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ACTG > SEC Filings for ACTG > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for ACACIA RESEARCH CORP


7-Nov-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward Looking Statements

You should read the following discussion and analysis in conjunction with the consolidated financial statements and related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this Quarterly Report on Form 10-Q. Such statements may be identified by the use of forward-looking terminology such as "may," "will," "should," "could," "expect," "plan," "believe," "estimate," "anticipate," "intend," "predict," "potential," "continue" or similar terms, variations of such terms or the negative of such terms, although not all forward-looking statements contain these terms. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning intellectual property acquisition and development, licensing and enforcement activities, capital expenditures, earnings, litigation, regulatory matters, markets for our services, liquidity and capital resources and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as our ability to acquire new technologies and patents, future global economic conditions, changes in demand for our services, legislative, regulatory and competitive developments in markets in which we and our subsidiaries operate, results of litigation and other circumstances affecting anticipated revenues and costs. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements contained herein to conform such statements to actual results or to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, including without limitation the disclosures made under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements" in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and disclosures made under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Risk Factors" and "Financial Statements and Supplementary Data" included in our Annual Report on Form 10-K for the year ended December 31, 2012.

General

As used in this Quarterly Report on Form 10-Q, "we," "us" and "our" refer to Acacia Research Corporation, a Delaware corporation, and/or its wholly and majority-owned and controlled operating subsidiaries. All intellectual property acquisition, development, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation's wholly and majority-owned and controlled operating subsidiaries. Our operating subsidiaries generate revenues and related cash flows from the granting of intellectual property rights for the use of, or pertaining to, patented technologies that our operating subsidiaries own or control.

We merge our legal and technology expertise to continually uncover patent assets and bring needed proficiency to patent licensing. Our professionals actively seek to identify high-quality but undervalued patent portfolios in a variety of industries. We are an intermediary in the patent marketplace partnering with inventors and patent owners to unlock the financial value in their patented inventions.

Our partnership with patent owners is the cornerstone of our corporate strategy. We partner with the patent-disenfranchised, including individual inventors, universities, and large multi-national corporations in the technology, medical technology, energy, and industrial sectors. We assume all responsibility for operational expenses and share net licensing revenue with our patent partners on a pre-arranged and negotiated basis. We also provide capital to the patent owner as an advance against future licensing revenue. We bridge the gap between invention and production, facilitating efficiency and bringing monetary liquidity to otherwise illiquid patent assets.


We have established a proven track record of licensing success with over 1,300 license agreements executed to date across 162 of our licensing and enforcement programs.

We were originally incorporated in California in January 1993 and reincorporated in Delaware in December 1999.

Executive Summary

During the three months ended September 30, 2013, we reported revenues of $15.5 million from 24 new revenue agreements covering 24 different licensing programs, including 5 licensing programs generating initial revenues in the quarter. Cash and investments totaled $285.3 million as of September 30, 2013 as compared to $311.3 million as of December 31, 2012.

During the three months ended September 30, 2013, we acquired control of 6 new patent portfolios and invested $7.9 million (including $3.8 million in future payments accrued as of September 30, 2013) in patent portfolio related up-front advances to patent owners with whom we have partnered for the licensing of their patented technologies.

During the three months ended September 30, 2013, we partnered with patent owners with respect to patents relating to fluorescent microscopy technology with relevance in the life sciences industry, patents relating to professional and social media networking technology applicable to features of product and service offerings in the social networking industry, patents relating to post market sales data, multiple coordinated viewing devices and progressive deletion, patents relating to intelligent beverage dispensing technology used in the beverage industry, patents relating to power managed security system technology, and patents relating to semiconductor testing technology used by semiconductor designers to test wafers.

We continue to identify and explore numerous opportunities for partnering with companies in the technology, energy, medical technology and other sectors for the licensing of their patented technologies, and are also expanding our activity in international markets, both of which we expect will expand and diversify our future revenue generating opportunities. During the nine months ended September 30, 2013 we have expanded our management team with key hires of experienced intellectual property acquisition and licensing executives from industry that we expect will facilitate our continued development of these growth areas.

