acacia_10q-063007.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________________

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
 

Commission File Number 0-26068


ACACIA RESEARCH CORPORATION
(Exact Name of Registrant as Specified in Its Charter)


Delaware
 
95-4405754
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
     
     
500 Newport Center Drive, Newport Beach, CA
 
92660
(Address of Principal Executive Offices)
 
(Zip Code)


Registrant’s telephone number, including area code:  (949) 480-8300


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.    Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 Large accelerated filer   ¨
  
Accelerated filer  þ
  
Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨  No  þ 
 
As of July 27, 2007, 29,356,953 shares of Acacia Research-Acacia Technologies common stock were issued and outstanding. As of July 27, 2007 59,875,769 shares of Acacia Research-CombiMatrix common stock were issued and outstanding.






ACACIA RESEARCH CORPORATION
Table of Contents

Part I. Financial Information
     
Item 1.
Financial Statements
 
     
 
Acacia Research Corporation Consolidated Financial Statements
 
     
 
Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 (Unaudited)
1
   
 
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months and Six Months Ended June 30, 2007
and 2006 (Unaudited)
 
2
     
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006 (Unaudited)
3
     
 
Notes to Consolidated Financial Statements (Unaudited)
4
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
29
     
Item 4.
Controls and Procedures
29
     
     
Part II. Other Information
     
Item 1.
Legal Proceedings
30
     
Item 1A.
Risk Factors
30
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
30
     
Item 4.
Submission of Matters to a Vote of Security Holders
31
     
Item 6.
Exhibits
31
     
Signatures 
32
   
Exhibit Index 
33


*NOTE: Refer to the Acacia Research Corporation consolidating unaudited segment information for separate Acacia Technologies group and CombiMatrix group financial information for the periods presented (Refer to Note 9). The separate financial information of the two groups is being provided as additional disclosure regarding the financial performance of the two divisions and to provide investors with information regarding the potential value and operating results of the respective businesses, which may affect the respective share values. The separate financial information should be reviewed in conjunction with Acacia Research Corporation’s consolidated financial statements and accompanying notes. The presentation of separate financial information is not intended to indicate that we have changed the title to any of our assets or changed the responsibility for any of our liabilities, nor is it intended to indicate that the rights of our creditors have been changed. Acacia Research Corporation, and not the individual groups, is the issuer of the securities. Holders of the two securities are stockholders of Acacia Research Corporation and do not have a separate and exclusive interest in the respective groups.


ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
(Unaudited) 
 

   
June 30,
 
December 31,
 
   
2007
 
2006
 
ASSETS
         
           
Current assets:
         
Cash and cash equivalents
 
$
35,067
 
$
32,215
 
Short-term investments
   
15,308
   
12,783
 
Accounts receivable
   
2,180
   
269
 
Prepaid expenses, inventory, and other assets
   
1,403
   
1,187
 
Total current assets related to discontinued operations - Split-off of CombiMatrix Corporation
   
13,991
   
15,552
 
Total current assets
   
67,949
   
62,006
 
               
Property and equipment, net of accumulated depreciation
   
322
   
221
 
Patents, net of accumulated amortization
   
17,279
   
18,515
 
Goodwill
   
121
   
121
 
Other assets
   
84
   
79
 
Total non-current assets related to discontinued operations - Split-off of CombiMatrix Corporation
   
27,261
   
28,662
 
   
$
113,016
 
$
109,604
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
             
               
Current liabilities:
             
Accounts payable and accrued expenses
 
$
2,147
 
$
2,201
 
Royalties and legal fees payable
   
2,176
   
1,684
 
Deferred revenues
   
251
   
360
 
Total current liabilities related to discontinued operations - Split-off of CombiMatrix Corporation
   
2,263
   
3,211
 
Total current liabilities
   
6,837
   
7,456
 
               
Other liabilities
   
67
   
31
 
Total non-current liabilities related to discontinued operations - Split-off of CombiMatrix Corporation
   
10,318
   
7,808
 
Total liabilities
   
17,222
   
15,295
 
               
Commitments and contingencies (Note 6)
             
               
Redeemable stockholders' equity:
             
Preferred stock
             
Acacia Research Corporation, par value $0.001 per share; 10,000,000 shares authorized;
             
no shares issued or outstanding
   
-
   
-
 
Common stock
             
Acacia Research - Acacia Technologies stock, par value $0.001 per share; 100,000,000
             
shares authorized; 29,356,953 and 28,231,701 shares issued and outstanding as of
             
June 30, 2007 and December 31, 2006, respectively
   
29
   
28
 
Acacia Research - CombiMatrix stock, par value $0.001 per share; 100,000,000 shares
             
authorized; 59,875,769 and 50,365,810 shares issued and outstanding as of
             
June 30, 2007 and December 31, 2006, respectively
   
60
   
50
 
 Additional paid-in capital
   
333,089
   
326,599
 
 Accumulated comprehensive income
   
(5
)
 
2
 
 Accumulated deficit
   
(237,379
)
 
(232,370
)
Total stockholders' equity
   
95,794
   
94,309
 
   
$
113,016
 
$
109,604
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
1

ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share information)
(Unaudited) 
 

   
For the Three Months Ended
 
For the Six Months Ended
 
   
June 30, 2007
 
June 30, 2006
 
June 30, 2007
 
June 30, 2006
 
Revenues:
                 
License fees
 
$
5,865
 
$
14,371
 
$
31,050
 
$
19,088
 
Total revenues
   
5,865
   
14,371
   
31,050
   
19,088
 
                           
Operating expenses:
                         
Marketing, general and administrative expenses (including non-cash stock compensation expense of $1,144 and $1,907 for the three and six months ended June 30, 2007 and $889 and $1,937 for the three and six months ended June 30, 2006)
   
4,190
   
2,986
   
8,518
   
6,492
 
Legal expenses - patents
   
1,069
   
1,082
   
2,436
   
1,448
 
Inventor royalties and contingent legal fees expense - patents
   
3,406
   
7,847
   
17,528
   
10,118
 
Amortization of patents
   
1,314
   
1,326
   
2,630
   
2,669
 
Write-off of patent-related intangible asset
   
-
   
297
   
-
   
297
 
Total operating expenses
   
9,979
   
13,538
   
31,112
   
21,024
 
Operating income (loss)
   
