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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
COMMISSION FILE NUMBER 0-26068
ACACIA RESEARCH CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-4405754
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
500 NEWPORT CENTER DRIVE, NEWPORT BEACH, CA 92660
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 480-8300
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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 |X| No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes |X| No [ ]
As of May 3, 2005, 27,270,935 shares of Acacia Research-Acacia
Technologies common stock were issued and outstanding. As of May 3, 2005,
31,200,496 shares of Acacia Research-CombiMatrix common stock were issued and
outstanding.
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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 March 31, 2005, and
December 31, 2004 (Unaudited)....................................................... 1
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
Three Months Ended March 31, 2005 and 2004 (Unaudited).............................. 2
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2005 and 2004 (Unaudited)................................................. 3
Notes to Consolidated Financial Statements (Unaudited).............................. 4
*CombiMatrix Group Financial Statements
Balance Sheets as of March 31, 2005, and December 31, 2004 (Unaudited).............. 20
Statements of Operations for the Three Months Ended
March 31, 2005 and 2004 (Unaudited)................................................. 21
Statements of Cash Flows for the Three Months Ended
March 31, 2005 and 2004 (Unaudited)................................................. 22
Notes to Financial Statements (Unaudited)........................................... 23
*Acacia Technologies Group Financial Statements
Balance Sheets as of March 31, 2005, and December 31, 2004 (Unaudited).............. 27
Statements of Operations for the Three Months Ended
March 31, 2005 and 2004 (Unaudited)................................................. 28
Statements of Cash Flows for the Three Months Ended
March 31, 2005 and 2004 (Unaudited)................................................. 29
Notes to Financial Statements (Unaudited)........................................... 30
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 37
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 56
Item 4. Controls and Procedures............................................................. 56
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 57
Item 5. Other Information................................................................... 57
Item 6. Exhibits............................................................................ 58
SIGNATURES............................................................................................. 59
EXHIBIT INDEX ......................................................................................... 60
*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)
MARCH 31, DECEMBER 31,
2005 2004
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ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 38,387 $ 18,735
Short-term investments ......................................................... 23,186 33,623
Accounts receivable ............................................................ 1,398 536
Prepaid expenses, inventory, and other assets .................................. 1,382 983
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Total current assets ................................................ 64,353 53,877
Property and equipment, net of accumulated depreciation ........................... 2,439 2,434
Patents, net of accumulated amortization of $5,948 (2005) and $4,758 (2004)........ 36,206 12,063
Goodwill .......................................................................... 19,545 19,545
Other assets ...................................................................... 674 408
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$ 123,217 $ 88,327
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other ................................... $ 4,687 $ 4,139
Royalties and legal fees payable ............................................... 481 --
Current portion of deferred revenues ........................................... 638 494
------------- -------------
Total current liabilities ........................................... 5,806 4,633
Deferred income taxes ............................................................. 2,911 2,981
Deferred revenues, net of current portion ......................................... 4,148 3,893
Other liabilities ................................................................. 360 406
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Total liabilities ................................................... 13,225 11,913
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Minority interests ................................................................ 482 778
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Commitments and contingencies (Note 9)
Redeemable Stockholders' equity:
Preferred stock
Acacia Research Corporation, par value $0.001 per share; 10,000,000
shares authorized; no shares issued or outstanding ......................... -- --
Common stock
Acacia Research - Acacia Technologies stock, par value $0.001 per
share; 50,000,000 shares authorized; 27,268,852 and 19,811,524
shares issued and outstanding as of March 31, 2005 and
December 31, 2004, respectively ............................................ 27 20
Acacia Research - CombiMatrix stock, par value $0.001 per share;
50,000,000 shares authorized; 31,200,496 and 31,200,496 shares
issued and outstanding as of March 31, 2005 and
December 31, 2004, respectively ............................................ 31 31
Additional paid-in capital ..................................................... 302,695 263,900
Accumulated comprehensive income ............................................... (55) (77)
Accumulated deficit ............................................................ (193,188) (188,238)
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Total stockholders' equity .......................................... 109,510 75,636
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$ 123,217 $ 88,327
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
1
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
--------------------------------------
MARCH 31, 2005 MARCH 31, 2004
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Revenues:
Research and development contract ......................................... $ -- $ 17,302
License fees .............................................................. 1,863 599
Government contract ....................................................... 731 217
Products .................................................................. 278 16
Service contracts ......................................................... 60 81
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Total revenues ......................................................... 2,932 18,215
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Operating expenses:
Cost of government contract revenues ...................................... 691 205
Cost of product sales ..................................................... 163 4
Research and development expenses ......................................... 1,140 1,383
Non-cash stock compensation amortization - research and development ....... -- 69
Marketing, general and administrative expenses ............................ 3,889 3,284
Legal expense - patents ................................................... 561 602
Contingent legal fees and royalties expense - patents ..................... 647 --
Non-cash stock compensation amortization - marketing,
general and administrative ............................................. (126) 334
Amortization of patents ................................................... 1,190 399
Legal settlement charges (credits) ........................................ (179) 1,257
---------------- ----------------
Total operating expenses ............................................... 7,976 7,537
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Operating income (loss) ................................................ (5,044) 10,678
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Other income (expense):
Interest income ........................................................... 273 158
Other expense ............................................................. (39) --
---------------- ----------------
Total other income ..................................................... 234 158
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Income (loss) from continuing operations before income taxes .................. (4,810) 10,836
Benefit for income taxes ...................................................... 70 67
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Income (loss) from continuing operations ...................................... (4,740) 10,903
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Discontinued operations:
Estimated loss on disposal of discontinued operations ..................... (210) --
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Net income (loss) ............................................................. (4,950) 10,903
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Unrealized gains on short-term investments ................................ 14 2
Unrealized gains on foreign currency translation .......................... 8 6
---------------- ----------------
Comprehensive income (loss) ................................................... $ (4,928) $ 10,911
================ ================
Earnings (loss) per common share:
Attributable to the Acacia Technologies group:
Net loss ................................................................... $ (1,874) $ (989)
Basic and diluted loss per share ........................................ (0.08) (0.05)
Attributable to the CombiMatrix group:
Basic
Net income (loss) .......................................................... $ (3,076) $ 11,892
Basic earnings (loss) per share ......................................... (0.10) 0.44
Diluted
Net income (loss) .......................................................... $ (3,076) $ 11,892
Diluted earnings (loss) per share ....................................... (0.10) 0.41
Weighted average shares:
Acacia Research - Acacia Technologies stock:
Basic and diluted ....................................................... 24,558,419 19,752,335
================ ================
Acacia Research - CombiMatrix stock:
Basic ................................................................... 31,200,496 27,274,627
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Diluted ................................................................. 31,200,496 29,233,817
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
2
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------------------
MARCH 31, 2005 MARCH 31, 2004
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Cash flows from operating activities:
Net income (loss) from continuing operations .................................... $ (4,740) $ 10,903
Adjustments to reconcile net income (loss) from continuing operations
to net cash used in operating activities:
Depreciation and amortization .............................................. 1,482 712
Non-cash stock compensation ................................................ (126) 403
Deferred tax benefit ....................................................... (70) (70)
Non-cash legal settlement charge (credit) .................................. (179) 1,257
Other ...................................................................... 11 (27)
Changes in assets and liabilities, excluding effect of business acquisition:
Accounts receivable ........................................................ (862) (16)
Prepaid expenses, inventory and other assets ............................... (542) (221)
Accounts payable, accrued expenses and other ............................... 349 671
Royalties and legal fees payable ........................................... 481 --
Deferred revenues .......................................................... 399 (17,442)
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Net cash used in operating activities from continuing operations ........... (3,797) (3,830)
Net cash used in operating activities from discontinued operations ......... (288) (87)
---------------- ----------------
Net cash used in operating activities ...................................... (4,085) (3,917)
---------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment ......................................... (268) (97)
Purchase of available-for-sale investments ................................. (4,638) (14,605)
Sale of available-for-sale investments ..................................... 15,184 14,196
Business acquisition ....................................................... (5,689) --
Purchase of additional interests in equity method investee ................. (250) --
Patent acquisition costs ................................................... (175) --
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Net cash provided by (used in) investing activities ........................ 4,164 (506)
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Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs .................. 19,530 --
Proceeds from the exercise of stock options and warrants ................... 34 4,450
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Net cash provided by financing activities .................................. 19,564 4,450
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Effect of exchange rate on cash ................................................... 9 6
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Increase in cash and cash equivalents ............................................. 19,652 33
Cash and cash equivalents, beginning .............................................. 18,735 24,199
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Cash and cash equivalents, ending ................................................. $ 38,387 $ 24,232
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
3
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: 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 K.K. and includes all corporate assets, liabilities and
transactions related to Acacia Research Corporation's life sciences business.
