acacia_10q-093007.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
|
|
SECURITIES
EXCHANGE ACT OF 1934
|
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
Commission
File Number 0-26068
ACACIA
RESEARCH CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
95-4405754
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
|
|
|
500
Newport Center Drive, Newport Beach, CA
|
92660
|
(Address
of Principal Executive Offices)
|
(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 24, 2007, 29,911,638 shares of Acacia Research-Acacia Technologies
common stock were issued and outstanding.
ACACIA
RESEARCH CORPORATION
Table
of Contents
Part
I. Financial Information
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Consolidated
Balance Sheets as of
September 30, 2007 and December
31, 2006 (Unaudited)
|
1
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Income (Loss) for the
Three
Months and Nine Months Ended
September
30, 2007 and 2006 (Unaudited)
|
2
|
|
|
|
|
Consolidated
Statements of Cash
Flows for the Nine Months Ended September
30, 2007 and 2006 (Unaudited)
|
3
|
|
|
|
|
Notes
to Consolidated Financial
Statements (Unaudited)
|
4
|
|
|
|
Item
2.
|
Management’s
Discussion and
Analysis of Financial Condition and Results
of Operations
|
10
|
|
|
|
Item
3.
|
Quantitative
and Qualitative
Disclosures About Market Risk
|
17
|
|
|
|
Item
4.
|
Controls
and
Procedures
|
17
|
|
|
|
Part
II. Other Information
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
18
|
|
|
|
Item
1A.
|
Risk
Factors
|
18
|
|
|
|
Item
5.
|
Other
Information
|
18
|
|
|
|
Item
6.
|
Exhibits
|
18
|
|
|
|
Signatures
|
19
|
|
|
Exhibit
Index
|
20
|
ACACIA
RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share information)
(Unaudited)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
44,169
|
|
|
$ |
32,215
|
|
Short-term
investments
|
|
|
11,245
|
|
|
|
12,783
|
|
Accounts
receivable
|
|
|
1,211
|
|
|
|
269
|
|
Prepaid
expenses and other assets
|
|
|
1,429
|
|
|
|
1,187
|
|
Total
current assets related to discontinued operations - Split-off of
CombiMatrix Corporation
|
|
|
-
|
|
|
|
15,552
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
58,054
|
|
|
|
62,006
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
303
|
|
|
|
221
|
|
Patents,
net of accumulated amortization
|
|
|
15,814
|
|
|
|
18,515
|
|
Other
assets
|
|
|
204
|
|
|
|
200
|
|
Total
non-current assets related to discontinued operations - Split-off
of
CombiMatrix Corporation
|
|
|
-
|
|
|
|
28,662
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
74,375
|
|
|
$ |
109,604
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
3,446
|
|
|
$ |
2,201
|
|
Royalties
and legal fees payable
|
|
|
5,529
|
|
|
|
1,684
|
|
Deferred
revenues
|
|
|
462
|
|
|
|
360
|
|
Total
current liabilities related to discontinued operations - Split-off
of
CombiMatrix Corporation
|
|
|
-
|
|
|
|
3,211
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
9,437
|
|
|
|
7,456
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
160
|
|
|
|
31
|
|
Total
non-current liabilities related to discontinued operations - Split-off
of
CombiMatrix Corporation
|
|
|
-
|
|
|
|
7,808
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
9,597
|
|
|
|
15,295
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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;
100,000,000 shares authorized; 29,668,395 and 28,231,701 shares
issued and
outstanding as of September 30, 2007 and December 31, 2006,
respectively
|
|
|
30
|
|
|
|
28
|
|
Acacia
Research - CombiMatrix stock, par value $0.001 per share; 100,000,000
shares authorized; 0 and 50,365,810 shares issued and outstanding
as of
September 30, 2007 and December 31, 2006,
respectively
|
|
|
-
|
|
|
|
50
|
|
Additional
paid-in capital
|
|
|
156,409
|
|
|
|
326,599
|
|
Accumulated
comprehensive income
|
|
|
2
|
|
|
|
2
|
|
Accumulated
deficit
|
|
|
(91,663 |
) |
|
|
(232,370 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
64,778
|
|
|
|
94,309
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
74,375
|
|
|
$ |
109,604
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ACACIA
RESEARCH CORPORATION AND SUBSIDIARIES
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, 2007
|
|
|
September
30, 2006
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$ |
9,544
|
|
|
$ |
8,424
|
|
|
$ |
40,594
|
|
|
$ |
27,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and
administrative expenses (including non-cash stock compensation
expense of $1,869 and $3,776 for the three and nine
months ended
September 30, 2007 and $985 and $2,922 for the three and
nine months ended
September 30, 2006)
|
|
|
5,454
|
|
|
|
3,560
|
|
|
|
13,972
|
|
|
|
10,051
|
|
Legal
expenses - patents
|
|
|
2,027
|
|
|
|
2,354
|
|
|
|
4,463
|
|
|
|
3,803
|
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
5,669
|
|
|
|
2,623
|
|
|
|
23,197
|
|
|
|
12,741
|
|
Amortization
of patents
|
|
|
1,451
|
|
|
|
1,322
|
|
|
|
4,081
|
|
|
|
3,991
|
|
Write-off
of patent-related intangible asset
|
|
|
235
|
|
|
|
-
|
|
|
|
235
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
14,836
|
|
|
|
9,859
|
|
|
|
45,948
|
|
|
|
30,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(5,292 |
) |
|
|
(1,435 |
) |
|
|
(5,354 |
) |
|
|
(3,371 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and investment income
|
|
|
647
|
|
|
|
390
|
|
|
|
1,704
|
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(4,645 |
) |
|
|
(1,045 |
) |
|
|
(3,650 |
) |
|
|
(2,228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
(29 |
) |
|
|
(2 |
) |
|
|
(177 |
) |
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(4,674 |
) |
|
|
(1,047 |
) |
|
|
(3,827 |
) |
|
|
(2,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations - Split-off of CombiMatrix Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations - Split-off of CombiMatrix
Corporation
|
|
|
(2,286 |
) |
|
|
(4,329 |
) |
|
|
(8,086 |
) |
|
|
(15,549 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(6,960 |
) |
|
|
(5,376 |
) |
|
|
(11,913 |
) |
|
|
(17,817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on short-term investments
|
|
|
3
|
|
|
|
59
|
|
|
|
(17 |
) |
|
|
62
|
|
Unrealized
gains on foreign currency translation
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$ |
(6,957 |
) |
|
$ |
(5,315 |
) |
|
$ |
(11,930 |
) |
|
$ |
(17,753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
$ |
(4,674 |
) |
|
$ |
(1,047 |
) |
|
$ |
(3,827 |
) |
|
$ |
(2,268 |
) |
Basic
and diluted loss per share
|
|
|
(0.16 |
) |
|
|
(0.04 |
) |
|
|
(0.14 |
) |
|
|
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations - Split-off of CombiMatrix Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations - Split-off of CombiMatrix
Corporation
|
|
$ |
(2,286 |
) |
|
$ |
(4,329 |
) |
|
$ |
(8,086 |
) |
|
$ |
(15,549 |
) |
Basic
and diluted loss per share
|
|
|
(0.04 |
) |
|
|
(0.11 |
) |
|
|
(0.14 |
) |
|
|
(0.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - Acacia Technologies stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
28,739,499
|
|
|
|
27,567,848
|
|
|
|
28,296,328
|
|
|
|
27,492,410
|
|
Acacia
Research - CombiMatrix stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
59,875,769
|
|
|
|
40,209,640
|
|
|
|
55,862,707
|
|
|
|
39,411,421
|
|
The
accompanying notes are an integral part of these
consolidated financial statements.
