss
|
|
$
|
(11,131
|
)
|
$
|
(6,733
|
)
|
Adjustments
to reconcile division net loss to
net cash used in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,016
|
|
|
1,079
|
|
Non-cash
stock compensation
|
|
|
1,168
|
|
|
(111
|
)
|
Deferred
income taxes
|
|
|
(34
|
)
|
|
(69
|
)
|
Non-cash
warrant charges (gains)
|
|
|
250
|
|
|
-
|
|
Non-cash
legal settlement charges (credits)
|
|
|
-
|
|
|
(195
|
)
|
Loss
from equity investments
|
|
|
533
|
|
|
102
|
|
Loss
on sale of interest in subsidiary
|
|
|
84
|
|
|
-
|
|
Other
|
|
|
124
|
|
|
(56
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(228
|
)
|
|
(1,202
|
)
|
Inventory,
prepaid expenses and other assets
|
|
|
(133
|
)
|
|
(206
|
)
|
Accounts
payable and accrued expenses
|
|
|
240
|
|
|
453
|
|
Deferred
revenues
|
|
|
9
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(8,102
|
)
|
|
(6,962
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(450
|
)
|
|
(453
|
)
|
Purchase
of available-for-sale investments
|
|
|
(1,021
|
)
|
|
(11,952
|
)
|
Sale
of available-for-sale investments
|
|
|
6,520
|
|
|
24,132
|
|
Purchase
of additional interests in equity method investee
|
|
|
(1,400
|
)
|
|
(600
|
)
|
Sale
of interest in subsidiary
|
|
|
(369
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash provided by investing activities
|
|
|
3,280
|
|
|
11,127
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
cash flows attributed to the CombiMatrix group
|
|
|
86
|
|
|
327
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
|
-
|
|
|
21
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(4,736
|
)
|
|
4,513
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning
|
|
|
5,666
|
|
|
2,985
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending
|
|
$
|
930
|
|
$
|
7,498
|
|
The
accompanying notes are an integral part of these financial
statements.
COMBIMATRIX
GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
1.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description
of Business. Acacia
Research Corporation is comprised of two separate divisions: the CombiMatrix
group and the Acacia Technologies group.
Our
life
sciences business, referred to as the “CombiMatrix group,” a division of Acacia
Research Corporation, is comprised of our wholly owned subsidiary, CombiMatrix
Corporation and CombiMatrix Corporation’s wholly owned subsidiary, CombiMatrix
Molecular Diagnostics and includes all corporate assets, liabilities and
transactions related to Acacia Research Corporation’s life sciences business.
The
CombiMatrix
group develops proprietary technologies and products and services in the
areas
of drug development, genetic analysis, nanotechnology research, defense and
homeland security markets, and other markets where its products could be
utilized. Among the technologies being developed by the CombiMatrix group
is a
platform technology to produce customizable arrays, which are
semiconductor-based tools for use in identifying and determining the roles
of
genes, gene mutations and proteins. This technology has potential applications
in the areas of genomics, proteomics, biosensors, drug discovery, drug
development, diagnostics, combinatorial chemistry, material sciences and
nanotechnology. Other technologies include proprietary molecular synthesis
and
screening methods for the discovery of potential new drugs. CombiMatrix
Molecular Diagnostics, Inc., a wholly owned subsidiary located in Irvine,
California, is exploring opportunities for the CombiMatrix group’s arrays in the
field of molecular diagnostics. CombiMatrix K.K., a Japanese corporation
located
in Tokyo, Japan, has existed for the purpose of exploring opportunities for
CombiMatrix Corporation’s array system with pharmaceutical and biotechnology
companies in the Asian market. In January 2006, CombiMatrix Corporation sold
67%
of its ownership interest in CombiMatrix K.K. to a third party. Refer to
Note
7.
In
January 2006, Acacia Research Corporation’s board of directors approved a plan
for its wholly owned subsidiary, CombiMatrix Corporation, to become an
independent public company. The transaction is expected to be completed no
sooner than the fourth quarter of 2006, subject, however, to determination
that
there are no significant negative tax consequences to Acacia Research
Corporation or its shareholders and completing the required filings with
the
Securities and Exchange Commission, or SEC. We have requested a private letter
ruling from the IRS and intend to proceed only after receiving the ruling.
If
the conditions are met, Acacia Research Corporation will redeem all of the
issued and outstanding shares of AR-CombiMatrix common stock for all of the
common stock of CombiMatrix Corporation, which will register its common stock
under the Securities and Exchange Act of 1934. Following the redemption,
CombiMatrix Corporation will apply to list its shares for trading on a national
exchange.
Liquidity
and Risks.
Refer to
Note 1 to the Acacia Research Corporation consolidated financial statements
for
a discussion of consolidated and individual group liquidity and
risks.
Basis
of Presentation. The
unaudited interim CombiMatrix group financial statements as of June 30, 2006,
and for the interim periods presented, have been prepared in accordance with
generally accepted accounting principles for interim financial information.
These interim financial statements should be read in conjunction with the
CombiMatrix group financial statements and Acacia Research Corporation’s
consolidated financial statements and notes thereto for the year ended December
31, 2005. The year-end balance sheet data was derived from audited financial
statements but does not include all disclosures required by accounting
principles generally accepted in the United States of America.
The
CombiMatrix group financial statements include all adjustments of a normal
recurring nature which, in the opinion of management, are necessary for a
fair
statement of its financial position as of June 30, 2006, and the results
of its
operations and its cash flows for the interim periods presented. The results
of
operations for the three and six months ended June 30, 2006, are not necessarily
indicative of the results to be expected for the entire year.
Capital
Structure.
On
December 11, 2002, Acacia Research Corporation’s stockholders voted in favor of
a recapitalization transaction, which became effective on December 13, 2002,
whereby Acacia Research Corporation created two new classes of common stock
called Acacia Research-CombiMatrix common stock (“AR-CombiMatrix stock”) and
Acacia Research-Acacia Technologies common stock (“AR-Acacia Technologies
stock”), and divided Acacia Research Corporation’s existing Acacia Research
Corporation common stock into shares of the two new classes of common
stock.
COMBIMATRIX
GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
AR-CombiMatrix
stock is
intended to reflect the separate performance of the CombiMatrix group, a
division of Acacia Research Corporation. The CombiMatrix group is not a separate
legal entity. Holders of AR-CombiMatrix
stock
are stockholders of Acacia Research Corporation. As a result, holders of
AR-CombiMatrix
stock
are subject to all of the risks of an investment in Acacia Research Corporation
and all of its businesses, assets and liabilities. The assets that Acacia
Research Corporation attributes to the CombiMatrix group could be subject
to the
liabilities of the Acacia Technologies group.
The
CombiMatrix group financial statements taken together with the Acacia
Technologies group financial statements comprise all of the accounts included
in
the corresponding consolidated financial statements of Acacia Research
Corporation. The financial statements of the CombiMatrix group reflect the
financial position, results of operations, and cash flows of the businesses
included therein. The financial statements of the CombiMatrix group include
the
accounts or assets of Acacia Research Corporation specifically attributed
to the
CombiMatrix group and were prepared using amounts included in Acacia Research
Corporation’s consolidated financial statements.
Financial
effects arising from one group that affect Acacia Research Corporation’s results
of operations or financial condition could, if significant, affect the results
of operations or financial condition of the other group and the market price
of
the class of common stock relating to the other group. Any division net losses
of the CombiMatrix group or the Acacia Technologies group and dividends or
distributions on, or repurchases of, AR-CombiMatrix stock or AR-Acacia
Technologies stock or repurchases of preferred stock of Acacia Research
Corporation will reduce the assets of Acacia Research Corporation legally
available for payment of dividends on AR-CombiMatrix stock or AR-Acacia
Technologies stock.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates.
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management
to
make estimates and assumptions that affect the reported amount of assets
and
liabilities and disclosure of contingent assets and liabilities at the date
of
the consolidated financial statements and the reported amounts of revenues
and
expenses during the reporting period. Actual results could differ from these
estimates.
Stock-Based
Compensation.
Refer
to
Note 2 and Note 9 to the Acacia Research Corporation consolidated financial
statements included in Part I, Item 1 of this report.
Earnings
Per Share Information and Stock Option and Related Option Plan
Information.
Earnings per share and stock option and related option plan information is
omitted from the CombiMatrix group footnotes because AR-CombiMatrix stock
is
part of the capital structure of Acacia Research Corporation. The CombiMatrix
group is not a separate legal entity. Holders of AR-CombiMatrix
stock
are stockholders of Acacia Research Corporation. This presentation reflects
the
fact that the CombiMatrix group does not have legally issued common or preferred
stock and AR-CombiMatrix stock transactions are not legal transactions of
the
CombiMatrix group. Refer to the Acacia Research Corporation consolidated
financial statements for earnings per share information for Acacia Research
Corporation’s classes of stock, computed using the two-class method in
accordance with SFAS No. 128, “Earnings per Share.” Refer to the Acacia Research
Corporation consolidated financial statements for disclosures regarding Acacia
Research Corporation’s stock option plans.
Warrant
Liability.
See Note
8 to
the
Acacia Research Corporation consolidated financial statements included in
Part
I, Item 1 of this report.
3.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer
to
Note 5 to the Acacia Research Corporation consolidated financial statements
included in Part I, Item 1 of this report.
COMBIMATRIX
GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
4.
GOODWILL
AND INTANGIBLE ASSETS
The
CombiMatrix group’s identifiable intangible assets are patents, which have
remaining economic useful lives up to 2020. Annual aggregate amortization
expense for each of the five fiscal years through December 31, 2010 is estimated
to be $1,095,000 per year. At
June 30,
2006 and December 31, 2005, all of the CombiMatrix group’s acquired intangible
assets other than goodwill were subject to amortization.
As
of
March 31, 2006, the CombiMatrix group reduced its goodwill and deferred tax
liability balances by $1,941,000, which were initially recorded in fiscal
2000,
to properly reflect the reduction in its income tax valuation allowance after
consideration of the deferred tax liability.
On
June
14, 2006, Acacia Research Corporation entered into a standby equity distribution
agreement (the “SEDA”) with Cornell Capital Partners, LP (“Cornell”). Under the
terms of the SEDA, Acacia Research Corporation can require Cornell to purchase
up to $50.0 million of AR-CombiMatrix common stock, or up to 13,024,924 shares,
over a two-year period following the effective date of the SEDA. Such shares
will be in the form of registered securities drawn from Acacia Research
Corporation’s current shelf registration statement and the proceeds from each
advance will be contributed to the CombiMatrix group. Acacia Research
Corporation can request advances under the SEDA in up to $5.0 million
increments. At the closing of each advance, which will take place six days
after
the initial notification to Cornell, Acacia Research Corporation will issue
to
Cornell a number of shares of AR-CombiMatrix common stock equal to the amount
of
the advance divided by the lowest daily volume weighted average price (“VWAP”)
of AR-CombiMatrix common stock during the five trading days following the
advance notice to Cornell, which will purchase the shares at 97.5% of the
VWAP.
Management can also specify a floor price whereby shares that trade below
this
price during the five-day trading period will be excluded from determining
the
VWAP. At each closing, Acacia Research Corporation will pay an underwriting
fee
of 4% of the gross amount of each advance on the first $20.0 million and
5% of
the gross proceeds of each advance on the remaining $30.0 million of the
SEDA to
Cornell. Acacia Research Corporation is not obligated to request any advances
under the agreement and will not pay any additional fees to Cornell so long
as
no advances are requested. The SEDA is also cancelable by Acacia Research
Corporation at any time, without penalty. Acacia Research Corporation may
not
request advances if the shares to be issued in connection with such advances
would result in Cornell owning more than 9.9% of the outstanding AR-CombiMatrix
common stock. A total of 13,024,924 shares of AR-CombiMatrix common stock
are
authorized to be issued under the SEDA.
Upon
closing of the SEDA, the CombiMatrix group paid Cornell a one-time commitment
fee of $550,000 and an additional $20,000 in due diligence and other
closing-related costs. The $550,000 fee was recorded as a long-term asset
and
will be amortized against future advances as costs of equity issuances. On
June
23 2006, Cornell purchased 343,750 shares of AR-CombiMatrix common stock
at
$1.60 per share, based on the fair value of AR-CombiMatrix stock on June
12,
2006. The shares of AR-CombiMatrix stock were offered pursuant to an effective
registration statement previously filed with the Securities and Exchange
Commission. As of July 26, 2006, Acacia Research Corporation had completed
one
advance under the SEDA, selling a total of 429,849 shares of AR-CombiMatrix
common stock for gross proceeds of approximately $500,000, resulting in net
proceeds attributed to the CombiMatrix group of approximately $480,000. As
of
June 30, 2006, $49,450,000, or up to 12,681,174 shares of AR-CombiMatrix
common
stock are available under the SEDA.
6.
COMMITMENTS
AND CONTINGENCIES
Collaborative
and Research Agreements
On
February 8, 2006, the CombiMatrix group executed a one-year, $2.1 million
contract with the Department of Defense (“DoD”) to further the development of
the CombiMatrix group’s array technology for the detection of biological and
chemical threat agents. Under the terms of the CombiMatrix group’s one-year
contract with the DoD, the CombiMatrix group will perform research and
development activities as described under the contract and will be reimbursed
on
a periodic basis for actual costs incurred to perform its obligations, plus
a
fixed fee, of up to $2.1 million. The CombiMatrix group expects to incur
approximately $991,000 in research and development costs for the remainder
of
2006 to complete its obligations to the DoD under this contract. As of June
30,
2006, the biological threat detection contract with the DoD was approximately
38% complete. In March 2004, the CombiMatrix group was awarded a two-year,
$5.9
million contract with the DoD to further the development of the CombiMatrix
group’s array technology for the detection of biological and chemical threat
agents. The two-year $5.9 million contract was completed in December
2005.
COMBIMATRIX
GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
In
October 2004, the CombiMatrix group entered into an agreement to acquire
up to a
one-third ownership interest in Leuchemix, Inc. (“Leuchemix”), a private drug
development firm, which is developing several compounds for the treatment
of
leukemia and other cancers. In accordance with the terms of the purchase
agreement, the CombiMatrix group will purchase 3,137,500 shares of Series
A
Preferred Stock of Leuchemix for a total purchase price of $4,000,000. The
ownership interest will be acquired and paid for quarterly over the two-year
period commencing with the fourth quarter of 2004. In accordance with the
terms
of the purchase agreement, the CombiMatrix group made an additional $750,000
investment in Leuchemix during the three months ended June 30, 2006, resulting
in an ownership interest of approximately 29% as of June 30, 2006. The
CombiMatrix group will make a final contractual investment in Leuchemix of
$750,000 in the third quarter of 2006 in accordance with the terms of the
agreement. The CombiMatrix group’s investment is being accounted for under the
equity method.
Litigation
On
September 30, 2002, CombiMatrix Corporation and Dr. Donald Montgomery entered
into a settlement agreement with Nanogen, Inc. to settle all pending litigation
between the parties. During the six months ended June 30, 2005, the CombiMatrix
group recorded a net non-cash credit totaling $195,000 in connection with
certain anti-dilution provisions of the settlement agreement. The related
liability reflected management’s estimate, as of each balance sheet date, of the
fair value of AR-CombiMatrix stock potentially issuable to Nanogen, Inc.
as a
result of certain options and warrants exercised during the period, if any,
and
the fair value of AR-CombiMatrix stock potentially issuable to Nanogen, Inc.
as
of each balance sheet date pursuant to the anti-dilution terms of the agreement.
The liability was adjusted at each balance sheet date for changes in the
market
value of the AR-CombiMatrix stock and is reflected as long-term until settled
in
equity. The anti-dilution provisions of the settlement agreement expired
in
September 2005 and thus, there is no liability recorded as of September 30,
2005, or in any future periods, and there were no charges or credits recognized
during the three and six months ending June 30, 2006.
