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ACTG > SEC Filings for ACTG > Form 10-Q on 7-Aug-2014All Recent SEC Filings

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Form 10-Q for ACACIA RESEARCH CORP


7-Aug-2014

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, 2013, filed with the SEC on March 3, 2014.

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 invest in 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, 2013.

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, and/or where applicable, its management. 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 invest in, license and enforce patented technologies. Our operating subsidiaries partner with inventors and patent owners, applying our legal and technology expertise to patent assets to unlock the financial value in their patented inventions. We are an intermediary in the patent marketplace, bridging the gap between invention and application, facilitating efficiency and delivering monetary rewards to patent owners.

Our operating subsidiaries generate revenues and related cash flows from the granting of patent rights for the use of patented technologies that our operating subsidiaries control or own. Our operating subsidiaries assist patent owners with the prosecution and development of their patent portfolios, the protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of their patented technologies and, where necessary, with the enforcement against unauthorized users of their patented technologies through the filing of patent infringement litigation.

We are a leader in licensing patented technologies and have established a proven track record of licensing success with over 1,380 license agreements executed to date, across 173 of our patent licensing and enforcement programs. Currently, on a


consolidated basis, our operating subsidiaries own or control the rights to over 200 patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries.

Executive Summary

During the periods presented, we continued our business of empowering patent owners and rewarding invention by providing a path to patent monetization for the people and companies who have contributed valuable patented inventions to an industry, but who require a professional, experienced independent third-party licensing partner to get rewarded for those inventions.

Our operating activities for the periods presented were principally focused on the continued investment in and development of our patent licensing and enforcement business, including the continued pursuit of our ongoing patent licensing and enforcement programs and the commencement of new patent licensing and enforcement programs. In addition, we continued our focus on business development, including the acquisition of several additional high quality patent portfolios by certain of our operating subsidiaries and the continued pursuit of additional opportunities to partner with patent owners or invest in patent portfolios, and continue our industry leading patent licensing and enforcement activities.

For the three months ended June 30, 2014, we reported revenues of $50.1 million from 15 new revenue agreements covering 16 different licensing programs, including 4 licensing programs generating initial revenues in the quarter. Cash and investments totaled $220.8 million as of June 30, 2014 as compared to $256.7 million as of December 31, 2013.

During the three months ended June 30, 2014, we invested in a new patent portfolio related to high speed digital display interface technology. During the three months ended June 30, 2014, we made patent related upfront advances and milestone payments to patent owners, with whom we partnered for the licensing of their patented technologies, totaling $21.1 million, which included payment of $16.3 million of patent related upfront advances and milestone payments accrued as of March 31, 2014 related to patent portfolio acquisitions prior to the second quarter of 2014.

Operating activities during the periods presented included the following:

                                       Three Months Ended                Six Months Ended
                                            June 30,                         June 30,
                                      2014            2013             2014            2013

Revenues (in thousands)          $     50,076     $    23,110     $     62,654     $    99,971
New agreements executed                    15              43               35              72
Licensing and enforcement
programs generating revenues               16              28               31              40
Licensing and enforcement
programs with initial revenues              4               3                7              14
New patent portfolios                       1               7                4              16
Cumulative number of licensing
and enforcement programs
generating revenues - inception
to date                                   173             157              173             157

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 during the periods presented were as follows (in thousands, except percentage change values):

As of Date:           Trailing Twelve -Month Revenues      % Change

June 30, 2014        $                          93,239       41  %
March 31, 2014       $                          66,273      (49 )%
December 31, 2013    $                         130,556      (28 )%
September 30, 2013   $                         181,755      (10 )%
June 30, 2013        $                         201,174        -  %


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;

•         the timing, results and uncertainties associated with patent licensing
          negotiations, mediations, patent infringement actions, trial dates and
          other enforcement proceedings relating to our patent licensing and
          enforcement programs;

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

•         other external factors, including the periodic status or results of
          ongoing negotiations, the status of ongoing litigations, actual or
          perceived shifts in the regulatory environment, impact of unrelated
          patent related judicial proceedings and other macroeconomic factors.

Management does not attempt to manage for smooth sequential periodic growth in revenues period to period, and therefore, periodic results can be uneven. Unlike most operating businesses and industries, licensing revenues not generated in a current period are not necessarily foregone but, most likely, depending on whether negotiations, litigation or both continue into subsequent periods, and depending on a number of other factors, such potential revenues may be pushed into subsequent fiscal periods.

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.

Going forward, we have strategically chosen to shift the focus of our operating business to increasingly serve a smaller number of customers each having higher quality patent portfolios. High quality patent portfolios are typically associated with higher numbers of varied defensible claims, higher revenue potential, originating from high-pedigreed patent owners and/or possessing a relatively large number of prospective licensees. In this regard, in 2014, we have continued the shift in our focus at our point of patent intake from quantity to quality.

We continue to identify and assess additional opportunities to partner with companies in the technology, energy, medical technology and other sectors for the licensing and enforcement of their high quality 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.