ACACIA
RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
|
For
the Nine Months Ended
|
|
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(11,913 |
) |
|
$ |
(17,817 |
) |
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,168
|
|
|
|
4,046
|
|
|
Non-cash
stock compensation
|
|
|
3,776
|
|
|
|
2,922
|
|
|
Deferred
taxes
|
|
|
-
|
|
|
|
(36 |
) |
|
Loss
on disposal of discontinued operations - Split-off of CombiMatrix
Corporation
|
|
|
8,086
|
|
|
|
15,549
|
|
|
Write-off
of patent-related intangible asset
|
|
|
235
|
|
|
|
297
|
|
|
Other
|
|
|
(5 |
) |
|
|
(82 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(942 |
) |
|
|
2,946
|
|
|
Prepaid
expenses and other assets
|
|
|
133
|
|
|
|
(296 |
) |
|
Accounts
payable and accrued expenses
|
|
|
1,255
|
|
|
|
2,020
|
|
|
Royalties
and legal fees payable
|
|
|
3,845
|
|
|
|
(1,415 |
) |
|
Deferred
revenues
|
|
|
102
|
|
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities from continuing
operations
|
|
|
8,740
|
|
|
|
8,018
|
|
|
Net
cash used in operating activities from discontinued
operations
|
|
|
(8,163 |
) |
|
|
(11,717 |
) |
|
Net
cash provided by (used in) operating activities
|
|
|
577
|
|
|
|
(3,699 |
) |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(170 |
) |
|
|
(124 |
) |
|
Purchase
of available-for-sale investments
|
|
|
(7,726 |
) |
|
|
(13,906 |
) |
|
Sale
of available-for-sale investments
|
|
|
9,287
|
|
|
|
17,934
|
|
|
Business
acquisition
|
|
|
-
|
|
|
|
(16 |
) |
|
Patent
acquisition costs
|
|
|
(1,595 |
) |
|
|
(1,020 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities from continuing
operations
|
|
|
(204 |
) |
|
|
2,868
|
|
|
Net
cash provided by (used in) investing activities from discontinued
operations
|
|
|
(2,738 |
) |
|
|
5,913
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(2,942 |
) |
|
|
8,781
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from the exercise of stock options
|
|
|
3,582
|
|
|
|
455
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities from continuing
operations
|
|
|
3,582
|
|
|
|
455
|
|
|
Net
cash provided by financing activities from discontinued
operations
|
|
|
5,369
|
|
|
|
2,090
|
|
|
Net
cash provided by financing activities
|
|
|
8,951
|
|
|
|
2,545
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
6,586
|
|
|
|
7,627
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning (including cash and cash equivalents
related to discontinued operations - split-off of CombiMatrix Corporation
of $7,829 and $5,666, respectively)
|
|
|
40,044
|
|
|
|
20,164
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending
|
|
|
46,630
|
|
|
|
27,791
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Cash and cash equivalents of discontinued operations,
ending
|
|
|
(2,461 |
) |
|
|
(2,304 |
) |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents of continuing operations, ending
|
|
$ |
44,169
|
|
|
$ |
25,487
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ACACIA
RESEARCH CORPORATION AND
SUBSIDIARIES
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 Acacia Research Corporation, and its wholly owned operating
subsidiaries.
Acacia
Research Corporation’s operating subsidiaries acquire, develop, license and
enforce patented technologies. Acacia Research Corporation’s
operating subsidiaries generate license fee revenues and related cash flows
from
the granting of licenses for the use of their patented
technologies. Our operating subsidiaries assist patent owners with
the prosecution and development of their patent portfolios, the protection
of
their patented inventions from unauthorized use, the generation of licensing
revenue from users of their patented technologies and, if necessary, with the
enforcement against unauthorized users of their patented technologies. On a
consolidated basis, our operating subsidiaries own or control the rights to
81
patent portfolios, covering technologies used in a wide variety of
industries.
CombiMatrix
Group Split-off Transaction and Related Discontinued
Operations. In January 2006, Acacia Research
Corporation’s board of directors approved a plan for its wholly owned
subsidiary, CombiMatrix Corporation, the primary component of Acacia Research
Corporation’s CombiMatrix group, to become an independent public
company. CombiMatrix Corporation’s registration statement on Form S-1
was declared effective by the Securities and Exchange Commission (“SEC”) on June
8, 2007. Following the redemption period required by Acacia Research
Corporation’s Restated Certificate of Incorporation, on August 15, 2007
(the “Redemption Date”), CombiMatrix Corporation was split-off from Acacia
Research Corporation through the redemption of all outstanding shares of Acacia
Research-CombiMatrix common stock and the distribution of new shares of
CombiMatrix Corporation common stock, on a pro-rata basis, to the holders of
Acacia Research-CombiMatrix stock on the Redemption Date (the “Split-off
Transaction”). On the Redemption Date, every ten (10) shares of Acacia
Research-CombiMatrix stock outstanding on August 15, 2007, was redeemed for
one
(1) share of common stock of CombiMatrix Corporation. Subsequent to
the Redemption Date, Acacia Research Corporation no longer owns any equity
interests in CombiMatrix Corporation and the two companies operate independently
of each other.
As
a
result of the Split-off Transaction, we have disposed of our investment in
CombiMatrix Corporation. Refer to Note 7 for information regarding
presentation of the assets, liabilities, results of operations and cash flows
for the CombiMatrix group as Discontinued Operations in the accompanying
consolidated financial statements for all periods presented, in accordance
with
guidance set forth in SFAS No. 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”).
Capital
Structure. As a result of the Split-off Transaction, the
CombiMatrix group is no longer a business group of Acacia Research
Corporation. As a result of the Split-off Transaction, all
outstanding shares of AR-CombiMatrix stock were redeemed, and hence, all rights
of holders of AR-CombiMatrix stock ceased as of the Redemption Date, except
for
the right, upon the surrender to the exchange agent of shares of AR-CombiMatrix
stock, to receive new shares of CombiMatrix Corporation stock pursuant to the
exchange ratio described above. Subsequent to the consummation of the
Split-off Transaction, Acacia Research Corporation’s only class of common stock
outstanding is its AR-Acacia Technologies stock.
