| | | • | stock-based compensation expense; |
| | | • | valuation of long-lived and intangible assets; and |
| | | • | 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
| impairmentChange in Accounting Policy for Term Agreements. Certain revenue agreements provide for the payment 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
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 Staff Accounting Bulletin No. 104, “Revenue Recognition,” or SAB No. 104, 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. 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.
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 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 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
Effective January 1, 2006, we adopted the provisions of SFAS No. 123R, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123R sets forth the accounting requirements for “share-based” compensation payments to employees and non-employee directors and requires all share based-payments to be recognized as expense in the statement of operations. 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.
SFAS No. 123R also requires stock-based compensation expense to be recorded only for those awards expected to vest using an estimated pre-vesting forfeiture rate. As such, SFAS No. 123R requires 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 11 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:a minimum upfront fee at the inception of each contractual term in consideration for the respective intellectual property rights granted, hereinafter referred to as “term agreements.” Effective October 1, 2009, we elected to change our method of accounting for our term agreements to recognize reve nue when delivery of the intellectual property rights and all other arrangement deliverables has substantially occurred, which is typically at the time of execution of the related term agreement, or upon receipt of the applicable minimum upfront renewal payment, and when all other revenue recognition criteria, as described below, have been met. Prior to the change in method of accounting, fees for term agreements were deferred and amortized to revenue on a straight-line basis over the applicable contractual term. We adopted the new method because it provides a consistent approach to accounting for all of our revenue arrangements with similar significant terms and conditions and more closely reflects the culmination of the earnings process associated with these revenue arrangements.
| We accounted for the change in accounting policy through a retrospective application of the new accounting policy as of January 1, 2009. The effect of applying the new accounting policy to term 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.
| significant underperformance relative to expected historical or projected future operating results; |
|
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 when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been performed pur suant 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 fees receivable from licensees is reasonably assured. We assess the collectibility of 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's estimates regarding collectibility impa ct 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 and thus materially impact our financial position and results of operations. In general, our revenue arrangements provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by our operating subsidiaries. These rights typically include some combination of the following: (i) 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 subsid iaries, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The intellectual property rights granted may be perpetual in nature, extending until the expiration of the related patents, or can be granted for a defined, relatively short period of time, with the licensee possessing the right to renew the agreement at the end of each contractual term for an additional minimum upfront payment. 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 licenses, covenants-not-to-sue, releases, and other deliverables, 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 licenses, covenants-not-to-sue, releases, and other significant deliverab les upon execution of the agreement, or upon receipt of the minimum upfront payment for term 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 upfront fee for term agreement renewals, and when all other revenue recognition criteria have been met. Depending on the complexity of the underlying revenue arrangement 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, the completion of the earning process occurs. Depending on the magnitude of specific revenue arrangements, 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 subsidia ries may recognize revenues in a current period that relate to infringements by licensees that occurred in prior periods. These 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. The economic terms of the inventor agreements, operating agreements and contingent legal fee arrangements associated with the patent portfolios owned or controlled by our operating subsidiaries, if any, including royalty rates, contingent f ee rates and other terms, vary across the patent portfolios owned or controlled by our operating subsidiaries. Inventor royalties, noncontrolling interests and contingent legal fees expenses fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of revenue agreements executed each period and the mix of specific patent portfolios with varying economic terms and obligations generating revenues each period. Inventor royalties, noncontrolling interests and contingent legal fees expenses will continue to fluctuate and may continue to vary significantly period to period, based primarily on these factors.
During the year ended December 31, 2010, we entered into significant agreements with unrelated third parties resolving pending patent matters that resulted in the grant of certain intellectual property rights and recognition of revenues, the majority of which were not subject to inventor royalty and contingent legal fee arrangements, as well as the grant of licenses from certain of our operating subsid iaries and recognition of revenues that were subject to inventor royalties and contingent legal fee arrangements. Revenues recognized subject to inventor royalties and contingent legal fees are based on a determination by the respective operating subsidiaries. Depending on the magnitude of specific revenue arrangements, if different judgments are made regarding revenues subject to inventor royalties and contingent legal fees in any specific period, our periodic financial results may be materially affected. Stock-based Compensation Expense Stock-based compensation payments to employees and non-employee directors are recognized as expense in the statements 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. Stock-based compensation expense is recorded only for those awards expected to vest using an estimated pre-vesting forfeiture rate. As such, we are required 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 11 to our consolidated financial statements included elsewhere herein. 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: | | | • | significant underperformance relative to expected historical or projected future operating results; |
| | | • | 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; |
| | | • | significant adverse changes in legal factors or in the business climate, including adverse regulatory actions or assessments; and |
| | | • | significant decline in our stock price for a sustained period. |
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, which considers the estimated future undiscounted cash flows resulting from the use of the acquiredasset, and a discount rate commensurate with the risks involved. Third party appraised values may also be used in determining whether impairment potentially exists. The estimated fair value is compared to the long-lived asset's' carrying value to determining whether impairment 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.
Impairment of Marketable Securities U.S. generally accepted accounting principles define fair value as the price that would be received for an asset or the strategy for our overall business; |
| | significant negative industry or economic trends; |
| | significant adverse changes in legal factors orexit price that would be paid to transfer a liability in the business climate, including adverse regulatory actionsprincipal or assessments;most advantageous market in an orderly transaction between market participants on the measurement date, and |
| | significant decline in our stock price for also establishes 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 SFAS No. 157. SFAS No. 157 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. SFAS No. 157 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. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. SFAS No. 157fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three-level hierarchy of valuation techniques established a three-level hierarchy of valuation techniques used to measure fair value, is 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. |
We use observable market inputs (quoted market prices) when measuring fair value and are required to use a Level 1 quoted price to measure fair value whenever possible. At December 31, 2010 and 2009, 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 hierarc hy described above. 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. 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 investments. |
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 and related recoveries recorded in the consolidated statements of operations for the periods presented.
Consolidated Results of Operations Comparison of the Results of Operations for Fiscal Years 2010, 2009 and 2008 Revenues (In thousands) | | | | | | | | | | | | | | | | 2010 | | 2009 | | 2008 | | | | | | | | | | Revenues | | $ | 131,829 | | | $ | 67,340 | | | $ | 48,227 | |
Revenues. In general, revenue arrangements provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by our operating subsidiaries. These rights typically include some combination of the following: (i) 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, (ii) covenants-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. | | | | | | | | | | | | | 2010 | | 2009 | | 2008 | | | | | | | | | | New agreements executed | | 221 | | | 117 | | | 80 | | | Licensing and enforcement programs with initial revenues | | 31 | | | 12 | | | 20 | |
Two licensees individually accounted for 35% and 19%, respectively, of revenues recognized in fiscal year 2010, two licensees individually accounted for 15% and 12%, resp ectively, of revenues recognized in fiscal year 2009, and two licensees individually accounted for 13% and 12%, respectively, of revenues recognized in fiscal year 2008. On a consolidated basis, as of December 31, 2010, 91 of our licensing programs had begun generating licensing revenues, up from 60 as of December 31, 2009 and 48 as of December 31, 2008. Revenues recognized by our operating subsidiaries fluctuate from period to period primarily based on the following factors: SFAS No. 157 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.
| | | • | the dollar amount of agreements executed each period, which can be driven by the nature and characteristics of the technology or technologies being licensed and the magnitude of infringement associated with a specific licensee; |
At December 31, 2008 and 2007, all of our investments are classified as available-for-sale, which are reported at fair value, in accordance with SFAS No. 157, 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.
We review impairments associated with our investments in marketable securities in accordance with Emerging Issues Task Force, or EITF, 03-1 and FSP SFAS 115-1 and 124-1, “The Meaning of Other-Than-Temporary-Impairment and Its Application to Certain Investments,” 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 year ended December 31, 2008.
Acacia Research Corporation
Consolidated Results of Operations
Net Loss (In thousands)
| | | 2008 | | | 2007 | | | 2006 | | | Loss from continuing operations | | $ | (13,757 | ) | | $ | (7,359 | ) | | $ | (5,363 | ) | | Loss from discontinued operations - Split-off of CombiMatrix Corporation and other | | | - | | | | (8,086 | ) | | | (20,093 | ) | | Net loss | | $ | (13,757 | ) | | $ | (15,445 | ) | | $ | (25,456 | ) |
The changes in consolidated loss from continuing operations were primarily due to operating results and activities, as discussed below.
Revenues (In thousands)
| | | 2008 | | | 2007 | | | 2006 | | | License fees | | $ | 48,227 | | | $ | 52,597 | | | $ | 34,825 | |
License Fees. Revenues for 2008 included license fees from 80 new licensing agreements covering 30 of our technology licensing and enforcement programs, as compared to 91 new licensing agreements covering 16 of our technology licensing and enforcement programs in 2007, and 72 new licensing agreements covering 14 of our technology licensing and enforcement programs in 2006. The increase in license fee revenues in 2008 and 2007, as compared to 2006, reflects the impact of the increase in patent portfolios owned or controlled by our operating subsidiaries since 2006, and the related increase in the number of patent licensing and enforcement programs developed, launched and generating revenues since 2006. On a consolidated basis, as of December 31, 2008, 48 of our licensing programs had begun generating licensing revenues, up from 28 as of December 31, 2007 and 20 as of December 31, 2006. License fee revenues recognized by our operating subsidiaries fluctuate from period to period primarily based on the following factors:
| ● | the timing and results of patent filings and other enforcement proceedings relating to our intellectual property rights; |
| | | 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, including the nature and characteristics of rights granted, and the periods of infringement or term of use contemplated by the respective payments; |
| | | • | fluctuations in the total number of agreements executed; |
| | | &bu ll; | fluctuations in the sales results or other royalty per unit activities of our licensees that impact the calculation of fees due; |
| | | • | the timing of the receipt of periodic payments and/or reports from licensees; and |
| | | • | fluctuations in the net number of active licensees from period to period. |
The 96% increase in revenues in fiscal year 2010, as compared to fiscal year 2009, was due primarily to an increase in the average revenue per executed agreement and an increase in the number of new licensing agreements executed during the period. In fiscal year 2010, we entered into a number of separate significant revenue agreements with unrelated third parties resolving pending patent matters. The 40 % increase in revenues for fiscal year 2009, as compared to fiscal year 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.
Cost of Revenues and Net Income Attributable to Noncontrolling Interests (In thousands) | | | | | | | | | | | | | | 2010 | | 2009 | | 2008 | | | | | | | | | Cost of revenues: | | | | | | | Inventor royalties | $ | 25,292 | | | $ | 15,673 | | | $ | 14,995 | | | Contingent legal fees | 19,906 | | | 15,945 | | | 12,429 | | | Litigation and licensing expenses - patents | 13,891 | | | 14,055 | | | 6,900 | | | Amortization of patents | 6,931 | | | 4,634 | | | 6,043 | | | Net income attributable to noncontrolling interests | (2,965 | ) | | (5,657 | ) | | — | |
Inventor Royalties, Net Income Attributable to Noncontrolling Interests and Contingent Legal Fees Expense. Net income or loss attributable to noncontrolling interests represents the portion of net income or loss from the licensing and enforcement activities of our majority-owned operating subsidiaries that are distributable to the operating subsidiary's noncontrolling interest holders pursuant to the underlying operating agreements. The economic terms of the inventor agreements, operating agreements and contingent legal fee arrangements associated with the patent portfolios owned or controlled by our operating subsidiaries, 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, these costs fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of agreements executed each period and the periodsmix of infringement contemplatedspecific patent portfolios with varying economic terms and obligations generating revenues each period. | | | | | | | | | | 2010 vs. 2009 | | 2009 vs. 2008 | | | | | &n bsp; | | | | Increase in revenues | 96 | % | | | 40 | % | | | Increase in inventor royalties and net income attributable to noncontrolling interests | 34 | % | Note (a) | | 42 | % | Note (a) | | Increase in contingent legal fees expense | 25 | % | Note (b) | | 28 | % | Note (b) | | Increase in inventor royalties expense, net income attributable to noncontrolling interests and contingent legal fees expense | 30 | % | &n bsp;Note (a),(b) | | 36 | % | Note (a),(b) |
| | | | | | | | | | | | | | | 2010 | | 2009 | | 2008 | | | | | | | | | | | | | | Inventor royalties and net income attributable to noncontrolling interests as a percentage of revenues | | 22 | % | | 32 | % | | 31 | % | | Note (a) | | Contingent legal fees expense as a percentage of revenues | | 15 | % | | 24 | % | | 26 | % | | Note (b) | | Inventor royalties, net income attributable to noncontrolling interests and contingent legal fees, combined, as a percentage of revenues | | 37 | % | | 55 | % | | 57 | % | | Note (a),(b) |
______________________ | | | (a) | The increase in inventor royalties and net income attributable to noncontrolling interests in fiscal year 2010, as compared to fiscal year 2009, was less than the increase in revenues for the same periods, pr imarily due to a portion of revenues recognized in fiscal year 2010 having no corresponding inventor royalty arrangement obligations, and in the aggregate, lower inventor royalty rates associated with the portfolios generating revenues in fiscal year 2010. |
The increase in fiscal year 2009, as compared to fiscal year 2008 was due primarily to the increase in related revenues and a minor increase in inventor royalties and net income attributable to noncontrolling interests as a percentage of revenues. | | | (b) | The increase in contingent legal fees expense in fiscal year 2010, as compared fiscal year 2009, was less than the increase in revenues for the same periods, primarily due to a portion of revenues recognized in fiscal year 2010 having no corresponding contingent legal fee arrangement obligations, and in the aggregate, lower contingent legal fee rates associated with the portfolios generating revenues in fiscal year 2010. |
The increase in fiscal year 2009, as compared to fiscal year 2008, was due to an increase in related revenues, partially offset by a decrease in contingent legal fees as a percentage of revenues due to certain patent portfolios with lower contingent fee rates generating revenues in fiscal year 2009. Certain revenue agreements with unrelated third parties entered into in fiscal year 2010 resulted in the grant of certain intellectual property rights and recognition of revenues, the majority of which were not subject to inventor royalty and contingent legal fee arrangements, as well as the grant of licenses from certain of our operating subsidiaries and recognition of revenues that were subject to inventor royalties and contingent legal fee arrangements. Revenues recognized subject to inventor royalties and contingent legal fees are based on a determination by the respective payments; |
operating subsidiaries. | | | fluctuationsLitigation 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 include licensing and enforcement related third-party patent research, development, consulting, and other costs incurred in connection with the total numberlicensing and enforcement 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; | | | ● | 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 receiptcommencement of periodicnew licensing and enforcement programs in each period. Litigation and licensing expenses-patents decreased slightly in fiscal year 2010, as compared to fiscal year 2009, reflecting relatively comparable net levels of related patent enforcement and prosecution activity associated with our continued investment in ongoing licensing and enforcement programs and new licensing and enforcement programs commenced since the end of the applicable prior year period. Litigation and licensing expenses-patents increased 104% in fiscal year 2009, as compared to fiscal year 2008, due primarily to a n 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 fiscal year 2009, licensing and enforcement programs with trial dates scheduled for fiscal year 2010, and a net increase in costs related to new licensing and enforcement programs commenced since the end of fiscal year 2008. 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 acqui sition, development, licensing and enforcement activities. Amortization of Patents. Amortization expense increased 50% in fiscal year 2010, as compared to fiscal year 2009, due primarily to amortization on patent portfolios acquired since the end of the prior year period totaling $539,000, the acceleration of patent amortization related to recoupable up-front patent portfolio acquisition costs that were recovered in fiscal year 2010, pursuant to the provisions of the underlying inventor agreements totaling $ 1.2 million, and a scheduled increase in amortization related to intangible assets held as of the end of fiscal year 2009 totaling $312,000. In addition, fiscal year 2010 amortization expense included accelerated amortization totaling $275,000, related to a patent portfolio to which our operating subsidiary elected to terminate its rights, and a patent portfolio that was disposed of through a sale to an unrelated party. Patent amortization expense decreased 23% in fiscal year 2009, as compared to fiscal year 2008, primarily due to higher amortization expense recorded in fiscal year 2008, resulting from the acceleration of amortization on a patent portfolio as described below, and a scheduled decrease in amortization totaling $950,000, whi ch was partially offset by an increase in amortization expense related to new patent portfolios acquired in fiscal year 2009 totaling $635,000. In the fourth quarter of fiscal year 2008, pursuant to the terms of the respective inventor agreements, our management elected to terminate our rights to exclusively license fee payments and/or reports from licensees;a patent portfolio. As such, the economic useful life of the patent-related intangible asset was reduced, resulting in the acceleration of $1.1 million of amortization expense for the patent-related asset in fiscal year 2008. Operating Costs and Expenses (In thousands) | | | | | | | | | | | | | | | | 2010 | | 2009 | | 2008 | | | | | | | | | | Marketing, general and administrative expenses (including non-cash stock compensation expense of $7,121 for 2010, $7,065 for 2009 and $7,355 for 2008) | | $ | 25,067 | | | $ | 21,070 | | | $ | 21,130 | | | Research, consulting and other expenses - business development |
| | | 2,121 | | | ●
1,689 | fluctuations in the net number of active licensees period to period. | | 933 | |
Two licensees individually accounted for 13% and 12% of license fee revenue recognized during the year ended December 31, 2008, two licensees individually accounted for 19% and 12% of license fee revenue recognized during the year ended December 31, 2007, and one licensee accounted for 14% of license fee revenue recognized during the year ended December 31, 2006.
Costs incurred in connection with our operating subsidiaries licensing and enforcement activities, other than inventor royalties expense, contingent legal fees expense and patent-related legal expenses, are included in marketing, general and administrative expenses.
