Attached files
file | filename |
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EX-18.1 - PREFERABILITY LETTER - ACACIA RESEARCH CORP | acacia_10k-ex1801.htm |
EX-31.1 - CERTIFICATION - ACACIA RESEARCH CORP | acacia_10k-ex3101.htm |
EX-21.1 - SUBSIDIARIES - ACACIA RESEARCH CORP | acacia_10k-ex2101.htm |
EX-31.2 - CERTIFICATION - ACACIA RESEARCH CORP | acacia_10k-ex3102.htm |
EX-23.1 - CONSENT - ACACIA RESEARCH CORP | acacia_10k-ex2301.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009
OR
FOR
THE TRANSITION PERIOD
FROM TO .
Commission
File Number 0-26068
ACACIA
RESEARCH CORPORATION
(Exact
name of registrant as specified in its charter)
DELAWARE
|
95-4405754
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
organization)
|
Identification
No.)
|
500
NEWPORT CENTER DRIVE, NEWPORT BEACH, CA
|
92660
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (949) 480-8300
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each
Class
|
Name
of Each Exchange on Which Registered
|
Common
Stock, $0.001 par value
|
The
NASDAQ Stock Market, LLC
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No o
Indicate
by check mark that disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer ¨
|
|
Accelerated
filer þ
|
Non-accelerated
filer ¨ (Do not check if
a smaller reporting company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No þ
The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant, computed by reference to the last sale price of such stock
reported on The NASDAQ Global Market, as of June 30, 2009, was approximately
$236,617,000. (All executive officers and directors of the registrant are
considered affiliates.)
As of
February 23, 2010, 33,148,984 shares of common stock were issued and
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement for its Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the close of
its fiscal year are incorporated by reference into Part III.
ACACIA
RESEARCH CORPORATION
FORM
10-K ANNUAL REPORT
FISCAL
YEAR ENDED DECEMBER 31, 2009
TABLE
OF CONTENTS
Item
|
|
Page
|
PART
I
|
||
1.
|
Business
|
1
|
1A.
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Risk
Factors
|
7
|
1B.
|
Unresolved
Staff Comments
|
17
|
2.
|
Properties
|
17
|
3.
|
Legal
Proceedings
|
17
|
4.
|
Submission
of Matters to a Vote of Security Holders
|
17
|
PART
II
|
||
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases
of Equity Securities
|
18
|
6.
|
Selected
Financial Data
|
21
|
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
23
|
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
37
|
8.
|
Financial
Statements and Supplementary Data
|
38
|
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
38
|
9A.
|
Controls
and Procedures
|
38
|
9B.
|
Other
Information
|
38
|
PART
III
|
||
10.
|
Directors,
Executive Officers and Corporate Governance
|
39
|
11.
|
Executive
Compensation
|
39
|
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
39
|
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
39
|
14.
|
Principal
Accounting Fees and Services
|
39
|
PART
IV
|
||
15.
|
Exhibits,
Financial Statement Schedules
|
40
|
PART
I
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
As used
in this Annual Report on Form 10-K, “we,” “us” and “our” refer to Acacia
Research Corporation and/or its wholly and majority-owned operating
subsidiaries. All intellectual property acquisition, development,
licensing and enforcement activities are conducted solely by certain of our
wholly owned operating subsidiaries.
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, and other circumstances affecting anticipated
revenues and costs, as more fully disclosed in our discussion of risk factors
incorporated by reference in Item 1A. of Part I of this
report. 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.
Item
1. BUSINESS
General
Our
operating subsidiaries acquire, develop, license and enforce patented
technologies. Our operating subsidiaries generate license fee
revenues and related cash flows from the granting of licenses for the use of
patented technologies that our operating subsidiaries own or
control. 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.
We are a
leader in licensing patented technologies and have established a proven track
record of licensing success with over 740 license agreements executed to date,
across 60 of our technology license programs. Currently, on a
consolidated basis, our operating subsidiaries own or control the rights to over
140 patent portfolios, which include U.S. patents and certain foreign
counterparts, covering technologies used in a wide variety of
industries.
CombiMatrix Group
Split-Off Transaction and Related Discontinued Operations. In
January 2006, our board of directors approved a plan for our former wholly owned
subsidiary, CombiMatrix Corporation, or CombiMatrix, the primary component of
our life science business, known as the CombiMatrix group, to become an
independent publicly-held company. On August 15, 2007, or the
Redemption Date, CombiMatrix was split-off from us through the redemption of all
outstanding shares of Acacia Research-CombiMatrix common stock in exchange for
the distribution of new shares of CombiMatrix common stock, on a pro-rata basis,
to the holders of Acacia Research-CombiMatrix common stock on the Redemption
Date. We refer to this transaction as the Split-Off
Transaction. Subsequent to the Redemption Date, we no longer own any
equity interests in CombiMatrix and the CombiMatrix group is no longer one of
our business groups. Subsequent to the Split-Off Transaction,
our only business is our intellectual property licensing business.
Refer to
Note 11 to our consolidated financial statements, included elsewhere herein, for
information regarding presentation of the assets, liabilities, results of
operations and cash flows for the CombiMatrix group as “Discontinued
Operations,” for all periods presented, in accordance with guidance set forth in
Financial Accounting Standards Board, or FASB, Accounting Standards
Codification, or ASC, Topic 205-20 “Discontinued Operations,” or ASC Topic
205-20.
1
Capital
Structure. Pursuant to the terms of the Split-Off Transaction,
all outstanding shares of Acacia Research-CombiMatrix common stock were
redeemed, and all rights of holders of Acacia Research-CombiMatrix common stock
ceased as of the Redemption Date, except for the right, upon the surrender to
the exchange agent of shares of Acacia Research-CombiMatrix common stock, to
receive new shares of CombiMatrix common stock. As a result of, and
immediately following, the consummation of the Split-Off Transaction, our only
class of common stock outstanding was our Acacia Research-Acacia Technologies
common stock.
On May
20, 2008, our stockholders approved an amendment and restatement of our
Certificate of Incorporation to eliminate all references to Acacia
Research-CombiMatrix common stock and all provisions relating to the rights and
obligations of the Acacia Research-CombiMatrix common stock. In
addition, the amendment and restatement changed the name of the “Acacia
Research-Acacia Technologies common stock” to “common stock,” and our common
stock is the only class of common stock authorized and
issuable.
Other
We were
originally incorporated in California in January 1993 and reincorporated in
Delaware in December 1999. Our website address is www.acaciaresearch.com. We
make our filings with the Securities and Exchange Commission, or the SEC,
including our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, available free of
charge on our website as soon as reasonably practicable after we file these
reports. In addition, we post the following information on our
website:
|
·
|
our
corporate code of conduct, our code of conduct for our board of directors
and our fraud policy; and
|
|
·
|
charters
for our audit committee, nominating and corporate governance committee,
disclosure committee and compensation
committee.
|
The
public may read and copy any materials that we file with the SEC at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, D.C.
20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the
SEC maintains an Internet website that contains reports, proxy and information
statements, and other information regarding issuers, including us, that file
electronically with the SEC. The public can obtain any documents that
we file with the SEC at http://www.sec.gov.
2
BUSINESS
OVERVIEW
Intellectual
Property Licensing Business
Our
operating subsidiaries acquire, develop, license and enforce patented
technologies. Our operating subsidiaries generate license fee
revenues and related cash flows from the granting of licenses for the use of
patented technologies that our operating subsidiaries own or
control. 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.
Currently, on a consolidated basis, our operating subsidiaries own or control
the rights to over 140 patent portfolios, which include U.S. patents and certain
foreign counterparts, covering technologies used in a wide variety of
industries. Refer to “Patented Technologies” below for a partial
summary of patent portfolios owned or controlled by certain of our operating
subsidiaries.
We are a
leader in patent licensing and our operating subsidiaries have established a
proven track record of licensing success with more than 740 license agreements
executed to date. To date, on a consolidated basis, we have generated
revenues from 60 of our technology licensing and enforcement
programs. Our professional staff includes in-house patent attorneys,
licensing executives, engineers and business development
executives.
Our
partners are primarily individual inventors and small companies who have limited
resources and/or expertise to effectively address the unauthorized use of their
patented technologies, and also include large companies seeking to effectively
and efficiently monetize their portfolio of patented technologies. In a typical
partnering arrangement, our operating subsidiary will acquire a patent
portfolio, or acquire rights to a patent portfolio, with our partner receiving
an upfront payment for the purchase of the patent portfolio or patent portfolio
rights, or receiving a percentage of our operating subsidiaries net recoveries
from the licensing and enforcement of the patent portfolio, or a combination of
the two.
Under
U.S. law, an inventor or patent owner has the right to exclude others from
making, selling or using their patented invention. Unfortunately, in the
majority of cases, infringers are generally unwilling, at least initially, to
negotiate or pay reasonable royalties for their unauthorized use of third-party
patents and will typically fight any allegations of patent
infringement. Inventors and/or patent holders without sufficient
financial or expert technical resources to bring legal action may lack
credibility in dealing with unwilling licensees and as a result, are often
blatantly ignored.
As a
result of the common reluctance of patent infringers to negotiate and ultimately
take a patent license for the use of third-party patented technologies without
at least the threat of legal action, patent licensing and enforcement often
begins with the filing of patent enforcement litigation. However, the
majority of patent infringement contentions settle out of court, based on the
strength of the patent claims, validity, and persuasive evidence and clarity
that the patent is being infringed.
We
execute patent licensing arrangements with users of our patented technologies
through willing licensing negotiations without the filing of patent infringement
litigation, or through the negotiation of license and settlement arrangements in
connection with the filing of patent infringement litigation.
3
Business
Model and Strategy
Overview
The
business model associated with the licensing and enforcement activities
conducted by our operating subsidiaries is summarized in the following
illustration:
Key
Elements of Business Strategy
Our
intellectual property acquisition, development, licensing and enforcement
business strategy, conducted solely by our operating subsidiaries, includes the
following key elements:
|
·
|
Identify
Emerging Growth Areas where Patented Technologies will Play a Vital
Role
|
The
patent process breeds, encourages and sustains innovation and invention by
granting a limited monopoly to the inventor in exchange for sharing the
invention with the public. Certain technologies, including several of the
technologies controlled by our operating subsidiaries, some of which are
summarized below, become core technologies in the way products and services are
manufactured, sold and delivered by companies across a wide array of
industries. Our operating subsidiaries identify core, patented
technologies that have been or are anticipated to be widely adopted by third
parties in connection with the manufacture or sale of products and
services.
|
·
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Contact
and Form Alliances with Owners of Core, Patented
Technologies
|
|
Often
individual inventors and small companies have limited resources and/or
expertise and are unable to effectively address the unauthorized use of
their patented technologies. Individual inventors and small
companies may lack sufficient capital resources and may also lack in-house
personnel with patent licensing expertise and/or experience, which may
make it difficult to effectively out-license and/or enforce their patented
technologies.
|
|
For
years, many large companies have earned substantial revenue licensing
patented technologies to third parties. Other companies that do
not have internal licensing resources and expertise may have continued to
record the capitalized carrying value of their core and or non-essential
intellectual property in their financial statements, without deriving
income from their intellectual property or realizing the potential value
of their intellectual property assets. Securities and financial
reporting regulations require these companies to periodically evaluate and
potentially reduce or write-off these intellectual property assets if they
are unable to substantiate these reported carrying
values.
|
4
Our
operating subsidiaries seek to enter into business agreements with owners of
intellectual property that do not have experience or expertise in the areas of
intellectual property licensing and enforcement or that do not possess the
in-house resources to devote to intellectual property licensing and enforcement
activities or that, for any number of strategic business reasons, desire to more
efficiently and effectively outsource their intellectual property licensing and
enforcement activities.
|
·
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Effectively
and Efficiently Evaluate Patented Technologies for Acquisition, Licensing
and Enforcement
|
|
Subtleties
in the language of a patent, recorded interactions with the patent office,
and the evaluation of prior art and literature can make a significant
difference in the potential licensing and enforcement revenue derived from
a patent or patent portfolio. Our specialists are trained and
skilled in these areas. It is important to identify potential
problem areas, if any, and determine whether potential problem areas can
be overcome, prior to acquiring a patent portfolio or launching an
effective licensing program. We have developed processes and
procedures for identifying problem areas and evaluating the strength of a
patent portfolio before the decision is made to allocate resources to an
acquisition or an effective licensing and enforcement
effort.
|
|
Patent Portfolio
Evaluation. The processes and procedures employed in
connection with the evaluation of a specific patent portfolio for
acquisition, licensing and enforcement are tailored and unique to each
specific situation, and can vary widely, based on the specific facts and
circumstances of a specific patent portfolio, technology, related industry
and other factors. Some of the key components of our processes
and procedures may include:
|
|
·
|
Utilizing
our staff of in-house intellectual property business development
executives, patent attorneys, intellectual property licensing executives,
and technology engineers to conduct our tailored patent acquisition and
evaluation processes and procedures. We may also leverage the
expertise of external specialists and technology
consultants.
|
|
·
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Identifying
emerging growth areas where patented technologies will play a vital role
in connection with the manufacture or sale of products and
services.
|
|
·
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Identifying
core, patented technologies that have been or are anticipated to be widely
adopted by third parties in connection with the manufacture or sale of
products and services.
|
|
·
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Considering
the impact of subtleties in the language of a patent, recorded
interactions with the patent office, evaluating prior art and literature
and considering the impact on the potential licensing and enforcement
revenue that can be derived from a patent or patent
portfolio.
|
|
·
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Evaluating
the strength of a patent portfolio, including consideration of the types
of claims and the number of claims potentially infringed by third parties,
before the decision is made to allocate resources to an acquisition or an
effective licensing and enforcement
effort.
|
|
·
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Identifying
and considering potential problem areas, if any, and determining whether
potential problem areas can be overcome prior to acquiring a patent
portfolio or launching an effective licensing
program.
|
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·
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Identifying
potential infringers, industries within which the potential infringers
exist, longevity of the patented technology, and a variety of other
factors that directly impact the magnitude and potential success of a
licensing and enforcement program.
|
|
·
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Purchase
or Acquire the Rights to Patented
Technologies
|
|
After
evaluation, our operating subsidiaries may elect to purchase the patented
technology, or acquire the exclusive right to license the patented
technology in all or in specific fields of use. In either case,
the owner of the patent generally retains the rights to a portion of the
net revenues generated from a patent portfolio’s licensing and enforcement
program. Our operating subsidiaries generally control the
licensing and enforcement process and utilize experienced in-house
personnel to reduce outside costs and to ensure that the necessary capital
and expertise is allocated and deployed in an efficient and cost effective
manner.
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5
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·
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Successfully
License and Enforce Patents with Significant Royalty
Potential
|
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As
part of the patent evaluation process employed by our operating
subsidiaries, significant consideration is also given to the
identification of potential infringers, industries within which the
potential infringers exist, longevity of the patented technology, and a
variety of other factors that directly impact the magnitude and potential
success of a licensing and enforcement program. Our specialists
are trained in evaluating potentially infringing technologies and in
presenting the claims of our patents and demonstrating how they apply to
companies we believe are using our technologies in their products or
services. These presentations can take place in a
non-adversarial business setting, but can also occur through the
litigation process, if necessary. Ultimately, we execute patent
licensing arrangements with users of our patented technologies through
willing licensing negotiations without the filing of patent infringement
litigation, or through the negotiation of license and settlement
arrangements in connection with the filing of patent infringement
litigation.
|
Patented
Technologies
Currently,
on a consolidated basis, our operating subsidiaries own or control the rights to
over 140 patent portfolios, with patent expiration dates ranging from 2010 to
2029, and covering technologies used in a wide variety of industries, including
the following:
·
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Aligned
Wafer Bonding
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Enterprise
Content Management
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·
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Optical
Switching
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Audio
Communications Fraud Detection
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Facilities
Operation Management System
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Parallel
Processing with Shared Memory
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·
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Audio
Storage and Retrieval System
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·
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File
Locking in Shared Storage Networks
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·
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Peer
to Peer Communications
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Audio
Video Enhancement & Synchronization
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Flash
Memory
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·
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Physical
Access Control
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·
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Authorized
Spending Accounts
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Fluid
Flow Control and Monitoring
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Picture
Archiving & Communication Systems
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·
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Automated
Notification of Tax Return Status
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Hearing
Aid ECS
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·
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Pointing
Device
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Automated
Tax Reporting
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Heated
Surgical Blades
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Pop-Up
Internet Advertising
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·
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Biosensor
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High
Performance Computer Architecture
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Portable
Credit Card Processing
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Broadcast
Data Retrieval
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·
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High
Quality Image Processing
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Portable
Storage Devices with Links
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·
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Child-friendly
Secure Mobile Phones
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·
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High
Resolution Optics
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Product
Activation
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·
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Chip-Stacking
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Image
Resolution Enhancement
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Projector
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·
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Color
Correction for Video Graphics Systems
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Improved
Anti-Trap Safety Technology for Vehicles
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Purifying
Nucleic Acids
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·
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Compact
Disk
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Improved
Commercial Print
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Radio
Communication with Graphics
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·
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Compiler
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Improved
Lighting
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·
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Records
Management
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·
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Computer
Architecture and Power Management
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·
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Improved
Memory Manufacturing
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·
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Relational
Database Access
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·
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Computer
Graphics
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·
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Improved
Printing
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·
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Remote
Management of Imaging Devices
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·
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Computer
Memory Cache Coherency
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·
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Information
Portal Software
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·
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Remote
Video Camera
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·
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Computer
Simulations
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Integrated
Access
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·
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Resource
Scheduling
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·
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Consumer
Rewards
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·
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Interactive
Content in a Cable Distribution System
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·
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Rule
Based Monitoring
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·
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Continuous
TV Viewer Measuring
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·
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Interactive
Mapping
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·
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Shape
Memory Alloys
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·
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Copy
Protection
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·
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Internet
Radio Advertising
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·
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Software
Installation
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·
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Credit
Card Fraud Protection
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·
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Interstitial
Internet Advertising
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·
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Software
License Management
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·
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Data
Encryption
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·
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Intraluminal
Device Technology
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·
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Spreadsheet
Automation
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·
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Database
Access
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·
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Laparoscopic
Surgery
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·
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Storage
Technology
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·
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Database
Management
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·
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Laptop
Connectivity
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·
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Surgical
Catheter
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·
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Database
Retrieval
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·
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Lighting
Ballast
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·
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Telematics
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·
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Digital
Newspaper Delivery
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·
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Location
Based Services
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·
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Television
Data Display
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·
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Digital
Signal Processing Architecture
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·
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Manufacturing
Data Transfer
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·
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Television
Signal Scrambling
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·
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Digital
Video Enhancement
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·
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Medical
Image Manipulation
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·
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Text
Auto-Completion
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·
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Digital
Video Production
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·
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Medical
Image Stabilization
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·
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User
Programmable Engine Control
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·
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Distributed
Data Management and Synchronization
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·
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Medical
Monitoring
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·
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Vehicle
Anti-Theft Parking Systems
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·
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DMT®
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MEMS
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Vehicle
Maintenance
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Document
Generation
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Messaging
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Vehicle
Occupant Sensing
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Document
Retrieval Using Global Word Co-Occurrence Patterns
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Micromirror
Digital Display
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Videoconferencing
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Dynamic
Manufacturing Modeling
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Microprocessor
Enhancement
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Virtual
Computer Workspaces
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Ecommerce
Pricing
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Microprocessor
Memory Management
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Virtual
Server
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Electronic
Address List Management
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Mobile
Computer Synchronization
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Website
Crawling
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Electronic
Message Advertising
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Multi-Dimensional
Database Compression
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Wireless
Data
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Electronic
Securities Trading
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Network
Monitoring
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Wireless
Digital Messaging
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Embedded
Broadcast Data
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Network
Remote Access
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Wireless
LAN
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Encrypted
Media & Playback Devices
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Online
Ad Tracking
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Workspace
with Moving Viewpoint
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Enhanced
DRAM Architecture
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Online
Auction Guarantees
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Enhanced
Internet Navigation
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Online
Promotion
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6
Patent
Enforcement Litigation
Our
operating subsidiaries are often required to engage in litigation to enforce
their patents and patent rights. Certain of our operating
subsidiaries are parties to ongoing patent enforcement related litigation,
alleging infringement by third parties of certain of the patented technologies
owned or controlled by our operating subsidiaries.
Competition
We expect
to encounter increased competition in the area of patent acquisitions and
enforcement. This includes an increase in the number of competitors
seeking to acquire the same or similar patents and technologies that we may seek
to acquire. Entities including Allied Security Trust, Altitude
Capital Partners, Coller IP, Intellectual Ventures, Millennium Partners, Open
Innovation Network, RPX Corporation and Rembrandt IP Management compete in
acquiring rights to patents, and we expect more entities to enter the
market.
We also
compete with venture capital firms, strategic corporate buyers and various
industry leaders for technology acquisitions and licensing
opportunities. Many of these competitors may have more financial and
human resources than our operating subsidiaries. As we become more
successful, we may find more companies entering the market for similar
technology opportunities, which may reduce our market share in one or more
technology industries that we currently rely upon to generate future
revenue.
Other
companies may develop competing technologies that offer better or less expensive
alternatives to our patented technologies that we may acquire and/or
out-license. Many potential competitors may have significantly
greater resources than the resources that our operating subsidiaries
possess. Technological advances or entirely different approaches
developed by one or more of our competitors could render certain of the
technologies owned or controlled by our operating subsidiaries obsolete and/or
uneconomical.
Employees
As of
December 31, 2009, on a consolidated basis, we had 44 full-time
employees. Neither we nor any of our subsidiaries are a party to any
collective bargaining agreement. We consider our employee relations
to be good.
An
investment in our common stock involves a high degree risk. Before
making a decision to invest in shares of our common stock, you should carefully
consider the following risk factors, as well as the other information contained
in this annual report. If any of the following risks actually occur,
our business, financial condition, results of operations and prospectus could be
materially adversely affected. If this were to occur, the trading
price of our common stock could decline significantly and you may lose all or
part of your investment in our common stock. All intellectual
property acquisition, development, licensing and enforcement activities are
conducted solely by certain of our wholly and majority-owned operating
subsidiaries.
7
RISKS
RELATED TO OUR BUSINESS
WE
HAVE A HISTORY OF LOSSES AND WILL PROBABLY INCUR ADDITIONAL LOSSES IN THE
FUTURE.
We have
sustained substantial losses since our inception. We may never become
profitable, or if we do, we may never be able to sustain
profitability. As of December 31, 2009, our accumulated deficit was
$120.2 million. As of December 31, 2009, we had approximately $53.9
million in cash and cash equivalents along with investments and working capital
of $36.0 million. We expect to incur significant legal,
marketing, general and administrative expenses. As a result, it is more likely
than not that we will incur losses for the foreseeable
future. However, we believe our current cash and investments on hand
will be sufficient to finance anticipated capital and operating requirements for
at least the next twelve months.
IF
WE, OR OUR SUBSIDIARIES, ENCOUNTER UNFORESEEN DIFFICULTIES AND CANNOT OBTAIN
ADDITIONAL FUNDING ON FAVORABLE TERMS, OUR BUSINESS MAY SUFFER.
Our
consolidated cash and cash equivalents along with investments totaled $53.9
million and $51.5 million at December 31, 2009 and 2008,
respectively. To date, we have relied primarily upon selling of
equity securities and payments from our licensees to generate the funds needed
to finance our operations and the operations of our operating
subsidiaries.
We may
encounter unforeseen difficulties in the future, including the outside
influences identified below, that may deplete our capital resources more rapidly
than anticipated. As a result, we and or our subsidiary companies may be
required to obtain additional financing in the future through bank borrowings,
debt or equity financings or otherwise. If we are required to raise additional
capital in the future, such additional financing may not be available on
favorable terms, or at all, or may be dilutive to our existing stockholders. If
we fail to obtain additional capital as and when needed for our subsidiary
companies and ourselves, such failure could have a material adverse impact on
our business plans and business.
FAILURE
TO EFFECTIVELY MANAGE OUR GROWTH COULD PLACE STRAINS ON OUR MANAGERIAL,
OPERATIONAL AND FINANCIAL RESOURCES AND COULD ADVERSELY AFFECT OUR BUSINESS AND
OPERATING RESULTS.
Our
growth has placed, and is expected to continue to place, a strain on our
managerial, operational and financial resources and systems. Further, as our
subsidiary companies’ businesses grow, we will be required to manage multiple
relationships. Any further growth by us or our subsidiary companies or an
increase in the number of our strategic relationships may place additional
strain on our managerial, operational and financial resources and systems.
Although we may not grow as we expect, if we fail to manage our growth
effectively or to develop and expand our managerial, operational and financial
resources and systems, our business and financial results will be materially
harmed.
OUR
FUTURE SUCCESS DEPENDS ON OUR ABILITY TO EXPAND OUR ORGANIZATION TO MATCH THE
GROWTH OF OUR SUBSIDIARIES.
As our
operating subsidiaries grow, the administrative demands upon us and our
operating subsidiaries will grow, and our success will depend upon our ability
to meet those demands. These demands include increased accounting, management,
legal services, staff support, and general office services. We may need to hire
additional qualified personnel to meet these demands, the cost and quality of
which is dependent in part upon market factors outside of our control. Further,
we will need to effectively manage the training and growth of our staff to
maintain an efficient and effective workforce, and our failure to do so could
adversely affect our business and operating results.
OUR
REVENUES WILL BE UNPREDICTABLE, AND THIS MAY HARM OUR FINANCIAL
CONDITION.
From
January 2005 to present, certain of our operating subsidiaries have continued to
execute our business strategy of acquiring patent portfolios and accompanying
patent rights. Currently, on a consolidated basis, our operating
subsidiaries own or control the rights to over 140 patent portfolios, which
include U.S. patents and certain foreign counterparts, covering technologies
used in a wide variety of industries. These acquisitions continue to
expand and diversify our revenue generating opportunities. We believe that our
cash and cash equivalent balances, anticipated cash flow from operations and
other external sources of available credit, will be sufficient to meet our cash
requirements through at least March 2011, and for the foreseeable
future. However, due to the nature of our licensing business and
uncertainties regarding the amount and timing of the receipt of license fees
from potential infringers, stemming primarily from uncertainties regarding the
outcome of enforcement actions, rates of adoption of our patented technologies,
the growth rates of our existing licensees and other factors, our revenues may
vary significantly from quarter to quarter, which could make our business
difficult to manage, adversely affect our business and operating results, cause
our quarterly results to be below market expectations and adversely affect the
market price of our common stock.
8
OUR
OPERATING SUBSIDIARIES DEPEND UPON RELATIONSHIPS WITH OTHERS TO PROVIDE
TECHNOLOGY-BASED OPPORTUNITIES THAT CAN DEVELOP INTO PROFITABLE ROYALTY-BEARING
LICENSES, AND IF THEY ARE UNABLE TO MAINTAIN AND GENERATE NEW RELATIONSHIPS,
THEN THEY MAY NOT BE ABLE TO SUSTAIN EXISTING LEVELS OF REVENUE OR INCREASE
REVENUE.
Neither
we nor our operating subsidiaries invent new technologies or products but
instead depend on the identification and acquisition of new patents and
inventions through our relationships with inventors, universities, research
institutions, and others. If our operating subsidiaries are unable to
maintain those relationships and continue to grow new relationships, then they
may not be able to identify new technology-based opportunities for growth and
sustainable revenue.
Our
current or future relationships may not provide the volume or quality of
technologies necessary to sustain our business. In some cases,
universities and other technology sources may compete against us as they seek to
develop and commercialize technologies. Universities may receive
financing for basic research in exchange for the exclusive right to
commercialize resulting inventions. These and other strategies may
reduce the number of technology sources and potential clients to whom we can
market our services. If we are unable to maintain current
relationships and sources of technology or to secure new relationships and
sources of technology, such inability may have a material adverse effect on our
operating results and financial condition.
THE
SUCCESS OF OUR OPERATING SUBSIDIARIES DEPENDS IN PART UPON THEIR ABILITY TO
RETAIN THE BEST LEGAL COUNSEL TO REPRESENT THEM IN PATENT ENFORCEMENT
LITIGATION.
The
success of our licensing business depends upon our operating subsidiaries’
ability to retain the best legal counsel to prosecute patent infringement
litigation. As our operating subsidiaries’ patent enforcement actions increase,
it will become more difficult to find the best legal counsel to handle all of
our cases because many of the best law firms may have a conflict of interest
that prevents their representation of our subsidiaries.
OUR
OPERATING SUBSIDIARIES, IN CERTAIN CIRCUMSTANCES, RELY ON REPRESENTATIONS,
WARRANTIES AND OPINIONS MADE BY THIRD PARTIES, THAT IF DETERMINED TO BE FALSE OR
INACCURATE, MAY EXPOSE US AND OUR OPERATING SUBSIDIARIES TO CERTAIN MATERIAL
LIABILITIES.
