Acacia Research Corp (ACTG) 2006 Q2 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the Acacia Research second quarter shareholder conference call. [Operator Instructions]

I will now turn the conference call over to Mr. Paul Ryan.

Please go ahead, sir.

Thank you for being with us today.

Today's call may involve what the SEC considers to be forward-looking statements.

Please refer to our 8-K, which was filed with the SEC today, for our forward-looking statement disclaimer.

With me today are Chip Harris, President of the Acacia Technologies Group, Clayton Haynes, our Chief Financial Officer, and Rob Berman, our Chief Operating Officer and General Counsel.

Today, I will give an overview of the progress we are making in building the business.

Clayton Haynes will provide you with an analysis of our financial results.

And Rob Berman will provide a brief update on the litigations we have initiated.

We will then open the call for questions.

As we just reported, Acacia Technologies' revenues for the second quarter increased to $14,371,000, compared to $2,682,000 in the year-ago period.

Acacia reported GAAP net income of $1,191,000, or $0.04 per share, including non-cash patent amortization and non-cash compensation charges of $2,215,000.

Cash and short term investments increased by $3,050,000 from the previous quarter to $40.7 million.

We continue to expect significant growth in 2006 annual revenues compared to 2005.

As always, we want to remind shareholders that revenues may be lumpy on a quarterly basis, and that we measure our performance on trailing 12-month revenues, which have been growing steadily over the past few quarters, and reached $34.1 million at the end of the second quarter, compared to $22.4 million at the end of the previous quarter.

During the second quarter, we generated revenues from 27 new licensing agreements, covering nine different licensing programs, including two new licensing programs.

New agreements included licenses of our laptop connectivity technology to IBM, our multi-dimensional bar code technology to Intel and the US Bank National Association, our resource scheduling technology to Cerner, McKesson, and Siemens, our audio/video enhancement technology to Philips Electronics, our dynamic manufacturing modeling to Brooks Automation, and our product activation technology to [Nassau].

During the second quarter, we also added five new portfolios.

These relate to telematics, systems used in vehicles that combine wireless communications with GPS tracking, software license management technology, video tracking technology, portable audio device technology, and mobile communication devices and networks.

Acacia continues to build the country's premier patent licensing company.

As an outsource patent licensing company, we are meeting a huge unserved need in the market from technology companies that do not have the scale, expertise, or experience to execute patent licensing and enforcement programs.

It is far more effective for them to outsource the licensing of their patented technologies to Acacia.

We are at a very early stage in the growth of our business.

Our licensing success is creating new business opportunities for us.

And given the current pipeline of patented technologies we are evaluating, we expect to significantly expand our business.

Acacia is also at an early stage in generating revenues from its patent portfolios.

We have only begun generating revenues from 18 of our patented technologies, and have realized only a small percentage of the potential revenue from many of these 18 licensing programs.

We will continue to build our revenue base from the licensing of our current patent portfolios, and by adding new portfolios for licensing.

Technology licensing in the United States is growing rapidly, and is expected to generate $500 billion in annual revenues within the next few years.

Acacia is very well-positioned to take advantage of this growth.

We have established a leadership position in technology licensing, and we see a major business opportunity for our company in serving this unmet need.

I will now turn the call over to Chief Financial Officer Clayton Haynes.

Thanks, Paul.

As indicated in today's earnings press release, second quarter of 2006 license fee revenues totaled $14,371,000, as compared to $2,682,000 in the second quarter of 2005, reflecting another strong quarter of revenue growth.

During the second quarter of 2006, we generated revenues from nine of our ongoing technology licensing programs, including initial license fees from our dynamic manufacturing modeling technology and product activation technology portfolios.

As discussed in prior quarters, the Acacia Technologies Group's licensee revenues fluctuate from period to period, primarily based on the mix of specific terms and conditions of license agreements executed each period.

Revenues also fluctuate as a result of fluctuations in the number of license agreements executed each period, fluctuations in the royalty per unit activities of our licensees, the timing of the receipt of periodic license fee payments, and our periodic reports from licensees, and other factors.

Management's measure and assessment of our results and growth continues to be based on total license fee revenues recognized across all of our current and future licensing programs on a trailing 12-month basis.