The CombiMatrix group is seeking to become a broadly diversified
biotechnology business, through the development of proprietary technologies and
products in the areas of drug development, genetic analysis, nanotechnology
research, defense and homeland security markets, as well as other potential
markets where its products could be utilized. Among the technologies being
developed by the CombiMatrix group is a platform technology to rapidly 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 a wide range of 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 K.K., a wholly owned Japanese corporation
located in Tokyo, is exploring opportunities for CombiMatrix Corporation's array
system with pharmaceutical and biotechnology companies in the Asian market.
Our intellectual property licensing and enforcement business, referred
to as the "Acacia Technologies group," a division of Acacia Research
Corporation, is currently comprised of certain of Acacia Research Corporation's
wholly owned subsidiaries and limited liability companies including: Acacia
Global Acquisition Corporation, Acacia Internet Access Corporation, Acacia Media
Technologies Corporation, Acacia Patent Acquisition Corporation, Acacia
Technologies Services Corporation, AV Technologies LLC, Broadcast Innovation
LLC, Computer Cache Coherency Corporation, Data Innovation LLC, Financial
Services Innovation LLC, Information Technology Innovation LLC, InternetAd LLC,
IP Innovation LLC, KY Data Systems LLC, Microprocessor Enhancement Corporation,
New Medium LLC, TechSearch LLC, VData LLC, Soundview Technologies, Inc., and
Spreadsheet Automation Corporation and also includes all corporate assets,
liabilities, and related transactions of Acacia Research Corporation attributed
to the Acacia Research Corporation's intellectual property licensing and
enforcement business. See Note 8 for business acquisitions during the three
months ended March 31, 2005.
The Acacia Technologies group develops, acquires, licenses and enforces
patented technologies. The Acacia Technologies group controls 30 patent
portfolios, which include 128 U.S. patents, and certain foreign counterparts,
covering technologies used in a wide variety of industries including Audio/Video
Enhancement & Synchronization, Broadcast Data Retrieval, Computer Memory Cache
Coherency, Credit Card Fraud Protection, Database Management, Data Encryption &
Product Activation, Digital Media Transmission ("DMT(R)"), Digital Video
Production, Dynamic Manufacturing Modeling, Enhanced Internet Navigation, Image
Resolution Enhancement, Interactive Data Sharing, Interactive Television,
Internet Access Redirection, Interstitial Internet Advertising, Laptop
Connectivity, Microprocessor Enhancement, Multi-dimensional Bar Codes, Network
Data Storage, Resource Scheduling, Rotational Video Imaging and Spreadsheet
Automation.
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.
BASIS OF PRESENTATION. The accompanying unaudited consolidated
financial statements include the accounts of Acacia Research Corporation and its
wholly owned and majority-owned subsidiaries. Material intercompany transactions
and balances have been eliminated in consolidation.
4
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 Securities and Exchange Commission ("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, 2004, 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
March 31, 2005, and results of operations and cash flows for the interim periods
presented. The results of operations for the three months ended March 31, 2005,
are not necessarily indicative of the results to be expected for the entire
year.
SEPARATE GROUP PRESENTATION. AR-CombiMatrix stock and AR-Acacia
Technologies stock are intended to reflect the separate performance of the
respective division of Acacia Research Corporation. The CombiMatrix group and
the Acacia Technologies group are not separate legal entities. Holders of
AR-CombiMatrix stock and AR-Acacia Technologies stock are stockholders of Acacia
Research Corporation. As a result, holders of AR-CombiMatrix stock and AR-Acacia
Technologies stock continue to be subject to all of the risks of an investment
in Acacia Research Corporation and all of its businesses, assets and
liabilities. The assets Acacia Research Corporation attributes to one of the
groups could be subject to the liabilities of the other group. The group
financial statements have been prepared in accordance with generally accepted
accounting principles in the United States of America, and taken together,
comprise all the accounts included in the corresponding consolidated financial
statements of Acacia Research Corporation. The financial statements of the
groups reflect the financial condition, 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.
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
REVISION IN THE CLASSIFICATION OF CERTAIN SECURITIES. In connection
with the preparation of our annual Report on Form 10-K for the year ending
December 31, 2004, we concluded that it was appropriate to classify our auction
rate municipal bonds and variable rate municipal demand notes as current
investments. Previously, such investments had been classified as cash and cash
equivalents. Accordingly, we have revised our prior classification to report
these securities as current investments in our Consolidated Balance Sheet as of
March 31, 2004. We have also made corresponding adjustments to our Consolidated
Statement of Cash Flows for the three months ended March 31, 2004, to reflect
the gross purchases and sales 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 Consolidated Statements of Cash Flows, or
our previously reported Consolidated Statements of Income for any period.
As of March 31, 2004, and December 31, 2003, before this revision in
classification, $8,750,000 and $7,750,000, respectively, of these current
investments were classified as cash and cash equivalents on our Consolidated
Balance Sheets. For the three months ended March 31, 2004, before this revision
in classification, net cash used in investing activities related to these
current investments of $1,000,000 were included in cash and cash equivalents in
our Consolidated Statement of Cash Flows.
