UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 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
|
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
|
Identification
No.)
|
500
Newport Center Drive, Newport Beach, CA
|
|
92660
|
(Address
of Principal Executive Offices)
|
|
(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.
Yes
þ
No
¨
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).
Yes ¨ No þ
As
of
October 31, 2006, 28,020,042 shares of Acacia Research-Acacia Technologies
common stock were issued and outstanding. As of October 31, 2006, 41,507,579
shares of Acacia Research-CombiMatrix common stock were issued and
outstanding.
ACACIA
RESEARCH CORPORATION
Table
of Contents
Part
I. Financial Information
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Acacia
Research Corporation Consolidated Financial Statements
|
|
|
|
|
|
Consolidated
Balance Sheets as of September 30, 2006, and
December
31, 2005 (Unaudited)
|
1
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Income (Loss) for the
Three
Months and Nine Months Ended September 30, 2006 and 2005
(Unaudited)
|
2
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Nine Months Ended
September
30, 2006 and 2005 (Unaudited)
|
3
|
|
|
|
|
Notes
to Consolidated Financial Statements (Unaudited).
|
4
|
|
|
|
|
|
|
|
*Acacia
Technologies Group Financial Statements
|
|
|
|
|
|
Balance
Sheets as of September 30, 2006, and December 31, 2005 (Unaudited)
|
25
|
|
|
|
|
Statements
of Operations for the Three Months and Nine Months Ended
September
30, 2006 and 2005 (Unaudited)
|
26
|
|
|
|
|
Statements
of Cash Flows for the Nine Months Ended
September
30, 2006 and 2005 (Unaudited)
|
27
|
|
|
|
|
Notes
to Financial Statements (Unaudited)
|
28
|
|
|
|
|
|
|
|
*CombiMatrix
Group Financial Statements
|
|
|
|
|
|
Balance
Sheets as of September 30, 2006, and December 31, 2005
(Unaudited)
|
33
|
|
|
|
|
Statements
of Operations for the Three Months and Nine Months Ended
September
30, 2006 and 2005 (Unaudited)
|
34
|
|
|
|
|
Statements
of Cash Flows for the Nine Months Ended
September
30, 2006 and 2005 (Unaudited)
|
35
|
|
|
|
|
Notes
to Financial Statements (Unaudited)
|
36
|
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
|
41
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
65
|
|
|
|
Item
4.
|
Controls
and Procedures
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Part
II. Other Information
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
66
|
|
|
|
Item
1A.
|
Risk
Factors
|
66
|
|
|
|
Item
6.
|
Exhibits
|
68
|
|
|
|
|
|
|
Signatures
|
69
|
|
|
Exhibit
Index
|
70
|
*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)
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
27,791
|
|
$
|
20,164
|
|
Short-term
investments
|
|
|
26,511
|
|
|
39,009
|
|
Accounts
receivable
|
|
|
2,762
|
|
|
5,332
|
|
Prepaid
expenses, inventory, and other assets
|
|
|
1,955
|
|
|
2,115
|
|
Total
current assets
|
|
|
59,019
|
|
|
66,620
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
2,259
|
|
|
2,484
|
|
Patents,
net of accumulated amortization
|
|
|
26,931
|
|
|
31,712
|
|
Goodwill
|
|
|
17,039
|
|
|
18,980
|
|
Other
assets
|
|
|
2,747
|
|
|
1,638
|
|
|
|
$
|
107,995
|
|
$
|
121,434
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
5,883
|
|
$
|
3,924
|
|
Royalties
and legal fees payable
|
|
|
2,343
|
|
|
3,758
|
|
Current
portion of deferred revenues
|
|
|
930
|
|
|
804
|
|
Total
current liabilities
|
|
|
9,156
|
|
|
8,486
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
2,701
|
|
Deferred
revenues, net of current portion
|
|
|
1,145
|
|
|
1,439
|
|
Other
liabilities
|
|
|
736
|
|
|
1,464
|
|
Total
liabilities
|
|
|
11,037
|
|
|
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; 28,017,459 and 27,722,242 shares
issued and
outstanding as of September 30, 2006 and December 31, 2005,
respectively
|
|
|
28
|
|
|
28
|
|
Acacia
Research - CombiMatrix stock, par value $0.001 per share; 50,000,000
shares authorized; 41,405,798 and 38,992,402 shares issued and
outstanding
as of September 30, 2006 and December 31, 2005,
respectively
|
|
|
41
|
|
|
39
|
|
Additional
paid-in capital
|
|
|
321,604
|
|
|
315,146
|
|
Deferred
stock compensation
|
|
|
-
|
|
|
(1,400
|
)
|
Accumulated
comprehensive income
|
|
|
16
|
|
|
(2
|
)
|
Accumulated
deficit
|
|
|
(224,731
|
)
|
|
(206,914
|
)
|
Total
stockholders' equity
|
|
|
96,958
|
|
|
106,897
|
|
|
|
|
|
|
|
|
|
|
|
$
|
107,995
|
|
$
|
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 Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$
|
8,424
|
|
$
|
6,783
|
|
$
|
27,512
|
|
$
|
11,328
|
|
Government
contract
|
|
|
725
|
|
|
973
|
|
|
1,563
|
|
|
2,985
|
|
Products
|
|
|
968
|
|
|
453
|
|
|
3,050
|
|
|
1,298
|
|
Service
contracts
|
|
|
151
|
|
|
37
|
|
|
268
|
|
|
106
|
|
Total
revenues
|
|
|
10,268
|
|
|
8,246
|
|
|
32,393
|
|
|
15,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of government contract revenues
|
|
|
684
|
|
|
920
|
|
|
1,476
|
|
|
2,820
|
|
Cost
of product sales
|
|
|
412
|
|
|
282
|
|
|
973
|
|
|
635
|
|
Research
and development expenses (including non-cash stock compensation
expense of
$311 and $797 for the three and nine months ended September
30, 2006 and
$0 for the three and nine months ended September 30,
2005)
|
|
|
2,819
|
|
|
1,527
|
|
|
7,380
|
|
|
4,082
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense of $1,262 and $3,881 for the three and nine months
ended September
30, 2006 and $88 and ($23) for the three and nine months
ended September
30, 2005)
|
|
|
6,315
|
|
|
4,918
|
|
|
20,086
|
|
|
12,957
|
|
Legal
expenses - patents
|
|
|
2,354
|
|
|
1,076
|
|
|
3,803
|
|
|
2,173
|
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
2,623
|
|
|
3,939
|
|
|
12,741
|
|
|
5,706
|
|
Inventor
royalties - V-chip
|
|
|
-
|
|
|
225
|
|
|
-
|
|
|
225
|
|
Amortization
of patents
|
|
|
1,596
|
|
|
1,607
|
|
|
4,813
|
|
|
4,407
|
|
Write-off
of patent-related intangible asset
|
|
|
-
|
|
|
-
|
|
|
297
|
|
|
-
|
|
Legal
settlement credits
|
|
|
-
|
|
|
(211
|
)
|
|
-
|
|
|
(406
|
)
|
Loss
from equity investments
|
|
|
253
|
|
|
100
|
|
|
786
|
|
|
202
|
|
Total
operating expenses
|
|
|
17,056
|
|
|
14,383
|
|
|
52,355
|
|
|
32,801
|
|
Operating
loss
|
|
|
(6,788
|
)
|
|
(6,137
|
)
|
|
(19,962
|
)
|
|
(17,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and investment income
|
|
|
501
|
|
|
434
|
|
|
1,572
|
|
|
1,090
|
|
Loss
on sale of interest in subsidiary
|
|
|
-
|
|
|
-
|
|
|
(84
|
)
|
|
-
|
|
Warrant
gains (charges)
|
|
|
913
|
|
|
163
|
|
|
663
|
|
|
163
|
|
Total
other income, net
|
|
|
1,414
|
|
|
597
|
|
|
2,151
|
|
|
1,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes and minority
interests
|
|
|
(5,374
|
)
|
|
(5,540
|
)
|
|
(17,811
|
)
|
|
(15,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision)
benefit for income taxes
|
|
|
(2
|
)
|
|
98
|
|
|
(6
|
)
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before minority interests
|
|
|
(5,376
|
)
|
|
(5,442
|
)
|
|
(17,817
|
)
|
|
(15,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(5,376
|
)
|
|
(5,441
|
)
|
|
(17,817
|
)
|
|
(15,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
loss on disposal of discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(5,376
|
)
|
|
(5,441
|
)
|
|
(17,817
|
)
|
|
(15,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on short-term investments
|
|
|
70
|
|
|
(5
|
)
|
|
73
|
|
|
2
|
|
Unrealized
gains on foreign currency translation
|
|
|
2
|
|
|
14
|
|
|
6
|
|
|
36
|
|
Sale
of interest in subsidiary's cumulative translation
adjustment
|
|
|
-
|
|
|
-
|
|
|
(61
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$
|
(5,304
|
)
|
$
|
(5,432
|
)
|
$
|
(17,799
|
)
|
$
|
(15,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable
to the Acacia Technologies group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(1,049
|
)
|
$
|
(1,558
|
)
|
$
|
(2,359
|
)
|
$
|
(4,982
|
)
|
Basic
and diluted loss per share
|
|
|
(0.04
|
)
|
|
(0.06
|
)
|
|
(0.09
|
)
|
|
(0.19
|
)
|
Loss
from discontinued operations
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(210
|
)
|
Basic
and diluted loss per share
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.01
|
)
|
Net
loss
|
|
$
|
(1,049
|
)
|
$
|
(1,558
|
)
|
$
|
(2,359
|
)
|
$
|
(5,192
|
)
|
Basic
and diluted loss per share
|
|
|
(0.04
|
)
|
|
(0.06
|
)
|
|
(0.09
|
)
|
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable
to the CombiMatrix group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,327
|
)
|
$
|
(3,883
|
)
|
$
|
(15,458
|
)
|
$
|
(10,616
|
)
|
Basic
and diluted loss per share
|
|
|
(0.11
|
)
|
|
(0.12
|
)
|
|
(0.39
|
)
|
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - Acacia Technologies stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
27,567,848
|
|
|
27,302,693
|
|
|
27,492,410
|
|
|
26,387,562
|
|
Acacia
Research - CombiMatrix stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
40,209,640
|
|
|
33,239,726
|
|
|
39,411,421
|
|
|
31,887,872
|
|
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 Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(17,817
|
)
|
$
|
(15,808
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
5,553
|
|
|
5,260
|
|
Minority
interests
|
|
|
-
|
|
|
3
|
|
Non-cash
stock compensation
|
|
|
4,678
|
|
|
(23
|
)
|
Deferred
income taxes
|
|
|
(70
|
)
|
|
(210
|
)
|
Non-cash
warrant charges (gains)
|
|
|
(663
|
)
|
|
(163
|
)
|
Non-cash
legal settlement charges (credits)
|
|
|
-
|
|
|
(406
|
)
|
Loss
on disposal of discontinued operations
|
|
|
-
|
|
|
210
|
|
Write-off
of patent-related intangible asset
|
|
|
297
|
|
|
-
|
|
Loss
from equity investments
|
|
|
786
|
|
|
253
|
|
Loss
on sale of interest in subsidiary
|
|
|
84
|
|
|
-
|
|
Stock
issued to consultant
|
|
|
94
|
|
|
-
|
|
Other
|
|
|
42
|
|
|
(128
|
)
|
Changes
in assets and liabilities, excluding effect of business
acquisition:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
2,553
|
|
|
(986
|
)
|
Prepaid
expenses, inventory and other assets
|
|
|
(213
|
)
|
|
(576
|
)
|
Accounts
payable and accrued expenses
|
|
|
2,285
|
|
|
574
|
|
Royalties
and legal fees payable
|
|
|
(1,415
|
)
|
|
1,331
|
|
Deferred
revenues
|
|
|
(115
|
)
|
|
375
|
|
Net
cash used in operating activities from continuing
operations
|
|
|
(3,921
|
)
|
|
(10,294
|
)
|
Net
cash provided by (used in) operating activities from discontinued
operations
|
|
|
222
|
|
|
(525
|
)
|
Net
cash used in operating activities
|
|
|
(3,699
|
)
|
|
(10,819
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(619
|
)
|
|
(1,162
|
)
|
Purchase
of available-for-sale investments
|
|
|
(14,927
|
)
|
|
(57,309
|
)
|
Sale
of available-for-sale investments
|
|
|
27,485
|
|
|
59,260
|
|
Business
acquisition (Note 7)
|
|
|
(16
|
)
|
|
(5,796
|
)
|
Purchase
of additional interests in equity method investee
|
|
|
(1,400
|
)
|
|
(1,100
|
)
|
Patent
acquisition costs
|
|
|
(1,020
|
)
|
|
(445
|
)
|
Sale
of interest in subsidiary (net of cash disposed)
|
|
|
(369
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
9,134
|
|
|
(6,552
|
)
|
Net
cash used in investing activities from discontinued
operations
|
|
|
(353
|
)
|
|
-
|
|
Net
cash provided by (used in) investing activities
|
|
|
8,781
|
|
|
(6,552
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock, net of issuance costs
|
|
|
2,640
|
|
|
32,354
|
|
Prepaid
Standby Equity Distribution Agreement commitment fees (Note
6)
|
|
|
(550
|
)
|
|
-
|
|
Proceeds
from the exercise of stock options
|
|
|
455
|
|
|
187
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
2,545
|
|
|
32,541
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
|
-
|
|
|
35
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
7,627
|
|
|
15,205
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning
|
|
|
20,164
|
|
|
13,910
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending
|
|
$
|
27,791
|
|
$
|
29,115
|
|
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.
Acacia
Technologies Group
The
Acacia Technologies group, a division of Acacia Research Corporation, develops,
acquires, licenses and enforces patented technologies. The Acacia Technologies
group owns and has rights to patent portfolios covering a wide range of
technology areas. 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
· Acacia
Media Technologies Corporation
· Acacia
Patent Acquisition Corporation
· Acacia
Technologies Services Corporation
· AV
Technologies LLC
· Broadcast
Data Retrieval Corporation
· Broadcast
Innovation LLC
· Computer
Acceleration Corporation
· Computer
Cache Coherency Corporation
· Computer
Docking Station Corporation
· Credit
Card Fraud Control Corporation
· Data
Encryption Corporation
· Data
Innovation LLC
· Diagnostic
Systems Corporation
· Disk
Link Corporation
· Financial
Systems Innovation LLC
· High
Resolution Optics Corporation
|
· Information
Technology Innovation LLC
· InternetAd
LLC
· IP
Innovation LLC
· KY
Data Systems LLC
· Micromesh
Technology Corporation
· Microprocessor
Enhancement Corporation
· New
Medium LLC
· Peer
Communications Corporation
· Product
Activation Corporation
· Resource
Scheduling Corporation
· Software
Collaboration Corporation
· Soundview
Technologies, Inc.
· Spreadsheet
Automation Corporation
· TechSearch
LLC
· Telematics
Corporation
· VData
LLC
|
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.
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.