Revenues for the six months ended June 30, 2014 included fees from the following technology licensing and enforcement programs:

• 3G & 4G Wireless Patents technology    • Online Auction Guarantee technology
• 4G Wireless technology                 • Online Gaming technology
• Audio Communications Fraud Detection   • Online Newsletters with Links technology
  technology
•                                        • Radio Frequency Modulation
  Broadband Communications technology      technology(1)(2)
•                                        • Reflective and Radiant Barrier
  Computer-Aided Design technology(1)      Insulation technology
• Core Fiber Optic Network               •
  Architectures technology                 Semiconductor Packaging technology
• DMT technology                         • Software Activation technology
• Electronic Access Control              • Speech codes used in wireless and
  technology(1)                            wireline systems technology(1)(2)
• Gas Modulation Control Systems         • Super Resolutions Microscopy
  technology                               technology(1)
• Improved Lighting technology           • Suture Anchors technology
• Innovative Display technology(1)(2)    • Telematics technology
• Interstitial and Pop-Up Internet       •
  Advertising technology                   Video Analytics for Security technology
•                                        • Wireless Data Synchronization & Data
  Location Based Services technology       Transfer technology
•                                        • Wireless Location Based Services
  Messaging technology                     technology


• Mobile Computer Synchronization        •
  technology                               Wireless Monitoring technology
• Multi-Display Content Delivery and
  Data Aggregation technology(1)(2)


_________________________________________


(1) Initial revenues recognized during the six months ended June 30, 2014
(2) Initial revenues recognized during the three months ended June 30, 2014

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

•                                           • Interstitial and Pop-Up Internet
  4G Wireless Handsets technology(1)          Advertising technology
• Audio Communications Fraud Detection      •
  technology                                  Lighting Ballast technology
• Broadband Communications                  •
  technology(1)(2)                            Location Based Services technology
•                                           • Memory Circuit and Packaging
  Business Process Modeling technology        technology(1)
• Camera Support technology                 • Messaging technology
•                                           • Mobile Computer Synchronization
  Catheter Ablation technology(1)(2)          technology
• Computer Architecture and Power           •
  Management technology                       NOR Flash technology
• Digital Imaging technology(1)             • Online Auction Guarantees technology
• Digital Signal Processing Architecture    • Online Gaming technology
  technology
• DMT® technology                           • Power Management Within Integrated
                                              Circuits technology
• Domain Name Redirection technology        • Prescription Lens technology(1)
• Electronic spreadsheet, data analysis     • Semiconductor Memory and Process
  and software development technology(1)      technology(1)
• Enhanced Mobile Communications            • Semiconductor Packaging
  technology                                  technology(1)(2)
• Facilities Operation Management System    •
  technology                                  Surgical Access technology
• Gas Modulation Control Systems            • Suture Anchors technology
  technology(1)
• Greeting Card technology(1)               • Telematics technology
• Improved Memory Manufacturing             • User Programmable Engine Control
  technology                                  technology
•                                           • Video Analytics for Security
  Information Portal Software technology      technology
• Information Storage, Searching &          • Wireless Data Synchronization & Data
  Retrieval technology                        Transfer technology(1)
•                                           • Wireless Location Based Services
  Intercarrier SMS technology(1)              technology(1)


__________________________________________


(1) Initial revenues recognized during the six months ended June 30, 2013
(2) Initial revenues recognized during the three months ended June 30, 2013


Summary of Results of Operations - Overview
For the Three and Six Months Ended June 30, 2014 and 2013
(In thousands, except percentage change values)
                              Three Months Ended                        Six Months Ended
                                   June 30,                %                June 30,                %
                             2014            2013        Change        2014           2013        Change

Revenues                 $    50,076     $   23,110       117  %   $   62,654     $   99,971       (37 )%
Operating costs and
expenses                      58,307         46,040        27  %       96,936        115,806       (16 )%
Operating loss                (8,231 )      (22,930 )     (64 )%      (34,282 )      (15,835 )     116  %
Loss before (provision
for) benefit from income
taxes                         (8,427 )      (22,530 )     (63 )%      (34,369 )      (14,145 )     143  %
(Provision for) benefit
from income taxes             (4,689 )        9,050      (152 )%       (3,317 )        5,778      (157 )%
Net loss attributable to
Acacia Research
Corporation                  (12,949 )      (12,503 )       4  %      (37,370 )       (7,390 )     406  %

Overview - Three months ended June 30, 2014 compared with the three months ended June 30, 2013

•         Revenues increased $27.0 million, or 117%, to $50.1 million, as
          compared to $23.1 million in the comparable prior year quarter, due
          primarily to an increase in the average revenue per agreement.



•         Loss before income taxes decreased 63%, to $8.4 million, as compared to
          $22.5 million in the comparable prior year quarter, due primarily to a
          117% increase in revenues and 84% (ie. less than the 117% increase in
          related revenues) increase in inventor royalties and contingent legal
          fees, on a combined basis, which was partially offset by an increase in
          patent amortization expense.