Prior
to
the Split-off Transaction, Acacia Research Corporation had two classes of common
stock outstanding, its Acacia Research-Acacia Technologies common stock
(“AR-Acacia Technologies stock”) and its Acacia Research-CombiMatrix common
stock (AR-CombiMatrix stock). AR-Acacia Technologies stock was
intended to reflect separately the performance of Acacia Research Corporation’s
Acacia Technologies group. AR-CombiMatrix stock was intended to
reflect separately the performance of Acacia Research Corporation’s CombiMatrix
group. Although the AR-Acacia Technologies stock and the
AR-CombiMatrix stock were intended to reflect the performance of our different
business groups, they were both classes of common stock of Acacia Research
Corporation and were not stock issued by the respective groups.
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 accounting principles generally accepted in the United States of America
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 accounting principles generally accepted in the United
States of America 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, 2006, as reported by us in our Annual Report on Form 10-K. The
year-end consolidated balance sheet data was derived from audited financial
statements but does not include all disclosures required by accounting
principles generally accepted in the United States of America.
ACACIA
RESEARCH CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
consolidated financial statements of Acacia Research Corporation include all
adjustments of a normal recurring nature which, in the opinion of management,
are necessary for a fair statement of our financial position as of September
30,
2007, 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, 2007 are not necessarily indicative of the results to be
expected for the entire year.
2. SUMMARY
OF SIGNIFICANT
ACCOUNTING POLICIES
Use
of Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted 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 licensees
individually accounted for 26% and 11% of license fee revenues recognized during
the three months ended September 30, 2007, and two licensees
individually accounted for 24% and 16% of license fee revenues recognized during
the nine months ended September 30, 2007. Two licensees individually accounted
for 59%, and 11% of license fee revenues recognized during the three months
ended September 30, 2006, and three licensees individually accounted for 11%,
12% and 18% of license fee revenues recognized during the nine months ended
September 30, 2006. Two licensees individually represented approximately 39%
and
36% of accounts receivable at September 30, 2007. Three licensees individually
represented approximately 37%, 24% and 13% of accounts receivable at December
31, 2006.
Segments. As
of September 30, 2007, under the provisions of SFAS No. 131, “Disclosures
about Segments of an Enterprise and Related Information,” we have one reportable
segment, our intellectual property acquisition, development, licensing and
enforcement segment. As a result of the Split-off Transaction, as of
the Redemption Date, Acacia Research Corporation has disposed of its investment
in CombiMarix Corporation and no longer has an ownership interest in CombiMatrix
Corporation. As such, as of the Redemption Date, the CombiMatrix
group is no longer a reportable segment.
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.
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, on a
straight-line basis, over the employee’s requisite service period (generally the
vesting period of the equity award) which is generally two to four
years.
The
fair
value of each option award is estimated on the date of grant using a
Black-Scholes option valuation model. 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 underlying common stock.
SFAS
No.
123R requires stock-based compensation expense to be recorded only for those
awards expected to vest using an estimated forfeiture rate. Acacia
Research Corporation estimates pre-vesting option forfeitures at the time of
grant and reflects the impact of estimated pre-vesting option forfeitures on
compensation expense recognized.
Income
Taxes. Effective January 1, 2007, Acacia Research Corporation
adopted FASB 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. In accordance with FIN 48, a
tax position is a position in a previously filed tax return or a position
expected to be taken in a future tax filing that is reflected in measuring
current or deferred income tax assets and liabilities. Tax positions shall
be
recognized only when it is more likely than not (likelihood of greater than
50%), based on technical merits, that the position will be sustained upon
examination. Tax positions that meet the more likely than not threshold should
be measured using a probability weighted approach as the largest amount of
tax
benefit that is greater than 50% likely of being realized upon
settlement. The adoption of FIN 48 did not have a material impact on
our consolidated financial position, results of operations or cash
flows.
ACACIA
RESEARCH CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
total
amount of unrecognized tax benefits as of January 1, 2007 and September 30,
2007
was $56,000, all of which, if recognized, would affect the effective tax
rate.
Acacia
Research Corporation recognizes interest and penalties with respect to
unrecognized tax benefits in income tax expense. We have identified no
uncertain tax position for which it is reasonably possible that the total amount
of unrecognized tax benefits will significantly increase or decrease within
12
months.
Acacia
Research Corporation is subject to taxation in the U.S. and various state
jurisdictions. With no material exceptions, Acacia Research Corporation is
no
longer subject to U.S. federal or state examinations by tax authorities for
years before 2001.
At
December 31, 2006, Acacia Research Corporation’s U.S. federal and state income
tax net operating loss carryforwards were approximately $53,727,000 (excluding
NOLs related to subsidiaries for which Acacia Research Corporation does not
file
a consolidated return) and $54,700,000, expiring between 2007 and
2026. Due to uncertainties surrounding our ability to generate future
taxable income to realize these assets, a full valuation allowance has been
established to offset our net deferred tax assets. All NOLs and tax
credits generated by the continuing operations of Acacia Research Corporation
and its operating subsidiaries have been retained by Acacia Research Corporation
subsequent to the Split-off Transaction. Subsequent to the Split-off
Transaction, all NOLs and tax credits generated by CombiMatrix Corporation
and
its subsidiaries have been retained by CombiMatrix Corporation and are not
available to Acacia Research Corporation.
Utilization
of the NOL and R&D credit carryforwards may be subject to a substantial
annual limitation due to ownership change limitations that may have occurred
or
that could occur in the future, as required by Section 382 of the Internal
Revenue Code of 1986, as amended (the “Code”), as well as similar state
provisions. These ownership changes may limit the amount of NOL and R&D
credit carryforwards that can be utilized annually to offset future taxable
income and tax, respectively. In general, an “ownership change” as defined by
Section 382 of the Code results from a transaction or series of transactions
over a three-year period resulting in an ownership change of more than 50
percentage points of the outstanding stock of a company by certain stockholders
or public groups. Since Acacia Research Corporation’s formation, we
have raised capital through the issuance of capital stock on several occasions
(both before and after its public offering) which, combined with the purchasing
stockholders’ subsequent disposition of those shares, may have resulted in such
an ownership change, or could result in an ownership change in the future upon
subsequent disposition.