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
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 first quarter of 2007, 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 received a private letter
ruling from the IRS addressing certain tax implications of the transaction
and
have requested a tax opinion from counsel. 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 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 our cash requirements through at least
November 2007.
Management
believes that the CombiMatrix group’s cash and cash equivalent balances,
anticipated cash flows from operations and other external sources of available
credit, including the standby equity distribution agreement (the “SEDA”),
discussed at Note 6, will be sufficient to meet its cash requirements for the
next six months.
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. Subsequent to the GPH Acquisition, the Acacia
Technologies group has acquired or acquired the rights to over 20 additional
patent portfolios, covering a wide range of technology areas, which it intends
to develop, license and enforce.
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. 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.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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’s success also depends on its ability to protect its
intellectual property. 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.
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 the CombiMatrix group’s cash and cash equivalent balances,
anticipated cash flows from operations and other external sources of available
credit including the SEDA will be sufficient to meet its cash requirements
for
the next six months. In order for the CombiMatrix group to continue as a going
concern beyond March 31, 2007, the CombiMatrix group will be required to obtain
capital from external sources, including the SEDA. However, based on the recent
decline in the market value of AR-CombiMatrix stock, which began trading below
$1.00 per share in late September 2006, and due to the limitation of the number
of shares of AR-CombiMatrix stock available on the SEDA, the CombiMatrix group
may be required to seek additional sources of financing, including the issuance
of debt and/or equity securities that may not be available at times and at
terms
acceptable to the CombiMatrix group. The issuance of equity securities will
also
cause dilution to the AR-CombiMatrix shareholders. If external financing sources
beyond the SEDA are not available or are inadequate to fund the operations
of
the CombiMatrix group, it will be required to reduce its operating costs
including research projects and personnel, which could jeopardize the future
strategic initiatives and business plans of the CombiMatrix group. For example,
reductions in research and development activities and/or personnel at our
Mukilteo, Washington facility could result in the inability to invest the
resources necessary to continue to develop next-generation products and improve
existing product lines in order to remain competitive in the marketplace,
resulting in reduced revenues and cash flows from the sales of our CustomArray
products and services. Also, reduction in operating costs at our diagnostics
subsidiary in Irvine, California, (CMDX), should they occur, could jeopardize
its ability to launch, market and sell additional products and services
necessary in order to grow and sustain its operations and eventually achieve
profitability.
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.
|
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.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Acacia
Research Corporation’s cash and cash equivalent and short term investment
balances, cash flows and anticipated cash flows from operations and other
sources of external credit, are attributed to the Acacia Technologies group
and
the CombiMatrix group based on the respective assets of the specific businesses
comprising each group. Issuances of AR-Acacia Technologies stock (and the
proceeds thereof) are attributed to the Acacia Technologies group and issuances
of AR-CombiMatrix stock (and the proceeds thereof) are attributed to the
CombiMatrix group. Neither of the groups is obligated to fund the ongoing
operations of the other group. Management has no intent to use the cash and
cash
equivalent balances, anticipated cash flow from operations, and other external
sources of available credit of one group to fund the ongoing operations of
the
other group.
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.
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 September
30,
2006, and results of operations and cash flows for the interim periods
presented. The results of operations for the three and nine months ended
September 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 of 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.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 nine
months ended September 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
September 30, 2005, before this revision in classification, $4,933,000 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.
Concentrations. Two
and
three licensee(s) individually accounted for greater than 10% of the Acacia
Technologies group’s license fee revenues recognized during the three and nine
months ended September 30, 2006, as compared to one licensee during the three
and nine months ended September 30, 2005, respectively. Three
and
two licensees represented approximately 82% and 95% of the Acacia Technologies
group’s accounts receivable at September 30, 2006 and December 31, 2005,
respectively.
Two
and
no customer(s) individually accounted for greater than 10% of the CombiMatrix
group’s product sales recognized during the three and nine months ended
September 30, 2006, as compared to one and no customer(s) during the three
and
nine months ended September 30, 2005, respectively. Five and two customers
represented approximately 89% and 84% of the CombiMatrix group’s accounts
receivable at September 30, 2006 and December 31, 2005,
respectively.
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).
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.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We
adopted SFAS No. 123R using the modified prospective transition method. Under
this transition method, compensation cost recognized for the nine months ended
September 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.
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:
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Risk
Free Interest Rate
|
|
Term
|
|
Volatility
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended September 30, 2006 (1)
|
|
|
|
|
|
|
|
|
|
AR-CombiMatrix
stock
|
|
|
5.10%
|
|
|
6
years
|
|
|
82%
|
|
|
0%
|
|
CMDX
stock
|
|
|
5.00%
|
|
|
6.25
years
|
|
|
82%
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AR-CombiMatrix
stock
|
|
|
5.06%
|
|
|
6
years
|
|
|
82%
|
|
|
0%
|
|
AR-Acacia
Technologies stock
|
|
|
4.30%
|
|
|
6
years
|
|
|
75%
|
|
|
0%
|
|
CMDX
stock
|
|
|
5.07%
|
|
|
6.25
years
|
|
|
82%
|
|
|
0%
|
|
___________________________________
(1)
No AR - Acacia Technologies stock options were granted during the three months
ended September 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
September
30, 2006
|
|
For
the Nine Months Ended
September
30, 2006
|
|
|
|
|
|
Impact
of Stock
|
|
|
|
Impact
of Stock
|
|
|
|
As
Reported
|
|
Based
Compensation
|
|
As
Reported
|
|
Based
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
$
|
(5,374
|
)
|
$
|
(1,310
|
)
|
$
|
(17,811
|
)
|
$
|
(3,789
|
)
|
Net
loss
|
|
|
(5,376
|
)
|
|
(1,310
|
)
|
|
(17,817
|
)
|
|
(3,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AR-Acacia
Technologies stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
$
|
-
|
|
$
|
(702
|
)
|
$
|
-
|
|
$
|
(2,072
|
)
|
Basic
and diluted
|
|
$
|
(0.04
|
)
|
$
|
(0.03
|
)
|
$
|
(0.09
|
)
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AR-CombiMatrix
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
$
|
-
|
|
$
|
(608
|
)
|
$
|
-
|
|
$
|
(1,717
|
)
|
Basic
and diluted
|
|
$
|
(0.11
|
)
|
$
|
(0.02
|
)
|
$
|
(0.39
|
)
|
$
|
(0.04
|
)
|
Stock-based
compensation expense for the three and nine months ended September 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 the accompanying unaudited consolidated
statements of operations for the three and nine months ended September 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):
|
|
AR-Acacia
Technologies Stock
|
|
AR-Acacia
CombiMatrix Stock
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2005
|
|
September
30, 2005
|
|
September
30, 2005
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations, as reported
|
|
$
|
(1,558
|
)
|
$
|
(5,192
|
)
|
$
|
(3,883
|
)
|
$
|
(10,616
|
)
|
Add:
Stock-based compensation, intrinsic value method reported in net
loss, net
of tax(3)
|
|
|
- |
|
|
123
|
|
|
- |
|
|
- |
|
Deduct:
Pro forma stock-based compensation fair value method (2)
|
|
|
(726
|
)
|
|
(1,945
|
)
|
|
(870
|
)
|
|
(2,549
|
)
|
Loss
from continuing operations, pro forma
|
|
$
|
(2,284
|
)
|
$
|
(7,014
|
)
|
$
|
(4,753
|
)
|
$
|
(13,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share from operations, as reported
|
|
$
|
(0.06
|
)
|
$
|
(0.20
|
)
|
$
|
(0.12
|
)
|
$
|
(0.33
|
)
|
Basic
and diluted loss per share from operations, pro forma
|
|
$
|
(0.08
|
)
|
$
|
(0.27
|
)
|
$
|
(0.14
|
)
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Assumptions used (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
free interest rate
|
|
|
3.96%
|
|
|
3.76%
|
|
|
3.97%
|
|
|
3.83%
|
|
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 Acacia Research Corporation for all
periods
presented and to exclude stock compensation expense related to
non-employees.
|
(3)
|
Includes
the impact of non-cash stock compensation expense related to restricted
stock grants. The pro forma impact on net income (loss) and earnings
(loss) per share of options outstanding under the CombiMatrix Molecular
Diagnostics, Inc. Plan was not
material.
|
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 (LOSS) PER SHARE
Earnings
(Loss) 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 Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Acacia
Research - Acacia Technologies stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average number of common shares
outstanding
|
|
|
27,567,848
|
|
|
27,302,693
|
|
|
27,492,410
|
|
|
26,387,562
|
|
All
outstanding stock awards excluded from the computation of diluted
loss per
share because the effect of inclusion would have been
anti-dilutive
|
|
|
6,520,052
|
|
|
6,201,869
|
|
|
6,520,052
|
|
|
6,201,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - CombiMatrix stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average number of common shares
outstanding
|
|
|
40,209,640
|
|
|
33,239,726
|
|
|
39,411,421
|
|
|
31,887,872
|
|
All
outstanding stock options excluded from the computation of diluted
loss
per share because the effect of inclusion would have been
anti-dilutive
|
|
|
8,557,557
|
|
|
6,981,677
|
|
|
8,557,557
|
|
|
6,981,677
|
|
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 September
30, 2006,
and December 31, 2005. The CombiMatrix group had $16,918,000 and $18,859,000
of
goodwill at September
30, 2006,
and December 31, 2005, respectively.
Acacia
Research Corporation’s identifiable intangible assets at September
30, 2006,
and December 31, 2005, are comprised of patents and patent rights. The gross
carrying amounts and accumulated amortization as of September
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
|
|
|
|
September
30,
|
|
December
31,
|
|
September
30,
|
|
December
31,
|
|
September
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
|
|
|
(10,480
|
)
|
|
(6,606
|
)
|
|
(4,991
|
)
|
|
(4,169
|
)
|
|
(15,471
|
)
|
|
(10,775
|
)
|
Patents,
net
|
|
$
|
19,827
|
|
$
|
23,786
|
|
$
|
7,104
|
|
$
|
7,926
|
|
$
|
26,931
|
|
$
|
31,712
|
|
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 2006, and
December 31, 2005, all of our acquired intangible assets other than goodwill
were subject to amortization.
For
the
nine months ended September 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
nine months ended September 30, 2005.
In
June 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 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
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, if any, on our consolidated and separate group
financial position, results of operations and cash flows.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB
108”), “Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB 108 is effective for
fiscal years ending on or after November 15, 2006 and addresses how
financial statement errors should be considered from a materiality perspective
and corrected. The literature provides interpretive guidance on how the effects
of the carryover or reversal of prior year misstatements should be considered
in
quantifying a current year misstatement. Historically there have been two common
approaches used to quantify such errors: (i) the “rollover” approach, which
quantifies the error as the amount by which the current year income statement
is
misstated, and (ii) the “iron curtain” approach, which quantifies the error
as the cumulative amount by which the current year balance sheet is misstated.
The SEC Staff believes that companies should quantify errors using both
approaches and evaluate whether either of these approaches results in
quantifying a misstatement that, when all relevant quantitative and qualitative
factors are considered, is material. Historically, we have evaluated uncorrected
differences utilizing the “rollover” approach, and we are currently evaluating
the impact, if any, of adopting the provisions of SAB 108 on our consolidated
and separate group financial position, results of operations and cash
flows.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”). SFAS No. 157 establishes a common definition for fair value to be
applied to US GAAP guidance requiring use of fair value, establishes a framework
for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. We are currently assessing the impact, if any, of adopting
SFAS No. 157 on our consolidated and separate group financial position, results
of operations and cash flows.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 (which was not an advance under the SEDA), 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. Since
executing the SEDA through September 30, 2006, Acacia Research Corporation
has
requested three advances from Cornell to purchase a total of 2,019,646 shares
of
AR-CombiMatrix stock at prices ranging from $1.16 to $1.13 per share, resulting
in net proceeds of $2,207,000 contributed to the CombiMatrix group. Subsequent
to September 30, 2006 through November 2, 2006, an additional 1,191,699 shares
of AR-CombiMatrix stock at prices ranging from $0.98 to $0.73 per share have
been sold to Cornell, generating net proceeds of $863,000 contributed to the
CombiMatrix group. As of November 2, 2006, 9,813,579 shares of AR-CombiMatrix
common stock remain available under the SEDA.
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.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED 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 nine months ended
September 30, 2006 include $272,000 and $816,000, respectively, in expenses
related to the consulting agreement.
Marketing, general and administrative expenses for the three and nine months
ended September 30, 2005 include $274,000 and $738,000, 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.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED 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. 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 September 30, 2006 and December 31, 2005 was $719,000 and
$1,381,000, respectively. Net warrant
gains for the three and nine months ended September
30, 2006,
reflected in other income (expense), related to changes in the fair value of
the
warrant liability totaled $913,000 and $663,000, respectively. Net
warrant
gains for the three and nine months ended September
30, 2005
totaled
$163,000.
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 4.71% (two-year) and 4.62% (four year) in September 2006, volatility
over the remaining term of the warrants of 84% in December 2005 and 79% and
82%
in September 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’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).
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
September
30, 2006,
shares
available for grant are 53,427 and 1,038,872 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 nine months ended
September
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
|
1,834,000
|
|
$1.41
|
|
|
|
|
Exercised
|
-
|
|
-
|
|
|
|
|
Forfeited
|
(95,000)
|
|
$3.11
|
|
|
|
|
Expired
|
(106,000)
|
|
$6.72
|
|
|
|
|
Outstanding
at September 30, 2006
|
8,558,000
|
|
$5.70
|
|
6.5
years
|
|
-
|
Vested
and Exercisable at September 30, 2006
|
6,185,000
|
|
$7.13
|
|
5.4
years
|
|
-
|
The
weighted average grant date fair value of stock options granted during the
three
and nine months ended September
30, 2006 was $1.02, and during the three and nine months ended September,
30,
2005
was $1.38 and $2.09, respectively. No AR-CombiMatrix options were exercised
during the three and nine months ended September
30, 2006.
The
total intrinsic value of options exercised during the three and nine months
ended September 30, 2005 was not material. The fair value of options vested
during the three and nine months ended September
30, 2006 was $486,000
and $2,138,000, respectively, and during the three and nine months ended
September 30, 2005 was $686,000 and $2,327,000, respectively. As of September
30, 2006,
the
total unrecognized compensation expense related to nonvested stock option awards
was $2,932,000, which is expected to be recognized over a weighted average
term
of approximately one year.