Operating activities during the periods presented included the following:

                                          Three Months Ended             Nine Months Ended
                                            September 30,                  September 30,
                                         2013            2012           2013           2012

Revenues (in thousands)              $    15,520     $   34,939     $  115,491     $  184,463
New agreements executed                       24             33             96            111
Licensing and enforcement programs
generating revenues                           24             31             47             57
Licensing and enforcement programs
with initial revenues                          5              9             19             22
New patent portfolios                          6             13             22             45
Cumulative number of licensing and
enforcement programs generating
revenues - inception to date                 162            134            162            134

Our revenues historically have fluctuated quarterly, and can vary significantly, based on a number of factors including the following:

•         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;


•         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 each period,
          which can be impacted by the periodic status of ongoing negotiations
          with prospective licensees and the relative complexity, scope,
          valuation, volume of matters and other factors associated with the
          respective negotiations;


•         the timing, results and uncertainties associated with patent filings
          and other enforcement proceedings relating to our intellectual property
          rights;


• the relative maturity of licensing programs during the applicable periods; and

• other external factors.

On a consolidated basis, as of September 30, 2013, 162 of our licensing programs had begun generating revenues, up from 143 as of December 31, 2012, and 134 as of September 30, 2012. Although revenues from one or more of our patents or patent portfolios may be significant in a specific reporting period, we believe that none of our individual patents or patent portfolios is individually significant to our licensing and enforcement business as a whole.

We measure and assess the performance and growth of the patent licensing and enforcement businesses conducted by our operating subsidiaries based on consolidated revenues recognized across all of our technology licensing and enforcement programs on a trailing twelve-month basis. Trailing twelve-month revenues for the periods presented were as follows (in thousands):

As of Date:           Trailing Twelve -Month Revenues      % Change

September 30, 2013   $                         181,755      (10 )%
June 30, 2013                                  201,174      (12 )%
March 31, 2013                                 228,548       (9 )%
December 31, 2012                              250,727       22  %
September 30, 2012                             205,258        -  %

Revenues for the nine months ended September 30, 2013 included fees from the following technology licensing and enforcement programs:

• 3G & 4G Wireless Handsets              •
  technology(1)                            Location Based Services technology
• Audio Communications Fraud Detection   • Memory Circuit and Packaging
  technology                               technology(1)
• Automotive Safety, Navigation and      • Messaging technology
  Diagnostics technology
• Broadband Communications               • Mobile Computer Synchronization
  technology(1)                            technology
• Business Process Modeling technology   • Mobile Enhancement Solutions technology
• Camera Support technology              • NOR Flash technology
• Catheter Ablation technology(1)        • Online Auction Guarantees technology
• Computer Architecture and Power        • Online Gaming technology
  Management technology
• Core Fiber Optic Network               • Online newsletters with links technology
  Architectures technology(1)(2)
• Digital Imaging technology(1)          • Optical Networking technology(1)(2)
• Digital Signal Processing              • Power Management within Integrated
  Architecture technology                  Circuits technology
• DMT technology                         • Prescription Lens technology(1)
•                                        • Reflective and Radiant Barrier
  Domain Name Redirection technology       Insulation technology(1)(2)
• Dynamic Transmissions                  • Semiconductor Memory and Process
  technology(1)(2)                         technology(1)
• Electronic spreadsheet, data           • Semiconductor Packaging technology(1)
  analysis and software development
  technology(1)
• Facilities Operation Management        • Surgical Access technology
  System technology
• Gas Modulation Control Systems         •
  technology(1)                            Suture Anchors technology
• Greeting Card technology(1)            • Telematics technology
• Improved Memory Manufacturing          • User Programmable Engine Control
  technology                               technology
• Information Portal Software            •
  technology                               Video Analytics for Security technology
• Information Storage, Searching &       •
  Retrieval technology                     Web Collaboration technology(1)(2)
•                                        • Wireless Data Synchronization & Data
  Intercarrier SMS technology(1)           Transfer technology(1)
• Interstitial and Pop-Up Internet       • Wireless Location Based Services
  Advertising technology                   technology(1)
• Lighting Ballast technology




(1) Initial revenues recognized during the nine months ended September 30, 2013.
(2) Initial revenues recognized during the three months ended September 30, 2013.

Revenues for the nine months ended September 30, 2012 included fees from the following technology licensing and enforcement programs:

• 4G Wireless technology(1)                 • Messaging technology
• Application Authentication                • Mobile Computer Synchronization
  technology(1)(2)                            technology
• Audio Communications Fraud Detection      •
  technology                                  Network Monitoring technology
• Bone Graft Harvesting technology(1)(2)    • NOR Flash technology
• Camera Support technology                 • Online Ad Tracking technology
• Consumer Rewards technology(1)            • Online Auction Guarantee technology
• Data Compression technology               • Online Gaming technology(1)(2)
• DDR SDRAM technology                      • Optical Recording technology
• Digital Signal Processing Architecture    •
  technology                                  Optical Switching technology
• Disk Array Systems & Storage Area         • Pop-up Internet Advertising
  Network technology                          technology
• DMT® technology                           • Power Management Within Integrated
                                              Circuits technology
• Document Generation technology            • Power-over-Ethernet technology
• Domain Name Redirection                   •
  technology(1)(2)                            Rule Based Monitoring technology
• Dynamic Random Access Memory              • Semiconductor Memory and Process
  technology(1)                               Patents(1)
• Facilities Operation Management System    • Shape Memory Alloys technology
  technology
• Hearing Aid technology(1)                 • Software Activation technology(1)
• Impact Instrument technology              • Surgical Access technology(1)(2)
• Improved Anti-Trap Safety Technology      •
  for Vehicles(1)                             Suture Anchors technology(1)(2)
• Improved Lighting technology              • Targeted Content Delivery technology
• Improved Memory Manufacturing             • Telematics technology
  technology(1)
•                                           • User Programmable Engine Control
  Information Portal Software technology      technology
• Information Storage, Searching and        • Video Delivery and Processing
  Retrieval technology(1)                     technology(1)
• Integrated Access technology(1)           • Video Encoding technology
• Intraluminal Device technology(1)(2)      • Videoconferencing technology(1)
• Lighting Ballast technology               • Visual Data Evaluation technology
• Location Based Services technology        • Voice-Over-IP Technology(1)
• Medical Image Manipulation                •
  technology(1)(2)                            Website Crawling technology
• Medical Monitoring technology             • Wireless Monitoring technology(1)(2)
• MEMS technology



(1) Initial revenues recognized during the three months ended September 30, 2012.
(2) Initial revenues recognized during the nine months ended September 30, 2012.


Summary of Results of Operations - Overview
For the Three and Nine Months Ended September 30, 2013 and 2012
(In thousands, except percentage change values)
                            Three Months Ended                         Nine Months Ended
                              September 30,               %              September 30,             %
                           2013            2012        Change         2013           2012        Change

Revenues               $    15,520     $   34,939        (56 )%   $  115,491     $  184,463       (37 )%
Operating costs and
expenses                    50,856         43,303         17  %      166,662        118,710        40  %
Operating income
(loss)                     (35,336 )       (8,364 )      322  %      (51,171 )       65,753      (178 )%
Benefit from
(provision for) income
taxes                       19,570          1,938        910  %       25,348        (16,303 )    (255 )%
Net income (loss)
attributable to Acacia
Research Corporation       (15,711 )       (6,619 )      137  %      (23,101 )       49,630      (147 )%

Overview - Three months ended September 30, 2013 compared with the three months ended September 30, 2012

• Revenues decreased $19.4 million, or 56%, to $15.5 million, as compared to $34.9 million in the comparable prior year quarter.

• Cost of Revenues and Other Operating Expenses:

•           Inventor royalties and contingent legal fees, on a combined basis,
            decreased $9.0 million, or 65%, as compared to the 56% decrease in
            related revenues for the same periods, due primarily to revenues
            generated during the three months ended September 30, 2013 having, on
            average, lower contingent legal fee arrangement obligations, as
            compared to the revenues generated during the three months ended
            September 30, 2012.



•           Litigation and licensing expenses-patents increased $4.9 million, or
            82%, to $10.9 million, due primarily to an increase in international
            enforcement and strategic patent portfolio prosecution costs,
            associated with ongoing and new licensing and enforcement programs
            commenced since the end of the comparable prior year quarter. We
            expect patent-related legal expenses to continue to fluctuate period
            to period in connection with our current and future patent
            acquisition, development, licensing and enforcement activities.



•           Amortization of patents increased $2.2 million, or 21%, to $12.6
            million, due primarily to an increase in quarterly amortization
            expense related to patent portfolios acquired since September 30,
            2012, totaling $4.4 million. The increase was partially offset by a
            decrease in accelerated patent amortization related to patent
            portfolio dispositions totaling $2.6 million.



•           Marketing, general and administrative expenses increased $6.3
            million, or 53%, to $18.2 million, due primarily to nonrecurring
            costs and noncash stock compensation charges associated with the
            board approved retirement package for our former CEO (retired
            effective 7/31/2013), a net increase in licensing, business
            development, and engineering personnel since the end of the prior
            year quarter, an increase in non-recurring personnel severance costs,
            and a net increase in corporate legal, facilities and general and
            administrative costs.