Operating Expenses (In thousands)
| | | 2008 | | | 2007 | | | 2006 | | Marketing, general and administrative expenses (including non-cash stock compensation expense of $7,355 for 2008, $5,908 for 2007 and $3,946 for 2006) | | $ | 24,014 | | | $ | 20,042 | | | $ | 14,123 | | | Inventor royalties and contingent legal fees expense - patents | | | 27,424 | | | | 29,224 | | | | 17,159 | | | Legal expenses - patents | | | 4,949 | | | | 7,024 | | | | 4,780 | | | Amortization of patents | | | 6,043 | | | | 5,583 | | | | 5,313 | | | Write-off of patent-related intangible asset | | | - | | | | 235 | | | | 297 | |
Marketing, General and Administrative Expenses. Marketing, general and administrative expenses include employee compensation and related personnel costs, including non-cash stock compensation expenses, officeoff ice and facilities costs, legal and accounting professional fees, public relations, marketing, stock administration, gross receipts based state taxes and other corporate costs, and patent related development, licensing, research, consulting and maintenance 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): | | | | | | | | | | 2010 vs. 2009 | | 2009 vs. 2008 | | | | | | | Addition of licensing, business development and engineering personnel and other personnel costs, net | $ | 1,021 | | | $ | (305 | ) | | Increase in variable performance-based compensation and other variable personnel costs | 2,153 | | | 701 | | | Corporate, general and administrative costs | 622 | | | (46 | ) | | State and foreign gross receipts taxes | 145 | | | (120 | ) | | Non-cash stock compensation expense | 56 | | | (290 | ) |
| | | 2008 vs. 2007 | | | 2007 vs. 2006 | | | Addition of licensing, business development and engineering personnel | | $ | 1,510 | | | $ | 2,767 | | | Consulting expenses paid to former CEO of Global Patent Holdings, LLC | | | (74 | ) | | | (925 | ) | | One time employee severance charges | | | (129 | ) | | | 360 | | | Foreign taxes paid on licensing fees | | | (27 | ) | | | 125 | | | Business development and licensing related patent research and consulting costs | | | 1,069 | | | | 1,021 | | | Corporate, general and administrative costs | | | 176 | | | | 609 | | | Non-cash stock compensation expense | | | 1,447 | | | | 1,962 | |
The overall increase in marketing, generalResearch, Consulting and administrativeOther Expenses - Business Development. Research, consulting and other expenses is reflective of the continued growthinclude third-party business development related research, development, consulting, and expansion of our intellectual property acquisition, licensing and enforcement business conducted by our operating subsidiaries and related ongoing operations.
Non-cash stock compensation expense increased during 2008, as compared to 2007 and 2006, primarily due to an increase in the average fair value of equity-based incentive awards expensed during the periods presented. The weighted-average grant date fair value of equity-based incentive awards expensed during 2008, 2007 and 2006, which is generally based on the grant date market value of our common stock, was approximately $11.66, $9.95 and $4.96, respectively. The weighted-average grant date fair value of equity-based awards granted during 2008, 2007 and 2006 was $4.85, $12.74 and $6.88, respectively. Equity-based awards are generally expensed on a straight-line basis over a two to three year vesting period. Refer to Note 11 to our consolidated financial statements, included elsewhere herein, for additional information on equity-based award grant activity for the periods presented.
Inventor Royalties and Contingent Legal Fees Expense. Inventor royalties expense totaled $15.0 million, $12.1 million and $9.6 million in 2008, 2007 and 2006, respectively, and contingent legal fees expense totaled $12.4 million, $17.2 million and $7.5 million in 2008, 2007 and 2006, respectively. Inventor royalties expenses and contingent legal fees expenses for the periods presented wereother costs incurred in connection with the recognition of the related license fee revenues, summarized above. The majority of the patent portfolios owned or controlled by our operating subsidiaries are subject to patent and patent rights agreements with inventors containing provisions granting to the original patent owner the right to receive inventor royalties based on future net revenues, as defined in the respective agreements, and may also be subject to contingent legal fee arrangements with external law firms engaged on a contingent fee basis. The economic terms of the inventor and contingent fee arrangements, if any, vary across our patent portfolios. Certain contingent legal fee arrangements employ a graduated fee structure based on the stage of litigation. As such, inventor royalties and contingent legal fee expensesbusiness development activities. These costs 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.
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. 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.
Legal Expense – Patents. Patent-related legal expenses include patent-related prosecution and enforcement costs incurred by outside law firms engaged on an hourly basis and the out-of-pocket expenses incurred by outside law firms engaged on a contingent fee basis. Patent-related legal expenses include casebusiness development related costs billed by outside counsel for discovery, depositions, economic analyses, damages assessments, expert witnesses and other consultants, case related audio/video presentations for the court, and other litigation support and administrative costs. Patent-related legal expenses fluctuate from period to period based on patent enforcement and prosecution activity associated with ongoing licensing and enforcement programs and the timing of the commencement of new licensing and enforcement programsactivities in each period.
Provision for Income Taxes (in thousands) 28 | | | | | | | | | | | | | 2010 | | 2009 | | 2008 | | | | | | | | Provision for income taxes | $ | 1,740 | | | $ | 209 | | | $ | 124 | | | Effective tax rate | 4 | % | | (4 | ) % | | (1 | )% |
Provision for Income Taxes. The increase in the our tax expense in fiscal year 2010, as compared to fiscal year 2009, reflects the impact of the suspension of the use of NOLs in California, as described below, and the calculation of tax expense for financial reporting purposes without the excess tax benefit related to the exercise and vesting of equity-based incentive awards in fiscal year 2010. Under U.S. generally accepted accounting principles, if a deduction reported on a tax return for an equity-based incentive award exceeds the cumulative compensation cost for those instruments recognized for financial reporting purposes, any resulting realized tax benefit that exceeds the previously calculated and recognized compensation expense for those instruments is considered an exce ss tax benefit, and is recognized as a credit to additional paid-in capital. The deduction related to the exercise and vesting of equity-based incentive awards in fiscal year 2010 is available to offset taxable income on our 2010 consolidated tax return, as no NOLs are allowed to be utilized for California tax return purposes in 2010, as described below. Accordingly, the excess tax benefit related to the exercise and vesting of equity-based incentive awards in fiscal year 2010 was credited to additional paid-in capital, not tax expense. The actual tax benefit realized for excess tax deductions resulting from the exercise and vesting of equity-based incentive awards in fiscal year 2010 totaled $1.3 million. As a result of the excess tax benefit realized, our state taxes payable in fiscal year 2010, for the 2010 tax year, totaled $170,000, primarily re lating to California state minimum taxes for the 2010 tax year. In 2007, we incurred increased litigation support related outOctober 2010, the State 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 inCalifornia passed a state budget including provisions furthering the prosecutionsuspension of the related litigationuse of NOLs, for the 2010 and certain of our enforcement actions that proceeded2011 tax years. As a result, California State NOLs are not available 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 inoffset California taxable income for the overall number of outstanding enforcement actions during the period.2010 or 2011 tax years.
The increase in patent related legal expensesour effective tax rate in 2007,fiscal year 2009, as compared to 2006, is primarily due tofiscal year 2008 reflects a net increasedecrease in ongoing patent enforcement litigationloss from continuing operations before provision for income taxes and an increase in litigation support related out of pocket expenses, third party technical consulting expensesstate minimum taxes and professional expert expenses incurredother state tax liabilities in connection withjurisdictions where certain of our patent portfolios that were further along in the prosecution of the related litigation and certain of our patent portfolios that proceeded to trial and concluded in 2007.
We expect patent-related legal expenses to continue to fluctuate period to period based on the factors summarized above, in connection with current and future patent licensing and enforcement programs.
Amortization of Patents. During the fourth quarter of 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 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 the January 2005 GPH Acquisition.
The increase in 2007, as compared to 2006, was due to additional patent amortization charges related to certain patent portfolios acquired by ourAcacia's operating subsidiaries in late 2006 and throughout 2007. Patent amortization charges will continue to be significant in future periods as we continue to amortize the acquired patent related costs over a weighted-average remaining economic useful life of approximately four years. Refer to “Liquidity and Capital Resources” below for patent portfolio acquisition costs incurred during the periods presented.file separate state tax returns.
Other
At December 31, 2008,2010 and 2009, the par value of our auction rate securities collateralized by student loan portfolios totaled $2.75 million.$2.5 million and $2.7 million, respectively. As a result of the liquidity issues associated with the failed auctions as described in Item 1A. “Risk Factors” elsewhere herein,Note 7 to the consolidated financial statements included in this report, we estimateestimated 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, 2008 consolidated balance sheet.sheets. In addition, we recorded an other-than-temporary loss on our student loan collateralized auction rate securities of $250,000$ 296,000 and $263,000 in the accompanying consolidated statementstatements of operations forin fiscal years 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 net realized gains totaling $32,000 (original recognized unrealized loss was $49,000), $13,000 and $13,000, in fiscal years 2010, 2009 and 2008, respectively, reflecting a partial recovery of the year ended December 31, 2008.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, 2008.
At2010 and 2009. As of December 31, 2008, we also held2010, the net other-than-temporary loss on auction rate securities with a par value totaling $975,000, issuedcollateralized by high credit quality closed-end investment companies. Despite the reduction in liquidity resulting from the failure of auctions for these securities since February 2008, the issuers of these auction rate securities have redeemed, at par, approximately 66% of the securities held by us since February 2008, and have indicated that they continue to evaluate ways to provide additional liquidity to their auction rate security holders. Additionally, these securities continue to be AAA rated and the underlying funds continue to meet certain specified asset coverage tests required by the rating agencies, as well as the 200% asset coverage test with respect to auction rate securities set forth in the Investment Company Act of 1940, as amended. However, due to the impact of the reduced liquidity asstudent loan portfolios totaled $484,000.
As of December 31, 2008, we recorded an other-than-temporary loss on our2009, all of the auction rate securities issued by closed-end investment companies ofwere redeemed at par. As a result, we recorded realized gains totaling $236,000 in the accompanyingconsolidated statement of operations for the year ended December 31, 2008, and have classified2009, reflecting a recovery of the other-than-temporary loss originally recorded on these securities as noncurrent assets in the accompanying December 31, 2008 consolidated balance sheet.securities. Discontinued Operations – Split-Off of CombiMatrix CorporationInflation
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, 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, in accordance with guidance set forth in SFAS No. 144, our accompanying consolidated financial statements for all 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 of us under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”
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 December 31, 2007 consolidated balance sheet is a charge to consolidated shareholders’ 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 10A 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 impacti mpact on us or any of our subsidiaries in the current or prior periods.
Liquidity and Capital Resources
General Our consolidatedprimary sources of liquidity are cash, cash equivalents and investments on hand generated from our opera ting activities. Our management believes that our cash and cash equivalents, 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 2012. 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 issuances of equity or debt, or other external financing. However, additional funding may not be available on favorable terms, if at all. The capital and credit markets have experienced extreme volatility and disruption since late 2007, and the volatility and impact of the disruption has continued into 2011. At times during this period, the volatility and disruption has reached unprecedented levels. In several cases, the markets have exerted downward pressure on stock prices and credit capacity for cert ain 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, conducted by our operating subsidiaries, may suffer. As described above, in August 2010, one of our wholly-owned subsidiaries became the general partner of the Acacia IP Fund, which was formed in August 2010. The Acacia IP Fund is authorized to raise up to $250 million. The Acacia IP Fund acquires, licenses and enforces intellectual property consisting primarily of patents, patent rights, and patented technologies. Cash, Cash Equivalents and Investments Our consolidated cash, cash equivalents and investments on hand totaled $51.5$104.5 million at December 31, 2010, compared to $53.9 million at DecemberDece mber 31, 2008, compared to $51.4 million at December 31, 2007. Working capital at December 31, 2008 was $42.6 million, compared to $48.1 million at December 31, 2007. The change in working capital primarily reflects the impact of cash flows used in continuing operating and investing activities, as discussed below. In addition, the change in working capital also reflects the reclassification of $2.75 million (par value) of auction rate securities collateralized by student loans and $975,000 (par value) of auction rate securities issued by high credit quality closed-end investment companies to noncurrent assets as of December 31, 2008, as described above.
2009. The net change in cash, and cash equivalents and investments on hand related to continuing operations for 2008, 20072010, 2009 and 20062008 was comprised of the following (in thousands):
| | | 2008 | | | 2007 | | | 2006 | | | | | | | | | | Net cash provided by (used in) continuing operations: | | | | | | | | | | | | | | | 2010 | | 2009 | | 2008 | | | | | | | | | | | Net cash provided by (used in) operations: | | | | | | | | | Operating activities | | $ | 2,598 | | | $ | 5,166 | | | $ | 6,608 | | | $ | 44,922 | | | $ | 16,118 | | | $ | 2,600 | | | Investing activities | | | 5,070 | | | | (2,145 | ) | | | 10,513 | | | (8,098 | ) | | (8,652 | ) | | 5,070 | | | Financing activities | | | 142 | | | | 5,014 | | | | 1,475 | | | 13,956 | | | (4,010 | ) | | 142 | |
Cash Flows from Operating Activities.License fee payments received Cash receipts from licensees decreased tototaled $127.4 million, $70.9 million and $42.1 million in fiscal years 2010, 2009 and 2008 compared to $51.4, respectively. The fluctuations in cash receipts for the periods presented primarily reflects the corresponding fluctuations in revenues recognized during the same periods, as described above. Cash outflows from operations totaled $82.5 million, $54.8 million and $39.5 million in 2007, reflecting the decrease in license fee revenues recognized infiscal years 2010, 2009 and 2008 as compared to 2007, as discussed above., respectively. The decrease in consolidated net cash inflows from operations in 2008, as compared to 2007, and 2007, as compared to 2006 was primarily due to the related fluctuations in license fee revenues recognizedcash outflows for the respective periods presented reflect the net increase in revenue related inventor royalties and the increases in business development and licensing related patent research and consulting costs, personnel expenses,contingent legal fees and other corporate, generaloperating costs and administrative expenses during the same periods, as describeddiscussed 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 $8.2 million, $9.6 million and $2.1 million in fiscal years 2010, 2009 and 2008, respectively. Net sales of short-term investments totaled $184,000, $1.0 million and $7.2 million in fiscal years 2010, 2009 and 2008, respectively. ConsolidatedCash Flows from Financing Activities. Cash inflows from financing activities in fiscal year 2010 included $2.4 million in capital contributions to the Acacia IP Fund and $1.3 million in excess tax benefits rela ted to stock-based compensation. Distributions to noncontrolling interests totaled $4.8 million in fiscal year 2010 and $3.2 million in fiscal year 2009. Cash inflows from financing activities in fiscal years 2010, 2009 and 2008 included stock option exercise proceeds of $15.1 million, $247,000, and $142,000, respectively.
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. Working Capital The primary components of working capital are cash and cash equivalents, accounts receivable, increasedprepaid expenses, accounts payable, accrued expenses, royalties and contingent legal fees payable and deferred revenues. Working capital at December 31, 2010 was $92.3 million, compared to $7.4$36.0 million at December 31, 2008,2009. Consolidated accounts receivable from licensees increased to $8.0 million at December 31, 2010, compared to $1.4$5.1 million at December 31, 2007. 2009. Accounts receivable balances fluctuate based on the timing, magnitude and payment terms associated with revenue agreements executed during the period, and the timing of cash receipts on accounts receivable balances recorded in previous periods. One licensee individually represented approximately 74% of accounts receivable at December 31, 2010. Two licensees individually represented approximately 78% and 10%, respectively, of accounts receivable at December 31, 2009. Consolidated royalties and contingent legal fees payable increased to $10.8$12.8 million at December 31, 2010, compared to $12.4 million at December 31, 2008, compared to $2.3 million at December 31, 2007. The increase in accounts receivable2009. 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 primarily reflects higher license fee revenues recognized in the fourth quarter of 2008, as compared to the same period in 2007,inventor and the timing of cash receipts from licensees and the related payments to the inventors and contingent law firms with whom we partner. outside attorneys, respectively. The majority of accounts receivable from licensees at December 31, 20082010 were collected or scheduled to be collected in the first and second quarter of 2009,2011, 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 and second quarter of 2009,2011, upon receipt by us of the related license fee payments from licensees, in accordance withw ith the underlying contractual arrangements.
Investing Activities. The change in net cash flows used in investing activities for the periods presented reflects fluctuations in net purchasesAccounts payable and sales of available-for-sale investments in connection with ongoing cash management activities. Short-term investments represent capital availableaccrued expenses decreased to fund current operations and fund capital expenditures. In addition, certain of our operating subsidiaries incurred patent acquisition costs of $2.1$7.1 million $3.8 at December 31, 2010, from $8.0 million and $1.0 million in 2008, 2007 and 2006, respectively, relatedat December 31, 2009, due primarily to the acquisitiondecrease in litigation and licensing expenses-patents described above and the related timing of additional patent portfolios,payments to attorneys and other vendors.
Deferred revenues, representing non-refundable cash payments received from a licensee prior to all of the required revenue recognition criteria, as described earlier.
Financing Activities. Consolidated net cash inflows from financing activities in 2008, 2007 and 2006 included stock option exercise proceeds of $142,000, $5.0 million, andabove, being met, totaled $1.5 million respectively.
Management believes that our consolidated cash and cash equivalent balances, anticipated cash flow fromat December 31, 2009. These amounts were recognized as revenues in the statement of operations and other external sourcesi n the first quarter of available credit, will be sufficient to meet its cash requirements through at least Marchfiscal 2010, and for the foreseeable future. However, we may, and our subsidiaries may, encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated, including those set forth in Item 1A. “Risk Factors” included elsewhere herein. There can be no assurance that funds from additional sources will be available when needed or, if available, will be on terms favorable to us or to our stockholders. If additional funds are raised by issuing equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock. If we and our subsidiaries fail to obtain additional funding when needed, they may not be able to execute their business plans and their businesses may suffer. Refer to the “Liquidity and Risks” discussion included in Note 1 to our consolidated financial statements included elsewhere herein for additional information.all revenue recognition criteria were met.
Refer to Note 7 to our consolidated financial statements elsewhere herein for information on auction rate securities held as of December 31, 2008.