In
addition to other terms of the settlement agreement, CombiMatrix Corporation
is
also required to make quarterly payments to Nanogen, Inc. equal to 12.5%
of
payments to CombiMatrix Corporation from sales of products developed by
CombiMatrix Corporation and its affiliates and based on the patents that
had
been in dispute in the litigation, up to an annual maximum of $1,500,000.
The
minimum quarterly payments under the settlement agreement are $25,000 per
quarter until the patents expire in 2018. Royalties recognized under the
agreement during the six months ended June 30, 2006, and 2005, were $161,000
and
$53,000, respectively.
The
CombiMatrix group is subject to claims and legal actions that arise in the
ordinary course of business. Management believes that the ultimate liability
with respect to these claims and legal actions, if any, will not have a material
effect on the CombiMatrix group’s financial position, results of operations or
cash flows.
7.
SALE OF INTEREST IN SUBSIDIARY
In
January 2006, the CombiMatrix group expanded its relationship with one of
its
existing distributors, InBio, for the Asia Pacific region. Major components
of
the expanded relationship included the transfer of day-to-day operational
responsibility and majority ownership of CombiMatrix K.K. to InBio, along
with
an expanded distribution agreement that encompasses Japan. InBio obtained
67% of
the voting interests in CombiMatrix K.K. for a nominal amount of consideration.
As a result, InBio assumed all operational and financial responsibilities
of
CombiMatrix K.K. The net loss on the sale of 67% of the voting interest in
CombiMatrix K.K. recorded in the statement of operations during the first
quarter of 2006 was
$84,000. CombiMatrix
Corporation continues to own a 33% interest in CombiMatrix K.K. Subsequent
to
the sale, the CombiMatrix group’s investment in CombiMatrix K.K. was accounted
for under the equity method. The deconsolidation of CombiMatrix K.K. did
not
have a material impact on the CombiMatrix group balance sheet as of June
30,
2006.
ACACIA
TECHNOLOGIES GROUP
(A
Division of Acacia Research Corporation)
BALANCE
SHEETS
(In
thousands)
(Unaudited)
|
|
June
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
16,115
|
|
$
|
14,498
|
|
Short-term
investments
|
|
|
24,600
|
|
|
24,462
|
|
Accounts
receivable
|
|
|
3,725
|
|
|
4,421
|
|
Prepaid
expenses and other assets
|
|
|
1,385
|
|
|
1,406
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
45,825
|
|
|
44,787
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
116
|
|
|
121
|
|
Patents,
net of accumulated amortization
|
|
|
21,148
|
|
|
23,786
|
|
Goodwill
|
|
|
121
|
|
|
121
|
|
Other
assets
|
|
|
79
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67,289
|
|
$
|
68,893
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND ALLOCATED NET WORTH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,537
|
|
$
|
1,441
|
|
Royalties
and legal fees payable
|
|
|
2,652
|
|
|
3,758
|
|
Current
portion of deferred revenues
|
|
|
432
|
|
|
639
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
4,621
|
|
|
5,838
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
726
|
|
Other
liabilities
|
|
|
10
|
|
|
83
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
4,631
|
|
|
6,647
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
-
|
|
|
443
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
net worth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
allocated by Acacia Research Corporation
|
|
|
146,252
|
|
|
144,087
|
|
|
|
|
|
|
|
|
|
Accumulated
net losses
|
|
|
(83,594
|
)
|
|
(82,284
|
)
|
|
|
|
|
|
|
|
|
Total
allocated net worth
|
|
|
62,658
|
|
|
61,803
|
|
|
|
$
|
67,289
|
|
$
|
68,893
|
|
The
accompanying notes are an integral part of these financial
statements.
ACACIA
TECHNOLOGIES GROUP
(A
Division of Acacia Research Corporation)
STATEMENTS
OF OPERATIONS
(In
thousands)
(Unaudited)
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
June
30, 2006
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$
|
14,371
|
|
$
|
2,682
|
|
$
|
19,088
|
|
$
|
4,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
14,371
|
|
|
2,682
|
|
|
19,088
|
|
|
4,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense of $889 and $1,937 for the three and six months ended
June 30,
2006)
|
|
|
3,441
|
|
|
1,759
|
|
|
6,978
|
|
|
3,369
|
|
Legal
expenses - patents
|
|
|
685
|
|
|
536
|
|
|
1,051
|
|
|
1,097
|
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
7,847
|
|
|
1,120
|
|
|
10,118
|
|
|
1,767
|
|
Amortization
of patents
|
|
|
1,326
|
|
|
1,336
|
|
|
2,669
|
|
|
2,252
|
|
Write-off
of patent-related intangible asset
|
|
|
297
|
|
|
-
|
|
|
297
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
13,596
|
|
|
4,751
|
|
|
21,113
|
|
|
8,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
775
|
|
|
(2,069
|
)
|
|
(2,025
|
)
|
|
(3,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and investment income
|
|
|
394
|
|
|
279
|
|
|
753
|
|
|
450
|
|
Total
other income
|
|
|
394
|
|
|
279
|
|
|
753
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
1,169
|
|
|
(1,790
|
)
|
|
(1,272
|
)
|
|
(3,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision)
benefit for income taxes
|
|
|
(70
|
)
|
|
30
|
|
|
(38
|
)
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
1,099
|
|
|
(1,760
|
)
|
|
(1,310
|
)
|
|
(3,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
loss on disposal of discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(210
|
)
|
Division
net income (loss)
|
|
$
|
1,099
|
|
$
|
(1,760
|
)
|
$
|
(1,310
|
)
|
$
|
(3,634
|
)
|
The
accompanying notes are an integral part of these financial
statements.
ACACIA
TECHNOLOGIES GROUP
(A
Division of Acacia Research Corporation)
STATEMENTS
OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Division
net loss
|
|
$
|
(1,310
|
)
|
$
|
(3,634
|
)
|
Adjustments
to reconcile division net loss to
net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,704
|
|
|
2,279
|
|
Non-cash
stock compensation
|
|
|
1,937
|
|
|
-
|
|
Deferred
income taxes
|
|
|
(36
|
)
|
|
(71
|
)
|
Loss
on disposal of discontinued operations
|
|
|
-
|
|
|
210
|
|
Write-off
of patent-related intangible asset
|
|
|
297
|
|
|
-
|
|
Other
|
|
|
(87
|
)
|
|
-
|
|
Changes
in assets and liabilities, excluding effect of business
acquisitions:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
696
|
|
|
(457
|
)
|
Prepaid
expenses and other assets
|
|
|
(346
|
)
|
|
(387
|
)
|
Accounts
payable and accrued expenses
|
|
|
175
|
|
|
(869
|
)
|
Royalties
and legal fees payable
|
|
|
(1,106
|
)
|
|
447
|
|
Deferred
revenues
|
|
|
(207
|
)
|
|
153
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities from continuing
operations
|
|
|
2,717
|
|
|
(2,329
|
)
|
Net
cash provided by (used in) operating activities from discontinued
operations
|
|
|
222
|
|
|
(433
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
2,939
|
|
|
(2,762
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(29
|
)
|
|
(59
|
)
|
Purchase
of available-for-sale investments
|
|
|
(11,932
|
)
|
|
(26,367
|
)
|
Sale
of available-for-sale investments
|
|
|
11,786
|
|
|
12,150
|
|
Business
acquisition (Note 6)
|
|
|
(16
|
)
|
|
(5,796
|
)
|
Patent
acquisition costs
|
|
|
(1,020
|
)
|
|
(325
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(1,211
|
)
|
|
(20,397
|
)
|
Net
cash used in investing activities from discontinued
operations
|
|
|
(353
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(1,564
|
)
|
|
(20,397
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
cash flows attributed to the Acacia Technologies group
|
|
|
242
|
|
|
19,479
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
1,617
|
|
|
(3,680
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning
|
|
|
14,498
|
|
|
10,925
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending
|
|
$
|
16,115
|
|
$
|
7,245
|
|
The
accompanying notes are an integral part of these financial
statements.
ACACIA
TECHNOLOGIES GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
1.
DESCRIPTION
OF BUSINESS AND BASIS OF PRESENTATION
The
Acacia Technologies group, a division of Acacia Research Corporation, develops,
acquires, licenses and enforces patented technologies. The Acacia Technologies
group is primarily comprised of certain of Acacia Research Corporation’s direct
and or indirect wholly owned subsidiaries and limited liability companies
including:
·
|
Acacia
Global Acquisition Corporation
|
·
|
Information
Technology Innovation LLC
|
·
|
Acacia
Media Technologies Corporation
|
·
|
InternetAd
LLC
|
·
|
Acacia
Patent Acquisition Corporation
|
·
|
IP
Innovation LLC
|
·
|
Acacia
Technologies Services Corporation
|
·
|
KY
Data Systems LLC
|
·
|
AV
Technologies LLC
|
·
|
Microprocessor
Enhancement Corporation
|
·
|
Broadcast
Data Retrieval Corporation
|
·
|
New
Medium LLC
|
·
|
Broadcast
Innovation LLC
|
·
|
Peer
Communications Corporation
|
·
|
Computer
Acceleration Corporation
|
·
|
Product
Activation Corporation
|
·
|
Computer
Cache Coherency Corporation
|
·
|
TechSearch
LLC
|
·
|
Computer
Docking Station Corporation
|
·
|
VData
LLC
|
·
|
Data
Encryption Corporation
|
·
|
Resource
Scheduling Corporation
|
·
|
Data
Innovation LLC
|
·
|
Software
Collaboration Corporation
|
·
|
Disk
Link Corporation
|
·
|
Soundview
Technologies, Inc.
|
·
|
Financial
Systems Innovation LLC
|
·
|
Spreadsheet
Automation Corporation
|
·
|
High
Resolution Optics Corporation
|
·
|
Spreadsheet
Automation Corporation
|
The
Acacia Technologies group also includes all corporate assets, liabilities,
and
related transactions of Acacia Research Corporation attributed to Acacia
Research Corporation’s intellectual property licensing and enforcement business.
Refer to “Business Acquisition” below for information on the Acacia Technologies
group’s 2005 business acquisition activity.
The
Acacia Technologies group currently controls 46 patent portfolios covering
technologies used in a wide variety of industries.
Business
Acquisition.
On
January 28, 2005, Acacia Global Acquisition Corporation acquired the assets
of
Global Patent Holdings, LLC, which owned 11 patent licensing companies (“GPH
Acquisition”). The acquisition provided the Acacia Technologies group ownership
of companies that control 27 patent portfolios, which include 120 U.S. patents
and certain foreign counterparts, and cover technologies used in a wide variety
of industries. Refer to Note 6 for a description of the acquisition
transaction.
Liquidity
and Risks.
Refer to
Note 1 to the Acacia Research Corporation consolidated financial statements
for
a discussion of consolidated and individual group liquidity and
risks.
Basis
of Presentation.
The
unaudited interim Acacia Technologies group financial statements as of
June
30,
2006,
and for
the interim periods presented, have been prepared in accordance with generally
accepted accounting principles for interim financial information. These interim
financial statements should be read in conjunction with the Acacia Technologies
group financial statements and Acacia Research Corporation’s consolidated
financial statements and notes thereto for the year ended December 31, 2005.
The
year-end balance sheet data was derived from audited financial statements
but
does not include all disclosures required by accounting principles generally
accepted in the United States of America.
The
Acacia Technologies group financial statements include all adjustments of
a
normal recurring nature which, in the opinion of management, are necessary
for a
fair statement of its financial position as of June 30, 2006, and the results
of
its operations and its cash flows for the interim periods presented. The
results
of operations for the three and six months ended June 30, 2006, are not
necessarily indicative of the results to be expected for the entire
year.
Capital
Structure.
On
December 11, 2002, our stockholders voted in favor of a recapitalization
transaction, which became effective on December 13, 2002, whereby we created
two
new classes of common stock called Acacia Research-CombiMatrix common stock
(“AR-CombiMatrix stock”) and Acacia Research-Acacia Technologies common stock
(“AR-Acacia Technologies stock”), and divided our existing Acacia Research
Corporation common stock into shares of the two new classes of common stock.
ACACIA
TECHNOLOGIES GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
AR-Acacia
Technologies stock is intended to reflect the separate performance of the
Acacia
Technologies group, a division of Acacia Research Corporation. The Acacia
Technologies group is not a separate legal entity. Holders of AR-Acacia
Technologies stock are stockholders of Acacia Research Corporation. As a
result,
holders of AR-Acacia
Technologies stock are subject to all of the risks of an investment in Acacia
Research Corporation and all of its businesses, assets and liabilities. The
assets Acacia Research Corporation attributes to Acacia Technologies group
could
be subject to the liabilities of the CombiMatrix group.
The
Acacia Technologies group financial statements taken together with the
CombiMatrix group financial statements comprise all of the accounts included
in
the corresponding consolidated financial statements of Acacia Research
Corporation. The financial statements of Acacia Technologies group reflect
the
financial position, results of operations, and cash flows of the businesses
included therein. The financial statements of the Acacia Technologies group
include the accounts or assets of Acacia Research Corporation specifically
attributed to the Acacia Technologies group and were prepared using amounts
included in Acacia Research Corporation’s consolidated financial statements.
Financial
effects arising from one group that affect Acacia Research Corporation’s results
of operations or financial condition could, if significant, affect the results
of operations or financial condition of the other group and the market price
of
the class of common stock relating to the other group. Any division net losses
of the CombiMatrix group or the Acacia Technologies group and dividends or
distributions on, or repurchases of, AR-CombiMatrix stock or AR-Acacia
Technologies stock or repurchases of preferred stock of Acacia Research
Corporation will reduce the assets of Acacia Research Corporation legally
available for payment of dividends on AR-CombiMatrix stock or AR-Acacia
Technologies stock.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates. The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management
to
make estimates and assumptions that affect the reported amount of assets
and
liabilities and disclosure of contingent assets and liabilities at the date
of
the consolidated financial statements and the reported amounts of revenues
and
expenses during the reporting period. Actual results could differ from these
estimates.
Revision
in the Classification of Certain Securities.
In
connection with the preparation of the 2005 consolidated financial statements,
Acacia Research Corporation concluded that it was appropriate to classify
its
annuity investments as current investments. Prior to 2005, such
investments had been classified as cash and cash equivalents. Accordingly,
we
have made adjustments to our consolidated statement of cash flows for the
six
months ended June 30, 2005, to reflect the gross purchases of these securities
as investing activities rather than as a component of cash and cash equivalents.
This change in classification does not affect previously reported cash
flows from operations or from financing activities in our previously reported
statements of cash flows, and it does not affect our previously reported
statements of operations for any period.
As
of
June 30, 2005, before this revision in classification, $4,896,000 of these
current investments were classified as cash and cash equivalents on our
consolidated balance sheet. There were no material purchases or sales
of annuity investments during any of the periods presented, as such, the
impact
of the revision in classification on consolidated cash flows from investing
activities was not material for any of the periods presented.
Stock-Based
Compensation.
Refer
to
Note 2 and Note 9 to the Acacia Research Corporation consolidated financial
statements included in Part I, Item 1 of this report.
Earnings
Per Share Information and Stock Option and Related Option Plan
Information.
Earnings per share and stock option and related option plan information is
omitted from the Acacia Technologies group footnotes because AR-Acacia
Technologies stock is part of the capital structure of Acacia Research
Corporation. The Acacia Technologies group is not a separate legal entity.
Holders of AR-Acacia
Technologies stock are stockholders of Acacia Research Corporation. This
presentation reflects the fact that the Acacia Technologies group does not
have
legally issued common or preferred stock and AR-Acacia Technologies stock
transactions are not legal transactions of the Acacia Technologies group.
Refer
to the Acacia Research Corporation consolidated financial statements for
earnings per share information for Acacia Research Corporation’s classes of
stock, computed using the two-class method in accordance with SFAS No. 128,
“Earnings per Share.” Refer to the Acacia Research Corporation consolidated
financial statements for disclosures regarding Acacia Research Corporation’s
stock option plans.