From time
to time, our operating subsidiaries may rely upon representations and warranties
made by third parties from whom our operating subsidiaries acquired patents or
the exclusive rights to license and enforce patents. We also may rely upon the
opinions of purported experts. In certain instances, we may not have
the opportunity to independently investigate and verify the facts upon which
such representations, warranties, and opinions are made. By relying on these
representations, warranties and opinions, our operating subsidiaries may be
exposed to liabilities in connection with the licensing and enforcement of
certain patents and patent rights which could have a material adverse effect on
our operating results and financial condition.
9
IN
CONNECTION WITH PATENT ENFORCEMENT ACTIONS CONDUCTED BY CERTAIN OF OUR
SUBSIDIARIES, A COURT MAY RULE THAT WE OR OUR SUBSIDIARIES HAVE VIOLATED CERTAIN
STATUTORY, REGULATORY, FEDERAL, LOCAL OR GOVERNING RULES OR STANDARDS, WHICH MAY
EXPOSE US AND OUR OPERATING SUBSIDIARIES TO CERTAIN MATERIAL
LIABILITIES.
In
connection with any of our patent enforcement actions, it is possible that a
defendant may request and/or a court may rule that we have violated statutory
authority, regulatory authority, federal rules, local court rules, or governing
standards relating to the substantive or procedural aspects of such enforcement
actions. In such event, a court may issue monetary sanctions against
us or our operating subsidiaries or award attorney’s fees and/or expenses to a
defendant(s), which could be material, and if we or our operating subsidiaries
are required to pay such monetary sanctions, attorneys’ fees and/or expenses,
such payment could materially harm our operating results and our financial
position.
OUR
INVESTMENTS IN AUCTION RATE SECURITIES ARE SUBJECT TO RISKS, INCLUDING THE
CONTINUED FAILURE OF FUTURE AUCTIONS, WHICH MAY CAUSE US TO INCUR LOSSES OR HAVE
REDUCED LIQUIDITY.
At
December 31, 2009, our investments in marketable securities included certain
auction rate securities. Our auction rate securities are investment grade
quality and were in compliance with our investment policy when
purchased. Historically, our auction rate securities were recorded at
cost, which approximated their fair market value due to their variable interest
rates, which typically reset every 7 to 35 days, despite the long-term nature of
their stated contractual maturities. The Dutch auction process that resets
the applicable interest rate at predetermined calendar intervals is intended to
provide liquidity to the holder of auction rate securities by matching buyers
and sellers within a market context enabling the holder to gain immediate
liquidity by selling such interests at par or rolling over their investment. If
there is an imbalance between buyers and sellers the risk of a failed auction
exists. Due to recent liquidity issues in the global credit and
capital markets, these securities experienced several failed auctions since
February 2008. In such case of a failure, the auction rate securities
continue to pay interest, at the maximum rate, in accordance with their terms,
however, we may not be able to access the par value of the invested funds until
a future auction of these investments is successful, the security is called by
the issuer or a buyer is found outside of the auction process.
At
December 31, 2009, the par value of auction rate securities collateralized by
student loan portfolios totaled $2.7 million. As a result of the
liquidity issues associated with the failed auctions, we estimate that the fair
value of these auction rate securities no longer approximates their par
value. Due to the estimate that the market for these student loan
collateralized instruments may take in excess of twelve months to fully recover,
we have classified these investments as noncurrent in the accompanying December
31, 2009 consolidated balance sheet. In addition, as a result of our
analysis of the estimated fair value of our student loan collateralized
instruments, as described at Note 7 to the consolidated financial statements
included elsewhere herein, we have recorded an other-than-temporary loss of
$296,000 and $263,000 for our student loan collateralized instruments in the
accompanying consolidated statements of operations for the years ended December
31, 2009 and 2008, respectively.
The
capital and credit markets have been experiencing extreme volatility and
disruption for more than 12 months, and at times, the volatility and disruption
have reached unprecedented levels. In several cases, the markets have exerted
downward pressure on stock prices and credit capacity for certain
issuers. Given the deteriorating credit markets, and the sustained
incidence of failure within the auction market since February 2008, we may be
unable to liquidate a particular issue. Furthermore, if these market
conditions were to persist despite our ability to hold such investments until
maturity, we may be required to record additional impairment charges in a future
period. The systemic failure of future auctions for auction rate
securities may result in a loss of liquidity, substantial impairment to our
investments, realization of substantial future losses, or a complete loss of the
investment in the long-term which may have a material adverse effect on our
business, results of operations, liquidity, and financial condition. Refer to
Note 7 to our accompanying consolidated financial statements, included elsewhere
herein, for additional information about our investments in auction rate
securities.
10
RISKS
RELATED TO OUR INDUSTRY
OUR
EXPOSURE TO UNCONTROLLABLE OUTSIDE INFLUENCES, INCLUDING NEW LEGISLATION, COURT
RULINGS OR ACTIONS BY THE UNITED STATES PATENT AND TRADEMARK OFFICE, COULD
ADVERSELY AFFECT OUR LICENSING AND ENFORCEMENT BUSINESS AND RESULTS OF
OPERATIONS.
Our
licensing and enforcement business is subject to numerous risks from outside
influences, including the following:
New
legislation, regulations or rules related to obtaining patents or enforcing
patents could significantly increase our operating costs and decrease our
revenue.
Our
operating subsidiaries acquire patents with enforcement opportunities and are
spending a significant amount of resources to enforce those patents. If new
legislation, regulations or rules are implemented either by Congress, the U.S.
Patent and Trademark Office, or USPTO, or the courts that impact the patent
application process, the patent enforcement process or the rights of patent
holders, these changes could negatively affect our expenses and revenue. For
example, new rules regarding the burden of proof in patent enforcement actions
could significantly increase the cost of our enforcement actions, and new
standards or limitations on liability for patent infringement could negatively
impact our revenue derived from such enforcement actions.
Trial
judges and juries often find it difficult to understand complex patent
enforcement litigation, and as a result, we may need to appeal adverse decisions
by lower courts in order to successfully enforce our patents.
It is
difficult to predict the outcome of patent enforcement litigation at the trial
level. It is often difficult for juries and trial judges to understand complex,
patented technologies, and as a result, there is a higher rate of successful
appeals in patent enforcement litigation than more standard business litigation.
Such appeals are expensive and time consuming, resulting in increased costs and
delayed revenue. Although we diligently pursue enforcement litigation, we cannot
predict with significant reliability the decisions made by juries and trial
courts.
More
patent applications are filed each year resulting in longer delays in getting
patents issued by the USPTO.
Certain
of our operating subsidiaries hold and continue to acquire pending patents. We
have identified a trend of increasing patent applications each year, which we
believe is resulting in longer delays in obtaining approval of pending patent
applications. The application delays could cause delays in recognizing revenue
from these patents and could cause us to miss opportunities to license patents
before other competing technologies are developed or introduced into the market.
See the subheading “Competition is intense in the
industries in which our subsidiaries do business and as a result, we may not be
able to grow or maintain our market share for our technologies and patents,”
below.
Federal
courts are becoming more crowded, and as a result, patent enforcement litigation
is taking longer.
Our
patent enforcement actions are almost exclusively prosecuted in federal court.
Federal trial courts that hear our patent enforcement actions also hear criminal
cases. Criminal cases always take priority over our actions. As a result, it is
difficult to predict the length of time it will take to complete an enforcement
action. Moreover, we believe there is a trend in increasing numbers of civil
lawsuits and criminal proceedings before federal judges, and as a result, we
believe that the risk of delays in our patent enforcement actions will have a
greater affect on our business in the future unless this trend
changes.
Any
reductions in the funding of the USPTO could have an adverse impact on the cost
of processing pending patent applications and the value of those pending patent
applications.
The
assets of our operating subsidiaries consist of patent portfolios, including
pending patent applications before the USPTO. The value of our patent portfolios
is dependent upon the issuance of patents in a timely manner, and any reductions
in the funding of the USPTO could negatively impact the value of our assets.
Further, reductions in funding from Congress could result in higher patent
application filing and maintenance fees charged by the USPTO, causing an
unexpected increase in our expenses.
11
Competition
is intense in the industries in which our subsidiaries do business and as a
result, we may not be able to grow or maintain our market share for our
technologies and patents.
We expect
to encounter competition in the area of patent acquisition and enforcement as
the number of companies entering this market is increasing. This includes
competitors seeking to acquire the same or similar patents and technologies that
we may seek to acquire. Entities including Allied Security Trust, Altitude
Capital Partners, Coller IP, Intellectual Ventures, Millennium Partners, Open
Innovation Network, RPX Corporation and Rembrandt IP Management compete in
acquiring rights to patents, and we expect more entities to enter the market. As
new technological advances occur, many of our patented technologies may become
obsolete before they are completely monetized. If we are unable to replace
obsolete technologies with more technologically advanced patented technologies,
then this obsolescence could have a negative effect on our ability to generate
future revenues.
Our
licensing business also competes with venture capital firms and various industry
leaders for technology licensing opportunities. Many of these
competitors may have more financial and human resources than we
do. As we become more successful, we may find more companies entering
the market for similar technology opportunities, which may reduce our market
share in one or more technology industries that we currently rely upon to
generate future revenue.
Our
patented technologies face uncertain market value.
Our
operating subsidiaries have acquired patents and technologies that are at early
stages of adoption in the commercial and consumer markets. Demand for some of
these technologies is untested and is subject to fluctuation based upon the rate
at which our licensees will adopt our patents and technologies in their products
and services. Refer to the related risk factor below.
As
patent enforcement litigation becomes more prevalent, it may become more
difficult for us to voluntarily license our patents.
We
believe that the more prevalent patent enforcement actions become, the more
difficult it will be for us to voluntarily license our patents. As a result, we
may need to increase the number of our patent enforcement actions to cause
infringing companies to license the patent or pay damages for lost royalties.
This may increase the risks associated with an investment in our
company.
The
foregoing outside influences may affect other risk factors described in this
annual report.
Any one
of the foregoing outside influences may cause our company to need additional
financing to meet the challenges presented or to compensate for a loss in
revenue, and we may not be able to obtain the needed financing. See the heading
“If we, or our subsidiaries,
encounter unforeseen difficulties and cannot obtain additional funding on
favorable terms, our business may suffer” above.
THE
MARKETS SERVED BY OUR OPERATING SUBSIDIARIES ARE SUBJECT TO RAPID TECHNOLOGICAL
CHANGE, AND IF OUR OPERATING SUBSIDIARIES ARE UNABLE TO DEVELOP AND ACQUIRE NEW
TECHNOLOGIES AND PATENTS, OUR ABILITY TO GENERATE REVENUES COULD BE
SUBSTANTIALLY IMPAIRED.
The
markets served by our operating subsidiaries’ licensees frequently undergo
transitions in which products rapidly incorporate new features and performance
standards on an industry-wide basis. Products for communications applications,
high-speed computing applications, as well as other applications covered by our
operating subsidiaries’ intellectual property, are based on continually evolving
industry standards. Our ability to compete in the future will, however, depend
on our ability to identify and ensure compliance with evolving industry
standards. This will require our continued efforts and success in acquiring new
patent portfolios with licensing and enforcement opportunities. While we expect
for the foreseeable future to have sufficient liquidity and capital resources
needed to maintain the level of acquisitions necessary to keep pace with these
technological advances, outside influences may cause the need for greater
liquidity and capital resources than expected, as described under the caption
“Because our business
operations are subject to many uncontrollable outside influences, we may not
succeed” above. If we are unable to acquire new technologies and
related patent portfolios, or to identify and ensure compliance with evolving
industry standards, our ability to generate revenues could be substantially
impaired and our business and financial condition could be materially
harmed.
12
THE
RECENT FINANCIAL CRISIS AND CURRENT UNCERTAINTY IN GLOBAL ECONOMIC CONDITIONS
COULD NEGATIVELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL
CONDITION
Our
revenue-generating opportunities depend on the use of our patented technologies
by existing and prospective licensees, the overall demand for the products and
services of our licensees, and on the overall economic and financial health of
our licensees. The recent financial crisis affecting the banking
system and financial markets and the current uncertainty in global economic
conditions have resulted in a tightening in the credit markets, a low level of
liquidity in many financial markets, and extreme volatility in the credit,
equity and fixed income markets. If the current worldwide economic downturn
continues, many of our licensees’ customers, which may rely on credit financing,
may delay or reduce their purchases of our licensees’ products and
services. In addition, the use or adoption of our patented
technologies is often based on current and forecasted demand for our licensees’
products and services in the marketplace and may require companies to make
significant initial commitments of capital and other resources. If
the negative conditions in the global credit markets delay or prevent our
licensees’ and their customers’ access to credit, overall consumer spending on
the products and services of our licensees may decrease and the adoption or use
of our patented technologies may slow, respectively. Further, if the
markets in which our licensees’ participate experience further economic
downturns, as well as a slow recovery period, this could negatively impact our
licensees’ long-term sales and revenue generation, margins and operating
expenses, which could impact the magnitude of revenues generated or projected to
be generated by our licensees, which could have a material impact on our
business, license fee generating opportunities, operating results and financial
condition.
In
addition, we have significant patent-related intangible assets recorded on our
consolidated balance sheet. We will continue to evaluate the recoverability of
the carrying amount of our patent-related intangible assets on an ongoing basis,
and we may incur substantial impairment charges, which would adversely affect
our consolidated financial results. There can be no assurance that the
outcome of such reviews in the future will not result in substantial impairment
charges. Impairment assessment inherently involves judgment as to assumptions
about expected future cash flows and the impact of market conditions on
those assumptions. Future events and changing market conditions may impact our
assumptions as to prices, costs, holding periods or other factors that may
result in changes in our estimates of future cash flows. Although we
believe the assumptions we used in testing for impairment are reasonable,
significant changes in any one of our assumptions could produce a significantly
different result.
RISKS
RELATED TO OUR COMMON STOCK
THE
AVAILABILITY OF SHARES FOR SALE IN THE FUTURE COULD REDUCE THE MARKET PRICE OF
OUR COMMON STOCK.
In the
future, we may issue securities to raise cash for operations and acquisitions.
We may also pay for interests in additional subsidiary companies by using shares
of our common stock or a combination of cash and shares of our common stock. We
may also issue securities convertible into our common stock. Any of these events
may dilute stockholders’ ownership interests in our company and have an adverse
impact on the price of our common stock.
In
addition, sales of a substantial amount of our common stock in the public
market, or the perception that these sales may occur, could reduce the market
price of our common stock. This could also impair our ability to raise
additional capital through the sale of our securities.
DELAWARE
LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE OR
PREVENT A POTENTIAL TAKEOVER OF OUR COMPANY THAT MIGHT OTHERWISE RESULT IN OUR
STOCKHOLDERS RECEIVING A PREMIUM OVER THE MARKET PRICE OF THEIR
SHARES.
Provisions
of Delaware law and our certificate of incorporation and bylaws could make the
acquisition of our company by means of a tender offer, proxy contest or
otherwise, and the removal of incumbent officers and directors, more difficult.
These provisions include:
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Section
203 of the Delaware General Corporation Law, which prohibits a merger with
a 15%-or-greater stockholder, such as a party that has completed a
successful tender offer, until three years after that party became a
15%-or-greater stockholder;
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13
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amendment
of our bylaws by the stockholders requires a two-thirds approval of the
outstanding shares;
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the
authorization in our certificate of incorporation of undesignated
preferred stock, which could be issued without stockholder approval in a
manner designed to prevent or discourage a
takeover;
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provisions
in our bylaws eliminating stockholders’ rights to call a special meeting
of stockholders, which could make it more difficult for stockholders to
wage a proxy contest for control of our board of directors or to vote to
repeal any of the anti-takeover provisions contained in our certificate of
incorporation and bylaws; and
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the
division of our board of directors into three classes with staggered terms
for each class, which could make it more difficult for an outsider to gain
control of our board of directors.
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Together
these provisions may make the removal of management more difficult and may
discourage transactions that otherwise could involve payment of a premium over
prevailing market prices for our common stock.
AS A RESULT OF THE REDEMPTION OF
ACACIA RESEARCH-COMBIMATRIX COMMON STOCK FOR THE COMMON STOCK OF COMBIMATRIX
CORPORATION, WE MAY BE SUBJECT TO CERTAIN TAX LIABILITY UNDER THE INTERNAL
REVENUE CODE.
Our
distribution of the common stock of CombiMatrix in the Split-Off Transaction
will be tax-free to us if the distribution qualifies under Sections 368 and 355
of the Internal Revenue Code of 1986, as amended, or the Code. If the
Split-Off Transaction fails to qualify under Section 355 of the Code,
corporate tax would be payable by the consolidated group as of the date of the
Split-Off Transaction, of which we are the common parent, based upon the
difference between the aggregate fair market value of the assets of
CombiMatrix’s business and the adjusted tax bases of such business to us prior
to the redemption.
We
received a private letter ruling from the Internal Revenue Service, or the IRS,
to the effect that, among other things, the redemption would be tax free to us
and the holders of Acacia Research-Acacia Technologies common stock and Acacia
Research-CombiMatrix common stock under Sections 368 and 355 of the Code.
The private letter ruling, while generally binding upon the IRS, was based upon
factual representations and assumptions and commitments on our behalf with
respect to future operations made in the ruling request. The IRS could modify or
revoke the private letter ruling retroactively if the factual representations
and assumptions in the request were materially incomplete or untrue, the facts
upon which the private letter ruling was based were materially different from
the facts at the time of the redemption, or if we do not comply with certain
commitments made.
If the
Split-Off Transaction fails to qualify under Section 355 of the Code, corporate
tax, if any, would be payable by the consolidated group of which we are the
common parent, as described above. As such, the corporate level tax
would be payable by us. CombiMatrix has agreed however, to indemnify us for this
and certain other tax liabilities if they result from actions taken by
CombiMatrix. Notwithstanding CombiMatrix’s agreement to indemnify us,
under the Code’s consolidated return regulations, each member of our
consolidated group, including our company, will be severally liable for these
tax liabilities. Further, we may be liable for additional taxes if we take
certain actions within two years following the redemption, as more fully
discussed in the immediately following risk factor. If we are found
liable to the IRS for these liabilities, the resulting obligation could
materially and adversely affect our financial condition, and we may be unable to
recover on the indemnity from CombiMatrix.
FOLLOWING THE REDEMPTION OF ACACIA
RESEARCH-COMBIMATRIX COMMON STOCK FOR THE COMMON STOCK OF COMBIMATRIX, WE MAY BE
SUBJECT TO CERTAIN TAX LIABILITIES UNDER THE INTERNAL REVENUE CODE FOR ACTIONS
TAKEN BY US OR COMBIMATRIX FOLLOWING THE
REDEMPTION.
14
Even if
the distribution qualifies under Section 368 and 355 of the Code, it will be
taxable to us if Section 355(e) of the Code applies to the distribution. Section
355(e) will apply if 50% or more of our common stock or CombiMatrix’s common
stock, by vote or value, is acquired by one or more persons, other than the
holders of Acacia Research-CombiMatrix common stock who receive the common stock
of CombiMatrix in the redemption, acting pursuant to a plan or a series of
related transactions that includes the redemption. Any shares of our common
stock, the Acacia Research-CombiMatrix stock or the common stock of CombiMatrix
acquired directly or indirectly within two years before or after the redemption
generally are presumed to be part of such a plan unless we can rebut that
presumption. To prevent applicability of Section 355(e) or to otherwise prevent
the distribution from failing to qualify under Section 355 of the Code,
CombiMatrix has agreed that, until two years after the redemption, it will not
take any of the following actions unless prior to taking such action, it has
obtained, and provided to us, a written opinion of tax counsel or a ruling from
the IRS to the effect that such action will not cause the redemption to be
taxable to us, which we refer to in this report collectively as Disqualifying
Actions:
|
·
|
merge
or consolidate with another
corporation;
|
|
·
|
liquidate
or partially liquidate;
|
|
·
|
sell
or transfer all or substantially all of its
assets;
|
|
·
|
redeem
or repurchase its stock (except in certain limited circumstances);
or
|
|
·
|
take
any other action which could reasonably be expected to cause Section
355(e) to apply to the
distribution.
|
Further,
if we take any Disqualifying Action, we may be subject to additional tax
liability. Many of our competitors are not subject to similar
restrictions and may issue their stock to complete acquisitions, expand their
product offerings and speed the development of new
technology. Therefore, these competitors may have a competitive
advantage over us. Substantial uncertainty exists on the scope of
Section 355(e), and we may have undertaken, may contemplate undertaking or may
otherwise undertake in the future transactions which may cause Section 355(e) to
apply to the redemption notwithstanding our desire or intent to avoid
application of Section 355(e). Accordingly, we cannot provide you any assurance
that we will not be liable for taxes if Section 355(e) applies to the
redemption.
WE
MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS, WHICH COULD CAUSE THE PRICE OF OUR COMMON STOCK TO
DECLINE.
Our
reported revenues and operating results have fluctuated in the past and may
continue to fluctuate significantly from quarter to quarter in the future. It is
possible that in future periods, revenues could fall below the expectations of
securities analysts or investors, which could cause the market price of our
common stock to decline. The following are among the factors that could cause
our operating results to fluctuate significantly from period to
period:
|
·
|
the
dollar amount of agreements executed in 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 in 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;
|
|
·
|
fluctuations
in the net number of active licensees period to
period;
|
|
·
|
costs
related to acquisitions, alliances, licenses and other efforts to expand
our operations;
|
15
|
·
|
the
timing of payments under the terms of any customer or license agreements
into which our operating subsidiaries may enter;
and
|
|
·
|
expenses
related to, and the timing and results of, patent filings and other
enforcement proceedings relating to intellectual property rights, as more
fully described in this section.
|
TECHNOLOGY
COMPANY STOCK PRICES ARE ESPECIALLY VOLATILE, AND THIS VOLATILITY MAY DEPRESS
THE PRICE OF OUR COMMON STOCK.
The stock
market has experienced significant price and volume fluctuations, and the market
prices of technology companies have been highly volatile. We believe that
various factors may cause the market price of our common stock to fluctuate,
perhaps substantially, including, among others, the following:
|
·
|
announcements
of developments in our patent enforcement
actions;
|
|
·
|
developments
or disputes concerning our patents;
|
|
·
|
our
or our competitors’ technological
innovations;
|
|
·
|
developments
in relationships with licensees;
|
|
·
|
variations
in our quarterly operating results;
|
|
·
|
our
failure to meet or exceed securities analysts’ expectations of our
financial results;
|
|
·
|
a
change in financial estimates or securities analysts’
recommendations;
|
|
·
|
changes
in management’s or securities analysts’ estimates of our financial
performance;
|
|
·
|
changes
in market valuations of similar
companies;
|
|
·
|
announcements
by us or our competitors of significant contracts, acquisitions, strategic
partnerships, joint ventures, capital commitments, new technologies, or
patents; and
|
|
·
|
failure
to complete significant
transactions.
|
For
example, the NASDAQ Computer Index had a range of $585.69 - $1,183.34 during the
52-weeks ended December 31, 2009 and the NASDAQ Composite Index had a range of
$1,265.52 - $2,295.80 over the same period. Over the same period, our
common stock fluctuated within a range of $2.14 - $9.64.
The
financial crisis affecting the banking system and financial markets and the
current uncertainty in global economic conditions, which began in late 2007 and
continued throughout 2009 and into 2010, have resulted in a tightening in the
credit markets, a low level of liquidity in many financial markets, and extreme
volatility in the credit, equity and fixed income markets. As noted above, our
stock price, like many other stocks, has fluctuated significantly recently and
if investors have concerns that our business, operating results and financial
condition will be negatively impacted by a continuing worldwide economic
downturn, our stock price could continue to fluctuate significantly in future
periods.
In
addition, we believe that fluctuations in our stock price during applicable
periods can also be impacted by court rulings and or other developments in our
patent licensing and enforcement actions. Court rulings in patent enforcement
actions are often difficult to understand, even when favorable or neutral to the
value of our patents and our overall business, and we believe that investors in
the market may overreact, causing fluctuations in our stock prices that may not
accurately reflect the impact of court rulings on our business operations and
assets.
In the
past, companies that have experienced volatility in the market price of their
stock have been the objects of securities class action litigation. If our common
stock was the object of securities class action litigation, it could result in
substantial costs and a diversion of management’s attention and resources, which
could materially harm our business and financial results.
16
WE DO NOT ANTICIPATE DECLARING ANY
CASH DIVIDENDS ON OUR COMMON STOCK.
We have
never declared or paid cash dividends on our common stock and do not plan to pay
any cash dividends in the near future. Our current policy is to retain all funds
and any earnings for use in the operation and expansion of our business. If we
do not pay dividends, our stock may be less valuable to you because a return on
your investment will only occur if our stock price appreciates.
Item
1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Item
2.
|
PROPERTIES
|
Our
corporate, administrative and operational headquarters are located in Newport
Beach, California where we lease approximately 18,302 square feet of office
space, under a lease agreement that expires in February 2012. Certain
of our operating subsidiaries also maintain additional leased office space in
Frisco, Texas, Northbrook, Illinois, San Francisco, California, Atlanta,
Georgia, San Diego, California, Brooklyn, New York and Santa Clara,
California. Presently, certain of our operating subsidiaries are
seeking additional office facilities in Texas. We believe that our
facilities are adequate, suitable and of sufficient capacity to support our
immediate needs.
Item
3.
|
LEGAL
PROCEEDINGS
|
In the
ordinary course of business, we are the subject of, or party to, various pending
or threatened legal actions, including various counterclaims in connection with
our intellectual property enforcement activities. We believe that any
liability arising from these actions will not have a material adverse effect on
our consolidated financial position, results of operations or cash
flows.
In
connection with any of our patent enforcement actions, it is possible that a
defendant may request and/or a court may rule that we have violated statutory
authority, regulatory authority, federal rules, local court rules, or governing
standards relating to the substantive or procedural aspects of such enforcement
actions. In such event, a court may issue monetary sanctions against
us or our operating subsidiaries or award attorney’s fees and/or expenses to a
defendant(s), which could be material, and if required to be paid by us or our
operating subsidiaries, could materially harm our operating results and our
financial position.
Item
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
17
PART
II
Item
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Price
Range of Common Stock
Our
common stock commenced trading on The NASDAQ Global Market on December 16, 2002,
under the symbol “ACTG.” Prior to December 16, 2002, our only class
of common stock began trading under the symbol “ACRI” on the NASDAQ National
Market System on July 8, 1996.
Prior to the Split-Off
Transaction. Prior to the Split-Off Transaction described
above, we had two classes of common stock outstanding, our Acacia
Research-Acacia Technologies common stock and our Acacia Research-CombiMatrix
common stock. As a result of the Split-Off Transaction, all
outstanding shares of Acacia Research-CombiMatrix common stock were redeemed,
and all rights of holders of Acacia Research-CombiMatrix common stock ceased as
of August 15, 2007. As a result of the consummation of the Split-Off
Transaction, our only class of common stock outstanding is our common
stock.
The
markets for securities such as our common stock have historically experienced
significant price and volume fluctuations during certain periods. These broad
market fluctuations and other factors, such as new product and technology
developments, business or regulatory trends in our industry and the investment
markets generally, as well as economic conditions and quarterly variations in
the results of our licensing and enforcement activities and our results of
operations, may adversely affect the market price of our common
stock.
The high
and low bid prices for our common stock as reported by The NASDAQ Global Market
for the periods indicated are shown in the table below. Such prices are
inter-dealer prices without retail markups, markdowns or commissions and may not
necessarily represent actual transactions.
2009
|
2008
|
||||||||||||||
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First
Quarter
|
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First
Quarter
|
||||||||
High
|
$9.64
|
$9.59
|
$7.90
|
$4.50
|
$3.18
|
$5.20
|
$6.70
|
$9.30
|
|||||||
Low
|
$6.81
|
$6.77
|
$3.82
|
$2.14
|
$1.87
|
$2.98
|
$4.20
|
$4.58
|
STOCK
PRICE PERFORMANCE GRAPH
The
following stock price performance graph shall not be deemed “filed” for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, or otherwise subject to the liabilities under that Section and
shall not be deemed to be incorporated by reference into any of our filings
under the Securities Act of 1933, as amended.
The Stock
Performance Graph depicted below compares the yearly change in our cumulative
total stockholder return for the last five fiscal years with the cumulative
total return of The NASDAQ Stock Market (U.S.) Composite Index.