We
have
not completed a study to assess whether an ownership change has occurred or
whether there have been multiple ownership changes since our formation due
to
the complexity and cost associated with such a study, and the fact that there
may be additional such ownership changes in the future. If we have experienced
an ownership change at any time since our formation, utilization of the NOL
or
R&D credit carryforwards would be subject to an annual limitation under
Section 382 of the Code, which is determined by first multiplying the value
of
Acacia Research Corporation's stock at the time of the ownership change by
the
applicable long-term, tax-exempt rate, and then could be subject to additional
adjustments, as required. Any limitation may result in expiration of a portion
of the NOL or R&D credit carryforwards before utilization. Further, until a
study is completed and any limitation known, no amounts are being considered
as
an uncertain tax position or disclosed as an unrecognized tax benefit under
FIN
48. Due to the existence of a full valuation allowance, future changes in our
unrecognized tax benefits will not impact our effective tax rate. Any
carryforwards that will expire prior to utilization as a result of such
limitations will be removed from deferred tax assets with a corresponding
reduction of the valuation allowance.
3. EARNINGS
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
or
loss 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 common stock equivalents. Potentially dilutive common stock equivalents
primarily consist of employee stock options, unvested restricted stock,
restricted stock unit grants and common stock purchase warrants.
ACACIA
RESEARCH CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, consistently applied. We believe this
method of allocation to be systematic and reasonable. As a result of
the Split-off Transaction, earnings or losses allocated
to the CombiMatrix group are presented as Discontinued Operations in the
accompanying consolidated financial statements. Subsequent to the Split-off
Transaction, Acacia Research Corporation’s only class of common stock
outstanding is its AR-Acacia Technologies stock.
The
following table presents the weighted-average number of common shares
outstanding used in basic and diluted loss per share:
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
Acacia
Research - Acacia Technologies stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average number of common shares
outstanding
|
|
|
28,739,499
|
|
|
|
27,567,848
|
|
|
|
28,296,328
|
|
|
|
27,492,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
stock options and restricted stock excluded from the computation
of
diluted income (loss) per share because the effect of inclusion
would have
been anti-dilutive
|
|
|
5,910,137
|
|
|
|
6,520,052
|
|
|
|
5,910,137
|
|
|
|
6,520,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - CombiMatrix stock (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average number of common shares
outstanding
|
|
|
59,875,769
|
|
|
|
40,209,640
|
|
|
|
55,862,707
|
|
|
|
39,411,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
outstanding stock options excluded from the computation of diluted
loss
per share because the effect of inclusion would have been
anti-dilutive
|
|
|
7,003,390
|
|
|
|
8,557,557
|
|
|
|
7,003,390
|
|
|
|
8,557,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
outstanding common stock purchase warrants excluded from the
computation
of
diluted loss per share because the effect of inclusion would
have been
anti dilutive
|
|
|
23,838,648
|
|
|
|
1,879,888
|
|
|
|
23,838,648
|
|
|
|
1,879,888
|
|
_____________________
(1) Includes
AR-CombiMatrix
stock activity for the three and nine months ended September 30, 2007 up to
August 15, 2007, the Redemption Date.
4. INTANGIBLE
ASSETS
Acacia
Research Corporation’s only identifiable intangible assets at September 30, 2007
and December 31, 2006, are patents and patent rights. Patent related
accumulated amortization totaled $15,828,000 and $11,802,000 as of September
30,
2007 and December 31, 2006, respectively.
Our
patents and patent rights have remaining estimated economic useful lives ranging
from one to seven years. The weighted average remaining estimated
economic useful life of our patents and patent rights is four
years. Annual aggregate amortization expense is estimated to be
$1,454,000 for the remainder of 2007, $4,494,000 in 2008, $4,042,000 in 2009,
$3,833,000 in 2010 and $2,923,000 in 2011. At September 30, 2007 and
December 31, 2006, all of our acquired intangible assets were subject to
amortization.
For
the
nine months ended September 30, 2007 and 2006, we incurred patent acquisition
costs totaling $1,595,000 and $1,020,000 in connection with the acquisition
of
the rights to additional patent portfolios. The patents and patent
rights acquired have estimated economic useful lives ranging from five to seven
years.
During
the three months ended September 30, 2007, we recorded a non-cash impairment
charge of $235,000, related to the write-off of a patent-related intangible
asset. The related licensing program was completed during the third
quarter of 2007 resulting in the write-off of the remaining carrying value
of
the patent-related intangible asset as of September 30, 2007. During
the three months ended June 30, 2006, we 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.
ACACIA
RESEARCH CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. RECENT
ACCOUNTING
PRONOUNCEMENTS
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value, with unrealized gains and losses related to these financial instruments
reported in earnings at each subsequent reporting date. We do not expect
the adoption of SFAS No. 159 to have a material impact, if any, on our
consolidated 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 do not expect the adoption of SFAS No. 157 to have a
material impact, if any, on our consolidated financial position, results of
operations and cash flows.
6. COMMITMENTS
AND
CONTINGENCIES
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. Operating subsidiaries of Acacia Research Corporation
are often required to engage in litigation to enforce their patents and patent
rights.
Inventor
Royalties and Contingent Legal Expenses
In
connection with the acquisition of certain patents and patent rights, certain
operating subsidiaries of Acacia Research Corporation 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 as a result of
licensing the respective patents or patent portfolios. Inventor
royalties paid pursuant to the agreements are expensed in the consolidated
statements of operations and comprehensive income (loss) in the period that
the
related license fee revenues are recognized.
In
connection with the licensing and enforcement activities of our operating
subsidiaries, they 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. In instances where there are no recoveries
from potential infringers (ie. license fees), no contingent legal fees are
paid;
however, our operating subsidiaries may be liable for certain out of pocket
legal costs incurred pursuant to the underlying legal services
agreement. Legal fees advanced by contingent law firms that are
required to be paid in the event that no license recoveries are obtained are
expensed as incurred and included in liabilities in the consolidated balance
sheet.
Guarantees
and Indemnifications
Certain
of our operating subsidiaries have made guarantees and indemnities under which
they 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 and certain of its operating subsidiaries have indemnified
lessors for certain claims arising from the facilities or the
leases. 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 that we could
be obligated to make. To date, we have made no payments related to
these guarantees and indemnities. We estimate the fair value of our
indemnification obligations to be insignificant based on this history and have
therefore, not recorded any liability for these guarantees and indemnities
in
the accompanying consolidated balance sheets.
7. DISCONTINUED
OPERATIONS
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. CombiMatrix Corporation’s registration
statement on Form S-1 was declared effective by the SEC on June 8, 2007.
Following the redemption period required by Acacia Research Corporation’s
Restated Certificate of Incorporation, on August 15, 2007 (the “Redemption
Date”), CombiMatrix Corporation was split-off from Acacia Research Corporation
through the redemption of all outstanding shares of AR-CombiMatrix common stock
and the distribution of new shares of CombiMatrix Corporation common stock,
on a
pro-rata basis, to the holders of AR-CombiMatrix stock as of the Redemption
Date
(the “Split-off Transaction”). On the Redemption
Date, every ten (10) shares of AR-CombiMatrix stock outstanding on August 15,
2007, was redeemed for one (1) share of common stock of CombiMatrix
Corporation. Subsequent to the Redemption Date, Acacia Research
Corporation no longer owns any equity interests in CombiMatrix Corporation
and
the two companies operate independently of each other.