ACACIA
TECHNOLOGIES GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
3.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer
to
Note 5 to the Acacia Research Corporation consolidated financial statements
included in Part I, Item 1 of this report.
4.
GOODWILL AND INTANGIBLE ASSETS
The
Acacia Technologies group had $121,000 of goodwill at June 30, 2006 and December
31, 2005. The Acacia
Technologies group’s identifiable intangible assets are comprised of patents and
patent rights which have remaining economic useful lives up to 2013. The
weighted average remaining economic useful life of the Acacia Technologies
group’s patents is approximately 5 years. Annual
aggregate amortization expense for each of the five fiscal years through
December 31, 2010 is estimated to be $5,272,000
in 2006, $5,235,000 in 2007, $3,912,000 in 2008, $3,461,000 in 2009 and
$3,270,000
in
2010. At
June
30, 2006, and December 31, 2005, all of the Acacia Technologies group’s acquired
intangible assets other than goodwill were subject to amortization.
During
the three months ended June 30, 2006, the Acacia Technologies group recorded
a
non-cash charge of $297,000, related to the write-off of a patent-related
intangible asset. We
review
long-lived assets and intangible assets for potential impairment annually
and
when events or changes in circumstances indicate the carrying amount of an
asset
may not be recoverable. In the event the sum of the expected undiscounted
future
cash flows resulting from the use of the asset is less than the carrying
amount
of the asset, an impairment loss equal to the excess of the asset’s carrying
value over its fair value is recorded. During the second quarter of 2006,
pursuant to the terms of the respective license agreement, management elected
to
terminate its rights to exclusively license and enforce the patent, resulting
in
the write-off of the remaining carrying value of the patent-related intangible
asset as of June 30, 2006.
For
the
six months ended June
30,
2006,
the
Acacia Technologies group incurred patent acquisition costs totaling $1,020,000
in connection with the acquisition of the rights to several additional patent
portfolios. The acquired patents and patent rights have estimated economic
useful lives ranging from 5 to 7 years. Refer to Note 6 for additions to
patent
related intangibles during the six months ended June 30, 2005.
As
of
March 31, 2006, the Acacia Technologies group reduced its patents and deferred
tax liability by $691,000, which were initially recorded in fiscal 2002,
to
properly reflect the reduction in its income tax valuation allowance after
consideration of the deferred tax liability.
5.
EQUITY FINANCING
In
February 2005, Acacia Research Corporation raised gross proceeds of $19,600,000
through the sale of 3,500,000 shares of AR-Acacia Technologies stock at a
price
of $5.60 per share in a registered direct offering. Net proceeds raised of
approximately $19,532,000, which are net of related issuance costs, were
attributed to the Acacia Technologies group. The shares of AR-Acacia
Technologies stock were offered pursuant to an effective registration statement
previously filed with the Securities and Exchange Commission.
6.
ACQUISITION
On
January 28, 2005, Acacia Global Acquisition Corporation, a wholly owned
subsidiary of Acacia Research Corporation, acquired substantially all of
the
assets of Global Patent Holdings, LLC, a privately held patent holding company
based in Northbrook, Illinois, which owned 11 patent licensing companies.
The
acquisition provided the Acacia Technologies group 100% ownership of companies
that control 27 patent portfolios, which include 120 U.S. patents and certain
foreign counterparts, and cover technologies used in a wide variety of
industries. As a result of the acquisition, we have expanded and diversified
the
Acacia Technologies group’s potential revenue generating
activities.
ACACIA
TECHNOLOGIES GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
The
acquisition was accounted for in accordance with the purchase method of
accounting. Under the purchase method of accounting, the purchase consideration
is allocated to the assets acquired, including tangible assets, patents and
other identifiable intangibles and liabilities assumed, based on their estimated
fair values at the date of acquisition. The consolidated statement of operations
includes the results of the acquired companies beginning on January 28, 2005,
the date of acquisition. The aggregate purchase consideration was approximately
$25,105,000, including $5.0 million of cash, the issuance of 3,938,832 shares
of
AR-Acacia Technologies stock valued at $19,293,000 (net of estimated common
stock registration costs of $228,000) and acquisition costs, including
registration costs, of $812,000. The value of the common shares issued was
determined based on the average market price of AR-Acacia Technologies stock,
as
reported on NASDAQ, over the 5-day period (December 13 - December 17, 2004)
before and after the terms of the acquisition were agreed to and
announced.
The
following table summarizes the total purchase consideration and the allocation
of the consideration paid to the estimated fair value of the assets acquired
and
liabilities assumed (in thousands):
Purchase
Consideration:
|
|
|
|
|
Cash
paid
|
|
$
|
5,000
|
|
Fair
value of AR-Acacia Technologies stock issued(1)
|
|
|
19,293
|
|
Acquisition
and registration costs
|
|
|
812
|
|
Total
purchase consideration
|
|
$
|
25,105
|
|
Purchase
Price Allocation:
|
|
|
|
|
Estimated
fair value of net tangible assets acquired at January 28, 2005
|
|
$
|
(26
|
)
|
Intangible
assets acquired - patents and patent rights(1)
|
|
|
25,131
|
|
Total
|
|
$
|
25,105
|
|
___________________________________
(1)
Reflects non-cash investing activity.
Management
was primarily responsible for determining the fair value of the tangible
and
identifiable intangible assets acquired and liabilities assumed at the date
of
acquisition. Management considered a number of factors in estimating the
fair
value of the intangible assets acquired, including reference to an independent
valuation. The
patents and patent rights acquired were valued using a discounted cash flow
model on a patent portfolio by portfolio basis, which estimated the future
net
cash flows expected to result from the licensing of each portfolio, taking
into
account potential infringers of the patents, usage of the underlying
technologies, estimated license fee revenues, contingent legal fee arrangements,
royalties due to former patent holders, other estimated costs, tax implications
and other factors. A discount rate consistent with the risks associated with
achieving the estimated net cash flows was used to estimate the present value
of
future estimated net cash flows. Management’s
valuation resulted in an estimated fair value of patent related assets acquired
of approximately $27,000,000, resulting in approximately $1,900,000 of excess
fair value over the cost of net assets acquired, which has been allocated
as a
pro rata reduction to the amounts that otherwise would have been assigned
to the
assets acquired, in accordance with the purchase method of accounting.
Amounts
attributable to patents and patent rights acquired are amortized using the
straight-line method over the estimated economic useful lives of the underlying
patents which range from two to seven years. At the date of acquisition,
the
estimated weighted average useful life of amortizable patent related intangibles
acquired was approximately 6 years.
In
connection with the acquisition described above, Acacia Global Acquisition
Corporation entered into a consulting agreement with the former CEO of Global
Patent Holdings, LLC who, as a result of the acquisition transaction, is
also a
shareholder of Acacia Research Corporation. The agreement requires the payment
of $2,000,000 in consulting fees over a two-year period, and certain
reimbursable consulting related expenses, commencing on the date of acquisition.
Marketing, general and administrative expenses for the three and six months
ended June 30, 2006 include $271,000 and $544,000, respectively, in expenses
related to the consulting agreement. Marketing, general and administrative
expenses for the three and six months ended June 30, 2005 include $271,000
and
$466,000, respectively, in expenses related to the consulting agreement.
ACACIA
TECHNOLOGIES GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
The
acquisition was treated for tax purposes as a taxable asset acquisition and,
as
such, Acacia Research Corporation did not record any book/tax basis differences
and thus, no deferred income taxes were recorded in connection with the
application of the purchase method of accounting.
7.
COMMITMENTS AND CONTINGENCIES
In
connection with the acquisition of certain patents and patent rights, certain
companies included in the Acacia Technologies group executed related agreements
which grant to the former owners of the respective patents or patent rights,
the
right to receive royalties based on future net license fee revenues (as defined
in the respective agreements) generated by the Acacia Technologies group
as a
result of licensing the respective patents or patent portfolios. Royalties
paid
pursuant to the agreements are expensed in the consolidated statement of
operations in the period that the related license fee revenues are
recognized.
In
connection with the Acacia Technologies group’s licensing and enforcement
activities, the Acacia Technologies group may retain the services of law
firms
that specialize in intellectual property licensing and enforcement and patent
law. These law firms may be retained on a contingent fee basis in which the
law
firms are paid on a scaled percentage of any negotiated license fees,
settlements or judgments awarded based on how and when the license fees,
settlements or judgments are obtained by the Acacia Technologies group. In
instances where the Acacia Technologies group does not recover license fees
from
potential infringers, no contingent legal fees are paid; however, the Acacia
Technologies group is generally liable for certain out of pocket legal costs
incurred pursuant to the underlying legal services agreement.
The
Acacia Technologies group is subject to claims, counterclaims and legal actions
that arise in the ordinary course of business. Management believes that the
ultimate liability with respect to these claims and legal actions, if any,
will
not have a material effect on the Acacia Technologies group’s financial
position, results of operations or cash flows. From time to time, companies
comprising the Acacia Technologies group engage in litigation to enforce
their
patents and patent rights.
8.
DISCONTINUED OPERATIONS
Results
for the six months ended June 30, 2005, include a $210,000 charge, net of
minority interests, related to estimated additional costs to be incurred
in
connection with the discontinued operations of Soundbreak.com (originally
ceased
operations in February 2001), related primarily to certain noncancellable
lease
obligations and a reduction in estimated amounts recoverable from existing
sublease arrangements. The related lease obligations, which were guaranteed
by
Acacia Research Corporation, expired in August 2005. At June 30, 2006, assets
consisted of cash and cash equivalents. At December 31, 2005, assets consisted
of cash and cash equivalents and lease deposits. At June 30, 2006, liabilities
related to miscellaneous accounts payable. At December 31, 2005, liabilities
related primarily to miscellaneous payables and accrued lease termination
costs.
In
April
2006, a final distribution to Soundbreak.com’s minority shareholders was paid
totaling $353,000.
Refer to
Note 13 to the Acacia Research Corporation consolidated financial statements
for
additional information on assets and liabilities related to discontinued
operations for the periods presented.
Item
2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Cautionary
Statement
You
should read the following discussion and analysis in conjunction with the
consolidated financial statements and related notes thereto contained in
Part I,
Item 1 of this report. The information contained in this Quarterly Report
on
Form 10-Q is not a complete description of our businesses or the risks
associated with an investment in our common stock. We urge you to carefully
review and consider the various disclosures made by us in this report and
in our
other reports filed with the Securities and Exchange Commission, or SEC,
including our Annual Report on Form 10-K for the year ended December 31,
2005,
filed with the SEC on March 16, 2006, and our Registration Statement on Form
S-3
filed with the SEC on April 25, 2006, that discuss our businesses in greater
detail.
This
report contains forward-looking statements within the meaning of the “safe
harbor” provisions of the Private Securities Litigation Reform Act of 1995.
Reference is made in particular to the description of our plans and objectives
for future operations, assumptions underlying such plans and objectives,
and
other forward-looking statements included in this report. Such statements
may be
identified by the use of forward-looking terminology such as “may,” “will,”
“expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar
terms, variations of such terms or the negative of such terms. Such statements
are based on management’s current expectations and are subject to a number of
factors and uncertainties, which could cause actual results to differ materially
from those described in the forward-looking statements. Such statements address
future events and conditions concerning, among others, product development,
capital expenditures, earnings, litigation, regulatory matters, markets for
products and services, liquidity and capital resources and accounting matters.
Actual results in each case could differ materially from those anticipated
in
such statements by reason of factors such as future economic conditions,
changes
in consumer demand, legislative, regulatory and competitive developments
in
markets in which we and our subsidiaries operate, results of litigation and
other circumstances affecting anticipated revenues and costs. We expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based. Additional
factors that could cause such results to differ materially from those described
in the forward-looking statements are set forth in connection with the
forward-looking statements and in our “Risk Factors” incorporated by reference
in Part II, Item 1A of this report.
Businesses
As
used
in this Form 10-Q, “we,” “us” and “our” refer to Acacia Research Corporation and
its subsidiary companies.
Acacia
Research Corporation, a Delaware corporation, was originally incorporated
in
California in January 1993 and reincorporated in Delaware in December
1999.
The
following discussion is based primarily on our unaudited consolidated balance
sheet as of June 30, 2006, and on our unaudited consolidated statement of
operations for the period from January 1, 2006, to June 30, 2006. The discussion
compares the activities for the three and six months ended June 30, 2006,
to the
activities for the three and six months ended June 30, 2005. This information
should be read in conjunction with the accompanying unaudited consolidated
financial statements and notes thereto. This information should also be read
in
conjunction with the “Risk Factors” incorporated by reference in Part II, Item
1A of this report.
Acacia
Research Corporation is comprised of two operating groups, the CombiMatrix
group, our life sciences business, and the Acacia Technologies group, our
intellectual property licensing and enforcement business. Refer to Note 1
to the
Acacia Research Corporation consolidated financial statements included in
Part
I, Item 1 of this report, for a description of Acacia Research Corporation’s
operating groups.
Overview
CombiMatrix
Group
During
the three and six months ended June 30, 2006, the CombiMatrix group’s operating
activities included the recognition of $1.8 million and $3.0 million in
revenues, including $574,000 and $838,000 in government contract revenues,
and
$1.2 million and $2.2 million in CustomArraysTM
product,
equipment and service revenues, including $71,000 of array revenue from our
wholly owned diagnostics subsidiary, CombiMatrix Molecular Diagnostics, or
CMDX.
CustomArray product and service revenues increased 111% from the second quarter
of 2005 and 24% over the prior quarter, signaling continued growth of the
CombiMatrix group’s business and acceptance of its products and services in the
marketplace. Research and development expenses, excluding government contract
costs, increased due primarily to the impact of CMDX, which was formed and
began
research and development activities in the second quarter of 2005.
During
the second quarter of 2006, the CombiMatrix group made significant developments
in a number of its strategic business objectives including its commercial
array
technology platform, its partnership with the U.S. government and in the
area of
clinical diagnostics.
Regarding
its array platform, the CombiMatrix group executed two manufacturing and
distribution agreements, increasing its global network of distributors for
CustomArray products. The CombiMatrix group also launched its 90K CustomArray
and CustomArray Synthesizer, as well as its human 90K CatalogArray.
In
the
area of national defense, the CombiMatrix group received notification of
a new
$1.9 million award from the Army Research Office, expanding the CombiMatrix
group’s alliances with the US Department of Defense, or DoD.
In
the
area of clinical diagnostics, CMDX began shipment of its first diagnostic
microarray product, and recognized its initial revenues from providing molecular
diagnostic products and services using the CombiMatrix group’s microarray
technology. CMDX also added Dr. Stephen W. Scherer to its scientific advisory
board.
Acacia
Technologies Group
The
Acacia Technologies group’s operating activities for the three and six months
ended June
30,
2006,
were
principally focused on the continued development, licensing and enforcement
of
its patent portfolios, including the continued pursuit of multiple ongoing
technology licensing programs and the commencement of new technology licensing
programs. In addition, we continued our focus on business development, including
the acquisition of additional patent portfolios and the continued pursuit
of
opportunities to partner with patent owners and provide Acacia Technologies
group’s unique intellectual property licensing, development and enforcement
services.
Revenues
for the three and six months ended June 30, 2006 were $14.4 million and $19.1
million, respectively, representing increases of approximately 436% and 320%
over the respective comparable 2005 periods. Trailing twelve-month revenues
as
of June 30, 2006 were $34.1 million, compared to $22.4 million as of March
31,
2006, $19.6 million as of December 31, 2005, $7.6 million as of June 30,
2005
and $5.5 million as of March 31, 2005.