18
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||
Acacia
Research Corporation common stock
|
$130
|
$252
|
$169
|
$57
|
$172
|
|||||||||
Nasdaq
Composite Index
|
$101
|
$111
|
$122
|
$72
|
$104
|
|||||||||
Dow
Jones U.S. Technology Index
|
$102
|
$105
|
$116
|
$134
|
$
77
|
The graph
covers the period from December 31, 2004 to December 31,
2009. Cumulative total returns are calculated assuming that $100 was
invested on December 31, 2004, in our common stock, in the NASDAQ Composite
Index, and in the Dow Jones U.S. Technology Index, and that all dividends, if
any, were reinvested. Refer to our Dividend Policy
below. Stockholder returns over the indicated period should not be
considered indicative of future stock prices or shareholder
returns.
On
February 23, 2010, there were approximately 120 owners of record
of our common stock. The majority of the outstanding shares of our common stock
are held by a nominee holder on behalf of an indeterminable number of ultimate
beneficial owners.
Repurchase
of Restricted Common Stock
In May
2009, our board of directors approved a restricted stock vesting net issuance
program. Under the program, upon the vesting of unvested shares of
restricted common stock, we withhold from fully vested shares of common stock
otherwise deliverable to any employee-participant in our equity compensation
programs, a number of whole shares of common stock having a fair market value
(as determined by us as of the date of vesting) equal to the amount of tax
required to be withheld by law, in order to satisfy our tax withholding
obligations in connection with the vesting of such shares. Of a total
of 580,600 shares of restricted stock vested between June 2009
and September 2009, 174,628 shares of common stock were withheld by us, in
satisfaction of $1.1 million in required withholding tax
liability. Additional repurchases under the net issuance program are
not anticipated at this time.
Dividend
Policy
To date,
we have not declared or paid any cash dividends with respect to our common
stock, and the current policy of the board of directors is to retain earnings,
if any, to provide for our growth and the growth of our operating subsidiaries.
Consequently, we do not expect to pay any cash dividends in the foreseeable
future. Further, there can be no assurance that our proposed operations will
generate revenues and cash flow needed to declare a cash dividend or that we
will have legally available funds to pay dividends.
19
Equity
Compensation Plan Information
The
following table provides information with respect to shares of our common stock
issuable under our equity compensation plans as of December 31,
2009:
Plan
Category
|
(a)
Number of securities to be issued upon exercise of outstanding
options
|
(b)
Weighted-average exercise price of outstanding
options
|
(c)
Number of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|||||||||
Equity
compensation plans approved by security holders
|
||||||||||||
2002
Acacia Technologies Stock Incentive Plan(1)
|
3,398,000 | $ | 5.38 | 1,350,000 | ||||||||
2007
Acacia Technologies Stock Incentive Plan(2)
|
50,000 | $ | 16.01 | 542,000 | ||||||||
Subtotal
|
3,448,000 | $ | 5.54 | 1,892,000 | ||||||||
Equity compensation plans not
approved by security holders(3)
|
||||||||||||
N/A | N/A | N/A | ||||||||||
Total
|
3,448,000 | $ | 5.54 | 1,892,000 |
(1)
|
Our
2002 Acacia Technologies Stock Incentive Plan, as amended, or the 2002
Plan, allows for the granting of stock options and other awards to
eligible individuals, which generally includes directors, officers,
employees and consultants. The 2002 Plan does not segregate the
number of securities remaining available for future issuance among stock
options and other awards. The shares authorized for future
issuance represents the total number of shares available through any
combination of stock options or other awards. The share reserve
under the 2002 Plan automatically increases on the first trading day in
January each calendar year by an amount equal to three percent (3%) of the
total number of shares of our common stock outstanding on the last trading
day of December in the prior calendar year, but in no event will this
annual increase exceed 500,000 shares and in no event will the total
number of shares of common stock in the share reserve (as adjusted for all
such annual increases) exceed twenty million shares. Column (a)
excludes 1,093,000 in nonvested restricted stock awards and restricted
stock units outstanding at December 31, 2009. Refer to Note 12
to our consolidated financial statements included elsewhere
herein.
|
(2)
|
Our
2007 Acacia Technologies Stock Incentive Plan, or the 2007 Plan, allows
for the granting of stock options and other awards to eligible
individuals, which generally includes directors, officers, employees and
consultants, and was approved by security holders on May 15,
2007. The 2007 Plan does not segregate the number of securities
remaining available for future issuance among stock options and other
awards. The shares authorized for future issuance represents
the total number of shares available through any combination of stock
options or other awards. The initial share reserve under the
2007 Plan was 560,000 shares of our common stock. The share reserve under
the 2007 Plan automatically increased on January 1, 2008 and 2009, by an
amount equal to two percent (2%) of the total number of shares of our
common stock outstanding on the last trading day of December in the prior
calendar year. After January 1, 2009, no new additional shares will be
added to the 2007 Plan without security holder approval (except for shares
subject to outstanding awards that are forfeited or otherwise returned to
the 2007 Plan). Column (a) excludes 604,000 in nonvested
restricted stock awards outstanding at December 31, 2009. Refer
to Note 12 to our consolidated financial statements included elsewhere
herein.
|
(3)
|
We
have not authorized the issuance of equity securities under any plan not
approved by security holders.
|
20
Item
6.
|
SELECTED
FINANCIAL DATA
|
The
consolidated selected balance sheet data as of December 31, 2009 and 2008
and the consolidated selected statements of operations data for the years ended
December 31, 2009, 2008 and 2007 set forth below have been derived from our
audited consolidated financial statements included elsewhere herein, and should
be read in conjunction with those financial statements (including notes
thereto). The consolidated selected balance sheet data as of
December 31, 2007, 2006 and 2005 and the consolidated selected statements
of operations data for the years ended December 31, 2006 and 2005 have been
derived from unaudited consolidated financial statements not included herein,
but which were previously filed with the SEC.
Consolidating
Statements of Operations Data
(In
thousands, except share and per share data)
For
the Years Ended December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
License
fee revenues
|
$ | 67,340 | $ | 48,227 | $ | 52,597 | $ | 34,825 | $ | 19,574 | ||||||||||
Inventor
royalties and contingent legal fees expense - patents
|
31,618 | 27,424 | 29,224 | 17,159 | 11,331 | |||||||||||||||
Litigation
and licensing expenses - patents
|
14,055 | 6,900 | 7,799 | 5,047 | 2,838 | |||||||||||||||
Amortization
of patents
|
4,634 | 6,043 | 5,583 | 5,313 | 4,922 | |||||||||||||||
Marketing,
general and administrative expenses (including non-cash stock
compensation expense)
|
21,070 | 21,130 | 18,381 | 13,550 | 7,526 | |||||||||||||||
Research,
consulting and other expenses - business development
|
1,689 | 933 | 886 | 306 | 201 | |||||||||||||||
Operating
loss
|
(5,726 | ) | (14,203 | ) | (9,511 | ) | (6,847 | ) | (7,244 | ) | ||||||||||
Other
income, net
|
302 | 570 | 2,359 | 1,524 | 1,071 | |||||||||||||||
Loss
from continuing operations before provision for income
taxes
|
(5,424 | ) | (13,633 | ) | (7,152 | ) | (5,323 | ) | (6,173 | ) | ||||||||||
Net
loss from continuing operations including noncontrolling interests in
operating subsidiary
|
(5,633 | ) | (13,757 | ) | (7,359 | ) | (5,363 | ) | (6,038 | ) | ||||||||||
Net
income attributable to noncontrolling interests in operating
subsidiary
|
(5,657 | ) | - | - | - | - | ||||||||||||||
Net
loss from continuing operations attributable to Acacia Research
Corporation
|
(11,290 | ) | (13,757 | ) | (7,359 | ) | (5,363 | ) | (6,038 | ) | ||||||||||
Discontinued
operations - Split-off of CombiMatrix Corporation and
other
|
- | - | (8,086 | ) | (20,093 | ) | (12,638 | ) | ||||||||||||
Net
loss
|
(11,290 | ) | (13,757 | ) | (15,445 | ) | (25,456 | ) | (18,676 | ) | ||||||||||
Loss
per common share - basic and diluted:
|
||||||||||||||||||||
Loss
from continuing operations
|
||||||||||||||||||||
Acacia
Research Corporation common stock
|
$ | (0.38 | ) | $ | (0.47 | ) | $ | (0.26 | ) | $ | (0.19 | ) | $ | (0.23 | ) | |||||
Discontinued
operations - Split-off of CombiMatrix Corporation
|
||||||||||||||||||||
Acacia
Research - CombiMatrix stock
|
- | - | $ | (0.14 | ) | $ | (0.49 | ) | $ | (0.37 | ) | |||||||||
Weighted
average number of common and potential common shares used in computation of income (loss) per common
share :
|
||||||||||||||||||||
Acacia
Research Corporation common stock:
|
||||||||||||||||||||
Basic
and diluted
|
29,914,801 | 29,423,998 | 28,503,314 | 27,547,651 | 26,630,732 | |||||||||||||||
Acacia
Research - CombiMatrix stock:
|
||||||||||||||||||||
Basic
and diluted
|
- | - | 55,862,707 | 40,605,038 | 33,678,603 |
21
Consolidating
Balance Sheet Data
(In
thousands)
At
December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Total
assets:
|
||||||||||||||||||||
Acacia
Research Corporation
|
$ | 78,256 | $ | 73,074 | $ | 71,051 | $ | 65,770 | $ | 68,893 | ||||||||||
Discontinued
operations - Split-off of CombiMatrix Corporation
|
- | - | - | 44,214 | 52,541 | |||||||||||||||
Eliminations
|
- | - | - | (380 | ) | - | ||||||||||||||
Total
|
$ | 78,256 | $ | 73,074 | $ | 71,051 | $ | 109,604 | $ | 121,434 | ||||||||||
Total
liabilities:
|
||||||||||||||||||||
Acacia
Research Corporation
|
$ | 22,287 | $ | 14,527 | $ | 6,247 | $ | 4,276 | $ | 6,647 | ||||||||||
Discontinued
operations - Split-off of CombiMatrix Corporation
|
- | - | - | 11,399 | 7,443 | |||||||||||||||
Eliminations
|
- | - | - | (380 | ) | - | ||||||||||||||
Total
|
$ | 22,287 | $ | 14,527 | $ | 6,247 | $ | 15,295 | $ | 14,090 | ||||||||||
Noncontrolling
interests in operating subsidiary:
|
||||||||||||||||||||
Acacia
Research Corporation
|
$ | 2,507 | $ | - | $ | - | $ | - | $ | 443 | ||||||||||
Discontinued
operations - Split-off of CombiMatrix Corporation
|
- | - | - | - | 4 | |||||||||||||||
Total
|
$ | 2,507 | $ | - | $ | - | $ | - | $ | 447 | ||||||||||
Stockholders'
equity:
|
||||||||||||||||||||
Acacia
Research Corporation
|
$ | 53,462 | $ | 58,547 | $ | 64,804 | $ | 61,494 | $ | 61,803 | ||||||||||
Discontinued
operations - Split-off of CombiMatrix Corporation
|
- | - | - | 32,815 | 45,094 | |||||||||||||||
Total
|
$ | 53,462 | $ | 58,547 | $ | 64,804 | $ | 94,309 | $ | 106,897 |
Factors
Affecting Comparability:
|
·
|
During
the fourth quarter of 2008, pursuant to the terms of the respective
inventor agreements, our management elected to terminate our rights
to exclusively license a patent portfolio. As such, the
economic useful life of the patent-related intangible asset was reduced,
resulting in the acceleration $1,094,000 of amortization expense for the
patent-related asset and an increase in amortization expense in
2008.
|
|
·
|
Effective
January 1, 2006, we adopted the provisions of ASC Topic 718,
“Compensation - Stock Compensation,” 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. Refer to Note 2 and Note 12 to our consolidated
financial statements included elsewhere herein, for additional information
and a description of the impact of ASC Topic 718 on our consolidated
statements of operations data presented above. Non-cash stock
compensation expense included in marketing, general and administrative
expense was $7,065,000, $7,355,000, $5,908,000 and $3,946,000 in 2009,
2008, 2007 and 2006, respectively.
|
|
·
|
We
recorded an other than temporary impairment loss of $47,000 and $486,000
on certain auction rate securities held as of December 31, 2009 and
December 31, 2008, respectively.
|
|
·
|
As
a result of the Split-Off Transaction, as discussed above, we disposed of
our investment in CombiMatrix. Refer to Note 11 to our
consolidated financial statements, included elsewhere herein, for
information regarding presentation of the assets, liabilities, results of
operations and cash flows for the CombiMatrix group as “Discontinued
Operations,” for all periods presented, in accordance with guidance set
forth in ASC Topic 360.
|
|
·
|
Refer
to Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Critical Accounting Policies” below for information regarding the
change in accounting policy for term license agreements effective October
2009.
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22
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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The
following discussion should be read in conjunction with our consolidated
financial statements included elsewhere in this Form 10-K. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors
including those set forth under item 1A. “Risk Factors” elsewhere
herein.
General
Our
operating subsidiaries acquire, develop, license and enforce patented
technologies. Our operating subsidiaries generate license fee
revenues and related cash flows from the granting of licenses for the use of
patented technologies that our operating subsidiaries own or
control. 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. We are a
leader in licensing patented technologies and have established a proven track
record of licensing success with over 740 license agreements executed to date,
across 60 of our technology license programs. Currently, on a
consolidated basis, our operating subsidiaries own or control the rights to over
140 patent portfolios, which include U.S. patents and certain foreign
counterparts, covering technologies used in a wide variety of
industries.
The
intellectual property acquisition, development, licensing and enforcement
business conducted by our operating subsidiaries, is described more fully in
Item 1, “Business,” of this report.
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 us effective August 15, 2007. As such,
the historical results of operations for the CombiMatrix group in the
accompanying consolidated financial statements are presented as part of our
results from “Discontinued Operations” for the applicable historical periods
presented. Subsequent to the Split-Off Transaction, our only business
is our intellectual property licensing business.
Overview
Our
operating activities during 2009, 2008 and 2007 were principally focused on the
continued development, licensing and enforcement of the patent portfolios owned
or controlled by our operating subsidiaries, 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
by certain of our operating subsidiaries and the continued pursuit of additional
opportunities to partner with patent owners and continue our unique intellectual
property licensing, development and enforcement activities.
We
recognized license fee revenues of $67.3 million in 2009, a 40% increase
compared to 2008 license fee revenues of $48.2 million, and a 28% increase
compared to 2007 license fee revenues of $52.6 million.
Revenues
for 2009 included license fees from 117 new licensing agreements covering 30 of
our technology licensing and enforcement programs, as compared to 80 new
licensing agreements covering 30 of our technology licensing and enforcement
programs in 2008 and 91 new licensing agreements covering 16 of our technology
licensing and enforcement programs in 2007. On a consolidated basis,
our operating subsidiaries generated licensing revenues from 12 new technology
licensing and enforcement programs during 2009, as compared to 20 new programs
in 2008 and 8 new programs in 2007. As of December 31, 2009, we have
generated revenues from 60 technology licensing and enforcement programs, as
compared to 48 programs as of December 31, 2008 and 28 programs as of December
31, 2007.
During
2009, we recorded initial license fee revenues from 12 new technology licensing
programs, including our Database Access technology, Surgical Catheter
technology, Encrypted Media & Playback Devices technology, Child-friendly
Secure Mobile Phones technology, Heated Surgical Blades technology, Lighting
Ballast technology, High Performance Computer Architecture technology, Online
Promotion technology, Multi-Dimensional Database Compression
technology, Document Generation technology, Internet Radio
Advertising technology and our Virtual Server technology. Revenues
for 2009 also included fees from the licensing of our DMT® technology,
Telematics technology, Pop-up Internet Advertising technology, Audio
Communications Fraud Detection technology, Picture Archiving & Communication
Systems technology, Projector technology, Rule Based Monitoring technology,
Credit Card Fraud Protection technology, Remote Management of Imaging Devices
technology, Vehicle Maintenance technology, Medical Image
Stabilization technology, Audio Video Enhancement & Synchronization
technology, Location Based Services technology, eCommerce Pricing technology,
High Quality Image Processing technology, Authorized Spending Accounts
technology, Storage technology and Online Auction Guarantee
technology.
23
During
2008, we recorded initial license fee revenues for 20 of our technology
licensing programs, including our Vehicle Anti-Theft Parking Systems technology,
Online Auction Guarantee technology, Projector technology, Web Personalization
technology, Vehicle Maintenance technology, Physical Access Control technology,
High Resolution Optics technology, Software License Management technology,
Authorized Spending Accounts technology, Picture Archiving & Communications
System technology, Video Editing technology, Electronic Message Advertising
technology, Remote Management of Imaging Devices technology, High Quality Image
Processing technology, Wireless Traffic Information technology, Medical Image
Stabilization technology, Storage technology, Ecommerce Pricing technology,
Location Based Services technology and File Locking in Shared Storage Networks
technology. Revenues for 2008 also included fees from the licensing
of our Audio Communications Fraud Detection technology, Audio Video
Enhancement & Synchronization technology, Credit Card Fraud Protection
technology, DMT® technology, Electronic Address List Management technology,
Image Resolution Enhancement technology, Pop-up Internet Advertising technology,
Portable Storage Devices with Links technology, Rule-Based Monitoring technology
and Telematics technology.
During
2007, we recorded initial license fee revenues for 8 of our technology licensing
programs, including our Portable Storage Devices with Links technology, Color
Correction for Video Graphics Systems technology, Rule Based Monitoring
technology, Spreadsheet Automation technology, Virtual Computer Workspace
technology, Electronic Address List Management technology, Vehicle Magnetic
Braking technology and our Telematics technology. Revenues for 2007
also included fees from the licensing of our DMT® technology, Audio/Video
Enhancement and Synchronization technology, Image Resolution Enhancement
technology, Credit Card Fraud Control technology, Multi-Dimensional Bar Code
technology, Product Activation technology, Audio Communications Fraud Detection
technology and our Pop-up Advertising technology.
Our
revenues historically have fluctuated quarterly based on the number of patented
technology portfolios owned or controlled by our operating subsidiaries, the
timing and results of patent filings and other enforcement proceedings relating
to our intellectual property rights, the number of active licensing programs,
and the relative maturity of active licensing programs during the applicable
periods. Additional factors impacting the amount of license fee
revenues recognized each period are included below. Although license
fee revenues from one or more of our patents or patent portfolios may be
significant in a specific reporting period, we believe that none of our patents
or patent portfolios are individually significant to our licensing and
enforcement business as a whole.
We
measure and assess the performance and growth of the patent licensing and
enforcement business conducted by our operating subsidiaries based on
consolidated license fee revenues recognized across all of our technology
licensing and enforcement programs on a trailing twelve-month
basis. Trailing twelve-month revenues totaled $67.3 million as of
December 31, 2009, as compared to $65.7 million as of September 30, 2009, $63.4
million as of June 30, 2009, $56.1 million as of March 31, 2009, $48.2 million
as of December 31, 2008, and $52.6 million as of December 31,
2007. In addition, we also measure and assess the performance and
growth of the patent licensing and enforcement business conducted by our
operating subsidiaries based on the number of patent portfolios owned or
controlled by our operating subsidiaries on a consolidated basis. As
of December 31, 2009, 2008 and 2007, on a consolidated basis, our operating
subsidiaries owned or controlled the rights to approximately 135, 100 and 90
patent portfolios, respectively, which include U.S. patents and certain foreign
counterparts, covering technologies used in a wide variety of industries.
The
consolidated net loss for 2009 was $11.3 million, as compared to $13.8 million
for 2008 and $15.4 million for 2007. Results for 2009 included
non-cash charges totaling $11.7 million, comprised of non-cash stock
compensation charges of $7.1 million and non-cash patent amortization charges of
$4.6 million. Results for 2008 included non-cash charges of
$13.4 million, comprised of non-cash stock compensation charges of $7.4 million
and non-cash patent amortization charges of $6.0 million. Results for
2007 included non-cash charges of $11.5 million, comprised of non-cash stock
compensation charges of $5.9 million and non-cash patent amortization charges of
$5.6 million.
24
Marketing,
general and administrative expenses for 2009 (including non-cash stock
compensation charges of $7.1 million) were $21.1 million, as compared to $21.1
million (including non-cash stock compensation charges of $7.4 million) for 2008
and $18.4 million (including non-cash stock compensation charges of $5.9
million) for 2007. Excluding the impact of the decrease in non-cash stock
compensation in 2009, as compared to 2008, marketing, general and administrative
expenses remained relatively flat for the same periods. Marketing,
general and administrative expenses increased during 2008, as compared to 2007,
due primarily to the hiring of additional patent licensing, business development
and engineering personnel and an increase and other personnel costs, an increase
in non-cash stock compensation charges and an increase in corporate, general and
administrative costs related to the growth of ongoing operations.
In the
aggregate, inventor royalties, net income attributable to noncontrolling
interests in operating subsidiary and contingent legal fees expenses for 2009
increased by 36%, as compared to 2008, and decreased 6% in 2008, as compared to
2007, versus an increase of 40% and a decrease of 8% in related license fee
revenues for the same periods, as discussed above.
Litigation
and licensing expenses - patents for 2009, 2008 and 2007 were $14.1 million,
$6.9 million and $7.8 million, respectively. Litigation and licensing
expenses-patents 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. Litigation and licensing expenses - patents increased
for 2009, as compared to 2008 and 2007, due to an increase in litigation and
licensing support related out of pocket expenses, third party technical
consulting expenses, professional expert expenses and other litigation support
and administrative costs incurred in connection with our investment in certain
of our licensing and enforcement programs that went to trial and concluded in
2009, licensing and enforcement programs with trial dates scheduled for 2010,
and a net increase in costs related to new licensing and enforcement programs
commenced since the end of the prior year periods.
We expect
patent-related legal expenses to continue to fluctuate period to period based on
the factors summarized above, in connection with upcoming scheduled trial dates
and our current and future patent acquisition, development, licensing and
enforcement activities.
We pursue
enforcement actions in connection with our licensing and enforcement programs
which can involve certain risks and uncertainties, including the
following:
·
|
Increases
in patent litigation related legal expenses, including, but not limited
to, increases in costs billed by outside legal counsel for discovery,
depositions, economic analyses, damages assessments, expert witnesses and
other consultants, case-related audio/video presentations and other
litigation support and administrative costs, could increase our operating
costs and decrease our revenue generating
opportunities;
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·
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Our
patented technologies and enforcement actions are complex, and, as a
result, we may be required to appeal adverse decisions by trial courts in
order to successfully enforce our
patents;
|
·
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New
legislation, regulations or rules related to enforcement actions could
significantly increase our operating costs and decrease our revenue
generating opportunities; and
|
·
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Courts
may rule that our subsidiaries have violated certain statutory,
regulatory, federal, local or governing rules or standards by pursuing
such enforcement actions, which may expose us and our operating
subsidiaries to material liabilities, which could harm our operating
results and our financial
position.
|
Investments
in Patent Portfolios
Our
operating subsidiaries intend to sustain the long term growth of our
intellectual property licensing and enforcement business through the
identification and acquisition of, or the rights to, additional core patented
technologies, across a wide range of technology areas that have been, or are
anticipated to be, widely adopted by third parties in connection with the
manufacture or sale of products and services. During 2009, certain of
our operating subsidiaries continued to execute their business strategy in the
area of patent portfolio acquisitions. Patent portfolio acquisition
costs for 2009 totaled $9.6 million, as compared to $2.1 million in 2008 and
$3.8 million in 2007.
25
The total
number of patents, associated U.S. applications and foreign counterparts per
portfolio acquired during the year ended December 31, 2009 ranged from one to
59. Several of the patent portfolios acquired in 2009 were
acquired in connection with partnering arrangements executed with major
technology companies, reflecting our continued identification of opportunities
to partner not only with individual inventors and small to medium size
technology companies, but also major well established technology companies with
larger patent portfolios.
Of the
$9.6 million in patent acquisition costs invested during the year ended December
31, 2009, we have a contractual guarantee to receive a minimum of $5.0 million
in net proceeds, which significantly reduces the risk associated with these
initial investments. The majority of remaining acquisition costs
incurred are subject to contractual provisions providing for higher percentage
returns to our operating subsidiaries early on in the licensing and enforcement
program until such initial upfront acquisition costs are fully
recovered.
The
higher level of acquisition costs incurred in 2009 reflects our continued
identification of opportunities to partner with major technology companies and
exchange up front, advanced royalty payments to patent owners, for a reduced
future inventor royalty percentage, resulting in the potential for higher
returns on our investments in connection with future licensing and enforcement
activities.
Acquisitions
during 2009 included the acquisition of, or the acquisition of the rights to, 30
patent portfolios covering a variety of applications, including the
following:
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·
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Online
Promotion. This patented technology generally relates to
online promotion of consumer products and can be used to provide consumers
with web access to discount coupons and rebate
offers.
|
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·
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Interactive
Mapping. This patented technology generally relates to
interactive maps and can be used to provide user-generated data, such as
places of interest or reviews, over the
Internet.
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·
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Improved Anti-Trap
Safety. This patented technology can be used to adapt automatic
vent closure to changes, such as environment or mechanical wear. This
technology may be applicable to vehicles that implement
anti-pinch/anti-trap safety systems on powered vents such as windows,
doors and sunroofs.
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·
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Improved Commercial
Print. This patented technology can eliminate various print
artifacts while improving resolution, color and ink consumption from
commercial presses. Printers can benefit from these improvements,
particularly those who specialize in high volume press
work.
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·
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Electronic Securities Trading.
This patented technology generally relates to tools for automated
electronic securities trading and may be used in online
trading.
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·
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User Programmable Engine
Control. This patented technology generally relates to the user
interface for the engine control module, or ECM, and offers control
and calibration of the ECM including input and output parameters
controlling engine performance.
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·
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Wireless LAN. This
patented technology generally relates to wireless local area networking,
or WLAN, and includes communications architectures for use in spread
spectrum systems. This technology can be used in equipment
such as laptops, wireless routers, access points, handsets and other
consumer electronics devices with WLAN
capability.
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·
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Network Monitoring.
This patented technology generally relates to monitoring and reporting on
management and financial characteristics of networks and can be used
to help organizations make resource
decisions.
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·
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Medical Image
Manipulation. This patented technology generally relates to the
manipulation of medical images and can be used in the surgical
process.
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·
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Consumer Rewards
Program. This patented technology generally relates to
consumer rewards programs such as loyalty programs offered by
airlines, hotels and credit card companies and may be used
to provide a single source for consumers to
access and utilize applicable benefits under different
loyalty programs.
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26
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·
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Messaging.
This patented technology generally relates to a communications
messaging platform that notifies the
user after receiving messages and enables the user
to access the messages via a
browser. The platform may receive messages in
multiple formats, such as voice, text, or
image.
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·
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Computer Architecture and
Power Management. These patented technologies generally relate
to computer architecture and power management. These
technologies can be used in computers, servers, cell phones, game
consoles, microprocessors and other electronic
systems.
|
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·
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Records Management.
This patented technology generally relates
to enabling individuals in an enterprise to uniformly classify
records.
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·
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Digital Video
Enhancement. This patented technology generally relates to the
enhancement of digital video images and has applications in a wide
variety of consumer electronics products, such as TV’s, DVD/Blu-ray
players, game consoles, smart phones and cameras, in reducing
artifacts created during digital video
encoding.
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·
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Biosensor. This
patented technology generally relates to biosensors, such as those used in
drug discovery.
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·
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Integrated Access. This
patented technology includes the delivery of triple play (voice,
video and data) services and can be used in installations that
incorporate set top boxes and/or voice/data
gateways.
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·
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Mobile Computer
Synchronization. The patent portfolio includes patents
relating to the synchronization of data between mobile and fixed computer
systems. This technology may be used to keep email, contacts,
calendar information and other data synchronized between mobile
devices (such as personal digital assistants, or PDA’s, and smart phones)
and servers or desktop computers.
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·
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MEMS. This
patented technology generally relates to micromechanical components which
can be integrated with electronic circuits to form microelectromechanical
systems known as MEMS. This technology can be used in automobiles, medical
devices, mobile phones and other consumer
products.
|
|
·
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Digital Signal Processing
Architecture. This patented technology generally relates
to instructions that can be used to implement signal processing techniques
in a digital signal processor.
|
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·
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Software Installation.
This patented technology generally relates to creating and maintaining
desired configurations of
software.
|
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·
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Distributed Data Management
and Synchronization. This patented technology generally
relates to the distributed management and synchronization of select data
elements between applications based on pre-defined
permissions.
|
During
2008, we
acquired a total of 20 new patent portfolios with applications over a wide range
of technology areas as compared to 31 new patent portfolios in
2007.
As of
December 31, 2009, certain of our operating subsidiaries 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 future revenue generating
opportunities.