(4,114
)
 
833
   
(62
)
 
(1,936
)
                           
Other income:
                         
Interest and investment income
   
650
   
394
   
1,057
   
753
 
Total other income
   
650
   
394
   
1,057
   
753
 
                           
Income (loss) from continuing operations before income taxes
   
(3,464
)
 
1,227
   
995
   
(1,183
)
                           
Provision for income taxes
   
(124
)
 
(70
)
 
(148
)
 
(38
)
Income (loss) from continuing operations - Acacia Technologies group
   
(3,588
)
 
1,157
   
847
   
(1,221
)
                           
Discontinued operations - Split-off of CombiMatrix Corporation
                         
Loss from discontinued operations - Split-off of CombiMatrix Corporation
   
(3,667
)
 
(3,500
)
 
(5,800
)
 
(11,220
)
Net income (loss)
   
(7,255
)
 
(2,343
)
 
(4,953
)
 
(12,441
)
                           
Unrealized gains (losses) on short-term investments
   
(9
)
 
4
   
(8
)
 
3
 
Unrealized gains on foreign currency translation
   
1
   
-
   
1
   
4
 
Sale of interest in subsidiary's cumulative translation adjustment
   
-
   
-
   
-
   
(61
)
Comprehensive income (loss)
 
$
(7,263
)
$
(2,339
)
$
(4,960
)
$
(12,495
)
                           
Earnings (loss) per common share:
                         
Continuing operations - Attributable to the Acacia Technologies group:
                         
Net income (loss) from continuing operations
 
$
(3,588
)
$
1,157
 
$
847
 
$
(1,221
)
Basic earnings (loss) per share
   
(0.13
)
 
0.04
   
0.03
   
(0.04
)
Diluted earnings (loss) per share
   
(0.13
)
 
0.04
   
0.03
   
(0.04
)
                           
Discontinued operations - Attributable to the CombiMatrix group:
                         
Loss from discontinued operations - Split-off of CombiMatrix Corporation
 
$
(3,667
)
$
(3,500
)
$
(5,800
)
$
(11,220
)
Basic and diluted loss per share
   
(0.06
)
 
(0.09
)
 
(0.11
)
 
(0.29
)
                           
Weighted average shares:
                         
Acacia Research - Acacia Technologies stock:
                         
Basic
   
28,298,328
   
27,507,024
   
28,071,069
   
27,454,066
 
Diluted
   
28,298,328
   
30,324,732
   
31,064,677
   
27,454,066
 
Acacia Research - CombiMatrix stock:
                         
Basic and diluted
   
57,143,839
   
39,018,844
   
54,842,813
   
39,005,696
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
2

ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 

   
For the Six Months Ended
 
   
June 30, 2007
 
June 30, 2006
 
Cash flows from operating activities:
         
Net income (loss)
 
$
(4,953
) 
$
(12,441
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
             
Depreciation and amortization
   
2,687
   
2,704
 
Non-cash stock compensation
   
1,907
   
1,937
 
Deferred taxes
   
-
   
(36
)
Loss on disposal of discontinued operations
    5,800     11,220  
Write-off of patent-related intangible asset
   
-
   
297
 
Other
   
(21
)
 
(87
)
Changes in assets and liabilities:
             
Accounts receivable
   
(1,911
)
 
696
 
Prepaid expenses, inventory and other assets
   
119
   
(346
)
Accounts payable and accrued expenses
   
(82
)
 
175
 
Royalties and legal fees payable
   
492
   
(1,106
)
Deferred revenues
   
(109
)
 
(207
)
Net cash provided by operating activities from continuing operations
   
3,929
   
2,806
 
Net cash used in operating activities from discontinued operations
   
(7,018
)
 
(7,969
)
Net cash used in operating activities
   
(3,089
)
 
(5,163
)
               
Cash flows from investing activities:
             
Purchase of property and equipment
   
(160
)
 
(29
)
Purchase of available-for-sale investments
   
(5,477
)
 
(11,932
)
Sale of available-for-sale investments
   
2,959
   
11,786
 
Business acquisition
   
-
   
(16
)
Patent acquisition costs
   
(1,395
)
 
(1,020
)
               
Net cash used in investing activities from continuing operations
   
(4,073
)
 
(1,211
)
Net cash provided by (used in) investing activities from discontinued operations
   
(3,960
)
 
2,927
 
Net cash provided by (used in) investing activities
   
(8,033
)
 
1,716
 
               
Cash flows from financing activities:
             
Proceeds from the exercise of stock options
   
3,159
   
335
 
Net cash provided by financing activities from continuing operations
   
3,159
   
335
 
Net cash provided by (used in) financing activities from discontinued operations
   
5,369
   
(7
)
Net cash provided by financing activities
   
8,528
   
328
 
               
Decrease in cash and cash equivalents
   
(2,594
)
 
(3,119
)
               
Cash and cash equivalents, beginning (inclulding cash and cash equivalents related to discontinued operations-split-off of CombiMatrix Corporation of $7,829 and $5,666, respectively)
   
40,044
   
20,164
 
               
Cash and cash equivalents, ending
   
37,450
   
17,045
 
               
Less cash and cash equivalents of discontinued operations, ending
   
(2,383
)
 
(930
)
               
Cash and cash equivalents of continuing operations, ending
 
$
35,067
 
$
16,115
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
3


ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business. Acacia Research Corporation (“we,” “us” and “our”) operates in one reportable segment referred to as the Acacia Technologies group. As discussed below and more fully in Note 7, Acacia Research Corporation’s CombiMatrix group (primarily comprised of Acacia Research Corporation’s wholly owned subsidiary, CombiMatrix Corporation and its subsidiary), which was previously presented as a separate reportable segment, will be split-off from Acacia Research Corporation, effective August 15, 2007. As such, the assets and liabilities of the CombiMatrix group in the accompanying consolidated balance sheets, the results of operations for the CombiMatrix group in the accompanying consolidated statements of operations and the cash flows for the CombiMatrix group in the accompanying consolidated cash flow statements, have been segregated from continuing operations and presented as Discontinued Operations, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). Accordingly, the CombiMatrix group’s assets, liabilities, results of operations and cash flows for all prior periods presented have been reclassified to Discontinued Operations to conform to the current period presentation.