Trailing 12-month revenues as of June 30, 2006, were $34.1 million, as compared to $22.4 million as of March 31, 2006, and $19.6 million as of December 31, 2005.

The average contribution for portfolios generating revenues in the second quarter of 2006, defined as gross license fees less inventor royalties expense and contingent legal fees expense, was approximately 45% as compared to 58% in the prior year quarter.

Average contributions fluctuate period to period based on the mix of portfolios that generate revenues each period, and the related economics associated with the underlying inventor agreements and contingent legal fee arrangements, if any.

For the second quarter of 2006, the Acacia Technologies Group reported net income in accordance with US generally accepted accounting principles of $1,191,000, versus a net loss of $1,760,000 in the second quarter of 2005, as illustrated in the Acacia Technologies Group comparative income statements provided in today's press release and related 8-K filed with the SEC.

Excluding the impact of non-cash patent amortization charges of $1,326,000, and non-cash stock compensation charges of $889,000, the Acacia Technologies Group's second quarter 2006 net income from continuing operations was $3,406,000, versus a net loss of $424,000 in the second quarter of 2005.

As a reminder, the new accounting standard that requires all companies to expense stock options and other stock-based awards in the income statement was adopted by Acacia effective January 1, 2006.

As such, expense related to all stock-based awards is and will continue to be reflected in our financial statements.

We expect that stock compensation charges will continue to be significant in future periods as a result of the adoption of the new standard.

Second quarter 2006 total operating expenses were $13,504,000, as compared to $4,751,000 in the second quarter of 2005.

The primary drivers of the quarter-to-quarter increase in operating expenses include -- a $6.7 million increase in inventor royalties and contingent legal fees expense, which is directly related to the increase in gross license fee revenues recognized in the current quarter, as previously discussed; an $889,000 increase in non-cash stock compensation charges resulting from the adoption of the new stock option expensing standard, effective January 1; an increase in MG&A related to the addition of licensing, engineering, and business development personnel since the end of the prior year quarter, which is reflective of the continued growth of our business; an increase in patent-related research and consulting costs related to ongoing licensing programs and business development related diligence efforts; and finally, an increase in facilities costs and other corporate general and admin costs related to ongoing operations.

Second quarter 2006 patent-related legal expenses were relatively flat quarter-over-quarter.

Patent-related legal expenses include patent-related prosecution, enforcement costs incurred by outside patent attorneys engaged on an hourly basis, and the out-of-pocket expenses incurred by law firms engaged on a contingent fee basis.

These expenses fluctuate from period to period based on patent enforcement and prosecution activity associated with ongoing licensing and enforcement programs, and with the commencement of new licensing enforcement programs each period.

The majority of our current litigation continues to be handled by outside IP law firms engaged on a contingent fee basis.

Estimated fixed costs for the Acacia Technologies Group for fiscal 2006 are expected to be in the range of $8.5 million to $9 million.

Fixed costs include employee salaries and benefits, facilities costs, certain consulting costs, corporate legal, accounting, and other general and admin costs, and are included in the marketing, general, and administration expense line in our income statement.

Estimated variable costs for 2006, excluding inventor royalties and contingent legal fees, are expected to be in the range of $2 million to $3 million for the year.

Variable costs include patent-related legal fees, patent-related research, consulting, and maintenance expenses, and other patent-related development and commercialization expenses.

These costs will fluctuate quarter to quarter based on patent-related business development, enforcement, research, and prosecution activities each quarter.

All variable costs, excluding patent-related legal costs, are included in the marketing, general, and administrative expense line in our income statement.

Variable costs included in MG&A for the second quarter of 2006 totaled approximately $561,000, as compared to approximately $170,000 in the prior year quarter.

As of the end of the second quarter, cash and short term investment balances totaled approximately $40.7 million, versus $37.7 million as of March 31, 2006.

Acacia Technologies recorded second quarter 2006 positive net cash inflows from continuing operations of $3.6 million, versus net cash outflows of $1.5 million in the comparable 2005 quarter.

Receivables from license fees totaled $3.7 million at quarter end.

The majority of accounts receivable are scheduled to be collected within 10 to 30 days after the execution of their related agreement.