Critical
Accounting Policies
Our
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America. In
preparing these financial statements, we make assumptions, judgments and
estimates that can have a significant impact on amounts reported in our
consolidated financial statements. We base our assumptions, judgments and
estimates on historical experience and various other factors that we believe to
be reasonable under the circumstances. Actual results could differ materially
from these estimates under different assumptions or conditions. On a regular
basis, we evaluate our assumptions, judgments and estimates and make changes
accordingly.
27
We believe that, of the significant
accounting policies discussed in Note 2 to our consolidated financial
statements, the following accounting policies require our most difficult,
subjective or complex judgments:
|
·
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revenue
recognition;
|
|
·
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stock-based
compensation expense;
|
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·
|
valuation
of long-lived and intangible assets;
and
|
|
·
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impairment
of marketable securities;
|
We discuss below the critical
accounting assumptions, judgments and estimates associated with these policies.
Historically, our assumptions, judgments and estimates relative to our critical
accounting policies have not differed materially from actual results. For
further information on our critical accounting policies, refer to Note 2 to
the consolidated financial statements included herein.
Revenue
Recognition
Change in Accounting Policy for Term
License Agreements. Certain
license agreements provide for the payment of a minimum upfront annual license
fee at the inception of each annual license term, hereinafter referred to as
“term license agreements.” Effective October 1, 2009, we elected to
change our method of accounting for our term license agreements to recognize
revenue when delivery of the license has occurred, which is typically at the
time of execution of the related license agreement, or upon receipt of the
applicable minimum upfront annual renewal license fee payment, and when all
other revenue recognition criteria, as described below, have been
met. Prior to the change in method of accounting, license fees
for term license agreements were deferred and amortized to revenue on a
straight-line basis over the applicable contractual license term. The
new method was adopted as it provides a consistent approach to accounting for
all of our license arrangements with similar significant terms and conditions
and more closely reflects the culmination of the earnings process associated
with these revenue arrangements. Refer to Exhibit 18.1 for related
preferability letter issued by our independent registered public accounting firm
regarding the change in accounting policy as required by Rule 10-01(b)(6) of
Regulation S-X.
The
change was accounted for through retrospective application of the new accounting
policy as of January 1, 2009. The effect of applying the new
accounting policy to term license agreements in periods prior to January 1, 2009
was not material. Accordingly, our consolidated financial statements
for years ending prior to January 1, 2009 have not been retroactively adjusted
for this change in accounting policy. Refer to Note 8 to the
consolidated financial statement for information on the effect of the change in
accounting policy on our consolidated financial statement line items for the
applicable 2009 interim reporting periods.
As
described below, significant management judgments must be made and used in
connection with the revenue recognized in any accounting
period. Material differences may result in the amount and timing of
revenue recognized or deferred for any period, if management made different
judgments.
Revenue
is recognized, in accordance with ASC Topic 605, “Revenue Recognition,” or
ASC Topic 605, when (i) persuasive evidence of an arrangement exists, (ii) all
obligations have been performed pursuant to the terms of the agreement, (iii)
amounts are fixed or determinable and (iv) collectibility of amounts is
reasonably assured.
We make
estimates and judgments when determining whether the collectibility of license
fees receivable from licensees is reasonably assured. We assess the
collectibility of license fees receivable based on a number of factors,
including past transaction history and the credit-worthiness of
licensees. 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 for transactions where collectibility may have
been an issue. Management estimates regarding collectibility impact the actual
revenues recognized each period and the timing of the recognition of
revenues. Our assumptions and judgments regarding future
collectibility could differ from actual events, thus materially impacting our
financial position and results of operations.
28
Certain
license agreements provide for the payment of contractually determined paid-up
license fees to our operating subsidiaries in consideration for the grant of a
non-exclusive, retroactive and future license to manufacture and/or sell
products covered by patented technologies owned or controlled by our operating
subsidiaries. Generally, the execution of these license agreements
also provide for the release of the licensee from certain past and future
claims, and the dismissal of any pending litigation. Pursuant to the
terms of these agreements, our operating subsidiaries have no further obligation
with respect to the grant of the non-exclusive retroactive and future license
and related releases, including no express or implied obligation on our
operating subsidiaries’ part to maintain or upgrade the technology, or provide
future support or services. Generally, the agreements provide for the
grant of the license and releases upon execution of the agreement. As
such, the earnings process is generally complete upon the execution of the
agreement, and as a result, revenue is recognized upon execution of the
agreement, when collectibility is reasonably assured, and all other revenue
recognition criteria have been met. Depending on the complexity of
the underlying license agreement and related terms and conditions, significant
judgments, assumptions and estimates may be required to determine when
substantial delivery of contract elements has occurred, whether any significant
ongoing obligations exist subsequent to contract execution, whether amounts due
are collectible and the appropriate period or periods, in which, or during
which, respectively, the completion of the earning process
occurs. Depending on the magnitude of specific license agreements, if
different judgments, assumptions and estimates are made regarding contracts
executed in any specific period, our periodic financial results may be
materially affected.
Our
operating subsidiaries are responsible for the licensing and enforcement of
their respective patented technologies and pursue third parties that are
utilizing their intellectual property without a license or who have
under-reported the amount of royalties owed under a license
agreement. As a result of these activities, from time to time, our
operating subsidiaries may recognize royalty revenues in a current period that
relate to infringements by licensees that occurred in prior
periods. These royalty recoveries may cause revenues to be higher
than expected during a particular reporting period and may not occur in
subsequent periods. Differences between amounts initially recognized
and amounts subsequently audited or reported as an adjustment to those amounts,
are recognized in the period such adjustment is determined as a change in
accounting estimate.
Stock-based
Compensation Expense
ASC
Topic 718, “Compensation – Stock Compensation,” or ASC Topic 718, sets
forth the accounting requirements for “share-based” compensation payments to
employees and non-employee directors and requires all share based-payments to be
recognized as expense in the statement of operations. The compensation cost for
all stock-based awards is measured at the grant date, based on the fair value of
the award (determined using a Black-Scholes option pricing model for stock
options and intrinsic value on the date of grant for nonvested restricted
stock), and is recognized as an expense over the employee’s requisite service
period (generally the vesting period of the equity
award). Determining the fair value of stock-based awards at the grant
date requires significant estimates and judgments, including estimating the
market price volatility of our common stock, future employee stock option
exercise behavior and requisite service periods.
ASC Topic
718 also requires stock-based compensation expense to be recorded only for those
awards expected to vest using an estimated pre-vesting forfeiture
rate. As such, ASC Topic 718 requires us to estimate pre-vesting
option forfeitures at the time of grant and reflect the impact of estimated
pre-vesting option forfeitures on compensation expense
recognized. Estimates of pre-vesting forfeitures must be periodically
revised in subsequent periods if actual forfeitures differ from those
estimates. We consider several factors in connection with our
estimate of pre-vesting forfeitures including types of awards, employee class,
and historical pre-vesting forfeiture data. The estimation of stock
awards that will ultimately vest requires judgment, and to the extent that
actual results differ from our estimates, such amounts will be recorded as
cumulative adjustments in the period the estimates are revised. If
actual results differ significantly from these estimates, stock-based
compensation expense and our results of operations could be materially
impacted.
Refer to
Notes 2 and 12 to our consolidated financial statements included in Part IV,
Item 15 of this report for more information.
Valuation
of Long-lived and Intangible Assets
We review
long-lived assets, including patent-related intangibles, for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Factors we consider important, which could
trigger an impairment review include the following:
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·
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significant
underperformance relative to expected historical or projected future
operating results;
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29
|
·
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significant
changes in the manner of our use of the acquired assets or the strategy
for our overall business;
|
|
·
|
significant
negative industry or economic
trends;
|
|
·
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significant
adverse changes in legal factors or in the business climate, including
adverse regulatory actions or assessments;
and
|
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·
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significant
decline in our stock price for a sustained
period.
|
We
calculate estimated future undiscounted cash flows, before interest and taxes,
resulting from the use of the asset and its estimated value at disposal and
compare it to its carrying value in determining whether impairment potentially
exists. If a potential impairment exists, a calculation is performed to
determine the fair value of the long-lived asset. This calculation is based on a
valuation model and discount rate commensurate with the risks involved. Third
party appraised values may also be used in determining whether impairment
potentially exists.
As
described above, in assessing the recoverability of intangible assets,
significant judgment is required in connection with estimates of market values,
estimates of the amount and timing of future cash flows, and estimates of other
factors that are used to determine the fair value of the respective assets. If
these estimates or related projections change in future periods, future
intangible asset impairment tests may result in charges to
earnings. Refer to Note 6 to the consolidated financial statements,
included elsewhere herein, for information on impairment charges recorded during
the periods presented.
Impairment
of Marketable Securities
Effective
January 1, 2008, we adopted ASC Topic 820, “Fair Value Measurements and
Disclosures,” or ASC Topic 820. ASC Topic 820 establishes a common definition
for fair value to be applied to U.S. generally accepted accounting principles
guidance requiring use of fair value, establishes a framework for measuring fair
value, and expands disclosure about such fair value measurements. ASC
Topic 820 defines fair value as the price that would be received for an asset or
the exit price that would be paid to transfer a liability in the principal or
most advantageous market in an orderly transaction between market participants
on the measurement date. ASC Topic 820 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs, where
available. ASC Topic 820 established a three-level hierarchy of valuation
techniques used to measure fair value, defined as follows:
|
·
|
Level
1 - Observable Inputs: Quoted prices in active markets for
identical investments;
|
|
·
|
Level
2 - Pricing Models with Significant Observable Inputs: Other
significant observable inputs, including quoted prices for similar
investments, interest rates, credit risk, etc.;
and
|
|
·
|
Level
3 - Unobservable Inputs: Significant unobservable inputs,
including the entity’s own assumptions in determining the fair value of
investments.
|
ASC Topic
820 requires the use of observable market inputs (quoted market prices) when
measuring fair value and requires a Level 1 quoted price to be used to measure
fair value whenever possible.
At
December 31, 2009 and 2008, our investments were comprised of auction rate
securities classified as available-for-sale, which are reported at fair value,
and included in Level 3 of the valuation hierarchy prescribed by ASC Topic
820. The fair values of auction rate securities included in Level 3
of the hierarchy of valuation techniques are estimated utilizing an analysis of
certain unobservable inputs and by reference to a discounted cash flow
analysis. These analyses consider, among other items, the underlying
structure of each security, the collateral underlying the security investments,
the creditworthiness of the counterparty, the present value of future principal
and contractual interest payments discounted at rates considered to be
reflective of current market conditions, consideration of the probabilities of
default, continued auction failure, or repurchase or redemption at par for each
period, and estimates of the time period over which liquidity related issues
will be resolved. Observable market data for instruments with similar
characteristics to our auction rate securities is also considered when
possible.
30
Significant
judgment is required in connection with the assumptions and inputs included in
the discounted cash flow analysis and estimates of other factors that are used
to determine the fair value of our marketable securities. If these
estimates and assumptions change in future periods, future estimates of the fair
value of our marketable securities may result in additional charges to
earnings.
We review
impairments associated with our investments in marketable securities to
determine the classification of any impairment as “temporary” or
“other-than-temporary.” For investments classified as
available-for-sale, unrealized losses that are other than temporary are
recognized in the consolidated statements of operations. An
impairment is deemed other than temporary unless (a) we have the ability and
intent to hold an investment for a period of time sufficient for recovery of its
carrying amount and (b) positive evidence indicating that the investment's
carrying amount is recoverable within a reasonable period of time outweighs any
evidence to the contrary. All available evidence, both positive and negative, is
considered to determine whether, based on the weight of that evidence, the
carrying amount of the investment is recoverable within a reasonable period of
time.
Refer to
“Consolidated Results of Operations – Other” below for information regarding
other-than-temporary charges recorded in the consolidated statements of
operations for the years ended December 31, 2009 and 2008.
Consolidated
Results of Operations
Comparison
of the Results of Operations for the years ended December 31, 2009, 2008 and
2007
Net
Loss Attributable to Acacia Research Corporation (In thousands)
2009
|
2008
|
2007
|
||||||||||
Net
loss from continuing operations attributable to Acacia Research
Corporation
|
$ | (11,290 | ) | $ | (13,757 | ) | $ | (7,359 | ) | |||
Loss
from discontinued operations - Split-off of CombiMatrix
Corporation
|
- | - | (8,086 | ) | ||||||||
Net
loss
|
(11,290 | ) | (13,757 | ) | (15,445 | ) |
The
changes in consolidated loss from continuing operations were primarily due to
operating results and activities, as discussed below.
Revenues
(In thousands)
2009
|
2008
|
2007
|
||||||||||
License
fees
|
$ | 67,340 | $ | 48,227 | $ | 52,597 |
License Fees. Revenues for
2009 included license fees from 117 new licensing agreements covering 30 of our
technology licensing and enforcement programs, as compared to 80 new licensing
agreements covering 30 of our technology licensing and enforcement programs in
2008, and 91 new licensing agreements covering 16 of our technology licensing
and enforcement programs in 2007.
Two
licensees individually accounted for 15% and 12% of license fee revenue
recognized during the year ended December 31, 2009, two licensees individually
accounted for 13% and 12% of license fee revenue recognized during the year
ended December 31, 2008, and two licensees individually accounted for 19% and
12% of license fee revenue recognized during the year ended December 31,
2007.
On a
consolidated basis, as of December 31, 2009, 60 of our licensing programs had
begun generating licensing revenues, up from 48 as of December 31, 2008 and 28
as of December 31, 2007.
License
fee revenues recognized by our operating subsidiaries 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;
|
31
|
·
|
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.
|
The 40%
increase in license fee revenues for 2009, as compared to 2008, was due
primarily to an increase in the number of new licensing agreements executed
during the period, which was partially offset by a minor decrease in the average
revenue per license agreement executed during the same periods. The
8% decrease in license fee revenues for 2008, as compared to 2007, was due to a
decrease in the number of license agreements executed during 2008, as compared
to 2007, which was partially offset by a minor increase in the average revenue
per license agreement executed during the same periods.
Cost
of Revenues and Net Income Attributable to Noncontrolling Interests (In
thousands)
2009
|
2008
|
2007
|
||||||||||
Cost
of revenues:
|
||||||||||||
Inventor
royalties
|
$ | 15,673 | $ | 14,995 | $ | 12,050 | ||||||
Contingent
legal fees
|
15,945 | 12,429 | 17,174 | |||||||||
Litigation
and licensing expenses - patents
|
14,055 | 6,900 | 7,799 | |||||||||
Amortization
of patents
|
4,634 | 6,043 | 5,583 | |||||||||
Net
income attributable to noncontrolling interests in operating
subsidiary
|
5,657 | - | - |
Inventor Royalties, Net Income
Attributable to Noncontrolling Interests in Operating Subsidiary and Contingent
Legal Fees Expense. Net income attributable to noncontrolling
interests in operating subsidiary, represents the portion of net proceeds from
the licensing and enforcement activities of our majority-owned operating
subsidiary that are distributable to the operating subsidiary’s noncontrolling
interest holders pursuant to the underlying operating agreement. The
economic terms of the inventor agreements, operating agreements and contingent
legal fee arrangements, if any, including royalty rates, contingent fee rates
and other terms, vary across the patent portfolios owned or controlled by our
operating subsidiaries. As such, inventor royalties, payments to
noncontrolling interests in operating subsidiaries and contingent legal fees
expenses fluctuate period to period, based on the amount of revenues recognized
each period and the mix of specific patent portfolios with varying economic
terms generating revenues each period.
2009
vs. 2008
|
2008
vs. 2007
|
|||||||||
Increase
(decrease) in license fee revenues
|
40 | % | (8 | %) | ||||||
Increase
(decrease) in inventor royalties expense, net income attributable to
noncontrolling interests in operating subsidiary and contingent
legal fees expense
|
36 | % |
Note
a
|
(6 | %) |
Note
a
|
||||
Increase
in inventor royalties and net income attributable to noncontrolling
interests in operating subsidiary
|
42 | % |
Note
b
|
24 | % |
Note
d
|
||||
Increase
(decrease) in contingent legal fees expense
|
28 | % |
Note
c
|
(28 | %) |
Note
e
|
2009
|
2008
|
2007
|
||||||||||
Inventor
royalties and net income attributable to noncontrolling interests in
operating subsidiary as a percentage of license fee
revenues
|
32 | % | 31 | % | 23 | % | ||||||
Contingent
legal fees expenses as a percentage of license fee
revenues
|
24 | % | 26 | % | 33 | % | ||||||
Inventor
royalties, net income attributable to noncontrolling interests in
operating subsidiary and contingent legal fees, combined, as a
percentage of license fee revenues
|
55 | % | 57 | % | 56 | % |
|
a)
|
The
increase (decrease) in inventor royalties, noncontrolling interests in
operating subsidiary and contingent legal fees, in the aggregate, is
consistent with the related increase (decrease) in license fee revenues
for the periods presented.
|
|
b)
|
The
increase is due primarily to the increase in related license fee revenues
and a 1% increase in inventor royalties and noncontrolling interests in
operating subsidiaries as a percentage of license fee
revenues.
|
|
c)
|
Increase
due to increase in related license fee revenues, partially offset by a
decrease in contingent legal fees as a percentage of license fee revenues
due to certain patent portfolios with lower contingent fee rates
generating revenues during 2009, as compared to the patent portfolios
generating revenues during 2008.
|
32
|
d)
|
Certain
patent portfolios generating revenues in 2007 had inventor agreements with
lower than average inventor royalty rates, as compared to those patent
portfolios generating revenues in 2008, resulting in the 24% increase in
inventor royalties expenses in 2008, versus 2007, as compared to the 8%
decrease in license fee revenues during the same periods. In
addition, the lower contingent legal fee rates for certain patent
portfolios generating revenue in 2008 also contributed to the period to
period increase in inventor royalties expenses as a percentage of license
fee revenues recognized.
|
|
e)
|
Certain
patent portfolios generating revenues in 2008 had contingent legal
arrangements with lower applicable contingent fee rates, as compared to
those patent portfolios generating revenues in 2007, resulting in the 28%
decrease in contingent legal fees expenses in 2008, versus 2007, as
compared to the 8% decrease in license fee revenues during the same
periods.
|
Litigation and Licensing Expenses -
Patents. Litigation and licensing expenses-patents include
patent-related prosecution and enforcement costs incurred by outside patent
attorneys engaged on an hourly basis and the out-of-pocket expenses incurred by
law firms engaged on a contingent fee basis. Litigation and licensing
expenses-patents also includes licensing and enforcement related third-party
patent research, development, consulting, and other costs incurred in connection
with the licensing and enforcement of patent portfolios. Litigation
and licensing expenses-patents fluctuate from period to period based on patent
enforcement and prosecution activity associated with ongoing licensing and
enforcement programs and the timing of the commencement of new licensing and
enforcement programs in each period.
The net
increase during 2009, as compared to 2008, is primarily due to an increase in
litigation and licensing support related out of pocket expenses, third party
technical consulting expenses, professional expert expenses and other litigation
support and administrative costs incurred in connection with our continued
investment in certain of our licensing and enforcement programs that went to
trial and concluded in 2009, licensing and enforcement programs with trial dates
scheduled for 2010, and a net increase in costs related to new licensing and
enforcement programs commenced since the end of the prior year
period.
In 2007,
we incurred increased litigation support related out of pocket expenses, third
party technical consulting expenses and professional expert expenses incurred in
connection with certain of our patent portfolios that were further along in the
prosecution of the related litigation and certain of our enforcement actions
that proceeded to trial and concluded, resulting in increased patent –related
legal expenses in 2007, as compared to 2008. During 2008, none of our
ongoing enforcement actions went to trial, despite an increase in the overall
number of outstanding enforcement actions during the period.
We expect
patent-related legal expenses to continue to fluctuate period to period based on
the factors summarized above, in connection with upcoming scheduled trial dates
and our current and future patent acquisition, development, licensing and
enforcement activities.
Amortization of
Patents. Patent amortization expense decreased in 2009, as
compared to 2008, primarily due to higher amortization expense recorded in 2008
resulting from the acceleration of amortization on a patent portfolio as
described below, and a scheduled decrease in amortization totaling $950,000,
which was partially offset by an increase in amortization expense related to new
patent portfolios acquired during 2009 totaling $635,000.
During
the fourth quarter of 2008, pursuant to the terms of the respective inventor
agreements, our management elected to terminate our rights to exclusively
license a patent portfolio. As such, the economic useful life of the
patent-related intangible asset was reduced, resulting in the acceleration of
$1,094,000 of amortization expense for the patent-related asset and an increase
in amortization expense in 2008, as compared to 2007. This increase
was partially offset by a reduction in scheduled amortization expense resulting
from the completion of amortization on certain portfolios acquired in connection
with significant patent portfolio acquisitions in January 2005.
33
Operating
Costs and Expenses (In thousands)
2009
|
2008
|
2007
|
||||||||||
Marketing,
general and administrative expenses (including non-cash stock compensation
expense of $7,065 for 2009, $7,355 for 2008 and $5,908
for 2007)
|
$ | 21,070 | $ | 21,130 | $ | 18,381 | ||||||
Research,
consulting and other expenses - business development
|
1,689 | 933 | 886 |
Marketing, General and
Administrative Expenses. Marketing, general and administrative
expenses include employee compensation and related personnel costs, including
non-cash stock compensation expenses, office and facilities costs, legal and
accounting professional fees, business development related research and
consulting costs, public relations, marketing, stock administration and other
corporate costs.
A summary
of the main drivers of the change in marketing, general and administrative
expenses, including the impact of non-cash stock compensation charges, for the
periods presented, is as follows (in thousands):
2009
vs. 2008
|
2008
vs. 2007
|
|||||||
Addition
of licensing, business development and engineering personnel and other
personnel costs
|
$ | 464 | $ | 1,510 | ||||
Consulting
expenses paid to former CEO of Global Patent Holdings, LLC
|
- | (74 | ) | |||||
One
time employee severance charges
|
(68 | ) | (129 | ) | ||||
Foreign
taxes paid on licensing fees
|
(120 | ) | (27 | ) | ||||
Corporate,
general and administrative costs
|
(46 | ) | 22 | |||||
Non-cash
stock compensation expense
|
(290 | ) | 1,447 |
Excluding
non-cash stock compensation expense, the overall increase in marketing, general
and administrative expenses is reflective of the continued growth and expansion
of our intellectual property acquisition, licensing and enforcement business
conducted by our operating subsidiaries and related ongoing
operations.
The
fluctuation in non-cash stock compensation expense period to period is based
primarily on the average fair value of equity-based incentive awards granted and
expensed each period, and the number of equity based incentive awards granted
and expensed each period. The weighted-average grant date fair value
of equity-based incentive awards expensed during 2009, 2008 and 2007, which is
generally based on the grant date market value of our common stock, was
approximately $8.17, $11.66 and $9.95, respectively. The
weighted-average grant date fair value of equity-based awards granted during
2009, 2008 and 2007 was $3.51, $4.85 and $12.74,
respectively. Equity-based awards are generally expensed on a
straight-line basis over a two to three year vesting period. Refer to
Note 12 to our consolidated financial statements, included elsewhere herein, for
additional information on equity-based award grant activity for the periods
presented.
Research, Consulting and Other
Expenses - Business Development. Research, consulting and
other expenses include third-party business development related research,
development, consulting, and other costs incurred in connection with business
development activities. These costs fluctuate period to period based
on business development related activities in each period.
Other
At
December 31, 2009, the par value of auction rate securities collateralized by
student loan portfolios totaled $2.7 million. As a result of the
liquidity issues associated with the failed auctions as described at Note 7 to
the consolidated financial statements included in this report, we estimate that
the fair value of these auction rate securities no longer approximates their par
value. Due to the estimate that the market for these student loan
collateralized instruments may take in excess of twelve months to fully recover,
we have classified these investments as noncurrent in the accompanying
consolidated balance sheets. In addition, we recorded an
other-than-temporary loss on our student loan collateralized auction rate
securities of $296,000 and $263,000 in the accompanying consolidated statements
of operations for the years ended December 31, 2009 and 2008,
respectively. As a result of partial redemptions at par on certain of
our auction rate securities collateralized by student loan portfolios, we
recorded realized gains totaling $13,000 and $13,000 for 2009 and 2008,
respectively, reflecting a partial recovery of the other-than-temporary loss
originally recorded on these securities. Refer to Note 7 to our
consolidated financial statements elsewhere herein for information on the
valuation of auction rate securities held as of December 31, 2009. As
of December 31, 2009, the net other-than-temporary loss on auction rate
securities collateralized by student loan portfolios totaled
$533,000.
34
At
December 31, 2008, we also held auction rate securities with a par value
totaling $975,000, issued by high credit quality closed-end investment
companies. We recorded an other-than-temporary loss on our auction
rate securities issued by closed-end investment companies of $236,000 in the
accompanying consolidated statement of operations for the year ended December
31, 2008. As of December 31, 2009, all of the auction rate securities
issued by closed-end investment companies were redeemed at par. As a result, we
recorded realized gains totaling $236,000 in the accompanying consolidated
statement of operations for the year ended December 31, 2009, reflecting a
recovery of the other-than-temporary loss originally recorded on these
securities.
Discontinued
Operations – Split-Off of CombiMatrix Corporation
On August
15, 2007, CombiMatrix was split-off from us through the redemption of all
outstanding shares of Acacia Research-CombiMatrix common stock in exchange for
the distribution of new shares of CombiMatrix, on a pro-rata basis, to the
holders of Acacia Research-CombiMatrix stock as of the Redemption
Date. Subsequent to the Redemption Date, we no longer own any equity
interests in CombiMatrix and the CombiMatrix group is no longer one of our
business groups.
As a
result of the Split-Off Transaction, the assets, liabilities, results of
operations and cash flows of CombiMatrix have been eliminated from our
continuing operations and we do not have any continuing involvement in the
operations of CombiMatrix. As a result of the Split-Off Transaction,
we have disposed of our investment in CombiMatrix, and therefore, our
accompanying consolidated financial statements for all applicable historical
periods presented reflect the assets, liabilities, results of operations and
cash flows for CombiMatrix as “Discontinued Operations.” CombiMatrix
was previously presented as a separate operating segment.
The
Split-Off Transaction was accounted for by us at historical
cost. Accordingly, no gain or loss on disposal was recognized in the
2007 consolidated statement of operations. Included in the consolidated
statement of stockholder’s equity for the year ended December 31, 2007 is a
charge to consolidated stockholders’ equity totaling $35,444,000, reflecting the
distribution of our investment in the net assets of CombiMatrix to holders of
Acacia Research-CombiMatrix stock, as of the Redemption Date. 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-Off Transaction will be treated as a tax-free exchange under Sections 368
and 355 of the Code.
Refer to
Note 11 to our consolidated financial statements included elsewhere herein for
information regarding the revenues and pretax loss included in discontinued
operations for the applicable historical periods presented.
Inflation
Inflation
has not had a significant impact on us or any of our subsidiaries in the current
or prior periods.
Liquidity
and Capital Resources
General
Our
primary sources of liquidity are cash and cash equivalents and investments, as
well as cash generated from operations. Our management believes that
the cash and cash equivalent balances, investments, anticipated cash flow from
operations and other external sources of available credit, will be sufficient to
meet our cash requirements through at least March 2011 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 under
Item 1A. “Risk Factors” above. Any efforts to seek additional funding
could be made through equity, debt or other external
financing. However, additional funding may not be available on
favorable terms, or at all. The capital and credit markets have been
experiencing extreme volatility and disruption for more than 12 months.
Recently, the volatility and disruption have reached unprecedented levels. In
several cases, the markets have exerted downward pressure on stock prices and
credit capacity for certain issuers, and there can be no assurance that the
commercial paper markets will be a reliable source of short-term financing for
us. If we fail to obtain additional funding when needed, we may not be able to
execute our business plans and our business may suffer.
35
Cash
and Cash Equivalents and Investments
Our
consolidated cash and cash equivalents and investments totaled
$53.9 million at December 31, 2009, compared to $51.5 million at
December 31, 2008. The net change in cash and cash equivalents
and investments related to continuing operations for 2009, 2008 and 2007 was
comprised of the following (in thousands):
2009
|
2008
|
2007
|
||||||||||
Net
cash provided by (used in) continuing operations:
|
||||||||||||
Operating
activities
|
$ | 16,145 | $ | 2,598 | $ | 5,166 | ||||||
Investing
activities
|
(8,652 | ) | 5,070 | (2,145 | ) | |||||||
Financing
activities
|
(4,010 | ) | 142 | 5,014 |
Cash Flows from Operating
Activities. Cash receipts from licensees totaled $70.9
million, $42.1 million and $51.4 million for 2009, 2008 and 2007,
respectively. The fluctuations in cash receipts for the periods
presented primarily reflects the corresponding fluctuations in license fee
revenues recognized during the same periods, as described above. Cash
outflows from operations totaled $54.8 million, $39.5 million and $46.2 million
for 2009, 2008 and 2007, respectively. The fluctuations in cash
outflows for the periods presented reflect the net increase in license fee
revenue related inventor royalties and contingent legal fees and other operating
costs and expenses during the same periods, as discussed above, and the impact
of the timing of payments to inventors, attorneys and other
vendors.