Acacia Technologies Group

The Acacia Technologies group, a division of Acacia Research Corporation, develops, acquires, licenses and enforces patented technologies. The Acacia Technologies group currently owns or controls the rights to 77 patent portfolios, covering technologies used in a wide variety of industries. The Acacia Technologies group is primarily comprised of certain of Acacia Research Corporation’s wholly owned subsidiaries and limited liability companies including:

·  Acacia Global Acquisition Corporation
·  Acacia Media Technologies Corporation
·  Acacia Patent Acquisition Corporation
·  Acacia Technologies Services Corporation
·  Automated Facilities Management Corporation
·  AV Technologies LLC
·  Broadcast Data Retrieval Corporation
·  Broadcast Innovation LLC
·  Computer Acceleration Corporation
·  Computer Cache Coherency Corporation
·  Computer Docking Station Corporation
·  Contacts Synchronization Corporation
·  Creative Internet Advertising Corporation
·  Credit Card Fraud Control Corporation
·  Database Structures Inc.
·  Data Encryption Corporation
·  Data Innovation LLC
·  Diagnostic Systems Corporation
·  Digital Security Systems Corporation
·  Disc Link Corporation
·  Email Link Corporation
·  Financial Systems Innovation LLC
·  Fluid Dynamics Corporation
·  High Resolution Optics Corporation
·  Hospital Systems Corporation
·  Information Technology Innovation LLC
·  InternetAd LLC
·  IP Innovation LLC
·  KY Data Systems LLC
·  Location Based Services Corporation
·  Micromesh Technology Corporation
·  Microprocessor Enhancement Corporation
·  Mobile Traffic Systems Corporation
·  New Medium LLC
·  Parallel Processing Corporation
·  Parking Security Systems Corporation
·  Peer Communications Corporation
·  Priority Access Solutions Corporation
·  Product Activation Corporation
·  Refined Recommendations Corporation
·  Remote Video Camera Corporation
·  Resource Scheduling Corporation
·  Safety Braking Corporation
·  Screentone Systems Corporation
·  Secure Access Corporation
·  Soundview Technologies LLC
·  Spreadsheet Automation Corporation
·  TechSearch LLC
·  Telematics Corporation
·  VData LLC

The Acacia Technologies group also includes all corporate assets, liabilities, and related transactions of Acacia Research Corporation attributed to Acacia Research Corporation’s intellectual property licensing and enforcement business.

4


ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


CombiMatrix Group

Our life sciences business, referred to as the “CombiMatrix group,” a division of Acacia Research Corporation, is comprised of our wholly owned subsidiary, CombiMatrix Corporation and CombiMatrix Corporation’s wholly owned subsidiary, CombiMatrix Molecular Diagnostics, and includes all corporate assets, liabilities and transactions related to Acacia Research Corporation’s life sciences business.

The CombiMatrix group is seeking to become a diversified biotechnology business, through the development of proprietary technologies, products and services in the areas of drug development, genetic analysis, molecular diagnostics, nanotechnology research, defense and homeland security markets, as well as other potential markets where its products and services could be utilized. The technologies developed include a platform technology to rapidly produce customizable, in-situ synthesized, oligonucleotide arrays for use in identifying and determining the roles of genes, gene mutations and proteins. This technology has a wide range of potential applications in the areas of genomics, proteomics, biosensors, drug discovery, drug development, diagnostics, combinatorial chemistry, material sciences and nanotechnology. Other technologies include proprietary molecular synthesis and screening methods for the discovery of potential new drugs. CombiMatrix Molecular Diagnostics, Inc. (“CMDX”), a wholly owned subsidiary of CombiMatrix Corporation located in Irvine California, has developed capabilities of producing arrays that utilize bacterial artificial chromosomes, which also enable genetic analysis.

CombiMatrix Group Split-off Transaction and Related Discontinued Operations. In January 2006, Acacia Research Corporation’s board of directors approved a plan for its wholly owned subsidiary, CombiMatrix Corporation, to become an independent public company. CombiMatrix Corporation’s registration statement on Form S-1 was declared effective by the Securities and Exchange Commission on June 8, 2007.  Following the redemption period required by Acacia Research Corporation’s Restated Certificate of Incorporation, on August 15, 2007 (the “Redemption Date”), CombiMatrix Corporation will split-off from Acacia Research Corporation through the redemption of all outstanding shares of Acacia Research-CombiMatrix common stock (the “Split-off Transaction”). On the Redemption Date, every ten (10) shares of Acacia Research-CombiMatrix stock outstanding on August 15, 2007, will be redeemed for one (1) share of common stock of CombiMatrix Corporation. As of June 30, 2007, CombiMatrix Corporation continues to be wholly owned by Acacia Research Corporation, and will continue to be wholly owned by Acacia Research Corporation until the August 15, 2007 Redemption Date. Subsequent to the Redemption Date, Acacia Research Corporation will no longer own any equity interests in CombiMatrix Corporation and the two companies will operate independently of each other.

Refer to Note 7 for information regarding presentation of the assets, liabilities, results of operations and cash flows for the CombiMatrix group as Discontinued Operations in the accompanying consolidated financial statements for all periods presented, in accordance with guidance set forth in SFAS No. 144.

Capital Structure. Acacia Research Corporation has two classes of common stock called Acacia Research-Acacia Technologies common stock (“AR-Acacia Technologies stock”) and Acacia Research-CombiMatrix common stock (“AR-CombiMatrix stock”). AR-Acacia Technologies stock is intended to reflect separately the performance of Acacia Research Corporation’s Acacia Technologies group. AR-CombiMatrix stock is intended to reflect separately the performance of Acacia Research Corporation’s CombiMatrix group. Although the AR-Acacia Technologies stock and the AR-CombiMatrix stock are intended to reflect the performance of our different business groups, they are both classes of common stock of Acacia Research Corporation and are not stock issued by the respective groups.