ACACIA
RESEARCH CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As
a
result of the Split-off Transaction, the CombiMatrix group is no longer a
business group of Acacia Research Corporation. As a result of the
Split-off Transaction, all outstanding shares of AR-CombiMatrix stock were
redeemed, and hence, all rights of holders of AR-CombiMatrix stock ceased as
of
the Redemption Date, except for the right, upon the surrender to the exchange
agent of shares of AR-CombiMatrix stock, to receive new shares of CombiMatrix
Corporation stock pursuant to the exchange ratio described above.
As
a
result of the consummation of the Split-off Transaction, the assets,
liabilities, results of operations and cash flows of CombiMatrix Corporation
have been eliminated from the continuing operations of Acacia Research
Corporation and Acacia Research Corporation does not have any continuing
involvement in the operations of CombiMatrix Corporation. As a result
of the Split-off Transaction we have disposed of our investment in CombiMatrix
Corporation, and therefore, in accordance with guidance set forth in SFAS No.
144, Acacia Research Corporation’s accompanying consolidated balance sheets,
statements of operations and statements of cash flows for the current periods
presented reflect the assets, liabilities, results of operations and cash flows
for CombiMatrix Corporation as Discontinued Operations. Consolidated
financial statements presented for the comparable prior year periods have been
restated to conform to this presentation. CombiMatrix Corporation was
previously presented as a separate operating segment of Acacia Research
Corporation under SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information.”
The
Split-off Transaction was accounted for by Acacia Research Corporation at
historical cost. Accordingly, no gain or loss on disposal was
recognized in the accompanying consolidated statements of operations. Included
in the current period consolidated balance sheet is a charge to
consolidated shareholders’ equity totaling $35,444,000, reflecting the pro rata
distribution of our investment in the net assets of CombiMatrix Corporation
to
holders of AR-CombiMatrix stock, as of the Redemption Date, as described
above. We received a private letter ruling from the IRS with regard
to the U.S. federal income tax consequences of the Split-off Transaction to
the
effect that the Split-Transaction will be treated as a tax-free exchange under
Sections 368 and 355 of the Internal Revenue Code of 1986, as
amended.
The
carrying amount(s) of the major classes of assets and liabilities and revenues
and pretax loss included in Discontinued Operations for the periods presented
were as follows (in thousands):
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
Cash
and available-for-sale
investments
|
|
|
-
|
|
|
|
14,342
|
|
Accounts
receivable, inventory and other
asset
|
|
|
-
|
|
|
|
1,210
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
-
|
|
|
|
1,785
|
|
Intangibles
|
|
|
-
|
|
|
|
24,210
|
|
Other
assets
|
|
|
-
|
|
|
|
2,667
|
|
Accounts
payable and accrued
expenses
|
|
|
-
|
|
|
|
(2,846 |
) |
Deferred
revenues
|
|
|
-
|
|
|
|
(1,441 |
) |
Warrant
liability
|
|
|
-
|
|
|
|
(6,732 |
) |
|
|
Revenues
(1)
|
|
|
Pre-tax
Loss (1)
|
|
For
the three months ended September 30, 2007
|
|
|
495
|
|
|
|
(2,286 |
) |
For
the three months ended September 30, 2006
|
|
|
1,844
|
|
|
|
(4,329 |
) |
For
the nine months ended September 30, 2007
|
|
|
2,968
|
|
|
|
(8,086 |
) |
For
the nine months ended September 30, 2006
|
|
|
4,881
|
|
|
|
(15,549 |
) |
_____________________
(1) Includes
the results of
CombiMatrix Corporation for the three and nine months ended September 30, 2007
up to August 15, 2007, the Redemption Date.
Net
loss
from Discontinued operations related to CombiMatrix Corporation includes direct
costs incurred in connection with the Split-off Transaction, originally included
in Acacia Research Corporation corporate accounts, totaling $0 and $136,000
for
the three and nine months ended September 30, 2007 and $2,000 and $91,000 for
the three and nine months ended 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, 2006,
filed with the SEC on March 14, 2007.
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 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.
General
As
used
in this Form 10-Q, the “Company,” “we,” “us” and “our” refer to Acacia Research
Corporation and its subsidiary companies. As a result of the
Split-off Transaction described below, Acacia Research Corporation and
subsidiaries has one reportable segment.
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, 2007, and on our unaudited consolidated statements
of
operations for the period from January 1, 2007 to September 30, 2007. The
discussion compares the activities for the three and nine months ended September
30, 2007, to the activities for the three and nine months ended September 30,
2006. 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” referred to in Part II, Item 1A of this report.
Business
Acacia
Research Corporation’s operating subsidiaries acquire, develop, license and
enforce patented technologies. Acacia Research Corporation’s
operating subsidiaries generate license fee revenues and related cash flows
from
the granting of licenses for the use of their patented
technologies. Our operating subsidiaries assist patent owners with
the prosecution and development of their patent portfolios, the protection
of
their patented inventions from unauthorized use, the generation of licensing
revenue from users of their patented technologies and, if necessary, with the
enforcement against unauthorized users of their patented technologies. On a
consolidated basis, our operating subsidiaries own or control the rights to
81
patent portfolios, covering technologies used in a wide variety of
industries.
Other
CombiMatrix
Group Split-off Transaction and Related Discontinued
Operations. As discussed below under the caption
“Discontinued Operations – Split-off of CombiMatrix Corporation,” the
CombiMatrix group, which was previously presented as a separate reportable
segment, was split-off from Acacia Research Corporation (the “Split-off
Transaction”), effective August 15, 2007 (the “Redemption Date”). As
such, the results of operations for the CombiMatrix group in the accompanying
consolidated financial statements are presented as part of Acacia Research
Corporation’s results from Discontinued Operations in accordance with SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS
No. 144. Accordingly, the CombiMatrix group’s results of operations
in prior periods have been reclassified to discontinued operations to conform
to
the current period presentation.
Overview
Our
operating activities for the three and nine months ended September 30, 2007
and
2006, were principally focused on the continued development, licensing and
enforcement of our patent portfolios, including the continued pursuit of
multiple ongoing technology licensing and enforcement programs and
the commencement of new technology licensing and enforcement
programs. In addition, we continued our focus on business
development, including the acquisition of several additional patent portfolios
and the continued pursuit of opportunities to partner with patent owners and
provide our unique intellectual property licensing, development and enforcement
services.
License
fee revenues recognized for the three months ended September 30, 2007 totaled
$9.5 million, versus $8.4 million for the comparable 2006
period. License fee revenues recognized for the nine months ended
September 30, 2007 totaled $40.6 million, versus $27.5 million for the
comparable 2006 period. Trailing twelve-month revenues were $47.9
million as of September 30, 2007, as compared to $46.8 million as of June 30,
2007, $55.3 million as of March 31, 2007, $34.8 million at December 31, 2006,
and $35.8 million at September 30, 2006.