REVENUE RECOGNITION. We recognize revenue in accordance with Staff
Accounting Bulletin No. 104, "Revenue Recognition" ("SAB No. 104") and related
authoritative pronouncements. Revenues from multiple-element arrangements are
accounted for in accordance with Emerging Issues Task Force ("EITF") Issue
00-21, "Revenue Arrangements with Multiple Deliverables." Revenue is recognized
when (i) persuasive evidence of an arrangement exists, (ii) all obligations have
been performed pursuant to the terms of the license agreement, (iii) amounts are
fixed or determinable and (iv) collectibility of amounts is reasonably assured.
5
COMBIMATRIX GROUP
Revenues from multiple-element arrangements involving license fees,
up-front payments and milestone payments, which are received and/or billable by
us in connection with other rights and services that represent continuing
obligations of ours, are deferred until all of the elements have been delivered
or until we have established objective and verifiable evidence of the fair value
of the undelivered elements.
Revenues from government grants and contracts are recognized in
accordance with Accounting Research Bulletin ("ARB") No. 43, "Government
Contracts," and related pronouncements. Accordingly, revenues are recognized
under the percentage-of-completion method of accounting, using the cost-to-cost
approach to measure completeness at each reporting period. Under the
percentage-of-completion method of accounting, contract revenues and expenses
are recognized in the period that work is performed based on the percentage of
actual incurred costs to estimated total contract costs. Actual contract costs
and cost estimates include direct charges for labor and materials and indirect
charges for labor, overhead and certain general and administrative charges.
Contract change orders and claims are included when they can be reliably
estimated and are considered probable. For contracts that extend over a one-year
period, revisions in contract cost estimates, if they occur, have the effect of
adjusting current period earnings applicable to performance in prior periods.
Should current contract estimates indicate an overall future loss to be
incurred, a provision is made for the total anticipated loss in the current
period.
Revenue from the sale of products and services, including shipping and
handling fees, are recognized when delivery has occurred or services have been
rendered.
Deferred revenues arise from payments received in advance of the
culmination of the earnings process. Deferred revenues expected to be recognized
within the next twelve months are classified within current liabilities.
Deferred revenues will be recognized as revenue in future periods when the
applicable revenue recognition criteria as described above are met.
ACACIA TECHNOLOGIES GROUP
Under the terms of our license agreements, the Acacia Technologies
group grants non-exclusive licenses for the use of its patented technologies. In
general, pursuant to the terms of our agreements with licensees, upon the grant
of the licenses, the Acacia Technologies group has no further obligations with
respect to the licenses granted. License fees paid to and recognized as revenue
by the Acacia Technologies group are non-refundable.
Revenues generated from license agreements are generally accrued and
recognized as revenue in the period earned, provided that amounts are fixed or
determinable and collectibility is reasonably assured.
Certain license agreements provide for the calculation of license fees
based on a licensee's actual quarterly sales or actual per unit activity,
applied to a contractual royalty rate. Licensees that pay license fees on a
quarterly basis generally report actual quarterly sales or actual per unit
activity information and related quarterly license fees due to the Acacia
Technologies group within 30 to 45 days after the end of the quarter in which
such sales or activity takes place. Consequently, the Acacia Technologies group
recognizes revenue from these licensing agreements on a three-month lag basis,
in the quarter following the quarter of sales or per unit activity, provided
amounts are fixed or determinable and collectibility is reasonably assured. The
lag method described above allows for the receipt of licensee royalty reports
prior to the recognition of revenue.
Certain license agreements provide for the payment of a minimum upfront
annual license fee at the inception of each annual license term. Minimum upfront
annual license fees are generally determined based on a licensee's estimated
annual sales or a licensee's base level of per unit activity. These minimum
upfront annual license fee payments are deferred and amortized to revenue on a
straight-line basis over the annual license term. To the extent actual annual
royalties, determined and reported in accordance with the terms of the
respective agreements, exceed the minimum upfront annual license fees paid, the
additional royalties are recognized in revenue in the quarter following the
quarter in which the base per unit activity was exceeded or the quarter
following the annual license term, depending on the terms of the respective
agreement, provided that amounts are fixed or determinable and collectibility is
reasonably assured.
6
Certain license agreements provide for the payment of contractually
determined license fees to us in consideration for the grant of a non-exclusive,
retroactive and future license to manufacture and/or sell products covered by
our patented technologies. Certain agreements provide for one-time payments for
the grant of licenses and certain of the agreements also provide for future
royalties or additional required payments based on future activities of the
licensee. These agreements also generally include release provisions with
respect to current litigation. Pursuant to the terms of these agreements, the
Acacia Technologies group has no further obligation with respect to the grant of
the non-exclusive retroactive and future license, including no express or
implied obligation on the Acacia Technologies group's part to maintain or
upgrade the technology, or provide future support or services. Generally, the
agreements provide for the grant of the license upon execution of the agreement.
As such, the earnings process is generally complete upon the execution of the
agreement, and revenue is recognized upon execution of the agreement, when
collectibility is reasonably assured, and all other revenue recognition criteria
have been met.
License fee payments received by the Acacia Technologies group that do
not meet the revenue recognition criteria described above are deferred until the
revenue recognition criteria are met. The Acacia Technologies group assesses
collection of accrued license fees based on a number of factors, including past
transaction history and credit-worthiness. If it is determined that collection
is not reasonably assured, the fee is recognized when collectibility becomes
reasonably assured, assuming all other revenue recognition criteria have been
met, which is generally upon receipt of cash.
As a result of our licensing and any related intellectual property
enforcement activities, we may recognize royalty revenues that relate to prior
period activities of our licensees. Differences between amounts initially
recognized and amounts subsequently audited or reported as an adjustment to
those amounts are recognized in the period the adjustment is determined as a
change in accounting estimate.
INVENTORY. Inventory, which consists primarily of raw materials to be
used in the production of the CombiMatrix group's array products, is stated at
the lower of cost or market using the first-in, first-out method.
STOCK-BASED COMPENSATION. Acacia Research Corporation has two
stock-based employee compensation plans, the 2002 CombiMatrix Stock Incentive
Plan and the 2002 Acacia Technologies Stock Incentive Plan. Compensation cost of
stock options issued to employees is accounted for in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and related interpretations. Compensation cost
attributable to such options is recognized based on the difference, if any,
between the closing market price of the stock on the date of grant and the
exercise price of the option. Compensation cost is generally deferred and
amortized on an accelerated basis over the vesting period of the individual
option awards using the amortization method prescribed in Financial Accounting
Standards Board ("FASB") Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN No.
28"). We have adopted the disclosure only requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), as amended by SFAS
No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure--an
amendment of SFAS No. 123" ("SFAS No. 148"), with respect to options issued to
employees. Compensation cost of stock options and warrants issued to
non-employee service providers is accounted for under the fair value method
required by SFAS No. 123 and related interpretations.