Basis of Presentation. The accompanying unaudited consolidated financial statements include the accounts of Acacia Research Corporation and its wholly owned and majority-owned subsidiaries and investments accounted for under the equity method. Material intercompany transactions and balances have been eliminated in consolidation.

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnotes required by generally accepted accounting principles in annual financial statements have been omitted or condensed in accordance with quarterly reporting requirements of the Securities and Exchange Commission (“SEC”). These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2006, as reported by us in our Annual Report on Form 10-K. The year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

5


ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The consolidated financial statements of Acacia Research Corporation include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of our financial position as of June 30, 2007, and results of operations and cash flows for the interim periods presented. The results of operations for the three and six months ended June 30, 2007 are not necessarily indicative of the results to be expected for the entire year.

Separate Group Presentation. AR-Acacia Technologies stock and AR-CombiMatrix stock are intended to reflect the separate performance of the respective division of Acacia Research Corporation. The Acacia Technologies group and the CombiMatrix group are not separate legal entities. Holders of AR-Acacia Technologies stock and AR-CombiMatrix stock are stockholders of Acacia Research Corporation. As a result, holders of AR-Acacia Technologies stock and AR-CombiMatrix stock continue to be subject to all of the risks of an investment in Acacia Research Corporation and all of its businesses, assets and liabilities. The assets Acacia Research Corporation attributes to one of the groups could be subject to the liabilities of the other group. The group financial information has been prepared in accordance with generally accepted accounting principles in the United States of America, and taken together, comprise all the accounts included in the corresponding consolidated financial statements of Acacia Research Corporation. The financial information of the groups reflects the financial condition, results of operations, and cash flows of the businesses included therein. The financial information of the groups includes the accounts or assets of Acacia Research Corporation specifically attributed to the groups and were prepared using amounts included in Acacia Research Corporation’s consolidated financial statements. Refer to Note 9 for separate group financial information.


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted 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.

Concentrations. Three licensees individually accounted for 21%, 14% and 14% of the Acacia Technologies group’s license fee revenues recognized during the three months ended June 30, 2007, and two licensees individually accounted for 31% and 20% of the Acacia Technologies group’s license fee revenues recognized during the six months ended June 30, 2007. Four licensees individually accounted for 23%, 21%, 10% and 10% of the Acacia Technologies group’s license fee revenues recognized during the three months ended June 30, 2006, and two licensees individually accounted for 17% and 16% of the Acacia Technologies group’s license fee revenues recognized during the six months ended June 30, 2006. Two licensees individually represented approximately 39% and 21% of the Acacia Technologies group’s accounts receivable at June 30, 2007. Three licensees individually represented approximately 37%, 24% and 13% of the Acacia Technologies group’s accounts receivable at December 31, 2006.

Stock-Based Compensation. Effective January 1, 2006, Acacia Research Corporation adopted the provisions of Statement of Financial Accounting Standards 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 awards is determined by the product of the number of shares granted and the grant date market price of the underlying common stock.

SFAS No. 123R requires stock-based compensation expense to be recorded only for those awards expected to vest using an estimated forfeiture rate. Acacia Research Corporation estimates pre-vesting option forfeitures at the time of grant and reflects the impact of estimated pre-vesting option forfeitures on compensation expense recognized.

6


ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Income Taxes. Effective January 1, 2007, Acacia Research Corporation adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which clarifies the 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, a tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions shall be recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position will be sustained upon examination. Tax positions that meet the more likely than not threshold should be measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. The adoption of FIN 48 did not have a material impact on our consolidated or separate group financial position, results of operations or cash flows.

The total amount of unrecognized tax benefits as of January 1, 2007 and June 30, 2007 was $56,000, all of which, if recognized, would affect the effective tax rate. 
 
Acacia Research Corporation recognizes interest and penalties with respect to unrecognized tax benefits in income tax expense.  We have 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 Research Corporation is subject to taxation in the U.S. and various state jurisdictions. With no material exceptions, Acacia Research Corporation is no longer subject to U.S. federal or state examinations by tax authorities for years before 2001.
 
At December 31, 2006, the Acacia Technologies group’s U.S. federal and state income tax net operating loss carryforwards were approximately $53,727,000 (excluding NOLs related to subsidiaries for which Acacia Research Corporation does not file a consolidated return) and $54,700,000, expiring between 2007 and 2026. At December 31, 2006, the CombiMatrix group had federal net operating loss carryforwards of approximately $117,056,000, which will begin to expire in 2010 through 2026. At December 31, 2006, consolidated federal research and development (“R&D”) credit carryforwards were approximately $4,014,000, which begin to expire in 2017. Due to uncertainties surrounding our ability to generate future taxable income to realize these assets, a full valuation allowance has been established to offset our net deferred tax assets. All NOLs and tax credits attributed to the Acacia Technologies group will be retained by the Acacia Research Corporation, subsequent to the Split-off Transaction. All NOLs and tax credits attributed to the CombiMatrix group will be retained by the CombiMatrix group and will not be available to Acacia Research Corporation, subsequent to the Split-off Transaction.

Utilization of the NOL and 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 Research Corporation’s formation, we have 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 Research Corporation has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since Acacia Research Corporation’s 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 Research Corporation 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 Research Corporation'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 the valuation allowance, future changes in our unrecognized tax benefits will not impact our 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.

7


ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


3.  EARNINGS PER SHARE

Earnings (Loss) Per Share.  Basic earnings per share for each class of common stock is computed by dividing the income or loss allocated to each class of common stock by the weighted-average number of outstanding shares of that class of common stock. Diluted earnings per share is computed by dividing the income or loss allocated to each class of common stock by the weighted-average number of outstanding shares of that class of common stock including the dilutive effect of common stock equivalents. Potentially dilutive common stock equivalents primarily consist of employee stock options, unvested restricted stock grants and common stock purchase warrants.

The earnings or losses allocated to each class of common stock are determined by Acacia Research Corporation’s board of directors. This determination is generally based on the net income or loss amounts of the corresponding group determined in accordance with accounting principles generally accepted in the United States of America, consistently applied. Acacia Research Corporation believes this method of allocation is systematic and reasonable. The Acacia Research Corporation board of directors can, at its discretion, change the method of allocating earnings or losses to each class of common stock at any time.