Inventor royalties payable and contingent legal fees payable scheduled to be paid in the third quarter of 2006 totaled $2.3 million at the end of the quarter.

In conclusion, the Acacia Technologies Group's licensing, business development, and engineers produced another strong quarter of performance, adding to our strong 12-month trailing revenue growth quarter to quarter.

I look forward to continued successes for our clients and our shareholders in future periods.

I will now turn the call over to Rob Berman, Chief Operating Officer and General Counsel of Acacia, for his remarks.

Thanks, Clayton.

Since our last call with shareholders in April, the companies that are part of the Acacia Technologies Group dismissed lawsuits against 26 companies.

These dismissals were in connection with our audio/video enhancement and synchronization, laptop connectivity, digital media transmission, dynamic manufacturing modeling, user activated internet advertising, multi-dimensional barcode, and resource scheduling technologies.

In addition, since our last call, we became involved in new lawsuits with 11 companies, involving our user activated internet advertising, computer device performance, and resource scheduling technologies.

We currently have 25 ongoing lawsuits involving 93 companies.

As always, more information about these lawsuits can be obtained through the [Pacer] online system.

Paul?

Thanks, Rob.

And Operator, with that, we'd now like to open up the call for questions.

[Operator Instructions] Our first question comes from Mr. Harris Hall of Singular Research.

Congratulations, guys, on a fantastic quarter.

Thank you.

Wow.

It's your first quarter of profitability, if I got it right.

It is, indeed.

Just a quick housekeeping item.

I didn't see the basic and diluted shares anywhere in your release.

Do you have--

It was in the financials.

I know in our press release we just put the basic.

I believe in the tables in the financials we have the diluted.

Is that correct?

Yes.

There are basic and diluted EPS in the Acacia consolidated financial statements attached to the press release.

The basic number is the $0.04, and the fully diluted number is $0.04 as well.

No.

I was trying to get the number of shares.

Oh, shares.

Shares.

The basic number of shares, the weighted average number of shares, is 27,507,000.

And the fully diluted is 30,324,000.

Okay.

For the second.

When will the spin-off be final?

We're still awaiting the IRS on their letter opinion.

Recently, we contacted our legal representation, and then they indicated it was probably going to be another two or three weeks before they render their final opinion.

Because we do not want to move forward, obviously, unless we get a private letter ruling from the IRS considering the split-off to be non-taxable to both shareholders and to the corporate parent, because both groups have very considerable tax loss carry forwards they can take advantage of.

There was actually a flood in the IRS office in Washington, based on the recent weather that they had on the East Coast.

And that set them back a couple of weeks.

So that's the reason for the additional delay.

Okay.

And then just lastly, when do you guys expect to file your 10-Q?

By the middle of--I believe the first week in August, roughly.

Great.

Thank you.

That's all my questions.

And again, congratulations on your first quarter of profitability.

Okay.

Thank you, Harris.

Our next question comes from Philip Lamoreaux of Lamoreaux Partners.

Hi, Paul and Rob and all.

Question here on this contingent legal fee and royalty expenses, which of course is about 55% of revenue, and popped up a lot.

My impression is that the contingent fee payments for lawyers are maybe about a third or somewhere.

Of course, they're all negotiable.

And I wonder if there were some other items in here that made it pop up to 55% of total, where your one-time royalty expense or one-time events, so that--or should we be looking at that the contingent fees are in fact over half of the revenue you get?

Or is there some other elements in here?

Maybe you could shed a little color in there.

Well, the guidance we've consistently given, Phil, is that we expect gross margins of 40%.

In other words, the combination of the payments made to the original inventing company and on average, the contingent legal representation, would be about 60%, and then our margins would be about 40%.

That's our long-term.

In the last couple of quarters, we've had better margins than that.

This quarter, obviously, 45%.

I believe the quarter--the first quarter, we were about 53%.

And that's as a result that we're getting many more licenses done on a voluntary basis, without paying contingent legal fees.

And we certainly hope that trend continues.

It's beneficial, obviously, to both us and our partners, the inventors, because we split the revenues after contingent legal fees.

But it will vary significantly quarter to quarter, as Clayton described, based on which particular portfolios happen to license in a given quarter.