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
|
(216,000)
|
|
$2.11
|
|
|
|
|
Forfeited
|
(94,000)
|
|
$6.12
|
|
|
|
|
Outstanding
at September 30, 2006
|
6,132,000
|
|
$7.87
|
|
5.9
years
|
|
$31,224,000
|
Vested
and Exercisable at September 30, 2006
|
4,866,000
|
|
$8.43
|
|
5.3
years
|
|
$24,069,000
|
The
weighted average grant date fair value of stock options granted during the
nine
months ended September
30, 2006 was $5.35 (no AR-Acacia Technologies stock options were granted during
the three months ended September 30, 2006) and for the three and nine months
ended September, 30,
2005
was $3.73 and $4.04, respectively. The total intrinsic value of options
exercised during the three and nine months ended September
30, 2006 was $583,000
and $1,980,000, respectively, and during the three and nine months ended
September
30, 2005 was
$141,000 and $231,000, respectively. The fair value of options vested during
the
three and nine months ended September
30, 2006 was $950,000
and $2,825,000, respectively, and during the three and nine months ended
September 30, 2005 was $399,000 and $1,156,000, respectively. As of September
30, 2006,
the
total unrecognized compensation expense related to nonvested stock option awards
was $3,444,000, which is expected to be recognized over a weighted average
term
of approximately two years.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A
summary
of the status of AR-Acacia Technologies nonvested restricted shares as of
September
30, 2006,
and
changes during the nine months ended September
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
|
102,000
|
|
$10.82
|
Vested
|
(30,000)
|
|
$7.16
|
Forfeited
|
(23,000)
|
|
$6.75
|
Nonvested
restricted stock at September 30, 2006
|
387,000
|
|
$6.33
|
As
of
September
30, 2006,
the
total unrecognized compensation expense related to nonvested restricted stock
awards was $1,405,000, which is expected to be recognized over a weighted
average period of approximately one year. The total fair value of shares vested
during the three and nine months ended September
30, 2006 was
$0
and $215,000, respectively. There are no restricted share grants outstanding
under the AR-CombiMatrix Group Plan.
At
September
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 September
30, 2006,
shares
available for grant under the CMDX Plan are 2,150,000. A summary of option
activity under CMDX Plan for the nine months ended September
30, 2006 is
as
follows:
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
|
910,000
|
|
$0.50
|
|
|
|
|
Exercised
|
-
|
|
-
|
|
|
|
|
Forfeited
|
(752,000)
|
|
$0.10
|
|
|
|
|
Outstanding
at September 30, 2006
|
1,850,000
|
|
$0.30
|
|
8.8
years
|
|
$557,000
|
Vested
and Exercisable at September 30, 2006
|
171,000
|
|
$0.12
|
|
5
years
|
|
$20,000
|
The
weighted average grant date fair value of stock options granted during the
three
and nine months ended September
30, 2006 was $0.37, and during the three and nine months ended September
30,
2005
was $0.07. As of September
30, 2006, the
total
unrecognized compensation expense related to nonvested stock option awards
was
$244,000, which is expected to be recognized over a weighted average term of
approximately 2.7 years. Total stock compensation expense recognized and the
fair value of options vested for the three and nine months ended September
30, 2006 were
not
material.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 electrochemical detection
of
biological and chemical threat agents. Under the terms of this contract, 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.
As
of September
30, 2006,
the
CombiMatrix group had incurred $1.1 million in actual contract costs for the
electrochemical detection contract. 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. This contract was completed in December
2005.
On
August
9, 2006, the CombiMatrix group executed a two-year, $1.9 million contract with
the DoD, focusing on the integration of its electrochemical detection technology
currently under development with the CombiMatrix group’s microfluidics
“lab-on-a-chip” technology to be used for military and homeland security
applications. Under the terms of this contract, 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 $1.9 million. As of September
30, 2006,
the
CombiMatrix group had incurred $61,000 in actual contract costs for the
microfluidics contract.
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 $1,400,000
investment in Leuchemix during the nine months ended September 30, 2006,
resulting in an ownership interest of approximately 29% as of September 30,
2006. The CombiMatrix group will make a final contractual investment in
Leuchemix of $750,000 in the fourth 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 nine months ended September 30, 2005, the
CombiMatrix group recorded a net non-cash credit totaling $406,000 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 nine months ended September
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. Royalty expenses recognized under
the
agreement during the nine months ended September
30, 2006,
and
2005, were $338,000 and $130,000, respectively.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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, which are expensed
as incurred.
Inventor
royalties and contingent legal fees paid are expensed in the consolidated
statement of operations and comprehensive loss in the period that the related
license fee revenues are recognized.
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 nine months ended September 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 September 30, 2006,
assets consisted of cash and cash equivalents. At December 31, 2005, assets
consisted of cash and cash equivalents and lease deposits. At September 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.
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 September 30, 2006.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
September 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
|
|
$
|
25,487
|
|
$
|
2,304
|
|
$
|
-
|
|
$
|
27,791
|
|
$
|
14,498
|
|
$
|
5,666
|
|
$
|
-
|
|
$
|
20,164
|
|
Short-term
investments
|
|
|
20,484
|
|
|
6,027
|
|
|
-
|
|
|
26,511
|
|
|
24,462
|
|
|
14,547
|
|
|
-
|
|
|
39,009
|
|
Accounts
receivable
|
|
|
1,475
|
|
|
1,287
|
|
|
-
|
|
|
2,762
|
|
|
4,421
|
|
|
911
|
|
|
-
|
|
|
5,332
|
|
Prepaid
expenses, inventory and other assets
|
|
|
1,333
|
|
|
622
|
|
|
-
|
|
|
1,955
|
|
|
1,406
|
|
|
709
|
|
|
-
|
|
|
2,115
|
|
Total
current assets
|
|
|
48,779
|
|
|
10,240
|
|
|
-
|
|
|
59,019
|
|
|
44,787
|
|
|
21,833
|
|
|
-
|
|
|
66,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
189
|
|
|
2,070
|
|
|
-
|
|
|
2,259
|
|
|
121
|
|
|
2,363
|
|
|
-
|
|
|
2,484
|
|
Patents,
net of accumulated amortization
|
|
|
19,827
|
|
|
7,104
|
|
|
-
|
|
|
26,931
|
|
|
23,786
|
|
|
7,926
|
|
|
-
|
|
|
31,712
|
|
Goodwill
|
|
|
121
|
|
|
16,918
|
|
|
-
|
|
|
17,039
|
|
|
121
|
|
|
18,859
|
|
|
-
|
|
|
18,980
|
|
Other
assets
|
|
|
79
|
|
|
2,668
|
|
|
-
|
|
|
2,747
|
|
|
78
|
|
|
1,560
|
|
|
-
|
|
|
1,638
|
|
|
|
$
|
68,995
|
|
$
|
39,000
|
|
$
|
-
|
|
$
|
107,995
|
|
$
|
68,893
|
|
$
|
52,541
|
|
$
|
-
|
|
$
|
121,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
3,374
|
|
$
|
2,509
|
|
$
|
-
|
|
$
|
5,883
|
|
$
|
1,441
|
|
$
|
2,483
|
|
$
|
-
|
|
$
|
3,924
|
|
Royalties
and legal fees payable
|
|
|
2,343
|
|
|
-
|
|
|
-
|
|
|
2,343
|
|
|
3,758
|
|
|
-
|
|
|
-
|
|
|
3,758
|
|
Current
portion of deferred revenues
|
|
|
523
|
|
|
407
|
|
|
-
|
|
|
930
|
|
|
639
|
|
|
165
|
|
|
-
|
|
|
804
|
|
Total
current liabilities
|
|
|
6,240
|
|
|
2,916
|
|
|
-
|
|
|
9,156
|
|
|
5,838
|
|
|
2,648
|
|
|
-
|
|
|
8,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
726
|
|
|
1,975
|
|
|
-
|
|
|
2,701
|
|
Deferred
revenues, net of current portion
|
|
|
-
|
|
|
1,145
|
|
|
-
|
|
|
1,145
|
|
|
-
|
|
|
1,439
|
|
|
-
|
|
|
1,439
|
|
Other
liabilities
|
|
|
17
|
|
|
719
|
|
|
-
|
|
|
736
|
|
|
83
|
|
|
1,381
|
|
|
-
|
|
|
1,464
|
|
Total
liabilities
|
|
|
6,257
|
|
|
4,780
|
|
|
-
|
|
|
11,037
|
|
|
6,647
|
|
|
7,443
|
|
|
-
|
|
|
14,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
443
|
|
|
4
|
|
|
-
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AR
- Acacia Technologies stock
|
|
|
62,738
|
|
|
-
|
|
|
-
|
|
|
62,738
|
|
|
61,803
|
|
|
-
|
|
|
-
|
|
|
61,803
|
|
AR
- CombiMatrix stock
|
|
|
-
|
|
|
34,220
|
|
|
-
|
|
|
34,220
|
|
|
-
|
|
|
45,094
|
|
|
-
|
|
|
45,094
|
|
Total
stockholders' equity
|
|
|
62,738
|
|
|
34,220
|
|
|
-
|
|
|
96,958
|
|
|
61,803
|
|
|
45,094
|
|
|
-
|
|
|
106,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,995
|
|
$
|
39,000
|
|
$
|
-
|
|
$
|
107,995
|
|
$
|
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 $37,000 and $741,000 at September 30, 2006, and December
31,
2005, respectively. Total liabilities related to discontinued operations
totaled
$44,000 and $144,000 at September 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 September 30, 2006
|
|
For
the Nine Months Ended September 30, 2006
|
|
|
|
Acacia
|
|
|
|
|
|
Acacia
|
|
|
|
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
|
|
Group
|
|
Group
|
|
Consolidated
|
|
Group
|
|
Group
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
contract
|
|
$
|
-
|
|
$
|
725
|
|
$
|
725
|
|
$
|
-
|
|
$
|
1,563
|
|
$
|
1,563
|
|
License
fees
|
|
|
8,424
|
|
|
-
|
|
|
8,424
|
|
|
27,512
|
|
|
-
|
|
|
27,512
|
|
Products
and service contracts
|
|
|
-
|
|
|
1,119
|
|
|
1,119
|
|
|
-
|
|
|
3,318
|
|
|
3,318
|
|
Total
revenues
|
|
|
8,424
|
|
|
1,844
|
|
|
10,268
|
|
|
27,512
|
|
|
4,881
|
|
|
32,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of government contract revenues
|
|
|
-
|
|
|
684
|
|
|
684
|
|
|
-
|
|
|
1,476
|
|
|
1,476
|
|
Cost
of product sales
|
|
|
-
|
|
|
412
|
|
|
412
|
|
|
-
|
|
|
973
|
|
|
973
|
|
Research
and development expenses (including non-cash stock compensation
expense)
|
|
|
-
|
|
|
2,819
|
|
|
2,819
|
|
|
-
|
|
|
7,380
|
|
|
7,380
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense)
|
|
|
3,562
|
|
|
2,753
|
|
|
6,315
|
|
|
10,142
|
|
|
9,944
|
|
|
20,086
|
|
Legal
expenses - patents
|
|
|
2,354
|
|
|
-
|
|
|
2,354
|
|
|
3,803
|
|
|
-
|
|
|
3,803
|
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
2,623
|
|
|
-
|
|
|
2,623
|
|
|
12,741
|
|
|
-
|
|
|
12,741
|
|
Amortization
of patents
|
|
|
1,322
|
|
|
274
|
|
|
1,596
|
|
|
3,991
|
|
|
822
|
|
|
4,813
|
|
Write-off
of patent-related intangible asset
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
297
|
|
|
-
|
|
|
297
|
|
Loss
from equity investments
|
|
|
-
|
|
|
253
|
|
|
253
|
|
|
-
|
|
|
786
|
|
|
786
|
|
Total
operating expenses
|
|
|
9,861
|
|
|
7,195
|
|
|
17,056
|
|
|
30,974
|
|
|
21,381
|
|
|
52,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(1,437
|
)
|
|
(5,351
|
)
|
|
(6,788
|
)
|
|
(3,462
|
)
|
|
(16,500
|
)
|
|
(19,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and investment income
|
|
|
390
|
|
|
111
|
|
|
501
|
|
|
1,143
|
|
|
429
|
|
|
1,572
|
|
Loss
on sale of interest in subsidiary
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(84
|
)
|
|
(84
|
)
|
Warrant
gains (charges)
|
|
|
-
|
|
|
913
|
|
|
913
|
|
|
-
|
|
|
663
|
|
|
663
|
|
Total
other income (expense)
|
|
|
390
|
|
|
1,024
|
|
|
1,414
|
|
|
1,143
|
|
|
1,008
|
|
|
2,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations before income taxes
|
|
|
(1,047
|
)
|
|
(4,327
|
)
|
|
(5,374
|
)
|
|
(2,319
|
)
|
|
(15,492
|
)
|
|
(17,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision)
benefit for income taxes
|
|
|
(2
|
)
|
|
-
|
|
|
(2
|
)
|
|
(40
|
)
|
|
34
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,049
|
)
|
$
|
(4,327
|
)
|
$
|
(5,376
|
)
|
$
|
(2,359
|
)
|
$
|
(15,458
|
)
|
$
|
(17,817
|
)
|
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consolidating
Statements of Operations
(In
thousands)
(Unaudited)
|
|
For
the Three Months Ended September 30, 2005
|
|
For
the Nine Months Ended September
30, 2005
|
|
|
|
Acacia
|
|
|
|
|
|
Acacia
|
|
|
|
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
|
|
Group
|
|
Group
|
|
Consolidated
|
|
Group
|
|
Group
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
contract
|
|
$
|
-
|
|
$
|
973
|
|
$
|
973
|
|
$
|
-
|
|
$
|
2,985
|
|
$
|
2,985
|
|
License
fees
|
|
|
6,783
|
|
|
-
|
|
|
6,783
|
|
|
11,328
|
|
|
-
|
|
|
11,328
|
|
Products
and service contracts
|
|
|
-
|
|
|
490
|
|
|
490
|
|
|
-
|
|
|
1,404
|
|
|
1,404
|
|
Total
revenues
|
|
|
6,783
|
|
|
1,463
|
|
|
8,246
|
|
|
11,328
|
|
|
4,389
|
|
|
15,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of government contract revenues
|
|
|
-
|
|
|
920
|
|
|
920
|
|
|
-
|
|
|
2,820
|
|
|
2,820
|
|
Cost
of product sales
|
|
|
-
|
|
|
282
|
|
|
282
|
|
|
-
|
|
|
635
|
|
|
635
|
|
Research
and development expenses (including non-cash stock compensation
expense)
|
|
|
-
|
|
|
1,527
|
|
|
1,527
|
|
|
-
|
|
|
4,082
|
|
|
4,082
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense)
|
|
|
2,113
|
|
|
2,805
|
|
|
4,918
|
|
|
5,482
|
|
|
7,475
|
|
|
12,957
|
|
Legal
expenses - patents
|
|
|
1,076
|
|
|
-
|
|
|
1,076
|
|
|
2,173
|
|
|
-
|
|
|
2,173
|
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
3,939
|
|
|
-
|
|
|
3,939
|
|
|
5,706
|
|
|
-
|
|
|
5,706
|
|
Inventor
royalties - V-chip
|
|
|
225
|
|
|
-
|
|
|
225
|
|
|
225
|
|
|
-
|
|
|
225
|
|
Amortization
of patents
|
|
|
1,334
|
|
|
273
|
|
|
1,607
|
|
|
3,586
|
|
|
821
|
|
|
4,407
|
|
Legal
settlement credits
|
|
|
-
|
|
|
(211
|
)
|
|
(211
|
)
|
|
-
|
|
|
(406
|
)
|
|
(406
|
)
|
Loss
from equity investments
|
|
|
-
|
|
|
100
|
|
|
100
|
|
|
-
|
|
|
202
|
|
|
202
|
|
Total
operating expenses
|
|
|
8,687
|
|
|
5,696
|
|
|
14,383
|
|
|
17,172
|
|
|
15,629
|
|
|