The following table presents a reconciliation of basic and diluted income (loss) per share:

   
For the Three Months Ended
 
For the Six Months Ended
 
   
June 30, 2007
 
June 30, 2006
 
June 30, 2007
 
June 30, 2006
 
Acacia Research - Acacia Technologies stock
                 
                   
Basic weighted average number of common shares outstanding
   
28,298,328
   
27,507,024
   
28,071,069
   
27,454,066
 
                           
Effect of dilutive stock options and restricted stock awards
   
-
   
2,817,708
   
2,993,607
   
-
 
                           
Diluted weighted average number of common shares outstanding
   
28,298,328
   
30,324,732
   
31,064,677
   
27,454,066
 
                           
Outstanding stock options and restricted stock excluded from the computation of diluted income (loss) per share because the effect of inclusion would have been anti-dilutive
   
6,170,926
   
1,831,746
   
2,008,176
   
6,533,008
 
                           
Acacia Research - CombiMatrix stock
                         
                           
Basic and diluted weighted average number of common shares outstanding
   
57,143,839
   
39,018,844
   
54,842,813
   
39,005,696
 
                           
All outstanding stock options excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive
   
7,073,105
   
6,861,499
   
7,073,105
   
6,861,499
 
                           
All outstanding common stock purchase warrants excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive
   
23,838,648
   
1,879,888
   
23,838,648
   
1,879,888
 
 
 
4.  INTANGIBLE ASSETS

Acacia Research Corporation’s only identifiable intangible assets at June 30, 2007 and December 31, 2006, are patents. Patent related accumulated amortization totaled $14,433,000 and $11,802,000 as of June 30, 2007 and December 31, 2006, respectively.

The Acacia Technologies group’s patents have remaining estimated economic useful lives ranging from one to seven years. The weighted average remaining estimated economic useful life of the Acacia Technologies group’s patents is four years. Annual aggregate amortization expense is estimated to be $2,719,000 for the remainder of 2007, $4,119,000 in 2008, $3,668,000 in 2009, $3,477,000 in 2010 and $2,523,000 in 2011. At June 30, 2007 and December 31, 2006, all of our acquired intangible assets other than goodwill were subject to amortization.

For the six months ended June 30, 2007 and 2006, the Acacia Technologies group paid patent acquisition costs totaling $1,395,000 and $1,020,000 in connection with the acquisition of the rights to additional patent portfolios. The patents acquired have estimated economic useful lives ranging from five to seven years.


5.  RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”).  SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with unrealized gains and losses related to these financial instruments reported in earnings at each subsequent reporting date.  We are currently assessing the impact, if any, of adopting SFAS No. 159 on our consolidated and separate group financial position, results of operations and cash flows.

8


ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a common definition for fair value to be applied to US GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact, if any, of adopting SFAS No. 157 on our consolidated and separate group financial position, results of operations and cash flows.


6.  COMMITMENTS AND CONTINGENCIES

Litigation and Patent Enforcement

Acacia Research Corporation is subject to claims, counterclaims and legal actions that arise in the ordinary course of business. Management believes that the ultimate liability with respect to these claims and legal actions, if any, will not have a material effect on our financial position, results of operations or cash flows. Companies comprising the Acacia Technologies group are often required to engage in litigation to enforce their patents and patent rights.

Inventor Royalties and Contingent Legal Expenses

In connection with the acquisition of certain patents and patent rights, certain companies included in the Acacia Technologies group executed related agreements which grant to the former owners of the respective patents or patent rights, the right to receive inventor royalties based on future net license fee revenues (as defined in the respective agreements) generated by the Acacia Technologies group as a result of licensing the respective patents or patent portfolios. Inventor royalties paid pursuant to the agreements are expensed in the consolidated statement of operations and comprehensive income (loss) in the period that the related license fee revenues are recognized.

In connection with the Acacia Technologies group’s licensing and enforcement activities, the Acacia Technologies group may retain the services of law firms that specialize in intellectual property licensing and enforcement and patent law. These law firms may be retained on a contingent fee basis in which the law firms are paid on a scaled percentage of any negotiated license fees, settlements or judgments awarded based on how and when the license fees, settlements or judgments are obtained by the Acacia Technologies group. In instances where the Acacia Technologies group does not recover license fees from potential infringers, no contingent legal fees are paid; however, the Acacia Technologies group may be liable for certain out of pocket legal costs incurred pursuant to the underlying legal services agreement. Legal fees advanced by contingent law firms that are required to be paid in the event that no license recoveries are obtained by the Acacia Technologies group are expensed as incurred and included in liabilities in the statement of financial position.

Guarantees and Indemnifications

Acacia Research Corporation has made guarantees and indemnities under which it 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 Research Corporation has indemnified its lessors for certain claims arising from the facility or the lease. Acacia Research Corporation indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware. However, Acacia Research Corporation 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 Acacia Research Corporation could be obligated to make. To date, we have made no payments related to these guarantees and indemnities. Acacia Research Corporation estimates the fair value of its indemnification obligations as insignificant based on this history and has therefore, not recorded any liability for these guarantees and indemnities in the accompanying consolidated balance sheets.

9


ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


7.  DISCONTINUED OPERATIONS

In January 2006, Acacia Research Corporation’s board of directors approved a plan for its wholly owned subsidiary, CombiMatrix Corporation, to become an independent public company. CombiMatrix Corporation’s registration statement on Form S-1 was declared effective by the SEC on June 8, 2007. Following the redemption period required by Acacia Research Corporation’s Restated Certificate of Incorporation, on August 15, 2007 (the “Redemption Date”), CombiMatrix Corporation will split-off from Acacia Research Corporation through the redemption of all outstanding shares of Acacia Research-CombiMatrix common stock (“AR-CombiMatrix stock”). On the Redemption Date, every ten (10) shares of AR-CombiMatrix stock outstanding on August 15, 2007, will be redeemed for one (1) share of common stock of CombiMatrix Corporation. As of June 30, 2007 CombiMatrix Corporation continues to be wholly owned by Acacia Research Corporation, and will continue to be wholly owned by Acacia Research Corporation until the August 15, 2007 Redemption Date. Subsequent to the Redemption Date, Acacia Research Corporation will no longer own any equity interests in CombiMatrix Corporation and the two companies will operate independently of each other.