Some of them we may do with no contingent fees.

And some of them could be the maximum.

Generally, contingent legal fees can range anywhere from 20% up to the high 30s, in certain instances, if it requires going all the way through trial with a particular litigation.

Most of ours tend to get settled fairly early, and so the contingent rate is lower than that.

Well, congratulations on achieving this milestone of first quarter of GAAP profitability.

And most of us prefer to still look at non-GAAP and say, "Gee, you're in $3.4 million."

Congratulations.

Okay.

Thanks, Phil.

Our next question comes from Mr. Jack Armstrong.

How are you doing?

I wanted to know--you signed a number of deals towards the end of the quarter.

How many were actually booked in the quarter?

Or how many did you have to actually push into this quarter?

Well, they fall wherever they fall.

I mean, the ones that we've announced in our release.

Ones that did not fall into the quarter, we just put the date that we announced in July, when we did them.

And the--so basically, we've booked whatever announcements we put out in June.

And if the announcements were in July, you can look at the--subsequent events will have the deals that actually were not in the second quarter from a revenue standpoint.

And those are the ones outlined that we announced in July.

Could you talk about your three hires that you had hiring--what's the reason for the hire?

Were there particular expertises that they bring to the table?

And can you expand maybe on the pipeline that you're seeing?

Are you moving up the food chain, so to speak?

Or could you expand on that?

Well, sure.

Yes.

The addition on the business development side, Mr. Lee, he's a very experienced addition to the team.

He was the head of intellectual property for [Connexa].

And prior to that, he was the IP counsel at Gateway and [Callaway Golf].

He is going to be instrumental, I believe, in aligning ourselves with corporate partnerships or many technology companies, now that we're gaining visibility and a track record in licensing, that are interested in partnering with us.

And his primary responsibility will be putting together those partnerships with large NASDAQ companies.

The engineering team was significantly strengthened with Jacob and Mark.

They both come from exceptionally strong backgrounds.

And it's very important in our due diligence to have highly qualified engineers look at these patent portfolios and assess the engineering aspects of it.

And they're also used alongside our licensing teams when we go out to get voluntary licensing deals done.

So the engineers are critical support teams to the licensing process.

So are you going to maybe up what you think you guys can--new patent portfolios you can bring under your umbrella with these additional people?

Do you think three, four, five?

Is five a sustainable number per quarter that you could actually bring in?

Yes.

I mean, the last--I think we brought in 20 over the past 12 months.

[Inaudible].

We don't have a specific target, but yes, we've been bringing in--that may be a little ahead of where we are in the future.

I would hope that probably on average, we bring in about three or one month.

And these teams obviously are critically important in building the future pipeline of revenues, in addition to our current portfolios.

So we expect to flow--certainly our visibility is increasing awareness in the tech community, that they can outsource the licensing to us.

And we have indications that's going to continue to drive business to us.

We're also maintaining our standards, though, with respect to the portfolios that we do take in.

And we still find that a significant number of portfolios that we receive, we decide to not bring in for one reason or another.

And so although the number is sort of important of what we bring in, it's also the quality, of course, that's important as well.

Okay.

Thanks.

Our next question comes from a Mr. Mario Cibelli.

Hi.

Mario Cibelli.

I just want to clear up something.

So when you do a licensing deal and there's no litigation in process, right, so you don't have to share anything with the law firm.

And just for an example, then, let's say on one potential infringer, you do initiate a piece of legislation--or litigation.

Does that mean then that every licensing deal that you do once that litigation is initiated, you are sharing the contingency fee with the law firm?

Is that correct?

Well, actually, all of our agreements are different, depending on the law firm.

In certain instances, a law firm will receive full contingency on matters from defendants that are in litigation, and will sometimes receive a half or a quarter contingency on licenses that are done with that technology without the need for litigation.

And the reason for that is there's no question that the ongoing litigation definitely has an effect and definitely drives licensing activities.

So it's not correct for you to assume that they receive nothing.

The gamut goes from, frankly, full contingency for all licenses that are done with a particular technology, all the way down to perhaps 5% and 10%.

And it depends--

That would only be in the case where there's been some type of litigation initiated?

That's correct.

Okay.