The following table illustrates the effect on net income (loss) and
earnings (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-COMBIMATRIX STOCK
-------------------------------- -------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
-------------------------------- -------------------------------
MARCH 31, 2005 MARCH 31, 2004 MARCH 31, 2005 MARCH 31, 2004
-------------- -------------- -------------- --------------
Income (loss) from operations as reported .................. $ (1,874) $ (989) $ (3,076) $ 11,892
Add: Stock-based compensation, intrinsic
value method reported in net loss, net of tax ............ -- -- -- 238
Deduct: Pro forma stock-based compensation
fair value method, net of tax ............................ (346) (562) (1,019) (1,772)
-------------- -------------- -------------- --------------
Income (loss) from operations, pro forma ................... $ (2,220) $ (1,551) $ (4,095) $ 10,358
============== ============== ============== ==============
Basic earnings (loss) per share from
operations as reported ................................ $ (0.08) $ (0.05) $ (0.10) $ 0.44
Basic earnings (loss) per share from
operations, pro forma ................................. $ (0.09) $ (0.08) $ (0.13) $ 0.38
Diluted earnings (loss) per share from
operations as reported ................................ $ (0.08) $ (0.05) $ (0.10) $ 0.41
Diluted earnings (loss) per share from
operations, pro forma ................................. $ (0.09) $ (0.08) $ (0.13) $ 0.35
Weighted Average Assumptions used(1):
Risk free interest rate .................................... 3.68% 3.25% 3.78% 3.05%
Volatility ................................................. 94.00% 104% 88.00% 104%
Expected term .............................................. 5 years 5 years 5 years 5 years
- ----------------------
7
(1) The fair value of stock options was determined using the Black-Scholes
option-pricing model. The fair value calculations assume no expected
dividends.
PATENTS AND GOODWILL. Goodwill and identifiable intangibles, including
patents, are recorded when the consideration paid for acquisitions exceeds the
fair value of the net tangible assets acquired. Patents, once issued or
purchased, are amortized on the straight-line method over their remaining
economic useful lives. Goodwill is not amortized.
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL. We review long-lived
assets and intangible assets for potential impairment annually and when events
or changes in circumstances indicate the carrying amount of an asset may not be
recoverable. In the event the sum of the expected undiscounted future cash flows
resulting from the use of the asset is less than the carrying amount of the
asset, an impairment loss equal to the excess of the asset's carrying value over
its fair value is recorded. If an asset is determined to be impaired, the loss
is measured based on quoted market prices in active markets, if available. If
quoted market prices are not available, the estimate of fair value is based on
various valuation techniques, including a discounted value of estimated future
cash flows.
Goodwill is evaluated for impairment in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142") and is subject to a
periodic review for potential impairment at a reporting unit level. Reviews for
potential impairment must occur at least annually and may be performed earlier,
if circumstances indicate that an impairment may have occurred. Acacia Research
Corporation has elected to perform its annual tests for indications of goodwill
impairment as of December 31 of each year. Goodwill is allocated between two of
our reporting units at March 31, 2005: 1) the Acacia Technologies group and 2)
the CombiMatrix group. The fair values of our reporting units are estimated
using a discounted cash flow analysis and by reference to quoted market prices
of Acacia Research Corporation's classes of stock.
SFAS No. 142 requires us to compare the fair value of our reporting
units to their carrying amounts on an annual basis to determine if there is
potential goodwill impairment. If the fair value of a reporting unit is less
than its carrying value, an impairment loss is recorded to the extent that the
fair value of the goodwill within the reporting unit is less than its carrying
value. There can be no assurance that future goodwill impairment tests will not
result in a charge to earnings.
BUSINESS ACQUISITIONS. The cost of an acquired business is assigned to
the tangible and identifiable intangible assets acquired and liabilities assumed
on the basis of their fair values at the date of acquisition. We assess fair
value using a variety of methods, including the use of present value models,
independent appraisers, and estimation of current selling prices and replacement
values. Amounts recorded as intangible assets are based on assumptions and
estimates regarding the amount and timing of projected revenues and costs,
appropriate risk-adjusted discount rates, as well as assessing the economic
useful lives of our technologies, the impact of competition and other market
factors. Actual results may vary from projected results.
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.
3. EARNINGS PER SHARE
EARNINGS PER SHARE. Earnings per share for each class of common stock
is computed by dividing the earnings 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 earnings 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 and warrants.
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. 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. Management currently has no plans to change allocation
methods.
The following table presents a reconciliation of basic and diluted
income (loss) per share:
8
FOR THE THREE MONTHS ENDED
-----------------------------------------
MARCH 31, 2005 MARCH 31, 2004
------------------ ------------------
ACACIA RESEARCH - ACACIA TECHNOLOGIES STOCK
- -------------------------------------------
Basic and diluted weighted average number of
common shares outstanding ............................. 24,558,419 19,752,335
================== ==================
Potential AR-Acacia Technologies stock common
shares excluded from the per share calculation
because the effect of their inclusion would
be anti-dilutive ...................................... 1,402,348 1,436,257
================== ==================
ACACIA RESEARCH - COMBIMATRIX STOCK
- -----------------------------------
Basic weighted average number of common shares
outstanding ........................................... 31,200,496 27,274,627
Dilutive effect of outstanding stock options
and warrants(1) ....................................... -- 1,959,190
------------------ ------------------
Diluted weighted average number of common and
potential common shares outstanding ................... 31,200,496 29,233,817
================== ==================
Potential AR-CombiMatrix stock common shares excluded
from the per share calculation because the effect
of their inclusion would be anti-dilutive ............. 506,958 --
================== ==================
- ------------------
(1) Includes 84,299 shares of potentially dilutive AR-CombiMatrix stock
issuable as of March 31, 2004, related to certain anti-dilution
provisions of the September 2002 settlement agreement between
CombiMatrix Corporation, Dr. Donald Montgomery, and Nanogen, Inc.
4. GOODWILL AND INTANGIBLES
The Acacia Technologies group had $121,000 of goodwill at March 31,
2005, and December 31, 2004. The CombiMatrix group had $19,424,000 of goodwill
at March 31, 2005, and December 31, 2004.
Acacia Research Corporation's only identifiable intangible assets at
March 31, 2005, and December 31, 2004, are patents and patent rights. The gross
carrying amounts and accumulated amortization as of March 31, 2005, and December
31, 2004, related to patents, by segment, are as follows (in thousands):
ACACIA TECHNOLOGIES GROUP COMBIMATRIX GROUP
-------------------------------------- --------------------------------------
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
2005 2004 2005 2004
---------------- ---------------- ---------------- ----------------
Gross carrying amount - patents ..... $ 30,059 $ 4,726 $ 12,095 $ 12,095
Accumulated amortization ............ (2,600) (1,684) (3,348) (3,074)
---------------- ---------------- ---------------- ----------------
Patents, net ........................ $ 27,459 $ 3,042 $ 8,747 $ 9,021
================ ================ ================ ================
The Acacia Technologies group and the CombiMatrix group's patents have
remaining estimated economic useful lives up to 2012 and 2020, respectively. The
weighted average remaining estimated economic useful life of the Acacia
Technologies group's patents is 6 years. Annual aggregate amortization expense
for each of the five fiscal years through December 31, 2009 is estimated to be
$4,848,000 in 2005, $5,243,000 in 2006, $5,192,000 in 2007, $3,872,000 in 2008
and $3,466,000 in 2009 for the Acacia Technologies group and $1,095,000 per year
for the CombiMatrix group. At March 31, 2005, and December 31, 2004, all of our
acquired intangible assets other than goodwill were subject to amortization.