In accordance with guidance set forth in SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” since the assets, liabilities, results of operations and cash flows of the CombiMatrix group will be eliminated from the ongoing operations of Acacia Research Corporation as a result of the eventual consummation of the Split-off Transaction (on the Redemption Date) and Acacia Research Corporation will not have any continuing involvement in the operations of the CombiMatrix group subsequent to the consummation of the Split-off Transaction, Acacia Research Corporation’s accompanying consolidated balance sheet, statements of operations and statement of cash flows for the current periods presented reflect the assets, liabilities, results of operations and cash flows for the CombiMatrix group as Discontinued Operations. Financial statements presented for comparable prior year periods have also been restated to reflect the assets, liabilities, results of operations and cash flows for the CombiMatrix group as Discontinued Operations. The CombiMatrix group was previously presented as a separate operating segment of Acacia Research Corporation under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

Refer to Note 9 for detailed information regarding the assets and liabilities of the CombiMatrix group that have been segregated from continuing operations and presented as discontinued operations in the accompanying consolidated balance sheets. Refer to Note 9 for detailed information regarding the revenues and expenses of the CombiMatrix group that have been segregated from continuing operations and reported as Discontinued Operations in the accompanying consolidated statements of operations. Refer to Note 9 for detailed information regarding cash flows from operating, investing and financing activities of the CombiMatrix group that have been segregated from continuing operations and reported as Discontinued Operations in the accompanying consolidated statements of cash flows. Upon consummation of the Split-off Transaction on the Redemption Date, the Split-off Transaction will be accounted for by Acacia Research Corporation at historical cost. Accordingly, no gain or loss on disposal will be recognized in the statement of operations by Acacia Research Corporation.

Net loss from Discontinued operations related to the CombiMatrix group includes direct costs incurred in connection with the Split-off Transaction, originally included in Acacia Research Corporation corporate accounts, totaling $100,000 and $136,000 for the three and six months ended June 30, 2007 and $58,000 and $89,000 for the three and six months ended June 30, 2006.


8.  EQUITY FINANCING

On May 4, 2007, Acacia Research Corporation executed a registered direct offering with certain directors of CombiMatrix Corporation and other unaffiliated investors raising gross proceeds of $5,000,000 through the issuance of 6,780,931 units. Each unit consists of one share of AR-CombiMatrix common stock and 1.5 ten-year common stock warrants, for a total of 6,780,931 shares and warrants to purchase 10,171,397 shares of AR-CombiMatrix common stock, respectively, issued to investors. Each warrant entitles the holder to purchase a share of AR-CombiMatrix stock at a price of $0.55 per share. The proceeds from this financing were attributed to the CombiMatrix group, and are reflected in net cash provided by financing activities from discontinued operations in the accompanying Acacia Research Corporation consolidated statement of cash flows.

10


ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


9.  CONSOLIDATING SEGMENT INFORMATION

Acacia Research Corporation has adopted the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Our chief operating decision maker is considered to be Acacia Research Corporation’s Chief Executive Officer (“CEO”). The CEO reviews and evaluates financial information presented on a group basis as presented below. Management evaluates performance based on the profit or loss from continuing operations and financial position of its segments. As of the June 30, 2007, Acacia Research Corporation has one reportable segment, as described earlier in Note 1.

Material intercompany transactions and transfers have been eliminated in consolidation. The accounting policies of Acacia Research Corporation’s reportable segment (and the CombiMatrix group) are the same as those described in the summary of significant accounting policies.

Presented below is consolidating financial information for our reportable segment, the Acacia Technologies group, reflecting the continuing business of the Acacia Technologies group, and the discontinued operations of the CombiMatrix group (refer to Note 7 regarding Discontinued Operations). Earnings attributable to each group has been determined in accordance with accounting principles generally accepted in the United States of America.

11

ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Consolidating Balance Sheets
(In thousands)
(Unaudited)

   
At June 30, 2007
 
At December 31, 2006
 
   
Acacia
     
Reclass
     
Acacia
     
Reclass
     
   
Technologies
 
CombiMatrix
 
Discontinued
     
Technologies
 
CombiMatrix
 
Discontinued
     
   
Group
 
Group (1)
 
Operations (1)
 
Consolidated
 
Group
 
Group (1)
 
Operations (1)
 
Consolidated
 
ASSETS
                                 
                                   
Current assets:
                                 
Cash and cash equivalents
 
$
35,067
 
$
2,383
 
$
(2,383
)
$
35,067
 
$
32,215
 
$
7,829
 
$
(7,829
)
$
32,215
 
Short-term investments
   
15,308
   
10,414
   
(10,414
)
 
15,308
   
12,783
   
6,513
   
(6,513
)
 
12,783
 
Accounts receivable
   
2,180
   
481
   
(481
)
 
2,180
   
269
   
605
   
(605
)
 
269
 
Prepaid expenses, inventory and other assets
   
1,403
   
713
   
(713
)
 
1,403
   
1,187
   
605
   
(605
)
 
1,187
 
Receivable from CombiMatrix group
   
40
   
-
   
(40
)
 
-
   
380
   
-
   
(380
)
 
-
 
Total current assets related to discontinued operations - Split-off of CombiMatrix Corporation
   
-
   
-
   
13,991
   
13,991
   
-
   
-
   
15,552
   
15,552
 
Total current assets
   
53,998
   
13,991
   
(40
)
 
67,949
   
46,834
   
15,552
   
(380
)
 
62,006
 
                                                   
Property and equipment, net of accumulated depreciation
   
322
   
1,486
   
(1,486
)
 
322
   
221
   
1,785
   
(1,785
)
 
221
 
Patents, net of accumulated amortization
   
17,279
   
6,712
   
(6,712
)
 
17,279
   
18,515
   
7,292
   
(7,292
)
 
18,515
 
Goodwill
   
121
   
16,918
   
(16,918
)
 
121
   
121
   
16,918
   
(16,918
)
 
121
 
Other assets
   
84
   
2,145
   
(2,145
)
 
84
   
79
   
2,667
   
(2,667
)
 