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 2008.2011. 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, 2008,2010, and any material known commitments arising from events subsequent to year end: | | | | | | | | | | | | | | | | | | | | Payments Due by Period (In thousands) | | | | Total | | Less than 1 year | | 1-3 years | | More than 3 years | | | | | | | | | | | | Operating leases | | $ | 4,079 | | | $ | 808 | | | $ | 1,497 | | | $ | 1,774 | | | Scheduled patent acquisition related payments | | 1,100 | | | 350 | | | 750 | | | — | | | Total contractual obligations | | $ | 5,179 | | | $ | 1,158 | | | $ | 2,247 | | | $ | 1,774 | |
| | | Payments Due by Period (In thousands) | | | Contractual Obligations | | Total | | | Less than
1 year | | | 1-3 years | | | 3-5 years | | | More than
5 years | | | Operating leases | | $ | 2,945 | | | $ | 858 | | | $ | 1,923 | | | $ | 164 | | | | - | | | Total contractual obligations | | $ | 2,945 | | | $ | 858 | | | $ | 1,923 | | | $ | 164 | | | | - | |
Uncertain Tax PositionsFIN 48 Liability. Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, or FIN 48, “Accounting for Uncertainty in Income Taxes,” (refer to Note 2 to the consolidated financial statements included elsewhere herein). As of December 31, 2008,2010, the liability for uncertain tax positions, associated primarily with state income taxes, totaled $75,000,$85,000, none 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 the Acacia Research Corporationour consolidated financial statements included elsewhere herein.
Item 7A. | 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 interest rate 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 willmay 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, 2008,2010, all of our investments were in AAA rated money market funds that invest in U.S. Treasuryfirst-tier only securities, and obligationswhich primarily include domestic commercial paper, securities issued or guaranteed by the U.S. GovernmentU.S. government or its agencies, U.S. bank obligations, fully co llateralized repurchase agreements 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, 2008.2010. Refer to Item 1A.1A, “Risk Factors,” Item 7. “Liquidity7, --”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 included elsewhere herein for information on auction rate securities held as of December 31, 2008.for the periods presented.
Item 8. | 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 ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Item 9. | CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
Item 9A. | CONTROLS AND PROCEDURES |
ITEM 9A. CONTROLS AND PROCEDURES Conclusion Regarding the Effectiveness of DisclosureDisc losure Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officerChief Executive Officer and principal financial officer,Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rulein Rules 13a-15(e) promulgatedand 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on this evaluation, our principal executive officerChief Executive Officer and our principal financial officerChief Financial Officer concluded that, as of the end of the period covered by this annual report,December 31, 2010, 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 our management, including our chief executive officerChief Executive Officer and chief financial officer,Chief Financial Officer, as appropriate to allow timely decisionsdecisi ons 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 Rules 13a-15(f) and 15d-15(f) under the Exchange Act Rule 13a-15(f).Act. Under the supervision and with the participation of our management, including our principal executive officerChief Executive Officer and principal financial officer,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, 2008.2010. 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 issuedis sued 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.
ItemITEM 9B. | OTHER INFORMATION |
None
PART III Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Except as provided below, thein accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference from the information under the captions entitled “Election of Directors-Nominees,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” into our definitive proxy statement to be filed with the SEC no later than April 30, 2009.2011. Code of Conduct. We have adopted a Code of Conduct that applies to all of its employees, including itsour chief executive officer, chief financial and accounting officer, president and any persons performing similarsim ilar functions. Our Code of Conduct is provided on our internet website at www.acaciaresearch.com. Item 11. | EXECUTIVE COMPENSATION |
ITEM 11. EXECUTIVE COMPENSATION In accordance with Genera l Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference from the information under the caption entitled “Executive Officer Compensation and Other Information” into our definitive proxy statement to be filed with the SEC no later than April 30, 2009.2011. Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS In accordance with General Instruction G(3) to Form 10-K, thecertain information required by this Item is incorporated herein by reference from the information under the caption entitled “Security Ownership of Certain Beneficial Owners and Management” into our definitive proxy statement to be filed with the SEC no later than April 30, 2009.2011.
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, 2010: | | | | | | | | | | 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) | | 521,000 | | | $5.41 | | | 1,176,000 | | 2007 Acacia Technologies Stock Incentive Plan(2) | | — | | | — | | | — | | | Subtotal | | 521,000 | | | $5.41 | | | | Equity compensation plans not approved by security holders(3) | | | | | | | | | | | | | N/A | | | N/A | | | N/A | | | Total | | 521,000 | | | $5.41 | | | 1,176,000 | |
____________________ (1)The share reserve under the 2002 Acacia Technologies Stock Incentive 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 1,140,000 in nonvested restricted stock awards and restricted stock units outstanding at December 31, 2010. Refer to Note 11 to our consolidated f inancial statements included elsewhere herein. (2)The initial share reserve under the 2007 Acacia Technologies Stock Incentive Plan, or 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 565,000 in nonvested re stricted stock awards outstanding at December 31, 2010. Refer to Note 11 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. Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE In accordance with General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference from the information under the caption entitled “Certain Transactions” into our definitive proxy statement to be filed with the SEC no later than April 30, 2009.2011. Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES In accordance with General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference from the information under the caption entitled “Audit Committee Report” into our definitive proxy statement to be filed with the SEC no later than April 30, 2009.2011.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES | EXHIBITS, FINANCIAL STATEMENT SCHEDULES | | (a) | The following documents are filed as part of this report. |
(a) The following documents are filed as part of this report.
| | | | (1) Financial Statements | | Page | | | | | | Acacia Research Corporation Consolidated Financial Statements | | | | | | | F-1 | | | Report of Independent Registered Public Accounting Firm – PricewaterhouseCoopers LLP | F-3 | | | F-4 | | | | F-5 | | | | F-6 | | | | F-7 | | | | F-8 | | | & nbsp; | | | | (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)( 3) Exhibits | | | | | | | Refer to Item 15(b) below. | |
(b) Exhibits. The following exhibits are either filed herewith or incorporated herein by reference:
| | | (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)(1) | | 3.2 | Amended and Restated Bylaws (13)(11) | | 3.2.1 | Amendment to Amended and Restated Bylaws (14)(12) | | 10.1* | Acacia Research Corporation 1996 Stock Option Plan, as amended (4)(2) | | 10.2* | Form of Option Agreement constituting the Acacia Research Corporation 1996 Executive Stock Bonus Plan (5)(3) | | 10.3* | 2002 Acacia Technologies Stock Incentive Plan (6)(4) | | 10.4* | 2007 Acacia Technologies Stock Incentive Plan (7)(5) | | 10.5* | Form of Acacia Technologies Stock Option Agreement for the 2007 Acacia Technologies Stock Incentive Plan (8)(6) | | 10.6* | Form of Acacia Technologies Stock Issuance Agreement for the 2002 Acacia Technologies Stock Incentive Plan (8)(6) | | 10.7* | Form of Acacia Technologies Stock Issuance Agreement for the 2007 Acacia Technologies Stock Incentive Plan (8)(6) | | 10.8 | Office Space Lease Agreement dated January 28, 2002, between Acacia Research Corporation and The Irvine Company (9) |
| (7) | | 10.10 | Form of Indemnification Agreement (10)(8) | | 10.11 | Form of Subscription Agreement between Acacia Research Corporation and certain investors (11)(9) | | 10.12 | Third Amendment to leaseLease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (12)(10) | | 10.19* | Employment Agreement, dated January 28, 2005, by and between Acacia Technologies Services Corporation, and Dooyong Lee, as amended (13)ame nded (11) |
| | | 10.19.1* | Amendment to Employment Agreement, dated December 17, 2008, by and between Acacia Research CorporationTechnologies, LLC and Dooyong Lee (14) | | 10.20* | Employment Agreement, dated April 12, 2004, by and between Acacia Media Technologies Corporation and Edward Treska (13)(11) | | 10.20.1* | Addendum, to Employment Agreement with Edward Treska, dated March 31, 2008, (15)to Employment Agreement by and between Acacia Media Technologies Corporation and Edward Treska (13) | | 10.21 | Fourth Amendment to leaseLease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (13)(11) | | 10.22 | Fifth Amendment to Lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (13)(11) | | 10.23* | Employment Agreement, dated March 31, 2008, by and between Acacia Technologies, LLC and Paul Ryan (15)(13) | | 10.23.1* | Amendment to Employment Agreement, dated December 17, 2008, by and between Acacia Technologies, LLC and Paul Ryan (14) | | 10.24* | Employment Agreement, dated March 31, 2008, by and between Acacia Technologies, LLC and Robert L. Harris (15)(13) | | 10.24.1* | Amendment to Employment Agreement, dated December 17, 2008, by and between Acacia Research CorporationTechnologies, LLC and Robert L. HarrisH arris (14) | | 10.25* | Amended Employment Agreement, dated March 31, 2008, by and between Acacia Technologies, LLC and Clayton J. Haynes (15)(13) | | 10.25.1* | Amendment to Amended Employment Agreement, dated December 17, 2008, by and between Acacia Research CorporationTechnologies, LLC and Clayton J. Haynes (14) | | 10.26* | Amended Acacia Research Corporation Amended and Restated Executive Severance Policy (14) | | 10.27 | Sixth Amendment to Lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company | | 18.1 | Preferability Letter dated February 25, 2010 from Grant Thornton LLP, independent registered public accounting firm, regarding change in accounting principle (15) | | 21.1 | List of Subsidiaries | | 23.1 | Consent of Independent Registered Public Accounting Firm - Grant Thornton LLP | 23.224.1 | ConsentPower of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLPAttorney (included in the signature page hereto). | | 31.1 | Certification of Chief Executive Officer Pursuant to Section 302Rule 13a-14(a)/15d- 14(a) of the Sarbanes-OxleySecurities Exchange Act of 20021934 | | 31.2 | Certification of Chief Financial Officer Pursuant to Section 302Rule 13a-14(a)/15d-14(a) of the Sarbanes-OxleySecurities Exchange Act of 20021934 | | 32.1 | Certification of the Chief Executive Officer provided pursuantPursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 32.2 | Certification of the Chief Financial Officer provided pursuantPursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
___________________________
* | The referenced exhibit is a management contract, compensatory plan or arrangement. |
___________________________ † | Portions of this exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the United States Securities and Exchange Commission. |
* 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 June 5, 2008 (SEC File No. 000-26068). (2) 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). (3) 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). (4) Incorporated by reference to Annex 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. (5) Incorporated by reference to Acacia Research Corporation's Registration Statem ent on Form S-8 (SEC File No. 333-144754) which became effective on July 20, 2007.
(6) Incorporated by refer ence 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). (7) 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). (8) 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). (9) Incorporated by reference to Acacia Research Corporation's Current Report on Form 8-K filed on September 19, 2005 (SEC File No. 000-26068). (10) 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). (11) 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). (12) Incorporated by reference to Acacia Research Corporation's Current Report on Form 8-K filed on January 7, 2008 (File No. 000-26068). (13) Incorporated by reference to Acacia Research Corporation's Current Report on Form 8-K filed on April 2, 2008 (SEC File No. 000-26068). (14) Incorporated by reference to Acacia Research Corporation's Annual Report on Form 10-K for the year ende d December 31, 2008, filed on February 26, 2009 (File No. 000-26068). (15) Incorporated by reference to Acacia Research Corporation's Annual Report on Form 10-K for the year ended December 31, 2009, filed on February 25, 2010, as amended on February 26, 2010 (File No. 000-26068)
SIGNATURES (1) | Incorporated by reference from Acacia Research Corporation’s Current Report on Form 8-K filed on December 30, 1999 (SEC File No. 000-26068). |
(2) | Incorporated by reference as 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 as Appendix A to the Definitive Proxy Statement on Schedule 14A filed on April 10, 2000 (SEC File No. 000-26068). |
(5) | Incorporated by reference from Acacia Research Corporation’s Definitive Proxy as Appendix A Statement on Schedule 14A filed on April 26, 1996 (SEC File No. 000-26068). |
(6) | Incorporated by reference as 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 from 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 from 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 from Acacia Research Corporation’s Current Report on Form 8-K filed on September 19, 2005 (SEC File No. 000-26068). |
(12) | Incorporated by reference from 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 from 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 from Acacia Research Corporation’s Current Report on Form 8-K filed on January 7, 2008 (File No. 000-26068). |
(15) | Incorporated by reference from Acacia Research Corporation’s Current Report on Form 8-K filed on April 2, 2008 (SEC File No. 000-26068). |
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.
Dated: February 26, 2009 | | | | | | | | ACACIA RESEARCH CORPORATION | | | | | | | | | | Dated: | February 28, 2011 | By: | /s/ Paul R. Ryan
| | | | | Paul R. Ryan | | | Chairman of the Board | | and Chief Executive Officer | | (Authorized Signatory) | | | | | 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 ExchangeEx change 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 (including post-effective 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 26, 200928, 2011 | | | Paul R. Ryan | | Chief Executive Officer | | | | | | | (Principal Chief Executive)Executive Officer) | | | | | | | | | | | /s/ | Robert L. Harris, II | | Director and President | | February 26, 200928, 2011 | | | Robert L. Harris, II | | | | | | | | | | | | | | | | | | /s/ | Clayton J. Haynes | | Chief Financial Officer and Treasurer | February 26, 2009 | Februa ry 28, 2011 | | | Clayton J. Haynes | | (Principal Financial and Accounting Officer) | | | | | | | | | | | | | | | | /s/ | Fred A. de Boom | | Director | | February 26, 200928, 2011 | | | Fred A. de Boom | | | | | | | | | | | | | | | | /s/ | Edward W. Frykman | | Director | | February 26, 200928, 2011 | | | Edward W. Frykman | | | | | | | | | | | | | | /s/ | G. Louis Graziadio, III | | Director | February 26, 2009 |
| | | | | | | | /s/ | G. Louis Graziadio, III | | Director | | February 28, 2011 | | | G. Louis Graziadio, III | | | | | | | | | | | | | | /s/ | William S. Anderson | | Director | February 26, 2009 | | William S. Anderson | | | | |
| | | | | | | /s/ | William S. Anderson | | Director | | February 28, 2011 | | William S. Anderson | | | | |
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, 20082010 and 2007,2009, and the related consolidated statements of operations, and comprehensive loss, stockholders’ equity, and cash flows for each forof the twothree years in the period ended December 31, 2008.2010. 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, 20082010 and 2007,2009, and the results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2008,2010 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, 2008,2010, 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 26, 200928, 2011 expressed an unqualified opinion thereon.
As discussed in Note 8, the Company elected to change its method of accounting for term agreements in 2009.
/s/ GRANTGRAN T THORNTON LLP
Irvine, California February 26, 200928, 2011
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, 2008,2010, 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.cir cumstances. 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 statementsstatement s 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 policiespoli cies 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, 2008,2010, based on criteria established in Internal Control—Integrated Framework issued by COSO. We also haveh ave 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, 20082010 and 2007,2009, and the related consolidated statements of operations, and comprehensive loss, stockholders’ equity, and cash flows for each of the twothree years in the period ended December 31, 20082010 and our report dated February 26, 2009,28, 2011 expressed an unqualified opinion.opinion and contained an explanatory paragraph relating to the change in accounting method for term agreements in 2009.
/s/ GRANT THORNTON LLP Irvine, California February 26, 200928, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Acacia Research Corporation:
In our opinion, the consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for the year ended December 31, 2006 present fairly, in all material respects, the results of operations and cash flows of Acacia Research Corporation and its subsidiaries for the year ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. 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 audit. We conducted our audit of these statements 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Orange County, California
March 12, 2007, except for Note 10A, as to which the
date is March 10, 2008
ACACIA RESEARCH CORPORATION CONSOLIDATED BALANCE SHEETS As of December 31, 20082010 and 20072009 (In thousands, except share and per share information) | | | | | | | | | | | | December 31, | | December 31, | | & nbsp; | | 2010 | | 2009 | | | | | | | | ASSETS | | | | | | Current assets: | | | | | | Cash and cash equivalents | | $ | 102,515 | | | $ | 51,735 | | | Accounts receivable | | 7,987 | | | 5,110 | | | Prepaid expenses and other current assets | | 1,679 | | | 1,081 | | | Total current assets | | 112,181 | | | 57,926 | | | Property and equipment, net of accumulated depreciation | | 135 | | | 163 | | | Patents, net of accumulated amortization | | 19,803 | | | 17,510 | | | Investments - noncurrent | | 2,001 | | | 2,152 | | | Other assets | | 664 | | | 505 | | | | | $ | 134,784 | | | $ | 78,256 | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | Current liabilities: | | | | | | | | Accounts payable and accrued expenses | | $ | 7,099 | |
| $ | 8,006 | | | Royalties and contingent legal fees payable | | 12,760 | | | 12,402 | | | Deferred revenues | | — | | | 1,510 | | | Total current liabilities | | 19,859 | |
| 21,918 | | | Other liabilities | | 1,072 | | | 369 | | | Total liabilities | | 20,931 | | | 22,287 | | | Commitments and contingencies (Note 12) | | | | | | | | 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; 36,029,068 and 31,912,066 shares issued and outstanding as of December 31, 2010 and 2009, respectively | | 36 | | | 32 | | | Additional paid-in capital | | 197,026 | | | 173,672 | | | Accumulated deficit | | (86,191 | ) | | (120,242 | ) | | Total Acacia Research Corporation stockholders' equity | | 110,871 | | | 53,462 | | | Noncontrolling interests in operating subsidiaries | | 2,982 | | | 2,507 | | | Total stockholders' equity | | 113,853 | | | 55,969 | | | | | | December 31, | | | December 31, | | | | | 2008 | | | 2007 | | | ASSETS | | | | | | | | Current assets: | | | | | | | | Cash and cash equivalents | | $ | 48,279 | | | $ | 40,467 | | | Short-term investments | | | - | | | | 10,966 | | | Accounts receivable | | | 7,436 | | | | 1,409 | | | Prepaid expenses and other current assets | | | 1,255 | | | | 1,356 | | | Total current assets | | | 56,970 | | | | 54,198 | | | | | | | | | | | | | Property and equipment, net of accumulated depreciation | | | 221 | | | | 323 | | | Patents, net of accumulated amortization | | | 12,419 | | | | 16,307 | | | Investments - noncurrent | | | 3,239 | | | | - | | | Other assets | | | 225 | | | | 223 | | | | | $ | 73,074 | | | $ | 71,051 | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | Current liabilities: | | | | | | | | | | Accounts payable and accrued expenses | | $ | 3,240 | | | $ | 3,462 | | | Royalties and contingent legal fees payable | | | 10,770 | | | | 2,343 | | | Deferred revenues | | | 318 | | | | 321 | | | Total current liabilities | | | 14,328 | | | | 6,126 | | | | | | | | | | | | | Other liabilities | | | 199 | | | | 121 | | | Total liabilities | | | 14,527 | | | | 6,247 | | | | | | | | | | | | | Commitments and contingencies (Note 12) | | | | | | | | | | | | | | | | | | | | 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; 30,884,994 and 30,102,482 shares issued and outstanding as of December 31, 2008 and December 31, 2007, respectively | | | 31 | | | | 30 | | | Additional paid-in capital | | | 167,468 | | | | 159,972 | | | Accumulated comprehensive income | | | - | | | | (3 | ) | | Accumulated deficit | | | (108,952 | ) | | | (95,195 | ) | | Total stockholders' equity | | | 58,547 | | | | 64,804 | | | | | $ | 73,074 | | | $ | 71,051 | |
| $ | 134,784 | | | $ | 78,256 | | The accompanying notes are an integral part of these consolidated financial statements.