Revenues
for the six months ended June 30, 2006 included license fees from 48 new
licensing agreements covering 12 of our technology licensing programs, as
compared to 29 new licensing agreements covering 8 of our technology licensing
programs in the comparable 2005 periods. The Acacia Technologies group generated
licensing revenues from 5 new technology licensing programs during the six
months ended June 30, 2006, and to date, the Acacia Technologies group has
generated revenues from 18 of its technology licensing programs. License
fee
revenues for the three and six months ended June 30, 2006 included fees from
the
licensing of our DMT® technology, Audio/Video Enhancement and Synchronization
technology and Image Resolution technology, Interstitial Internet Advertising
technology, Laptop Connectivity technology, Multi-Dimensional Bar Code
technology, Resource Scheduling technology, Dynamic Manufacturing Modeling
technology, Product Activation technology, Enhanced Internet Navigation
technology, Interactive Data Sharing technology, and Credit Card Fraud
Protection technology.
Marketing,
general and administrative expenses increased during the three and six months
ended June 30, 2006, as compared to the same periods in 2005, due primarily
to
the hiring of additional patent licensing, business development and engineering
personnel since June 30, 2005, an increase in the Acacia Technologies group’s
patent-related research and consulting expenses related to new and ongoing
licensing programs, and an increase in corporate, general and administrative
costs related to the Acacia Technologies group’s ongoing operations. Inventor
royalty expenses and contingent legal fees expenses increased for the three
and
six months ended June 30, 2006, as compared to the three and six months ended
June 30, 2005, due to the increase in related license fee revenues recognized
during the 2006 periods.
During
the six months ended June 30, 2006, the Acacia Technologies group continued
to
execute its business strategy in the area of patent portfolio acquisitions,
including the acquisition of, or the acquisition of the rights to, the following
patent portfolios:
·
|
Video
Tracking Technology Patent. Acquired
rights to a patent relating to improving the performance and
user experience of video conferencing technologies. The patent
generally
relates to technology for automatically tracking and centering
the images
of videoconference participants. This technology allows webcams and
other digital cameras to automatically optimize and align a
videoconference participant’s image in each of the other conference
participants’ displays. The Video Tracking technology improves
desktop videoconferencing and video mail
performance.
|
|
|
·
|
Portable
Audio Device Patent.
Acquired a patent relating to portable audio recording and playback
devices from ESPRO Information Technologies, Ltd., www.espro.com,
a
provider of electronic audio guiding and interpretation systems.
The
patented technology relates to products such as certain MP3 players
and
cell phones using solid state memory that can download compressed
audio
and record analog audio.
|
|
|
·
|
Mobile
Communication Devices and Networks Patents.
Acquired
rights to patents relating to two-way mobile communication and
control
devices for data and voice communication networks. The patented
technology
generally relates to mobile communication devices that are capable
of
accessing and/or controlling other devices on a network to receive,
transmit, relay and/or process voice and data across the
network.
|
|
|
·
|
Software
License Management Patent. Acquired
rights to a patent relating to software license management technology.
The
patent generally relates to technology for monitoring and tracking
the use
of software applications across a network. This technology can be
used to provide a system for managing software license compliance
in an
enterprise environment as well as metering actual usage levels
in a
Software-as-a-Service (SaaS) environment.
|
|
|
·
|
Telematics
Technology Patents.
Acquired patents relating to the rapidly growing field of telematics.
Telematics refers to systems used in vehicles that combine wireless
communication with GPS tracking and can be used in vehicle navigation
systems and mobile fleet management. The patents generally relate
to
technology for displaying mobile vehicle information on a map.
This
technology can be used in navigation and fleet management systems
that
combine wireless communication with GPS tracking and map
displays.
|
|
|
·
|
File
Locking in Shared Storage Network Patent.
Acquired rights to a patent
relating to a file locking system for use in shared storage networks
such
as iSCSI. The use of the patented technology removes a single point
of
failure for companies migrating existing Storage Area Network (SAN)
implementations to iSCSI or for those creating new shared storage
networks.
|
|
|
·
|
Remote
Video Camera Patents.
Acquired patents relating to remote control of video cameras and
other
devices used in areas such as videoconferencing and surveillance
systems.
The uses of the patented technology include improved remote management
of
video camera functions such as pan, tilt, and focus, and improved
device
control in a networked videoconferencing system.
|
|
|
·
|
Audio
Communications Fraud Detection Patents.
Acquired rights to patents relating to the detection of fraud in
connection with paid communication services, such as audio communications.
The patented technology generally relates to a process for detecting,
reducing and preventing fraud in connection with payments for certain
communication services, including audio sessions delivered via
the
telephone, Internet, and other communication networks.
|
·
|
Micromirror
Digital Display Patents. Acquired
a patent portfolio relating to the use of micromirrors to create
a digital
image in televisions, monitors, and projectors. The patented technology
generally relates to techniques for using micromirrors to display
a color
image having gray scale gradations and is utilized in large screen
televisions and projectors.
|
2005
Acquisition. On
January 28, 2005, Acacia Global Acquisition Corporation, a wholly owned
subsidiary of Acacia Research Corporation, acquired substantially all of
the
assets of Global Patent Holdings, LLC, a privately held patent holding company
based in Northbrook, Illinois, which owned 11 patent licensing companies
(“GPH
Acquisition”). The acquisition provided the Acacia Technologies group 100%
ownership of companies that control 27 patent portfolios, which include 120
U.S.
patents and certain foreign counterparts, and cover technologies used in
a wide
variety of industries, as set forth below. The GPH Acquisition, and other
patent
acquisitions during 2005 and 2006, have expanded and diversified the Acacia
Technologies group’s revenue generating opportunities and furthered the
execution of the Acacia Technologies group’s business strategy of acquiring,
developing and licensing patented technologies.
Patent
Enforcement Litigation
Companies
comprising the Acacia Technologies group are often required to engage in
litigation to enforce their patents and patent rights. In the litigation
listed
below, certain companies comprising the Acacia Technologies group are parties
to
ongoing litigation alleging infringement of certain of our patented technologies
by the companies listed. Current patent enforcement litigation, by related
patented technology, is as follows:
Audio/Video
Enhancement and Synchronization Technology
Image
Resolution Enhancement Technology
·
|
IP
Innovation, LLC and Technology Licensing Corporation v. Lexmark
International, Inc. United States District Court for the Northern
District
of Illinois. Filed 10/23/02. Case No. 1:02-cv-07611.
|
·
|
IP
Innovation, LLC and Technology Licensing Corporation v. Dell Computer
Corporation. United States District Court for the Northern District
of
Illinois. Filed 5/15/03. Case No. 1:03-cv-03245.
|
·
|
New
Medium Technologies, LLC and AV Technologies, LLC v. Barco NV,
Miranda
Technologies, LG Philips LCD, Toshiba Corporation, and LG Electronics.
United States District Court for the Northern District of Illinois.
Filed
9/29/05. Case No. 1:05-cv-05620.
|
Broadcast
Data Retrieval Technology
·
|
Broadcast
Data Retrieval Corporation v. Sirius Satellite Radio, Inc. Transferred
to
United States District Court for the Southern District of New York
7/6/06.
Case No. 1:06-cv-05135.
|
Laptop
Connectivity Technology
·
|
Computer
Docking Station Corporation v. Dell, Inc., Gateway, Inc., Toshiba
America,
Inc., and Toshiba America Information Systems, Inc. United States
District
Court for the Western District of Wisconsin. Filed 1/17/06. Case
No.
06-cv-0032.
|
Computer
Memory Cache Coherency Technology
·
|
Computer
Cache Coherency Corporation v. VIA Technologies, Inc., Via Technologies,
Inc. (USA) and Intel Corporation. United States District Court
for the
Northern District of California. Filed 12/2/04. Case No. 5:05-cv-01668.
|
Credit
Card Fraud Protection Technology
·
|
Financial
Systems Innovation, LLC and Paul N. Ware v. Gap, Inc., Racetrac
Petroleum,
Inc. and The Kroger Company. United States District Court for the
Northern
District of Georgia. Filed 3/3/04. Case No.
4:04-cv-00065.
|
·
|
Financial
Systems Innovation, LLC and Paul N. Ware v. Williams-Sonoma, Inc.,
Linens
N Things, Inc. and Costco Wholesale Corporation. United States
District
Court for the Northern District of Texas. Filed 6/30/04. Case No.
4:04-cv-00479.
|
·
|
Financial
Systems Innovation, LLC and Paul N. Ware v. Circuit City Stores,
Inc.,
Officemax Incorporated, Staples, Inc., Cracker Barrel Old Country
Store,
Inc., Fry’s Electronics, Inc., and Rite Aid Corporation. United States
District Court for the Northern District of Georgia. Filed 7/19/05.
Case
No. 4:05-cv-00156.
|
·
|
Reinalt-Thomas
Corporation, dba Discount Tire Corporation, v. Acacia Research
Corporation, Paul N. Ware and Financial Systems Innovation, LLC.
United
States District Court for the District of Arizona. Filed 10/27/05.
Case
No. 2:05-cv-03459.
|
·
|
Financial
Systems Innovation, LLC and Paul Ware v. Discount Tire Company
of Georgia,
Inc. and Reinalt-Thomas Corporation, dba Discount Tire Company.
United
States District Court for the Northern District of Georgia. Filed
11/21/05. Case No. 4:05-cv-00252.
|
·
|
Lone
Star Steakhouse and Saloon, Inc. v. Acacia Technologies group and
Financial Systems Innovation, LLC. United States District Court
for the
District of Kansas. Filed 8/5/05. Case No.
6:05-cv-01249.
|
Computing
Device Performance Technology
·
|
Computer
Acceleration Corporation vs. Microsoft Corporation. United States
District
Court for the Eastern District of Texas. Filed 7/6/06. Case No.
9:06-cv-0140.
|
Data
Encryption and Product Activation Technology
·
|
Data
Encryption Corporation v. Microsoft Corporation and Dell Computer
Corporation. United States District Court for the Central District
of
California. Filed 7/29/05. Case No.
2:05-cv-05531.
|
Digital
Media Transmission Technology
·
|
In
accordance with the Transfer Order issued February 24, 2005, by
the
Judicial Panel on Multidistrict Litigation, all of the following
Digital
Media Transmission Technology cases have been transferred to the
Northern
District of California. The lead case number is
5:05-cv-01114.
|
·
|
Acacia
Media Technologies Corporation v. Comcast Cable Communications,
LLC,
Charter Communications, Inc., The DirectTV Group, Inc., Echostar
Communications Corporation, Cox Communications, Inc., Hospitality
Network,
Inc. (a wholly owned subsidiary of Cox that supplies hotel on-demand
TV
services), Mediacom, LLC, Armstrong Group, Arvig Communication
Systems,
Block Communications, Inc., Cable America Corporation, Cable One,
Inc.,
Cannon Valley Communications, Inc., East Cleveland Cable TV and
Communications, LLC, Loretel Cablevision, Massillon Cable TV, Inc.,
Mid-Continent Media, Inc., NPG Cable, Inc., Savage Communications,
Inc.,
Sjoberg's Cablevision, Inc., US Cable Holdings LP, and Wide Open
West,
LLC, Time Warner Cable, Cablevision Systems Corporation, Insight
Communications Company, Cebridge Communications and Bresnan
Communications.
|
·
|
Acacia
Media Technologies Corporation v. New Destiny Internet Group, Inc.,
Audio
Communications Inc., VS Media Inc., Ademia Multimedia, LLC, International
Web Innovations, Inc., Offendale Commercial BV, Ltd., Adult Entertainment
Broadcast Network, Cybertrend, Inc., Lightspeed Media Corporation,
Adult
Revenue Services, Innovative Ideas International, AskCS.com, Game
Link,
Inc., Club Jenna, Inc., Cybernet Ventures, Inc., ACMP, LLC, Global
AVS,
Inc. d/b/a DrewNet, and National A-1 Advertising.
|
Interactive
Television Technology
·
|
Broadcast
Innovation, LLC and IO Research, Ltd. v. Charter Communications,
Inc.
United States District Court for the District of Colorado. Case
No.
1:03-cv-02223. On appeal to the U.S. Court of Appeals for the Federal
Court from 9/28/04 to 11/21/05. Remanded to the U. S. District
Court for
further proceedings on 11/21/05.
|
·
|
Broadcast
Innovation, LLC v. Echostar Communications Corporation. United
States
District Court for the District of Colorado. Filed 11/9/01. Case
No.
1:01-cv-02201.
|
Interstitial
Internet Advertising Technology
·
|
InternetAd
Systems, LLC v. Aerovias de Mexico, S.A. de C.V. United States
District
Court for the Northern District of Texas. Filed 10/5/05. Case No.
3:05-cv-01969.
|
·
|
InternetAd
Systems, LLC v. Turner Broadcasting System, Inc., Freerealtime.com,
Inc.,
Knight Ridder Digital, Homestore, Inc., and Condenet, Inc. United
States
District Court for the North District of Texas. Filed 6/15/06.
Case No.
3:06-cv-01063.
|
·
|
InternetAd
Systems, LLC v. Opodo Limited, Amadeus Global Travel Distribution
S.A.,
Amadeus North America, LLC, Opentable, Inc. and Best Western
International, Inc. United States District Court for the North
District of
Texas. Filed 6/19/06. Case No. 3:06-cv-01084.
|
Microprocessor
Enhancement Technology
·
|
Microprocessor
Enhancement Corporation and Michael H. Branigin v. Texas Instruments,
Incorporated. United States District Court for the Central District
of
California. Filed 4/7/05. Case No. 8:05-cv-00323.
|
·
|
Microprocessor
Enhancement Corporation and Michael H. Branigin v. Intel Corporation.
United States District Court for the Central District of California.
Filed
8/3/05. Case No. 2:05-cv-05667.
|
Multi-Dimensional
Bar Code Technology
·
|
Cognex
Corporation v. VCode Holdings, Inc., VData LLC, Acacia Research
Corporation, TechSearch, LLC and Veritec Inc. United States District
Court
for the District of Minnesota. Filed 3/13/06. Case No.
0:06-cv-01040.
|
Resource
Scheduling Technology
·
|
Epic
Systems Corporation v. Acacia Research Corporation and Resource
Scheduling
Corporation. United States District Court for the District of Delaware.
Filed 4/19/06. Case No. 1:06-cv-00255.
|
Spreadsheet
Automation Technology
·
|
Spreadsheet
Automation Corporation v. Microsoft Corporation. United States
District
Court for the Eastern District of Texas. Filed 3/28/05. Case No.
2:05-cv-00127.
|
Critical
Accounting Estimates
Our
unaudited interim financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
Preparation of these statements requires management to make judgments and
estimates. Some accounting policies have a significant impact on amounts
reported in these financial statements. A summary of significant accounting
policies and a description of accounting policies that are considered critical
may be found in our 2005 Annual Report on Form 10-K, filed on March 16, 2006,
in
the Notes to the Consolidated Financial Statements and the Critical Accounting
Estimates section. In addition, refer to Note 2 to the consolidated interim
financial statements included in Part I, Item 1 of this report.
Stock-based
Compensation Expense
Effective
January 1, 2006, Acacia Research Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”
(“SFAS No. 123R”), which is a revision of SFAS No. 123, “Accounting for
Stock-Based Compensation.” SFAS No. 123R supersedes Accounting Principles Board
(“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and amends
SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123R sets forth the accounting
requirements for “share-based” compensation payments to employees and
non-employee directors and requires all share based-payments to be recognized
as
expense in the statement of operations. In March 2005, the SEC published
Staff
Accounting Bulletin No. 107 (“SAB 107”), which requires stock-based compensation
to be classified in the same expense line items as cash compensation (i.e.
marketing, general and administrative and research and development expenses).
The compensation cost for all stock-based awards is measured at the grant
date,
based on the fair value of the award (determined using a Black-Scholes option
pricing model), and is recognized as an expense over the employee’s requisite
service period (generally the vesting period of the equity award). Determining
the fair value of stock-based awards at the grant date requires significant
estimates and judgments, including estimating the market price volatility
of our
classes of common stock and employee stock option exercise behavior.
SFAS
No.
123R also requires stock-based compensation expense to be recorded only for
those awards expected to vest using an estimated pre-vesting forfeiture rate.