32,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(1,904
|
)
|
|
(4,233
|
)
|
|
(6,137
|
)
|
|
(5,844
|
)
|
|
(11,240
|
)
|
|
(17,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and investment income
|
|
|
312
|
|
|
122
|
|
|
434
|
|
|
762
|
|
|
328
|
|
|
1,090
|
|
Warrant
gains (charges)
|
|
|
-
|
|
|
163
|
|
|
163
|
|
|
-
|
|
|
163
|
|
|
163
|
|
Total
other income
|
|
|
312
|
|
|
285
|
|
|
597
|
|
|
762
|
|
|
491
|
|
|
1,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes and minority
interests
|
|
|
(1,592
|
)
|
|
(3,948
|
)
|
|
(5,540
|
)
|
|
(5,082
|
)
|
|
(10,749
|
)
|
|
(15,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
for income taxes
|
|
|
33
|
|
|
65
|
|
|
98
|
|
|
99
|
|
|
133
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before minority interests
|
|
|
(1,559
|
)
|
|
(3,883
|
)
|
|
(5,442
|
)
|
|
(4,983
|
)
|
|
(10,616
|
)
|
|
(15,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
1
|
|
|
- |
|
|
1
|
|
|
1
|
|
|
- |
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(1,558
|
)
|
|
(3,883
|
)
|
|
(5,441
|
)
|
|
(4,982
|
)
|
|
(10,616
|
)
|
|
(15,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
loss on disposal of discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(210
|
)
|
|
-
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,558
|
)
|
$
|
(3,883
|
)
|
$
|
(5,441
|
)
|
$
|
(5,192
|
)
|
$
|
(10,616
|
)
|
$
|
(15,808
|
)
|
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consolidating
Statements of Cash Flows
(In
thousands)
(Unaudited)
|
|
For
The Nine Months Ended September 30, 2006
|
|
For
The Nine Months Ended September 30, 2005
|
|
|
|
Acacia
|
|
|
|
|
|
|
|
Acacia
|
|
|
|
|
|
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
|
|
Technologies
|
|
CombiMatrix
|
|
|
|
|
|
|
|
Group
|
|
Group
|
|
Eliminations
|
|
Consolidated
|
|
Group
|
|
Group
|
|
Eliminations
|
|
Consolidated
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,359
|
)
|
$
|
(15,458
|
)
|
$
|
-
|
|
$
|
(17,817
|
)
|
$
|
(5,192
|
)
|
$
|
(10,616
|
)
|
$
|
-
|
|
$
|
(15,808
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,046
|
|
|
1,507
|
|
|
-
|
|
|
5,553
|
|
|
3,629
|
|
|
1,631
|
|
|
-
|
|
|
5,260
|
|
Minority
interests
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3
|
|
|
-
|
|
|
-
|
|
|
3
|
|
Non-cash
stock compensation
|
|
|
2,922
|
|
|
1,756
|
|
|
-
|
|
|
4,678
|
|
|
123
|
|
|
(146
|
)
|
|
-
|
|
|
(23
|
)
|
Deferred
income taxes
|
|
|
(36
|
)
|
|
(34
|
)
|
|
-
|
|
|
(70
|
)
|
|
(107
|
)
|
|
(103
|
)
|
|
-
|
|
|
(210
|
)
|
Non-cash
warrant charges (gains)
|
|
|
-
|
|
|
(663
|
)
|
|
-
|
|
|
(663
|
)
|
|
-
|
|
|
(163
|
)
|
|
-
|
|
|
(163
|
)
|
Non-cash
legal settlement charges (credits)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(406
|
)
|
|
-
|
|
|
(406
|
)
|
Loss
on disposal of discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
210
|
|
|
-
|
|
|
-
|
|
|
210
|
|
Write-off
of patent-related intangible asset
|
|
|
297
|
|
|
-
|
|
|
-
|
|
|
297
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Loss
from equity investments
|
|
|
-
|
|
|
786
|
|
|
-
|
|
|
786
|
|
|
-
|
|
|
253
|
|
|
-
|
|
|
253
|
|
Loss
on sale of interest in subsidiary
|
|
|
-
|
|
|
84
|
|
|
-
|
|
|
84
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Stock
issued to consultant
|
|
|
-
|
|
|
94
|
|
|
-
|
|
|
94
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
(82
|
)
|
|
124
|
|
|
-
|
|
|
42
|
|
|
-
|
|
|
(128
|
)
|
|
-
|
|
|
(128
|
)
|
Changes
in assets and liabilities, excluding effect of business
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
2,946
|
|
|
(393
|
)
|
|
-
|
|
|
2,553
|
|
|
(475
|
)
|
|
(511
|
)
|
|
-
|
|
|
(986
|
)
|
Prepaid
expenses, inventory and other assets
|
|
|
(296
|
)
|
|
83
|
|
|
-
|
|
|
(213
|
)
|
|
(328
|
)
|
|
(129
|
)
|
|
(119
|
)
|
|
(576
|
)
|
Accounts
payable and accrued expenses
|
|
|
2,020
|
|
|
265
|
|
|
-
|
|
|
2,285
|
|
|
113
|
|
|
342
|
|
|
119
|
|
|
574
|
|
Royalties
and legal fees payable
|
|
|
(1,415
|
)
|
|
-
|
|
|
-
|
|
|
(1,415
|
)
|
|
1,331
|
|
|
-
|
|
|
-
|
|
|
1,331
|
|
Deferred
revenues
|
|
|
(116
|
)
|
|
1
|
|
|
-
|
|
|
(115
|
)
|
|
353
|
|
|
22
|
|
|
-
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities from continuing
operations
|
|
|
7,927
|
|
|
(11,848
|
)
|
|
-
|
|
|
(3,921
|
)
|
|
(340
|
)
|
|
(9,954
|
)
|
|
-
|
|
|
(10,294
|
)
|
Net
cash provided by (used in) operating activities from discontinued
operations
|
|
|
222
|
|
|
-
|
|
|
-
|
|
|
222
|
|
|
(525
|
)
|
|
-
|
|
|
-
|
|
|
(525
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
8,149
|
|
|
(11,848
|
)
|
|
-
|
|
|
(3,699
|
)
|
|
(865
|
)
|
|
(9,954
|
)
|
|
-
|
|
|
(10,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(124
|
)
|
|
(495
|
)
|
|
-
|
|
|
(619
|
)
|
|
(65
|
)
|
|
(1,097
|
)
|
|
-
|
|
|
(1,162
|
)
|
Purchase
of available-for-sale investments
|
|
|
(13,906
|
)
|
|
(1,021
|
)
|
|
-
|
|
|
(14,927
|
)
|
|
(37,773
|
)
|
|
(19,536
|
)
|
|
-
|
|
|
(57,309
|
)
|
Sale
of available-for-sale investments
|
|
|
17,934
|
|
|
9,551
|
|
|
-
|
|
|
27,485
|
|
|
26,350
|
|
|
32,910
|
|
|
-
|
|
|
59,260
|
|
Business
acquisition
|
|
|
(16
|
)
|
|
-
|
|
|
-
|
|
|
(16
|
)
|
|
(5,796
|
)
|
|
-
|
|
|
-
|
|
|
(5,796
|
)
|
Purchase
of additional interests in equity method investee
|
|
|
-
|
|
|
(1,400
|
)
|
|
-
|
|
|
(1,400
|
)
|
|
-
|
|
|
(1,100
|
)
|
|
-
|
|
|
(1,100
|
)
|
Patent
acquisition costs
|
|
|
(1,020
|
)
|
|
-
|
|
|
-
|
|
|
(1,020
|
)
|
|
(445
|
)
|
|
-
|
|
|
-
|
|
|
(445
|
)
|
Sale
of interest in subsidiary (net of cash disposed)
|
|
|
-
|
|
|
(369
|
)
|
|
-
|
|
|
(369
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
2,868
|
|
|
6,266
|
|
|
-
|
|
|
9,134
|
|
|
(17,729
|
)
|
|
11,177
|
|
|
-
|
|
|
(6,552
|
)
|
Net
cash used in investing activities from discontinued
operations
|
|
|
(353
|
)
|
|
-
|
|
|
-
|
|
|
(353
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
cash provided by (used in) investing activities
|
|
|
2,515
|
|
|
6,266
|
|
|
-
|
|
|
8,781
|
|
|
(17,729
|
)
|
|
11,177
|
|
|
-
|
|
|
(6,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash attributed to the Acacia Technologies group
|
|
|
325
|
|
|
-
|
|
|
-
|
|
|
325
|
|
|
19,572
|
|
|
-
|
|
|
-
|
|
|
19,572
|
|
Net
cash attributed to the CombiMatrix group
|
|
|
-
|
|
|
2,220
|
|
|
-
|
|
|
2,220
|
|
|
-
|
|
|
12,969
|
|
|
-
|
|
|
12,969
|
|
Net
cash provided by financing activities
|
|
|
325
|
|
|
2,220
|
|
|
-
|
|
|
2,545
|
|
|
19,572
|
|
|
12,969
|
|
|
-
|
|
|
32,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
35
|
|
|
-
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
10,989
|
|
|
(3,362
|
)
|
|
-
|
|
|
7,627
|
|
|
978
|
|
|
14,227
|
|
|
-
|
|
|
15,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning
|
|
|
14,498
|
|
|
5,666
|
|
|
-
|
|
|
20,164
|
|
|
10,925
|
|
|
2,985
|
|
|
-
|
|
|
13,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending
|
|
$
|
25,487
|
|
$
|
2,304
|
|
$
|
-
|
|
$
|
27,791
|
|
$
|
11,903
|
|
$
|
17,212
|
|
$
|
-
|
|
$
|
29,115
|
|
ACACIA
TECHNOLOGIES GROUP
(A
Division of Acacia Research Corporation)
BALANCE
SHEETS
(In
thousands)
(Unaudited)
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
25,487
|
|
$
|
14,498
|
|
Short-term
investments
|
|
|
20,484
|
|
|
24,462
|
|
Accounts
receivable
|
|
|
1,475
|
|
|
4,421
|
|
Prepaid
expenses and other assets
|
|
|
1,333
|
|
|
1,406
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
48,779
|
|
|
44,787
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
189
|
|
|
121
|
|
Patents,
net of accumulated amortization
|
|
|
19,827
|
|
|
23,786
|
|
Goodwill
|
|
|
121
|
|
|
121
|
|
Other
assets
|
|
|
79
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,995
|
|
$
|
68,893
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND ALLOCATED NET WORTH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
3,374
|
|
$
|
1,441
|
|
Royalties
and legal fees payable
|
|
|
2,343
|
|
|
3,758
|
|
Current
portion of deferred revenues
|
|
|
523
|
|
|
639
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
6,240
|
|
|
5,838
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
726
|
|
Other
liabilities
|
|
|
17
|
|
|
83
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
6,257
|
|
|
6,647
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
-
|
|
|
443
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
net worth:
|
|
|
|
|
|
|
|
Funds
allocated by Acacia Research Corporation
|
|
|
147,381
|
|
|
144,087
|
|
|
|
|
|
|
|
|
|
Accumulated
net losses
|
|
|
(84,643
|
)
|
|
(82,284
|
)
|
|
|
|
|
|
|
|
|
Total
allocated net worth
|
|
|
62,738
|
|
|
61,803
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,995
|
|
$
|
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 Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$
|
8,424
|
|
$
|
6,783
|
|
$
|
27,512
|
|
$
|
11,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense
of $985 and $2,922 for the three and nine months ended September
30, 2006
and $123 for the three and nine months ending September 30,
2005)
|
|
|
3,562
|
|
|
2,113
|
|
|
10,142
|
|
|
5,482
|
|
Legal
expenses - patents
|
|
|
2,354
|
|
|
1,076
|
|
|
3,803
|
|
|
2,173
|
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
2,623
|
|
|
3,939
|
|
|
12,741
|
|
|
5,706
|
|
Inventor
royalties - V-chip
|
|
|
-
|
|
|
225
|
|
|
-
|
|
|
225
|
|
Amortization
of patents
|
|
|
1,322
|
|
|
1,334
|
|
|
3,991
|
|
|
3,586
|
|
Write-off
of patent-related intangible asset
|
|
|
-
|
|
|
-
|
|
|
297
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
9,861
|
|
|
8,687
|
|
|
30,974
|
|
|
17,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(1,437
|
)
|
|
(1,904
|
)
|
|
(3,462
|
)
|
|
(5,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and investment income
|
|
|
390
|
|
|
312
|
|
|
1,143
|
|
|
762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes and minority
interests
|
|
|
(1,047
|
)
|
|
(1,592
|
)
|
|
(2,319
|
)
|
|
(5,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision)
benefit for income taxes
|
|
|
(2
|
)
|
|
33
|
|
|
(40
|
)
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before minority interests
|
|
|
(1,049
|
)
|
|
(1,559
|
)
|
|
(2,359
|
)
|
|
(4,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(1,049
|
)
|
|
(1,558
|
)
|
|
(2,359
|
)
|
|
(4,982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
loss on disposal of discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Division
net loss
|
|
$
|
(1,049
|
)
|
$
|
(1,558
|
)
|
$
|
(2,359
|
)
|
$
|
(5,192
|
)
|
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 Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Division
net loss
|
|
$
|
(2,359
|
)
|
$
|
(5,192
|
)
|
Adjustments
to reconcile division net loss to net cash provided by (used
in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,046
|
|
|
3,629
|
|
Minority
interests
|
|
|
-
|
|
|
3
|
|
Non-cash
stock compensation
|
|
|
2,922
|
|
|
123
|
|
Deferred
income taxes
|
|
|
(36
|
)
|
|
(107
|
)
|
Loss
on disposal of discontinued operations
|
|
|
-
|
|
|
210
|
|
Write-off
of patent-related intangible asset
|
|
|
297
|
|
|
-
|
|
Other
|
|
|
(82
|
)
|
|
-
|
|
Changes
in assets and liabilities, excluding effect of business
acquisitions:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
2,946
|
|
|
(475
|
)
|
Prepaid
expenses and other assets
|
|
|
(296
|
)
|
|
(328
|
)
|
Accounts
payable and accrued expenses
|
|
|
2,020
|
|
|
113
|
|
Royalties
and legal fees payable
|
|
|
(1,415
|
)
|
|
1,331
|
|
Deferred
revenues
|
|
|
(116
|
)
|
|
353
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities from continuing
operations
|
|
|
7,927
|
|
|
(340
|
)
|
Net
cash provided by (used in) operating activities from discontinued
operations
|
|
|
222
|
|
|
(525
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
8,149
|
|
|
(865
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(124
|
)
|
|
(65
|
)
|
Purchase
of available-for-sale investments
|
|
|
(13,906
|
)
|
|
(37,773
|
)
|
Sale
of available-for-sale investments
|
|
|
17,934
|
|
|
26,350
|
|
Business
acquisition (Note 6)
|
|
|
(16
|
)
|
|
(5,796
|
)
|
Patent
acquisition costs
|
|
|
(1,020
|
)
|
|
(445
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
2,868
|
|
|
(17,729
|
)
|
Net
cash used in investing activities from discontinued
operations
|
|
|
(353
|
)
|
|
-
|
|
Net
cash provided by (used in) investing activities
|
|
|
2,515
|
|
|
(17,729
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
cash flows attributed to the Acacia Technologies group
|
|
|
325
|
|
|
19,572
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
10,989
|
|
|
978
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning
|
|
|
14,498
|
|
|
10,925
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending
|
|
$
|
25,487
|
|
$
|
11,903
|
|
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 owns and has rights to patent portfolios covering a wide range of
technology areas. 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
· Acacia
Media Technologies Corporation
· Acacia
Patent Acquisition Corporation
· Acacia
Technologies Services Corporation
· AV
Technologies LLC
· Broadcast
Data Retrieval Corporation
· Broadcast
Innovation LLC
· Computer
Acceleration Corporation
· Computer
Cache Coherency Corporation
· Computer
Docking Station Corporation
· Credit
Card Fraud Control Corporation
· Data
Encryption Corporation
· Data
Innovation LLC
· Diagnostic
Systems Corporation
· Disk
Link Corporation
· Financial
Systems Innovation LLC
· High
Resolution Optics Corporation
|
· Information
Technology Innovation LLC
· InternetAd
LLC
· IP
Innovation LLC
· KY
Data Systems LLC
· Micromesh
Technology Corporation
· Microprocessor
Enhancement Corporation
· New
Medium LLC
· Peer
Communications Corporation
· Product
Activation Corporation
· Resource
Scheduling Corporation
· Software
Collaboration Corporation
· Soundview
Technologies, Inc.