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Years Ended December 31, 2008, 2007 and 2006
(In thousands, except share and per share information)
| | | 2008 | | | 2007 | | | 2006 | | | | | | | | | | | | | | License fee revenues | | $ | 48,227 | | | $ | 52,597 | | | $ | 34,825 | | | Operating expenses: | | | | | | | | | | | | | Marketing, general and administrative expenses (including non-cash stock compensation
expense of $7,355 for 2008, $5,908 for 2007 and $3,946 for 2006) | | | 24,014 | | | | 20,042 | | | | 14,123 | | | Inventor royalties and contingent legal fees expense - patents | | | 27,424 | | | | 29,224 | | | | 17,159 | | | Legal expenses - patents | | | 4,949 | | | | 7,024 | | | | 4,780 | | | Amortization of patents | | | 6,043 | | | | 5,583 | | | | 5,313 | | | Write-off of patent-related intangible asset | | | - | | | | 235 | | | | 297 | | | Total operating expenses | | | 62,430 | | | | 62,108 | | | | 41,672 | | | Operating loss | | | (14,203 | ) | | | (9,511 | ) | | | (6,847 | ) | | | | | | | | | | | | | | | | Other income (expense): | | | | | | | | | | | | | | Interest income | | | 1,056 | | | | 2,359 | | | | 1,524 | | | Loss on investments | | | (486 | ) | | | - | | | | - | | | Total other income (expense) | | | 570 | | | | 2,359 | | | | 1,524 | | | | | | | | | | | | | | | | | Loss from continuing operations before income taxes | | | (13,633 | ) | | | (7,152 | ) | | | (5,323 | ) | | Provision for income taxes | | | (124 | ) | | | (207 | ) | | | (40 | ) | | Loss from continuing operations | | | (13,757 | ) | | | (7,359 | ) | | | (5,363 | ) | | | | | | | | | | | | | | | | Discontinued operations: | | | | | | | | | | | | | | Loss from discontinued operations - Split-off of CombiMatrix Corporation | | | - | | | | (8,086 | ) | | | (20,093 | ) | | Net loss | | | (13,757 | ) | | | (15,445 | ) | | | (25,456 | ) | | Unrealized gains (losses) on short-term investments | | | 3 | | | | (21 | ) | | | 59 | | | Unrealized gains (losses) from discontinued operations - Split-off of CombiMatrix Corporation | | | - | | | | 16 | | | | (55 | ) | | Comprehensive loss | | $ | (13,754 | ) | | $ | (15,450 | ) | | $ | (25,452 | ) | | | | | | | | | | | | | | | | Loss per common share: | | | | | | | | | | | | | | Acacia Research Corporation common stock: | | | | | | | | | | | | | | Net loss | | $ | (13,757 | ) | | $ | (7,359 | ) | | $ | (5,363 | ) | | Basic and diluted loss per share | | | (0.47 | ) | | | (0.26 | ) | | | (0.19 | ) | | | | | | | | | | | | | | | | Acacia Research - CombiMatrix stock - Discontinued Operations - Split-off of CombiMatrix Corporation: | | | | | | | | | | | | | | Loss from discontinued operations - Split-off of CombiMatrix Corporation | | $ | - | | | $ | (8,086 | ) | | $ | (20,093 | ) | | Basic and diluted loss per share | | | - | | | | (0.14 | ) | | | (0.49 | ) | | | | | | | | | | | | | | | | Weighted-average shares: | | | | | | | | | | | | | | Acacia Research Corporation common stock: | | | | | | | | | | | | | | Basic and diluted | | | 29,423,998 | | | | 28,503,314 | | | | 27,547,651 | | | Acacia Research - CombiMatrix stock: | | | | | | | | | | | | | | Basic and diluted | | | - | | | | 55,862,707 | | | | 40,605,038 | |
The accompanying notes are an integral part of these consolidated financial statements.
ACACIA RESEARCH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2010, 2009 and 2008 (In thousands, except share and per share information) | | | | | | | | | | | | | | | | 2010 | | 2009 | | 2008 | | | | | | | | | | Revenues | | $ | 131,829 | | | $ | 67,340 | | | $ | 48,227 | | | Operating costs and expenses: | | | | | | | | | | | Cost of revenues: | | | | | | | | | | | Invent or royalties | | 25,292 | | | 15,673 | | | 14,995 | | | Contingent legal fees | | 19,906 | | | 15,945 | | | 12,429 | | | Litigation and licensing expenses - patents | | 13,891 | | | 14,055 | | | 6,900 | | | Amortization of patents | | 6,931 | | | 4,634 | | | 6,043 | | | Marketing, general and administrative expenses (including non-cash stock compensation expense of $7,121 in 2010, $7,065 in 2009, and $7,355 in 2008) | | 25,067 | | | 21,070 | | | 21,130 | | | Research, consulting and other expenses - business development | | 2,121 | | | 1,689 | | | 933 | | | | | | | | | | | Total operating costs and expenses | | 93,208 | | | 73,066 | | | 62,430 | | | | | | | | | | | Operating income (loss) | | 38,621 | | | (5,726 | ) | | (14,203 | ) | | | | | | | | | | Other income (expense): | | | | | | | | | | | Interest income | | 103 | | | 148 | | | 1,056 | | | Gain on foreign currency translation | | — | | | 201 | | | — | | | Gain (loss) on investments | | 32 | | | (47 | ) | | (486 | ) | | | | | | | | | | Total other income | | 135 | | | 302 | | | 570 | | | | | | | | | | | Income (loss) before provision for income taxes | | 38,756 | | | (5,424 | ) | | (13,633 | ) | | | | | | | | | | Provision for income taxes | | (1,740 | ) | | (209 | ) | | (124 | ) | | | | | | | | | | Net income (loss) including noncontrolling interests in operating subsidiaries | | 37,016 | | | (5,633 | ) | | (13,757 | ) | | | | | | | | | | Net income attributable to noncontrolling interests in operating subsidiaries | | (2,965 | ) | | (5,657 | ) | | — | ; | | | | | | | | | | Net income (loss) attributable to Acacia Research Corporation | | $ | 34,051 | | | $ | (11,290 | ) | | $ | (13,757 | ) | | &nb sp; | | | | | | | | Net income (loss) per common share attributable to Acacia Research Corporation: | | | | | | | | | | | Basic income (loss) per share | | $ | 1.05 | | | $ | (0.38 | ) | | $ | (0.47 | ) | | Diluted incom e (loss) per share | | $ | 0.97 | | | $ | (0.38 | ) | | $ | (0.47 | ) | | | | | | | | | | Weighted-average shares: | | | | | | | | Weighted average number of shares outstanding, basic | | 32,306,322 | | | 29,914,801 | | | 29,423,998 | | | Weighted average number of shares outstanding, diluted | | 35,081,611 | | | 29,914,801 | | | 29,423,998 | |
The accompanying notes are an integral part of these consolidated financial statements.
ACACIA RESEARCH CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Years Ended DecemberDecem ber 31, 2008, 20072010, 2009 and 20062008 (In thousands, except share information) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Shares | | Common Stock | | Additional Paid-in Capital | | Other Comprehensive Income (Loss) | | Accumulated Deficit | | Noncontrolling Interests in Operating Subsidiaries | | Total | | | | | | | | | | | | | | | | | | Balance at December 31, 2007 | | 30,102,482 | | | $ | 30 | | | $ | 159,972 | | | $ | (3 | ) | | $ | (95,195 | ) | | $ | — | | | $ | 64,804 | | | 2008 | | | | | | | | | | | | | | | | Net loss attributable to Acacia Research Corporation | | — | | | — | | | — | | | — | | | (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 | | | — | | | — | | | — | |
| | | AR-Acacia
Technologies
Common
Shares (1) | | | AR-CombiMatrix
Common
Shares (1) | | | AR-Acacia
Technologies
Common
Stock (1) | | | | | | | | | Deferred Stock Compensation | | | | | | | | | Total | | | 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2005 | | | 27,722,242 | | | | 38,992,402 | | | $ | 28 | | | $ | 39 | | | $ | 315,146 | | | $ | (1,400 | ) | | $ | (2 | ) | | $ | (206,914 | ) | | $ | 106,897 | | | Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (25,456 | ) | | | (25,456 | ) | | Stock options exercised | | | 389,959 | | | | - | | | | - | | | | - | | | | 1,475 | | | | - | | | | - | | | | - | | | | 1,475 | | | Units issued in direct offering, net offering costs | | | - | | | | 11,323,408 | | | | - | | | | 11 | | | | 12,098 | | | | - | | | | - | | | | - | | | | 12,109 | | | Warrant liability | | | - | | | | - | | | | - | | | | - | | | | (7,104 | ) | | | - | | | | - | | | | - | | | | (7,104 | ) | | Reclassification of deferred stock compensation (see Note 2) | | | - | | | | - | | | | - | | | | - | | | | (1,400 | ) | | | 1,400 | | | | - | | | | - | | | | - | | | Stock issued to consultant | | | - | | | | 50,000 | | | | - | | | | - | | | | 94 | | | | - | | | | - | | | | - | | | | 94 | | | Compensation expense relating to stock options and restricted stock awards | | | 119,500 | | | | - | | | | - | | | | - | | | | 6,306 | | | | - | | | | - | | | | - | | | | 6,306 | | | Unrealized gain on short-term investments | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 61 | | | | - | | | | 61 | | | Unrealized loss on foreign currency translation | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (57 | ) | | | - | | | | (57 | ) | | Other | | | - | | | | - | | | | - | | | | - | | | | (16 | ) | | | - | | | | - | | | | - | | | | (16 | ) | | Balance at December 31, 2006 | | | 28,231,701 | | | | 50,365,810 | | | | 28 | | | | 50 | | | | 326,599 | | | | - | | | | 2 | | | | (232,370 | ) | | | 94,309 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | |
(1) – Prior | 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 the Redemption date, Acacia’s AR-Acacia TechnologiesAcacia 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 AR-CombiMatrix commonrestricted stock were classified as redeemableawards | | 1,107,000 | | | 1 | | | 7,064 | | | — | | | — | | | — | | | 7,065 | | Net income attributable to noncontrolling interests in the consolidated statements of stockholder’s equity. As a result of the Split-Off Transactionoperating subsidiary | | — | | | — | | | — | | | — | | | — | | | 5,657 | | | 5,657 | | | Distributions to 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 | | | 2010 | | | | | | | | | | | | | | | | | | | | | | | Net income attributable to Acacia Research Corporation | | — | | | — | |
| — | | | — | | | 34,051 | | | — | | | 34,051 | | | Stock options exercised | | 2,852,002 | | | 3 | | | 15,065 | | | — | | | — | | | — | | | 15,068 | | Compensation expense relating to stock options and related redemption of all shares of AR-CombiMatrix commonrestricted stock discussedawards | | 1,265,0 00 | | | 1 | | | 7,120 | | | — | | | — | | | — | | | 7,121 | | | Excess tax benefits from stock-based compensation | | — | | | — | | | 1,302 | | | — | | | — | | | — | | | 1,302 | | | Net income attributable to noncontrolling interests in operating subsidiaries | | — | | | — | | | — | | | — | | | — | | | 2,965 | | | 2,965 | | | Contributions from noncontrolling interests in operating subsidiary, net | | — | | | — | | | — | &nb sp; | | — | | | &mda sh; | | | 2,317 | | | 2,317 | | | Distributions to noncontrolling interests in operating subsidiary | | — | | | — | | | — | | | — | | | — | | | (4,807 | ) | | (4,807 | ) | | Issuance costs | | — | | | — | | | (133 | ) | | — | | | — | | | — | | | (133 | ) | Balance at Note 10 and 10A, and the amendment and restatement of Acacia’s Certificate of Incorporation discussed at Note 8, 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.December 31, 2010 | | 36,029,068 | | | $ | 36 | | | $ | 197,026 | | | $ | — | | | $ | (86,191 | ) | | $ | 2,982 | | | $ | 113,853 | | The accompanying notes are an integral part of these consolidated financial statements.
ACACIA RESEARCH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2008, 20072010, 2009 and 20062008 (In thousands) | | | | | 2010 | | 2009 | | 2008 | | | | 2008 | | | 2007 | | | 2006 | | | | | | | | | Cash flows from operating activities: | | | | | | | | | | | | | | | | | Net loss | | $ | (13,757 | ) | | $ | (15,445 | ) | | $ | (25,456 | ) | | Adjustments to reconcile net loss to net cash provided by operating
activities from continuing operations: | | | | | | | | | | | | | | | Discontinued operations - Split-off of CombiMatrix Corporation | | | - | | | | 8,086 | | | | 20,093 | | | | Net income (loss) including noncontrolling interests in operating subsidiaries | | | $ | 37,016 | | | $ | (5,633 | ) | | $ | (13,757 | ) | | Adjustments to reconcile net income (loss) including noncontrolling interests in operating subsidiaries to net cash provided by operating activities: | | | | | | | | | | | | Depreciation and amortization | | | 6,174 | | | | 5,702 | | | | 5,392 | | | 7,017 | | | 4,759 | | | 6,174 | | | Non-cash stock compensation | | | 7,355 | | | | 5,908 | | | | 3,946 | | | 7,121 | | | 7,065 | | | 7,355 | | | Write-off of patent-related intangible asset | | | - | | | | 235 | | | | 297 | | | | Deferred income taxes | | | - | | | | - | | | | (36 | ) | | | Loss on investments | | | 486 | | | | - | | | | - | | | | (Gain) loss on investments | | | (32 | ) | | 47 | | | 486 | | | Other | | | 6 | | | | 112 | | | | (96 | ) | | — | | | — | | | 6 | | | Changes in assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | Accounts receivable | | | (6,027 | ) | | | (1,140 | ) | | | 4,152 | | | (2,877 | ) | | 2,326 | &nbs p; | | (6,027 | ) | | Prepaid expenses and other assets | | | 99 | | | | (193 | ) | | | (150 | ) | | (757 | ) | | (106 | ) | | 99 | | | Accounts payable and accrued expenses | | | (162 | ) | | | 1,281 | | | | 819 | | | (1,414 | ) | | 4,836 | | | (160 | ) | | Royalties and contingent legal fees payable | | | 8,427 | | | | 659 | | | | (2,074 | ) | | 358 | | | 1,632 | | | 8,427 | | | Deferred revenues | | | (3 | ) | | | (39 | ) | | | (279 | ) | | (1,510 | ) | | 1,192 | | | (3 | ) | | | | | | | | | | | | | | | | | | | | | | Net cash provided by operating activities from continuing operations | | | 2,598 | | | | 5,166 | | | | 6,608 | | | | Net cash provided by (used in) operating activities from discontinued operations | | | 2 | | | | (7,782 | ) | | | (15,261 | ) | | | Net cash provided by (used in) operating activities | | | 2,600 | | | | (2,616 | ) | | | (8,653 | ) | | | Net cash provided by operating activities | | | 44,922 | | | 16,118 | | | 2,600 | | | | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | Purchase of property and equipment | | | (28 | ) | | | (223 | ) | | | (179 | ) | | (58 | ) | | (67 | ) | | (28 | ) | | Purchase of available-for-sale investments | | | (265 | ) | | | (13,035 | ) | | | (16,409 | ) | | — | | | — | | | (265 | ) | | Sale of available-for-sale investments | | | 7,503 | | | | 14,873 | | | | 28,147 | | | 184 | | | 1,040 | | | 7,503 | | | Business acquisition | | | - | | | | - | | | | (16 | ) | | | Patent acquisition costs | | | (2,140 | ) | | | (3,760 | ) | | | (1,030 | ) | | (8,224 | ) | | (9,625 | ) | | (2,140 | ) | | | | | | | | | | | | | | | | | | | | | | Net cash provided by (used in) investing activities from continuing operations | | | 5,070 | | | | (2,145 | ) | | | 10,513 | | | | Net cash provided by (used in) investing activities from discontinued operations | | | - | | | | (5,199 | ) | | | 4,628 | | | | Net cash provided by (used in) investing activities | | | 5,070 | | | | (7,344 | ) | | | 15,141 | | | | Net cash (used in) provided by investing activities | | | (8,098 | ) | | (8,652 | ) | | 5,070 | | | | | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | Distributions to noncontrolling interests in operating subsidiary | | | (4,807 | ) | | (3,150 | ) | | — | | | Contributions from noncontrolling interests in operating subsidiary, net of issuance costs | | | 2,393 | | | — | | | — | | | Repurchased restricted common stock | | | — | | | (1,107 | ) | | — | | | Proceeds from the exercise of stock options | | | 142 | | | | 5,014 | | | | 1,475 | | | 15,068 | | | 247 | | | 142 | | | Excess tax benefits from stock-based compensation | | | 1,302 | | | — | | | — | | | | | | | | | | | | | | | | | | | | | | | Net cash provided by financing activities from continuing operations | | | 142 | | | | 5,014 | | | | 1,475 | | | | Net cash provided by financing activities from discontinued operations | | | - | | | | 5,369 | | | | 11,917 | | | | Net cash provided by financing activities | | | 142 | | | | 10,383 | | | | 13,392 | | | | Net cash provided by (used in) financing activities | | | 13,956 | | | (4,010 | ) | | 142 | | | | | | | | | | | | | | | | | | | | | | | Increase in cash and cash equivalents | | | 7,812 | | | | 423 | | | | 19,880 | | | 50,780 | | | 3,456 | | | 7,812 | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents, beginning (including cash and cash equivalents related to
discontinued operations - split-off of CombiMatrix Corporation of $7,829 and $5,666
at December 31, 2006 and December 31, 2005, respectively) | | | 40,467 | | | | 40,044 | | | | 20,164 | | | | Cash and cash equivalents, beginning | | | 51,735 | | | 48,279 | | | 40,467 | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents, ending | | | 48,279 | | | | 40,467 | | | | 40,044 | | | $ | 102,515 | | | $ | 51,735 | | | $ | 48,279 | | | | | | | | | | | | | | | | | | Less: Cash and cash equivalents of discontinued operations, ending | | | - | | | | - | | | | (7,829 | ) | | | | | | | | | | | | | | | | | | Cash and cash equivalents of continuing operations, ending | | $ | 48,279 | | | $ | 40,467 | | | $ | 32,215 | | |
The accompanying notes are an integral part of these consolidated financial statements.