As
such, SFAS No. 123R requires Acacia Research Corporation to estimate pre-vesting
option forfeitures at the time of grant and reflect the impact of estimated
pre-vesting option forfeitures on compensation expense recognized. Estimates
of
pre-vesting forfeitures must be periodically revised in subsequent periods
if
actual forfeitures differ from those estimates. We consider several factors
in
connection with our estimate of pre-vesting forfeitures including types of
awards, employee class, and historical pre-vesting forfeiture data. The
estimation of stock awards that will ultimately vest requires judgment, and
to
the extent that actual results differ from our estimates, such amounts will
be
recorded as cumulative adjustments in the period the estimates are revised.
If
actual
results differ significantly from these estimates, stock-based compensation
expense and our results of operations could be materially impacted.
Refer
to
Notes 2 and 9 to the Acacia Research Corporation consolidated financial
statements included in Part I, Item 1 of this report for more
information.
Acacia
Research Corporation Consolidated
Comparison
of the Results
of Operations for the Three and Six
Months Ended June 30, 2006 and 2005
Net
Loss (In thousands)
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
June
30, 2006
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,343
|
)
|
$
|
(5,417
|
)
|
$
|
(12,441
|
)
|
$
|
(10,367
|
)
|
The
changes in net loss were primarily due to operating results and activities
as
discussed below.
Revenues
and Cost of Revenues (In thousands)
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
June
30, 2006
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$
|
14,371
|
|
$
|
2,682
|
|
$
|
19,088
|
|
$
|
4,545
|
|
Government
contract
|
|
|
574
|
|
|
1,281
|
|
|
838
|
|
|
2,012
|
|
Cost
of government contract revenues
|
|
|
(542
|
)
|
|
(1,209
|
)
|
|
(792
|
)
|
|
(1,900
|
)
|
Products
|
|
|
1,158
|
|
|
567
|
|
|
2,082
|
|
|
845
|
|
Cost
of product sales
|
|
|
(340
|
)
|
|
(190
|
)
|
|
(561
|
)
|
|
(353
|
)
|
Service
contracts
|
|
|
60
|
|
|
9
|
|
|
117
|
|
|
69
|
|
License
Fees. Revenues
for the three months ended June 30, 2006 included license fees from 27 new
licensing agreements covering 9 of our technology licensing programs, as
compared to 15 new licensing agreements covering 7 of our technology licensing
programs in the comparable 2005 period. Revenues for the six months ended
June
30, 2006 included license fees from 48 new licensing agreements covering
12 of
our technology licensing programs, as compared to 29 new licensing agreements
covering 8 of our technology licensing programs in the comparable 2005 period.
License
fee revenues recognized by the Acacia Technologies group fluctuate from period
to period primarily based on the following factors:
·
|
the
dollar amount of agreements executed each period, which is primarily
driven by the nature and characteristics of the technology being
licensed
and the magnitude of infringement associated with a specific
licensee;
|
·
|
the
specific terms and conditions of agreements executed each period
and the
periods of infringement contemplated by the respective
payments;
|
·
|
fluctuations
in the total number of agreements executed;
|
·
|
fluctuations
in the sales results or other royalty per unit activities of our
licensees
that impact the calculation of license fees due;
|
·
|
the
timing of the receipt of periodic license fee payments and/or reports
from
licensees; and
|
·
|
fluctuations
in the net number of active licensees period to
period.
|
Costs
incurred in connection with the Acacia Technologies group’s ongoing licensing
activities, other than inventor royalties expense and contingent legal fees
expense, are included in marketing, general and administrative
expenses.
Government
Contract and Cost of Government Contract Revenues.
The
decrease was due to the completion, in December 2005, of the CombiMatrix
group’s
commitments under its previous two-year, $5.9 million research and development
contract with the DoD to further the development of the CombiMatrix group’s
array technology for the detection of biological threat agents. In February
2006, the CombiMatrix group executed a new one-year, $2.1 million contract
with
the DoD to further the development of its biological and chemical detector
system. Government contract revenues and contract costs were lower during
the
three and six months ended June 30, 2006, as compared to the three and six
months ended June 30, 2005, due to the commencement of work under the new
$2.1
million contract in February 2006, as compared to six full months of activity
under the previous $5.9 million contract during the prior year.
Under
the
terms of its DoD contracts, the CombiMatrix group is reimbursed on a periodic
basis for actual costs incurred to perform its obligations, plus a fixed
fee.
Revenues are recognized under the percentage-of-completion method of accounting,
using the cost-to-cost approach to measure completeness at the end of each
reporting period. Cost of government contract revenues reflect research and
development expenses incurred in connection with the CombiMatrix group’s
commitments under its current contract with the DoD, which was approximately
38%
complete as of June 30, 2006. The CombiMatrix group expects to incur
approximately $991,000 in research and development costs for the remainder
of
2006, to complete its obligations to the DoD under the new $2.1 million
contract.
Product
Revenues and Cost of Product Sales. Product
revenues and costs of product sales relate to domestic and international
sales
of the CombiMatrix group’s array products. Product revenues include the sale of
DNA synthesizer instruments and CustomArray 12K DNA expression arrays and
related hardware including array revenue from our diagnostics subsidiary,
CMDX,
during the three months ended June 30, 2006, compared to only 12K DNA expression
arrays during the comparable quarter in 2005. The overall increase in product
revenues was due primarily to the increased product offerings currently
available to the CombiMatrix group’s customers, which includes 12K and 4X2K
arrays, DNA synthesizer instruments and related hardware, as compared to
only
the 902 and 12K expression arrays in the comparable 2005 quarters. The
increase in gross margins was due primarily to the impact of the mix of product
sales during the periods presented. Revenues for the three and six months
ended
June 30, 2006 included a higher percentage of product revenues from the sale
of
DNA synthesizer instruments, which generally have a higher gross margin than
the
expression array products.
Operating
Expenses (In thousands)
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
June
30, 2006
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses (including non-cash stock compensation
expense of
$193 and $486 for the three and six months ended June 30,
2006)
|
|
$
|
2,182
|
|
$
|
1,415
|
|
$
|
4,561
|
|
$
|
2,555
|
|
Research
and Development Expenses. During
the three and six months ended June 30, 2006 and 2005, the CombiMatrix group
continued internal research and development efforts to improve and expand
the
CombiMatrix group’s technology and product offerings. The increase in internal
research and development expenses was due primarily to the impact of the
CombiMatrix group’s wholly owned subsidiary, CMDX, which was formed and began
research and development activities in the second quarter of 2005. The increase
also reflects $193,000 and $486,000 for the three and six months ended June
30,
2006 in non-cash stock compensation charges recorded in connection with the
adoption of SFAS
No.
123R, effective January 1, 2006, as described above under “Critical
Accounting Estimates.”
Future
research and development expenses will continue to be incurred in connection
with the CombiMatrix group’s ongoing
internal research and development efforts in the areas of genomics, diagnostics,
drug discovery and development. The CombiMatrix group expects its research
and
development expenses to continue to fluctuate and such expenses could increase
in future periods as additional internal research and development programs
are
undertaken and/or as new research and development collaborations are executed
with strategic partners.
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
June
30, 2006
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense of $1,169 and $2,619 for the three and six months ended
June 30,
2006 and $15 and ($111) for the three and six months ended
June 30,
2005)
|
|
$
|
6,670
|
|
$
|
4,276
|
|
$
|
14,169
|
|
$
|
8,039
|
|
Legal
expenses - patents
|
|
|
685
|
|
|
536
|
|
|
1,051
|
|
|
1,097
|
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
7,847
|
|
|
1,120
|
|
|
10,118
|
|
|
1,767
|
|
Amortization
of patents
|
|
|
1,600
|
|
|
1,610
|
|
|
3,217
|
|
|
2,800
|
|
Write-off
of patent-related intangible asset
|
|
|
297
|
|
|
-
|
|
|
297
|
|
|
-
|
|
Loss
from equity investment
|
|
|
294
|
|
|
63
|
|
|
533
|
|
|
102
|
|
Marketing,
General and Administrative Expenses. The
increase primarily reflects Acacia Research Corporation’s adoption of SFAS No.
123R, effective January 1, 2006, which requires public companies to measure
all
employee stock-based compensation awards using a fair-value method and record
such expense in their consolidated financial statements, as described under
“Critical Accounting Estimates.” Non-cash stock compensation charges included in
marketing, general and administrative expense for the three and six months
ended
June 30, 2006 totaled $1,169,000 and $2,619,000, respectively, as compared
to
$15,000 and a credit of $111,000 for the three and six months ended June
30,
2005, respectively.
Excluding
the impact of the adoption of SFAS No. 123(R), the
increase in marketing, general and administrative expenses was due primarily
to
the addition of licensing, business development and engineering personnel
for
the Acacia Technologies group, an increase in the Acacia Technologies group’s
patent-related research and consulting expenses for new and ongoing licensing
programs, and an increase in corporate, general and administrative costs
related
to the Acacia Technologies group’s ongoing operations. The change also reflects
an increase in general and administrative expenses incurred by the CombiMatrix
group in connection with the ongoing operations of CMDX and an increase in
other
general and administrative expenses related to ongoing operations.
A
summary
of the main drivers of the change in marketing, general and administrative
expenses for the periods presented is as follows (in thousands):
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
|
2006
vs. 2005
|
|
2006
vs. 2005
|
|
CombiMatrix
group:
|
|
|
|
|
|
|
|
Decrease
in marketing and sales expenses
|
|
$
|
(360
|
)
|
$
|
(523
|
)
|
Increase
in general and administrative expenses related to CMDX
|
|
|
477
|
|
|
1,338
|
|
Increase
in legal, accounting and other professional fees
|
|
|
344
|
|
|
923
|
|
Decrease
in other general and administrative expenses
|
|
|
(14
|
)
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
Acacia
Technologies group:
|
|
|
|
|
|
|
|
Increase
in personnel expenses
|
|
$
|
237
|
|
$
|
680
|
|
Increase
in patent-related research and consulting expenses
|
|
|
422
|
|
|
540
|
|
Increase
in legal, accounting and other professional fees
|
|
|
22
|
|
|
257
|
|
Increase
in other general and administrative expenses
|
|
|
112
|
|
|
195
|
|
Legal
Expense - Patents (Acacia Technologies group only).
Patent-related legal expenses include patent-related prosecution and enforcement
costs incurred by outside patent attorneys engaged on an hourly basis and
the
out-of-pocket expenses incurred by law firms engaged on a contingent fee
basis.
Patent-related legal expenses fluctuate from period to period based on patent
enforcement and prosecution activity associated with ongoing licensing and
enforcement programs and the timing of the commencement of new licensing
and
enforcement programs in each period. Refer to “Patent Enforcement Litigation”
above. We expect patent-related legal expenses to continue to fluctuate based
on
the factors summarized above in connection with the Acacia Technologies group’s
ongoing patent commercialization and enforcement programs.
Inventor
Royalties and Contingent Legal Fees Expense.
During
the three and six months ended June 30, 2006, the Acacia Technologies group
incurred inventor royalty expenses of $4.0 million and $5.3 million,
respectively, as compared to $528,000 and $810,000 for the three and six
months
ended June 30, 2005. Contingent legal fees expenses incurred during the three
and six months ended June 30, 2006 were $3.8 million and $4.8 million,
respectively, as compared to $592,000 and $1.0 million during the three and
six
months ended June 30, 2005. The majority of patent and patent rights agreements
associated with patent portfolios acquired are subject to agreements with
inventors that contain provisions granting to the original patent owners
the
right to receive inventor royalties based on future net revenues, as defined
in
the respective agreements and are also subject to contingent legal fee
arrangements with outside attorneys engaged on a contingent fee basis. As
such,
inventor royalties and contingent legal fees expenses in future periods will
continue to fluctuate in accordance with the timing and amount of related
revenues recognized by the Acacia Technologies group from these patent
portfolios.
Amortization
of Patents.
The
increase was due
primarily to six full months of patent amortization expense resulting from
the
January 28, 2005 GPH Acquisition for the six months ended June 30, 2006,
as
compared to five months of amortization in comparable 2005 period. In addition,
amortization expense includes additional charges related to certain of the
patent portfolios acquired by the Acacia Technologies group subsequent to
June
30, 2005. Patent amortization charges will continue to be significant in
future
periods as the Acacia Technologies group continues to amortize acquired patent
related costs over a weighted average remaining economic useful life of
approximately 5 years.
Write-off
of Patent-related Intangible Asset.
During
the three months ended June 30, 2006, the Acacia Technologies group recorded
a
non-cash impairment charge of $297,000, related to the write-off of a
patent-related intangible asset. During the second quarter of 2006,
pursuant
to the terms of the respective license agreement, management elected to
terminate its rights to exclusively license and enforce the patent, resulting
in
the write-off of the remaining carrying value of the patent-related intangible
asset as of June 30, 2006.
Loss
from Equity Investment. As
of
June 30, 2006 and 2005, the CombiMatrix group owned 29% and 9.6%, respectively,
of Leuchemix Inc., or Leuchemix, a private drug development firm, which is
developing several compounds for the treatment of leukemia and other cancers.
The CombiMatrix group’s equity in the losses of Leuchemix increased due to the
CombiMatrix group’s increased ownership in Leuchemix as well as an increase in
expenses incurred by Leuchemix. The CombiMatrix group is under a contractual
commitment to increase ownership to approximately 33% during 2006 and as
a
result, equity in loss of Leuchemix is expected to increase in future
periods.
Other
Warrant
Gains (Charges).
In
accordance with SFAS No. 150, “Accounting for Certain Instruments with
Characteristics of Both Liabilities and Equity,” or SFAS No. 150, and related
interpretations, certain AR-CombiMatrix stock purchase warrants outstanding
at
June
30,
2006 have
been
classified as a long-term liability due to certain redemption provisions
associated with the underlying AR-CombiMatrix stock. Changes in the fair
value
of the stock purchase warrant liability are reflected in the statement of
operations. Refer to Note 8 to the Acacia Research Corporation consolidated
financial statements in Part I, Item 1 of this report.
Loss
on Sale of Investment. In
January 2006, the CombiMatrix group expanded its relationship with one of
its
existing distributors, InBio, for the Asia Pacific region. Major components
of
the expanded relationship included the transfer of day-to-day operational
responsibility and majority ownership of CombiMatrix K.K. to InBio, along
with
an expanded distribution agreement that encompasses Japan. InBio obtained
67% of
the voting interests in CombiMatrix K.K. for a nominal amount of consideration.
As a result, InBio assumed all operational and financial responsibilities
of
CombiMatrix K.K. The net loss on the sale of 67% of the voting interest in
CombiMatrix K.K. was $84,000. Subsequent to the sale, the CombiMatrix group’s
investment in CombiMatrix K.K. was accounted for under the equity method.
The
deconsolidation
of CombiMatrix K.K. did not have a material impact on the consolidated or
CombiMatrix group balance sheets as of June
30,
2006.
The
impact on the statement of operations resulting from the transition to the
equity method of accounting for the CombiMatrix group's investment in
CombiMatrix K.K. was not material during the periods presented.
Estimated
Loss on Discontinued Operations.
Results
for the six months ended June 30, 2005, include a $210,000 charge, net of
minority interests, related to estimated additional costs to be incurred
in
connection with the discontinued operations of Soundbreak.com (originally
ceased
operations in February 2001), related primarily to certain noncancellable
lease
obligations and a reduction in estimated amounts recoverable from existing
sublease arrangements. The related lease obligations expired in August
2005.
Inflation
Inflation
has not had a significant impact on Acacia Research Corporation.
Liquidity
and Capital Resources
Acacia
Research Corporation’s consolidated cash and cash equivalents and short-term
investments totaled $50.7 million at June
30,
2006,
compared to $59.2 million at December 31, 2005. Working capital at
June
30,
2006,
was
$50.5 million, compared to $58.1 million at December 31, 2005. The
change in working capital was due primarily to the impact of net cash flow
activities as discussed below.