See Note 8 for additions to patent related intangibles during the three
months ended March 31 ,2005.
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 $19,530,000, 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.
9
6. RESEARCH AND DEVELOPMENT CONTRACTS
In March 2004, the CombiMatrix group completed all phases of its
research and development agreement with Roche Diagnostics, GmbH ("Roche"). As a
result of completing all of its obligations under this agreement and in
accordance with the CombiMatrix group's revenue recognition policies for
multiple-element arrangements, the CombiMatrix group recognized all previously
deferred Roche related contract revenues totaling $17,302,000 during the first
quarter of 2004.
In August 2004, the CombiMatrix group received a $1,000,000 upfront
payment from Furuno Electric Co., LTD ("Furuno") as part of a multi-year
collaboration agreement to develop a bench-top array synthesizer for commercial
applications. In 2003, the CombiMatrix group received upfront and milestone
payments from Toppan Printing Co., LTD. ("Toppan") totaling $2,400,000, pursuant
to a multi-year collaboration and supply agreement to develop and manufacture
arrays using the CombiMatrix group's proprietary electrochemical detection
approach. The payments received from Furuno and Toppan are included in deferred
revenues at March 31, 2005, and December 31, 2004, in accordance with the
CombiMatrix group's revenue recognition policies for multiple-element
arrangements.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payments," ("SFAS No. 123(R)") that addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS No. 123(R) will require Acacia Research Corporation to measure all employee
stock-based compensation awards using a fair-value method and record such
expense in its consolidated and separate group financial statements. The
adoption of SFAS No. 123(R) will require additional accounting related to the
income tax effects and additional disclosure regarding the cash flow effects
resulting from share-based payment arrangements. SFAS No. 123(R) was to be
effective beginning in the quarter ending September 30, 2005. On April 14, 2005,
the SEC announced a deferral of the effective date of SFAS No. 123(R) for
calendar year companies until the beginning of 2006. In March 2005, the SEC
issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the SEC Staff's
interpretation of SFAS No. 123(R) and provides the Staff's views regarding
interactions between SFAS No. 123(R) and certain SEC rules and regulations and
provides interpretations of the valuation of share-based payments for public
companies. The effect of the adoption of SFAS No. 123(R) is expected to be
comparable to the effect disclosed on a pro forma basis resulting from the
application of the current fair-value recognition provisions of SFAS No. 123, as
shown in Note 2 above.
In March 2004, the FASB issued EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,"
which provides new guidance for assessing impairment losses on debt and equity
investments, as well as new disclosure requirements for investments that are
deemed to be temporarily impaired. In September 2004, the FASB delayed the
accounting provisions of EITF Issue No. 03-1; however, the disclosure
requirements remain effective and were adopted for our year ended December 31,
2004. We do not expect the adoption of EITF Issue No. 03-1 to have a material
impact on Acacia Research Corporation's, the CombiMatrix group's or the Acacia
Technologies group's financial position, results of operations or cash flows.
8. 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 revenue generating opportunities and accelerated
the execution of the Acacia Technologies group's business strategy of acquiring,
developing and licensing patented technologies.
The acquisition is being accounted for by 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 market 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 $25,053,000, including $5.0 million of cash, the issuance of
3,938,832 shares of AR-Acacia Technologies stock valued at $19,364,000 (net of
10
estimated common stock registration costs of $141,000) and acquisition costs,
including registration costs, of $689,000. 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)............................. 19,364
Acquisition and registration costs............................................... 689
--------
Total purchase consideration.......................................................... $ 25,053
========
Purchase Price Allocation:
Estimated fair value of net tangible assets acquired at January 28, 2005 ......... $ (15)
Intangible assets acquired - patents and patent rights(1)......................... 25,068
--------
Total................................................................................ $ 25,053
========
- ------------------
(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, 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. The
estimated weighted average useful life of amortizable patent related intangibles
acquired is 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 months ended March
31, 2005, include $195,000 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 will be expensed in the
consolidated statement of operations as the consulting services are rendered
during the two-year term of the consulting agreement. Acacia Global Acquisition
Corporation may terminate the consulting agreement for cause as provided for in
the agreement. The consulting agreement also contains certain automatic
termination provisions, including; the failure by Acacia Global Acquisition
Corporation to make timely consulting payments in accordance with the agreement;
a significant decrease in working capital of Acacia Research Corporation, as
defined in the agreement; material breach of the agreement by Acacia Global
Acquisition Corporation; and the death of the consultant. Any occurrence of
these conditions may require the payment of all remaining consulting fees
outstanding under the agreement within thirty days of the occurrence of the
termination event. Acacia Research Corporation also executed an agreement
guaranteeing Acacia Global Acquisition Corporation's performance of its
obligations under the consulting agreement.
The acquisition will be treated for tax purposes as a taxable asset
acquisition and, as such, Acacia Research Corporation does not expect any
book/tax basis differences and thus, no deferred income taxes were recorded in
connection with the application of the purchase method of accounting.
11
The following unaudited pro forma combined results of operations for
the interim period presented are provided for illustrative purposes only and
assume the acquisition occurred as of January 1, 2005, and 2004. The unaudited
pro forma combined financial results do not purport to be indicative of the
results of operations for future periods or the results that actually would have
been realized had the entities been a single entity during these periods. The
unaudited pro forma combined results are presented in thousands, except share
and per share information.
FOR THE THREE MONTHS ENDED
-------------------------------------------
MARCH 31, 2005 (1) MARCH 31, 2004
----------------- -----------------
Total revenues ......................................... $ 2,932 $ 23,455
----------------- -----------------
Total operating expenses ............................... 8,453 12,827
----------------- -----------------
Operating income (loss) ................................ (5,521) 10,628
----------------- -----------------
Total other income ..................................... 234 156
----------------- -----------------
Income (loss) from continuing operations
before income taxes ................................. (5,287) 10,784
Benefit for income taxes ............................... 70 59
Estimated loss on discontinued operations .............. (210) --
----------------- -----------------
Net income (loss) ...................................... $ (5,427) $ 10,843
================= =================
Pro forma earnings (loss) per common share:
Attributable to the Acacia Technologies group:
Net loss ............................................... $ (2,351) $ (1,049)
Basic and diluted loss per share ..................... (0.09) (0.04)
Weighted average shares (2):
Acacia Research - Acacia Technologies stock:
Basic and diluted .................................... 25,740,069 23,691,167
================= =================
- --------------------------------------------------------------------------------
(1) Results of operations for Global Patent Holdings, LLC were not material
for the period January 1, 2005, through January 28, 2005. Pro forma
adjustments reflect the impact of the acquisition for the 28 day period
from January 1, 2005 to January 28, 2005.
(2) There is no pro forma impact on earnings (loss) per share attributable
to the CombiMatrix group as presented in the accompany statements of
operations for the three months ended March 31, 2005, and 2004.