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESSESBUSINESS
Description of Business. Acacia Research Corporation (“Acacia” or the “Company”) is comprised of Acacia and its wholly owned operating subsidiaries. As used herein, “Acacia” and the “Company” refer to Acacia Research Corporation and/or its wholly ownedand majority-owned operating subsidiaries. All intellectual property acquisition, development, licensing and enforcement activities are conducted solely by certain of Acacia’sAcacia's wholly ownedand majority-owned operating subsidiaries.
Acacia’sAcacia's operating subsidiaries acquire, develop, license and otherwise enforce patented technologies. Acacia’sAcacia's operating subsidiaries generate license fee revenues and related cash flows from the granting of licensesintellectual property rights for the use of, or pertaining to, patented technologies that itssuch operating subsidiaries own or control. Acacia’sAcacia's operating subsidiaries assist patentpaten t owners with the prosecution and development of their patent portfolios, the protection of their patented inventionstechnologies 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, Acacia’sAcacia's operating subsidiaries own or control the rights to over 100171 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. CombiMatrix’s registration statement on Form S-1 was declared effective by the Securities and Exchange Commission (“SEC”) on June 8, 2007. 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 10A 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, in accordance with guidance set forth in Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”).
Capital Structure. Pursuant to the Split-Off Transaction, all outstanding shares of Acacia 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. 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 2010. 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 preparedp repared 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 ownedand majority-owned and controlled subsidiaries. Material intercompany transactions and balances have been eliminated in consolidation. The cost Noncontrolling interests in Acacia’s majority-owned operating subsidiaries ("noncontrolling interests") are separately presented as a component of stockholders’ equity in the consolidated statements of financial position for the applicable periods presented. Consolidated net income or (loss) is adjusted to include the net (income) or loss attributed to noncontrolling interests in the consolidated statements of operations for the applicable periods presented. Refer to the accompanying consolidated financial statements for total noncontrolling interests, and net income attributable to noncontrolling interests, for the applicable periods presented. Change in Account ing Policy for Term Agreements. Effective October 1, 2009, the Company elected to change its method is used where Acacia maintains ownership interests of less than 20%accounting for its term agreements to recognize revenue when delivery of the intellectual property rights and does not exercise significant influence over the investee.all other arrangement deliverables has substantially occurred. Refer to Note 8 for additional information.
Revenue Recognition. Acacia recognizes revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”) and related authoritative pronouncements. 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) the 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.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain license agreementsarrangements provide for the payment of contractually determined paid-up license fees in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by Acacia's operating subsidiaries. These rights typically include some combination of the following: (i) 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’sAcacia's operating subsidiaries. Certain of the agreements also provide for future royalties or additional required payments based on future activities. Generally, the execution of these license agreements also provide forsubsidiaries, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The intellectual property rights granted may be perpetual in nature, extending until the expiration of the related patents, or can be granted for a defined, relatively short period of time, with the licensee possessing the right to renew the agreement at the end of each contractual term for an additional minimum upfront payment. Pursuant to the terms of these agreements, Acacia’sAcacia's operating subsidiaries have no further obligation with respect to the grant of the non-exclusive retroactive and future licenselicenses, covenants-not-to-sue, releases, and related releases,other deliverables, including no express or implied obligation on Acacia’sAcacia's operating subsidiaries’subsidiaries' part to maintain or upgrade the technology, or provide future support or services. Generally, the agreements provide for the grant of the licenselicenses, covenants-not-to-sue, releases, and releasesother significant deliverables upon execution of the agreement.agreement, or upon receipt of the minimum upfront payment for term agreement renewals. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement , when collectibility is reasonably
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assured, or upon receipt of the minimum upfront fee for term agreement renewals, and when all other revenue recognition criteria have been met. Refer to Note 12 for information on inventor royalties and contingent legal fees.
Certain of the Company's revenue arrangements 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 of the Company's revenue arrangements 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.r ate. 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 agreementsrevenue arrangements each quarter cannot be reasonably estimated by management. Consequently, Acacia’s operating subsidiaries recognize revenue from these licensing agreementsrevenue arrangements on a three-month lag basis, in the quarter following the quarter of sales or per unit activity, provided amounts are fixed or determinable and collectibility is reasonably assured. The lag method described above allows for the receipt of licensee royalty reports prior to the recognition of revenue.
Certain license agreements provide for the payment of a minimum upfront annual license fee at the inception of each annual license term. Minimum upfront annual license fees are generally determined based on a licensee’s estimated annual sales or a licensee’s base level of per unit activity. These minimum upfront annual license fee payments are deferred and amortizedAmounts related to revenue on a straight-line basis over the annual license term. To the extent actual annual royalties, determined and reported in accordance with the terms of the respective agreements, exceed the minimum upfront annual license fees paid, the additional royalties are recognized in revenue in the quarter following the quarter in which the base per unit activity was exceeded or the quarter following the annual license term, depending on the terms of the respective agreement, provided that amounts are fixed or determinable and collectibility is reasonably assured. Amounts of additional royalties due under these license agreements, if any, cannot be reasonably estimated by management.
License fee payments receivedarrangements 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 RevenuesFair Value Measurements. Effective January 1, 2008, Acacia adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a common definition for fair valueCost of revenues include the costs and expenses incurred in connection with Acacia's patent licensing and enforcement activities, including inventor royalties paid to be appliedoriginal patent owners, contingent legal fees paid to U.S. generally accepted accounting principles guidance requiring use of fair value, establishes a framework for measuring fair value,external patent counsel, other patent-related legal expenses paid to external patent counsel, licensing and expands disclosure about such fair value measurements. This statement applies whenever other accounting pronouncements require or permit fair value measurements. The adoption of SFAS No. 157 did not have a material impact on Acacia’s consolidated financial position, results of operations and cash flows. In February 2008, the FASB issued FSP SFAS No. 157–1 which amends SFAS No. 157 to exclude FASB Statement No. 13, “Accounting for Leases”,enforcement related research, consulting and other accounting pronouncements that address fair value measurements for purposesexpenses paid to third parties and the amortization of lease classification or measurementpatent-related acquisition costs. These costs are included under Statement 13. In February 2008, the FASB issued FSP SFAS No. 157-2 (“FSP 157-2”) which would delay the effective datecaption “Cost of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair valuerevenues” in the financialaccompanying consolidated statements on a recurring basis (at least annually). FSP 157-2 partially defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of FSP 157-2.operations. 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 revenues (as defined in the respective agreements) generated as a result of licensing and otherwise enforcing the respective patents or patent portfolios. Inventor royalties are expensed in the consolidated statements of operations in the period that the related 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 ac quisition 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 fees, settlements or judgments awarded based on how and when the fees, settlements or judgments are obtained. Contingent legal fees are expensed in the consolidated statements of operations in the period that the related revenues are recognized. In instances where there are no recoveries from potential infringers, 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. The economic terms of the inventor agreements, operating agreements and contingent legal fee arrangements associated with the patent portfolios owned or controlled by Acacia's operating subsidiaries, if any, including royalty rates, contingent fee rates and other terms, vary across the patent portfolios owned or controlled by such operating subsidiaries. Inventor royalties, payments to noncontrolling interests and contingent legal fees expenses fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of revenue agreements executed each period and the mix of specific patent portfolios with varying economic terms and obligations generating revenues each
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
period. Inventor royalties, payments to noncontrolling interests and contingent legal fees expenses will continue to fluctuate and may continue to vary significantly period to period, based primarily on these factors. SFAS No. 157 definesDuring the year ended December 31, 2010, A cacia entered into significant agreements with unrelated third parties resolving pending patent matters that resulted in the grant of certain intellectual property rights and recognition of revenues, the majority of which were not subject to inventor royalty and contingent legal fee arrangements, as well as the grant of licenses from certain of Acacia's operating subsidiaries and recognition of revenues that were subject to inventor royalties and contingent legal fee arrangements. Revenues recognized subject to inventor royalties and contingent legal fees are based on a determination by the respective operating subsidiaries.
Fair Value Measurements. U.S. generally accepte d accounting principles define 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. SFAS No. 157date, and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. SFAS No. 157 established aThe three-level hierarchy of valuation techniques usedestablished to measure fair value, is 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. |
SFAS No. 157 requires the use ofThe Company uses observable market inputs (quoted market prices) when measuring fair value and requiresis required to use 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, 20082010 and 2007.2009. Refer to Note 7 for information on the determination of fair value for auctionauct ion rate securities held as of December 31, 2008.2010 and 2009.
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. At December 31, 2008,For the periods presented, Acacia’s cash equivalents are comprised of investments in AAA rated money market funds that invest in U.S. Treasuryfirst-tier only securities, and obligationswhich primarily includes: domestic commercial paper, securities issued or guaranteed by the U.S. Government.U.S. government or its agencies, U.S. bank obligations, and fully collateralized repurchase agreements. Acacia’s cash equivalents are measured at fair value using quoted prices that represent Level 1 inputs under SFAS No. 157.inputs.
Investments in Marketable Securities. Acacia’s marketable securities are typically held in a variety of interest bearing instruments including U.S. government debt securities, high-grade corporate bonds, commercial paper, auction rate securities, certificates of deposit and other high-credit quality marketable 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. Investmentsinvestments, unless there are classified into categoriesindications that such investments may not be readily sold in accordance with the provisions of SFAS No. 115, “Accounting for Certain Investments in Debtshort term. At Decembe r 31, 2010 and Equity Securities” (“SFAS No. 115”). At December 31, 2008 and 2007,2009, all of Acacia’s investments are classified as available-for-sale, which are reported at fair value in accordance with SFAS No. 157, 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 and dividends 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, 2008.2010 and 2009.
Impairment of Marketable Securities.Acacia evaluates its investments in marketable securities for potential impairment, employing a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence. If the cost or carrying value of an investment exceeds its estimated fair value, the Company evaluates, among other factors, general market conditions, credit quality of instrument issuers, the duration and extent to which the fair value is less than cost, and the Company's intent and ability to hold, or plans or ability to sell. Fair value is estimated based on publicly available market information or other estimates determined by management. Investments are considered to be impaired when a decline in fair value is estimated to be other-than-temporary. Acacia reviews impairments associated with its investments in marketablemark etable securities in accordance with Emerging Issues Task Force (“EITF”) 03-1 and FSP SFAS 115-1 and 124-1, “The Meaning of Other-Than-Temporary-Impairment and Its Application to Certain Investments,” to determinedetermines the classification of any impairment as “temporary”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 and comprehensive loss (hereinafter “consolidated statements of operations”).other-than-temporary. An impairment is deemed other than temporaryother-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. For investments classified as available-for-sale, unrealized losses that are other-than-temporary are recognized in the consolidated statements of operations. Refer to Note 7 for disclosures regarding investments in auction rate securities.
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration of Credit Risks. Financial instruments that potentially subject Acacia to concentrations of credit risk are cash equivalents, investments and accounts receivable. AcaciaAcaci a 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.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Two licensees accounted for 35% and 19%, respectively, of the revenues recognized during t he year ended December 31, 2010. Two licensees accounted for 15% and 12%, respectively, of the revenues recognized during the year ended December 31, 2009. Two licensees accounted for 13% and 12%, respectively, 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 and one2008. One licensee represented 14% of the license fee revenues recognized during the year ended December 31, 2006. Three licensees represented approximately 27%, 24% and 19%74% of accounts receivable at December 31, 2008. One licensee2010. Two licensees represented approximately 89%78% and 10%, respectively, of accounts receivable at December 31, 2007.2009.
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 operatingop erating 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 issuedincludes the cost of patents or purchased,patent rights (hereinafter, collectively "patents"), acquired. Patent acquisition costs 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,imp aired, 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 approximateapproximates their fair valuevalues due to their short-term maturity. Refer to Note 7 for disclosures regarding investments in auction rate securities. maturities.
Stock-Based Compensation.Effective January 1, 2006, Acacia adopted the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which sets forth the accounting requirements for “share-based” compensation payments to employees and non-employee directors and requires that compensation cost relating to share-based payment transactions be recognized in the statement of operations. The compensation cost for all stock-based awards is measured at the grant date, based on the fair value of the award, and is recognized as an expense, on a straight-line basis, over the employee’s requisite service period (generally the vesting period of the equity award) which is generally two to four years.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. The fair value of restricted stock 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.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 123R requires stock-basedThe fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. Stock-based compensation expense to beis 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 SFAS No. 123R 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 SFAS No. 123 and previously presented in the pro forma footnote disclosures), and (ii) compensation cost for all stock-based awards granted subsequent to January 1, 2006 (based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R).
The fair value of stock options granted during the years ended December 31, 2007 and 2006 were estimated using the Black-Scholes option-pricing model, assuming weighted-average risk free interest rates of 4.64% and 4.30%, expected terms of 5.71 years and 6 years and volatility of 68% and 75%, respectively. There were no stock options granted during the year ended December 31, 2008. Refer to Note 11 for information on stock-based awards granted for the periods presented.
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acacia adopted the alternative transition method provided in FASB Staff Position No. 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” 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 SFAS 123R.
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.
Effective January 1, 2007, Acacia adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which clarifies theUnder U.S. generally accepted accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. In accordance with FIN 48,principles, 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 beare 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 beare measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. The adoption of FIN 48 did not have a material impact on Acacia’s consolidated financial position, results of operations or cash flows.
The total amount of unrecognized tax benefits as of December 31, 20082010, 2009 and 2007,2008 was $85,000, $85,000 and January 1, 2007 was $75,000, $67,000 and $56,000, 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. 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 2002. 2005.
At December 31, 2008,2010, Acacia had U.S. federal and state income tax net operating loss carryforwards ("NOL") as summarized atin Note 9.10. 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. ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If a deduction reported on a tax return for an equity-based i ncentive award exceeds the cumulative compensation cost for those instruments recognized for financial reporting purposes, any resulting realized tax benefit that exceeds the previously calculated deferred tax asset for those instruments is considered an excess tax benefit, and is recognized as additional paid-in capital. 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 FIN 48. 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.
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.
Earnings (Loss) Per Share.Share . Basic earningsincome (loss) per share for each class of common stock is computed by dividing the income or loss allocated to each class of common stock bybased upon the weighted-average number of common shares outstanding, shares of that class of commonexcluding unvested restricted stock. Diluted earningsincome (loss) per share is computed by dividing the income or loss allocated to each class of common stock bybased upon the weighted-average number of outstandingcommon shares of that class of common stock,outstanding, including the dilutive effect of common stock equivalents.equivalents outstanding during the periods. Potentially dilutive common stock equivalents primarily consist of employee stock options, unvested restricted stock, and restricted stock units and(“Equity-based Incentive Awards”). Potentially dilutive common stock purchase warrants (AR-CombiMatrix stock only).
The earnings or losses allocated to each class of common stockshares from Equity-based Incentive Awards are determined by Acacia’s boardapplying the treasury stock method to the a ssumed exercise of directors. This determination is generally based onoutstanding employee stock options, and the net income or loss amountsassumed vesting 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 systematicoutstanding unvested restricted stock and reasonable.restricted stock units.
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 tabletab le presents the weighted-average number of common shares outstanding used in the calculation of basic and diluted lossincome (loss) per share: | | | For the Year Ended December 31, | | | | | 2008 | | | 2007 | | | 2006 | | | Acacia Research Corporation stock | | | | | | | | | | | Basic and diluted weighted-average number of common shares outstanding | | | 29,423,998 | | | | 28,503,314 | | | | 27,547,651 | | 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 | | | 4,928,986 | | | | 5,884,934 | | | | 6,385,810 | | | | | | | | | | | | | | | | 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 | | | | 40,605,038 | | Outstanding stock options excluded from the computation of diluted loss per share
because the effect of inclusion would have been anti-dilutive | | | - | | | | 7,003,390 | | | | 8,068,139 | | 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 | | | | 14,090,279 | |
| | | | | | | | | | | | | 2010 | | 2009 | | 2008 | | | | | | | | | | Weighted-average common shares outstanding - basic | | 32,306,322 | | | 29,914,801 | | | 29,423,998 | | | Dilutive effect of Equity-based Incentive Awards | | 2,775,289 | | | — | | | — | | | Weighted-average common shares outstanding - diluted | | 35,081,611 | | | 29,914,801 | | | 29,423,998 | | | | | | | | | | | | | | Equity-based Incentive Awards excluded from the computation of diluted income (loss) per share because the effect of inclusion would have been anti-dilutive | | 14,768 | | | 5,144,960 | | | 4,928,986 | |
_____________________
(1) | Reflects activity and amounts outstanding as of the Redemption Date. |
Recent Accounting Pronouncements.In March 2008,October 2009, the FASBFinancial Accounting Standards Board issued SFAS No. 161, “Disclosures About Derivative Instrumentsnew accounting guidance which amends existing revenue recognition accounting pronouncements and Hedging Activities - an amendment of FASB Statement No. 133,” (“SFAS No. 161”). SFAS No. 161 expandsprovides accounting principles and application guidance on whether multiple deliverables exist, how the disclosure requirements in SFAS No. 133 regarding an entity’s derivative instruments and hedging activities. SFAS No. 161 is effective for Acacia’s fiscal year beginning January 1, 2009. Acacia does not expect the adoption of SFAS No. 161 to have a material impact on its consolidated financial position, results of operations or cash flows. In April 2008, the FASB issued FASB Staff Position FAS 142-3, “Determination of Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors thatarrangement should be considered in developingseparated, and the renewal or extension assumptions usedconsideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management's estimate of the selling price for an undelivered item when there is no other means to determine the useful lifefair value of that undelivere d item. Previous accounting principles required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. This was difficult to determine when the product was not individually sold because of its unique features. If the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. The accounting guidance will be applied prospectively and will become effective for the Company no later than January 1, 2011. Early adoption is allowed. Acacia elected to adopt this accounting guidance effective January 1, 2010. The adoption of this standard did not have an impact on Acacia's financial position or results of operations.