Cash Flows from Investing
Activities. The change in net cash flows used in investing activities was
primarily due to the impact of patent portfolio acquisitions and net sales of
available-for-sale investments in connection with ongoing short-term cash
management activities during the periods presented. Certain of our
operating subsidiaries incurred patent acquisition costs totaling $9.6 million,
$2.1 million and $3.8 million in 2009, 2008 and 2007,
respectively. Refer to the “Overview” section above for a discussion
of patent acquisition activities for the periods presented. Net sales
of short-term investments totaled $1.0 million, $7.2 million and $1.8 million in
2009, 2008 and 2007, respectively.
Cash Flows from Financing
Activities. In May 2009, our board of directors approved a
restricted stock vesting net issuance program. Under the program,
upon the vesting of unvested shares of restricted common stock, we withheld from
fully vested shares of common stock otherwise deliverable to any
employee-participant in our equity compensation programs, a number of whole
shares of common stock having a fair market value (as determined by us as of the
date of vesting) equal to the amount of tax required to be withheld by law, in
order to satisfy the tax withholding obligations of ours in connection with the
vesting of such shares. Of a total of 580,600 shares of restricted
stock vesting between June 2009 and September 2009, 174,628 shares of common
stock were withheld by us, in satisfaction of $1.1 million in required
withholding tax liability. Consolidated net cash inflows from financing
activities in 2009, 2008 and 2007 included stock option exercise proceeds of
$247,000, $142,000, and $5.0 million, respectively.
Working
Capital
The
primary components of working capital are cash and cash equivalents, accounts
receivable, prepaid expenses, accounts payable, accrued expenses, royalties and
contingent legal fees payable and deferred revenues. Working capital
at December 31, 2009 was $36.0 million, compared to $42.6 million at
December 31, 2008. Refer to “Liquidity and Capital Resources -
Cash and Investments” above for a discussion of the impact of activities related
to cash and investments on working capital for the periods
presented.
Consolidated
accounts receivable from licensees decreased to $5.1 million at December 31,
2009, compared to $7.4 million at December 31, 2008. Accounts
receivable balances fluctuate based on the timing, magnitude and payment terms
associated with license agreements executed during the period, and the timing of
cash receipts on accounts receivable balances recorded in previous periods. Two
licensees individually represented approximately 78% and 10% of accounts
receivable at December 31, 2009. Three licensees individually represented
approximately 27%, 24% and 19% of accounts receivable at December 31,
2008.
Consolidated
royalties and contingent legal fees payable increased to $12.4 million at
December 31, 2009, compared to $10.8 million at December 31,
2008. Royalties and contingent legal fees payable balances fluctuate
based on the magnitude and timing of the execution of related license
agreements, the timing of cash receipts for the related license agreements, and
the timing of payment of current and prior period royalties and contingent legal
fees payable to inventor and outside attorneys, respectively.
36
The
majority of accounts receivable from licensees at December 31, 2009 were
collected or scheduled to be collected in the first quarter of 2010, in
accordance with the terms of the related underlying license
agreements. The majority of royalties and contingent legal fees
payable are scheduled to be paid in the first quarter of 2010, upon receipt by
us of the related license fee payments from licensees, in accordance with the
underlying contractual arrangements.
Accounts
payable and accrued expenses increased to $8.0 million at December 31, 2009,
from $3.2 million at December 31, 2008, due primarily to the increase in
litigation and licensing expenses-patents described above and the related timing
of payments to attorneys and other vendors.
Deferred
revenues, representing cash payments received from licensees prior to all of the
required revenue recognition criteria described above being met, totaled $1.5
million at December 31, 2009 compared to $318,000 at December 31,
2008. Amounts recorded as deferred revenues are
non-refundable.
Off-Balance
Sheet Arrangements
We have
not entered into off-balance sheet financing arrangements, other than operating
leases.
Contractual
Obligations
We have
no significant commitments for capital expenditures in 2010. We have
no committed lines of credit or other committed funding or long-term
debt. The following table lists our material known future cash
commitments as of December 31, 2009, and any material known commitments arising
from events subsequent to year end:
Payments
Due by Period (In thousands)
|
||||||||||||||||
Contractual
Obligations
|
Total
|
Less
than
1
year
|
1-3
years
|
More
than 3 years
|
||||||||||||
Operating
leases
|
$ | 2,010 | $ | 869 | $ | 1,141 | $ | - | ||||||||
Total
contractual obligations
|
$ | 2,010 | $ | 869 | $ | 1,141 | $ | - |
Uncertain Tax
Positions. As of December 31, 2009, the liability for
uncertain tax positions, associated primarily with state income taxes, totaled
$85,000, of which none is expected to be paid within one year. The liability for
uncertain tax positions is recorded in other long-term liabilities in the
consolidated balance sheet.
Recent
Accounting Pronouncements
Refer to
Note 2 to our consolidated financial statements included elsewhere
herein.
Item
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
primary objective of our investment activities is to preserve principal while
concurrently maximizing the income we receive from our investments without
significantly increasing risk. Some of the securities that we may invest in may
be subject to market risk. This means that a change in prevailing interest rates
may cause the principal amount of the investment to fluctuate. For example, if
we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the current
value of the principal amount of our investment will decline. To minimize this
risk in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, high-grade corporate bonds, government and non-government
debt securities and certificates of deposit. In general, money market funds are
not subject to market risk because the interest paid on such funds fluctuates
with the prevailing interest rate. As of December 31, 2009, all of our
investments were in money market funds that invest in U.S. Treasury securities
and obligations issued or guaranteed by the U.S. Government and
certain auction rate securities. A hypothetical 100 basis point
increase in interest rates would not have a material impact on the fair value of
our available-for-sale securities as of December 31, 2009. Refer to
Item 1A. “Risk Factors,” Item 7. “Liquidity and Capital Resources,” and Notes 2
and 3 to our consolidated financial statements included in this report for
additional information. Refer to Note 7 to our consolidated financial
statements elsewhere herein for information on auction rate securities held as
of December 31, 2009.
37
Item
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The
financial statements and related financial information required to be filed
hereunder are indexed under Item 15 of this report and are incorporated herein
by reference.
Item
9.
|
CHANGES
IN AND DISAGREEMENTS WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
Item
9A.
|
CONTROLS
AND PROCEDURES
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined under
Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act
of 1934, as amended, or the Exchange Act. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31,
2009, 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 Exchange Act 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.
Management’s Report on Internal
Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) or 15d-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2009.
Grant
Thornton, LLP, the independent registered public accounting firm who audited our
consolidated financial statements included in this Annual Report on
Form 10-K, has issued a report on our internal control over financial
reporting, which is included herein.
There
were no changes in our internal control over financial reporting during the
fourth fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B.
|
OTHER
INFORMATION
|
None
38
PART
III
Item
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Except as
provided below, the information required by this Item is incorporated herein by
reference to our definitive proxy statement to be filed with the SEC no later
than April 30,
2010.
Code
of Conduct.
We have
adopted a Code of Conduct that applies to all employees, including our chief
executive officer, chief financial and accounting officer, president and any
persons performing similar functions. Our Code of Conduct is provided
on our internet website at www.acaciaresearch.com.
Item
11.
|
EXECUTIVE
COMPENSATION
|
In
accordance with Instruction G(3) to Form 10-K, the information required by this
Item is incorporated herein by reference to our definitive proxy statement to be
filed with the SEC no later than April 30,
2010.
Item
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
In
accordance with Instruction G(3) to Form 10-K, the information required by this
Item is incorporated herein by reference to our definitive proxy statement to be
filed with the SEC no later than April 30,
2010.
Item
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
In
accordance with Instruction G(3) to Form 10-K, the information required by this
Item is incorporated herein by reference to our definitive proxy statement to be
filed with the SEC no later than April
30, 2010.
Item
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
In
accordance with Instruction G(3) to Form 10-K, the information required by this
Item is incorporated herein by reference to our definitive proxy statement to be
filed with the SEC no later than April 30,
2010.
39
PART
IV
Item
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a)
|
The
following documents are filed as part of this
report.
|
(1) Financial Statements | Page | |
Acacia Research Corporation Consolidated Financial Statements | ||
Reports of Independent Registered Public Accounting Firm | F-1 | |
Consolidated Balance Sheets as of December 31, 2009 and 2008 | F-3 | |
Consolidated
Statements of Operations for the Years Ended
December 31, 2009, 2008 and 2007
|
F-4 | |
Consolidated
Statements of Stockholders’ Equity for the Years Ended
December 31, 2009, 2008
and 2007
|
F-5 | |
Consolidated
Statements of Cash Flows for the Years Ended December
31, 2009, 2008 and 2007
|
F-6 | |
Notes to Consolidated Financial Statements | F-7 | |
(2) Financial
Statement Schedules
|
||
Financial
statement schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or the Notes
thereto.
|
||
(3) Exhibits | ||
Refer to Item 15(b) below. |
(b)
|
Exhibits.
The following exhibits are either filed herewith or incorporated herein by
reference:
|
Exhibit
Number
|
Description
|
2.1
|
Agreement
and Plan of Merger of Acacia Research Corporation, a California
corporation, and Acacia Research Corporation, a Delaware corporation,
dated as of December 23, 1999 (1)
|
2.2
|
Agreement
and Plan of Reorganization by and among Acacia Research Corporation, Combi
Acquisition Corp. and CombiMatrix Corporation dated as of March 20, 2002
(2)
|
3.1
|
Amended
and Restated Certificate of Incorporation (3)
|
3.2
|
Amended
and Restated Bylaws (13)
|
3.2.1
|
Amendment
to Amended and Restated Bylaws (14)
|
10.1*
|
Acacia
Research Corporation 1996 Stock Option Plan, as amended
(4)
|
10.2*
|
Form
of Option Agreement constituting the Acacia Research Corporation 1996
Executive Stock Bonus Plan (5)
|
10.3*
|
2002
Acacia Technologies Stock Incentive Plan (6)
|
10.4*
|
2007 Acacia
Technologies Stock Incentive Plan (7)
|
10.5*
|
Form
of Acacia Technologies Stock Option Agreement for the 2007 Acacia
Technologies Stock Incentive Plan (8)
|
10.6*
|
Form
of Acacia Technologies Stock Issuance Agreement for the 2002 Acacia
Technologies Stock Incentive Plan (8)
|
10.7*
|
Form
of Acacia Technologies Stock Issuance Agreement for the 2007 Acacia
Technologies Stock Incentive Plan (8)
|
10.8
|
Lease
Agreement dated January 28, 2002, between Acacia Research Corporation and
The Irvine Company (9)
|
10.10
|
Form
of Indemnification Agreement (10)
|
10.11
|
Form
of Subscription Agreement between Acacia Research Corporation and certain
investors (11)
|
10.12
|
Third
Amendment to lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company (12)
|
10.19*
|
Employment
Agreement, dated January 28, 2005, by and between Acacia Technologies
Services Corporation, and Dooyong Lee, as amended
(13)
|
40
10.19.1*
|
Amendment
to Employment Agreement, dated December 17, 2008, by and between Acacia
Technologies, LLC and Dooyong Lee (16)
|
10.20*
|
Employment
Agreement, dated April 12, 2004, by and between Acacia Media Technologies
Corporation and Edward Treska (13)
|
10.20.1*
|
Addendum
to Employment Agreement with Edward Treska, dated March 31, 2008
(15)
|
10.21
|
Fourth
Amendment to Lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company (13)
|
10.22
|
Fifth
Amendment to Lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company (13)
|
10.23*
|
Employment
Agreement, dated March 31, 2008, by and between Acacia Technologies, LLC
and Paul Ryan (15)
|
10.23.1*
|
Amendment
to Employment Agreement, dated December 17, 2008, by and between Acacia
Technologies, LLC and Paul Ryan (16)
|
10.24*
|
Employment
Agreement, dated March 31, 2008, by and between Acacia Technologies, LLC
and Robert L. Harris (15)
|
10.24.1*
|
Amendment
to Employment Agreement, dated December 17, 2008, by and between Acacia
Technologies, LLC and Robert L. Harris (16)
|
10.25*
|
Amended
Employment Agreement, dated March 31, 2008, by and between Acacia
Technologies, LLC and Clayton J. Haynes (15)
|
10.25.1*
|
Amendment
to Amended Employment Agreement, dated December 17, 2008, by and between
Acacia Technologies, LLC and Clayton J. Haynes (16)
|
10.26*
|
Amended
Acacia Research Corporation Executive Severance Policy
(16)
|
18.1
|
Preferability
Letter dated February 25, 2010 from Grant Thornton LLP, Acacia Research
Corporation’s registered independent accounting firm, regarding
change in accounting principle
|
21.1
|
List
of Subsidiaries
|
23.1
|
Consent
of Independent Registered Public Accounting Firm
|
24.1
|
Power
of Attorney (included in the signature page hereto).
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934
|
32.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C. Section
1350
|
32.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C. Section
1350
|
___________________________
*
|
The
referenced exhibit is a management contract, compensatory plan or
arrangement.
|
(1)
|
Incorporated
by reference to Acacia Research Corporation’s Current Report on Form 8-K
filed on December 30, 1999 (SEC File No.
000-26068).
|
(2)
|
Incorporated
by reference to Appendix A to the Proxy Statement/Prospectus which formed
part of Acacia Research Corporation’s Registration Statement on Form S-4
(SEC File No. 333-87654) which became effective on November 8,
2002.
|
(3)
|
Incorporated
by reference to Acacia Research Corporation’s Current Report on Form 8-K
filed on June 5, 2008 (SEC File No.
000-26068).
|
(4)
|
Incorporated
by reference to Appendix A to Acacia Research Corporation’s Definitive
Proxy Statement on Schedule 14A filed on April 10, 2000 (SEC File No.
000-26068).
|
(5)
|
Incorporated
by reference to Appendix A to Acacia Research Corporation’s Definitive
Proxy Statement on Schedule 14A filed on April 26, 1996 (SEC File No.
000-26068).
|
41
(6)
|
Incorporated
by reference to Appendix E to the Proxy Statement/Prospectus which formed
part of Acacia Research Corporation’s Registration Statement on Form S-4
(SEC File No. 333-87654) which became effective on November 8,
2002.
|
(7)
|
Incorporated
by reference to Acacia Research Corporation’s Registration Statement on
Form S-8 (SEC File No. 333-144754) which became effective on July 20,
2007.
|
(8)
|
Incorporated
by reference to Acacia Research Corporation’s Quarterly Report on Form
10-Q for the period ended September 30, 2007, filed on November 2, 2007
(SEC File No. 000-26068).
|
(9)
|
Incorporated
by reference to Acacia Research Corporation’s Annual Report on
Form 10-K for the year ended December 31, 2001, filed on
March 27, 2002 (SEC File
No. 000-26068).
|
(10)
|
Incorporated
by reference to Acacia Research Corporation’s Annual Report on Form 10-K
for the year ended December 31, 2002, filed on March 27, 2003 (SEC File
No. 000-26068).
|
(11)
|
Incorporated
by reference to Acacia Research Corporation’s Current Report on Form 8-K
filed on September 19, 2005 (SEC File No.
000-26068).
|
(12)
|
Incorporated
by reference to Acacia Research Corporation’s Quarterly Report on Form
10-Q for the period ended March 31, 2006, filed on May 10, 2006 (SEC File
No. 000-26068).
|
(13)
|
Incorporated
by reference to Acacia Research Corporation’s Annual Report on Form 10-K
for the year ended December 31, 2007, filed on March 14, 2008 (File No.
000-26068).
|
(14)
|
Incorporated
by reference to Acacia Research Corporation’s Current Report on Form 8-K
filed on January 7, 2008 (File No.
000-26068).
|
(15)
|
Incorporated
by reference to Acacia Research Corporation’s Current Report on Form 8-K
filed on April 2, 2008 (SEC File No.
000-26068).
|
(16)
|
Incorporated
by reference to Acacia Research Corporation’s Annual Report on Form 10-K
for the year ended December 31, 2008, filed on February 26, 2009 (File No.
000-26068).
|
42
SIGNATURES
Pursuant to the requirements of
Section 13 or 15(d) 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 | |||
Dated: February
25, 2010
|
By:
|
/s/ Paul R. Ryan | |
Paul R. Ryan | |||
Chairman
of the Board
and
Chief Executive Officer
(Authorized
Signatory)
|
POWER
OF ATTORNEY
We, the
undersigned directors and officers of Acacia Research Corporation, do hereby
constitute and appoint Paul R. Ryan and Clayton J. Haynes, and each of them, as
our true and lawful attorneys-in-fact and agents with power of substitution, to
do any and all acts and things in our name and behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
names in the capacities indicated below, which said attorney-in-fact and agent
may deem necessary or advisable to enable said corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Annual Report on Form 10-K, including specifically but without limitation, power
and authority to sign for us or any of us in our names in the capacities
indicated below, any and all amendments hereto; and we do hereby ratify and
confirm all that said attorney-in-fact and agent, shall do or cause to be done
by virtue hereof.
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and the
capacities and on the dates indicated.
Signature | Title | Date | |||
/s/ | Paul R. Ryan | Chairman of the Board and | February 25, 2010 | ||
Paul R. Ryan | Chief Executive Officer | ||||
(Principal Chief Executive) | |||||
/s/ | Robert L. Harris, II | Director and President | February 25, 2010 | ||
Robert L. Harris, II | |||||
/s/ | Clayton J. Haynes | Chief Financial Officer and Treasurer | February 25, 2010 | ||
Clayton J. Haynes | (Principal Financial and Accounting Officer) | ||||
/s/ | Fred A. de Boom | Director | February 25, 2010 | ||
Fred A. de Boom | |||||
/s/ | Edward W. Frykman | Director | February 25, 2010 | ||
Edward W. Frykman | |||||
/s/ | G. Louis Graziadio, III | Director | February 25, 2010 | ||
G. Louis Graziadio, III | |||||
/s/ | William S. Anderson | Director | February 25, 2010 | ||
William S. Anderson |
43
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Acacia
Research Corporation
We have
audited the accompanying consolidated balance sheets of Acacia Research
Corporation (a Delaware corporation) as of December 31, 2009 and 2008, and
the related consolidated statements of operations, stockholders’ equity, and
cash flows for each for the three years in the period ended December 31, 2009.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Acacia Research Corporation
as of December 31, 2009 and 2008, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of
America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Acacia Research Corporation’s internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 25, 2010 expressed an
unqualified opinion thereon.
As
discussed in Note 8, the Company elected to change its method of accounting for
term license agreements in 2009.
/s/ GRANT
THORNTON LLP
Irvine,
California
February
25, 2010
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Acacia
Research Corporation
We have
audited Acacia Research Corporation’s (a Delaware corporation) internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Acacia Research Corporation’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to
express an opinion on Acacia Research Corporation’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Acacia Research Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control—Integrated
Framework issued by COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Acacia
Research Corporation as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2009 and our report
dated February 25, 2010 expressed an unqualified opinion and contained an
explanatory paragraph relating to the change in accounting method for term
license agreements.
/s/ GRANT
THORNTON LLP
Irvine,
California
February
25, 2010
F-2
ACACIA
RESEARCH CORPORATION
CONSOLIDATED
BALANCE SHEETS
As
of December 31, 2009 and 2008
(In
thousands, except share and per share information)
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 51,735 | $ | 48,279 | ||||
Accounts
receivable
|
5,110 | 7,436 | ||||||
Prepaid
expenses and other current assets
|
1,081 | 1,255 | ||||||
Total
current assets
|
57,926 | 56,970 | ||||||
Property
and equipment, net of accumulated depreciation
|
163 | 221 | ||||||
Patents,
net of accumulated amortization
|
17,510 | 12,419 | ||||||
Investments
- noncurrent
|
2,152 | 3,239 | ||||||
Other
assets
|
505 | 225 | ||||||
$ | 78,256 | $ | 73,074 | |||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$ | 8,006 | $ | 3,240 | ||||
Royalties
and contingent legal fees payable
|
12,402 | 10,770 | ||||||
Deferred
revenues
|
1,510 | 318 | ||||||
Total
current liabilities
|
21,918 | 14,328 | ||||||
Other
liabilities
|
369 | 199 | ||||||
Total
liabilities
|
22,287 | 14,527 | ||||||
Commitments
and contingencies (Note 13)
|
||||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, par value $0.001 per share; 10,000,000 shares authorized; no shares
issued or outstanding
|
- | - | ||||||
Common
stock, par value $0.001 per share; 100,000,000 shares authorized;
31,912,066 and 30,884,994 shares issued and outstanding as of December 31,
2009 and December 31, 2008, respectively
|
32 | 31 | ||||||
Additional
paid-in capital
|
173,672 | 167,468 | ||||||
Accumulated
deficit
|
(120,242 | ) | (108,952 | ) | ||||
Total
Acacia Research Corporation stockholders' equity
|
53,462 | 58,547 | ||||||
Noncontrolling
interests in operating subsidiary
|
2,507 | - | ||||||
Total
stockholders' equity
|
55,969 | 58,547 | ||||||
$ | 78,256 | $ | 73,074 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
ACACIA
RESEARCH CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Years Ended December 31, 2009, 2008 and 2007
(In
thousands, except share and per share information)
2009
|
2008
|
2007
|
||||||||||
License
fee revenues
|
$ | 67,340 | $ | 48,227 | $ | 52,597 | ||||||
Operating
costs and expenses:
|
||||||||||||
Cost
of revenues:
|
||||||||||||
Inventor
royalties
|
15,673 | 14,995 | 12,050 | |||||||||
Contingent
legal fees
|
15,945 | 12,429 | 17,174 | |||||||||
Litigation
and licensing expenses - patents
|
14,055 | 6,900 | 7,799 | |||||||||
Amortization
of patents
|
4,634 | 6,043 | 5,583 | |||||||||
Marketing,
general and administrative expenses (including non-cash stock compensation
expense of $7,065 for 2009, $7,355 for 2008 and $5,908 for
2007)
|
21,070 | 21,130 | 18,381 | |||||||||
Research,
consulting and other expenses - business development
|
1,689 | 933 | 886 | |||||||||
Write-off
of patent-related intangible asset
|
- | - | 235 | |||||||||
Total
operating costs and expenses
|
73,066 | 62,430 | 62,108 | |||||||||
Operating
loss
|
(5,726 | ) | (14,203 | ) | (9,511 | ) | ||||||
Other
income (expense):
|
||||||||||||
Interest
income
|
148 | 1,056 | 2,359 | |||||||||
Gain
on foreign currency translation
|
201 | - | - | |||||||||
Loss
on investments
|
(47 | ) | (486 | ) | - | |||||||
Total
other income (expense)
|
302 | 570 | 2,359 | |||||||||
Loss
from continuing operations before provision for income
taxes
|
(5,424 | ) | (13,633 | ) | (7,152 | ) | ||||||
Provision
for income taxes
|
(209 | ) | (124 | ) | (207 | ) | ||||||
Net
loss from continuing operations including noncontrolling interests in
operating subsidiary
|
(5,633 | ) | (13,757 | ) | (7,359 | ) | ||||||
Net
income attributable to noncontrolling interests in operating
subsidiary
|
(5,657 | ) | - | - | ||||||||
Net
loss from continuing operations attributable to Acacia Research
Corporation
|
(11,290 | ) | (13,757 | ) | (7,359 | ) | ||||||
Discontinued
operations:
|
||||||||||||
Loss
from discontinued operations - Split-off of CombiMatrix
Corporation
|
- | - | (8,086 | ) | ||||||||
Net
loss attributable to Acacia Research Corporation
|
$ | (11,290 | ) | $ | (13,757 | ) | $ | (15,445 | ) | |||
Loss
per common share:
|
||||||||||||
Acacia
Research Corporation common stock:
|
||||||||||||
Net
loss
|
$ | (11,290 | ) | $ | (13,757 | ) | $ | (7,359 | ) | |||
Basic
and diluted loss per share
|
(0.38 | ) | (0.47 | ) | (0.26 | ) | ||||||
Acacia
Research - CombiMatrix stock - Discontinued Operations - Split-off of
CombiMatrix Corporation:
|
||||||||||||
Loss
from discontinued operations - Split-off of CombiMatrix
Corporation
|
- | - | $ | (8,086 | ) | |||||||
Basic
and diluted loss per share
|
- | - | (0.14 | ) | ||||||||
Weighted-average
shares:
|
||||||||||||
Acacia
Research Corporation common stock:
|
||||||||||||
Basic
and diluted
|
29,914,801 | 29,423,998 | 28,503,314 | |||||||||
Acacia
Research - CombiMatrix stock:
|
||||||||||||
Basic
and diluted
|
- | - | 55,862,707 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
ACACIA
RESEARCH CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
For
the Years Ended December 31, 2009, 2008 and 2007
(In
thousands, except share information)
|
||||||||||||||||||||||||||||||||||||
AR-Acacia Technologies |
AR-CombiMatrix
|
AR-Acacia Technologies |
AR-CombiMatrix
|
Additional
|
Other
|
Noncontrolling Interests
in |
||||||||||||||||||||||||||||||
Common
|
Common
|
Common
|
Common
|
Paid-in
|
Comprehensive
|
Accumulated
|
Operating
|
|||||||||||||||||||||||||||||
Shares(1)
|
Shares(1)
|
Stock(1)
|
Stock(1)
|
Capital
|
Income
(Loss)
|
Deficit
|
Subsidiary
|
Total
|
||||||||||||||||||||||||||||
2007
|
||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2006
|
28,231,701 | 50,365,810 | $ | 28 | $ | 50 | $ | 326,599 | $ | 2 | $ | (232,370 | ) | $ | - | $ | 94,309 | |||||||||||||||||||
Activities
related to continuing operations:
|
||||||||||||||||||||||||||||||||||||
Net
loss from continuing operations
|
- | - | - | - | - | - | (7,359 | ) | - | (7,359 | ) | |||||||||||||||||||||||||
Stock
options exercised
|
1,062,513 | - | 1 | - | 5,013 | - | - | - | 5,014 | |||||||||||||||||||||||||||
Compensation
expense relating to stock options and restricted stock
awards
|
808,268 | - | 1 | - | 5,908 | - | - | - | 5,909 | |||||||||||||||||||||||||||
Unrealized
loss on short-term investments
|
- | - | - | - | - | (21 | ) | - | - | (21 | ) | |||||||||||||||||||||||||
Other
|
- | - | - | - | - | - | (55 | ) | - | (55 | ) | |||||||||||||||||||||||||
Activities
related to discontinued operations - Split-off of CombiMatrix
Corporation:
|
||||||||||||||||||||||||||||||||||||
Loss
from discontinued operations - Split-off of CombiMatrix
Corporation
|
- | - | - | - | - | - | (8,086 | ) | - | (8,086 | ) | |||||||||||||||||||||||||
Stock
options and warrants exercised and units issued in direct offering, net
offering costs
|
- | 9,203,959 | - | 10 | 480 | - | - | - | 490 | |||||||||||||||||||||||||||
Compensation
expense relating to stock options
|
- | - | - | - | 726 | - | - | - | 726 | |||||||||||||||||||||||||||
Warrant
liability
|
- | - | - | - | 9,089 | - | - | - | 9,089 | |||||||||||||||||||||||||||
Stock
issued to consultant
|
- | 306,000 | - | - | 208 | - | - | - | 208 | |||||||||||||||||||||||||||
Unrealized
gain on short-term investments
|
- | - | - | - | - | 13 | - | - | 13 | |||||||||||||||||||||||||||
Other
|
- | - | - | - | 11 | - | - | - | 11 | |||||||||||||||||||||||||||
Discontinued
operations - Split-off of CombiMatrix Corporation
|
- | (59,875,769 | ) | - | (60 | ) | (188,062 | ) | 3 | 152,675 | - | (35,444 | ) | |||||||||||||||||||||||
Balance
at December 31, 2007
|
30,102,482 | - | 30 | - | 159,972 | (3 | ) | (95,195 | ) | - | 64,804 | |||||||||||||||||||||||||
2008
|
- | |||||||||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | (13,757 | ) | - | (13,757 | ) | |||||||||||||||||||||||||
Stock
options exercised
|
38,079 | - | - | - | 142 | - | - | - | 142 | |||||||||||||||||||||||||||
Compensation
expense relating to stock options and restricted stock
awards
|
744,433 | - | 1 | - | 7,354 | - | - | - | 7,355 | |||||||||||||||||||||||||||
Unrealized
gain on short-term investments
|
- | - | - | - | - | 3 | - | - | 3 | |||||||||||||||||||||||||||
Balance
at December 31, 2008
|
30,884,994 | - | 31 | - | 167,468 | - | (108,952 | ) | - | 58,547 | ||||||||||||||||||||||||||
2009
|
||||||||||||||||||||||||||||||||||||
Net
loss attributable to Acacia Research Corporation
|
- | - | - | - | - | - | (11,290 | ) | - | (11,290 | ) | |||||||||||||||||||||||||
Stock
options exercised
|
94,700 | - | - | - | 247 | - | - | - | 247 | |||||||||||||||||||||||||||
Repurchased
restricted common stock
|
(174,628 | ) | - | - | - | (1,107 | ) | - | - | - | (1,107 | ) | ||||||||||||||||||||||||
Compensation
expense relating to stock options and restricted stock
awards
|
1,107,000 | - | 1 | - | 7,064 | - | - | - | 7,065 | |||||||||||||||||||||||||||
Net
income attributable to noncontrolling interests in operating
subsidiary
|
- | - | - | - | - | - | - | 5,657 | 5,657 | |||||||||||||||||||||||||||
Distributions
of noncontrolling interests in operating subsidiary
|
- | - | - | - | - | - | - | (3,150 | ) | (3,150 | ) | |||||||||||||||||||||||||
Balance
at December 31, 2009
|
31,912,066 | - | $ | 32 | $ | - | $ | 173,672 | $ | - | $ | (120,242 | ) | $ | 2,507 | $ | 55,969 |
_______________________________________________________
1 – Prior
to the Redemption date, Acacia’s AR-Acacia Technologies common stock and
AR-CombiMatrix common stock were classified as redeemable in the consolidated
statements of stockholder’s equity. As a result of the Split-Off
Transaction and related redemption of all shares of AR-CombiMatrix common stock
discussed at Note 11, and the amendment and restatement of Acacia’s Certificate
of Incorporation discussed at Note 9, as of August 15, 2007, Acacia’s only class
of stock authorized and issuable is its “common stock” and Acacia's common stock
is no longer redeemable.