The
net
increase (decrease) in cash and cash equivalents for the six months ended
June
30,
2006, and 2005 was comprised of the following (in thousands):
|
|
For
the Six Months Ended June 30, 2006
|
|
For
the Six Months Ended June 30, 2005
|
|
|
|
Acacia
|
|
|
|
|
|
Acacia
|
|
|
|
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
|
|
Group
|
|
Group
|
|
Consolidated
|
|
Group
|
|
Group
|
|
Consolidated
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities (including discontinued operations of $222 in 2006
and ($433)
in 2005)
|
|
$
|
2,939
|
|
$
|
(8,102
|
)
|
$
|
(5,163
|
)
|
$
|
(2,762
|
)
|
$
|
(6,962
|
)
|
$
|
(9,724
|
)
|
Investing
activities (including discontinued operations of ($353) in
2006)
|
|
|
(1,564
|
)
|
|
3,280
|
|
|
1,716
|
|
|
(20,397
|
)
|
|
11,127
|
|
|
(9,270
|
)
|
Financing
activities
|
|
|
242
|
|
|
86
|
|
|
328
|
|
|
19,479
|
|
|
327
|
|
|
19,806
|
|
Effect
of exchange rate on cash
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
21
|
|
|
21
|
|
Increase
(decrease) in cash and cash equivalents
|
|
$
|
1,617
|
|
$
|
(4,736
|
)
|
$
|
(3,119
|
)
|
$
|
(3,680
|
)
|
$
|
4,513
|
|
$
|
833
|
|
Cash
receipts from customers for the CombiMatrix group for the six months ended
June
30,
2006, were $2.8 million, comprised of $1.6 million from the sale of array
products and services and $1.2 million in payments received from the DoD.
Cash
receipts in the comparable 2005 period totaled $1.8 million, comprised of
$1.3
million in biological threat detection contract payments received from the
Department of Defense and $498,000 from the sale of array products and related
services. Cash outflows from operations for the CombiMatrix group for the
six
months ended June 30, 2006, increased to $10.9 million, as compared to $8.8
million in the comparable 2005 period, due primarily to an increase in research
and development, marketing, general and administrative expenses related to
CMDX
as described above, and the impact of the timing of vendor payments and related
accruals.
Cash
receipts from licensees for the Acacia Technologies group for the six months
ended June 30, 2006, increased to $19.6 million from $4.3 million in the
comparable 2005 period. Cash outflows from operations for the Acacia
Technologies group for the six months ended June 30, 2006, increased to $16.7
million from $7.1 million in the comparable 2005 period, due
to
increases in inventor royalties expenses and contingent legal fees expenses,
personnel expenses, corporate, general and administrative expenses,
patent-related research and consulting expenses, as described above, and
the
impact of the timing of payments and related accruals.
The
change in net cash flows used in investing activities was due to net purchases
and sales of available-for-sale investments by the Acacia Technologies group
and
the CombiMatrix group, respectively, in connection with ongoing short-term
cash
management activities. Net cash outflows from investing activities for the
six
months ended June 30, 2006 also included Acacia Technologies group patent
related acquisitions costs totaling $1.0 million and the CombiMatrix group’s
additional contractual investment in Leuchemix totaling $1.4 million. Net
cash
outflows from investing activities for the six months ended June 30, 2005
included the cash consideration and related acquisition and registration
costs
paid by the Acacia Technologies group in connection with the GPH Acquisition
and
the CombiMatrix group’s additional contractual investment in Leuchemix of
$600,000. Fixed asset purchases for the six months ended June 30, 2006 and
2005,
primarily related to the CombiMatrix group were $479,000 and $512,000,
respectively. In addition, in April 2006, a final distribution to
Soundbreak.com’s minority shareholders was paid totaling $353,000.
Net
cash
flows provided by financing activities during the six months ended June
30,
2006 included proceeds from the exercise of AR-Acacia Technologies stock
options
of $335,000. Net
cash
flows provided by financing activities during the six months ended June 30,
2005
included
net proceeds of approximately $19.5 million from the sale of 3.5 million
shares
of AR-Acacia Technologies stock in a registered direct offering.
On
June
14, 2006, Acacia Research Corporation entered into a Standby Equity Distribution
Agreement (the “SEDA”) with Cornell Capital Partners, LP (“Cornell”), providing
up to $50 million of equity financing from Cornell through the sale of
AR-CombiMatrix common stock through June 2008. As of June 30, 2006,
$49,450,000, or up to 12,681,174 shares of AR-CombiMatrix common stock are
available under the SEDA. For more information on the terms of this agreement,
please see Note 6 of our Consolidated Financial Statements in this report
and
our Form 8-K filed with the Commission on June 15, 2006 and our Form 8-K
filed
with the Commission on June 22, 2006, incorporated herein by reference.
Management
believes that our cash and cash equivalent balances, anticipated cash flow
from
operations, and other external sources of available credit, will be sufficient
to meet our cash requirements through at least September 30, 2007. We may
however encounter unforeseen difficulties that may deplete our capital resources
more rapidly than anticipated, including those set forth in our Risk Factors
on
pages 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 and 15 of our shelf registration
statement on Form S-3 filed with the SEC on April 25, 2006, included as Exhibit
99.1 of our Quarterly Report for the three months ended March 31, 2006, and
incorporated by reference herein. Any efforts to seek additional funding
could
be made through equity, debt or other external financing and there can be
no
assurance that additional funding will be available on favorable terms, if
at
all. If we fail to obtain additional funding when needed, we may not be able
to
execute our business plans and our business may suffer.
Off-Balance
Sheet Arrangements
We
have
not entered into off-balance sheet financing arrangements, other than operating
leases. We have no significant commitments for capital expenditures in 2006.
Other than as set forth below, we have no committed lines of credit or other
committed funding or long-term debt. The following table lists our material
known future cash commitments as of June
30,
2006:
|
|
Payments
Due by Period (in thousands)
|
|
Contractual
Obligations
|
|
Remaining
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
and Thereafter
|
|
Operating
leases
|
|
$
|
1,165
|
|
$
|
2,489
|
|
$
|
2,180
|
|
$
|
588
|
|
$
|
1,355
|
|
Minimum
royalty payments(1)
|
|
|
50
|
|
|
100
|
|
|
100
|
|
|
100
|
|
|
875
|
|
Leuchemix
equity purchases(2)
|
|
|
750
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Consulting
contract(3)
|
|
|
537
|
|
|
99
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
contractual cash obligations
|
|
$
|
2,502
|
|
$
|
2,688
|
|
$
|
2,280
|
|
$
|
688
|
|
$
|
2,230
|
|
____________________________________
(1)
|
Refer
to Note 10 to the Acacia Research Corporation consolidated financial
statements for a description of the September 30, 2002 settlement
agreement between CombiMatrix Corporation and Dr. Donald Montgomery
and
Nanogen.
|
(2)
|
Refer
to Note 10 to the Acacia Research Corporation consolidated financial
statements included in Part I, Item 1 of this report for additional
information regarding the October 2004 Leuchemix
transaction.
|
(3)
|
Reflects
January 2005 $2.0 million consulting contract commitment, including
reimbursable expenses, to be paid over two years in connection
with the
Acacia Technologies group’s GPH Acquisition, as described
above.
|
In
connection with the acquisition of certain patents and patent rights, certain
companies included in the Acacia Technologies group executed related agreements
which grant to the former owners of the respective patents or patent rights,
the
right to receive royalties based on future net license fee revenues (as defined
in the respective agreements) generated by the Acacia Technologies group
as a
result of licensing the respective patents or patent portfolios. Royalties
paid
pursuant to the agreements are expensed in the consolidated statement of
operations in the period that the related license fee revenues are
recognized.
Recent
Accounting Pronouncements
Refer
to
Note 5 to the Acacia Research Corporation consolidated financial statements
included in Part I, Item 1 of this report.
Quantitative
and Qualitative Disclosures About Market Risk
Our
exposure to market risk is limited primarily to interest income sensitivity,
which is affected by changes in the general level of United States interest
rates, particularly because a significant portion of our investments are
in
short-term debt securities issued by the U.S. government, U.S. corporations,
institutional money market funds and other money market instruments. The
primary
objective of our investment activities is to preserve principal while at
the
same time maximizing the income received without significantly increasing
risk.
To minimize risk, we maintain a portfolio of cash, cash equivalents and
short-term investments in a variety of investment-grade securities and with
a
variety of issuers, including corporate notes, commercial paper and money
market
instruments. Due to the nature of our short-term investments, we believe
that we
are not subject to any material market risk exposure. We do not have any
derivative financial instruments.
DISCUSSION
OF SEGMENTS’ OPERATIONS, FINANCIAL RESOURCES AND LIQUIDITY
COMBIMATRIX
GROUP MANAGEMENT’S DISCUSSION AND ANALYSIS
(A
Division of Acacia Research Corporation)
You
should read this discussion in conjunction with the CombiMatrix group financial
statements and related notes and the Acacia Research Corporation consolidated
financial statements and related notes, both included in Part I, Item 1 of
this
report. Historical results and percentage relationships are not necessarily
indicative of operating results for any future periods.
General
See
Item
2. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Overview,” for a general overview of the CombiMatrix group’s
business.
Although
AR-CombiMatrix
stock is intended to reflect the separate performance of the CombiMatrix
group,
rather than the performance of Acacia Research Corporation as a whole, the
CombiMatrix group is not a separate legal entity. Holders of AR-CombiMatrix
stock are stockholders of Acacia Research Corporation. As a result, they
continue to be subject to all of the risks of an investment in Acacia Research
Corporation and all of its businesses, assets and liabilities. The assets
Acacia
Research Corporation attributes to the CombiMatrix group could be subject
to the
liabilities of the Acacia Technologies group. Refer to Note 1
to our
consolidated financial statements included in
Part
I, Item 1 of this report for
details regarding our separate group presentation and our classes of common
stock.
CombiMatrix
Group
(A
Division of Acacia Research Corporation)
Comparison
of the Results
of Operations for the Three
and Six Months Ended June 30, 2006 and 2005
Division
Net Loss (In thousands)
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
June
30, 2006
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Division
net loss
|
|
$
|
(3,442
|
)
|
$
|
(3,657
|
)
|
$
|
(11,131
|
)
|
$
|
(6,733
|
)
|
The
changes in net loss were primarily due to operating results and activities
as
discussed below.
Revenues
and Cost of Revenues (In thousands)
|
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
|
June
30, 2006
|
|
|
June
30, 2005
|
|
|
June
30, 2006
|
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
contract
|
|
$
|
574
|
|
$
|
1,281
|
|
$
|
838
|
|
$
|
2,012
|
|
Cost
of government contract revenues
|
|
|
542
|
|
|
1,209
|
|
|
792
|
|
|
1,900
|
|
Products
|
|
|
1,158
|
|
|
567
|
|
|
2,082
|
|
|
845
|
|
Cost
of product sales
|
|
|
340
|
|
|
190
|
|
|
561
|
|
|
353
|
|
Service
contracts
|
|
|
60
|
|
|
9
|
|
|
117
|
|
|
69
|
|
Government
Contract and Cost of Government Contract Revenues.
The
decrease was due to the completion, in December 2005, of the CombiMatrix
group’s
commitments under its previous two-year, $5.9 million research and development
contract with the DoD to further the development of the CombiMatrix group’s
array technology for the detection of biological threat agents. In February
2006, the CombiMatrix group executed a new one-year, $2.1 million contract
with
the DoD to further the development of its biological and chemical detector
system. Government contract revenues and contract costs were lower during
the
three and six months ended June 30, 2006, as compared to the three and six
months ended June 30, 2005, due to the commencement of work under the new
$2.1
million contract in February 2006, as compared to six full months of activity
under the previous $5.9 million contract during the prior year.
Under
the
terms of its DoD contracts, the CombiMatrix group is reimbursed on a periodic
basis for actual costs incurred to perform its obligations, plus a fixed
fee.
Revenues are recognized under the percentage-of-completion method of accounting,
using the cost-to-cost approach to measure completeness at the end of each
reporting period. Cost of government contract revenues reflect research and
development expenses incurred in connection with the CombiMatrix group’s
commitments under its current contract with the DoD, which was approximately
38%
complete as of June 30, 2006. The CombiMatrix group expects to incur
approximately $991,000 in research and development costs for the remainder
of
2006, to complete its obligations to the DoD under the new $2.1 million
contract.
Product
Revenues and Cost of Product Sales. Product
revenues and costs of product sales relate to domestic and international
sales
of the CombiMatrix group’s array products. Product revenues include the sale of
DNA synthesizer instruments and CustomArray 12K DNA expression arrays and
related hardware including array revenue from our diagnostics subsidiary,
CMDX,
during the three months ended June 30, 2006, compared to only 12K DNA expression
arrays during the comparable quarter in 2005. The overall increase in product
revenues was due primarily to the increased product offerings currently
available to the CombiMatrix group’s customers, which includes 12K and 4X2K
arrays, DNA synthesizer instruments and related hardware, as compared to
only
the 902 and 12K expression arrays in the comparable 2005 quarters. The increase
in gross margins was due primarily to the impact of the mix of product sales
during the periods presented. Revenues for the three and six months ended
June
30, 2006 included a higher percentage of product revenues from the sale of
DNA
synthesizer instruments, which generally have a higher gross margin than
the
expression array products.
Operating
Expenses (In
thousands)
|
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
|
June
30, 2006
|
|
|
June
30, 2005
|
|
|
June
30, 2006
|
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses (including non-cash stock compensation
expense of
$193 and $486 for the three and six months ended June 30,
2006)
|
|
$
|
2,182
|
|
$
|
1,415
|
|
$
|
4,561
|
|
$
|
2,555
|
|
Research
and Development Expenses. During
the three and six months ended June 30, 2006 and 2005, the CombiMatrix group
continued internal research and development efforts to improve and expand
the
CombiMatrix group’s technology and product offerings. The increase in internal
research and development expenses was due primarily to the impact CMDX which
was
formed and began research and development activities in the second quarter
of
2005. The increase also reflects $193,000 and $486,000, for the three and
six
months ended June 30, 2006, in non-cash stock compensation charges recorded
in
connection with the adoption of SFAS
No.
123R, effective January 1, 2006, as described above under “Critical
Accounting Estimates.”
Future
research and development expenses will continue to be incurred in connection
with the CombiMatrix group’s ongoing internal research and development efforts
in the areas of genomics, diagnostics, drug discovery and development. The
CombiMatrix group expects its research and development expenses to continue
to
fluctuate and such expenses could increase in future periods as additional
internal research and development agreements are undertaken and/or as new
research and development collaborations are executed with strategic partners.
|
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
|
June
30, 2006
|
|
|
June
30, 2005
|
|
|
June
30, 2006
|
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and administrative expenses (including non-cash stock compensation
expense of $280 and $682 for the three and six months ended une
30, 2006
and $15 and ($111) for the three and six months ended June 30,
2005)
|
|
$
|
3,229
|
|
$
|
2,517
|
|
$
|
7,191
|
|
$
|
4,670
|
|
Loss
from equity investment
|
|
|
294
|
|
|
63
|
|
|
533
|
|
|
102
|
|
Marketing,
General and Administrative Expenses. The
increase reflects the CombiMatrix group’s adoption of SFAS No. 123R, effective
January 1, 2006, which requires public companies to measure all employee
stock-based compensation awards using a fair-value method and record such
expense in their consolidated financial statements, as described under “Critical
Accounting Estimates.” Non-cash stock compensation charges included in
marketing, general and administrative expense for the three and six months
ended
June 30, 2006 totaled $280,000 and $682,000, respectively, as compared to
$15,000 and a credit of $111,000 for the three and six months ended June
30,
2005.
Excluding
the impact of the adoption of SFAS
No.
123R, the change in marketing, general and administrative expenses was due
primarily to an increase in general and administrative expenses incurred
by
CMDX, which commenced operations in the second quarter of 2005, an increase
in
the CombiMatrix group’s other corporate, general and administrative expenses
related to ongoing operations and a decrease in marketing and sales expense.