· Spreadsheet
Automation Corporation
· TechSearch
LLC
· Telematics
Corporation
· VData
LLC
|
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.
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
September
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 September 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 nine months ended September 30,
2006, are not necessarily indicative of the results to be expected for the
entire year.
ACACIA
TECHNOLOGIES GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
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-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 nine
months ended September 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
September 30, 2005, before this revision in classification, $4,933,000 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.
Concentrations. Two
and
three licensee(s) individually accounted for greater than 10% of the Acacia
Technologies group’s license fee revenues recognized during the three and nine
months ended September 30, 2006, as compared to one licensee during the three
and nine months ended September 30, 2005, respectively. Three and two licensees
represented approximately 82% and 95% of the Acacia Technologies group’s
accounts receivable at September 30, 2006 and December 31, 2005,
respectively.
ACACIA
TECHNOLOGIES GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
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.
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 September
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
September 30, 2006, and December 31, 2005, all of the Acacia Technologies
group’s acquired intangible assets other than goodwill were subject to
amortization.
In
June 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 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
nine months ended September
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 nine months ended September 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.
ACACIA
TECHNOLOGIES GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
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.
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.
ACACIA
TECHNOLOGIES GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
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 nine months
ended September 30, 2006 include $272,000 and $816,000, respectively, in
expenses related to the consulting agreement. Marketing, general and
administrative expenses for the three and nine months ended September 30, 2005
include $274,000 and $738,000, respectively, in expenses related to 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.
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.
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, which are expensed
as incurred.
Royalties
and contingent legal fees paid are expensed in the consolidated statement of
operations in the period that the related license fee revenues are
recognized.
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 nine months ended September 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 September 30, 2006,
assets consisted of cash and cash equivalents. At December 31, 2005, assets
consisted of cash and cash equivalents and lease deposits. At September 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.
COMBIMATRIX
GROUP
(A
Division of Acacia Research Corporation)
BALANCE
SHEETS
(In
thousands)
(Unaudited)
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,304
|
|
$
|
5,666
|
|
Available-for-sale
investments
|
|
|
6,027
|
|
|
14,547
|
|
Accounts
receivable
|
|
|
1,287
|
|
|
911
|
|
Inventory,
prepaid expenses and other assets
|
|
|
622
|
|
|
709
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
10,240
|
|
|
21,833
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
2,070
|
|
|
2,363
|
|
Patents,
net of accumulated amortization
|
|
|
7,104
|
|
|
7,926
|
|
Goodwill
|
|
|
16,918
|
|
|
18,859
|
|
Other
assets
|
|
|
2,668
|
|
|
1,560
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,000
|
|
$
|
52,541
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND ALLOCATED NET WORTH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
2,509
|
|
$
|
2,483
|
|
Current
portion of deferred revenues
|
|
|
407
|
|
|
165
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,916
|
|
|
2,648
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
1,975
|
|
Deferred
revenues, net of current portion
|
|
|
1,145
|
|
|
1,439
|
|
Other
liabilities
|
|
|
719
|
|
|
1,381
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
4,780
|
|
|
7,443
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
-
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
net worth:
|
|
|
|
|
|
|
|
Funds
allocated by Acacia Research Corporation
|
|
|
174,307
|
|
|
169,723
|
|
|
|
|
|
|
|
|
|
Accumulated
net losses
|
|
|
(140,087
|
)
|
|
(124,629
|
)
|
|
|
|
|
|
|
|
|
Total
allocated net worth
|
|
|
34,220
|
|
|
45,094
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,000
|
|
$
|
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 Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Government
contract
|
|
$
|
725
|
|
$
|
973
|
|
$
|
1,563
|
|
$
|
2,985
|
|
Products
|
|
|
968
|
|
|
453
|
|
|
3,050
|
|
|
1,298
|
|
Service
contracts
|
|
|
151
|
|
|
37
|
|
|
268
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
1,844
|
|
|
1,463
|
|
|
4,881
|
|
|
4,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of government contract revenues
|
|
|
684
|
|
|
920
|
|
|
1,476
|
|
|
2,820
|
|
Cost
of product sales
|
|
|
412
|
|
|
282
|
|
|
973
|
|
|
635
|
|
Research
and development expenses (including non-cash stock compensation
expense of
$311 and $797 for the three and nine months ended September
30, 2006 and
$0 for the three and nine months ended September 30,
2005)
|
|
|
2,819
|
|
|
1,527
|
|
|
7,380
|
|
|
4,082
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense
of $277 and $959 for the three and nine months ended September
30, 2006
and ($35) and ($146) for the three and nine months ended September
30,
2005)
|
|
|
2,753
|
|
|
2,805
|
|
|
9,944
|
|
|
7,475
|
|
Amortization
of patents
|
|
|
274
|
|
|
273
|
|
|
822
|
|
|
821
|
|
Legal
settlement credits
|
|
|
-
|
|
|
(211
|
)
|
|
-
|
|
|
(406
|
)
|
Loss
from equity investments
|
|
|
253
|
|
|
100
|
|
|
786
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
7,195
|
|
|
5,696
|
|
|
21,381
|
|
|
15,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(5,351
|
)
|
|
(4,233
|
)
|
|
(16,500
|
)
|
|
(11,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and investment income
|
|
|
111
|
|
|
122
|
|
|
429
|
|
|
328
|
|
Loss
on sale of interest in subsidiary
|
|
|
-
|
|
|
-
|
|
|
(84
|
)
|
|
-
|
|
Warrant
gains (charges)
|
|
|
913
|
|
|
163
|
|
|
663
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
1,024
|
|
|
285
|
|
|
1,008
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations before income taxes
|
|
|
(4,327
|
)
|
|
(3,948
|
)
|
|
(15,492
|
)
|
|
(10,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
for income taxes
|
|
|
-
|
|
|
65
|
|
|
34
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Division
net loss
|
|
$
|
(4,327
|
)
|
$
|
(3,883
|
)
|
$
|
(15,458
|
)
|
$
|
(10,616
|
)
|
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 Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Division
net loss
|
|
$
|
(15,458
|
)
|
$
|
(10,616
|
)
|
Adjustments
to reconcile division net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,507
|
|
|
1,631
|
|
Non-cash
stock compensation
|
|
|
1,756
|
|
|
(146
|
)
|
Deferred
income taxes
|
|
|
(34
|
)
|
|
(103
|
)
|
Non-cash
warrant charges (gains)
|
|
|
(663
|
)
|
|
(163
|
)
|
Non-cash
legal settlement charges (credits)
|
|
|
-
|
|
|
(406
|
)
|
Loss
from equity investments
|
|
|
786
|
|
|
253
|
|
Loss
on sale of interest in subsidiary
|
|
|
84
|
|
|
-
|
|
Stock
issued to consultant
|
|
|
94
|
|
|
-
|
|
Other
|
|
|
124
|
|
|
(128
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(393
|
)
|
|
(511
|
)
|
Inventory,
prepaid expenses and other assets
|
|
|
83
|
|
|
(129
|
)
|
Accounts
payable and accrued expenses
|
|
|
265
|
|
|
342
|
|
Deferred
revenues
|
|
|
1
|
|
|
22
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(11,848
|
)
|
|
(9,954
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(495
|
)
|
|
(1,097
|
)
|
Purchase
of available-for-sale investments
|
|
|
(1,021
|
)
|
|
(19,536
|
)
|
Sale
of available-for-sale investments
|
|
|
9,551
|
|
|
32,910
|
|
Purchase
of additional interests in equity method investee
|
|
|
(1,400
|
)
|
|
(1,100
|
)
|
Sale
of interest in subsidiary (net of cash disposed)
|
|
|
(369
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash provided by investing activities
|
|
|
6,266
|
|
|
11,177
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
cash flows attributed to the CombiMatrix group
|
|
|
2,220
|
|
|
12,969
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
|
-
|
|
|
35
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(3,362
|
)
|
|
14,227
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning
|
|
|
5,666
|
|
|
2,985
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending
|
|
$
|
2,304
|
|
$
|
17,212
|
|
|
|
|
|
|
|
|
|
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 first quarter of 2007, 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 received a private letter
ruling from the IRS addressing certain tax implications of the transaction
and
have requested a tax opinion from counsel. 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.
Anticipated cash flows from operations and other sources may not be sufficient
to meet the capital requirements of the CombiMatrix group beyond March 31,
2007
and as a result will be seeking additional sources of capital including the
issuance of debt and/or equity securities. Refer to Note 1 to the Acacia
Research Corporation consolidated financial statements for a detailed discussion
of consolidated and individual group liquidity and risks.
Basis
of Presentation. The
unaudited interim CombiMatrix group financial statements as of September 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 September 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 nine months ended September 30, 2006, are not
necessarily indicative of the results to be expected for the entire
year.
COMBIMATRIX
GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
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.
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.
Concentrations.
Two
and
no customer(s) individually accounted for greater than 10% of the CombiMatrix
group’s product sales recognized during the three and nine months ended
September 30, 2006, as compared to one and no customer(s) during the three
and
nine months ended September 30, 2005, respectively. Five and two customers
represented approximately 89% and 84% of the CombiMatrix group’s accounts
receivable at September 30, 2006 and December 31, 2005,
respectively.
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.
COMBIMATRIX
GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
Warrant
Liability.
Refer to 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.
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
September 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.
5.
EQUITY
FINANCING
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 (which was not an advance under the SEDA), 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. Since executing the SEDA
through September 30, 2006, Acacia Research Corporation has requested three
advances from Cornell to purchase a total of 2,019,646 shares of AR-CombiMatrix
stock at prices ranging from $1.16 to $1.13 per share, resulting in net proceeds
of $2,207,000 contributed to the CombiMatrix group. Subsequent to September
30,
2006 through November 2, 2006, an additional 1,191,699 shares of AR-CombiMatrix
stock at prices ranging from $0.98 to $0.73 per share have been sold to Cornell,
generating net proceeds of $863,000 contributed to the CombiMatrix group. As
of
November 2, 2006, 9,813,579 shares of AR-CombiMatrix common stock are available
under the SEDA.
COMBIMATRIX
GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
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 electrochemical detection
of
biological and chemical threat agents. Under the terms of this contract, 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.
As
of September
30, 2006,
the
CombiMatrix group had incurred $1.1 million in actual contract costs for the
electrochemical detection contract. 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. This contract was completed in December
2005.
On
August
9, 2006, the CombiMatrix group executed a two-year, $1.9 million contract with
the DoD, focusing on the integration of its electrochemical detection technology
currently under development with the CombiMatrix group’s microfluidics
“lab-on-a-chip” technology to be used for military and homeland security
applications. Under the terms of this contract, 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 $1.9 million. As of September
30, 2006,
the
CombiMatrix group had incurred $61,000 in actual contract costs for the
microfluidics contract.
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 $1,400,000
investment in Leuchemix during the nine months ended September 30, 2006,
resulting in an ownership interest of approximately 29% as of September 30,
2006. The CombiMatrix group will make a final contractual investment in
Leuchemix of $750,000 in the fourth 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 nine months ended September 30, 2005, the
CombiMatrix group recorded a net non-cash credit totaling $406,000 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 nine months ending September 30, 2006.
COMBIMATRIX
GROUP
(A
Division of Acacia Research Corporation)
NOTES
TO 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 nine months ended September 30, 2006, and 2005, were
$338,000 and $130,000, 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 September
30, 2006.
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 September 30, 2006, and on our unaudited consolidated statement
of
operations for the period from January 1, 2006, to September 30, 2006. The
discussion compares the activities for the three and nine months ended September
30, 2006, to the activities for the three and nine months ended September 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.
The
Acacia Technologies group, a division of Acacia Research Corporation, develops,
acquires, licenses and enforces patented technologies. The Acacia Technologies
group currently controls 52 patent portfolios covering technologies used in
a
wide variety of industries.
The
CombiMatrix group, a division of Acacia Research Corporation, 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.
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
Acacia
Technologies Group
The
Acacia Technologies group’s operating activities for the three and nine months
ended September
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 nine months ended September 30, 2006 were $8.4 million and
$27.5 million, respectively, representing increases of approximately 24% and
143% over the respective comparable 2005 periods. Trailing twelve-month revenues
as of September 30, 2006 were $35.8 million, compared to $34.1 million as of
June 30, 2006, $19.6 million as of December 31, 2005 and $12.1 million as of
September 30, 2005.
Revenues
for the nine months ended September 30, 2006 included license fees from 58
new
licensing agreements covering 12 of our technology licensing programs, as
compared to 61 new licensing agreements covering 11 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 nine
months ended September 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 nine months ended September 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 nine months
ended September 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 September 30, 2005 and an increase in corporate,
general and administrative costs related to the Acacia Technologies group’s
ongoing operations. Despite the increase in licensing revenues, inventor
royalties expenses and contingent legal fees expenses decreased for the three
months ended September 30, 2006, as compared to the same period in 2005, due
to
the mix of patent portfolios generating revenue for the respective periods
and
the related economic terms of the underlying inventor and contingent fee
arrangements, if any, associated with the revenue generating patent portfolios
for the respective periods, as discussed below. Inventor royalties expenses
and
contingent legal fees expenses increased for the nine months ended September
30,
2006, as compared to the same period in 2005, due to the overall increase in
related license fee revenues.