Revenues
included license fees from 5 new technology licensing and enforcement programs
during the nine months ended September 30, 2007, including our Spreadsheet
Automation technology, Rule-Based Monitoring technology, Digital Color
Correction for Video Graphics Systems technology, Virtual Computer Workspace
technology and Portable Storage Devices with Links technology licensing
programs. Revenues for the nine months ended September 30, 2007 also
included fees from the licensing of our DMT® technology, Audio/Video Enhancement
and Synchronization technology, Audio Communications Fraud Detection technology,
Credit Card Fraud Protection technology, Image Resolution Enhancement
technology, Pop-Up Advertising technology, Multi-dimensional Bar Codes, and
Product Activation technology licensing programs. To date, our
operating subsidiaries have generated revenues from 25 technology licensing
and
enforcement programs.
Marketing,
general and administrative expenses increased during the three and nine months
ended September 30, 2007, as compared to the three and nine months ended
September 30, 2006. The overall increase in marketing, general and
administrative expenses is reflective of the continued growth and expansion
of
the Company’s intellectual property acquisition, licensing and enforcement
business and related ongoing operations. Inventor
royalties expenses and contingent legal fee expenses increased during the three
and nine months ended September 30, 2007, versus the comparable 2006 period,
primarily due to the related fluctuations in license fee revenues, as discussed
above, and the impact of the varying economic terms related to inventor
agreements and contingent legal fee arrangements associated with the revenue
generating patent portfolios in each period.
During
the nine months ended September 30, 2007, Acacia Patent Acquisition Corporation
continued to execute its business strategy in the area of patent portfolio
acquisitions, including the acquisition of, or the acquisition of the rights
to,
21 patent portfolios covering a variety of applications. Patent
rights acquired during the three months ended September 30, 2007 included the
following:
·
|
Ecommerce
Pricing. This patented technology generally relates
to transacting business over a network such as the Internet.
This technology can be used in auctions or competitive transactions
where the final price is based upon the buyer’s
actions.
|
·
|
Database
Access. This patented technology generally facilitates
smoother interoperation between databases and applications and can
be
deployed in a variety of markets including ecommerce, healthcare,
telecom,
and finance.
|
·
|
Mulit-Dimensional
Database Compression. This patented technology
generally relates to the compression of databases. The
technology enables the compressed information to be accessible in
real
time and generates cost savings in enterprise
storage.
|
·
|
Vehicle
Location. This patented technology generally relates to
systems capable of locating vehicles and providing subsequent services
from a remote location. It covers satellite-based location systems,
such as GPS, and is applicable to vehicle tracking, vehicle assistance
services and other similar
services.
|
·
|
Video
Editing. This patented technology generally relates to altering video
streams in real time to remove portions of an original image and
substitute elements to create a new image. This technology can be
used to digitally change the background of a video image without
using
traditional blue screen techniques.
|
·
|
Heated
Surgical Blades. This patented technology relates to
surgical instruments, such as scalpels, that are heated to reduce
bleeding
when tissue is cut. These devices can be used in orthopedics,
endoscopy, arthroscopy, trauma, wound care, cosmetic, and numerous
other
surgical procedures.
|
·
|
Graphic
Data Processing. The patented
technology relates to the processing of graphics data,
including clipping, masking and writing of pixel data to memory.
The
technology has applications in PC's and gaming
consoles.
|
Refer
to
“Liquidity and Capital Resources” below for information regarding the impact of
patent and patent rights acquisitions on the consolidated financial statements
for the periods presented.
As
of
September 30, 2007, we had several option agreements with third-party patent
portfolio owners regarding the potential acquisition of additional patent
portfolios. Future patent portfolio acquisitions will continue to
expand and diversify our revenue generating opportunities and accelerate the
execution of our business strategy, as we continue to build our leadership
position in patent licensing.
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 2006 Annual Report on Form 10-K, filed on March 14, 2007,
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.
Acacia
Research Corporation
Comparison
of the Results of Operations for the Three and Nine Months Ended September
30,
2007 and 2006
Net
Loss (In thousands)
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(4,674 |
) |
|
$ |
(1,047 |
) |
|
$ |
(3,827 |
) |
|
$ |
(2,268 |
) |
Loss
from discontinued operations - Split-off of CombiMatrix
Corporation
|
|
|
(2,286 |
) |
|
|
(4,329 |
) |
|
|
(8,086 |
) |
|
|
(15,549 |
) |
Net
loss
|
|
|
(6,960 |
) |
|
|
(5,376 |
) |
|
|
(11,913 |
) |
|
|
(17,817 |
) |
The
changes in net loss from continuing operations for the periods presented 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, 2007
|
|
|
September
30, 2006
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$ |
9,544
|
|
|
$ |
8,424
|
|
|
$ |
40,594
|
|
|
$ |
27,512
|
|
License
Fees.
Revenues for the three months ended September 30, 2007 included license fees
from 27 new licensing agreements covering 7 of our technology licensing and
enforcement programs, as compared to10 new licensing agreements covering 7
of
our technology licensing and enforcement programs in the comparable 2006
period. Revenues for the nine months ended September 30, 2007
included license fees from 69 new licensing agreements covering 13 of our
technology licensing and enforcement programs, as compared to 58 new licensing
agreements covering 12 of our technology licensing and enforcement programs
in
the comparable 2006 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 ongoing licensing activities, other than inventor
royalties expense, contingent legal fees expense and patent-related legal
expenses, are included in marketing, general and administrative expenses
in the
accompanying consolidated statements of operations.
Operating
Expenses (In thousands)
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense of $1,869 and $3,776 for the three and nine months ended
September
30, 2007 and $985 and $2,922 for the three and nine months ended
September
30, 2006)
|
|
$ |
5,454
|
|
|
$ |
3,560
|
|
|
$ |
13,972
|
|
|
$ |
10,051
|
|
Legal
expenses - patents
|
|
|
2,027
|
|
|
|
2,354
|
|
|
|
4,463
|
|
|
|
3,803
|
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
5,669
|
|
|
|
2,623
|
|
|
|
23,197
|
|
|
|
12,741
|
|
Amortization
of patents
|
|
|
1,451
|
|
|
|
1,322
|
|
|
|
4,081
|
|
|
|
3,991
|
|
Write-off
of patent-related intangible asset
|
|
|
235
|
|
|
|
-
|
|
|
|
235
|
|
|
|
297
|
|
Marketing,
General and Administrative Expenses. The net increase for the
periods presented was due primarily to the addition of licensing, business
development and engineering personnel since the end of the comparable 2006
period and an increase in other personnel related expenses, a one-time
severance charge for an employee separation under the Acacia Research
Corporation Executive Severance Plan in the first quarter of 2007, an increase
in patent acquisition and business development related research and consulting
costs and an increase in corporate, general and administrative
costs. The overall increase in marketing, general and administrative
expenses is reflective of the continued growth and expansion of the Company’s
intellectual property acquisition, licensing and enforcement business and
related ongoing operations. These increases were partially
offset by a decrease in consulting expenses due to the expiration of the
consulting agreement with the former CEO of Global Patent Holdings, LLC in
January 2007. Non-cash stock compensation charges increased during
the three and nine months ended September 30, 2007, as compared to the three
and
nine months ended September 30, 2006, due to the issuance of additional equity
based incentive awards to new and existing employees during the second and
third
quarter of 2007. There were no new grants of equity based incentive
awards to existing employees during fiscal 2006. Non-cash stock
compensation expense for the nine months ended September 30, 2007 includes
a
credit of $170,000 related to the reversal of certain non-cash stock
compensation charges, originally recorded in prior periods, resulting from
the
pre-vesting forfeiture of certain share-based awards in connection with the
employee separation referred to above.