• Cost of Revenues and Other Operating Expenses:

•           Inventor royalties and contingent legal fees, on a combined basis,
            increased $8.1 million, or 84%, as compared to the 117% increase in
            related revenues for the same periods, due primarily to a higher
            percentage of revenues generated during the three months ended
            June 30, 2014 having no inventor royalty or contingent legal fee
            obligations and lower overall average contingent legal fee rates, as
            compared to the revenues generated during the three months ended
            June 30, 2013.



•           Litigation and licensing expenses-patents increased $902,000, or 9%,
            to $10.8 million, due primarily to a net increase in litigation
            support and third-party technical consulting expenses associated with
            ongoing and new licensing and enforcement programs commenced since
            the end of the comparable prior year quarter.



•           Amortization of patents increased $3.0 million, or 23%, to $15.5
            million, due primarily to a net increase in accelerated amortization
            related to patent portfolio sales and terminations totaling $1.7
            million and an increase in quarterly amortization expense for patent
            portfolios acquired since the end of the prior year period totaling
            $1.2 million.



•         The effective tax rates for the three months ended June 30, 2014 and
          2013 were 56% and (40)%, respectively. The effective rate for the
          second quarter of 2014 reflects the impact of foreign taxes withheld on
          certain revenue agreements executed with licensees domiciled in foreign
          jurisdictions and valuation allowances recorded for current period
          foreign withholding tax credits and net operating loss carryforward
          related tax assets generated during the three months ended June 30,
          2014. The tax benefit recorded for the three months ended June 30, 2013
          reflects the realization of foreign tax credit and net operating loss
          carryforward related tax assets generated during the period.

Overview - Six months ended June 30, 2014 compared with the six months ended June 30, 2013

•         Revenues decreased $37.3 million, or 37%, to $62.7 million, as compared
          to $100.0 million in the comparable prior year period, due primarily to
          a decrease in the total number of agreements executed.


•         Loss before income taxes increased 143%, to $34.4 million, as compared
          to $14.1 million in the comparable prior year period, due primarily to
          a 37% decrease in revenues and an increase in patent amortization
          expense, which was partially offset by a 53% (ie. greater than the 37%
          decrease in related revenues) decrease in inventor royalties and
          contingent legal fees, on a combined basis.

• Cost of Revenues and Other Operating Expenses:

•           Inventor royalties and contingent legal fees, on a combined basis,
            decreased $22.9 million, or 53%, as compared to the 37% decrease in
            related revenues for the same periods, due primarily to a higher
            percentage of revenues generated during the six months ended June 30,
            2014 having no inventor royalty obligations and lower overall average
            inventor royalty and contingent legal fee rates, as compared to the
            revenues generated during the six months ended June 30, 2013.



•           Litigation and licensing expenses-patents increased $248,000, or 1%,
            to $19.8 million, relatively consistent with the comparable prior
            year period.



•           Amortization of patents increased $5.7 million, or 23%, to $30.0
            million, due primarily to accelerated amortization related to patent
            portfolio write-downs totaling $2.6 million, an increase in scheduled
            amortization expense for patent portfolios invested in since the end
            of the prior period totaling $1.8 million and a net increase in
            accelerated amortization related to patent portfolio sales and
            terminations totaling $1.7 million.



•           Marketing, general and administrative expenses decreased $2.2
            million, or 8%, to $24.9 million, due primarily to a net decrease in
            non-cash stock compensation charges, a decrease in variable
            performance-based compensation costs and a decrease in other
            corporate, general and administrative costs.



•         The effective tax rates for the six months ended June 30, 2014 and 2013
          were 10% and (41%), respectively. The effective tax rate for the six
          months ended June 30, 2014 reflects the impact of foreign withholding
          taxes and valuation allowances recorded for the majority of tax assets
          generated during the period. The tax benefit recorded for the six
          months ended June 30, 2013 reflects the realization of foreign tax
          credit and net operating loss carryforward related tax assets generated
          during the period.

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
patent portfolio partnering / intake opportunities closed by our operating
subsidiaries on a consolidated basis during the applicable reporting
periods. During the six months ended June 30, 2014, patent portfolio intake
activities included the following:

•        In February 2014, we partnered with a leading research institute to
         monetize the institute's patents relating to ceramics and associated
         manufacturing processes for medical devices.



•        In March 2014, we invested in U.S. patents and foreign counterparts
         related to the use of shared memory in multimedia processing systems
         such as mobile phones, tablets and other consumer electronic devices.



•        In April 2014, we partnered with a leading semiconductor company on
         patents related to high speed digital display interface technology used
         in industry standards such as DisplayPort and DisplayPort-related
         technologies and also MIPI DSI.



•        In June 2014, we announced that Renesas Electronics Corporation, a
         premier supplier of advanced semiconductor solutions, and Acacia agreed
         to a new phase in their strategic patent licensing alliance. Pursuant to
         this new agreement, we will receive broad and lengthy access to the
         worldwide patent portfolio of Renesas Electronics.

Refer to "Liquidity and Capital Resources" below for information regarding the impact on the consolidated financial statements of upfront advances and milestone payments made in connection with patent partnering and investment activities during the periods presented.


As of June 30, 2014, certain of our operating subsidiaries had several patent . . .

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