During
the nine months ended September 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:
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·
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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.
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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.
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·
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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.
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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.
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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.
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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.
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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.
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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.
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Fluid
Flow Control and Monitoring Patent.
Acquired rights to patent relating to systems used in the remote
control
and monitoring of fluid flow, both gas and liquid. This technology
can be
used in heating/ventilation/air conditioning (“HVAC”), plumbing and other
industrial, commercial and residential fluid flow
systems.
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Medical
Images Stabilization Patents.
This patented technology can be used in stabilizing medical images
for
interventional procedures such as cardiac catheters and stents, and
for
diagnostics procedures such as visualization of arterial
lesions.
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Vehicle
Magnetic Braking and Motor Technology Patents.
These patents generally relate to technology for smooth, reliable
braking
and acceleration of vehicles on parallel
rails.
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Web
Personalization Patents.
This patented technology generally relates to technology for learning
user
preferences and automatically personalizing a user's online experience.
The technology is applicable to web sites that use categories plus
attributes to identify items, and where individual attributes apply
to
multiple categories.
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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, continue to expand and diversify the Acacia
Technologies group’s revenue generating opportunities and furthers the execution
of the Acacia Technologies group’s business strategy of acquiring, developing
and licensing patented technologies.
CombiMatrix
Group
During
the three and nine months ended September 30, 2006, the CombiMatrix group’s
operating activities included the recognition of $1.8 million and $4.9 million
in revenues, including $725,000 and $1.6 million in government contract
revenues, and $1.1 million and $3.3 million in CustomArraysTM
product,
equipment and service revenues, including $153,000 and $221,000 of array revenue
from our wholly owned diagnostics subsidiary, CombiMatrix Molecular Diagnostics,
or CMDX. CustomArray product and service revenues increased 128% from the third
quarter of 2005 and decreased 8% from the prior three months ending June 30,
2006. While the CombiMatrix group has achieved significant growth in its product
and service revenues from the prior year, a decrease in the number of
instruments sold in the third quarter of 2006 compared to the second quarter
resulted in the slight overall decrease in revenues from the previous quarter.
This was partially offset by an increase in CustomArray microarrays and related
hardware, including $153,000 in array revenues recognized by CMDX in the third
quarter of 2006 compared to $71,000 in the second quarter of 2006. 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 third 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 one manufacturing and
distribution agreement and two non-exclusive array access agreements under
its
Combi-CoreTM
access
program, increasing its global network of distributors for CustomArray products.
The CombiMatrix group also launched, in collaboration with Furuno Electric
Co.,
Ltd., its QuadroCASTM
CustomArray synthesizer and made available new versions of its Influenza A
and
miRNA product offerings.
In
the
area of national defense, the CombiMatrix group executed a new two-year, $1.9
million contract with the US Department of Defense, or DoD, for the purposes
of
integrating its elechtrochemical detection technology with its microfluidics
“lab-on-a-chip” technology for national defense and homeland security
applications.
In
the
area of clinical diagnostics, CMDX received a letter from the Office of In
Vitro
Diagnostic Device Evaluation and Safety (“OIVD”) of the US Food and Drug
Administration (“FDA”). The letter invited CMDX to meet with the OIVD to discuss
CMDX’s plans to market its Constitutional Genetic Array Test (“CGAT”). After
meeting with the FDA in September 2006, CMDX received a second letter from
the
OIVD indicating that the FDA agreed with management that CMDX’s CGAT does not
require regulation covered by recent FDA guidelines covering certain diagnostic
assays. CMDX also launched its first molecular diagnostic service using its
CGAT
platform.
Historically,
the CombiMatrix group has relied upon investing and financing activities to
fund
operating activities. Net proceeds to the CombiMatrix group from investing
and
financing activities were considerably lower for the nine months ended September
30, 2006, than for the nine months ended September 30, 2005, and its cash and
cash equivalent balances, anticipated cash flows from operations and other
existing sources of credit may not be sufficient to meet the capital
requirements beyond March 31, 2007. The CombiMatrix group will be seeking
additional sources of capital including the issuance of debt and/or equity
securities.
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
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·
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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.
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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.
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New
Medium Technologies, LLC and AV Technologies, LLC v. Barco NV, Miranda
Technologies, LG Philips LCD, Toshiba Corporation, Toshiba America
Consumer Products, LLC, LG Electronics, Inc., and Syntax-Brillian
Corporation. United States District Court for the Northern District
of
Illinois. Filed 9/29/05. Case No. 1:05-cv-05620.
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Broadcast
Data Retrieval Technology
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·
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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.
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Laptop
Connectivity Technology
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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-c-0032-c.
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Computer
Memory Cache Coherency Technology
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·
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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.
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Credit
Card Fraud Control Technology
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·
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Ingenio
Inc. v. Acacia Patent Acquisition Corporation and Acacia Research
Corporation. United States Distrcit Court for the Northern District
of
California. Filed 10/13/06. Case No.
3:06-cv-06423.
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Credit
Card Fraud Protection Technology
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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.
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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.
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Financial
Systems Innovation, LLC and Paul N. Ware v. Circuit City Stores,
Inc.,
Officemax Inc., 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.
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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.
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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.
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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.
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Computing
Device Performance Technology
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·
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Computer
Acceleration Corporation v. Microsoft Corporation. United States
District
Court for the East District of Texas. Filed 7/6/06. Case No. 9:06-cv-0140.
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Data
Encryption Technology
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·
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Data
Encryption Corporation v. Microsoft Corporation and Dell Computer
Corporation. United States District Court for the Central District
of
California. On appeal to the U.S. Court of Appeals for the Federal
Court.
Lower Court Case No. 2:05-cv-05531.
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Digital
Media Transmission Technology
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·
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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.
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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.
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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.
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High
Resolution Optics Technology
|
·
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Theodore
Whitney and High Resolution Optics Corporation v. The United States.
United States Court of Federal Claims. Filed 8/23/06. Case No.
1:06-cv-00601.
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Interactive
Television Technology
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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.
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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.
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Micromesh
Technology
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Micromesh
Technology Corporation v. American Recreation Productions, Inc.,
and
American Recreation Products, Inc., dba Kelty. United States District
Court for the Northern District of California. Filed 9/27/06. Case
No.
3:06-cv-06030.
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Micromesh
Technology Corporation v. Columbia Sportswear Company. United States
District Court for the Northern District of California. Filed 9/27/06.
Case No.5:06-cv-06031.
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·
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Micromesh
Technology Corporation v. Red Wing Shoe Company and Red Wing Shoe
Company,
dba Vasque. United States District Court for the Eastern District
of
Texas. Filed 10/4/06. Case No.
2:06-cv-00421.
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Micromesh
Technology Corporation v. VF Corporation, VF Corporation, dba JanSport,
VF
Outdoor, Inc., dba The North Face. United States District Court for
the
Eastern District of Texas. Filed 10/4/06. Case No.
2:06-cv-00422.
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Microprocessor
Enhancement Technology
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Microprocessor
Enhancement Corporation and Michael H. Branigin v. Texas Instruments,
Inc.
United States District Court for the Central District of California.
Filed
4/7/05. Case No. 8:05-cv-00323.
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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.
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Multi-Dimensional
Bar Code Technology
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Cognex
Corporation v. VCode Holdings, Inc., VData, LLC, Acacia Research
Corporation, and Veritec Inc. United States District Court for the
District of Minnesota. Filed 3/13/06. Case No.
0:06-cv-01040.
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VData,
LLC and VCode Holdings, Inc. v. Aetna, Inc., PNY Technologies Inc.,
and
Merchant’s Credit Guide Co. United States District Court for the District
of Minnesota. Filed 5/8/06. Case No. 0:06-cv-01701.
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Peer
to Peer Communications Technology
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Peer
Communications Corporation v. Skype Technologies SA, Skype,
Inc., and
eBay, Inc. United States District Court for the Eastern District
of Texas.
Filed 8/22/06. Case No.
6:06-cv-00370.
|
Product
Activation Technology
|
·
|
Product
Activation Corporation v. Abbyy USA Software House, Inc., Adobe Systems
Inc., Autodesk, Inc. United States District Court for the Eastern
District
of Texas. Filed 8/14/06 Case No. 2:06-cv-00326.
|
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.
|
User
Activated Internet Advertising Technology
|
·
|
InternetAd
Systems, LLC v. Turner Broadcasting System, Inc., Freerealtime.com,
Inc.,
Knight Ridder Digital, Homestore, Inc., Condenet, Inc. and Tribune
Company. 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, 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.
|
In
connection with the Acacia Technologies group’s patent enforcement activities,
we may be subject to certain claims, counterclaims and legal actions that arise
in the ordinary course of our patent enforcement activities. 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.
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 Nine
Months Ended September 30, 2006 and 2005
Net
Loss (In thousands)
|
|
For
the Three Months Ended
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,376
|
)
|
$
|
(5,441
|
)
|
$
|
(17,817
|
)
|
$
|
(15,808
|
)
|
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 Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$
|
8,424
|
|
$
|
6,783
|
|
$
|
27,512
|
|
$
|
11,328
|
|
Government
contract
|
|
|
725
|
|
|
973
|
|
|
1,563
|
|
|
2,985
|
|
Cost
of government contract revenues
|
|
|
(684
|
)
|
|
(920
|
)
|
|
(1,476
|
)
|
|
(2,820
|
)
|
Products
|
|
|
968
|
|
|
453
|
|
|
3,050
|
|
|
1,298
|
|
Cost
of product sales
|
|
|
(412
|
)
|
|
(282
|
)
|
|
(973
|
)
|
|
(635
|
)
|
Service
contracts
|
|
|
151
|
|
|
37
|
|
|
268
|
|
|
106
|
|
License
Fees. Revenues
for the three months ended September 30, 2006 included license fees from 10
new
licensing agreements covering 7 of our technology licensing programs, as
compared to 32 new licensing agreements covering 9 of our technology licensing
programs in the comparable 2005 period. Revenues for the nine months ended
September 30, 2006 included license fees from 58 new licensing agreements
covering 12 of our technology licensing programs, as compared to 61 new
licensing agreements covering 11 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 electrochemical 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 electrochemical
detection system. Government contract revenues and contract costs were lower
during the three and nine months ended September 30, 2006, as compared to the
three and nine months ended September 30, 2005, due to the commencement of
work
under the new $2.1 million contract in February 2006, as compared to nine full
months of activity under the previous $5.9 million contract during the prior
year. In August 2006, the CombiMatrix group executed a new two-year, $1.9
million contract with the DoD to integrate its electrochemical detection
technology with its microfluidics “lab-on-a-chip” technology for national
defense and homeland security applications. Efforts under the microfluidics
contract were not significant during the three months ended September 30, 2006.
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 contracts with the DoD, which were approximately
68% and 4% complete as of September 30, 2006 for the electrochemical detection
and microfluidics contracts, respectively.
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 nine months ended September 30, 2006, compared to lower instrument
and 12K DNA expression array sales 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 and electrochemical detection
reader instruments and related hardware, as compared to only the 902 and 12K
expression arrays and DNA synthesizer instruments in the comparable 2005
quarters. For
the
three and nine months ended September 30, 2006, product revenues includes
$153,000 and $221,000 in array sales, respectively, from our diagnostics
subsidiary, CMDX, compared to no sales in the comparable 2005 periods. 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 nine months
ended
September 30, 2006 included a higher percentage of product revenues from the
sale of DNA synthesizer and electrochemical detection reader instruments, which
generally have higher gross margins than the expression array
products.
Operating
Expenses (In thousands)
|
|
For
the Three Months Ended
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses (including non-cash stock compensation
expense of
$311 and $797 for the three and nine months ended September 30,
2006 and
$0 for the three and nine months ended September 30,
2005)
|
|
$
|
2,819
|
|
$
|
1,527
|
|
$
|
7,380
|
|
$
|
4,082
|
|
Research
and Development Expenses. During
the three and nine months ended September 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 development
of higher density array products by the CombiMatrix group as well as the impact
of the CombiMatrix group’s diagnostics subsidiary, CMDX, which was formed and
began research and development activities in the second quarter of 2005. The
increase also reflects $311,000 and $797,000 for the three and nine months
ended
September 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 Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense of $1,262 and $3,881 for the three and nine months
ended September
30, 2006 and $88 and ($23) for the three and nine months ended
September
30, 2005)
|
|
$
|
6,315
|
|
$
|
4,918
|
|
$
|
20,086
|
|
$
|
12,957
|
|
Legal
expenses - patents
|
|
|
2,354
|
|
|
1,076
|
|
|
3,803
|
|
|
2,173
|
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
2,623
|
|
|
3,939
|
|
|
12,741
|
|
|
5,706
|
|
Amortization
of patents
|
|
|
1,596
|
|
|
1,607
|
|
|
4,813
|
|
|
4,407
|
|
Write-off
of patent-related intangible asset
|
|
|
-
|
|
|
-
|
|
|
297
|
|
|
-
|
|
Loss
from equity investment
|
|
|
253
|
|
|
100
|
|
|
786
|
|
|
202
|
|
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 nine months
ended September 30, 2006 totaled $1,262,000 and $3,881,000, respectively, as
compared to $88,000 and a credit of $23,000 for the three and nine months ended
September 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 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 Nine Months
Ended
|
|
|
|
2006
vs. 2005
|
|
2006
vs. 2005
|
|
CombiMatrix
group:
|
|
|
|
|
|
|
|
Decrease
in marketing and sales expenses
|
|
$
|
(313
|
)
|
$
|
(836
|
)
|
(Decrease)
increase in general and administrative expenses related to CMDX
|
|
|
(46
|
)
|
|
1,292
|
|
Increase
in legal, accounting and other professional fees
|
|
|
183
|
|
|
1,106
|
|
Decrease
in other general and administrative expenses
|
|
|
(188
|
)
|
|
(198
|
)
|
|
|
|
|
|
|
|
|
Acacia
Technologies group:
|
|
|
|
|
|
|
|
Increase
in personnel expenses
|
|
$
|
406
|
|
$
|
1,086
|
|
Increase
in legal, accounting and other professional fees
|
|
|
142
|
|
|
399
|
|
Increase
in other general and administrative expenses
|
|
|
39
|
|
|
376
|
|
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. Patent-related legal expenses include
case
related costs billed by outside counsel for economic analyses and damages
assessments, expert witnesses and other consultants, case related audio/video
presentations for the court, and other litigation support and administrative
costs. Refer to “Patent Enforcement Litigation” above. We expect patent-related
legal expenses to continue to fluctuate period to period based on the factors
summarized above in connection with the Acacia Technologies group’s current and
future patent commercialization and enforcement programs.
Inventor
Royalties and Contingent Legal Fees Expense.