79
 
Total non current assets related to discontinued operations - Split-off of CombiMatrix Corporation
   
-
   
-
   
27,261
   
27,261
   
-
   
-
   
28,662
   
28,662
 
   
$
71,804
 
$
41,252
 
$
(40
)
$
113,016
 
$
65,770
 
$
44,214
 
$
(380
)
$
109,604
 
                                                   
LIABILITIES AND STOCKHOLDERS' EQUITY
                                                 
                                                   
Current liabilities:
                                                 
Accounts payable and accrued expenses
 
$
2,147
 
$
1,937
 
$
(1,937
)
$
2,147
 
$
2,201
 
$
2,846
 
$
(2,846
)
$
2,201
 
Royalties and legal fees payable
   
2,176
   
-
   
-
   
2,176
   
1,684
   
-
   
-
   
1,684
 
Current portion of deferred revenues
   
251
   
326
   
(326
)
 
251
   
360
   
365
   
(365
)
 
360
 
Payable to Acacia Technologies group
   
-
   
40
   
(40
)
 
-
   
-
   
380
   
(380
)
 
-
 
Total current liabilities related to discontinued operations - Split-off of CombiMatrix Corporation
   
-
   
-
   
2,263
   
2,263
   
-
   
-
   
3,211
   
3,211
 
Total current liabilities
   
4,574
   
2,303
   
(40
)
 
6,837
   
4,245
   
3,591
   
(380
)
 
7,456
 
                                                   
Deferred revenues, net of current portion
   
-
   
939
   
(939
)
 
-
   
-
   
1,076
   
(1,076
)
 
-
 
Warrant liability
   
-
   
9,379
   
(9,379
)
 
-
   
-
   
6,732
   
(6,732
)
 
-
 
Other liabilities
   
67
   
-
   
-
   
67
   
31
   
-
   
-
   
31
 
Total non current liabilities related to discontinued operations - Split-off of CombiMatrix Corporation
   
-
   
-
   
10,318
   
10,318
   
-
   
-
   
7,808
   
7,808
 
Total liabilities
   
4,641
   
12,621
   
(40
)
 
17,222
   
4,276
   
11,399
   
(380
)
 
15,295
 
                                                   
Redeemable stockholders' equity:
                                                 
AR - Acacia Technologies stock
   
67,163
   
-
   
-
   
67,163
   
61,494
   
-
   
-
   
61,494
 
AR - CombiMatrix stock - Split-off of CombiMatrix Corporation
   
-
   
28,631
   
-
   
28,631
   
-
   
32,815
   
-
   
32,815
 
                                                   
Total stockholders' equity
   
67,163
   
28,631
   
-
   
95,794
   
61,494
   
32,815
   
-
   
94,309
 
   
$
71,804
 
$
41,252
 
$
(40
)
$
113,016
 
$
65,770
 
$
44,214
 
$
(380
)
$
109,604
 
 
(1) Refer to Note 7 regarding presentation of the CombiMatrix group as discontinued operations.
12

ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Consolidating Statements of Operations
(In thousands)
(Unaudited)
 
   
 For the Three Months Ended June 30, 2007
 
For the Six Months Ended June 30, 2007
 
   
Acacia
     
Reclass
     
Acacia
     
Reclass
     
   
Technologies
 
CombiMatrix
 
Discontinued
     
Technologies
 
CombiMatrix
 
Discontinued
     
   
Group
 
Group
 
Operations (1)
 
Consolidated
 
Group
 
Group
 
Operations (1)
 
Consolidated
 
Revenues:
                                 
Government contracts
 
$
-
 
$
679
 
$
(679
)
$
-
 
$
-
 
$
1,228
 
$
(1,228
)
$
-
 
License fees
   
5,865
   
-
   
-
   
5,865
   
31,050
   
-
   
-
   
31,050
 
Products and service contracts
   
-
   
657
   
(657
)
 
-
   
-
   
1,245
   
(1,245
)
 
-
 
Total revenues
   
5,865
   
1,336
   
(1,336
)
 
5,865
   
31,050
   
2,473
   
(2,473
)
 
31,050
 
                                                   
Operating expenses:
                                                 
Cost of government contract revenues
   
-
   
641
   
(641
)
 
-
   
-
   
1,175
   
(1,175
)
 
-
 
Cost of product sales
   
-
   
248
   
(248
)
 
-
   
-
   
551
   
(551
)
 
-
 
Research and development expenses (including non-cash stock compensation expense)
   
-
   
1,102
   
(1,102
)
 
-
   
-
   
2,950
   
(2,950
)
 
-
 
Marketing, general and administrative expenses (including non-cash stock compensation expense)
   
4,190
   
2,404
   
(2,404
)
 
4,190
   
8,518
   
4,927
   
(4,927
)
 
8,518
 
Legal expenses - patents
   
1,069
   
-
   
-
   
1,069
   
2,436
   
-
   
-
   
2,436
 
Inventor royalties and contingent legal fees expense - patents
   
3,406
   
-
   
-
   
3,406
   
17,528
   
-
   
-
   
17,528
 
Amortization of patents
   
1,314
   
344
   
(344
)
 
1,314
   
2,630
   
662
   
(662
)
 
2,630
 
Loss from equity investment
   
-
   
250
   
(250
)
 
-
   
-
   
522
   
(522
)
 
-
 
Total operating expenses
   
9,979
   
4,989
   
(4,989
)
 
9,979
   
31,112
   
10,787
   
(10,787
)
 
31,112
 
Operating income (loss)
   
(4,114
)
 
(3,653
)
 
3,653
   
(4,114
)
 
(62
)
 
(8,314
)
 
8,314
   
(62
)
                                                   
Other income (expense):
                                                 
Interest and investment income
   
650
   
131
   
(131
)
 
650
   
1,057
   
281
   
(281
)
 
1,057
 
Warrant gains (charges)
   
-
   
(145
)
 
145
   
-
   
-
   
2,233
   
(2,233
)
 
-
 
Total other income (expense)
   
650
   
(14
)
 
14
   
650
   
1,057
   
2,514
   
(2,514
)
 
1,057
 
                                                   
Income (loss) from continuing operations before income taxes
   
(3,464
)
 