•           Operating expenses for the three months ended September 30, 2013 also
            included a one-time, non-recurring charge related to the resolution
            of a dispute concerning legal fees associated with a prior matter
            totaling $3.5 million.



•           Effective tax rates were 56% and 23% for the three months ended
            September 30, 2013 and 2012, respectively. The effective rate for the
            third quarter of 2013 reflects the impact of certain non-deductible
            permanent items. Discrete items impacting the effective tax rate for
            the three months ended September 30, 2012 were primarily comprised of
            $10.2 million of tax benefits recognized resulting from the release
            of valuation allowance on the majority of our net deferred tax assets
            in the first quarter of 2012.


Overview - Nine months ended September 30, 2013 compared with the nine months ended September 30, 2012

• Revenues decreased $69.0 million, or 37%, to $115.5 million, as compared to $184.5 million in the comparable prior year period.

• Cost of Revenues and Other Operating Expenses:

•           Inventor royalties and contingent legal fees, on a combined basis,
            increased $6.7 million, or 16%, as compared to the 37% decrease in
            related revenues for the same periods, due primarily to a higher
            percentage of revenues generated during the nine months ended
            September 30, 2012, having no inventor royalty obligations (i.e.,
            patent portfolio owned outright without back-end royalty obligation)
            or contingent legal fee arrangement obligations (i.e., revenues
            generated without litigation), as compared to the revenues generated
            during the nine months ended September 30, 2013.



•           Litigation and licensing expenses-patents increased $15.8 million, or
            108%, to $30.4 million, due primarily to an increase in international
            enforcement and strategic patent portfolio prosecution costs,
            associated with ongoing and new licensing and enforcement programs
            commenced since the end of the comparable prior year period. We
            expect patent-related legal expenses to continue to fluctuate period
            to period in connection with our current and future patent
            acquisition, development, licensing and enforcement activities.



•           Amortization of patents increased $16.0 million, or 76%, to $36.9
            million, due primarily to amortization expense related to new patent
            portfolios acquired since September 30, 2012, totaling $12.3 million
            and an increase in scheduled patent amortization for patent
            portfolios acquired during the prior year period totaling $5.8
            million. The increase was partially offset by a decrease in
            accelerated patent amortization related to patent portfolio
            dispositions totaling $2.0 million.



•           Marketing, general and administrative expenses increased $7.7
            million, or 21%, to $45.3 million, due primarily to nonrecurring
            costs and noncash stock compensation charges associated with the
            board approved retirement package for our former CEO (retired
            effective 7/31/2013), a net increase in licensing, business
            development, and engineering personnel since the end of the prior
            year quarter, an increase in non-recurring personnel severance costs,
            and a net increase in corporate legal, facilities and general and
            administrative costs.

• Our effective tax rate was approximately 52% and 25% for the nine months ended September 30, 2013 and 2012, respectively. Discrete items impacting the effective tax rate for the nine months ended September 30, 2012 were primarily comprised of $10.2 million of tax benefits recognized resulting from the release of valuation allowance on the majority of our net deferred tax assets in the first quarter of 2012.

Acquisition of ADAPTIX, Inc.

On January 12, 2012, a wholly-owned operating subsidiary of ours completed its acquisition of ADAPTIX, which held no material assets other than its portfolio of patents and $10 million in cash, through a merger with and into ADAPTIX, with ADAPTIX as the surviving corporation. Upon completion of the merger, ADAPTIX became a wholly-owned subsidiary of our operating subsidiary. The total consideration paid in connection with the merger was approximately $160 million, paid in cash.

ADAPTIX, a pioneer in the development of 4G technologies for wireless systems, is an award-winning technology company long recognized in the industry as one of the first developers of cutting edge 4G wireless systems. With patents filed as early as 2000, ADAPTIX's research and development efforts have resulted in one of the world's most significant intellectual property portfolios focused on 4G technologies. With its rapidly growing portfolio of 230 issued and pending patents in 13 countries, ADAPTIX's innovations extend across a broad range of 4G technologies including OFDMA and MIMO.

Investments in Patent Portfolios

We also measure and assess the performance and growth of the patent licensing and enforcement businesses conducted by our operating subsidiaries based on the number of patent portfolio partnering opportunities closed by our operating subsidiaries on a consolidated basis during the applicable reporting periods. During the nine months ended September 30, 2013, certain of our operating subsidiaries continued to execute their business strategy in the area of patent portfolio partnering transactions, partnering with patent owners on 22 patent portfolios, covering a variety of applications, including the following:


• In January 2013, obtained a patent relating to core fiber optic network architectures.

. . .

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