During
the three and nine months ended September 30, 2006, the Acacia Technologies
group incurred inventor royalty expenses of $1.8 million and $7.1 million,
respectively, as compared to $2.1 million and $2.9 million for the three and
nine months ended September 30, 2005. Contingent legal fees expenses incurred
during the three and nine months ended September 30, 2006 were $786,000 and
$5.6
million, respectively, as compared to $1.8 million and $2.8 million during
the
three and nine months ended September 30, 2005. The majority of the Acacia
Technologies group’s patent portfolios are subject to patent and patent rights
agreements with inventors containing provisions granting to the original patent
owner the right to receive inventor royalties based on future net revenues,
as
defined in the respective agreements and may also be subject to contingent
legal
fee arrangements with external law firms engaged on a contingent fee basis.
The
economic terms of the inventor and contingent arrangements, if any, vary across
the Acacia Technologies group’s 52 patent portfolios. As such, inventor
royalties and contingent legal fees expenses fluctuate period to period based
on
the amount of revenues recognized each period and the mix of specific patent
portfolios generating revenues each period.
Amortization
of Patents.
The year
to date increase was due
primarily to nine full months of patent amortization expense resulting from
the
January 28, 2005 GPH Acquisition for the nine months ended September 30, 2006,
as compared to eight 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
September 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.
In June 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 September 30, 2006 and 2005, the CombiMatrix group owned 29% and 14%,
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 the
fourth quarter of 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
September
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 September
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 nine months ended September 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 $54.3 million at September
30, 2006,
compared to $59.2 million at December 31, 2005. Working capital at
September
30, 2006,
was
$49.9 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 nine months ended
September 30, 2006, and 2005 was comprised of the following (in
thousands):
|
|
For
the Nine Months Ended September 30, 2006
|
|
For
the Nine Months Ended September 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
($525)
in 2005)
|
|
$
|
8,149
|
|
$
|
(11,848
|
)
|
$
|
(3,699
|
)
|
$
|
(865
|
)
|
$
|
(9,954
|
)
|
$
|
(10,819
|
)
|
Investing
activities (including discontinued operations of ($353) in
2006)
|
|
|
2,515
|
|
|
6,266
|
|
|
8,781
|
|
|
(17,729
|
)
|
|
11,177
|
|
|
(6,552
|
)
|
Financing
activities
|
|
|
325
|
|
|
2,220
|
|
|
2,545
|
|
|
19,572
|
|
|
12,969
|
|
|
32,541
|
|
Effect
of exchange rate on cash
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
35
|
|
|
35
|
|
Increase
(decrease) in cash and cash equivalents
|
|
$
|
10,989
|
|
$
|
(3,362
|
)
|
$
|
7,627
|
|
$
|
978
|
|
$
|
14,227
|
|
$
|
15,205
|
|
Cash
receipts from licensees for the Acacia Technologies group for the nine months
ended September 30, 2006, increased to $30.2 million from $11.3 million in
the
comparable 2005 period, reflecting the increase in license fee revenues
recognized in 2006 compared to 2005. Cash outflows from operations for the
Acacia Technologies group for the nine months ended September 30, 2006,
increased to $22.1 million from $12.2 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, as described
above, and the impact of the timing of payments and related
accruals.
Cash
receipts from customers for the CombiMatrix group for the nine months ended
September 30, 2006, were $4.5 million, comprised of $2.6 million from the sale
of array products and services and $1.9 million in payments received from the
DoD. Cash
receipts in the comparable 2005 period totaled $4.1 million, comprised of $3.0
million in biological threat detection contract payments received from the
Department of Defense and $1.1 million from the sale of array products and
related services. Cash outflows from operations for the CombiMatrix group for
the nine months ended September 30, 2006, increased to $16.3 million, as
compared to $14.1 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 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
nine
months ended September 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 nine months ended September 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 $1.1
million. Fixed asset purchases for the nine months ended September 30, 2006
and
2005, primarily related to the CombiMatrix group were $619,000 and $1.2 million,
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 nine months ended September
30, 2006 included proceeds from the exercise of AR-Acacia Technologies stock
options of $455,000. Net
cash flows provided by financing activities during the nine months ended
September 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.
Net
cash
flows provided by financing activities during the nine months ended September
30, 2006 also included $2.1 million in proceeds from the Standby Equity
Distribution Agreement with Cornell Capital Partners, LP, which may provide
up to $50 million of equity financing from Cornell through the sale of
AR-CombiMatrix common stock through June 2008.
As of
November 2, 2006, 9,813,579 shares of AR-CombiMatrix common stock are available
under the SEDA. Refer to “CombiMatrix
Group Management’s Discussion and Analysis - Liquidity and Capital
Resources”
for a
more detailed discussion of the CombiMatrix group’s liquidity and capital
resources.
The
cash and cash equivalent balances, anticipated cash flow from operations, and
other external sources of available credit of
the Acacia Technologies group and the CombiMatrix group are discussed separately
below. The cash and cash equivalent balances, anticipated cash flow from
operations, and other external sources of available credit of one group are
not
generally available to the other group, and therefore, a discussion of the
sufficiency of these resources on a consolidated basis is not meaningful. Please
carefully review the discussion of the sufficiency of these resources under
the
heading “Liquidity
and Capital Resources”
within the discussion of each operating group below.
Acacia
Research Corporation’s cash and cash equivalent and short term investment
balances, cash flows and anticipated cash flows from operations and other
sources of external credit, are attributed to the Acacia Technologies group
and
the CombiMatrix group based on the respective assets of the specific businesses
comprising each group. Issuances of AR-Acacia Technologies stock (and the
proceeds thereof) are attributed to the Acacia Technologies group and issuances
of AR-CombiMatrix stock (and the proceeds thereof) are attributed to the
CombiMatrix group. Neither of the groups is obligated to fund the ongoing
operations of the other group. Management has no intent to use the cash and
cash
equivalent balances, anticipated cash flow from operations, and other external
sources of available credit of one group to fund the ongoing operations of
the
other group.
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
and
2007. 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 September
30, 2006:
|
|
Payments
Due by Period (in thousands)
|
|
Contractual
Obligations |
|
Remaining
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
and Thereafter
|
|
Operating
leases
|
|
$
|
561
|
|
$
|
2,489
|
|
$
|
2,180
|
|
$
|
588
|
|
$
|
1,355
|
|
Minimum
royalty payments(1)
|
|
|
25
|
|
|
100
|
|
|
100
|
|
|
100
|
|
|
875
|
|
Leuchemix
equity purchases(2)
|
|
|
750
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Consulting
contract(3)
|
|
|
289
|
|
|
99
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
contractual cash obligations
|
|
$
|
1,625
|
|
$
|
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
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
Refer
to 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 Nine
Months Ended September 30, 2006 and 2005
Division
Net Loss (In thousands)
|
|
For
the Three Months Ended
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Division
net loss
|
|
$
|
(1,049
|
)
|
$
|
(1,558
|
)
|
$
|
(2,359
|
)
|
$
|
(5,192
|
)
|
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 Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$
|
8,424
|
|
$
|
6,783
|
|
$
|
27,512
|
|
$
|
11,328
|
|
License
Fees.
Revenues
for the three months ended September 30, 2006 included license fees from 10
new
licensing agreements covering 7 of our technology licensing programs, as
compared to 32 new licensing agreements covering 9 of our technology licensing
programs in the comparable 2005 period. Revenues for the nine months ended
September 30, 2006 included license fees from 58 new licensing agreements
covering 12 of our technology licensing programs, as compared to 61 new
licensing agreements covering 11 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 Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and administrative expenses (including non-cash stock compensation
expense of $985 and $2,922 for the three and nine months ended
September 30, 2006 and $123 for the three and nine months ending
September
30, 2005)
|
|
$
|
3,562
|
|
$
|
2,113
|
|
$
|
10,142
|
|
$
|
5,482
|
|
Legal
expenses - patents
|
|
|
2,354
|
|
|
1,076
|
|
|
3,803
|
|
|
2,173
|
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
2,623
|
|
|
3,939
|
|
|
12,741
|
|
|
5,706
|
|
Amortization
of patents
|
|
|
1,322
|
|
|
1,334
|
|
|
3,991
|
|
|
3,586
|
|
Write-off
of patent-related intangible asset
|
|
|
-
|
|
|
-
|
|
|
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
nine
months ended September 30, 2006 totaled $985,000 and $2.9 million, respectively,
and $123,000 for the three and nine months ended September 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 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
2006
vs. 2005
|
|
For
the Nine
Months
Ended
2006
vs. 2005
|
|
Acacia
Technologies group:
|
|
|
|
|
|
|
|
Increase
in personnel expenses
|
|
$
|
406
|
|
$
|
1,086
|
|
Increase
in legal, accounting and other professional fees
|
|
|
142
|
|
|
399
|
|
Increase
in other general and administrative expenses
|
|
|
39
|
|
|
376
|
|
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. Patent-related legal expenses include
case
related costs billed by outside counsel for economic analyses and damages
assessments, expert witnesses and other consultants, case related audio/video
presentations for the court, and other litigation support and administrative
costs. The Acacia Technologies group currently has 33 ongoing lawsuits involving
106 companies. We expect patent-related legal expenses to continue to fluctuate
period to period based on the factors summarized above in connection with the
Acacia Technologies group’s current and future patent commercialization and
enforcement programs.
Inventor
Royalties and Contingent Legal Fees Expense.
During
the three and nine months ended September 30, 2006, the Acacia Technologies
group incurred inventor royalty expenses of $1.8 million and $7.1 million,
respectively, as compared to $2.1 million and $2.9 million for the three and
nine months ended September 30, 2005. Contingent legal fees expenses incurred
during the three and nine months ended September 30, 2006 were $786,000 and
$5.6
million, respectively, as compared to $1.8 million and $2.8 million during
the
three and nine months ended September 30, 2005. The majority of the Acacia
Technologies group’s patent portfolios are subject to patent and patent rights
agreements with inventors containing provisions granting to the original patent
owner the right to receive inventor royalties based on future net revenues,
as
defined in the respective agreements and may also be subject to contingent
legal
fee arrangements with external law firms engaged on a contingent fee basis.
The
economic terms of the inventor and contingent arrangements, if any, vary across
the Acacia Technologies group’s 52 patent portfolios. As such, inventor
royalties and contingent legal fees expenses fluctuate period to period based
on
the amount of revenues recognized each period and the mix of specific patent
portfolios generating revenues each period.
Amortization
of Patents.
The
increase was due
primarily to nine full months of patent amortization expense resulting from
the
January 28, 2005 GPH Acquisition for the nine months ended September
30, 2006,
as compared to eight 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
September 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.
In June 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
Estimated
Loss on Discontinued Operations.
Results
for the nine months ended September 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.
Liquidity
and Capital Resources
The
Acacia Technologies group’s cash and cash equivalents and short-term investments
totaled $46.0 million at September 30, 2006, compared to $39.0 million at
December 31, 2005. Working capital at September 30, 2006, was $42.5
million, compared to $38.9 million at December 31, 2005.
The
net
increase (decrease) in cash and cash equivalents for the nine months ended
September 30, 2006, and 2005, was comprised of the following (in
thousands):
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
Operating
activities (including discontinued operations of $222 in 2006
and ($525)
in 2005)
|
|
$
|
8,149
|
|
$
|
(865
|
)
|
Investing
activities (including discontinued operations of ($353) in
2006)
|
|
|
2,515
|
|
|
(17,729
|
)
|
Financing
activities
|
|
|
325
|
|
|
19,572
|
|
Increase
in cash and cash equivalents
|
|
$
|
10,989
|
|
$
|
978
|
|
Cash
receipts from licensees for the Acacia Technologies group for the nine months
ended September 30, 2006, increased to $30.2 million from $11.3 million in
the
comparable 2005 period, reflecting the increase in revenues recognized in 2006
compared to 2005. Net cash outflows from operations for the Acacia Technologies
group for the nine months ended September 30, 2006, increased to $22.1 million
from $12.2 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, 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 nine months ended September 30, 2006 also included Acacia
Technologies group patent related acquisitions costs totaling $1.0 million.
Net
cash outflows from investing activities for the nine months ended September
30,
2005 reflects the $5.8 million cash consideration and related acquisition and
registration costs paid in connection with the GPH Acquisition in the first
quarter of 2005 and $445,000 in other patent acquisition costs. 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 nine months ended September
30, 2006 included proceeds from the exercise of AR-Acacia Technologies stock
options of $455,000. Net
cash
flows provided by financing activities during the nine months ended September
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 its cash requirements through at least
November 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 and 2007. 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
September 30, 2006:
|
|
Payments
Due by Period (in
thousands)
|
|
Contractual
Obligations
|
|
Remaining
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
and Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases (1)
|
|
$
|
89
|
|
$
|
552
|
|
$
|
565
|
|
$
|
588
|
|
$
|
1,355
|
|
Consulting
contract (2)
|
|
|
289
|
|
|
99
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
contractual cash obligations
|
|
$
|
378
|
|
$
|
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.
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
Refer
to 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 Nine Months Ended September 30, 2006 and 2005
Division
Net Loss (In thousands)
|
|
For
the Three Months Ended
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Division
net loss
|
|
$
|
(4,327
|
)
|
$
|
(3,883
|
)
|
$
|
(15,458
|
)
|
$
|
(10,616
|
)
|
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 Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Government
contract
|
|
$
|
725
|
|
$
|
973
|
|
$
|
1,563
|
|
$
|
2,985
|
|
Cost
of government contract revenues
|
|
|
(684
|
)
|
|
(920
|
)
|
|
(1,476
|
)
|
|
(2,820
|
)
|
Products
|
|
|
968
|
|
|
453
|
|
|
3,050
|
|
|
1,298
|
|
Cost
of product sales
|
|
|
(412
|
)
|
|
(282
|
)
|
|
(973
|
)
|
|
(635
|
)
|
Service
contracts
|
|
|
151
|
|
|
37
|
|
|
268
|
|
|
106
|
|
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 electrochemical 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 electrochemical
detection system. Government contract revenues and contract costs were lower
during the three and nine months ended September 30, 2006, as compared to the
three and nine months ended September 30, 2005, due to the commencement of
work
under the new $2.1 million contract in February 2006, as compared to nine full
months of activity under the previous $5.9 million contract during the prior
year. In August 2006, the CombiMatrix group executed a new two-year, $1.9
million contract with the DoD to integrate its electrochemical detection
technology with its microfluidics “lab-on-a-chip” technology for national
defense and homeland security applications. Efforts under the microfluidics
contract were not significant during the three months ended September 30, 2006.
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 contracts with the DoD, which were approximately
68% and 4% complete as of September 30, 2006 for the electrochemical detection
and microfluidics contracts, respectively.
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 nine months ended September 30, 2006, compared to lower instrument
and 12K DNA expression array sales 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 and electrochemical detection
reader instruments and related hardware, as compared to only the 902 and 12K
expression arrays and DNA synthesizer instruments in the comparable 2005
quarters. For the three and nine months ended September 30, 2006, product
revenues includes $153,000 and $221,000 in array sales, respectively, from
our
diagnostics subsidiary, CMDX, compared to no sales in the comparable 2005
periods. 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
nine months ended September 30, 2006 included a higher percentage of product
revenues from the sale of DNA synthesizer and electrochemical detection reader
instruments, which generally have higher gross margins than the expression
array
products.