A
summary
of the main drivers of the change in marketing, general and administrative
expenses for the periods presented is as follows (in thousands):
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2007
vs. 2006
|
|
|
2007
vs. 2006
|
|
Increase
in personnel expenses
|
|
$ |
809
|
|
|
$ |
2,153
|
|
Decrease
in GPH Acquisition related consulting expenses
|
|
|
(250 |
) |
|
|
(675 |
) |
One-time
severance charge for employee separation
|
|
|
-
|
|
|
|
360
|
|
Increase
in foreign taxes paid on licensing fees
|
|
|
-
|
|
|
|
151
|
|
Increase
in patent development / commercialization and other
|
|
|
|
|
|
|
|
|
marketing,
general and administrative costs
|
|
|
451
|
|
|
|
1,078
|
|
Increase
in non-cash stock compensation expense
|
|
|
884
|
|
|
|
854
|
|
Legal
Expense – Patents. Patent-related legal expenses include
patent-related prosecution and enforcement costs incurred by outside law firms
engaged on an hourly basis and the out-of-pocket expenses incurred by outside
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. We
expect patent-related legal expenses to continue to fluctuate period to period
based on the factors summarized above in connection with our ongoing patent
commercialization and enforcement programs.
Inventor
Royalties and Contingent Legal Fees Expense. For the three and nine months
ended September 30, 2007, inventor royalties expenses were $2.7 million and
$9.8
million, respectively, as compared to $1.8 million and $7.1 million for the
three and nine months ended September 30, 2006. Contingent legal fee
expenses incurred during the three and nine months ended September 30, 2007
were
$3.0 million and $13.4 million, respectively, as compared to $786,000 and $5.6
million during the three and nine months ended September 30, 2006,
respectively. The majority of the patent portfolios owned
or controlled by our operating subsidiaries 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 our patent
portfolios. As such, inventor royalties and contingent legal fee
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.
The
third
quarter 2007 increase in inventor royalties expense and contingent legal fees
expense was due in part to the increase in license fee revenues recognized
in
the third quarter of 2007 compared to the third quarter of 2006, as discussed
above, and to a greater extent, reflects the impact of the mix of patent
portfolios with varying economic terms generating the revenues during the
respective periods. A portion of third quarter 2006 revenues were
comprised of license fees from patent portfolios with a lower average inventor
royalty percentage and without a contingent legal fee arrangement associated
with them. As a result, lower than average inventor royalties expense
and no contingent legal fees expense were incurred on revenues from those
specific patent portfolios, resulting in the sharply higher percentage
fluctuation in inventor royalties and contingent legal fees expense from the
third quarter of 2006 compared to third quarter 2007, as compared to the
percentage fluctuation in license fee revenues for the same
periods.
Write-off
of Patent-related Intangible Asset. During the three months
ended September 30, 2007 we recorded a non-cash impairment charge of $235,000,
related to the write-off of a patent-related intangible asset. The
related licensing program was completed during the third quarter of 2007
resulting in the write-off of the remaining carrying value of the patent-related
intangible asset as of September 30, 2007. During the three months
ended June 30, 2006, we 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.
Discontinued
Operations – Split-off of CombiMatrix Corporation
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. CombiMatrix Corporation’s registration
statement on Form S-1 was declared effective by the SEC on June 8, 2007.
Following the redemption period required by Acacia Research Corporation’s
Restated Certificate of Incorporation, on August 15, 2007 (the “Redemption
Date”), CombiMatrix Corporation was split-off from Acacia Research Corporation
through the redemption of all outstanding shares of Acacia Research-CombiMatrix
common stock and the distribution of new shares of CombiMatrix Corporation,
on a
pro-rata basis, to the holders of AR-CombiMatrix stock as of the Redemption
Date
(the “Split-off Transaction”). On the Redemption Date, every ten (10)
shares of Acacia Research-CombiMatrix stock outstanding on August 15, 2007,
was
redeemed for one (1) share of common stock of CombiMatrix
Corporation. Subsequent to the Redemption Date, Acacia Research
Corporation no longer owns any equity interests in CombiMatrix Corporation
and
the two companies operate independently of each other.
As
a
result of the consummation of the Split-off Transaction, the assets,
liabilities, results of operations and cash flows of CombiMatrix Corporation
have been eliminated from the continuing operations of Acacia Research
Corporation and Acacia Research Corporation does not have any continuing
involvement in the operations of CombiMatrix Corporation. As a result
of the Split-off Transaction we have disposed of our investment in CombiMatrix
Corporation, and therefore, in accordance with guidance set forth in SFAS No.
144, Acacia Research Corporation’s accompanying consolidated balance sheets,
statements of operations and statements of cash flows for the current periods
presented reflect the assets, liabilities, results of operations and cash flows
for CombiMatrix Corporation as Discontinued Operations. Consolidated
financial statements presented for the comparable prior year periods have been
restated to conform to this presentation. CombiMatrix Corporation was
previously presented as a separate operating segment of Acacia Research
Corporation under SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information.”
The
Split-off Transaction was accounted for by Acacia Research Corporation at
historical cost. Accordingly, no gain or loss on disposal was
recognized in the consolidated statements of operations. Included in the
accompanying current period consolidated balance sheet is a charge to
shareholder’s equity totaling $35,444,000 reflecting the pro rata distribution
of our investment in the net assets of CombiMatrix Corporation to holders of
AR-CombiMatrix stock, as of the Redemption Date, as described
above. We received a private letter ruling from the IRS with regard
to the U.S. federal income tax consequences of the Split-off Transaction to
the
effect that the Split-Transaction will be treated as a tax-free exchange under
Sections 368 and 355 of the Internal Revenue Code of 1986, as
amended.
Refer
to
Note 7 to the Acacia Research Corporation consolidated financial statements
included elsewhere herein for information regarding the carrying amount(s)
of
the major classes of assets and liabilities and revenues and pretax loss
included in Discontinued Operations for the periods presented.