&nb sp; On January 1, 2010, Acacia adopted the provisions of a recognized intangible asset under FAS No. 142, “Goodwillnew accounting standard which provides amendments to previous guidance on the consolidation of variable interest entities. This standard clarifies the characteristics that identify a variable interest entity (“VIE”) and Other Intangible Assets.” FSP 142-3changes how a reporting entity identifies a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards calculation to a qualitative approach based on which variable interest holder has a controlling financial interest and the ability to direct the most significant activities that impact the VIE's economic performance. This standard requires the primary beneficiary assessment to be performed on a continuous basis. It also requires expanded disclosure regardingadditional disclosures about an entity's involvement with a VIE, restrictions on the determination of intangible asset useful lives. FSP 142-3VIE's assets and liabilities that are inclu ded in the reporting entity's condensed consolidated balance sheet, significant risk exposures due to the entity's involvement with the VIE, and how its involvement with a VIE impacts the reporting entity's condensed consolidated financial statements. The standard is effective for fiscal years beginning after DecemberNovember 15, 2008. Earlier adoption is not permitted. Acacia is currently evaluating the potential impact of the2009. The adoption of FSP 142-3, if any, on its consolidated financial position, results of operations and cash flows.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States of America. SFAS No. 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Acacia doesthis standard did not expect the adoption of SFAS No. 162 to have a material impact on its consolidatedAcacia's financial position or results of operations or cash flows.operations.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 clarifies whether instruments, such as restricted stock, granted in share-based payments are participating securities prior to vesting. Such participating securities must be included in the computation of earnings per share under the two-class method as described in SFAS No. 128, “Earnings per Share.” FSP EITF 03-6-01 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008, and requires a company to retrospectively adjust its earnings per share data. Early adoption is not permitted. Acacia is currently evaluating the potential impact of the adoption of FSP EITF 03-6-1, if any, on its current and prior period loss per share computations.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”). FSP FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued. Acacia adopted FSP FAS 157-3 for the period ended September 30, 2008 and the adoption did not have a significant impact on its consolidated financial position, results of operations or cash flows.
In December 2008, the FASB issued FASB Staff Position (“FSP”) FAS 140-4 and FIN 46(R)-8, “Disclosure by Public Entities (Enterprises) About Transfers of Financial Assets and Interests in Variable Interest Entities.” FSP FAS 140-4 amends SFAS No. 140 to require public companies to provide additional disclosures about transferor’s continuing involvement with transferred financial assets. It also amends FIN 46R by requiring public companies to provide additional disclosures regarding their involvement with variable interest entities. FSP FAS 140-4 is effective for Acacia’s fiscal year beginning January 1, 2009. Acacia does not expect the adoption of FSP to have a material impact on its consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”). SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of business combinations. SFAS No. 141R is effective for Acacia as of January 1, 2009. Acacia does not expect the adoption of SFAS No. 141R to have a material impact on its consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for Acacia beginning January 1, 2009. Acacia does not expect the adoption of SFAS No. 160 to have a material impact on its consolidated financial position, results of operations or cash flows.
In December 2007, the FASB ratified the Emerging Issues Task Force consensus on EITF Issue No. 07-1, “Accounting for Collaborative Arrangements” (EITF Issue No. 07-1”) that discusses how parties to certain collaborative arrangements should account for various activities. The consensus indicates that costs incurred and revenues generated from transactions with third parties should be reported by the collaborators on the respective line items in their income statements pursuant to EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent.” Additionally, the consensus provides that income statement characterization of payments between the participants in a collaborative arrangement should be based upon existing authoritative pronouncements; analogy to such pronouncements if not within their scope; or a reasonable, rational, and consistently applied accounting policy election. EITF Issue No. 07-1 is effective for Acacia beginning January 1, 2009 and is to be applied retrospectively to all periods presented for collaborative arrangements existing as of the date of adoption. Acacia does not expect EITF Issue No. 07-1 to have a material impact on its consolidated financial position, results of operations or cash flows.
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
Investments at December 31, 2010 and 2009 consist of the following at December 31, 2008 and 2007 (in thousands):
| | | | | | | | | | | | | Amortized | | | Fair | | | Amortized | | | Fair | | | | | | | | | | | | | | | | | | | Available-for-sale securities: | | | | | | | | | | | | | | | Auction rate securities | | $ | 3,725 | | | $ | 3,239 | | | $ | 10,660 | | | $ | 10,660 | | | | U.S. government securities | | | - | | | | - | | | | 300 | | | | 300 | | | | Corporate securities | | | - | | | | - | | | | 9 | | | | 6 | | | | | | | 3,725 | | | | 3,239 | | | | 10,969 | | | | 10,966 | | | | Less: short-term investments | | | - | | | | - | | | | (10,969 | ) | | | (10,966 | ) | | | | | $ | 3,725 | | | $ | 3,239 | | | $ | - | | | $ | - | |
Gross unrealized gains and losses related to available-for-sale securities were not material for the periods presented. Except for investments in auction rate securities, all investmentsof which are classified as available-for-sale, at December 31, 2008with fair values of $2,001,000 and 2007 have contractual maturities$2,152,000, respectively, and amortized costs of one year or less. For$2,485,000 and $2,685,000, respectively. All of the Company’s investments in auction rate securities contractualare 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 2 and 7 for more information.information regarding gross unrealized gains and losses related to auction rate securities held for the periods presented.
.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2008 and 2007 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | Furniture and fixtures | | $ | 312 | | | $ | 309 | | | | Computer hardware and software | | | 427 | | | | 401 | | | | Leasehold improvements | | | 141 | | | | 141 | | | | | | | 880 | | | | 851 | | | | Less: accumulated depreciation | | | (659 | ) | | | (528 | ) | | | | | $ | 221 | | | $ | 323 | |
Depreciation expense was $131,000, $119,000 and $79,000 for the years ended December 31, 2008, 2007 and 2006, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December 31, 2008 and 2007 (in thousands):
| | | | | | | | | | | | | | | | | | | | Accounts payable | | $ | 208 | | | $ | 361 | | | | Payroll and other employee benefits | | | 509 | | | | 371 | | | | Accrued vacation | | | 431 | | | | 365 | | | | Accrued legal expenses - patent | | | 1,467 | | | | 2,082 | | | | Accrued consulting and other professional fees | | | 485 | | | | 108 | | | | Other accrued liabilities | | | 140 | | | | 175 | | | | | | $ | 3,240 | | | $ | 3,462 | |
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 2010 and 2009 (in thousands): | | | | | | | | | | | 2010 | | 2009 | | | | | | | Furniture and fixtures | | $ | 373 | | | $ | 354 | | | Computer hardware and software | | 478 | | | 450 | | | Leasehold improvements | | 154 | | | 143 | | | | 1,005 | | | 947 | | | Less: accumulated depreciation | | (870 | ) | | (784 | ) | | | $ | 135 | | | $ | 163 | |
Depreciation expense was $86,000, $125,000 and $131,000 for the years ended December 31, 2010, 2009 and 2008, respectively. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued exp enses consist of the following at December 31, 2010 and 2009 (in thousands): | | | | | | | | | | | | 2010 | | 2009 | | | | | | | | Accounts payable | | $ | 659 | | | $ | 381 | | | Payroll and other employee benefits | | 941 | | | 783 | | | Accrued vacation | | 589 | | | 481 | | | Accrued legal expenses - patent | | 2,535 | | | 4,412 | | | Accrued consulting and other professional fees | | 1,786 | | | 1,833 | | | Other accrued liabilities | | 589 | | | 116 | | | | | $ | 7,099 | | | $ | 8,006 | |
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, 20082010 and 20072009 are as follows (in thousands): | | | | | | | | | | | | | | | | | | | | Gross carrying amount – patents | | $ | 33,592 | | | $ | 33,607 | | | | Accumulated amortization | | | (21,173 | ) | | | (17,300 | ) | | | Patents, net | | $ | 12,419 | | | $ | 16,307 | |
| | | | | | | | | | | | 2010 | | 2009 | | | | | | | | Gross carrying amount - patents ; | | $ | 51,001 | | | $ | 43,317 | | | Accumulated am ortization - patents | | (31,198 | ) | | (25,807 | ) | | Patents, net | | $ | 19,803 | | | $ | 17,510 | |
The weighted-average remaining estimated economic useful life of Acacia’s patents is fourfive years. Aggregate patent amortization expense was $6,043,000, $5,583,000 and $5,313,000 in 2008, 2007 and 2006, respectively. Annual aggregate amortization expense for each of the next five years through December 31, 20132015 is estimated to be $3,999,000 in 2009, $3,528,000 in 2010, $2,629,000$5,153,000 in 2011, $931,000$3,630,000 in 2012, $3,331 ,000 in 2013, $3,097,000 in 2014 and $699,000$2,436,000 in 2013.2015. For the years ended December 31, 2008, 20072010, 2009 and 2006,2008, on a consolidated basis, Acacia’s operating subsidiaries incurred and capitalized patent acquisition costs totaling $2,140,000, $3,760,000$8,224,000, $9,625,000 and $1,030,000,$2,140,000, 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 2010 acquisitions, seven years for 2009 acquisi tions and five years for 2008 acquisitions, seven years for 2007 acquisitions and six years for 2006 acquisitions. At December 31, 20082010 and 2007,2009, all of Acacia’s acquired intangible assets were subject to amortization. Included in capitalized patent costs as of December 31, 2010 and 2009 are $1,050,000 and $100,000, respectively, of accrued future patent related acquisition costs that management expects to incur pursuant to the terms of the underlying patent acquisition agreements, which are being amortized over the
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estimated economic useful life of the patents acquired. Pursuant to provisions of the underlying inventor agreements, certain operating subsidiaries recovered up-front patent portfolio acquisition costs from applicable net licensing proceeds, prior to the scheduled amortization of such up-front patent portfolio acquisition costs, resulting in the acceleration of amortization expense for the applicable patent related assets. For the years ended December 31, 2010, 2009 and 2008, accelerated amortization expense related to the recovery of up-front patent acquisition costs totaled $1,171,000, $42,000 and $155,000, respectively. In 2010, pursuant to the terms of the respective inventor agreement, an Acacia operating subsidiary elected to terminate its rights to a patent portfolio, resulting in the acceleration of amortization expense for the patent related asset totaling $338,000. In December 2008, pursuantpursuan t 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,portfolio, resulting in the acceleration of $1,094,000 of amortization expense for the patent-related intangible asset totaling $1,094,000. Patent costs and accumulated amortization related to patent related intangible assetdisposals totaled $1,540,000 and $1,108,000, respectively, for the year ended December 31, 2010. Proceeds of $240,000 and costs of $94,000, related to the sale of patents are included in net operating income for the year ended December 2008.31, 2010.
7. FAIR VALUE MEASUREMENTS AND AUCTION RATE SECURITIES In September 2006, the FASB issued SFAS No. 157. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements. Acacia adopted the provisions of SFAS No. 157 effective January 1, 2008, for financial instruments. Although the adoption of SFAS No. 157 did not materially impact Acacia’s financial condition, results of operations, or cash flows, SFAS No. 157 requires Acacia to provide additional disclosures as part of its consolidated financial statements.
As of December 31, 2008,2010 and 2009, Acacia held investment grade auction rate securities with a par value totaling $3,725,000. Acacia’s auction rate securities consist$2,485,000 and $2,685,000, respectively, consisting of high credit quality securities issued by closed-end investment companies with portfolio asset coverage of at least 200%, and auction rate investments backed by student loans, issued under programs such as the Federal Family Education Loan Program, all of which carry credit ratings of AAA (S&P and Moody’s). Auction rate securities are classified as available-for-sale securities and reflected at fair value in accordance with the requirements of SFAS No. 157. value. 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 experienceexp erienced failed auctions since February 2008. In suchthe 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. 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, 2008.2010 and 2009. As a result, the fair values of these securities arewere estimated utilizing an analysis of certain unobservable inputs and by reference to a discounted cash flow analysis as of December 31, 2008.2010 and 2009. 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 characteristicscharacteri stics to Acacia’s auction rate securities was also considered when possible. At December 31, 2008, the par value of auction rate securities collateralized by student loan portfolios totaled $2,750,000. 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 December 31, 2008 consolidated balance sheet,sheets, and as a result of the analysis described above, recorded a netan other-than-temporary loss of $250,000$296,000 and $263,000 in the accompanying statements of operations for the yearyears ended December 31, 2008.
At2009 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 net realized gains totaling $32,000 (original recognized unrealized loss was $49,000), $13,000 and $13,000 for 2010, 2009 and 2008, respectively reflecting a partial recovery of the par valueother-than-temporary loss originally recorded on these securities. As ofDecember 31, 2010, the net other-than-temporary loss on auction rate securities collateralized by student loan portfolios totaled $484,000.
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All of Acacia’s auction rate securities issued by high credit quality closed-end investment companies totaled $975,000. Despite the reduction in liquidity resulting from the failure of auctions for these securities since February 2008, the issuers of these auction rate securities havewere redeemed at par approximately 66% of the securities held by Acacia since February 2008, and have indicated that they continue to evaluate ways to provide additional liquidity to their auction rate security holders. Additionally, these securities continue to be AAA rated and the underlying funds continue to meet certain specified asset coverage tests required by the rating agencies, as well as the 200% asset coverage test with respect to auction rate securities set forth in the Investment Company Act of 1940, as amended. However, due to the impact 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 of2009, resulting in realized gains totaling $236,000 in the accompanying statements of operations for the year ended December 31, 2008, and classified2009, reflecting the full recovery of the other-than-te mporary loss originally recorded on these securities as noncurrent assets in the accompanying December 31, 2008 consolidated balance sheet.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 SFAS No. 157 at December 31, 2008, were as follows (in thousands):
| | | | | Fair Value Measurements at Reporting Date Using: | | | | Balance at | | Quoted Prices in Active Markets For Identical Assets | | Significant Other
Observable Inputs | | Significant Unobservable Inputs | | Description | | December 31, 2008 | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | | | | | | | Auction rate securities | | $ 3,239 | | - | | - | | $ 3,239 |
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 SFAS No. 157’s hierarchy since the initial adoption of SFAS No. 157 at January 1, 2008. The following table presents the assets measured at fair value on a recurring basis using significant unobservableunobservabl e inputs (Level 3) as defined in SFAS No. 157 at December 31, 20082010 and 2009 (in thousands):
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | | | | | Auction rate securities: | | | | | Balance at December 31, 2007 | | $ | - | | | Transfers to Level 3 | | | 6,000 | | | Total gains or (losses) (realized or unrealized): | | | | | | Included in earnings | | | (486 | ) | | Included in other comprehensive income | | | - | | | Purchases and settlements (net) | | | (2,275 | ) | | Balance at December 31, 2008 | | $ | 3,239 | |
| | | | | | | | | | | | 2010 | | 2009 | | | | | | | Auction rate securities: | | | | | | Beginning balance as of January 1 | | $ | 2,152 | | | $ | 3,239 | | | Total gains or (losses) (realized or unrealized): | | | | | | | | Recognized (losses) included in earnings | | — | | | (296 | ) | | Recognized gains included in earnings | | 49 | | | 249 | | | Settlements (net) | | (200 | ) | | (1,040 | ) | | Ending balance as of December 31 | | $ | 2,001 | | | $ | 2,152 | |
8. CHANGE IN ACCOUNTING POLICY 8.
Certain revenue agreements provide for the payment of a minimum upfront fee at the inception of each contractual term in consideration for the respective intellectual property rights granted, hereinafter referred to as “term agreements.” Effective October 1, 2009, the Company elected to change its method of accounting for its term agreements to recognize revenue when delivery of the intellectual property rights and all other arrangement deliverables has substantially occurred, which is typically at the time of execution of the related term agreement, or upon receipt of the applicable minimum upfront renewal payment, and when all other revenue recognition criteria, as described in Note 2 above, have been met. Prior to the change in the Company’s method of accounting, fees for term 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 ar rangements 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 agreements in periods prior to fiscal year 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. 9. STOCKHOLDERS’ EQUITY CapitalRepurchase of Restricted Common Stock
In connection withMay 2009, Acacia’s board of directors approved a restricted stock vesting net issuance program. Under the consummationprogram, upon the vesting of the Split-Off Transaction, on August 15, 2007, CombiMatrix was split-off from Acacia through the redemption of all outstandingunvested 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 ofrestricted 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 100,000,000withheld from fully vested shares of common stock $0.001 par value, and 10,000,000otherwise deliverable to any employee-participant in Acacia’s equity compensation programs, a number of whole 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 entitledhaving a fair market value (as determined by Acacia as of the date of vesting) equal to one vote per share on all mattersthe amount of tax required to be voted onwithheld by law, in order to satisfy 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 uptax withholding obligations of Acacia after payment or provision for paymentin connection with the vesting of the debtssuch shares. Of a total of 580,600 shares of restricted stock vested between June 2009 and other liabilities and full preferential amounts to which holders of any preferred stock are entitled, the holdersSeptember 2009, 174,628 shares of common stock are entitled to share ratablywere withheld by Acacia, in all assetssatisfaction 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$1,107,000 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.required withholding tax liability.