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
ACACIA
RESEARCH CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Years Ended December 31, 2009, 2008 and 2007
(In
thousands)
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss including noncontrolling interests in operating
subsidiary
|
$ | (5,633 | ) | $ | (13,757 | ) | $ | (15,445 | ) | |||
Adjustments
to reconcile net loss to net cash provided by operating activities from
continuing operations:
|
||||||||||||
Discontinued
operations - Split-off of CombiMatrix Corporation
|
- | - | 8,086 | |||||||||
Depreciation
and amortization
|
4,759 | 6,174 | 5,702 | |||||||||
Non-cash
stock compensation
|
7,065 | 7,355 | 5,908 | |||||||||
Write-off
of patent-related intangible asset
|
- | - | 235 | |||||||||
Loss
on investments
|
47 | 486 | - | |||||||||
Other
|
- | 6 | 112 | |||||||||
Changes
in assets and liabilities:
|
||||||||||||
Accounts
receivable
|
2,326 | (6,027 | ) | (1,140 | ) | |||||||
Prepaid
expenses, deferred fees and other assets
|
(106 | ) | 99 | (193 | ) | |||||||
Accounts
payable and accrued expenses
|
4,863 | (162 | ) | 1,281 | ||||||||
Royalties
and contingent legal fees payable
|
1,632 | 8,427 | 659 | |||||||||
Deferred
revenues
|
1,192 | (3 | ) | (39 | ) | |||||||
Net
cash provided by operating activities from continuing
operations
|
16,145 | 2,598 | 5,166 | |||||||||
Net
cash provided by (used in) operating activities from discontinued
operations
|
(27 | ) | 2 | (7,782 | ) | |||||||
Net
cash provided by (used in) operating activities
|
16,118 | 2,600 | (2,616 | ) | ||||||||
Cash
flows from investing activities:
|
||||||||||||
Purchase
of property and equipment
|
(67 | ) | (28 | ) | (223 | ) | ||||||
Purchase
of available-for-sale investments
|
- | (265 | ) | (13,035 | ) | |||||||
Sale
of available-for-sale investments
|
1,040 | 7,503 | 14,873 | |||||||||
Business
acquisition
|
- | - | - | |||||||||
Patent
acquisition costs
|
(9,625 | ) | (2,140 | ) | (3,760 | ) | ||||||
Net
cash provided by (used in) investing activities from continuing
operations
|
(8,652 | ) | 5,070 | (2,145 | ) | |||||||
Net
cash used in investing activities from discontinued
operations
|
- | - | (5,199 | ) | ||||||||
Net
cash provided by (used in) investing activities
|
(8,652 | ) | 5,070 | (7,344 | ) | |||||||
Cash
flows from financing activities:
|
||||||||||||
Distributions
of noncontrolling interests in operating subsidiary
|
(3,150 | ) | - | - | ||||||||
Repurchased
restricted common stock
|
(1,107 | ) | - | - | ||||||||
Proceeds
from the exercise of stock options
|
247 | 142 | 5,014 | |||||||||
Net
cash provided by (used in) financing activities from continuing
operations
|
(4,010 | ) | 142 | 5,014 | ||||||||
Net
cash provided by financing activities from discontinued
operations
|
- | - | 5,369 | |||||||||
Net
cash provided by (used in) financing activities
|
(4,010 | ) | 142 | 10,383 | ||||||||
Increase
in cash and cash equivalents
|
3,456 | 7,812 | 423 | |||||||||
Cash
and cash equivalents, beginning (including cash and cash equivalents
related to discontinued operations - split-off of CombiMatrix Corporation
of $7,829 at December 31, 2006)
|
48,279 | 40,467 | 40,044 | |||||||||
Cash
and cash equivalents of continuing operations, ending
|
$ | 51,735 | $ | 48,279 | $ | 40,467 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
DESCRIPTION OF BUSINESS
Description of Business. As
used herein, “Acacia” and the “Company” refer to Acacia Research Corporation
and/or its wholly and majority-owned operating subsidiaries. All
intellectual property acquisition, development, licensing and enforcement
activities are conducted solely by certain of Acacia’s wholly and majority-owned
operating subsidiaries.
Acacia’s
operating subsidiaries acquire, develop, license and enforce patented
technologies. Acacia’s operating subsidiaries generate license fee
revenues and related cash flows from the granting of licenses for the use of
patented technologies that its operating subsidiaries own or
control. Acacia’s operating subsidiaries assist patent owners with
the prosecution and development of their patent portfolios, the protection of
their patented technologies from unauthorized use, the generation of licensing
revenue from users of their patented technologies and, if necessary, the
enforcement against unauthorized users of their patented technologies.
Currently, on a consolidated basis, Acacia’s operating subsidiaries own or
control the rights to over 140 patent portfolios, which include U.S. patents and
certain foreign counterparts, covering technologies used in a wide variety of
industries.
CombiMatrix Group Split-Off
Transaction and Related Discontinued Operations. In January
2006, Acacia’s board of directors approved a plan for its former wholly owned
subsidiary, CombiMatrix Corporation (“CombiMatrix”), the primary component of
Acacia’s life science business (the “CombiMatrix group”), to become an
independent publicly-held company. On August 15, 2007 (the
“Redemption Date”), CombiMatrix was split-off from Acacia through the redemption
of all outstanding shares of Acacia Research-CombiMatrix common stock in
exchange for the distribution of new shares of CombiMatrix common stock, on a
pro-rata basis, to the holders of Acacia Research-CombiMatrix common stock on
the Redemption Date (the “Split-Off Transaction”). On the Redemption Date, every
ten (10) shares of Acacia Research-CombiMatrix common stock outstanding on
August 15, 2007, was redeemed for one (1) share of common stock of
CombiMatrix. Subsequent to the Redemption Date, Acacia no longer owns
any equity interests in CombiMatrix and the CombiMatrix group is no longer a
business group of Acacia. As a result of the Split-Off Transaction,
Acacia’s only business is its intellectual property licensing
business.
As a
result of the Split-Off Transaction, Acacia disposed of its investment in
CombiMatrix. Refer to Note 11 for information regarding presentation
of the results of operations and cash flows for the CombiMatrix group as
“Discontinued Operations” in the accompanying consolidated financial statements
for all applicable historical periods presented.
Capital
Structure. Pursuant to the Split-Off Transaction, all
outstanding shares of Acacia Research-CombiMatrix common stock were redeemed,
and hence, all rights of holders of Acacia Research-CombiMatrix common stock
ceased as of the Redemption Date, except for the right, upon the surrender to
the exchange agent of shares of Acacia Research-CombiMatrix common stock, to
receive new shares of CombiMatrix common stock pursuant to the exchange ratio
described above. Subsequent to the consummation of the Split-Off
Transaction, Acacia’s only class of common stock outstanding is its common
stock.
Prior to
the Split-Off Transaction, Acacia 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’s Acacia Technologies
group. AR-CombiMatrix Stock was intended to reflect separately the
performance of Acacia’s CombiMatrix group. Although the AR-Acacia
Technologies Stock and the AR-CombiMatrix Stock were intended to reflect the
performance of the different business groups, they were both classes of common
stock of Acacia and were not stock issued by the respective groups.
Acacia
was incorporated on January 25, 1993 under the laws of the State of California.
In December 1999, it changed its state of incorporation from California to
Delaware.
F-7
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Liquidity
and Risks
Acacia’s
management believes that Acacia’s consolidated cash and cash equivalents and
investment balances, anticipated cash flow from operations and other external
sources of available credit will be sufficient to meet Acacia’s cash
requirements, on a consolidated basis, through at least March
2011. To date, Acacia has relied primarily upon selling equity
securities and payments from its licensees to generate the funds needed to
finance the implementation of its plans of operation for its operating
subsidiaries.
There can
be no assurance that Acacia will be able to implement its future
plans. Failure by management to achieve its plans would have a
material adverse effect on Acacia’s ability to achieve its intended business
objectives. Acacia may be required to obtain additional
financing. There can be no assurance that additional funding will be
available on favorable terms, if at all. If Acacia fails to obtain
additional funding when needed, it may not be able to execute its business plans
and its businesses may suffer.
The
timing of the receipt of revenues by Acacia’s operating subsidiaries are subject
to certain risks and uncertainties, including:
|
·
|
market
acceptance of its operating subsidiaries’ patented technologies and
services;
|
|
·
|
business
activities and financial results of its
licensees;
|
|
·
|
technological
advances that may make its patented technologies obsolete or less
competitive;
|
|
·
|
increases
in operating costs, including costs for legal services, engineering and
research and personnel;
|
|
·
|
the
availability and cost of capital;
and
|
|
·
|
governmental
regulation that may restrict Acacia’s
business.
|
Acacia’s
success also depends on its operating subsidiaries’ ability to protect their
intellectual property. The Company’s operating subsidiaries rely on
their proprietary rights and their protection. Although reasonable
efforts will be taken to protect Acacia’s operating subsidiaries’ proprietary
rights, the complexity of international trade secret, copyright, trademark and
patent law, and common law, coupled with limited resources and the demands of
quick delivery of technologies to market, create risk that these efforts will
prove inadequate. Accordingly, if Acacia’s operating subsidiaries are
unsuccessful with litigation to protect their intellectual property rights, the
future consolidated revenues of Acacia could be adversely
affected.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles and Fiscal
Year End. The consolidated financial statements and
accompanying notes are prepared on the accrual basis of accounting in accordance
with generally accepted accounting principles in the United States of
America. Acacia has a December 31 fiscal year end.
Principles of
Consolidation. The accompanying consolidated financial
statements include the accounts of Acacia and its wholly and majority-owned
subsidiaries, which have been consolidated pursuant to Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 810, “Consolidation” (“ASC Topic 810”). Material
intercompany transactions and balances have been eliminated in
consolidation.
F-8
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
ASC Topic
810 establishes accounting and reporting standards requiring the identification
of and distinction between ownership interests in subsidiaries held by the
parent and ownership interests in subsidiaries held by the noncontrolling
interest owners. ASC Topic 810 requires the noncontrolling interests in Acacia’s
majority-owned operating subsidiary to be separately presented as a component of
stockholders’ equity on the consolidated statement of financial position for the
applicable periods presented. In addition, ASC Topic 810 requires
that consolidated net income or loss be adjusted to include the net income or
loss attributed to the noncontrolling interests in the majority-owned operating
subsidiary on the consolidated statements of operations for the applicable
periods presented. Refer to the accompanying consolidated balance
sheet for noncontrolling interests in Acacia’s majority-owned operating
subsidiary as of December 31, 2009 and the accompanying consolidated statement
of operation for the year ended December 31, 2009 for the net income
attributable to noncontrolling interests in Acacia’s majority-owned operating
subsidiary.
Change in Accounting Policy for Term
License Agreements. Certain
license agreements provide for the payment of a minimum upfront annual license
fee at the inception of each annual license term, hereinafter referred to as
“term license agreements.” Effective October 1, 2009, the Company
elected to change its method of accounting for its term license agreements to
recognize revenue when delivery of the license has occurred, which is typically
at the time of execution of the related license agreement, or upon receipt of
the applicable minimum upfront annual renewal license fee payment, and when all
other revenue recognition criteria, as described below, have been
met. Prior to the change in method of accounting, license fees
for term license agreements were deferred and amortized to revenue on a
straight-line basis over the applicable contractual license
term. Refer to Note 8 for additional information.
Revenue
Recognition. Acacia recognizes revenue in accordance with ASC
Topic 605, “Revenue Recognition.” Revenue is recognized when (i)
persuasive evidence of an arrangement exists, (ii) all obligations have been
substantially performed pursuant to the terms of the license agreement, (iii)
amounts are fixed or determinable and (iv) collectibility of amounts is
reasonably assured.
Revenues
generated from license agreements are recognized in the period earned, provided
that amounts are fixed or determinable and collectibility is reasonably
assured. Under the terms of Acacia’s license agreements, Acacia’s
operating subsidiaries grant non-exclusive licenses for the use of patented
technologies, which they own or control. In general, pursuant to the
terms of the agreements with licensees, upon the grant of the licenses, Acacia
has no further obligations with respect to the licenses
granted. License fees paid to and recognized as revenue by Acacia’s
subsidiaries are non-refundable.
Certain
license agreements provide for the payment of contractually determined paid-up
license fees in consideration for the grant of a non-exclusive, retroactive and
future license to manufacture and/or sell products covered by patented
technologies owned or controlled by Acacia’s operating
subsidiaries. The licenses granted may be perpetual in nature,
extending until the expiration of the related patents. In addition,
the licenses granted may be granted for a defined, relatively short period of
time, typically one-year periods, with the licensee possessing the right to
renew the license at the end of each annual license term for an additional
minimum upfront license fee payment. Generally, the execution of
these license agreements also provide for the release of the licensee from
certain claims and the dismissal of any pending litigation. Pursuant
to the terms of these agreements, Acacia’s operating subsidiaries have no
further obligation with respect to the grant of the non-exclusive retroactive
and future license and related releases, including no express or implied
obligation on Acacia’s operating subsidiaries’ part to maintain or upgrade the
technology, or provide future support or services. Generally, the
agreements provide for the grant of the license and releases upon execution of
the agreement, or upon receipt of the minimum annual upfront license fee payment
for annual term license agreement renewals. As such, the earnings
process is complete and revenue is recognized upon the execution of the
agreement, when collectibility is reasonably assured, or upon receipt of the
minimum annual upfront license fee for term license agreement renewals, and when
all other revenue recognition criteria have been met.
Certain
of the agreements also provide for future royalties or additional required
payments based on future licensee activities. Additional royalties
are recognized in revenue upon resolution of the related contingency provided
that all revenue recognition criteria, as described above have been
met. Amounts of additional royalties due under these license
agreements, if any, cannot be reasonably estimated by management.
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 within 30 to 45 days
after the end of the quarter in which such sales or activity takes
place. The amount of license fees due under these license agreements
each quarter cannot be reasonably estimated by
management. Consequently, Acacia’s operating subsidiaries recognize
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.
F-9
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
License
fee payments received that do not meet the revenue recognition criteria
described above are deferred until the revenue recognition criteria are
met.
Acacia
assesses the collectibility of license fees receivable based on a number of
factors, including past transaction history and credit-worthiness of
licensees. 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.
Cost of
Revenues. Cost of revenues include the costs and expenses
incurred in connection with Acacia’s patent licensing and enforcement
activities, including inventor royalties paid to original patent owners,
contingent legal fees paid to external patent counsel, litigation and licensing
expense – patents, which includes patent-related legal expenses paid to external
patent counsel, licensing and enforcement related research, consulting and other
expenses paid to third parties, and the
amortization of patent-related acquisition costs. These costs are
included under the caption “Cost of revenues” in the accompanying consolidated
statements of operations. Refer to Note 13 for additional information
regarding inventor royalties expenses and contingent legal fee
expenses.
Reclassifications. Certain
operating costs and expenses previously reported for the years ended December
31, 2008 and 2007 have been reclassified to conform with the current period
presentation, as follows:
As
Reported
|
Revised
|
As
Reported
|
Revised
|
|||||||||||||||||||||
2008
|
Reclass
|
2008
|
2007
|
Reclass
|
2007
|
|||||||||||||||||||
Operating
costs and expenses:
|
||||||||||||||||||||||||
Cost
of revenues:
|
||||||||||||||||||||||||
Inventor
royalties and contingent legal fees expense - patents
|
27,424 | (27,424 | ) | - | 29,224 | (29,224 | ) | - | ||||||||||||||||
Inventor
royalties
|
14,995 | 14,995 | 12,050 | 12,050 | ||||||||||||||||||||
Contingent
legal fees
|
12,429 | 12,429 | 17,174 | 17,174 | ||||||||||||||||||||
Legal
expenses - patents
|
4,949 | (4,949 | ) | - | 7,024 | (7,024 | ) | - | ||||||||||||||||
Litigation
and licensing expenses - patents
|
- | 6,900 | 6,900 | - | 7,799 | 7,799 | ||||||||||||||||||
Marketing,
general and administrative expenses (including non-cash stock
compensation expense)
|
24,014 | (2,884 | ) | 21,130 | 20,042 | (1,661 | ) | 18,381 | ||||||||||||||||
Research,
consulting and other expenses - business development
|
- | 933 | 933 | - | 886 | 886 |
Fair Value Measurements. ASC
Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”),
establishes a common definition for fair value to be applied to U.S. generally
accepted accounting principles guidance requiring use of fair value, establishes
a framework for measuring fair value, and expands disclosure about such fair
value measurements. This statement applies whenever other accounting
pronouncements require or permit fair value
measurements.
F-10
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
ASC Topic
820 defines fair value as the price that would be received for an asset or the
exit price that would be paid to transfer a liability in the principal or most
advantageous market in an orderly transaction between market participants on the
measurement date. ASC Topic 820 also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs, where available.
ASC Topic 820 established a three-level hierarchy of valuation techniques used
to measure fair value, defined as follows:
●
|
Level
1 - Observable Inputs: Quoted prices in active markets for
identical investments;
|
|
●
|
Level
2 - Pricing Models with Significant Observable Inputs: Other
significant observable inputs, including quoted prices for similar
investments, interest rates, credit risk, etc.; and
|
|
●
|
Level
3 - Unobservable Inputs: Significant unobservable inputs,
including the entity’s own assumptions in determining the fair value of
investments.
|
ASC Topic
820 requires the use of observable market inputs (quoted market prices) when
measuring fair value and requires a Level 1 quoted price to be used to measure
fair value whenever possible. Refer to Note 3 for a summary of
marketable securities held as of December 31, 2009 and 2008. Refer to
Note 7 for information on the determination of fair value for auction rate
securities held as of December 31, 2009 and 2008.
Cash and Cash
Equivalents. Acacia considers all highly liquid, short-term
investments with original maturities of three months or less when purchased to
be cash equivalents. For the periods presented, Acacia’s cash
equivalents are comprised of investments in money market funds that invest in
U.S. Treasury securities and obligations issued or guaranteed by the U.S. Government.
Acacia’s cash equivalents are measured at fair value using quoted prices that
represent Level 1 inputs under ASC Topic 820.
Investments in Marketable
Securities. Acacia’s investments in marketable securities
consist of auction rate securities. Investments in securities with
original maturities of greater than three months and less than one year and
other investments representing amounts that are available for current operations
are classified as short-term investments. Investments are classified
into categories in accordance with the provisions of ASC Topic 320,
“Investments – Debt and Equity Securities” (“ASC Topic 320”). At
December 31, 2009 and 2008, all of Acacia’s investments are classified as
available-for-sale, which are reported at fair value, in accordance with ASC
Topic 820,
with related unrealized gains and losses in the value of such securities
recorded as a separate component of comprehensive income (loss) in stockholders’
equity until realized. Realized and unrealized gains and losses are
recorded based on the specific identification method. The cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest
income (expense). Interest on all securities are included in interest
income. Refer to Note 7 for information on the fair value and
classification of auction rate securities held as of December 31, 2009 and
2008.
Impairment of
Marketable Securities. Acacia reviews impairments associated
with its investments in marketable securities in accordance ASC Topic 320,
which provides guidance on determining the classification of any impairment as
“temporary” or “other-than-temporary.” For investments
classified as available-for-sale, unrealized losses that are other than
temporary are recognized in the consolidated statement of
operations. An impairment is deemed other than temporary unless (a)
Acacia has the ability and intent to hold an investment for a period of time
sufficient for recovery of its carrying amount and (b) positive evidence
indicating that the investment's carrying amount is recoverable within a
reasonable period of time outweighs any evidence to the contrary. All available
evidence, both positive and negative, is considered to determine whether, based
on the weight of that evidence, the carrying amount of the investment is
recoverable within a reasonable period of time. Refer to Note 7 for disclosures
regarding investments in auction rate securities.
Concentration of Credit
Risks. Financial instruments that potentially subject Acacia
to concentrations of credit risk are cash equivalents, investments and accounts
receivable. Acacia places its cash equivalents and investments
primarily in highly rated money market funds and investment grade, marketable
securities. Cash equivalents are also invested in deposits with
certain financial institutions and may, at times, exceed federally insured
limits. Acacia has not experienced any significant losses on its deposits of
cash and cash equivalents.
F-11
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Two
licensees accounted for 15% and 12% of the license fee revenues recognized
during the year ended December 31, 2009. Two licensees accounted for
13% and 12% of the license fee revenues recognized during the year ended
December 31, 2008. Two licensees accounted for 19% and 12% of the
license fee revenues recognized during the year ended December 31, 2007. Two
licensees represented approximately 78% and 10% of accounts receivable at
December 31, 2009. Three licensees represented approximately 27%, 24%
and 19% of accounts receivable at December 31, 2008.
Acacia
performs regular credit evaluations of its licensees with significant receivable
balances, if any, and has not experienced any significant credit
losses. Accounts receivable are recorded at the executed contract
amount and generally do not bear interest. Collateral is not
required.
Property and
Equipment. Property and equipment are recorded at cost. Major
additions and improvements that materially extend useful lives of property and
equipment are capitalized. Maintenance and repairs are charged against the
results of operations as incurred. When these assets are sold or
otherwise disposed of, the asset and related depreciation are relieved, and any
gain or loss is included in the consolidated statements of operations for the
period of sale or disposal. Depreciation is computed on a
straight-line basis over the following estimated useful lives of the
assets:
Furniture
and fixtures
|
3
to 5 years
|
Computer
hardware and software
|
3
to 5 years
|
Leasehold
improvements
|
2
to 5 years (Lesser of lease term or useful life of
improvement)
|
Rental
payments on operating leases are charged to expense in the consolidated
statements of operations on a straight-line basis over the lease
term.
Organization
Costs. Costs of start-up activities, including organization
costs, are expensed as incurred.
Patents. Patents,
once issued or purchased, are amortized on the straight-line method over their
remaining economic useful lives, ranging from one to seven years.
Impairment of Long-lived
Assets. Acacia reviews 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.
Fair Value of Financial
Instruments. The carrying value of cash and cash equivalents,
accounts receivables, accounts payable and accrued expenses approximates their
fair values due to their short-term maturities.
Stock-Based Compensation. ASC
Topic 718, “Compensation – Stock Compensation” (“ASC Topic 718”) 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.
F-12
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 and restricted stock unit awards is determined by the product of the
number of shares or units granted and the grant date market price of the
underlying common stock.
ASC Topic
718 requires stock-based compensation expense to be recorded only for those
awards expected to vest using an estimated forfeiture rate. Acacia
estimates pre-vesting option forfeitures at the time of grant and reflects the
impact of estimated pre-vesting option forfeitures on compensation expense
recognized. To the extent that actual results differ from Acacia’s
estimates, such amounts are recorded as cumulative adjustments in the period the
estimates are revised.
Acacia
adopted ASC Topic 718 using the modified prospective transition
method. Under this transition method, compensation cost recognized
for the periods presented includes: (i) compensation cost for all
stock-based awards granted prior to, but not yet vested as of January 1,
2006 (based on the grant-date fair value estimated in accordance with the
original provisions of ASC Topic 718 and previously presented in the Company’s
pro forma footnote disclosures), and (ii) compensation cost for all
stock-based awards granted subsequent to January 1, 2006.
The fair
value of stock options granted during the year ended December 31, 2007 were
estimated using the Black-Scholes option-pricing model, assuming
weighted-average risk free interest rate of 4.64%, expected term of 5.71 years
and volatility of 68%, respectively. Due to a lack of sufficient
historical share option exercise experience, the Company utilized the simplified
method for estimating the expected term for stock options granted during the
year ended December 31, 2007. Expected volatility is based on the
historical volatility of the Company’s stock for the length of time
corresponding to the expected term of the option. The risk-free interest rate is
based on the U.S. treasury yield curve on the grant date for the expected term
of the option. There were no stock options granted during the years
ended December 31, 2009 and December 31, 2008. Refer to Note 12 for
information on stock-based awards granted for the periods
presented.
Acacia
adopted the alternative transition method provided in ASC Topic
718. The alternative transition method includes a simplified method
to establish the beginning balance of the additional paid-in-capital pool
related to the tax effects of employee stock-based compensation which is
available to absorb tax deficiencies recognized subsequent to the adoption of
ASC Topic 718.
Income
Taxes. Income taxes are accounted for using an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in Acacia’s consolidated financial statements or consolidated tax
returns. A valuation allowance is established to reduce deferred tax assets if
all, or some portion, of such assets will more than likely not be
realized.
ASC
Topic 740, “Income Taxes” (“ASC Topic 740”) provides guidance on the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return, and on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures, and
transition. In accordance with ASC Topic 740, 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 total
amount of unrecognized tax benefits as of December 31, 2009, 2008 and 2007 was
$85,000, $75,000 and $67,000, respectively, all of which, if recognized, would
affect the effective tax rate.
Acacia
recognizes interest and penalties with respect to unrecognized tax benefits in
income tax expense. Acacia has 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.
F-13
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Acacia is
subject to taxation in the U.S. and various state jurisdictions. With
no material exceptions, Acacia is no longer subject to U.S. federal or state
examinations by tax authorities for years before 2003.
At
December 31, 2009, Acacia had U.S. federal and state income tax net operating
loss carryforwards as summarized at Note 10. Due to uncertainties
surrounding Acacia’s ability to generate future taxable income to realize these
assets, a full valuation allowance has been established to offset its net
deferred tax assets. All net operating loss carryforwards (“NOLs”)
and tax credits generated by the continuing operations of Acacia and its
operating subsidiaries have been retained by Acacia subsequent to the Split-Off
Transaction. Subsequent to the Split-Off Transaction, all NOLs and
tax credits generated by CombiMatrix and its subsidiaries have been retained by
CombiMatrix and are not available to Acacia.
Utilization
of the NOL and research and development (“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’s formation, it has
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.
Acacia
has not completed a study to assess whether an ownership change has occurred or
whether there have been multiple ownership changes since its 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 Acacia has
experienced an ownership change at any time since its 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’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 ASC
Topic 740. Due to the existence of a full valuation allowance, future changes in
Acacia’s unrecognized tax benefits will not impact its 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.
Comprehensive Income
(Loss). Comprehensive income (loss) is the change in equity
from transactions and other events and circumstances other than those resulting
from investments by owners and distributions to owners. Refer to Note
15.
Segment
Reporting. Acacia uses the management approach, which
designates the internal organization that is used by management for making
operating decisions and assessing performance as the basis of Acacia’s
reportable segments. Acacia’s intellectual property licensing and
enforcement business constitutes its single reportable segment.
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. Acacia believes that, of
the significant accounting policies described herein, the accounting policies
associated with revenue recognition, stock-based compensation expense, valuation
of long-lived and intangible assets and impairment of marketable securities,
require its most difficult, subjective or complex judgments.
F-14
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 units and common stock purchase warrants
(AR-CombiMatrix stock only).