9. COMMITMENTS AND CONTINGENCIES
COMBIMATRIX GROUP
In March 2004, the CombiMatrix group was awarded a two-year, $5.9
million contract with the Department of Defense to further the development of
the CombiMatrix group's array technology for the detection of biological threat
agents. Under the terms of the 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 $5.9 million. The CombiMatrix group
expects to incur approximately $2.2 million and $819,000 in research and
development costs during 2005 and 2006, respectively, to complete its
obligations to the Department of Defense under this contract. As of March 31,
2005, the biological threat detection contract with the Department of Defense
was approximately 46% complete.
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 $250,000
investment in Leuchemix during the three months ended March 31, 2005, resulting
in an ownership interest of approximately 6% as of March 31, 2005. The
CombiMatrix group will make additional investments in Leuchemix of $1,350,000 in
2005 and $2,150,000 in 2006, in accordance with the terms of the agreement. The
CombiMatrix group's investment is being accounted for under the equity method as
the CombiMatrix group has the ability to exercise significant influence over
Leuchemix, primarily due to CombiMatrix Corporation's representation on
Leuchemix's board of directors.
12
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 three months ended March 31,
2005, and 2004, we recorded a net non-cash credit totaling $179,000 and a net
non-cash charge totaling $1,257,000, respectively, in connection with certain
anti-dilution provisions of the settlement agreement. The related liability
reflects management's estimate, as of each balance sheet date, of the fair value
of AR-CombiMatrix stock to be issued 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
is 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 expire in September 2005.
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 paid under the agreement
during the three months ended March 31, 2005, and 2004, were $28,000 and
$37,500, respectively.
ACACIA TECHNOLOGIES GROUP
In connection with the acquisition of certain patents and patent
rights, certain companies included in the Acacia Technologies group executed
related agreements which grant to the former owners of the respective patents or
patent rights, the right to receive royalties based on future net license fee
revenues (as defined in the respective agreements) generated by the Acacia
Technologies group as a result of licensing the respective patents or patent
portfolios. Royalties paid pursuant to the agreements are expensed in the
consolidated statement of operations in the period that the related license fee
revenues are recognized.
In connection with the Acacia Technologies group's licensing and
enforcement activities, the Acacia Technologies group may retain the services of
law firms that specialize in intellectual property licensing and enforcement and
patent law. These law firms may be retained on a contingent fee basis in which
the law firms are paid on a scaled percentage of any negotiated license fees,
settlements or judgments awarded based on how and when the license fees,
settlements or judgments are obtained by the Acacia Technologies group. In
instances where the Acacia Technologies group does not recover license fees from
potential infringers, no contingent legal fees are paid; however, the Acacia
Technologies group 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 by the Acacia Technologies group are included in
long-term liabilities in the statement of financial condition.
LITIGATION
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. As additional information becomes available, we will
assess the potential liability related to our pending litigation and may revise
our estimates accordingly. Such revisions in our estimates of the potential
liability could materially impact our results of operations and financial
position.
PATENT ENFORCEMENT LITIGATION
From time to time, companies comprising the Acacia Technologies group
engage in litigation to enforce their patents and patent rights. In the
litigation listed below, certain companies comprising the Acacia Technologies
group are plaintiffs in ongoing litigation alleging infringement of certain of
our patented technologies by the defendants listed. Current patent enforcement
litigation, by related patented technology, is as follows:
13
AUDIO/VIDEO ENHANCEMENT AND SYNCHRONIZATION TECHNOLOGY
IMAGE RESOLUTION ENHANCEMENT TECHNOLOGY
IP Innovation LLC and Technology Licensing Corporation v. Lexmark
International, Inc., United States District Court for the Northern District of
Illinois. Filed 10/23/02. Case No. 1:02-cv-07611.
IP Innovation, LLC and Technology Licensing Corporation v. Dell
Computer Corporation. United States District Court for the Northern District of
Illinois. Filed 5/15/03. Case No. 1:03-cv-03245.
IP Innovation, LLC, Technology Licensing Corporation, New Medium
Technologies LC, AV Technologies LLC v. Sony Electronics. United States District
Court for the Northern District of Illinois. Filed 10/4/04. Case No.
1:04-cv-06388.
IP Innovation LLC, Technology Licensing Corporation, New Medium LLC and
AV Technologies LLC v. Matsushita Electric Industrial Co., Ltd. and Panasonic
Corporation of North America. United States District Court for the Northern
District of Illinois. Filed 2/14/05. Case No. 1:05-cv-00902.
Technology Licensing Corporation v. Thomson Inc. United States District
Court for the Eastern District of California. Filed 6/20/03. Case No.
2:03-cv-01329-WBS-PAN.
COMPUTER MEMORY CACHE COHERENCY TECHNOLOGY
Computer Cache Coherency Corporation v. VIA Technologies Inc. and Via
Technologies Inc. (USA). United States District Court for the Northern District
of California. Filed 12/2/04. Case No. 3:05-cv-01668.
Computer Cache Coherency Corporation v. Advanced Micro Devices, Inc.
United States District Court for the Northern District of California. Filed
4/28/05. Case No. 3:05-cv-01767. See Note 11.
Computer Cache Coherency Corporation v. Intel Corporation. United
States District Court for the Northern District of California. Filed 4/28/05.
Case No. 5:05-cv-01766. See Note 11.
CREDIT CARD FRAUD PROTECTION TECHNOLOGY
Financial Systems Innovation LLC and Paul N. Ware v. Gap, Inc.,
Racetrac Petroleum, Inc. and The Kroger Company. United States District Court
for the Northern District of Georgia. Filed 3/3/04. Case No. 4:04-cv-00065.
Financial Systems Innovation LLC and Paul N. Ware v. Williams-Sonoma
Inc., Linens N Things Inc. and Costco Wholesale Corporation,. United States
District Court for the Northern District of Texas. Filed 6/30/04. Case No.
4:04-cv-00479.
DIGITAL MEDIA TRANSMISSION TECHNOLOGY
In accordance with the Transfer Order issued February 24, 2005, by the
Judicial Panel on Multidistrict Litigation, all of the following Digital Media
Transmission Technology cases have been transferred to the Northern District of
California. The lead case number is 05-CV-01114.
Acacia Media Technologies Corporation v. Comcast Corporation, 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) and Mediacom, LLC,
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, and Wide Open West, LLC, Time Warner
Cable, Cablevision Systems Corporation, Insight Communications Company, Cebridge
Connections and Bresnan Communications. See Note 11.
Acacia Media Technologies Corporation, Inc. v. New Destiny Internet
Group, Inc., Audio Communications Inc., VS Media, 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, ICS, Inc. / AP Net Marketing, Inc., and National A-1 Advertising.
14
DYNAMIC MANUFACTURING MODELING TECHNOLOGY
Information Technology Innovation, LLC v. Motorola Inc. and Freescale
Semiconductor, Inc. United States District Court for the Northern District of
Illinois. Filed 11/3/04. Case No. 1:04-cv-07121.