I'm just wondering how you might sort of think about or strategize whether when you would have some potential--some infringers licensing, you haven't initiated any litigation yet, but then you may be getting some resistance.

I guess every situation's different, but you might even have a disincentive, then, to initiate some litigation if you are moving forward with some of the infringers on licensing deals?

Well, we work closely, obviously, with the outside litigation firm to get the best results for our shareholders.

And as Rob described, we have a great deal of flexibility.

And oftentimes, the outside law firm will only sue a handful of companies.

And then our expertise, obviously, is the in-house licensing personnel to get those deals done, even though those companies have not been sued.

And in some cases, as Rob indicated, we do give some revenue share to the law firm.

A lot of it depends on, frankly, who put the work in.

If a law firm is extremely instrumental in getting a licensing deal done even without litigation, then they should be paid appropriately for their time and effort.

On the other hand, if they really had nothing to do with it, then they should receive much less compensation.

So we want to keep our lawyers, our outside counsel, happy.

We continue to use them.

And we tend to work out basically what's fair based upon the facts of the situation.

Okay.

Thanks.

And any clues or hints you might want to give about subsequent quarters?

I know it's difficult to compare, but how much of--I don't know how hard we pushed for Q2.

How that might relate to Q3 or Q4.

Any sense there?

Anything you could say that might give us some idea of where Q2 would stand relative to any quarter for the rest of the year?

I think the most important takeaway is we are absolutely managing this company for trailing 12-month revenues, because how many deals happen to fall in a 13-week period?

And we've consistently guided--the one thing we will say is our revenues will be lumpy.

We think on a year-over-year basis, obviously, we indicated at the end of the first quarter to the marketplace that we thought we would expect significant revenue growth year-over-year.

But again, we--it's just highly unpredictable on a quarterly basis, and that's not how we're trying to manage the company, to meet any kind of quarterly expectations.

Because we want to optimize the revenues from these portfolios and not be under any pressure to have to get deals done in any constrained time frame.

Fair enough.

Thanks.

Our next question comes from Mr. [Neil Woodman].

Hey, Paul.

It's actually [Ken Fried].

How are you?

Hi, Ken.

Question.

How is the competitive landscape, particularly vis a vis intellectual ventures and potentially other sources of capital that'll be attracted to this industry?

Are you guys finding it more difficult to get deals with different terms?

Or given the scale that you're accomplishing, it is easier to attract deals?

I think we're attracting more deals.

There's no question about that, given our visibility and our emerging track record.

There are no other entities out there that we're aware of that have had this level of success in generating revenues from patent portfolios, particularly a diverse group of patent portfolios.

We expect that we will get competition.

It's an attractive business model financially.

We have not seen any--there are a few tech companies that have kind of tried to license their own technologies, but we haven't seen any indication that they're going to do anything other than that.

Intellectual ventures, certainly I think there's--being on the cover of Business Week certainly lends a lot of credibility to the fact that intellectual property is indeed becoming a major asset class.

And I think we're at a--very well-positioned in the market.

Quite frankly, I think their activities in going out and looking to acquire patent portfolios sometimes puts them into play.

Yes.

And that may be an advantage to us, because people then will comparison shop to us.

It essentially breaks down that we're really interested at this stage in partnering.

And typically, because of their strategic investors, they're more interested in purchasing.

So if someone wants to split the revenues and make a significant amount of money, we have a much better track record and ability for them to generate serious money.

If they just want to sell and take cash, there may be other financial buyers out there that--increasingly, in the conversations we're having, most of our potential partners are seeing the fact that they can generate a lot more money splitting revenues than simply trying to get a one-time payment.

Right.

And also--that makes sense.

And also, can you clarify this material weakness headline?

Yes.

Why don't I let Clayton address that?

Sure.

Sure.

The issue primarily related to an accounting conclusion reached by management based on our interpretation of a non-standard term and condition in one of our license agreements in the second quarter of 2006, which we subsequently adjusted during the quarterly review process.

And under the current standards, if such an adjustment is material or could have been material, materiality generally defined as 5% of pre-tax income, then the control deficiency associated with the adjustment by definition is deemed to be a material weakness.

Right.

But what was the actual adjustment?

Because of the confidentiality provision of our agreements, we can't comment on that.