Inflation
Inflation
has not had a significant impact on Acacia Research Corporation.
Liquidity
and Capital Resources
Cash
and
cash equivalents and short term investments related to Acacia Research
Corporation’s continuing operations totaled $55.4 million at September 30, 2007,
compared to $45.0 million at December 31, 2006.
Working
capital related to Acacia Research Corporation’s continuing operations at
September 30, 2007 was $48.6 million, compared to $42.2 million at
December 31, 2006. 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 periods presented
was
comprised of the following (in thousands):
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) continuing operations:
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
8,740
|
|
|
$ |
8,018
|
|
Investing
activities
|
|
|
(204 |
) |
|
|
2,868
|
|
Financing
activities
|
|
|
3,582
|
|
|
|
455
|
|
Discontinued
operations of Soundbreak.com
|
|
|
13
|
|
|
|
(131 |
) |
Cash
Flows from Continuing Operating Activities. Cash
receipts from licensees for the nine months ended September 30, 2007 increased
to $39.8 million, from $30.2 million in the comparable 2006
period. Cash outflows from operations for the nine months ended
September 30, 2007 increased to $31.1 million, from $22.1 million in the
comparable 2006 period. The increase in license fee payments received
was partially offset by increases in inventor royalties expenses, contingent
legal fee expenses, patent-related legal expenses, personnel expenses, and
other
corporate, general and administrative expenses, as described above, and the
related impact of the timing of payments to inventors, attorneys and other
vendors.
Cash
Flows from Continuing Investing Activities. The
change in net cash flows used in investing activities was primarily due to
net
purchases and sales of available-for-sale investments in connection with ongoing
short-term cash management activities during the periods
presented. Net cash outflows from investing activities for the nine
months ended September 30, 2007 also included patent related acquisition costs
totaling $1,595,000, as compared to $1,020,000 in the comparable 2006
period.
Cash
Flows from Continuing Financing Activities. Net cash flows
provided by financing activities during the nine months ended September 30,
2007
included proceeds from the exercise of AR-Acacia Technologies stock options
totaling $3.6 million, as compared to $455,000 for the comparable 2006
period.
Management
believes that the cash and cash equivalent balances, anticipated cash flow
from
operations and other external sources of available credit, will be sufficient
to
meet Acacia Research Corporation and its subsidiaries’ cash requirements through
at least November 2008 and for the foreseeable future. We may however
encounter unforeseen difficulties that may deplete our capital
resources more rapidly than anticipated, including those set forth
in Acacia Research Corporation's Risk Factors on page 25 of our
Annual Report on Form 10-K for the year ended December 31, 2006, filed with
the
SEC on March 14, 2007. Any efforts to seek additional funding could
be made through equity, debt or other external financing; however there can
be
no assurance that additional funding will be available on favorable terms,
if at
all. If we fail to obtain additional funding when needed, we may not be able
to
execute our business plans and our business may suffer.
Off-Balance
Sheet Arrangements
We
have
not entered into off-balance sheet financing arrangements, other than operating
leases. We have no significant commitments for capital expenditures
in 2007. We have no committed lines of credit or other committed
funding or long-term debt. The following table lists material known
future cash commitments as of September 30, 2007:
|
|
|
Payments
Due by Period (in thousands)
|
|
Contractual
Obligations
|
|
|
Remaining
2007
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2011
|
|
|
|
2012
and Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases
|
|
$ |
112
|
|
|
$ |
696
|
|
|
$ |
724
|
|
|
$ |
753
|
|
|
$ |
783
|
|
|
$ |
131
|
|
Total
contractual cash obligations
|
|
$ |
112
|
|
|
$ |
696
|
|
|
$ |
724
|
|
|
$ |
753
|
|
|
$ |
783
|
|
|
$ |
131
|
|
Recent
Accounting Pronouncements
Refer
to
Note 2 and Note 5 to the Acacia Research Corporation consolidated financial
statements included in Part I, Item 1 of this report.
Item
3. 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.
Item
4. CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
(a) 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.
Changes
in Internal Controls
(b) There
were no changes in our internal control over financial reporting that occurred
during our last fiscal quarter (the quarter ended September 30, 2007) that
have
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 6 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 common 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 ended December 31, 2006, filed with the Securities and
Exchange Commission on March 14, 2007. If any of the risks included
in this quarterly report or 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 25 through 49 of our annual report on Form 10-K for the year ended
December 31, 2006, filed with the Securities and Exchange Commission on March
14, 2007, and the risk factors included in our Form 8-K filed with the
Commission on April 27, 2007.
Item
5. OTHER
INFORMATION
On
April
24, 2007, our Compensation Committee approved the payment of a bonus in the
amount of $90,000 to each of Paul Ryan, Chief Executive Officer, and Robert
L.
Harris, II, President. On April 27, 2007, our Compensation Committee
approved the payment of a bonus in the amount of $69,000 to Clayton J. Haynes,
Chief Financial Officer. The bonuses were paid in recognition of the
efforts of each individual in taking into account total compensation payable
to
each individual.
Item
6. EXHIBITS
10.1
|
2007
Acacia Technologies Stock Incentive Plan (1)
|
10.2
|
Form
of Acacia Technologies Stock Option Agreement for the 2007 Acacia
Technologies Stock Incentive Plan
|
10.3
|
Form
of Acacia Technologies Stock Issuance Agreement for the 2002
Acacia
Technologies Stock Incentive Plan
|
10.4
|
Form
of Acacia Technologies Stock Issuance Agreement for the 2007
Acacia
Technologies Stock Incentive
Plan
|
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
|
_____________________________
(1)
|
Incorporated
by reference to Exhibit 99.1 of our Form S-8 filed with the SEC
on July
20, 2007.
|
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 |
|
|
|
(Authorized
Signatory) |
|
|
|
|
|
|
By:
|
/s/ Clayton
J.
Haynes |
|
|
|
Clayton
J. Haynes |
|
|
|
Chief
Financial Officer
/Treasurer |
|
|
|
(Principal
Financial
Officer) |
|
Date: November
2, 2007
EXHIBIT
INDEX
EXHIBIT
NUMBER EXHIBIT
10.1
|
2007
Acacia Technologies Stock Incentive Plan (1)
|
10.2
|
Form
of Acacia Technologies Stock Option Agreement for the 2007 Acacia
Technologies Stock Incentive Plan
|
10.3
|
Form
of Acacia Technologies Stock Issuance Agreement for the 2002 Acacia
Technologies Stock Incentive Plan
|
10.4
|
Form
of Acacia Technologies Stock Issuance Agreement for the 2007 Acacia
Technologies Stock Incentive
Plan
|
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
|
_____________________________
(1)
|
Incorporated
by reference to Exhibit 99.1 of our Form S-8 filed with the SEC
on July
20, 2007.
|
20