INTERACTIVE TELEVISION TECHNOLOGY
Broadcast Innovation, LLC and IO Research, Ltd. v. Charter
Communications, Inc. and Comcast Corporation. United States District Court for
the District of Colorado, on appeal to the U.S. Court of Appeals for the Federal
Court. Notice of Appeal Filed 9/28/04. Lower Court Case No. 1:03-cv-02223.
Broadcast Innovation, LLC v. Echostar Communications Corporation.
United States District Court for the District of Colorado 11/9/01. Case No.
1:01-cv-02201.
MICROPROCESSOR ENHANCEMENT TECHNOLOGY
Microprocessor Enhancement Corporation and Michael H. Branigin v. Texas
Instruments Incorporated and Intel Corporation. United States District Court for
the Central District of California. Filed 4/7/05. See Note 11.
MULTI-DIMENSIONAL BAR CODE TECHNOLOGY
VCode Holdings, Inc. and VData, LLC v. Adidas America, Inc., Advanced
Micro Devices, Inc., Boston Scientific Corporation, Stamps.com Inc. and Hitachi
Global Storage Technologies (Thailand), Ltd. United States District Court for
the District of Minnesota. Filed 10/25/04. Case No. 0:04-cv-04583.
V-CHIP TECHNOLOGY
The remaining Non-Soundview parties in the Acacia Technologies group's
V-chip patent infringement lawsuit, which concluded in August 2004, have a
motion pending before the United States District Court for the District of
Connecticut seeking reimbursement of certain attorney's fees. 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.
OTHER
IP Innovation LLC v. Digital Think, Inc., Docent, Inc., eCollege.Com
United States District Court for the Southern District of Texas. On appeal to
the U.S. Court of Appeals for the Federal Circuit. Notice of Appeal Filed
12/10/04. Lower Court Case No. 02-cv-2031.
10. DISCONTINUED OPERATIONS
Results for the three months ended March 31, 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 are guaranteed by Acacia Research Corporation, expire in August 2005.
11. SUBSEQUENT EVENTS
In April 2005, Microprocessor Enhancement Corporation, a wholly owned
subsidiary that is part of the Acacia Technologies group, filed a patent
infringement lawsuit in the District Court for the Central District of
California against Intel Corporation and Texas Instruments Corporation. The
lawsuit alleges patent infringement by Intel's Itanium(R) line of
microprocessors, and certain series of digital signal processors sold by Texas
Instruments.
In April 2005, Acacia Media Technologies Corporation added Time Warner
Cable, Cablevision Systems Corporation, Insight Communications Company, Cebridge
Connections, and Bresnan Communications to its DMT patent infringement
litigation. The lawsuit against Time Warner, Insight, and Bresnan Communications
was filed in the U.S. District Court for the Southern District of New York. The
15
lawsuit against Cablevision Systems Corporation was filed in the Eastern
District of New York, and the lawsuit against Cebridge Connections was filed in
the Northern District of California. In accordance with the Transfer Order
issued on February 24, 2005, by the Judicial Panel on Multidistrict Litigation,
all of the cases will be transferred to the Northern District of California for
consolidation with the existing DMT litigation.
In May 2005, Computer Cache Coherency Corporation, a wholly owned
subsidiary that is part of the Acacia Technologies group, added Intel
Corporation and Advanced Micro Devices, Inc. to the patent infringement
litigation for its Computer Memory Cache Coherency technology, which is pending
in the District Court for the Northern District of California.
12. 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.
16
CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
AT MARCH 31, 2005
-------------------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX
GROUP GROUP ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 32,932 $ 5,455 $ -- $ 38,387
Short-term investments .................................. 8,250 14,936 -- 23,186
Accounts receivable ..................................... 891 507 -- 1,398
Prepaid expenses, inventory and other assets ............ 949 433 -- 1,382
Receivable from CombiMatrix group ....................... 149 -- (149) --
------------- ------------ ------------- -------------
Total current assets ............................. 43,171 21,331 (149) 64,353
Property and equipment, net of accumulated depreciation ..... 107 2,332 -- 2,439
Patents, net of accumulated amortization .................... 27,459 8,747 -- 36,206
Goodwill .................................................... 121 19,424 -- 19,545
Other assets ................................................ 142 532 -- 674
------------- ------------ ------------- -------------
$ 71,000 $ 52,366 $ (149) $ 123,217
============= ============ ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other ............ $ 2,367 $ 2,320 $ -- $ 4,687
Royalties and legal fees payable ........................ 481 -- -- 481
Current portion of deferred revenues .................... 567 71 -- 638
Payable to Acacia Technologies group .................... -- 149 (149) --
------------- ------------ ------------- -------------
Total current liabilities ........................ 3,415 2,540 (149) 5,806
Deferred income taxes ....................................... 833 2,078 -- 2,911
Deferred revenues, net of current portion ................... 315 3,833 -- 4,148
Other liabilities ........................................... 133 227 -- 360
------------- ------------ ------------- -------------
Total liabilities ................................ 4,696 8,678 (149) 13,225
------------- ------------ ------------- -------------
Minority interests .......................................... 482 -- -- 482
------------- ------------ ------------- -------------
Redeemable Stockholders' equity:
AR - Acacia Technologies stock .......................... 65,822 -- -- 65,822
AR - CombiMatrix stock .................................. -- 43,688 -- 43,688
------------- ------------ ------------- -------------
Total stockholders' equity ....................... 65,822 43,688 -- 109,510
------------- ------------ ------------- -------------
$ 71,000 $ 52,366 $ (149) $ 123,217
============= ============ ============= =============
(CONTINUED ON NEXT PAGE)
17a
CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
(CONTINUED)
AT DECEMBER 31, 2004
------------------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX
GROUP GROUP ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 15,750 $ 2,985 $ -- $ 18,735
Short-term investments .................................. 12,896 20,727 -- 33,623
Accounts receivable ..................................... 193 343 -- 536
Prepaid expenses, inventory and other assets ............ 754 229 -- 983
Receivable from CombiMatrix group ....................... 119 -- (119) --
------------- ------------ ------------- ------------
Total current assets ............................. 29,712 24,284 (119) 53,877
Property and equipment, net of accumulated depreciation ..... 104 2,330 -- 2,434
Patents, net of accumulated amortization .................... 3,042 9,021 -- 12,063
Goodwill .................................................... 121 19,424 -- 19,545
Other assets ................................................ 79 329 -- 408
------------ ------------- ------------- ------------
$ 33,058 $ 55,388 $ (119) $ 88,327
============ ============= ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other ............ $ 2,175 $ 1,964 $ -- $ 4,139
Royalties and legal fees payable ........................ -- -- -- --
Current portion of deferred revenues .................... 428 66 -- 494
Payable to Acacia Technologies group .................... -- 119 (119) --
------------ ------------- ------------- ------------
Total current liabilities ........................ 2,603 2,149 (119) 4,633
Deferred income taxes ....................................... 869 2,112 -- 2,981
Deferred revenues, net of current portion ................... -- 3,893 -- 3,893
Other liabilities ........................................... -- 406 -- 406
------------ ------------- ------------- ------------
Total liabilities ................................ 3,472 8,560 (119) 11,913
------------ ------------- ------------- ------------
Minority interests .......................................... 778 -- -- 778
------------ ------------- ------------- ------------
Redeemable Stockholders' equity:
AR - Acacia Technologies stock .......................... 28,808 -- -- 28,808
AR - CombiMatrix stock .................................. -- 46,828 -- 46,828
------------ ------------- ------------- ------------
Total stockholders' equity ....................... 28,808 46,828 -- 75,636
------------ ------------- ------------- ------------
$ 33,058 $ 55,388 $ (119) $ 88,327
============ ============= ============= ============
- --------------------------------------------
NOTE: Segment information for the Acacia Technologies group includes
discontinued operations related to Soundbreak.com. Total assets related to
discontinued operations totaled $983,000 and $1,443,000 at March 31, 2005, and
December 31, 2004, respectively. Total liabilities related to discontinued
operations totaled $320,000 and $275,000 at March 31, 2005, and December 31,
2004, respectively.