So it basically was an interpretation of the licensing terms of an agreement with some non-standard clauses in it as to when the revenues should appropriately be taken for that particular licensing agreement.

I see.

Okay.

Got it.

So no big deal.

Okay.

Thank you.

Okay.

Thanks, Ken.

Our next question comes from Mr. [Ryan Han].

Hey, guys.

How you doing?

Good.

An investor here.

Great quarter.

I did have a couple of questions.

Maybe you could add some insight.

What percentage of the revenues, either on a quarterly or annual basis, is derived from the 300 or so licensing agreements with the DMT technology?

Basically, we've stopped splitting that out, but it's slightly under $1 million on the DMT.

For the quarter, or on the annual?

Per quarter.

Per quarter so far?

Yes.

Okay.

Also, what percentage of American households do you think are covered by those agreements with those cable companies?

I mean, is it 50% of households? 80% of households?

Well, we look at it from a licensee standpoint.

Yes.

Based on our rate card in generating, we have licensed, in our view, roughly 2% to 3% of the market.

In other words, we've licensed 108 small cable companies.

Okay.

But the vast majority of usage of our technology is really from the top five cable companies, and they have roughly 73 million customers.

Okay.

And they're on board, or they're not on board?

Well, we're in litigation with them.

We've been in litigation for the past three years.

And we will see what the outcome of that is.

But to give you a perspective, we're generating right now about $3.5 million to $4 million a year, and we've licensed about 2% to 3% of the market.

And most of the major players that would constitute the balance, we are in litigation with currently.

Okay.

Because that's where--that could be, obviously, an exponential grower right there.

Well, and there's also--the meter has been running for the past three years on those infringers.

Sure.

There could be a settlement, obviously, and then a forward-looking business to go on.

Right.

[Inaudible] agreements in place.

Okay.

And no real time frame on that?

Kind of just in the system?

Impossible to predict settlements.

It's still early on in the litigation.

Still construing claims and claims construction hearings.

We have another one scheduled for August.

And frankly, the discovery has not yet begun in the case.

So there are a number of defendants.

And there were some procedural maneuvers that needed to take place to consolidate the litigation in one jurisdiction.

And it has not moved on as quickly as we would have liked.

But basically, we're still early on and haven't begun discovery yet.

I mean, settlement in a lot of these cases is usually in the best interest of all parties.

Is there any indication towards them that they're going to fight this to the end?

Or they're going to come on board?

Well, settlement is--

Settlement and license I would hope for, obviously.

A variety of factors come into play with respect to settlement.

How much money is at stake?

How much money you're looking for.

Sure.

Of course, the merits of the case.

And we're still early on in this case.

I'll take a $500 million payout, or a market cap like [Rim].

I'm fine with either one.

Thank you for the--

Wherever this would--we're okay with both, to be honest with you.

Yes.

It's in progress.

And we have--

[Inaudible] its way out.

It's just going to have to play itself out.

It's got to play its way out in real time.

It's up to each company to determine how much risk they want to take.

I mean, that's why when Paul mentioned earlier guidance on a quarter to quarter basis, for example, we know what a reasonable license rate is.

And we know and have an idea what we want to get for various technologies.

And we don't want to be in a position of discounting deals and trying to get less than full value in order to meet quarterly numbers or anything else.

And that's something that we're just steadfast in.

We'll continue to hold out until we think we're getting at least appropriate value.

One [inaudible] question.

That's a special technology, and it should be rewarded for who has the patents on it.

And hopefully that's how it'll just play out.

Well, I'm using it myself quite a bit at home.

But don't tell the cable--

I have five of them.

Don't tell the cable company.

If they find out it's me, they'll probably turn it off.

Again, great job, fellows.

I mean, I'm happy that a lot of the revenues are not from that, because I think there's great growth in it.

I don't know if it's today, tomorrow, next quarter, the quarter after, but I'm waiting for it.

Okay.

Thank you.

You guys take care.

Our next question comes from Mr. Jeffrey [Lang].

Good afternoon.

Hi, Jeff.

Paul, I was wondering if you could comment at all on some of the--a few of the larger opportunities that are out there.

The microprocessor enhancement.

The data encryption.