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9.
10. INCOME TAXES Acacia’s provision (benefit) for income taxes consists of the following (in thousands): | | | | | | | | | | | | | | Current: | | | | | | | | | | | | U.S. Federal tax | | $ | - | | | $ | - | | | $ | - | | | | State taxes | | | 124 | | | | 207 | | | | 76 | | | | | | | 124 | | | | 207 | | | | 76 | | | | Deferred: | | | | | | | | | | | | | | | U.S. Federal tax | | | - | | | | - | | | | (36 | ) | | | State taxes | | | - | | | | - | | | | - | | | | | | | - | | | | - | | | | (36 | ) | | | | | $ | 124 | | | $ | 207 | | | $ | 40 | |
| | | | | | | | | | | | | | | | 2010 | | 2009 | | 2008 | | | | | | | | | | Current: | | | | | | | | State taxes | | $ | 1,473 | | | $ | 209 | | | $ | 124 | | | Foreign taxes | | 267 | | | — | | |
— | | | | $ | 1,740 | | | $ | 209 | | | $ | 124 | | The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following at December 31, 20082010 and 20072009 (in thousands): | | | | | | | | | | | Deferred tax assets: | | | | | | | | | Basis in affiliates | | $ | - | | | $ | 495 | | | | Depreciation and amortization | | | 4,405 | | | | 3,632 | | | | State taxes | | | 5 | | | | 3 | | | | Deferred revenue | | | 126 | | | | 127 | | | | Stock compensation | | | 3,045 | | | | 2,451 | | | | Accrued liabilities and other | | | 413 | | | | 153 | | | | Write-off of investments | | | 1,344 | | | | 1,344 | | | | Net operating loss and capital loss carryforwards and credits | | | 27,207 | | | | 22,938 | | | | | | | | | | | | | | | Total deferred tax assets | | | 36,545 | | | | 31,143 | | | | Less: valuation allowance | | | (36,360 | ) | | | (30,816 | ) | | | Net deferred tax assets, net of valuation allowance | | | 185 | | | | 327 | | | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | Intangibles | | | (185 | ) | | | (327 | ) | | | | | | | | | | | | | | Net deferred taxes | | $ | - | | | $ | - | |
| | | | | | | | | | | | 2010 | | 2009 | | | | | | | | Deferred tax assets: | | | | | Net operating loss and capital loss carryforwards and credits | | $ | 17,529 | | | $ | 28,629 | | | Amortization and depr eciation | | 5,702 | | | 5,879 | | | Stock compensation | | 1,595 | | | 3,218 | | | Write-off of investments | | 1,344 | | | 1,344 | | | Accrued liabilities and other | | 550 | | | 374 | | | Intangibles | | 100 | | | — | | | State taxes | | 5 | | | 5 | | | Deferred revenue | | — | | | 4 | | | Total deferred tax assets | | 26,825 | |
| | 39,453 | | | Less: valuation allowance | | (26,825 | ) | | (39,410 | ) | | Net deferred tax assets, net of valuation allowance | | — | | | 43 | | | Deferred tax liabilities: | | | | | | | | Intangibles | | — | | | (43 | ) | | Net deferred taxes | | $ | — | | | $ | — | |
A reconciliation of the federal statutory income tax rate and the effective income tax rate is as follows: | | | | | | | | | | | | | 2010 | | 2009 | | 2008 | | | | | | | | | | Statutory federal tax rate | | 34 | % | | 34 | % | | 34 | % | | State income and foreign taxes, net of federal tax effect | | 5 | % | | (4 | )% | | (1 | )% | | Noncontrolling interests in operating subsidiaries | | (3 | )% | | 40 | % | | — | &nb sp; | | Equity compensation | | (1 | )% | | (1 | )% | | (1 | )% |
| | | | | | | | | | | | | | Statutory federal tax rate | | | (34% | ) | | | (34% | ) | | | (34% | ) | | | State income taxes, net of federal tax effect | | | 1% | | | | 3% | | | | 1% | | | | Equity compensation | | | 1% | | | | 1% | | | | 6% | | | | Non deductible permanent items | | | 1% | | | | 1% | | | | - | | | | Capital loss carryforwards | | | 5% | | | | 6% | | | | - | | | | Valuation allowance | | | 27% | | | | 26% | | | | 27% | | | | | | | 1% | | | | 3% | | | | - | |
| Non deductible permanent items | | — | | | — | | | (1 | )% | | Expiration of NOLs and capital loss carryforwards | | 1 | % | | — | | | (5 | )% | | Valuation allowance | | (32 | )% | | (73 | )% | | (27 | )% | | | 4 | % | | (4 | )% | | (1 | )% | ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2008,2010, 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, 2008,2010 , Acacia had U.S. federal and state income tax NOLs totaling approximately $81,372,000$99,267,000 and $62,542,000,$61,681,000, expiring between 20102020 and 2028,2030, and 20122011 and 2018,2020, respectively. In addition, Acacia had tax credit carryforwards of approximately $40,000.
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2008,2010, approximately $11,762,000$4,392,000 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. Income taxes paid during the periods presented were not material.
10. ACCOUNTING FOR THE SPLIT-OFF OF COMBIMATRIX CORPORATION
In January 2006, Acacia’s board of directors approved a plan for CombiMatrix 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 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, the CombiMatrix group is no longer a business group of Acacia. As a result of 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 recognizedincrease in the accompanying consolidated statement of operationsCompany's tax expense for the year ended December 31, 2007. Included in2010, as compared to the year ended December 31, 2007 consolidated balance sheet is a charge to consolidated shareholders’ equity totaling $35,444,000, reflecting2009, reflects the distribution of Acacia’s investment in the net assets of CombiMatrix to holders of AR-CombiMatrix Stock, asimpact of the Redemption Date,suspension of the use of NOLs in California, as described above. Acacia receivedbelow, and the calculation of tax exp ense for financial reporting purposes without the excess tax benefit related to the exercise and vesting of equity-based incentive awards during the year ended December 31, 2010. Under U.S. generally accepted accounting principles, if a private letter rulingdeduction reported on a tax return for an equity-based incentive award exceeds the cumulative compensation cost for those instruments recognized for financial reporting purposes, any resulting realized tax benefit that exceeds the previously calculated and recognized compensation expense for those instruments is considered an excess tax benefit, and is recognized as a credit to additional paid-in capital. The deduction related to the exercise and vesting of equity-based incentive awards during the year e nded December 31, 2010 is available to offset taxable income on Acacia's 2010 consolidated tax return, as no NOLs are allowed to be utilized for California tax return purposes in 2010, as described below. Accordingly, the excess tax benefit related to the exercise and vesting of equity-based incentive awards during the year ended December 31, 2010 was credited to additional paid-in capital, not tax expense. The actual tax benefit realized for excess tax deductions resulting 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 368exercise and 355 of the Code
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 operationsvesting or equity-based incentive awards totaled $1,302,000 for the year ended December 31, 2007 includes direct costs incurred in connection with2010. As a result of the Split-Off Transaction, originally included in Acacia corporate accounts, totaling $136,000excess tax benefit realized, our state taxes payable for the year ended December 31, 2007.2010, for the 2010 tax year, totaled $170,000, primarily relating to California state minimum taxes for the 2010 tax year.
10A. DISCONTINUED OPERATIONS – SPLIT-OFF OF COMBIMATRIX CORPORATION
In January 2006, Acacia’s boardOctober 2010, the State of directors approvedCalifornia passed a planstate budget including provisions furthering the suspension of the use of NOLs, for its wholly owned subsidiary, CombiMatrix, to become an independent publicly-held company. CombiMatrix’s registration statement on Form S-1 was declared effective by the SEC on June 8, 2007.
2010 and 2011 tax years. As a result, ofCalifornia State NOLs are not available to offset California taxable income for the Split-Off Transaction, the CombiMatrix group is no longer a business group of Acacia. As a result of the consummation of the Split-Off Transaction, the assets, liabilities, results of operations and cash flows of CombiMatrix have been eliminated from the continuing operations of Acacia and Acacia does not have any continuing involvement in the operations of CombiMatrix. As a result of the Split-Off Transaction, Acacia has disposed of its investment in CombiMatrix, and therefore, in accordance with guidance set forth in SFAS No. 144, Acacia’s accompanying consolidated financial statements for all historical periods presented reflect the results of operations and cash flows for CombiMatrix as discontinued operations. CombiMatrix was previously presented as a separate operating segment of Acacia under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”2010 or 2011 tax years. ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues and pretax loss included in discontinued operations for the year ended December 31, 2006 were $5,740,000 and ($20,127,000), respectively. Net loss from discontinued operations related to CombiMatrix includes direct costs incurred in connection with the Split-Off Transaction, originally included in Acacia corporate accounts, totaling $133,000 for the year ended December 31, 2006.
11. 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 generallygeneral ly vest in full after two to three years (generally representsrepresenting the requisite service period in accordance with SFAS No. 123R)period). Programs The Plans provide for the following separate programs: ● | | | • | Discretionary Option Grant Program. Under the discretionary option grant program, Acacia’sAcacia'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 actuallya ctually or constructively owns more than 10% of Acacia’sAcacia's voting stock or the voting stock of any of its subsidiaries). |
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | | | • | 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. |
| | | • | Automatic Option Grant Program (2002 Plan only). UnderCommencing in fiscal 2008, each non-employee director will receive restricted stock units for the automatic option grant program, option grants will automatically be made at periodic intervals to eligible non-employee membersnumber of Acacia’s boardshares determined by dividing the annual retainer by the closing price 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 ofAcacia's common stock on the grant date, theprovided that such individual joins the board of directors.has served as a non-employee director for at least 6 months. In addition, onas of May 2007, each new non-employee director will receive restricted stock units for the first business day in each calendar year followingnumber of shares determined by dividing the adoption of the incentive plans by Acacia’sannual board of directors each non-employee board member then in office, including eachretainer by the closing price of Acacia’s current non-employee board members who is then in office, will automatically be granted an option to purchase 15,000 shares ofAcacia's common stock provided that the individual has served on the boardcommencement 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 for at least six months.do not have any rights, benefits or entitlements with respect to any shares unless and until the shares have been delivered. |
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2008,2010, there were 1,678,0001,176,000 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, 2008,2010, there were 130,000no 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.
The following table summarizes stock option activity for the Plans for the year ended December 31, 2008:
2010:
| | | | | | Weighted-Average | | | | | | | | | | Exercise | | | | | | | | | | | | | | | | | | | | Outstanding at December 31, 2007 | | | 4,969,000 | | | $ | 8.52 | | | | | | | | Exercised | | | (38,000 | ) | | $ | 3.74 | | | | | | | | Forfeited | | | (52,000 | ) | | $ | 14.93 | | | | | | | | Canceled | | | (1,223,000 | ) | | $ | 17.28 | | | | | | | | Outstanding at December 31, 2008 | | | 3,656,000 | | | $ | 5.55 | | | 4.6 years | | $ | 739,000 | | | Vested and expected to vest at December 31, 2008 | | | 3,654,000 | | | $ | 5.55 | | | 4.6 years | | $ | 739,000 | | | Exercisable at December 31, 2008 | | | 3,541,000 | | | $ | 5.40 | | | 4.5 years | | $ | 739,000 | |
| | | | | | | | | | | | | | | | | | | Weighted-Average | | | | | | Options | | Exercise Price | | Remaining Contractual Term | | Aggregate Intrinsic Value | | | | | | | | | | | | Ou tstanding at December 31, 2009 | | 3,448,000 | | | $ | 5.54 | | | | | | | Exercised | | (2,852,000 | ) | | $ | 5.28 | | | | | | | Expired | | (75,000 | ) | | $ | 16.05 | | | | | | | Outstanding at December 31, 2010 | | 521,000 | | | $ | 5.41 | | | 3.5 years | | $ | 10,700,000 | | | Vested | | 521,000 | | | $ | 5.41 | | | 3.5 years | | $ | 10,700,000 | | | Exercisable at December 31, 2010 | | 521,000 | | | $ | 5.41 | | 3.5 years | | $ | 10,700,000 | |
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average grant date fair value ofThere were no stock options granted during the years ended December 31, 20072010, 2009 and 2006 was $9.07, and $5.35, respectively.2008. The totalaggregate intrinsic value of options exercised during the years ended December 31, 2008, 20072010, 2009 and 20062008 was $120,000, $10,812,000,$40,994,000, $541,000, and $3,463,000,$120,000, respectively. The aggregate fair value of options that vested during the years ended December 31, 2008, 20072010, 2009 and 20062008 was $209,000, $587,000, and $1,534,000, $3,520,000, and $3,960,000, respectively. As of December 31, 2008, the total unrecognized compensation expense related to nonvested stock option awards was $722,000, which is expected to be recognized over a weighted-average term of approximately 1.4 years.
The following table summarizes nonvested restricted share activity for the year ended December 31, 2008:2010: | | | | Nonvested
Restricted
Shares | | | Weighted Average Grant
Date Fair Value | | | | | | | | | | | | | Nonvested restricted stock at December 31, 2007 | | | 912,000 | | | $ | 13.93 | | | | Granted | | | 966,000 | | | $ | 4.80 | | | | Vested | | | (400,000 | ) | | $ | 13.90 | | | | Forfeited | | | (221,000 | ) | | $ | 9.13 | | | | Nonvested restricted stock at December 31, 2008 | | | 1,257,000 | | | $ | 7.77 | |
| | | | | | | | | | | Nonvested Restricted Shares | | Weighted Average Grant Date Fair Value | | | | | | | | Nonvested restricted stock at December 31, 2009 | | 1,640,000 | | | $ | 4.35 | | | Granted | | 1,265,000 | | | $ | 8.61 | | | Vested | | (1,282,000 | ) | | $ | 5.39 | | | Nonvested restricted stock at December 31, 2010 | | 1,623,000 | | | $ | 6.85 | |
The weighted-average grant date fair value of nonvested restricted stock granted during the years ended December 31, 2008, 20072010, 2009 and 20062008 was $4.80, $14.05,$8.61, $3.51, and $11.87,$4.80, respectively. The aggregate fair value of restricted stock that vested during the years ended December 31, 2008, 20072010, 2009 and 20062008 was $6,914,000, $6,291,000, $5,556,000, $1,951,000, and $215,000, respectively. As of December 31, 2008,2010, the total unrecognized compensation expense related to nonvested restricted stock awards was $5,845,000,$7,234,000, which is expected to be recognized over a weighted-average period of approximately 1.32 years. The following table summarizes restricted stock unit activity for the year ended December 31, 2008:2010: | | | | | | | Weighted Average Grant
Date Fair Value | | | | | | | | | | | | | Restricted stock units outstanding at December 31, 2007 | | | 3,000 | | | $ | 11.19 | | | | Granted | | | 12,000 | | | $ | 8.68 | | | | Vested | | | (4,000 | ) | | $ | 9.32 | | | | Restricted stock units outstanding at December 31, 2008 | | | 11,000 | | | $ | 9.10 | |
| | | | | | | | | | | Restricted Stock Units | | Weighted Average Grant Date Fair Value | | | | | | | | Nonvested restricted stock units outstanding at December 31, 2009 | | 37,000 | | | $ | 4.40 | | | Granted | | 25,000 | | | $ | 11.99 | | | Vested | | (24,000 | ) | | $ | 6.51 | | | Nonvested restricted stock units outstanding at December 31, 2010 | | 38,000 | | | $ | 8.12 | | | Vested restricted stock units outstanding at December 31, 2010 | | 44,000 | | | $ | 6.42 | |
The weighted-average grant date fair value of restricted stock units granted during the years ended December 31, 20082010, 2009 and 20072008 was $8.68$11.99, $3.50 and $11.19,$8.68, respectively. The aggregate fair value of restricted stock units that vested during the years ended December 31, 20082010, 2009 and 20072008 was $39,000$158,000, $84,000 and $3,000,$39,000, respectively. As ofDecember 31, 2008,2010, the total unrecognized compensation expense related to restricted stock unit awards was $92,000,$267,000, which is expected to be recognized over a weighted-average period of approximately 1.91.8 years. As of December 31, 2008, 20105,480,000 , 1,779,000 shares of common stock are reserved for issuance under the Plans. ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
Acacia leases certain office space under various operating lease agreements expiring in 2012. Minimumat various dates from 2013 through 2016. ;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):
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | Year | | | | | | 2009 | | $ | 858 | | | | 2010 | | | 946 | | | | 2011 | | | 977 | | | | 2012 | | | 164 | | | | Total minimum lease payments | | $ | 2,945 | |
| | | | | Year | | | 2011 | $ | 808 | | | 2012 | 736 | | | 2013 | 761 | | | 2014 | 690 | | | 2015 | 718 | | | 2016 | 366 | | | Total minimum lease payments | $ | 4,079 | |
Rent expense related to continuing operations for the years ended December 31, 2008, 20072010, 2009 and 20062008 approximated $965,000, $749,000$1,011,000, $983,000 and $565,000,$965,000, respectively. Rental payments are expensed in the statementsstateme nts of operations in the period to which they relate. Scheduled rent increases are amortized on a straight-line basis over the lease term. Inventor Royalties and Contingent Legal Expenses
In connection with the acquisition of certain patents and patent rights, certain of Acacia's operating subsidiaries of Acacia 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 respectiver espective agreements) generated as a result of licensing and otherwise enforcing 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 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 inventor royalties and contingent legal fees – patents in the consolidated statements of operations.
In connection with the licensing and enforcement activities of Acacia’s operating subsidiaries, they may retain the services of law firms that specialize in intellectual property licensing and enforcement and patent law.law in connection with their licensing and enforcement activities. These law firms may be retained on a contingent fee basis in which thewhereby 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 (ie. 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’sAcacia's consolidated financial position, results of operations or cash flows. OperatingCertain of Acacia's operating subsidiaries of Acacia are often required to engage in litigation to enforce their patents and patent rights. ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 therefore, have therefore, not recorded any liability for these guarantees and indemnities in the accompanying consolidated balance sheets.