A
summary
of the main drivers of the change in marketing, general and administrative
expenses for the periods presented is as follows (in thousands):
|
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
|
2006
vs. 2005
|
|
|
2006
vs. 2005
|
|
|
|
|
|
|
|
|
|
Decrease
in marketing and sales expenses
|
|
$
|
(360
|
)
|
$
|
(523
|
)
|
Increase
in general and administrative expenses related to CMDX
|
|
|
477
|
|
|
1,338
|
|
Increase
in legal, accounting and other professional fees
|
|
|
344
|
|
|
923
|
|
Decrease
in other general and administrative expenses
|
|
|
(14
|
)
|
|
(10
|
)
|
Loss
from Equity Investment. As
of
June 30, 2006 and 2005, the CombiMatrix group owned 29% and 9.6%, respectively,
of Leuchemix Inc., or Leuchemix, a private drug development firm, which is
developing several compounds for the treatment of leukemia and other cancers.
The CombiMatrix group’s equity in the losses of Leuchemix increased due to the
CombiMatrix group’s increased ownership in Leuchemix as well as an increase in
expenses incurred by Leuchemix. The CombiMatrix group is under a contractual
commitment to increase ownership to approximately 33% during 2006 and as
a
result, equity in loss of Leuchemix is expected to increase in future
periods.
Other
Warrant
Gains (Charges).
In
accordance with SFAS No. 150, “Accounting for Certain Instruments with
Characteristics of Both Liabilities and Equity,” or SFAS No. 150, and related
interpretations, certain AR-CombiMatrix stock purchase warrants outstanding
at
June
30,
2006 have
been
classified as a long-term liability due to certain redemption provisions
associated with the underlying AR-CombiMatrix stock. Changes in the fair
value
of the stock purchase warrant liability are reflected in the statement of
operations. Refer to Note 8 to the Acacia Research Corporation consolidated
financial statements in Part I, Item 1 of this report.
Loss
on Sale of Investment. In
January 2006, the CombiMatrix group expanded its relationship with one of
its
existing distributors, InBio, for the Asia Pacific region. Major components
of
the expanded relationship included the transfer of day-to-day operational
responsibility and majority ownership of CombiMatrix K.K. to InBio, along
with
an expanded distribution agreement that encompasses Japan. InBio obtained
67% of
the voting interests in CombiMatrix K.K. for a nominal amount of consideration.
As a result, InBio assumed all operational and financial responsibilities
of
CombiMatrix K.K. The net loss on the sale of 67% of the voting interest in
CombiMatrix K.K. was $84,000. Subsequent to the sale, the CombiMatrix group’s
investment in CombiMatrix K.K. was accounted for under the equity method.
The
deconsolidation
of CombiMatrix K.K. did not have a material impact on the CombiMatrix group
balance sheet as of June
30,
2006.
The
impact on the statement of operations resulting from the transition to the
equity method of accounting for the CombiMatrix group's investment in
CombiMatrix K.K. was not material during the periods presented.
Inflation
Inflation
has not had a significant impact on the CombiMatrix group in the current
or
prior periods.
Liquidity
and Capital Resources
At
June
30,
2006,
cash
and cash equivalents and short-term investments totaled $10.0 million compared
to $20.2 million at December 31, 2005. Working capital at June
30,
2006,
was
$9.3 million, compared $19.2 million at December 31, 2005. The change in
working capital was due primarily to the impact of net cash flow activities
as
discussed below.
The
net
(decrease) increase in cash and cash equivalents for the six months ended
June
30,
2006, and 2005, was comprised of the following (in thousands):
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(8,102
|
)
|
$
|
(6,962
|
)
|
Investing
activities
|
|
|
3,280
|
|
|
11,127
|
|
Financing
activities
|
|
|
86
|
|
|
327
|
|
Effect
of exchange rate on cash
|
|
|
-
|
|
|
21
|
|
Increase
(decrease) in cash and cash equivalents
|
|
$
|
(4,736
|
)
|
$
|
4,513
|
|
Cash
receipts from customers for the CombiMatrix group for the six months ended
June
30,
2006, were $2.8 million, comprised of $1.6 million from the sale of array
products and services and $1.2 million in payments received from the DoD.
Cash
receipts in the comparable 2005 period totaled $1.8 million, comprised of
$1.3
million in biological threat detection contract payments received from the
Department of Defense and $498,000 from the sale of array products and related
services. Cash outflows from operations for the CombiMatrix group for the
six
months ended June 30, 2006, increased to $10.9 million, as compared to $8.8
million in the comparable 2005 period, due primarily to an increase in research
and development, marketing general and administrative expenses related to
CMDX
as described above and the impact of the timing of vendor payments and related
accruals.
The
change in net cash flows used in investing activities was due primarily to
net
sales of available-for-sale investments by the CombiMatrix group in connection
with ongoing short-term cash management activities. For the six months ending
June 30, 2006, the CombiMatrix group incurred $450,000 of capital expenditures
and $1.4 million in purchasing of Leuchemix preferred stock compared to $453,000
and $600,000, respectively, in the comparable 2005 period.
On
June
14, 2006, Acacia Research Corporation entered into a Standby Equity Distribution
Agreement (the “SEDA”) with Cornell Capital Partners, LP (“Cornell”), providing
up to $50 million of equity financing from Cornell through the sale of
AR-CombiMatrix common stock through June 2008. As of June 30, 2006, $49,450,000,
or up to 12,681,174 shares of AR-CombiMatrix common stock are available under
the SEDA. For more information on the terms of this agreement, please see
Note 6
of our Consolidated Financial Statements in this report and our Form 8-K
filed
with the Commission on June 15, 2006 and our Form 8-K filed with the Commission
on June 22, 2006, incorporated herein by reference.
Management
believes that the CombiMatrix group’s cash and cash equivalent balances,
anticipated cash flow from operations and other external sources of available
credit will be sufficient to meet its cash requirements through at least
September 30, 2007. The CombiMatrix group may however encounter unforeseen
difficulties that may deplete its capital resources more rapidly than
anticipated, including those set forth in our Risk Factors on pages 3, 4,
5, 6,
7, 8, 9, 10, 11 and 12 of our shelf registration statement on Form S-3 filed
with the SEC on April 25, 2006, included as Exhibit 99.1 of our Quarterly
Report
for the three months ended March 31, 2006, and incorporated by reference
herein.
Any efforts to seek additional funding could be made through equity, debt
or
other external financing and there can be no assurance that additional funding
will be available on favorable terms, if at all. If the CombiMatrix group
fails
to obtain additional funding when needed, it may not be able to execute its
business plans and its business may suffer.
Off-Balance
Sheet Arrangements
The
CombiMatrix group has not entered into off-balance sheet financing arrangements,
other than operating leases. The CombiMatrix group has no significant
commitments for capital expenditures in 2006. Other than as set forth below,
the
CombiMatrix group has no committed lines of credit or other committed funding
or
long-term debt. The following table lists the CombiMatrix group’s material known
future cash commitments as of June
30,
2006:
|
|
Payments
Due by Period (in thousands)
|
|
Contractual
Obligations
|
|
Remaining
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
and Thereafter
|
|
Operating
leases (2)
|
|
$
|
943
|
|
$
|
1,937
|
|
$
|
1,615
|
|
$
|
-
|
|
$
|
-
|
|
Minimum
royalty payments(1)
|
|
|
50
|
|
|
100
|
|
|
100
|
|
|
100
|
|
|
875
|
|
Leuchemix
equity purchases(3)
|
|
|
750
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
contractual cash obligations
|
|
$
|
1,743
|
|
$
|
2,037
|
|
$
|
1,715
|
|
$
|
100
|
|
$
|
875
|
|
____________________________________
(1)
|
Refer
to Note 10 to the Acacia Research Corporation consolidated financial
statements for a description of the September 30, 2002 settlement
agreement between CombiMatrix Corporation and Dr. Donald Montgomery
and
Nanogen.
|
(2)
|
Excludes
any allocated rent expense in connection with Acacia Research
Corporation’s management allocation policies.
|
(3)
|
Refer
to Note 10 to the CombiMatrix group financial statements for additional
information regarding the October 2004 Leuchemix
transaction.
|
Recent
Accounting Pronouncements
Refer
to
Note 5 to the Acacia Research Corporation consolidated financial statements
included in Part I, Item 1 of this report.
Quantitative
and Qualitative Disclosures About Market Risk
The
CombiMatrix group’s exposure to market risk is limited to interest income
sensitivity, which is affected by changes in the general level of United
States
interest rates, particularly because the majority of the group’s investments are
in short-term debt securities issued by the U.S. treasury and by U.S.
corporations. The primary objective of the group’s investment activities is to
preserve principal while at the same time maximizing the income the CombiMatrix
group receives without significantly increasing risk. To minimize risk, the
CombiMatrix group maintains its portfolio of cash, cash equivalents and
short-term investments in a variety of investment-grade securities and with
a
variety of issuers, including corporate notes, commercial paper, government
securities and money market funds. Due to the nature of its short-term
investments, we believe that the CombiMatrix group is not subject to any
material market risk exposure.
ACACIA
TECHNOLOGIES GROUP MANAGEMENT’S DISCUSSION AND ANALYSIS
(A
Division of Acacia Research Corporation)
You
should read this discussion in conjunction with the Acacia Technologies group
financial statements and related notes and the Acacia Research Corporation
consolidated financial statements and related notes, both included in Part
I,
Item 1 of this report. Historical results and percentage relationships are
not
necessarily indicative of operating results for any future
periods.
General
See
Item
2. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Overview,” for a general overview of the Acacia Technologies
group’s business.
Although
the AR-Acacia Technologies stock is intended to reflect the separate performance
of the Acacia Technologies group, rather than the performance of Acacia Research
Corporation as a whole, the Acacia Technologies group is not a separate legal
entity. Holders of the AR-Acacia Technologies stock are stockholders of Acacia
Research Corporation. As a result, they continue to be subject to all of
the
risks of an investment in Acacia Research Corporation and all of Acacia Research
Corporation’s businesses, assets and liabilities. The assets Acacia Research
Corporation attributes to the Acacia Technologies group could be subject
to the
liabilities of the CombiMatrix group. Refer to Note 1 to our consolidated
financial statements included in
Part
I, Item 1 of this report
for
details regarding our separate group presentation and our classes of common
stock.
Acacia
Technologies Group
(A
Division of Acacia Research Corporation)
Comparison
of the Results
of Operations for the Three and Six
Months Ended June 30, 2006 and 2005
Division
Net Income (Loss) (In thousands)
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
June
30, 2006
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Division
net income (loss)
|
|
$
|
1,099
|
|
$
|
(1,760
|
)
|
$
|
(1,310
|
)
|
$
|
(3,634
|
)
|
The
changes in net loss were primarily due to operating results and activities
as
discussed below.
Revenues
(In thousands)
|
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
|
June
30, 2006
|
|
|
June
30, 2005
|
|
|
June
30, 2006
|
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$
|
14,371
|
|
$
|
2,682
|
|
$
|
19,088
|
|
$
|
4,545
|
|
License
Fees.
Revenues
for the three months ended June 30, 2006 included license fees from 27 new
licensing agreements covering 9 of our technology licensing programs, as
compared to 15 new licensing agreements covering 7 of our technology licensing
programs in the comparable 2005 period. Revenues for the six months ended
June
30, 2006 included license fees from 48 new licensing agreements covering
12 of
our technology licensing programs, as compared to 29 new licensing agreements
covering 8 of our technology licensing programs in the comparable 2005 period.
License fee revenues recognized fluctuate from period to period primarily
based
on the following factors:
·
|
the
dollar amount of agreements executed each period, which is primarily
driven by the nature and characteristics of the technology being
licensed
and the magnitude of infringement associated with a specific
licensee;
|
·
|
the
specific terms and conditions of agreements executed each period
and the
periods of infringement contemplated by the respective
payments;
|
·
|
fluctuations
in the total number of agreements executed;
|
·
|
fluctuations
in the sales results or other royalty per unit activities of our
licensees
that impact the calculation of license fees due;
|
·
|
the
timing of the receipt of periodic license fee payments and/or reports
from
licensees; and
|
·
|
fluctuations
in the net number of active licensees period to
period.
|
Costs
incurred in connection with the Acacia Technologies group’s ongoing licensing
activities, other than inventor royalties expense and contingent legal fees
expense, are included in marketing, general and administrative
expenses.
Operating
Expense (In thousands)
|
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
|
June
30, 2006
|
|
|
June
30, 2005
|
|
|
June
30, 2006
|
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense of $889 and $1,937 for the three and six months ended
June 30,
2006)
|
|
$
|
3,441
|
|
$
|
1,759
|
|
$
|
6,978
|
|
$
|
3,369
|
|
Legal
expenses - patents
|
|
|
685
|
|
|
536
|
|
|
1,051
|
|
|
1,097
|
|
Contingent
legal fees and royalties expenses - patents
|
|
|
7,847
|
|
|
1,120
|
|
|
10,118
|
|
|
1,767
|
|
Amortization
of patents
|
|
|
1,326
|
|
|
1,336
|
|
|
2,669
|
|
|
2,252
|
|
Write-off
of patent-related intangible asset
|
|
|
297
|
|
|
-
|
|
|
297
|
|
|
-
|
|
Marketing,
General and Administrative Expenses. The
increase is primarily due to the Acacia Technologies group’s adoption of SFAS
No. 123R, effective January 1, 2006, which requires public companies to measure
all employee stock-based compensation awards using a fair-value method and
record such expense in their consolidated financial statements, as described
under “Critical Accounting Estimates.” Non-cash stock compensation charges
included in marketing, general and administrative expense for the three and
six
months ended June 30, 2006 totaled $889,000 and $1.9 million. There were
no
non-cash stock compensation charges for the three and six months ended June
30,
2005.
Excluding
the impact of the adoption of SFAS No. 123R, the change in marketing, general
and administrative expenses was due primarily to an increase in personnel
costs
related to the addition of licensing, business development and engineering
personnel, an increase in patent-related research and consulting expenses
for
new and ongoing licensing programs, and an increase in corporate, general
and
administrative costs related to ongoing operations. The net increase in other
corporate, general and administrative expenses was comprised primarily of
an
increase in public and investor relations, office rent and other facilities
costs.
A
summary
of the main drivers of the change in marketing, general and administrative
expenses (excluding the impact of SFAS No. 123R) for the periods presented
is as
follows (in thousands):
|
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
|
2006
vs. 2005
|
|
|
2006
vs. 2005
|
|
|
|
|
|
|
|
|
|
Increase
in personnel expenses
|
|
$
|
237
|
|
$
|
680
|
|
Increase
in patent-related research and consulting expenses
|
|
|
422
|
|
|
540
|
|
Increase
in legal, accounting and other professional fees
|
|
|
22
|
|
|
257
|
|
Increase
in other general and administrative expenses
|
|
|
112
|
|
|
195
|
|
Legal
Expense - Patents (Acacia Technologies group only).
Patent-related legal expenses include patent-related prosecution and enforcement
costs incurred by outside patent attorneys engaged on an hourly basis and
the
out-of-pocket expenses incurred by law firms engaged on a contingent fee
basis.
Patent-related legal expenses fluctuate from period to period based on patent
enforcement and prosecution activity associated with ongoing licensing and
enforcement programs and the timing of the commencement of new licensing
and
enforcement programs in each period. The Acacia Technologies group currently
has
25 ongoing law suits to enforce its patented technologies against a total
of 93
defendants. We expect patent-related legal expenses to continue to fluctuate
based on the factors summarized above in connection with the Acacia Technologies
group’s ongoing patent commercialization and enforcement programs.
Inventor
Royalties and Contingent Legal Fees Expense.