(3,667
)
 
3,667
   
(3,464
)
 
995
   
(5,800
)
 
5,800
   
995
 
                                                   
Provision for income taxes
   
(124
)
 
-
   
-
   
(124
)
 
(148
)
 
-
   
-
   
(148
)
Net income (loss) from continuing operations
   
(3,588
)
 
(3,667
)
 
3,667
   
(3,588
)
 
847
   
(5,800
)
 
5,800
   
847
 
                                                   
Discontinued operations - Split-off of CombiMatrix Corporation
                                                 
Loss from discontinued operations - Split-off of CombiMatrix Corporation
   
-
   
-
   
(3,667
)
 
(3,667
)
 
-
   
-
   
(5,800
)
 
(5,800
)
Net income (loss)
 
$
(3,588
)
$
(3,667
)
$
-
 
$
(7,255
)
$
847
 
$
(5,800
)
$
-
 
$
(4,953
)
 
(1) Refer to Note 7 regarding presentation of the CombiMatrix group as discontinued operations.
13

ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Consolidating Statements of Operations
(In thousands)
(Unaudited) 
 
   
For the Three Months Ended June 30, 2006 
 
For the Six Months Ended June 30, 2006 
 
   
Acacia
     
Reclass
     
Acacia
     
Reclass
     
   
Technologies
 
CombiMatrix
 
Discontinued
     
Technologies
 
CombiMatrix
 
Discontinued
     
   
Group
 
Group
 
Operations (1)
 
Consolidated
 
Group
 
Group
 
Operations (1)
 
Consolidated
 
Revenues:
                                 
Government contract
 
$
-
 
$
574
 
$
(574
)
$
-
 
$
-
 
$
838
 
$
(838
)
$
-
 
License fees
   
14,371
   
-
   
-
   
14,371
   
19,088
   
-
   
-
   
19,088
 
Products and service contracts
   
-
   
1,218
   
(1,218
)
 
-
   
-
   
2,199
   
(2,199
)
 
-
 
Total revenues
   
14,371
   
1,792
   
(1,792
)
 
14,371
   
19,088
   
3,037
   
(3,037
)
 
19,088
 
                                                   
Operating expenses:
                                                 
Cost of government contract revenues
   
-
   
542
   
(542
)
 
-
   
-
   
792
   
(792
)
 
-
 
Cost of product sales
   
-
   
340
   
(340
)
 
-
   
-
   
561
   
(561
)
 
-
 
Research and development expenses (including non-cash stock compensation expense)
   
-
   
2,182
   
(2,182
)
 
-
   
-
   
4,561
   
(4,561
)
 
-
 
Marketing, general and administrative expenses (including non-cash stock compensation expense)
   
2,986
   
3,176
   
(3,176
)
 
2,986
   
6,492
   
7,119
   
(7,119
)
 
6,492
 
Legal expenses - patents
   
1,082
   
-
   
-
   
1,082
   
1,448
   
-
   
-
   
1,448
 
Inventor royalties and contingent legal fees expense - patents
   
7,847
   
-
   
-
   
7,847
   
10,118
   
-
   
-
   
10,118
 
Amortization of patents
   
1,326
   
385
   
(385
)
 
1,326
   
2,669
   
709
   
(709
)
 
2,669
 
Write-off of patent-related intangible asset
   
297
   
-
   
-
   
297
   
297
   
-
   
-
   
297
 
Loss from equity investments
   
-
   
294
   
(294
)
 
-
   
-
   
533
   
(533
)
 
-
 
Total operating expenses
   
13,538
   
6,919
   
(6,919
)
 
13,538
   
21,024
   
14,275
   
(14,275
)
 
21,024
 
Operating income (loss)
   
833
   
(5,127
)
 
5,127
   
833
   
(1,936
)
 
(11,238
)
 
11,238
   
(1,936
)
                                                   
Other income (expense):
                                                 
Interest and investment income
   
394
   
137
   
(137
)
 
394
   
753
   
318
   
(318
)
 
753
 
Loss on sale of interest in subsidiary
   
-
   
-
   
-
   
-
   
-
   
(84
)
 
84
   
-
 
Warrant gains (charges)
   
-
   
1,490
   
(1,490
)
 
-
   
-
   
(250
)
 
250
   
-
 
Total other income (expense)
   
394
   
1,627
   
(1,627
)
 
394
   
753
   
(16
)
 
16
   
753
 
                                                   
Income (loss) from continuing operations before income taxes
   
1,227
   
(3,500
)
 
3,500
   
1,227
   
(1,183
)
 
(11,254
)
 
11,254
   
(1,183
)
                                                   
(Provision) benefit for income taxes
   
(70
)
 
-
   
-
   
(70
)
 
(38
)
 
34
   
(34
)
 
(38
)
Net income (loss) from continuing operations
   
1,157
   
(3,500
)
 
3,500
   
1,157
   
(1,221
)
 
(11,220
)
 
11,220
   
(1,221
)
                                                   
Discontinued operations - Split-off of CombiMatrix Corporation
                                                 
Loss from discontinued operations - Split-off of CombiMatrix Corporation
   
-
   
-
   
(3,500
)
 
(3,500
)
 
-
   
-
   
(11,220
)
 
(11,220
)
Net income (loss)
 
$
1,157
 
$
(3,500
)
$
-
 
$
(2,343
)
$
(1,221
)
$
(11,220
)
$
-
 
$
(12,441
)
 
(1) Refer to Note 7 regarding presentation of the CombiMatrix group as discontinued operations.
14

ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Consolidating Statements of Cash Flows
(In thousands)
(Unaudited)
 
   
For The Six Months Ended June 30, 2007 
 
 For The Six Months Ended June 30, 2006
 
   
Acacia
     
Reclass
     
Acacia
     
Reclass
     
   
Technologies
 
CombiMatrix
 
Discontinued
     
Technologies
 
CombiMatrix
 
Discontinued
     
   
Group
 
Group (1)
 
Operations (1)
 
Consolidated
 
Group
 
Group (1)
 
Operations (1)
 
Consolidated
 
Cash flows from operating activities:
                                 
Net income (loss)
 
$
847
 
$