The
earnings or losses allocated to each class of common stock are determined by
Acacia’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 believes 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, for applicable periods. Subsequent to the
Split-Off Transaction, Acacia’s only class of common stock outstanding is its
Acacia Research common stock.
The
following table presents the weighted-average number of common shares
outstanding used in the calculation of basic and diluted loss per
share:
For
the Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Acacia Research
Corporation stock
|
||||||||||||
Basic
and diluted weighted-average number of common shares
outstanding
|
29,914,801 | 29,423,998 | 28,503,314 | |||||||||
All
outstanding stock options, nonvested restricted stock and restricted stock
units excluded from the computation of diluted loss per share because the
effect of inclusion would have been anti-dilutive
|
5,144,960 | 4,928,986 | 5,884,934 | |||||||||
Acacia Research -
CombiMatrix stock - Discontinued Operations - Split-off of CombiMatrix
Corporation(1)
|
||||||||||||
Basic
and diluted weighted-average number of common shares
outstanding
|
- | - | 55,862,707 | |||||||||
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 | |||||||||
Warrants
excluded from the computation of diluted loss per share because the option
exercise price was greater than the average market price of the common
shares
|
- | - | 23,838,648 |
_____________________
|
(1)
|
Reflects
activity and amounts outstanding as of the Redemption
Date.
|
F-15
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Subsequent
Events. In May 2009, the FASB
issued a new accounting standard which established general accounting
standards and disclosure for subsequent events. In accordance with this
standard, Acacia evaluated subsequent events through February 25,
2010, the date we filed this Annual Report on Form 10-K with the Securities and
Exchange Commission.
Recent
Accounting Pronouncements. In
January 2010, the FASB issued new accounting guidance related to the disclosure
requirements for fair value measurements and provides clarification for existing
disclosures requirements. This update will require (a) an entity to disclose
separately the amounts of significant transfers in and out of Levels 1 and 2
fair value measurements and to describe the reasons for the transfers; and (b)
information about purchases, sales, issuances and settlements to be presented
separately (i.e. present the activity on a gross basis rather than net) in the
reconciliation for fair value measurements using significant unobservable inputs
(Level 3 inputs). This guidance clarifies existing disclosure requirements for
the level of disaggregation used for classes of assets and liabilities measured
at fair value and requires disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value
measurements using Level 2 and Level 3 inputs. The new disclosures and
clarifications of existing disclosure are effective for fiscal years beginning
after December 15, 2009, except for the disclosure requirements for related to
the purchases, sales, issuances and settlements in the rollforward activity of
Level 3 fair value measurements. Those disclosure requirements are effective for
fiscal years ending after December 31, 2010. The Company does not believe the
adoption of this guidance will have a material impact on its consolidated
financial statements.
In
October 2009, the FASB issued new accounting guidance related to the revenue
recognition of multiple element arrangements. The new guidance states
that if vendor specific objective evidence or third party evidence of fair value
for deliverables in an arrangement cannot be determined, companies will be
required to develop a best estimate of the selling price to separate
deliverables and allocate arrangement consideration using the relative selling
price method. The accounting guidance will be applied prospectively
and will become effective during the first quarter of 2011. Early
adoption is allowed. The Company is currently evaluating the impact
of this accounting guidance on its consolidated financial
statements.
In
October 2009, the FASB issued new accounting guidance related to certain revenue
arrangements that include software elements. Previously, companies
that sold tangible products with “more than incidental” software were required
to apply software revenue recognition guidance. This guidance often
delayed revenue recognition for the delivery of the tangible
product. Under the new guidance, tangible products that have software
components that are “essential to the functionality” of the tangible product
will be excluded from the software revenue recognition guidance. The
new guidance is to be applied on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010, with earlier application permitted. The adoption
of this accounting guidance will not have an impact on Acacia’s consolidated
financial statements.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05,
“Fair Value Measurements and Disclosures (Topic 820) - Measuring Liabilities at
Fair Value.” This update provides clarification for the fair value
measurement of liabilities in circumstances in which a quoted price in an active
market for an identical liability is not available. Acacia adopted
this update effective October 1, 2009. The adoption of this update
did not have a material effect on Acacia’s financial position, results of
operations or cash flows.
In
June 2009, the FASB issued new accounting guidance related to accounting
for transfers of financial assets. The new guidance changes the
accounting for securitizations and special-purpose entities and enhances
disclosure requirements related to the transfers of financial assets, including
securitization transactions, and the continuing risk exposures related to
transferred financial assets. The new guidance also modifies the
criteria which determines whether an entity should be
consolidated. The accounting guidance will be effective for fiscal
years beginning after November 15, 2009. The adoption of these
standards will not have a material impact on Acacia’s consolidated financial
statements and related disclosures.
In June
2009, the FASB issued new accounting guidance which amends the evaluation
criteria to identify the primary beneficiary of a variable interest entity
(“VIE”) and requires ongoing reassessment of whether an enterprise is the
primary beneficiary of the VIE. The new guidance significantly
changes the consolidation rules for VIEs including the consolidation of common
structures, such as joint ventures, equity method investments and collaboration
arrangements. The guidance is applicable to all new and existing
VIEs. The provisions of this new accounting guidance is effective as
of the beginning of the first annual reporting period after November 15,
2009 and will become effective for us beginning in the first quarter of
2010. Acacia does not expect the adoption of this accounting guidance
to have a material impact on its consolidated financial statements and related
disclosures.
F-16
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
Investments
at December 31, 2009 and 2008 consist of investments in auction rate securities,
all of which are classified as available-for-sale, with fair values of
$2,152,000 and $3,239,000, respectively, and amortized costs of $2,685,000 and
$3,725,000, respectively. All of the Company’s investments in auction
rate securities are classified as noncurrent for the periods
presented. Contractual maturity dates range up to thirty-five years,
or are perpetual, with reset dates every 7 to 63 days. Refer to Note
7 for information regarding gross unrealized gains and losses related to auction
rate securities held for the periods presented. Refer to Note 2 and 7
for more information.
4.
PROPERTY AND EQUIPMENT
Property
and equipment consists of the following at December 31, 2009 and 2008 (in
thousands):
2009
|
2008
|
|||||||
Furniture
and fixtures
|
$ | 354 | $ | 312 | ||||
Computer
hardware and software
|
450 | 427 | ||||||
Leasehold
improvements
|
143 | 141 | ||||||
947 | 880 | |||||||
Less: accumulated
depreciation
|
(784 | ) | (659 | ) | ||||
$ | 163 | $ | 221 |
Depreciation
expense was $125,000, $131,000 and $119,000 for the years ended December 31,
2009, 2008 and 2007, respectively.
5.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following at December 31, 2009 and
2008 (in thousands):
2009
|
2008
|
|||||||
Accounts
payable
|
$ | 381 | $ | 208 | ||||
Payroll
and other employee benefits
|
783 | 509 | ||||||
Accrued
vacation
|
481 | 431 | ||||||
Accrued
legal expenses - patent
|
4,412 | 1,467 | ||||||
Accrued
consulting and other professional fees
|
1,833 | 485 | ||||||
Other
accrued liabilities
|
116 | 140 | ||||||
$ | 8,006 | $ | 3,240 |
F-17
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
6. PATENTS
Acacia’s
only identifiable intangible assets are patents and patent rights, with
estimated remaining economic useful lives up to seven years. The
gross carrying amounts and accumulated amortization related to acquired
intangible assets as of December 31, 2009 and 2008 are as follows (in
thousands):
2009
|
2008
|
|||||||
Gross
carrying amount -
patents
|
$ | 43,317 | $ | 33,592 | ||||
Accumulated
amortization -
patents
|
(25,807 | ) | (21,173 | ) | ||||
Patents,
net
|
$ | 17,510 | $ | 12,419 |
The
weighted-average remaining estimated economic useful life of Acacia’s patents is
five years. Aggregate patent amortization expense was $4,634,000,
$6,043,000 and $5,583,000 in 2009, 2008 and 2007,
respectively. Annual aggregate amortization expense for each of the
next five years through December 31, 2014 is estimated to be $4,946,000 in 2010,
$4,043,000 in 2011, $2,340,000 in 2012, $2,105,000 in 2013 and $1,947,000 in
2014.
For the
years ended December 31, 2009, 2008 and 2007, on a consolidated basis, Acacia’s
operating subsidiaries incurred and capitalized patent acquisition costs
totaling $9,625,000, $2,140,000 and $3,760,000, respectively, in connection with
the acquisition of the rights to several additional patent
portfolios. The patents and patent rights have estimated economic
useful lives ranging from one to seven years and are being amortized over
weighted-average economic useful lives of seven years for 2009 acquisitions,
five years for 2008 acquisitions and seven years for 2007 acquisitions. At
December 31, 2009 and 2008, all of Acacia’s acquired intangible assets were
subject to amortization.
In
December 2008, pursuant to the terms of the respective inventor agreement,
management elected to terminate its rights to exclusively license a patent
portfolio. As such, the economic useful life of the patent-related
intangible asset was reduced, resulting in the acceleration of $1,094,000 of
amortization expense for the patent-related intangible asset in December
2008.
7. FAIR
VALUE MEASUREMENTS AND AUCTION RATE SECURITIES
As of
December 31, 2009 and 2008, Acacia held investment grade auction rate securities
with a par value totaling $2,685,000 and $3,725,000, respectively. During the
periods presented, Acacia’s auction rate securities consisted of auction rate
investments backed by student loans, issued under programs such as the Federal
Family Education Loan Program and high credit quality securities issued by
closed-end investment companies. Auction rate securities are
classified as available-for-sale securities and reflected at fair value in
accordance with the requirements of ASC Topic 820.
Historically,
Acacia’s auction rate securities were recorded at cost, which approximated their
fair market value due to their variable interest rates, which typically reset
every 7 to 35 days, despite the long-term nature of their stated contractual
maturities. The Dutch auction process that resets the applicable interest
rate at predetermined calendar intervals is intended to provide liquidity to the
holder of auction rate securities by matching buyers and sellers within a market
context enabling the holder to gain immediate liquidity by selling such
interests at par or rolling over their investment. If there is an imbalance
between buyers and sellers, the risk of a failed auction exists. Due
to current liquidity issues in the
global credit and capital markets, these securities have continued to experience
failed auctions since February 2008. In such case of a failure, the
auction rate securities continue to pay interest at the maximum contractual rate
in accordance with their terms; however, Acacia may not be able to access the
par value of the invested funds until a future auction of these investments is
successful, the security is called by the issuer, or a buyer is found outside of
the auction process.
F-18
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As a
result of the failed auctions, there are no reliable current observable market
prices available for these securities for purposes of establishing fair market
value as of December 31, 2009 and 2008. As a result, the fair values
of these securities were estimated utilizing an analysis of certain unobservable
inputs and by reference to a discounted cash flow analysis as of December 31,
2009 and 2008. These analyses considered, among other items, the
underlying structure of each security, the collateral underlying the security
investments, the creditworthiness of the counterparty, the present value of
future principal and contractual interest payments discounted at rates
considered to be reflective of current market conditions, consideration of the
probabilities of default, continued auction failure, or repurchase or redemption
at par for each period, and estimates of the time period over which liquidity
related issues will be resolved. Observable market data for
instruments with similar characteristics to Acacia’s auction rate securities was
also considered when possible.
At
December 31, 2009 and 2008, the par value of auction rate securities
collateralized by student loan portfolios totaled $2,685,000 and $2,750,000,
respectively. As a result of the liquidity issues associated with the
failed auctions, Acacia estimates that the fair value of these auction rate
securities no longer approximates their par value. Due to the
estimate that the market for these student loan collateralized instruments may
take in excess of twelve months to fully recover, Acacia has classified these
investments as noncurrent in the accompanying consolidated balance sheets, and,
as a result of the analysis described above, recorded an other-than-temporary
loss of $296,000 and $263,000 in the accompanying statements of operations for
the years ended December 31, 2009 and December 31, 2008,
respectively. As a result of partial redemptions at par on certain of
these auction rate securities subsequent to June 30, 2008, Acacia recorded
realized gains totaling $13,000 and $13,000 for 2009 and 2008, reflecting a
partial recovery of the other-than-temporary loss originally recorded on these
securities. As of December 31, 2009, the net other-than-temporary
loss on auction rate securities collateralized by student loan portfolios
totaled $533,000.
At
December 31, 2009 and 2008, the par value of auction rate securities issued by
closed-end investment companies totaled $0 and $975,000,
respectively. As a result of the reduced liquidity associated with
these securities as of December 31, 2008, Acacia recorded an
other-than-temporary loss on these auction rate securities of $236,000 in the
accompanying statements of operations for the year ended December 31, 2008,
and classified these securities as noncurrent assets in the
accompanying December 31, 2008 consolidated balance sheet. All of
Acacia’s auction rate securities issued by closed-end investment companies were
redeemed at par during 2009. As a result, Acacia recorded realized
gains totaling $236,000, reflecting the full recovery of the
other-than-temporary loss originally recorded on these securities.
Acacia
will continue to monitor and evaluate its investments in auction rate securities
for any further potential impairment in future periods. If it is
determined that any future valuation adjustments are other-than-temporary,
Acacia would record additional charges to earnings as appropriate.
Assets
measured at fair value on a recurring basis subject to the disclosure
requirements of ASC Topic 820 at December 31, 2009, were as follows (in
thousands):
Fair
Value Measurements at Reporting Date Using:
|
||||||||
Balance
at December 31,
|
Quoted
Prices in Active Markets For
Identical Assets |
Significant
Other Observable Inputs
|
Significant Unobservable Inputs |
|||||
Description
|
2009
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||
Auction
rate securities
|
$ 2,152
|
-
|
-
|
$ 2,152
|
As a
result of the change in market conditions, during the first quarter of 2008,
Acacia modified the valuation methodology for auction rate securities to include
consideration of the factors discussed above and reference to a discounted cash
flow analysis. Accordingly, these securities changed from Level 1 to
Level 3 within the fair value hierarchy prescribed by ASC Topic 820 since the
initial adoption of ASC Topic 820 effective January 1, 2008. The
following table presents the assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) as defined in ASC Topic 820 at
December 31, 2009 and 2008 (in thousands):
F-19
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
|
||||||||
2009
|
2008
|
|||||||
Auction rate
securities:
|
||||||||
Beginning
balance as of January 1
|
$ | 3,239 | $ | - | ||||
Transfers
to Level 3
|
- | 6,000 | ||||||
Total
gains or (losses) (realized or unrealized):
|
||||||||
Recognized
(losses) included in earnings
|
(296 | ) | (499 | ) | ||||
Recognized
gains included in earnings
|
249 | 13 | ||||||
Settlements
(net)
|
(1,040 | ) | (2,275 | ) | ||||
Ending
balance as of December 31
|
$ | 2,152 | $ | 3,239 |
8. CHANGE
IN ACCOUNTING POLICY
Effective
October 1, 2009, the Company elected to change its method of accounting for its
term license agreements to recognize revenue when delivery of the license has
occurred, which is typically at the time of execution of the related license
agreement, or upon receipt of the applicable minimum annual upfront renewal
license fee payment, and when all other revenue recognition criteria have been
met. Prior to the change in the Company’s method of accounting,
license fees for term license agreements were deferred and amortized to revenue
on a straight-line basis over the applicable contractual license
term. The new method was adopted as it provides a consistent approach
to accounting for all of the Company’s license arrangements with similar
significant terms and conditions and more closely reflects the culmination of
the earnings process associated with these revenue arrangements.
The
change was accounted for through retrospective application of the new accounting
policy as of January 1, 2009. The effect of applying the new
accounting policy to term license agreements in periods prior to fiscal 2009 was
not material. Accordingly, the Company’s consolidated financial
statements for years ending prior to January 1, 2009 have not been retroactively
adjusted for this change in accounting policy.
F-20
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
effect of the change in accounting policy on Acacia’s consolidated financial
statement line items for the applicable interim periods during 2009 was as
follows (in thousands, except per share data):
As
of and for the Three Months
|
As
of and for the Three Months
|
As
of and for the Three Months
|
||||||||||||||||||||||||||||||||||
Ended
March 31, 2009
|
Ended
June 30, 2009
|
Ended
September 30, 2009
|
||||||||||||||||||||||||||||||||||
As Reported
|
As Adjusted
|
Effect
of Change |
As Reported
|
As Adjusted
|
Effect
of Change |
As Reported
|
As Adjusted
|
Effect
of Change |
||||||||||||||||||||||||||||
Statement
of Operations:
|
||||||||||||||||||||||||||||||||||||
License
fee revenues
|
$ | 12,650 | $ | 16,957 | $ | 4,307 | $ | 15,031 | $ | 14,356 | $ | (675 | ) | $ | 12,831 | $ | 16,169 | $ | 3,338 | |||||||||||||||||
Inventor
royalties
|
3,528 | 5,377 | 1,849 | 2,352 | 2,019 | (333 | ) | 3,010 | 4,673 | 1,663 | ||||||||||||||||||||||||||
Contingent
legal fees
|
3,163 | 3,532 | 369 | 3,257 | 3,190 | (67 | ) | 3,470 | 3,799 | 329 | ||||||||||||||||||||||||||
Operating
loss
|
(2,606 | ) | (517 | ) | 2,089 | (535 | ) | (810 | ) | (275 | ) | (3,923 | ) | (2,577 | ) | 1,346 | ||||||||||||||||||||
Net
loss attributable to Acacia Research Corporation
|
(2,357 | ) | (268 | ) | 2,089 | (2,648 | ) | (2,923 | ) | (275 | ) | (4,775 | ) | (3,429 | ) | 1,346 | ||||||||||||||||||||
Basic
and diluted loss per share
|
(0.08 | ) | (0.01 | ) | 0.07 | (0.09 | ) | (0.10 | ) | (0.01 | ) | (0.16 | ) | (0.11 | ) | 0.04 | ||||||||||||||||||||
Balance
Sheet:
|
||||||||||||||||||||||||||||||||||||
Deferred
costs
|
$ | 2,219 | $ | - | $ | (2,219 | ) | $ | 1,819 | $ | - | $ | (1,819 | ) | $ | 3,811 | $ | - | $ | (3,811 | ) | |||||||||||||||
Total
assets
|
78,529 | 76,310 | (2,219 | ) | 75,579 | 73,760 | (1,819 | ) | 76,074 | 72,263 | (3,811 | ) | ||||||||||||||||||||||||
Deferred
revenues
|
4,319 | 10 | (4,309 | ) | 3,644 | 10 | (3,634 | ) | 6,982 | 10 | (6,972 | ) | ||||||||||||||||||||||||
Total
liabilities
|
20,419 | 16,110 | (4,309 | ) | 16,873 | 13,239 | (3,634 | ) | 21,727 | 14,755 | (6,972 | ) | ||||||||||||||||||||||||
Accumulated
deficit
|
(111,309 | ) | (109,220 | ) | 2,089 | (113,957 | ) | (112,143 | ) | 1,814 | (118,732 | ) | (115,572 | ) | 3,160 | |||||||||||||||||||||
Total
stockholders' equity
|
58,110 | 60,199 | 2,089 | 58,706 | 60,520 | 1,814 | 54,347 | 57,507 | 3,160 |
For
the Six Months
|
For
the Nine Months
|
|||||||||||||||||||||||
Ended
June 30, 2009
|
Ended
September 30, 2009
|
|||||||||||||||||||||||
As
Reported
|
As
Adjusted
|
Effect
of Change |
As
Reported
|
As
Adjusted
|
Effect
of Change |
|||||||||||||||||||
Statement
of Operations:
|
||||||||||||||||||||||||
License
fee revenues
|
$ | 27,681 | $ | 31,313 | $ | 3,632 | $ | 40,512 | $ | 47,482 | $ | 6,970 | ||||||||||||
Inventor
royalties
|
5,880 | 7,396 | 1,516 | 8,890 | 12,069 | 3,179 | ||||||||||||||||||
Contingent
legal fees
|
6,420 | 6,722 | 302 | 9,890 | 10,521 | 631 | ||||||||||||||||||
Operating
loss
|
(3,141 | ) | (1,327 | ) | 1,814 | (7,064 | ) | (3,904 | ) | 3,160 | ||||||||||||||
Net
loss attributable to Acacia Research Corporation
|
(5,005 | ) | (3,191 | ) | 1,814 | (9,780 | ) | (6,620 | ) | 3,160 | ||||||||||||||
Basic
and diluted loss per share
|
(0.17 | ) | (0.11 | ) | 0.06 | (0.33 | ) | (0.22 | ) | 0.11 |
F-21
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCKHOLDERS’
EQUITY
Capital
Stock
In
connection with the consummation of the Split-Off Transaction, on August 15,
2007, CombiMatrix was split-off from Acacia through the redemption of all
outstanding shares of AR-CombiMatrix Stock in exchange for the distribution of
new shares of CombiMatrix common stock. As a result of, and
immediately following, the consummation of the Split-Off Transaction, Acacia’s
only class of common stock outstanding was its AR-Acacia Technologies
stock. On May 20, 2008, Acacia’s stockholders approved an amendment
and restatement of Acacia’s Certificate of Incorporation to eliminate all
references to the AR-CombiMatrix Stock and all provisions relating to the rights
and obligations pursuant to the AR-CombiMatrix Stock. As a result of
the amendment and restatement, the name of “Acacia Research-Acacia Technologies
common stock” was changed to “common stock,” and it is the only class of common
stock authorized and issuable as a single class of common
stock.
Pursuant
to Acacia’s Amended and Restated Certificate of Incorporation the authorized
capital stock of Acacia consists of 100,000,000 shares of common stock, $0.001
par value, and 10,000,000 shares of preferred stock, $0.001 par
value. Under the terms of the Amended and Restated Certificate of
Incorporation, the board of directors may determine the rights, preferences and
terms of Acacia’s authorized but unissued shares of preferred
stock. Holders of common stock are entitled to one vote per share on
all matters to be voted on by the stockholders, and to receive ratably such
dividends, if any, as may be declared by the board of directors out of funds
legally available therefore. Upon the liquidation, dissolution or winding up of
Acacia, after payment or provision for payment of the debts and other
liabilities and full preferential amounts to which holders of any preferred
stock are entitled, the holders of common stock are entitled to share ratably in
all assets of Acacia which are legally available for
distribution. Holders of common stock have no preemptive,
subscription, redemption or conversion rights.
Acacia’s
board of directors, subject to state laws and limits in Acacia’s amended and
restated certificate of incorporation, including those discussed above, are able
to declare dividends on its common stock at its discretion. To date,
Acacia has never paid or declared cash dividends on shares of its stock, nor
does Acacia anticipate paying cash dividends on its common stock in the
foreseeable future.
Repurchase
of Restricted Common Stock
In May
2009, Acacia’s board of directors approved a restricted stock vesting net
issuance program. Under the program, upon the vesting of unvested
shares of restricted common stock, Acacia withheld from fully vested shares of
common stock otherwise deliverable to any employee-participant in Acacia’s
equity compensation programs, a number of whole shares of common stock having a
fair market value (as determined by Acacia as of the date of vesting) equal to
the amount of tax required to be withheld by law, in order to satisfy the tax
withholding obligations of Acacia in connection with the vesting of such
shares. Of a total of 580,600 shares of restricted stock vested
between June 2009 and September 2009, 174,628 shares of common stock were
withheld by Acacia, in satisfaction of $1,107,000 in required withholding tax
liability.
F-22
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME
TAXES
Acacia’s
provision for income taxes consists of the following (in
thousands):
2009
|
2008
|
2007
|
||||||||||
Current:
|
||||||||||||
U.S.
Federal
tax
|
$ | - | $ | - | $ | - | ||||||
State
taxes
|
209 | 124 | 207 | |||||||||
$ | 209 | $ | 124 | $ | 207 |
The tax
effects of temporary differences and carryforwards that give rise to significant
portions of deferred assets and liabilities consist of the following at December
31, 2009 and 2008 (in thousands):
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Net
operating loss and capital loss carryforwards and credits
|
$ | 28,629 | $ | 27,207 | ||||
Amortization
and depreciation
|
5,879 | 4,405 | ||||||
Stock
compensation
|
3,218 | 3,045 | ||||||
Write-off
of investments
|
1,344 | 1,344 | ||||||
Accrued
liabilities and other
|
374 | 413 | ||||||
State
taxes
|
5 | 5 | ||||||
Deferred
revenue
|
4 | 126 | ||||||
Total
deferred tax assets
|
39,453 | 36,545 | ||||||
Less: valuation
allowance
|
(39,410 | ) | (36,360 | ) | ||||
Net
deferred tax assets, net of valuation allowance
|
43 | 185 | ||||||
Deferred
tax liabilities:
|
||||||||
Intangibles
|
(43 | ) | (185 | ) | ||||
Net
deferred taxes
|
$ | - | $ | - |
F-23
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
reconciliation of the federal statutory income tax rate and the effective income
tax rate is as follows:
2009
|
2008
|
2007
|
||||||||||
Statutory
federal tax rate
|
(34% | ) | (34% | ) | (34% | ) | ||||||
State
income taxes, net of federal tax effect
|
4% | 1% | 3% | |||||||||
Noncontrolling
interests in operating subsidiary
|
(40% | ) | - | - | ||||||||
Equity
compensation
|
1% | 1% | 1% | |||||||||
Non
deductible permanent items
|
- | 1% | 1% | |||||||||
Capital
loss carryforwards
|
- | 5% | 6% | |||||||||
Valuation
allowance
|
73% | 27% | 26% | |||||||||
4% | 1% | 3% |
At
December 31, 2009, Acacia has established a full valuation allowance against its
net deferred tax assets, due to management’s determination that the criteria for
recognition have not been met.
At
December 31, 2009, Acacia had U.S. federal and state income tax NOLs totaling
approximately $86,406,000 and $68,775,000, expiring between 2010 and 2029, and
2012 and 2019, respectively.
As of
December 31, 2009, approximately $13,197,000 of the valuation allowance related
to the tax benefits of stock option deductions included in Acacia’s NOLs. At
such time as the valuation allowance is released, the benefit will be credited
to additional paid-in capital.
11. ACCOUNTING
FOR THE SPLIT-OFF OF COMBIMATRIX CORPORATION
On
August 15, 2007 (the “Redemption Date”), CombiMatrix was split-off from Acacia
through the redemption of all outstanding shares of AR-CombiMatrix Stock in
exchange for the distribution of new shares of CombiMatrix common stock, on a
pro-rata basis, to the holders of AR-CombiMatrix Stock as of the Redemption
Date. 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. Subsequent to the Redemption Date, Acacia no
longer owns any equity interests in CombiMatrix and the two companies operate
independently of each other.
As a
result of the Split-Off Transaction, effective August 15, 2007, the CombiMatrix
group is no longer a business group of Acacia and Acacia does not have any
continuing involvement in the operations of CombiMatrix. In
connection with the Split-Off Transaction, all outstanding shares of
AR-CombiMatrix Stock were redeemed, and 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 common stock pursuant to the exchange ratio described
above.
The
Split-Off Transaction was accounted for by Acacia at historical
cost. Accordingly, no gain or loss on disposal was recognized in the
accompanying consolidated statement of operations for the year ended December
31, 2007. Included in the consolidated statement of stockholder’s equity for the
year ended December 31, 2007 is a charge to consolidated shareholders’ equity
totaling $35,444,000, reflecting the distribution of Acacia’s investment in the
net assets of CombiMatrix to holders of AR-CombiMatrix Stock, as of the
Redemption Date, as described above. Acacia 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-Off Transaction will be
treated as a tax-free exchange under Sections 368 and 355 of the
Code.
F-24
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As a
result of the Split-Off Transaction, Acacia has disposed of its investment in
CombiMatrix, and therefore, Acacia’s accompanying consolidated financial
statements for the year ended December 31, 2007 reflects the results of
operations and cash flows for CombiMatrix as “Discontinued
Operations.” CombiMatrix was previously presented as a separate
operating segment of Acacia.
For the
period from January 1, 2007 through August 15, 2007, revenues and pre-tax loss
related to CombiMatrix included in discontinued operations were $2,968,000 and
$8,086,000, respectively. The net loss from discontinued operations
for the year ended December 31, 2007 includes direct costs incurred in
connection with the Split-Off Transaction, originally included in Acacia
corporate accounts, totaling $136,000 for the year ended December 31,
2007.
12. STOCK-BASED
INCENTIVE PLANS
The 2002
Acacia Technologies Stock Incentive Plan (“2002 Plan”) and the 2007 Acacia
Technologies Stock Incentive Plan (“2007 Plan”) (collectively, the “Plans”) were
approved by the stockholders of Acacia in December 2002 and May 2007,
respectively. Both Plans allow grants of stock options, stock awards and
performance shares with respect to Acacia common stock to eligible individuals,
which generally includes directors, officers, employees and
consultants. Except as noted below, the terms and provisions of the
Plans are identical in all material respects.