17b
CONSOLIDATING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31, 2005
-----------------------------------------------------------
ACACIA ELIMINATIONS/
TECHNOLOGIES COMBIMATRIX RECLASS- CONSOL-
GROUP GROUP IFICATIONS IDATED
----------- ----------- ------------ -----------
Revenues:
Research and development, government and service contracts....... $ -- $ 791 $ -- $ 791
License fees .................................................... 1,863 -- -- 1,863
Products ........................................................ -- 278 -- 278
----------- ----------- ------------ -----------
Total revenues ............................................. 1,863 1,069 -- 2,932
----------- ----------- ------------ -----------
Operating expenses:
Cost of government contract revenues ............................ -- 691 -- 691
Cost of product sales ........................................... -- 163 -- 163
Research and development expenses ............................... -- 1,140 -- 1,140
Non-cash stock compensation amortization - research
and development .............................................. -- -- -- --
Marketing, general and administrative expenses .................. 1,610 2,279 -- 3,889
Legal expenses - patents ........................................ 561 -- -- 561
Contingent legal fees and royalties expense - patents ........... 647 -- -- 647
Non-cash stock compensation amortization - marketing,
general and administrative ................................... -- (126) -- (126)
Amortization of patents ......................................... 916 274 -- 1,190
Legal settlement charges (credits) .............................. -- (179) -- (179)
----------- ----------- ------------ -----------
Total operating expenses ................................... 3,734 4,242 -- 7,976
----------- ----------- ------------ -----------
Operating income (loss) .................................... (1,871) (3,173) -- (5,044)
----------- ----------- ------------ -----------
Other income (expense):
Interest income ................................................. 171 102 -- 273
Other income .................................................... -- (39) -- (39)
----------- ----------- ------------ -----------
Total other income (expense) ............................... 171 63 -- 234
----------- ----------- ------------ -----------
Income (loss) from continuing operations before
income taxes .................................................... (1,700) (3,110) -- (4,810)
Benefit for income taxes ........................................... 36 34 -- 70
----------- ----------- ------------ -----------
Loss from continuing operations .................................... (1,664) (3,076) -- (4,740)
Discontinued operations:
Estimated loss on disposal of discontinued operations ........... (210) -- -- (210)
----------- ----------- ------------ -----------
Net income (loss) .................................................. $ (1,874) $ (3,076) $ -- $ (4,950)
=========== =========== ============ ===========
(CONTINUED ON NEXT PAGE)
18a
CONSOLIDATING STATEMENT OF OPERATIONS (IN THOUSANDS)
(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004
-------------------------------------------------------------
ACACIA ELIMINATIONS/
TECHNOLOGIES COMBIMATRIX RECLASS- CONSOL-
GROUP GROUP IFICATIONS IDATED
----------- ----------- ------------ ----------
Revenues:
Research and development, government and service contracts....... $ -- $ 17,600 $ -- $ 17,600
License fees .................................................... 599 -- -- 599
Products ........................................................ -- 16 -- 16
----------- ----------- ------------ -----------
Total revenues ............................................. 599 17,616 -- 18,215
----------- ----------- ------------ -----------
Operating expenses:
Cost of government contract revenues ............................ -- 205 -- 205
Cost of product sales ........................................... -- 4 -- 4
Research and development expenses ............................... -- 1,383 -- 1,383
Non-cash stock compensation amortization - research
and development .............................................. -- 69 -- 69
Marketing, general and administrative expenses .................. 1,006 2,278 -- 3,284
Legal expenses - patents ........................................ 602 -- -- 602
Contingent legal fees and royalties expense - patents ........... -- -- -- --
Non-cash stock compensation amortization - marketing,
general and administrative ................................... -- 334 -- 334
Amortization of patents ......................................... 125 274 -- 399
Legal settlement charges (credits) .............................. -- 1,257 -- 1,257
----------- ----------- ------------ -----------
Total operating expenses ................................... 1,733 5,804 -- 7,537
----------- ----------- ------------ -----------
Operating income (loss) .................................... (1,134) 11,812 -- 10,678
----------- ----------- ------------ -----------
Other income (expense):
Interest income ................................................. 112 46 -- 158
Other income .................................................... -- -- -- --
----------- ----------- ------------ -----------
Total other income (expense) ............................... 112 46 -- 158
----------- ----------- ------------ -----------
Income (loss) from continuing operations before
income taxes .................................................... (1,022) 11,858 -- 10,836
Benefit for income taxes ........................................... 33 34 -- 67
----------- ----------- ------------ -----------
Loss from continuing operations .................................... (989) 11,892 -- 10,903
Discontinued operations:
Estimated loss on disposal of discontinued operations ........... -- -- -- --
----------- ----------- ------------ -----------
Net income (loss) .................................................. $ (989) $ 11,892 $ -- $ 10,903
=========== =========== ============ ===========
18b
CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31, 2005
-------------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX
GROUP GROUP ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) from continuing operations ................... $ (1,664) $ (3,076) $ -- $ (4,740)
Adjustments to reconcile net income (loss) from continuing
operations to net cash used in operating activities:
Depreciation and amortization .................................. 929 553 -- 1,482
Non-cash stock compensation .................................... -- (126) -- (126)
Deferred tax benefit ........................................... (36) (34) -- (70)
Non-cash legal settlement charges (credits) .................... -- (179) -- (179)
Other .......................................................... -- 11 -- 11
Changes in assets and liabilities, excluding effect of business
acquisition:
Accounts receivable ............................................ (698) (164) -- (862)
Prepaid expenses, inventory and other assets ................... (375) (197) 30 (542)
Accounts payable, accrued expenses and other ................... 89 290 (30) 349
Royalties and legal fees payable ............................... 481 -- -- 481
Deferred revenues .............................................. 453 (54) -- 399
------------ ------------ ------------ ------------
Net cash used in operating activities from continuing
operations ................................................... (821) (2,976) -- (3,797)
Net cash used in operating activities from discontinued
operations ................................................... (288) -- -- (288)
------------ ------------ ------------ ------------
Net cash used in operating activities .......................... (1,109) (2,976) -- (4,085)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment ............................. (16) (252) -- (268)