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Febr uary 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 is appealing the verdict.
In 2009, CIAC purchased a specific contingency insurance policy covering approximately $6.9 million of the final judgment, and in April 2010, increased the policy to cover the remaining balance of the final judgment. 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 $12.4 million final judgment covered under the policy. In August 2010, a wholly-owned subsidiary of Acacia became the general partner of the Acacia Intellectual Property Fund, L.P. (the “Acacia IP Fund”), which was formed in August 2010. The Acacia IP Fund is authorized to raise up to $250 million. The Acacia IP Fund acquires, licenses and enforces intellectual property consisting primarily o f patents, patent rights, and patented technologies. The Acacia IP Fund is included in the Company's consolidated financial statements as of and for the year ended December 31, 2010, as Acacia's wholly owned subsidiary, as the general partner, has the ability to control the operations and activities of the Acacia IP Fund. See Note 2 for information regarding the consolidation of majority-owned subsidiaries and the presentation of related noncontrolling interests. At December 31, 2010, Acacia IP Fund net assets totaled $4,706,000, and primarily related to patent acquisition costs incurred during the period from August 6, 2010, the date of formation, to December 31, 2010, net of related accumulated amortization. 13. 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, 2008, 2007 and 2006.periods presented.
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.(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(to gether 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.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid by Acacia for state income taxes was not materialtotaled $211,000, $169,000 and $99,000 for the periods presented. years ended December 31, 2010, 2009 and 2008, respectively. Refer to Note 6 for impairment charges, and other non-cash changes in patentinformation regarding noncash investing activity related intangibles duringto the acquisition of patents for the periods presented. Referpresented. Noncash financing activity for the year ended December 31, 2010 included accrued issuance costs associated with the funding of the Acacia IP Fund totaling $210,000, $117,000 of which was charged to Notes 10additional-paid-in-capital and 10A for information regarding the Split-Off Transaction.$93,000 of which was charged to noncontrolling interests in operating subsidiaries.
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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, 2008.2010. 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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quarter Ended | | | Mar. 31, | | Jun. 30, | | Sep. 30, | | Dec. 31, | | Mar. 31, | | Jun. 30, | | Sep. 30, | | Dec. 31, | | | 2010 | | 2010 | | 2010 | | 2010 | | 2009 | | 2009 | | 2009 | | 2009 | | | (Unaudited, In thousands, except share and per share information) | | Revenues | | $ | 39,772 | | | $ | 15,006 | | | $ | 63,949 | | | $ | 13,102 | | | $ | 16,957 | | | $ | 14,356 | | | $ | 16,169 | | | $ | 19,858 | | | Operating costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | Cost of revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | Inventor royalties | | 3,911 | | | 2,877 | | | 14,508 | | | 3,996 | | | 5,377 | | | 2,019 | | | 4,673 | | | 3,604 | | Contingent legal fees | | 4,407 | | | 3,465 | | | 9,739 | | | 2,295 | | | 3,532 | | | 3,190 | | | 3,799 | | | 5,424 | | | Litigation and licensing expenses - patents | | 3,696 | | | 4,433 | | | 2,835 | | | 2,927 | | | 1,708 | | | 2,753 | | | 3,957 | | | 5,637 | | | Amortization of patents | | 1,703 | | | 1,876 | | | 1,963 | | | 1,389 | | | 1,065 | | | 1,060 | | | 1,245 | | | 1,264 | | | Marketing, general and administrative expenses (including non-cash stock compensation expense) | | 6,332 | | | 6,056 | | | 6,388 | | | 6,291 | | | 5,378 | | | 5,748 | | | 4,709 | | | 5,235 | | | Research, consulting and other expenses - business development | | 372 | | | 453 | | | 461 | | | 835 | | | 414 | | | 396 |
| | 363 | | | 516 | | | Total operating costs and expenses | | 20,421 | | | 19,160 | | | 35,894 | | | 17,733 | | | 17,474 | | | 15,166 | | | 18,746 | | | 21,680 | | | Operating income (loss) | | 19,351 | | | (4,154 | ) | | 28,055 | | | (4,631 | ) | | (517 | ) | | (810 | ) | | (2,577 | ) | | (1,822 | ) | | Other income (expense) | | 19 | | | 20 | | | 44 | | | 52 | | | 287 | | | 47 | | | 224 | | | (256 | ) | | Income (loss) before provision for income taxes | | 19,370 | | | (4,134 | ) | | 28,099 | | | (4,579 | ) | | (230 | ) | | (763 | ) | | (2,353 | ) | | (2,078 | ) | | (Provision) benefit for income taxes | | (321 | ) | | 13 | | | (317 | ) | | (1,115 | ) | | (38 | ) | | (39 | ) | | (47 | ) | | (85 | ) | | Net income (loss) including noncontrolling interests | | 19,049 | | | (4,121 | ) | | 27,782 | | | (5,694 | ) | | (268 | ) | | (802 | ) | | (2,400 | ) | | (2,163 | ) | | Net (income) loss attributable to noncontrolling interests | | (537 | ) | | 255 | | | (3,107 | ) | | 424 | | | — | | | (2,121 | ) | | (1,029 | ) | | (2,507 | ) | | Net income (loss) attributable to Acacia Research Corporation | | $ | 18,512 | | | $ | (3,866 | ) | | $ | 24,675 | | | $ | (5,270 | ) | | $ | (268 | ) | | $ | (2,923 | ) | | $ | (3,429 | ) | | $ | (4,670 | ) | | Net income (loss) per common share attributable to Acacia Research Corporation: | | | | | | | | | | | | | | | | | | | | | | | | | | Basic income (loss) per share | | $ | 0.60 | | | $ | (0.12 | ) | | $ | 0.75 | | | $ | (0.16 | ) | | $ | (0.01 | ) | | $ | (0.10 | ) | | $ | (0.11 | ) | | $ | (0.15 | ) | | Diluted income (loss) per share | | $ | 0.55 | | | $ | (0.12 | ) | | $ | 0.70 | | | $ | (0.16 | ) | | $ | (0.01 | ) | | $ | (0.10 | ) | | $ | (0.11 | ) | | $ | (0.15 | ) | | Weighted average number of shares outstanding, basic | | 30,847,403 | | | 31,664,869 | | | 32,794,553 | | | 33,879,777 | | | 29,639,459 | | | 29,741,168 | | | 30,071,492 | | | 30,199,211 | | | Weighted average number of shares outstanding, diluted | | 33,411,093 | | | 31,664,869 | | | 35,105,354 | | | 33,879,777 | | | 29,639,459 | | | 29, 741,168 | | | 30,071,492 | | | 30,199,211 | | As a result__________________
(1)Refer to Note 8 for information on the change in Acacia’s revenue recognition accounting policy for its term agreements. The change was accounted for through retrospective application of the Split-Off Transaction (refer to Notes 10new accounting policy as of January 1, 2009, and 10A), Acacia has disposed of its investment in CombiMatrix and therefore, in accordance with guidance set forth in SFAS No. 144, the statements of operations data for the four quartersbeen reflected in the period ended December 31, 2007, presented below, reflect the results of operations for CombiMatrix as discontinued operations.2009 quarterly financial data above.
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, | | | | | 2008 | | | 2008 | | | 2008 | | | 2008 | | | 2007 | | | 2007 | | | 2007 | | | 2007 | | | | | (In thousands, except share and per share information) | | | License fees | | $ | 9,048 | | | $ | 7,116 | | | $ | 13,796 | | | $ | 18,267 | | | $ | 25,185 | | | $ | 5,865 | | | $ | 9,544 | | | $ | 12,003 | | | Operating expenses | | | 13,708 | | | | 12,369 | | | | 16,433 | | | | 19,920 | | | | 21,133 | | | | 9,979 | | | | 14,836 | | | | 16,160 | | | Operating income (loss) | | | (4,660 | ) | | | (5,253 | ) | | | (2,637 | ) | | | (1,653 | ) | | | 4,052 | | | | (4,114 | ) | | | (5,292 | ) | | | (4,157 | ) | | Other income (expense) | | | 192 | | | | 238 | | | | 255 | | | | (115 | ) | | | 407 | | | | 650 | | | | 647 | | | | 655 | | | Income (loss) from continuing operations before income taxes | | | (4,468 | ) | | | (5,015 | ) | | | (2,382 | ) | | | (1,768 | ) | | | 4,459 | | | | (3,464 | ) | | | (4,645 | ) | | | (3,502 | ) | | Provision for income taxes | | | (21 | ) | | | (26 | ) | | | (38 | ) | | | (39 | ) | | | (24 | ) | | | (124 | ) | | | (29 | ) | | | (30 | ) | | Income (loss) from continuing operations | | | (4,489 | ) | | | (5,041 | ) | | | (2,420 | ) | | | (1,807 | ) | | | 4,435 | | | | (3,588 | ) | | | (4,674 | ) | | | (3,532 | ) | Loss from discontinued operations - Split-off of
CombiMatrix Corporation | | | - | | | | - | | | | - | | | | - | | | | (2,133 | ) | | | (3,667 | ) | | | (2,286 | ) | | | - | | | Net income (loss) | | $ | (4,489 | ) | | $ | (5,041 | ) | | $ | (2,420 | ) | | $ | (1,807 | ) | | $ | 2,302 | | | $ | (7,255 | ) | | $ | (6,960 | ) | | $ | (3,532 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings (loss) per common share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Acacia Research Corporation common stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings (loss) from continuing operations | | $ | (4,489 | ) | | $ | (5,041 | ) | | $ | (2,420 | ) | | $ | (1,807 | ) | | $ | 4,435 | | | $ | (3,588 | ) | | $ | (4,674 | ) | | $ | (3,532 | ) | | Basic earnings (loss) per share | | | (0.15 | ) | | | (0.17 | ) | | | (0.08 | ) | | | (0.06 | ) | | | 0.16 | | | | (0.13 | ) | | | (0.16 | ) | | | (0.12 | ) | | Diluted earnings (loss) per share | | | (0.15 | ) | | | (0.17 | ) | | | (0.08 | ) | | | (0.06 | ) | | | 0.14 | | | | (0.13 | ) | | | (0.16 | ) | | | (0.12 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Acacia Research - CombiMatrix stock - Discontinued | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operations - Split-off of CombiMatrix Corporation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | (2,133 | ) | | $ | (3,667 | ) | | $ | (2,286 | ) | | $ | - | | | Basic and diluted loss per share | | | - | | | | - | | | | - | | | | - | | | | (0.04 | ) | | | (0.06 | ) | | | (0.04 | ) | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average shares: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Acacia Research Corporation common stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 29,217,636 | | | | 29,321,176 | | | | 29,553,609 | | | | 29,599,602 | | | | 27,841,286 | | | | 28,298,328 | | | | 28,739,499 | | | | 29,117,523 | | | Diluted | | | 29,217,636 | | | | 29,321,176 | | | | 29,553,609 | | | | 29,599,602 | | | | 30,969,991 | | | | 28,298,328 | | | | 28,739,499 | | | | 29,117,523 | | | Acacia Research - CombiMatrix stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic and diluted | | | - | | | | - | | | | - | | | | - | | | | 52,516,220 | | | | 57,143,839 | | | | 59,875,769 | | | | - | |
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)(1) | | 3.2 | Amended and Restated Bylaws (13)(11) | | 3.2.1 | Amendment to Amended and Restated Bylaws (14)(12) | | 10.1* | Acacia Research Corporation 1996 Stock Option Plan, as amended (4)(2) | | 10.2* | Form of Option Agreement constituting the Acacia Research Corporation 1996 Executive Stock Bonus Plan (5)(3) | | 10.3* | 2002 Acacia Technologies Stock Incentive Plan (6)(4) | | 10.4* | 2007 Acacia Technologies Stock Incentive Plan (7)(5) | | 10.5* | Form of Acacia Technologies Stock Option Agreement for the 2007 Acacia Technologies Stock Incentive Plan (8)(6) | | 10.6* | Form of Acacia Technologies Stock Issuance Agreement for the 2002 Acacia Technologies Stock Incentive Plan (8)(6) | | 10.7* | Form of Acacia Technologies Stock Issuance Agreement for the 2007 Acacia Technologies Stock Incentive Plan (8)(6) | | 10.8 | Office Space Lease Agreement dated January 28, 2002, between Acacia Research Corporation and The Irvine Company (9)(7) | | 10.10 | Form of Indemnification Agreement (10)(8) | | 10.11 | Form of Subscription Agreement between Acacia Research Corporation and certain investors (11)(9) | | 10.12 | Third Amendment to leaseLease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (12)(10) | | 10.19* | Employment Agreement, dated January 28, 2005, by and between Acacia Technologies Services Corporation, and Dooyong Lee, as amended (13)(11) | | 10.19.1* | Amendment to Employment Agreement, dated December 17, 2008, by and between Acacia Research CorporationTechnologies, LLC and Dooyong Lee (14) | | 10.20* | Employment Agreement, dated April 12, 2004, by and between Acacia Media Technologies Corporation and Edward Treska (13)(11) | | 10.20.1* | Addendum, to Employment Agreement with Edward Treska, dated March 31, 2008, (15)to Employment Agreement by and between Acacia Media Technologies Corporation and Edward Treska (13) | | 10.21 | Fourth Amendment to leaseLease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (13)(11) | | 10.22 | Fifth Amendment to Lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company (13)(11) | | 10.23* | Employment Agreement, dated March 31, 2008, by and between Acacia Technologies, LLC and Paul Ryan (15)(13) | | 10.23.1* | Amendment to Employment Agreement, dated December 17, 2008, by and between Acacia Technologies, LLC and Paul Ryan (14) | 10.24* | Employment Agreement, dated March 31, 2008, by and between Acacia Technologies, LLC and Robert L. Harris (15)(13) | | 10.24.1* | Amendment to Employment Agreement, dated December 17, 2008, by and between Acacia Research CorporationTechnologies, LLC and Robert L. Harris (14) |
| 10.25* | Amended Employment Agreement, dated March 31, 2008, by and between Acacia Technologies, LLC and Clayton J. Haynes (15)(13) | | 10.25.1* | Amendment to Amended Employment Agreement, dated December 17, 2008, by and between Acacia Research CorporationTechnologies, LLC and Clayton J. Haynes (14) | | 10.26* | Amended Acacia Research Corporation Amended and Restated Executive Severance Policy (14) | | 10.27 | Sixth Amendment to Lease dated January 28, 2002 between Acacia Research Corporation and the Irvine Company | | 18.1 | Preferability Letter dated February 25, 2010 from Grant Thornton LLP, independent registered public accounting firm, regarding change in accounting principle (15) | | 21.1 | List of Subsidiaries | | 23.1 | Consent of Independent Registered Public Accounting Firm - Grant Thornton LLP | 23.224.1 | ConsentPower of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLPAttorney (included in the signature page hereto). |
| | | 31.1 | Certification of Chief Executive Officer Pursuant to Section 302Rule 13a-14(a)/15d-14(a) of the Sarbanes-OxleySecurities Exchange Act of 20021934 | | 31.2 | Certification of Chief Financial Officer Pursuant to Section 302Rule 13a-14(a)/15d-14(a) of the Sarbanes-OxleySecurities Exchange Act of 20021934 | | 32.1 | Certification of the Chief Executive Officer provided pursuantPursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 32.2 | Certification of the Chief Financial Officer provided pursuantPursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
______________
* | The referenced exhibit is a management contract, compensatory plan or arrangement. |
___________________________ † | Portions of this exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the United States Securities and Exchange Commission. |
* The referenced exhibit is a management contract, c ompensatory plan or arrangement.(1) Incorporated by reference to Acacia Research Corporation's Current Report on Form 8-K filed on June 5, 2008 (SEC File No. 000-26068). (1) | Incorporated by reference from Acacia Research Corporation’s Current Report on Form 8-K filed on December 30, 1999(2) 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). |
(3) Incorporated by reference to Appendix A to Acacia Research Corporation's Defin itive Proxy Statement on Schedule 14A filed on April 26, 1996 (SEC File No. 000-26068). (2) | Incorporated by reference as Appendix A to the Proxy Statement/Prospectus which formed part of Acacia Research Corporation’s(4) Incorporated by reference to Annex 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. |
(5) 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. (3) | Incorporated by reference to Acacia Research Corporation’s Current Report on Form 8-K filed on June 5, 2008(6) 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). |
(7) 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). (4) | Incorporated by reference as Appendix A to the Definitive Proxy Statement on Schedule 14A filed on April 10, 2000(8) 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). |
(9) Incorporated by reference to Acacia Research Corporation's Current Report on Form 8-K filed on September 19, 2005 (SEC File No. 000-26068). (5) | Incorporated by reference from Acacia Research Corporation’s Definitive Proxy as Appendix A Statement on Schedule 14A filed on April 26, 1996(10) 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). |
(11) 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). (6) | Incorporated by reference as 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. |
(12) Incorporated by reference to Acacia Research Corporation's Current Report on Form 8-K filed on January 7, 2008 (File No. 000-26068).(13) Incorporated by reference to Acacia Research Corporation's Current Report on Form 8-K filed on April 2, 2008 (SEC File No. 000-26068). (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. |
(14) Incorporated by re ference 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).(15) Incorporated by reference to Acacia Research Corporation's Annual Report on Form 10-K for the year ended December 31, 2009, filed on February 25, 2010, as amended on February 26, 2010 (File No. 000-26068) (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 from 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 from 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 from Acacia Research Corporation’s Current Report on Form 8-K filed on September 19, 2005 (SEC File No. 000-26068). |
(12) | Incorporated by reference from 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 from 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 from Acacia Research Corporation’s Current Report on Form 8-K filed on January 7, 2008 (File No. 000-26068). |
(15) | Incorporated by reference from Acacia Research Corporation’s Current Report on Form 8-K filed on April 2, 2008 (SEC File No. 000-26068). |
III-3
|