And the computer cache.

Can you give us updates on what's happening with those?

Well, we can't really qualify the portfolios other than--Rob, you can kind of give a status update on the litigation.

Sure.

You can, through the Pacer system, check on the dockets for those particular portfolios.

I know that for computer cache coherency, briefs are being filed with respect to summary judgment.

And in this particular court, the court won't have a separate markman hearing for claims construction.

They'll do it as part of summary judgment.

And that's scheduled in the coming months.

For Microprocessor Enhancement Corporation, again, summary judgment motions have been filed by both sides, both for infringement and non-infringement.

And if you look at the docket, you'll see that the court hasn't scheduled oral arguments on those yet, but we expect that the court will be doing that shortly, and those oral arguments will probably take place in the fall.

And what was the third one that you mentioned?

Data encryption.

Data encryption, again, is moving forward.

I don't believe we have a trial date yet.

But we're getting to the point where discovery is ongoing.

Expert depositions have been taken or are being taken.

And the case is moving forward.

One thing that you should be careful of is I’m not sure what you got the impression that those are larger opportunities as compared to other opportunities.

Frankly, it's pretty difficult to handicap these patents.

We generally don't take on a patent unless we think that there are potentially significant damages for us to uncover.

Or to recover.

I'm sorry.

But I would not want you to be misled into thinking that certain opportunities are necessarily bigger than others.

Okay.

Just to go back to a second on the split of the financial statements once the IRS letter comes out, when would we actually then--when would you report the first set of numbers?

Would you be able to start to do that retroactively once the filing is done?

Or would you do it after the quarter is complete, and then when you issue the new quarter, would you then retroactively split out from CombiMatrix?

When is the timing on that?

Assuming that we did move forward with that transaction, we would begin to report separately from the effective date of the transaction forward, if I understand your question correctly.

So then there wouldn't be a retroactive pulling it back, if somebody wanted to look back to see what the separate statements looked like?

Well, they could do a pro forma based on the standalone separate group financials, which would be available to everybody, certainly.

Yes.

Well, we break those financials out--

Yes.

Those financials are broken out now.

Obviously, the standalone Acacia Technology ones.

Right.

Certainly, going forward, after the split, people would be able to compare those to the ones before.

Okay.

Thank you.

It's also important to note that this is also subject to an effective registration statement from the SEC.

Right.

All right.

Thanks.

Okay.

Our next question comes from Mr. Michael [Needleman].

Hi, gentlemen.

How are you?

Great.

I wonder if you could just--I think what I heard you guys say about the issue of the accounting issue--am I of the understanding that there will not be any material issues?

Or there was--

They were addressed in the review.

Okay.

All right.

So in other words, it's over?

Well, the remediation is not over.

Going forward, we have to remediate.

But the adjustments that were made were made prior to the issuance of the financial statements.

Okay.

I have not had time, gentlemen, to read the entire press release.

Pardon me.

But of the new--of the royalties that were achieved this quarter, how many of them were actually out of new portfolios?

What's your definition of new portfolios?

I mean, we--most of the newer ones, you might say, are the ones that we've brought in in the last 12 months.

Yes.

[Technical difficulty].

Ones that you haven't received revenue in prior to this quarter.

Oh, there were two of them.

There was--

Two?

The one on product activations at Nassau and our dynamic manufacturing modeling to Brooks Automation.

There were two new licensing programs initiated in the quarter that generated revenues.

And I wanted to also be sure, because I think I heard a couple of ways of answering it.

Are you actually having to raise the amount of split that you are buying or partnering on these partnerships?

No.

We basically do revenue splits, and they've maintained the same proportionality over the last year.

There's been no real shift in the splits.

And has there been any change recently on the size of the portfolios that you actually are going after?

Well, I think we are getting, obviously, a lot more opportunities to look at a much larger number of portfolios.

And I think that enables us potentially to become more and more selective on portfolios, which we're always doing.

But I think the greater number of opportunities we have, obviously, the more discerning we can be.

And again, great job, gentlemen.

Thank you.

Okay.

Thanks.

And that was the last question at this time.

Okay.

Thank you, operator.

And I want to thank you all for being with us today.

We look forward to speaking with you next quarter. ??

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