Operating
Expenses (In
thousands)
|
|
For
the Three Months Ended
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses (including non-cash stock compensation
expense of
$311 and $797 for the three and nine months ended September 30,
2006 and
$0 for the three and nine months ended September 30,
2005)
|
|
$
|
2,819
|
|
$
|
1,527
|
|
$
|
7,380
|
|
$
|
4,082
|
|
Research
and Development Expenses. During
the three and nine months ended September 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 development
of higher density array products by the CombiMatrix group as well as the impact
of the CombiMatrix group’s subsidiary, CMDX, which was formed and began research
and development activities in the second quarter of 2005. The increase also
reflects $311,000 and $797,000, for the three and nine months ended September
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 Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense
of $277 and $959 for the three and nine months ended September
30, 2006
and ($35) and ($146) for the three and nine months ended September
30,
2005)
|
|
$
|
2,753
|
|
$
|
2,805
|
|
$
|
9,944
|
|
$
|
7,475
|
|
Loss
from equity investment
|
|
|
253
|
|
|
100
|
|
|
786
|
|
|
202
|
|
Marketing,
General and Administrative Expenses. Contributing
to the change for the periods presented is 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
nine
months ended September 30, 2006 totaled $277,000 and $959,000, respectively,
as
compared to a credit of $35,000 and a credit of $146,000 for the three and
nine
months ended September 30, 2005.
Excluding
the impact of the adoption of SFAS
No. 123R, the overall decrease in marketing, general and administrative expenses
for the three months ended September 30, 2006 vs. the comparable 2005 period
was
due primarily to decreases in marketing and sales expenses caused by a reduction
in sales and support staff, partially offset by an increase in legal and
accounting expenses. For the nine months ended September 30, 2006 vs. the
comparable 2005 period, overall marketing, general and administrative expenses
increased due primarily to the full year’s impact of general and administrative
expenses incurred by CMDX in 2006, which commenced operations in the second
quarter of 2005, as well as increased legal and accounting expenses related
mostly to costs associated with the planned split-off of the CombiMatrix group
from Acacia Research Corporation. These increases were partially offset by
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
2006
vs. 2005
|
|
For
the Nine
Months
Ended
2006
vs. 2005
|
|
CombiMatrix
group:
|
|
|
|
|
|
Decrease
in marketing and sales expenses
|
|
$
|
(313
|
)
|
$
|
(836
|
)
|
(Decrease)
increase in general and administrative expenses related to
CMDX
|
|
|
(46
|
)
|
|
1,292
|
|
Increase
in legal, accounting and other professional fees
|
|
|
183
|
|
|
1,106
|
|
Decrease
in other general and administrative expenses
|
|
|
(188
|
)
|
|
(198
|
)
|
Loss
from Equity Investment. As
of September 30, 2006 and 2005, the CombiMatrix group owned 29% and 14%,
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 the
fourth quarter of 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
September
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 September
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.
Liquidity
and Capital Resources
At
September
30, 2006,
cash
and cash equivalents and short-term investments totaled $8.3 million compared
to
$20.2 million at December 31, 2005. Working capital at September
30, 2006,
was
$7.3 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 nine months ended
September 30, 2006, and 2005, was comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
Operating
activities
|
|
$
|
(11,848
|
)
|
$
|
(9,954
|
)
|
Investing
activities
|
|
|
6,266
|
|
|
11,177
|
|
Financing
activities
|
|
|
2,220
|
|
|
12,969
|
|
Effect
of exchange rate on cash
|
|
|
-
|
|
|
35
|
|
Increase
(decrease) in cash and cash equivalents
|
|
$
|
(3,362
|
)
|
$
|
14,227
|
|
Cash receipts from customers for the CombiMatrix group for the nine months
ended
September 30, 2006, were $4.5 million, comprised of $2.6 million from the
sale
of array products and services and $1.9 million in
payments
received from the Department of Defense.
Cash
receipts in the comparable 2005 period totaled $4.1 million, comprised of
$1.1
million from the sale of array products and related services and $3.0 million
in
electrochemical detection contract payments received from the Department
of
Defense. Cash outflows from operations for the CombiMatrix group for the
nine
months ended September 30, 2006, increased to $16.3 million, as compared
to
$14.1 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
net
cash flows provided by investing activities for the nine months ended September
30, 2006 and 2005 were 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 nine months ended September 30, 2006, the
CombiMatrix group incurred $495,000 of capital expenditures and $1.4 million
in
purchasing of Leuchemix preferred stock, which amounted to $1.1 million and
$1.1
million, 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 up to
13,024,924 shares of AR-CombiMatrix common stock through June 2008. For the
nine
months ended September 30, 2006, the CombiMatrix group had received $2,207,000
in net proceeds in equity financings
through
the sale of 2,019,646 shares of AR-CombiMatrix stock
under
the SEDA. For the nine months ended September 30, 2005, the CombiMatrix group’s
financing activities were composed primarily of two financing events. First,
in
July 2005, Acacia Research Corporation sold 1,400,444 shares of AR-CombiMatrix
stock in
a
registered direct offering, generating net proceeds of approximately $3,114,000,
which were attributed to the CombiMatrix group. Second, in September 2005,
Acacia Research Corporation sold 6,385,907 shares of AR-CombiMatrix stock and
1,596,478 AR-CombiMatrix stock purchase warrants in
a
registered direct offering, generating net proceeds of approximately $9,707,000,
which were attributed to the CombiMatrix group. We
do not
expect the decline in net proceeds from financing activities to continue. As
discussed below, management believes the CombiMatrix group must raise additional
capital to meet its cash requirements over the next 12 months, and as a result,
net proceeds from financing activities should increase significantly
if the
CombiMatrix group is
able
to meet its goals over the next 12 months.
As
of
September 30, 2006, 11,005,278 shares of AR-CombiMatrix common stock were
available under the SEDA. Subsequent to this date, an additional 1,191,699
shares of AR-CombiMatrix common stock were purchased by Cornell under the SEDA,
generating net proceeds to the CombiMatrix group of $863,000. For more
information on the terms of this agreement, please refer to 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 flows from operations and other external sources of available
credit including the SEDA will be sufficient to meet its cash requirements
for
the next six months. In order for the CombiMatrix group to continue as a going
concern beyond March 31, 2007, the CombiMatrix group will be required to obtain
capital from external sources, including the SEDA. However, based on the recent
decline in the market value of AR-CombiMatrix stock, which began trading below
$1.00 per share in late September 2006, and due to the limitation of the number
of shares of AR-CombiMatrix stock available on the SEDA, the CombiMatrix group
may be required to seek additional
sources
of financing including the issuance of debt and/or equity securities that may
not be available at times and at terms acceptable to the CombiMatrix group.
The
issuance of equity securities will also cause dilution to the AR-CombiMatrix
shareholders. If external financing sources beyond the SEDA are not available
or
are inadequate to fund the operations of the CombiMatrix group, it will be
required to reduce its operating costs including research projects and
personnel, which could jeopardize the future strategic initiatives and business
plans of the CombiMatrix group. For example, reductions in research and
development activities and/or personnel at our Mukilteo, Washington facility
could result in the
inability to
invest
the resources necessary to continue to develop next-generation products and
improve existing product lines in order to remain competitive in the
marketplace,
resulting in reduced
revenues and cash flows from the sales of our CustomArray products and
services.
Also,
reduction in operating costs at our diagnostics subsidiary in Irvine,
California, (CMDX), should they occur, could jeopardize its ability to launch,
market and sell additional products and services necessary to order
grow
and
sustain
its operations and eventually achieve profitability.
The
CombiMatrix group may also encounter unforeseen difficulties that may deplete
its capital resources more rapidly than anticipated, including those set forth
in Part II Item 1A. “Risk Factors” in this Quarterly Report and 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 and six months ended June 30, 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.
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 September
30, 2006:
|
|
Payments
Due by Period (in thousands)
|
|
Contractual
Obligations
|
|
Remaining
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
and Thereafter
|
|
Operating
leases (2)
|
|
$
|
472
|
|
$
|
1,937
|
|
$
|
1,615
|
|
$
|
-
|
|
$
|
-
|
|
Minimum
royalty payments (1)
|
|
|
25
|
|
|
100
|
|
|
100
|
|
|
100
|
|
|
875
|
|
Leuchemix
equity purchases (3)
|
|
|
750
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
contractual cash obligations
|
|
$
|
1,247
|
|
$
|
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.
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.
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as amended. Based on this evaluation, our principal executive officer and our
principal financial officer concluded that, as of the end of the period covered
by this quarterly report, our disclosure controls and procedures were effective
to ensure that the information required to be disclosed by us in the reports
that we file or submit under the Securities Exchange Act of 1934 is accumulated
and communicated to management, including our chief executive officer and chief
financial officer, to allow timely decisions regarding required disclosure,
and
that such information is recorded, processed, summarized and reported within
the
time periods prescribed by the SEC.
(b)
Changes in Internal Control Over Financial Reporting
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. 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, the end of the prior quarter, 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. In
connection with the preparation of our Quarterly
Report for the three months ended June 30, 2006, we
performed additional analysis
of our license agreements to ensure that revenue reported in our June 30, 2006
interim consolidated financial statements was recognized in the proper period
in
accordance with generally accepted accounting principles.
Management
implemented additional controls and procedures, as summarized below, to
specifically address the deficiency noted as of June 30, 2006. Management
believes that the controls implemented are designed effectively and operated
effectively during the three months ended September 30, 2006 such that the
control deficiency identified above, has been fully remediated as of September
30, 2006. To remediate the above described material weakness, we implemented
the
following enhanced procedures and controls:
|
1)
|
Management
implemented enhanced procedures and controls which include an emphasis
on
the evaluation of revenue recognition for our license arrangements
with
non-standard terms and conditions.
|
|
2)
|
Management
created and implemented the use of a Revenue Recognition checklist
used by
accounting staff to facilitate, document and guide the Revenue Recognition
analysis under generally accepted accounting principles. The checklist
addresses and provides a framework for assessing the impact of certain
non-standard terms and conditions that may exist in agreements. The
checklist is completed for all new license agreements and is afforded
the
appropriate levels of review and authorization prior to the transaction
being entered into the general
ledger.
|
|
3)
|
Members
of management with responsibility for financial statement preparation
were
provided informal technical training regarding Revenue Recognition
under
SAB 104 and other applicable guidance, specifically related to the
complexities that non-standard contract language can give rise to
in the
analysis of appropriate revenue recognition. Management was trained
to
identify and more effectively assess the accounting impact of certain
non-standard contract terms on revenue
recognition.
|
Other
than the enhanced controls and procedures discussed above to remediate the
material weakness, there have been no changes in our internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the quarter ended September 30, 2006 which our
management concluded materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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.
You
should also carefully consider the following additional risk factor not
previously included in the documents incorporated by reference
above:
RISKS
RELATING TO THE COMBIMATRIX GROUP
Our
AR-CombiMatrix stock has traded
below the minimum bid price required by the Nasdaq Global Market continued
listing requirements for more
than thirty
consecutive business days,
and
we may be delisted from the Nasdaq Global Market if we are unable to achieve
compliance within 180 days following notice from Nasdaq.
Since
September 25,
2006, the trading
price of our AR-CombiMatrix stock has been below $1.00 per share. As a result,
we have failed
to meet the continued listing requirements of the Nasdaq Global Market
and will likely receive a notice from Nasdaq to comply with the standards or
face delisting from the exchange. As of the filing of this report, we have
not
received any notice from Nasdaq. If we receive such a notice from Nasdaq,
it
will be publicly disclosed. Following receipt of such notice, we would have
180
days to achieve compliance with the minimum bid price standard of $1.00 per
share. If we were unable to achieve compliance within 180 days, then our
AR-CombiMatrix stock would most likely be removed from trading on the Nasdaq
Global Market and begin trading on the OTC Bulletin Board until we were able
to
meet the initial listing requirements of a Nasdaq market or another national
exchange, such as Amex. If the AR-CombiMatrix stock is delisted, we would be
unable to provide any assurance that we would be eligible for listing on any
national exchange.
The
CombiMatrix group will not be able to meet its cash requirements over the next
12 months without obtaining additional capital from external sources, and if
it
is unable to do so, it may not be able to continue as a going
concern.
The
CombiMatrix group’s cash and cash equivalent balances, anticipated cash flows
from operations and other external sources of available credit should be
sufficient to meet its cash requirements through March 31, 2007. In order for
the CombiMatrix group to continue as a going concern beyond March 31, 2007,
the
CombiMatrix group will be required to obtain capital from external sources.
It
is unlikely it will be able to fund all needed financing from the remaining
capital available under the existing standby equity distribution agreement
with
Cornell Capital. If external financing sources are not available or are
inadequate to fund the operations of the CombiMatrix group, it could result
in
reduced revenues and cash flows from the sales of our CustomArray products
and
services and/or could jeopardize its ability to launch, market and sell
additional products and services necessary to grow and sustain its operations
and eventually achieve profitability. You should review the additional
information about the CombiMatrix group’s liquidity and capital resources
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The
CombiMatrix group plans to raise additional capital through the sale of equity
securities, and if the price of AR-CombiMatrix stock remains below $1.00 per
share, the dilution of existing stockholders could be greater than management
initially anticipated.
We
expect to sell the maximum number of shares available under the standby equity
distribution agreement with Cornell Capital in order to meet the capital
requirements of the CombiMatrix group. To date, we have sold 3,211,345 shares
out of a total of 13,024,924 shares available to be sold. In addition to selling
9,813,579 additional shares under the agreement with Cornell, we may need to
issue a significant number of additional shares of AR-CombiMatrix stock to
raise
the additional capital the CombiMatrix group needs over the next 12 months.
The
dilution of existing holders of AR-CombiMatrix stock could be more than
management initially anticipated if the stock price remains below $1.00 per
share.
The
recent decline in AR-CombiMatrix stock price could result in a goodwill
impairment for the CombiMatrix group.
Due
to the recent decline in the AR-CombiMatrix stock, the CombiMatrix group's
market value approximates its book value as of the date of this filing.
Should the AR-CombiMatrix stock continue to decline below the CombiMatrix
group's book value and if management concludes that the decline is other than
temporary, the CombiMatrix group's goodwill could be impaired.
Item
6. EXHIBITS
10.1
|
Manufacturing
and Supply Agreement with Furuno Electric Company, Ltd.,
effective July 1, 2006
|
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
(1)
|
__________________
(1) 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:
November 9, 2006
EXHIBIT
INDEX
EXHIBIT
NUMBER
|
EXHIBIT |
10.1
|
Manufacturing
and Supply Agreement with Furuno Electric Company, Ltd., effective
July 1,
2006
|
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
(1)
|
__________________
(1) Incorporated
by reference to Exhibit 99.1 of our Quarterly Report for the three months ended
March 31, 2006.
70