Acacia’s compensation committee
administers the discretionary option grant and stock issuance
programs. The compensation committee determines which eligible
individuals are to receive option grants or stock issuances under those
programs, the time or times when the grants or issuances are to be made, the
number of shares subject to each grant or issuance, the status of any granted
option as either an incentive stock option or a non-statutory stock option under
the federal tax laws, the vesting schedule to be in effect for the option grant
or stock issuance and the maximum term for which any granted option is to remain
outstanding. The exercise price of options is generally equal to the
fair market value of Acacia’s common stock on the date of
grant. Options generally begin to be exercisable six months to one
year after grant and generally expire ten years after grant. Stock
options generally vest over two to three years and restricted shares generally
vest in full after two to three years (generally represents the requisite
service period in accordance with ASC Topic 718).
Programs
The Plans
provide for the following separate programs:
|
●
|
Discretionary Option Grant
Program. Under the discretionary option grant program,
Acacia’s compensation committee may grant (1) non-statutory options to
purchase shares of common stock to eligible individuals in the employ or
service of Acacia or its subsidiaries (including employees, non-employee
board members and consultants) at an exercise price not less than 85% of
the fair market value of those shares on the grant date and (2) incentive
stock options to purchase shares of common stock to eligible employees at
an exercise price not less than 100% of the fair market value of those
shares on the grant date (not less than 110% of fair market value if such
employee actually or constructively owns more than 10% of Acacia’s voting
stock or the voting stock of any of its
subsidiaries).
|
|
●
|
Stock Issuance
Program. Under the stock issuance program, eligible
individuals may be issued shares of common stock directly, upon the
attainment of performance milestones or the completion of a specified
period of service or as a bonus for past services. Under this
program, the purchase price for the shares shall not be less than 100% of
the fair market value of the shares on the date of issuance, and payment
may be in the form of cash or past services
rendered.
|
F-25
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
●
|
Automatic Option Grant Program
(2002 Plan only). Under the automatic option grant
program, option grants will automatically be made at periodic intervals to
eligible non-employee members of Acacia’s board of directors to purchase
shares of common stock at an exercise price equal to 100% of the fair
market value of those shares on the grant date. Each individual
who first becomes a non-employee board member at any time after the date
of the adoption of the incentive plans by Acacia’s board of directors will
automatically receive an option to purchase 20,000 shares of common stock
on the date the individual joins the board of directors. In
addition, on the first business day in each calendar year following the
adoption of the incentive plans by Acacia’s board of directors, each
non-employee board member then in office, including each of Acacia’s
current non-employee board members who is then in office, will
automatically be granted an option to purchase 15,000 shares of common
stock, provided that the individual has served on the board of directors
for at least six months.
Commencing
in fiscal 2008, in lieu of the option grants described above, each
non-employee director will receive restricted stock units for the number
of shares determined by dividing the annual retainer by the closing price
of Acacia’s common stock on the grant date, provided that such individual
has served as a non-employee director for at least 6 months. In addition,
as of May 2007, each new non-employee director will receive restricted
stock units for the number of shares determined by dividing the annual
board of directors retainer by the closing price of Acacia’s common stock
on the commencement date.
Restricted
stock units vest in a series of twelve quarterly installments over the
three year period following the grant date, subject to immediate
acceleration upon a change in control. Acacia will deliver shares
corresponding to the vested restricted stock units within thirty (30) days
after the first to occur of the following events: (i) the fifth
(5th) anniversary of the grant date; or (ii) termination of the
non-employee director’s service as a member of the Company’s Board of
Directors. The non-employee directors do not have any rights,
benefits or entitlements with respect to any shares unless and until the
shares have been
delivered.
|
The
number of shares of common stock available for issuance under the 2002 Plan
automatically increases on the first trading day of January each calendar year
during the term of the Plan by an amount equal to three percent (3%) of the
total number of shares of common stock outstanding on the last trading day in
December of the immediately preceding calendar year, but in no event shall any
such annual increase exceed 500,000 shares. The aggregate number of
shares of common stock available for issuance under the 2002 Plan shall not
exceed 20,000,000 shares. At December 31, 2009, there were 1,350,000
shares available for grant under the 2002 Plan.
The
initial share reserve under the 2007 Plan was 560,000 shares. The
number of shares of common stock available for issuance under the 2007 Plan
automatically increased on January 1, 2008 and 2009, by an amount equal to two
percent (2%) of the total number of shares of common stock outstanding on the
last trading day of December in the prior calendar year. After
January 1, 2009, no new additional shares will be added to the 2007 Plan without
stockholder approval (except for shares subject to outstanding awards that are
forfeited or otherwise returned to the 2007 Plan). At December 31,
2009, there were 542,000 shares available for grant under the 2007
Plan.
The Plans
do not segregate the number of securities remaining available for future
issuance among stock options and other awards. The shares authorized
for future issuance represents the total number of shares available through any
combination of stock options or other awards. Upon the exercise of
stock options, the granting of restricted stock, or the delivery of shares
pursuant to vested restricted stock units, it is Acacia’s policy to issue new
shares of common stock.
Acacia’s
board of directors may amend or modify the Plans at any time, subject to any
required stockholder approval. The Plans will terminate no later than
the tenth anniversary of the approval of the incentive plans by Acacia’s
stockholders.
F-26
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes stock option activity for the Plans for the year
ended December 31, 2009:
Weighted-Average
|
||||||||||||||
Options
|
Exercise
Price
|
Remaining Contractual
Term |
Aggregate Intrinsic
Value |
|||||||||||
Outstanding
at December 31, 2008
|
3,656,000 | $5.55 | ||||||||||||
Exercised
|
(94,000 | ) | $2.61 | |||||||||||
Expired
|
(114,000 | ) | $8.55 | |||||||||||
Outstanding
at December 31, 2009
|
3,448,000 | $5.54 |
3.7
years
|
$13,900,000 | ||||||||||
Vested
and expected to vest at December 31, 2009
|
3,448,000 | $5.54 |
3.7
years
|
$13,900,000 | ||||||||||
Exercisable
at December 31, 2009
|
3,425,000 | $5.48 |
3.6
years
|
$13,892,000 |
The
weighted-average grant date fair value of stock options granted during the year
ended December 31, 2007 was $9.07. There were no stock options
granted during the years ended December 31, 2009 and 2008. The total
intrinsic value of options exercised during the years ended December 31, 2009,
2008 and 2007 was $541,000, $120,000, and $10,812,000,
respectively. The fair value of options that vested during the years
ended December 31, 2009, 2008 and 2007 was $587,000, $1,534,000, and $3,520,000,
respectively. As of December 31, 2009, the total unrecognized
compensation expense related to nonvested stock option awards was $149,000,
which is expected to be recognized over a weighted-average term of approximately
6 months.
The
following table summarizes nonvested restricted share activity for the year
ended December 31, 2009:
Nonvested
Restricted
Shares
|
Weighted
Average
Grant Date Fair Value
|
|||||||
Nonvested
restricted stock at December 31, 2008
|
1,257,000 | $7.77 | ||||||
Granted
|
1,152,000 | $3.51 | ||||||
Vested
|
(724,000 | ) | $8.69 | |||||
Forfeited
|
(45,000 | ) | $8.52 | |||||
Nonvested
restricted stock at December 31, 2009
|
1,640,000 | $4.35 |
The
weighted-average grant date fair value of nonvested restricted stock granted
during the years ended December 31, 2009, 2008 and 2007 was $3.51, $4.80, and
$14.05, respectively. The fair value of restricted stock that vested
during the years ended December 31, 2009, 2008 and 2007 was $6,291,000,
$5,556,000, and $1,951,000, respectively. As of December 31, 2009,
the total unrecognized compensation expense related to nonvested restricted
stock awards was $3,823,000, which is expected to be recognized over a
weighted-average period of approximately 1 year.
F-27
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes restricted stock unit activity for the year ended
December 31, 2009:
Restricted
Stock
Units
|
Weighted
Average
Grant Date Fair Value
|
||||||||
Restricted
stock units outstanding at December 31, 2008
|
11,000 | $9.10 | |||||||
Granted
|
41,000 | $3.50 | |||||||
Vested
|
(15,000 | ) | $5.42 | ||||||
Restricted
stock units outstanding at December 31, 2009
|
37,000 | $4.40 |
The
weighted-average grant date fair value of restricted stock units granted during
the years ended December 31, 2009, 2008 and 2007 was $3.50, $8.68 and $11.19,
respectively. The fair value of restricted stock units that vested
during the years ended December 31, 2009, 2008 and 2007 was $84,000, $39,000 and
$3,000, respectively. As of December 31, 2009, the total unrecognized
compensation expense related to restricted stock unit awards was $140,000, which
is expected to be recognized over a weighted-average period of approximately 1.7
years.
As of
December 31, 2009, 5,340,000 shares of common stock are reserved for issuance
under the Plans.
13. COMMITMENTS
AND CONTINGENCIES
Operating
Leases
Acacia
leases certain office space under various operating lease agreements expiring in
2012. Minimum annual rental commitments for operating leases of
continuing operations having initial or remaining noncancellable lease terms in
excess of one year are as follows (in thousands):
Year
|
||||
2010
|
$ | 869 | ||
2011
|
977 | |||
2012
|
164 | |||
Total
minimum lease payments
|
$ | 2,010 |
Rent
expense related to continuing operations for the years ended December 31, 2009,
2008 and 2007 approximated $983,000, $965,000 and $749,000,
respectively. Rental payments are expensed in the statements of
operations in the period to which they relate. Scheduled rent
increases are amortized on a straight-line basis over the lease
term.
F-28
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Inventor
Royalties and Contingent Legal Expenses
In
connection with the acquisition of certain patents and patent rights, certain of
Acacia’s operating subsidiaries 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 in the
period that the related license fee revenues are recognized. In
certain instances, pursuant to the terms of the underlying inventor agreements,
costs paid by Acacia’s operating subsidiaries to acquire patents are recoverable
from future net revenues. Patent acquisition costs that are
recoverable from future net revenues are amortized over the estimated economic
useful life of the related patents, or as the prepaid royalties are earned by
the inventor, as appropriate, and the related expense is included in
amortization expense in the consolidated statements of
operations. Any unamortized patent acquisition costs recovered from
net revenues are expensed in the period recovered, and included in amortization
expense in the consolidated statements of operations.
Acacia’s
operating subsidiaries may retain the services of law firms that specialize in
intellectual property licensing and enforcement and patent law in connection
with their licensing and enforcement activities. These law firms may
be retained on a contingent fee basis whereby such 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 (i.e. license fees), no contingent legal fees are paid; however,
Acacia’s 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
sheets.
Patent
Enforcement and Other Litigation
Acacia 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 Acacia’s consolidated financial position, results of operations or
cash flows.
Certain
of Acacia’s operating subsidiaries are often required to engage in litigation to
enforce their patents and patent rights. In connection with any of
Acacia’s operating subsidiaries’ patent enforcement actions, it is possible that
a defendant may request and/or a court may rule that an operating subsidiary has
violated statutory authority, regulatory authority, federal rules, local court
rules, or governing standards relating to the substantive or procedural aspects
of such enforcement actions. In such event, a court may issue
monetary sanctions against Acacia or its operating subsidiaries or award
attorney’s fees and/or expenses to a defendant(s), which could be material, and
if required to be paid by Acacia or its operating subsidiaries, could materially
harm the Company’s operating results and financial position.
F-29
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Guarantees
and Indemnifications
Certain
of Acacia’s 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 and certain of its operating subsidiaries have indemnified lessors
for certain claims arising from the facilities or the leases. Acacia
indemnifies its directors and officers to the maximum extent permitted under the
laws of the State of Delaware. However, Acacia 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 Acacia
could be obligated to make. To date, Acacia has made no payments
related to these guarantees and indemnities. Acacia estimates the
fair value of its 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.
Other
Creative
Internet Advertising Corporation (“CIAC”), an operating subsidiary of Acacia,
received a $12.4 million final judgment stemming from its May 2009 trial verdict
and corresponding $6.6 million damages award in its patent infringement lawsuit
with Yahoo! Inc. In the final judgment, signed on February 1, 2010,
the District Court for the Eastern District of Texas awarded enhanced damages
for willful infringement of $4.5 million. The District Court also
awarded prejudgment interest of $1.1 million, as well as supplemental damages,
bringing the total award to approximately $12.4 million. In addition,
the District Court’s final judgment awarded a post-verdict ongoing royalty rate
of 23% for all of Yahoo’s IMVironments sales. Yahoo! Inc has filed a
notice of its intent to appeal the verdict.
During
2009, CIAC purchased a specific contingency insurance policy covering
approximately $6.9 million of the final judgment described
above. Under the policy, the insurer will, subject to all of the
terms, conditions, and limitations of the underlying policy, indemnify CIAC for
covered losses incurred as a result of a final adjudication entered in the
underlying litigation (for example, as a result of a successful appeal by the
defendant in the litigation) which results in a revised final judgment amount
that is less than the $6.9 million of the original final judgment covered under
the policy.
14.
RETIREMENT SAVINGS PLAN AND EXECUTIVE SEVERANCE POLICY
Retirement Savings
Plan. Acacia has an employee savings and retirement plan under
section 401(k) of the Code (the “Plan”). The Plan is a defined
contribution plan in which eligible employees may elect to have a percentage of
their compensation contributed to the Plan, subject to certain guidelines issued
by the Internal Revenue Service. Acacia may contribute to the Plan at
the discretion of the board of directors. There were no contributions
made by Acacia during the years ended December 31, 2009, 2008 and
2007.
Executive Severance
Policy. Under Acacia’s Amended Executive Severance Policy,
full-time employees with the title of Senior Vice President and higher
(“Officer”) are entitled to receive certain benefits upon termination of
employment. If employment of an Officer is terminated for other than cause or
other than on account of death or disability, Acacia will (i) promptly pay to
the Officer a lump sum amount equal to the aggregate of (a) accrued obligations
( i.e., the Officer’s annual base salary through the date of termination to the
extent not theretofore paid and any compensation previously deferred by the
Officer (together with any accrued interest or earnings thereon) and any accrued
vacation pay, and reimbursable expenses, in each case to the extent not
theretofore paid) and (b) three (3) months of the Officer’s base salary for each
full year that the Officer was employed by the Company (the "Severance Period"),
up to a maximum of twelve (12) months of the Officer's base salary and (ii)
provide to the Officer, Acacia paid COBRA coverage for the medical and dental
benefits selected by the Officer in the year in which the termination occurs,
for the duration of the Severance Period.
F-30
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMPREHENSIVE
LOSS
Total
comprehensive loss attributable to Acacia Research Corporation is as follows (in
thousands):
2009
|
2008
|
2007
|
||||||||||
Net
loss from continuing operations including noncontrolling interests in
operating subsidiary
|
$ | (5,633 | ) | $ | (13,757 | ) | $ | (7,359 | ) | |||
Other
comprehensive income:
|
||||||||||||
Unrealized
gain (loss) on short-term investments
|
- | 3 | (21 | ) | ||||||||
Unrealized
gains from discontinued operations - Split-off of CombiMatrix
Corporation
|
- | - | 16 | |||||||||
Total
comprehensive loss before noncontrolling interests in operating subsidiary
and loss from discontinued operations
|
(5,633 | ) | (13,754 | ) | (7,364 | ) | ||||||
Net
income attributable to noncontrolling interests in operating
subsidiary
|
(5,657 | ) | - | - | ||||||||
Loss
from discontinued operations - Split-off of CombiMatrix
Corporation
|
- | - | (8,086 | ) | ||||||||
Comprehensive
loss
|
$ | (11,290 | ) | $ | (13,754 | ) | $ | (15,450 | ) |
16. SUPPLEMENTAL
CASH FLOW INFORMATION
Cash paid
by Acacia for income taxes was not material for the periods
presented. Refer to Note 6 for impairment charges, and other non-cash
changes in patent-related intangibles during the periods presented. Refer
to Notes 11 for information regarding the Split-Off Transaction.
17. QUARTERLY
FINANCIAL DATA (unaudited)
The
following table sets forth unaudited consolidated statements of operations data
for the eight quarters in the period ended December 31, 2009. This information
has been derived from Acacia’s unaudited condensed consolidated financial
statements that have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
the information when read in conjunction with the audited consolidated financial
statements and related notes thereto. Acacia’s quarterly results have been in
the past and may in the future be subject to significant fluctuations. As a
result, Acacia believes that results of operations for interim periods should
not be relied upon as any indication of the results to be expected in any future
periods.
Refer to
Note 8 for information on the Company’s change in revenue recognition accounting
policy for its term license agreements and the impact on the quarterly periods
presented in the table below.
F-31
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter
Ended
|
||||||||||||||||||||||||||||||||
Mar.
31,
|
Jun.
30,
|
Sep.
30,
|
Dec.
31,
|
Mar.
31,
|
Jun.
30,
|
Sep.
30,
|
Dec.
31,
|
|||||||||||||||||||||||||
2009
|
2009
|
2009
|
2009
|
2008
|
2008
|
2008
|
2008
|
|||||||||||||||||||||||||
(In
thousands, except share and per share information)
|
||||||||||||||||||||||||||||||||
(Unaudited)
|
||||||||||||||||||||||||||||||||
License
fee revenues
|
$ | 16,957 | $ | 14,356 | $ | 16,169 | $ | 19,858 | $ | 9,048 | $ | 7,116 | $ | 13,796 | $ | 18,267 | ||||||||||||||||
Operating
costs and expenses:
|
||||||||||||||||||||||||||||||||
Cost
of revenues:
|
||||||||||||||||||||||||||||||||
Inventor
royalties
|
5,377 | 2,019 | 4,673 | 3,604 | 2,090 | 2,177 | 4,329 | 6,399 | ||||||||||||||||||||||||
Contingent
legal fees
|
3,532 | 3,190 | 3,799 | 5,424 | 2,641 | 1,928 | 3,934 | 3,926 | ||||||||||||||||||||||||
Litigation
and licensing expenses - patents
|
1,708 | 2,753 | 3,957 | 5,637 | 1,603 | 1,509 | 1,554 | 2,234 | ||||||||||||||||||||||||
Amortization
of patents
|
1,065 | 1,060 | 1,245 | 1,264 | 1,335 | 1,244 | 1,152 | 2,312 | ||||||||||||||||||||||||
Marketing,
general and administrative expenses (including non-cash stock compensation
expense)
|
5,378 | 5,748 | 4,709 | 5,235 | 5,648 | 5,400 | 5,254 | 4,828 | ||||||||||||||||||||||||
Research,
consulting and other expenses - business development
|
414 | 396 | 363 | 516 | 391 | 111 | 210 | 221 | ||||||||||||||||||||||||
Total
operating costs and expenses
|
17,474 | 15,166 | 18,746 | 21,680 | 13,708 | 12,369 | 16,433 | 19,920 | ||||||||||||||||||||||||
Operating
loss
|
(517 | ) | (810 | ) | (2,577 | ) | (1,822 | ) | (4,660 | ) | (5,253 | ) | (2,637 | ) | (1,653 | ) | ||||||||||||||||
Other
income (expense)
|
287 | 47 | 224 | (256 | ) | 192 | 238 | 255 | (115 | ) | ||||||||||||||||||||||
Loss
from continuing operations before provision for income
taxes
|
(230 | ) | (763 | ) | (2,353 | ) | (2,078 | ) | (4,468 | ) | (5,015 | ) | (2,382 | ) | (1,768 | ) | ||||||||||||||||
Provision
for income taxes
|
(38 | ) | (39 | ) | (47 | ) | (85 | ) | (21 | ) | (26 | ) | (38 | ) | (39 | ) | ||||||||||||||||
Net
loss including noncontrolling interests in operating
subsidiary
|
(268 | ) | (802 | ) | (2,400 | ) | (2,163 | ) | (4,489 | ) | (5,041 | ) | (2,420 | ) | (1,807 | ) | ||||||||||||||||
Net
income attributable to noncontrolling interests in operating
subsidiary
|
- | (2,121 | ) | (1,029 | ) | (2,507 | ) | - | - | - | - | |||||||||||||||||||||
Net
loss attributable to Acacia Research Corporation
|
$ | (268 | ) | $ | (2,923 | ) | $ | (3,429 | ) | $ | (4,670 | ) | $ | (4,489 | ) | $ | (5,041 | ) | $ | (2,420 | ) | $ | (1,807 | ) | ||||||||
Net
loss per common share attributable to Acacia Research
Corporation:
|
||||||||||||||||||||||||||||||||
Basic
and diluted net loss per share
|
(0.01 | ) | (0.10 | ) | (0.11 | ) | (0.15 | ) | (0.15 | ) | (0.17 | ) | (0.08 | ) | (0.06 | ) | ||||||||||||||||
Weighted
average number of shares outstanding, basic and diluted
|
29,639,459 | 29,741,168 | 30,071,492 | 30,199,211 | 29,217,636 | 29,321,176 | 29,553,609 | 29,599,602 |
____________________
(1)
|
Refer
to Note 8 for information on the change in Acacia’s revenue recognition
accounting policy for its term license agreements. The change
was accounted for through retrospective application of the new accounting
policy as of January 1, 2009, and has been reflected in the quarterly
financial data above. The effect of applying the new accounting
policy to term licenses in periods prior to fiscal 2009 was not
material. Accordingly, the Company’s consolidated financial
statements for all periods ending prior to January 1, 2009 have not been
retroactively adjusted for this change in accounting
policy. Refer to Note 8 for information on the effect of the
change in accounting policy on our consolidated financial statement line
items for the applicable reporting periods during
2009.
|
F-32
EXHIBIT
INDEX
Exhibit
Number
|
Description
|
2.1
|
Agreement
and Plan of Merger of Acacia Research Corporation, a California
corporation, and Acacia Research Corporation, a Delaware corporation,
dated as of December 23, 1999 (1)
|
2.2
|
Agreement
and Plan of Reorganization by and among Acacia Research Corporation, Combi
Acquisition Corp. and CombiMatrix Corporation dated as of March 20, 2002
(2)
|
3.1
|
Amended
and Restated Certificate of Incorporation (3)
|
3.2
|
Amended
and Restated Bylaws (13)
|
3.2.1
|
Amendment
to Amended and Restated Bylaws (14)
|
10.1*
|
Acacia
Research Corporation 1996 Stock Option Plan, as amended
(4)
|
10.2*
|
Form
of Option Agreement constituting the Acacia Research Corporation 1996
Executive Stock Bonus Plan (5)
|
10.3*
|
2002
Acacia Technologies Stock Incentive Plan (6)
|
10.4*
|
2007 Acacia
Technologies Stock Incentive Plan (7)
|
10.5*
|
Form
of Acacia Technologies Stock Option Agreement for the 2007 Acacia
Technologies Stock Incentive Plan (8)
|
10.6*
|
Form
of Acacia Technologies Stock Issuance Agreement for the 2002 Acacia
Technologies Stock Incentive Plan (8)
|
10.7*
|
Form
of Acacia Technologies Stock Issuance Agreement for the 2007 Acacia
Technologies Stock Incentive Plan (8)
|
10.8
|
Lease
Agreement dated January 28, 2002, between Acacia Research Corporation and
The Irvine Company (9)
|
10.10
|
Form
of Indemnification Agreement (10)
|
10.11
|
Form
of Subscription Agreement between Acacia Research Corporation and certain
investors (11)
|
10.12
|
Third
Amendment to lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company (12)
|
10.19*
|
Employment
Agreement, dated January 28, 2005, by and between Acacia Technologies
Services Corporation, and Dooyong Lee, as amended (13)
|
10.19.1*
|
Amendment
to Employment Agreement, dated December 17, 2008, by and between Acacia
Technologies, LLC and Dooyong Lee (16)
|
10.20*
|
Employment
Agreement, dated April 12, 2004, by and between Acacia Media Technologies
Corporation and Edward Treska (13)
|
10.20.1*
|
Addendum
to Employment Agreement with Edward Treska, dated March 31, 2008
(15)
|
10.21
|
Fourth
Amendment to Lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company (13)
|
10.22
|
Fifth
Amendment to Lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company (13)
|
10.23*
|
Employment
Agreement, dated March 31, 2008, by and between Acacia Technologies, LLC
and Paul Ryan (15)
|
10.23.1*
|
Amendment
to Employment Agreement, dated December 17, 2008, by and between Acacia
Technologies, LLC and Paul Ryan (16)
|
10.24*
|
Employment
Agreement, dated March 31, 2008, by and between Acacia Technologies, LLC
and Robert L. Harris (15)
|
10.24.1*
|
Amendment
to Employment Agreement, dated December 17, 2008, by and between Acacia
Technologies, LLC and Robert L. Harris (16)
|
10.25*
|
Amended
Employment Agreement, dated March 31, 2008, by and between Acacia
Technologies, LLC and Clayton J. Haynes (15)
|
10.25.1*
|
Amendment
to Amended Employment Agreement, dated December 17, 2008, by and between
Acacia Technologies, LLC and Clayton J. Haynes (16)
|
10.26*
|
Amended
Acacia Research Corporation Executive Severance Policy
(16)
|
18.1
|
Preferability
Letter dated February 25, 2010 from Grant Thornton LLP, Acacia Research
Corporation’s registered independent accounting firm, regarding
change in accounting principle
|
21.1
|
List
of Subsidiaries
|
23.1
|
Consent
of Independent Registered Public Accounting Firm
|
24.1
|
Power
of Attorney (included in the signature
page).
|
III-1
Exhibit
Number
|
Description
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934
|
32.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C. Section
1350
|
32.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C. Section
1350
|
______________
*
|
The
referenced exhibit is a management contract, compensatory plan or
arrangement.
|
(1)
|
Incorporated
by reference to Acacia Research Corporation’s Current Report on Form 8-K
filed on December 30, 1999 (SEC File No.
000-26068).
|
(2)
|
Incorporated
by reference to Appendix A to the Proxy Statement/Prospectus which formed
part of Acacia Research Corporation’s Registration Statement on Form S-4
(SEC File No. 333-87654) which became effective on November 8,
2002.
|
(3)
|
Incorporated
by reference to Acacia Research Corporation’s Current Report on Form 8-K
filed on June 5, 2008 (SEC File No.
000-26068).
|
(4)
|
Incorporated
by reference to Appendix A to Acacia Research Corporation’s Definitive
Proxy Statement on Schedule 14A filed on April 10, 2000 (SEC File No.
000-26068).
|
(5)
|
Incorporated
by reference to Appendix A to Acacia Research Corporation’s Definitive
Proxy Statement on Schedule 14A filed on April 26, 1996 (SEC File No.
000-26068).
|
(6)
|
Incorporated
by reference to Appendix E to the Proxy Statement/Prospectus which formed
part of Acacia Research Corporation’s Registration Statement on Form S-4
(SEC File No. 333-87654) which became effective on November 8,
2002.
|
(7)
|
Incorporated
by reference to Acacia Research Corporation’s Registration Statement on
Form S-8 (SEC File No. 333-144754) which became effective on July 20,
2007.
|
(8)
|
Incorporated
by reference to Acacia Research Corporation’s Quarterly Report on Form
10-Q for the period ended September 30, 2007, filed on November 2, 2007
(SEC File No. 000-26068).
|
(9)
|
Incorporated
by reference to Acacia Research Corporation’s Annual Report on
Form 10-K for the year ended December 31, 2001, filed on
March 27, 2002 (SEC File
No. 000-26068).
|
(10)
|
Incorporated
by reference to Acacia Research Corporation’s Annual Report on Form 10-K
for the year ended December 31, 2002, filed on March 27, 2003 (SEC File
No. 000-26068).
|
(11)
|
Incorporated
by reference to Acacia Research Corporation’s Current Report on Form 8-K
filed on September 19, 2005 (SEC File No.
000-26068).
|
(12)
|
Incorporated
by reference to Acacia Research Corporation’s Quarterly Report on Form
10-Q for the period ended March 31, 2006, filed on May 10, 2006 (SEC File
No. 000-26068).
|
(13)
|
Incorporated
by reference to Acacia Research Corporation’s Annual Report on Form 10-K
for the year ended December 31, 2007, filed on March 14, 2008 (File No.
000-26068).
|
(14)
|
Incorporated
by reference to Acacia Research Corporation’s Current Report on Form 8-K
filed on January 7, 2008 (File No.
000-26068).
|
(15)
|
Incorporated
by reference to Acacia Research Corporation’s Current Report on Form 8-K
filed on April 2, 2008 (SEC File No.
000-26068).
|
(16)
|
Incorporated
by reference to Acacia Research Corporation’s Annual Report on Form 10-K
for the year ended December 31, 2008, filed on February 26, 2009 (File No.
000-26068).
|
III-2