During
the three and six months ended June 30, 2006, the Acacia Technologies group
incurred inventor royalty expenses of $4.0 million and $5.3 million,
respectively, as compared to $528,000 and $810,000 for the three and six
months
ended June 30, 2005. Contingent legal fees expenses incurred during the three
and six months ended June 30, 2006 were $3.8 million and $4.8 million,
respectively, as compared to $592,000 and $1.0 million during the three and
six
months ended June 30, 2005. The majority of patent and patent rights agreements
associated with patent portfolios acquired are subject to agreements with
inventors that contain provisions granting to the original patent owners
the
right to receive inventor royalties based on future net revenues, as defined
in
the respective agreements and are also subject to contingent legal fee
arrangements with outside attorneys engaged on a contingent fee basis. As
such,
inventor royalties and contingent legal fees expenses in future periods will
continue to fluctuate in accordance with the timing and amount of related
revenues recognized by the Acacia Technologies group from these patent
portfolios.
Amortization
of Patents.
The
increase was due
primarily to six full months of patent amortization expense resulting from
the
January 28, 2005 GPH Acquisition for the six months ended June
30,
2006,
as
compared to five months of amortization in comparable 2005 period. In addition,
amortization expense includes additional charges related to certain of the
patent portfolios acquired by the Acacia Technologies group subsequent to
June
30, 2005. Patent amortization charges will continue to be significant in
future
periods as the Acacia Technologies group continues to amortize acquired patent
related costs over a weighted average remaining economic useful life of
approximately 5 years.
Write-off
of Patent-related Intangible Asset.
During
the three months ended June 30, 2006, the Acacia Technologies group recorded
a
non-cash impairment charge of $297,000, related to the write-off of a
patent-related intangible asset. During the second quarter of 2006,
pursuant
to the terms of the respective license agreement, management elected to
terminate its rights to exclusively license and enforce the patent, resulting
in
the write-off of the remaining carrying value of the patent-related intangible
asset as of June 30, 2006.
Other
Results
for the six months ended June 30, 2005, include charges, net of minority
interests, of $210,000, related to estimated additional costs to be incurred
in
connection with the discontinued operations of Soundbreak.com (originally
ceased
operations in February 2001), related primarily to certain noncancellable
lease
obligations and a reduction in estimated amounts recoverable from existing
sublease arrangements. The related lease obligations expired in August
2005.
Inflation
Inflation
has not had a significant impact on the Acacia Technologies group in the
current
or previous periods.
Liquidity
and Capital Resources
The
Acacia Technologies group’s cash and cash equivalents and short-term investments
totaled $40.7 million at June 30, 2006, compared to $39.0 million at
December 31, 2005. Working capital at June 30, 2006, was $41.2 million,
compared to $38.9 million at December 31, 2005.
The
net
increase (decrease) in cash and cash equivalents for the six months ended
June
30, 2006, and 2005, was comprised of the following (in thousands):
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
Operating
activities (including discontinued operations of $222 in 2006
and ($433)
in 2005)
|
|
$
|
2,939
|
|
$
|
(2,762
|
)
|
Investing
activities (including discontinued operations of ($353) in
2006 and $0 in
2005)
|
|
|
(1,564
|
)
|
|
(20,397
|
)
|
Financing
activities
|
|
|
242
|
|
|
19,479
|
|
Increase
(decrease) in cash and cash equivalents
|
|
$
|
1,617
|
|
$
|
(3,680
|
)
|
Cash
receipts from licensees for the Acacia Technologies group for the six months
ended June
30,
2006, increased to $19.6 million from $4.3 million in the comparable 2005
period. Net cash outflows from operations for the Acacia Technologies group
for
the six months ended June 30, 2006, increased to $16.7 million from $7.1
million
in the comparable 2005 period, due to increases in inventor royalties expenses
and contingent legal fees expenses, personnel expenses, corporate, general
and
administrative expenses, patent-related research and consulting expenses,
as
described above, and the impact of the timing of payments and related
accruals.
The
change in net cash flows used in investing activities for the periods presented
reflects net short term investment activities in connection with ongoing
short-term cash management activities. Net cash outflows from investing
activities for the six months ended June 30, 2006 also included Acacia
Technologies group patent related acquisitions costs totaling $1.0 million.
Net
cash outflows from investing activities for the six months ended June 30,
2005
reflects the $5.8 million cash consideration and related acquisition and
registration costs paid in connection with the GPH Acquisition. In addition,
in
April 2006, a final distribution to Soundbreak.com’s minority shareholders was
paid totaling $353,000.
Net
cash
flows provided by financing activities during the six months ended June
30,
2006 included proceeds from the exercise of AR-Acacia Technologies stock
options
of $335,000. Net
cash
flows provided by financing activities during the six months ended June 30,
2005
included net proceeds of approximately $19.5 million from the sale of 3.5
million shares of AR-Acacia Technologies stock in a registered direct offering.
Management
believes that the Acacia Technologies group’s cash and cash equivalent balances,
anticipated cash flow from operations and other external sources of available
credit, will be sufficient to meet the its cash requirements through at least
September 30, 2007. The Acacia Technologies group may however encounter
unforeseen difficulties that may deplete its capital resources more rapidly
than
anticipated, including those set forth in our Risk Factors on pages 3, 4,
12, 13
and 15 of our shelf registration statement on Form S-3 filed with the SEC
on
April 25, 2006, and included as Exhibit 99.1 of our Quarterly Report for
the
three months ended March 31, 2006, and incorporated by reference herein.
Any
efforts to seek additional funding could be made through equity, debt or
other
external financing and there can be no assurance that additional funding
will be
available on favorable terms, if at all. If the Acacia Technologies group
fails
to obtain additional funding when needed, it may not be able to execute its
business plans and its business may suffer.
Off-Balance
Sheet Arrangements
The
Acacia Technologies group has not entered into off-balance sheet financing
arrangements, other than operating leases. The Acacia Technologies group
has no
significant commitments for capital expenditures in 2006. Other than as set
forth below, the Acacia Technologies group has no committed lines of credit
or
other committed funding or long-term debt. The following table lists the
Acacia
Technologies group’s material known future cash commitments as of June 30,
2006:
|
|
Payments
Due by Period (in thousands)
|
|
Contractual
Obligations
|
|
Remaining
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
and Thereafter
|
|
Operating
leases (1)
|
|
$
|
222
|
|
$
|
552
|
|
$
|
565
|
|
$
|
588
|
|
$
|
1,355
|
|
Consulting
contract (2)
|
|
|
537
|
|
|
99
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
contractual cash obligations
|
|
$
|
759
|
|
$
|
651
|
|
$
|
565
|
|
$
|
588
|
|
$
|
1,355
|
|
________________
(1)
|
Excludes
any allocated rent expense in connection with Acacia Research
Corporation’s management allocation policies.
|
(2)
|
Reflects
January 2005 $2.0 million consulting contract commitment, including
reimbursable expenses, to be paid over two years in connection
with the
Acacia Technologies group’s purchase of the assets of Global Patent
Holdings, LLC in January 2005, as described
above.
|
In
connection with the acquisition of certain patents and patent rights, certain
companies included in the Acacia Technologies group executed related agreements
which grant to the former owners of the respective patents or patent rights,
the
right to receive royalties based on future net license fee revenues (as defined
in the respective agreements) generated by the Acacia Technologies group
as a
result of licensing the respective patents or patent portfolios. Royalties
paid
pursuant to the agreements are expensed in the consolidated statement of
operations in the period that the related license fee revenues are
recognized.
Recent
Accounting Pronouncements
Refer
to
Note 5 to the Acacia Research Corporation consolidated financial statements
included in Part I, Item 1 of this report.
Quantitative
and Qualitative Disclosures About Market Risk
The
Acacia Technologies group’s exposure to market risk is limited primarily to
interest income sensitivity, which is affected by changes in the general
level
of United States interest rates, particularly because a significant portion
of
our investments are in short-term debt securities issued by United States
corporations, institutional money market funds and other money market
instruments. The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income received without
significantly increasing risk. To minimize risk, we maintain a portfolio
of
cash, cash equivalents and short-term investments in a variety of
investment-grade securities and with a variety of issuers, including U.S.
government and corporate notes and bonds, commercial paper and money market
instruments. Due to the nature of our short-term investments, we believe
that we
are not subject to any material market risk exposure. We do not have any
derivative financial instruments.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Refer
to
Item 2. “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” under the caption “Quantitative and Qualitative Disclosures About
Market Risk” for Acacia Research Corporation, the CombiMatrix group and the
Acacia Technologies group, in Part I, Item 2., incorporated by
reference.
Item
4. CONTROLS AND PROCEDURES
(a)
Evaluation of disclosure controls and procedures
The
term
“disclosure controls and procedures” refers to the controls and other procedures
of a company that are designed to ensure that information required to be
disclosed by the company in the reports that it files under the Securities
Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and
reported, within required time periods specified in Commission rules and
forms, and that such information is accumulated and communicated to management
as appropriate to allow timely decisions regarding required disclosures.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control system was designed
to
provide reasonable assurance to our management and board of directors regarding
the reliability, preparation and fair presentation of published financial
statements in accordance with generally accepted accounting
principles.
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Office carried out an evaluation of the effectiveness of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this report,
such
controls and procedures were not effective due to the material weakness
discussed below.
(b)
Material weakness in internal control over financial reporting
A
material weakness (within
the meaning of the Public Company Accounting Oversight Board (“PCAOB”) Auditing
Standard No. 2) is
a
control deficiency, or combination of control deficiencies, that results
in more
than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.
As
of
June 30, 2006, our management concluded that we did not maintain effective
controls over revenue recognition. Specifically, the controls over the
evaluation of certain non-standard terms and conditions contained in certain
of the Acacia Technologies group's license agreements were not effective to
ensure that revenue was recognized in the proper period in accordance with
generally accepted accounting principles. This control deficiency resulted
in an
audit adjustment to our preliminary interim consolidated financial statements
for the quarter ended June 30, 2006. In addition, this control deficiency
would
have resulted in a misstatement of revenue that would have resulted in a
material misstatement to our annual or interim consolidated financial statements
that would not have been prevented or detected. Accordingly, we have determined
that this control deficiency constitutes a material weakness.
(c)
Changes in Internal Control Over Financial Reporting
To
remediate the above described material weakness, we implemented
additional analysis of our license agreements to ensure that revenue reported
in
our interim consolidated financial statements included herein was recognized
in
the proper period in accordance with generally accepted accounting
principles.
In
addition to the additional procedures performed in conjunction with the
preparation of our second quarter 2006 financial statements to ensure our
consolidated financial statements included herein were prepared in accordance
with generally accepted accounting principles, during the third quarter of
fiscal 2006, we are implementing enhanced procedures and controls which include
an emphasis on the evaluation of revenue recognition for our license
arrangements with non-standard terms and conditions. We continue to monitor
and
assess our remediation activities to ensure that the material weakness discussed
above is remediated as soon as practicable.
PART
II--OTHER INFORMATION
Item
1. LEGAL PROCEEDINGS
Refer
to
Note 10 to the Acacia Research Corporation consolidated financial statements,
contained in Part I, Item 1 of this report, and hereby incorporated by
reference.
Item
1A. RISK FACTORS
An
investment in our stock involves a number of risks. Before making a decision
to
purchase our securities, you should carefully consider all of the risks
described in this quarterly report and in our annual report on
Form
10-K for the year ending December 31, 2005, filed with the Commission on
March
16, 2006.
If any
of the risks incorporated by reference into this quarterly report or into
our
annual report actually occur, our business, financial condition and results
of
operations could be materially adversely affected. If this were to occur,
the
trading price of our securities could decline significantly and you may lose
all
or part of your investment. You should carefully review the “Risk Factors” set
forth on pages 3 through 22 of our registration statement on Form S-3 filed
with
the Commission on April 25, 2006, included as Exhibit 99.1 of our Quarterly
Report for the three months ended March 31, 2006 and hereby incorporated
by
reference.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
We
held
our annual meeting of stockholders on May 16, 2006 in Newport Beach,
California.
(i)
At
the annual meeting, the following persons were elected directors for a
three-year term ending in 2009 based on the voting results below:
Name
|
|
For
|
|
Withheld
|
Paul
R. Ryan
|
|
124,864,191
|
|
1,223,051
|
G.
Louis Graziadio, III
|
|
113,834,940
|
|
12,252,302
|
Rigdon Currie
|
|
114,692,109
|
|
11,395,133
|
The
following persons’ terms as directors continued after the annual meeting and end
in 2007: Robert L. Harris, II, Fred A. DeBoom, Amit Kumar, Ph.D.
The
following persons' terms as directors continued after the annual meeting
and end
in 2008: Thomas B. Akin, Edward W. Frykman.
(ii)
The stockholders approved an amendment to the Company's Restated Certificate
of
Incorporation to increase the number of authorized shares of common
stock from 100,000,000 to 200,000,000. The voting results were as
follows:
|
|
|
|
|
119,980,843
|
|
5,832,156
|
|
274,243
|
(iii )
The stockholders also ratified the appointment of PricewaterhouseCoopers
LLP as
our independent registered public accounting firm for the fiscal year ending
December 31, 2006. The voting results were as follows:
|
|
|
|
|
124,848,789
|
|
1,159,394
|
|
79,059
|
Item
6. EXHIBITS
10.1
|
Standby
Equity Distribution Agreement,
dated June
14, 2006, by and between Cornell
Capital Partners, LP
and Acacia Research Corporation
(1)
|
10.2
|
Amendment
to Standby Equity Distribution Agreement, dated June 14, 2006,
by and
between Cornell Capital Partners, LP and Acacia Research Corporation
(2)
|
31.1
|
Certifications
of the Chief Executive Officer provided pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002
|
31.2
|
Certifications
of the Chief Financial Officer provided pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002
|
32.1
|
Certifications
of the Chief Executive Officer provided pursuant to 18 U.S.C. Section
1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
Certifications
of the Chief Financial Officer provided pursuant to 18 U.S.C. Section
1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
99.1
|
Risk
Factors incorporated by reference into Part II, Item 1A
(3)
|
__________________
(1)
|
Incorporated
by reference to the Current Report on Form 8-K filed on June 15,
2006, by
Acacia Research Corporation.
|
(2)
|
Incorporated
by reference to the Current Report on Form 8-K, filed on June 22,
2006, by
Acacia Research Corporation.
|
(3)
|
Incorporated
by reference to Exhibit 99.1 of our Quarterly Report for the three
months
ended March 31, 2006.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ACACIA
RESEARCH CORPORATION
By:
/S/
Paul R.
Ryan
Paul R. Ryan
Chief Executive Officer
(Principal Executive Officer)
By:
/S/
Clayton J.
Haynes
Clayton J. Haynes
Chief Financial Officer /Treasurer
(Principal Financial Officer)
Date:
August 9, 2006
EXHIBIT
INDEX
EXHIBIT
NUMBER
|
EXHIBIT |
10.1
|
Standby
Equity Distribution Agreement, dated June 14, 2006, by and between
Cornell
Capital Partners, LP and Acacia Research Corporation
(1)
|
10.2
|
Amendment
to Standby
Equity Distribution
Agreement, dated June
14, 2006, by and between Cornell
Capital Partners, LP
and Acacia Research Corporation
(2)
|
31.1
|
Certifications
of the Chief Executive Officer provided pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002
|
31.2
|
Certifications
of the Chief Financial Officer provided pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002
|
32.1
|
Certifications
of the Chief Executive Officer provided pursuant to 18 U.S.C. Section
1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
Certifications
of the Chief Financial Officer provided pursuant to 18 U.S.C. Section
1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
99.1
|
Risk
Factors incorporated by reference into Part II, Item 1A
(3)
|
_____________________
(1)
|
Incorporated
by reference to the Current Report on Form 8-K filed on June 15,
2006, by
Acacia Research Corporation.
|
(2)
|
Incorporated
by reference to the Current Report on Form 8-K, filed on June 22,
2006, by
Acacia Research Corporation.
|
(3)
|
Incorporated
by reference to Exhibit 99.1 of our Quarterly Report for the three
months
ended March 31, 2006.
|