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Acacia Research-Acacia Technologies (NASDAQ:ACTG)

Q3 2008 Earnings Call Transcript

October 23, 2008, 04:30 pm ET

Executives

Paul Ryan – Chairman & CEO

Clayton Haynes – CFO

Analysts

Bennett Notman – Davenport & Company

Paul Berger – AMIC Investors

Dan Katz – Apex Capital

Marco Petroni – MG Capital Management

Allen Armin – Wachovia

Fred Falkenberg – Bishop, Rosen & Co.

Operator

Good afternoon, and welcome ladies and gentlemen, to the Acacia Research Third Quarter Earnings Release Conference Call. (Operator instructions). I will now turn the conference over to Mr. Paul Ryan. Please go ahead, sir.

Paul Ryan

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 us today is Chip Harris, President of Acacia; Dooyong Lee, Executive Vice President; and Clayton Haynes, our Chief Financial Officer.

Today I will give you an overview of the progress we are making in building the business and Clayton Haynes will provide you with an analysis of our financial results. We will then open the call for questions.

As we just reported, Acacia Research c consolidated revenues for the third quarter of 2008 were $13,796,000 compared to $9,544,000 in the year ago period. The $13.8 million is Acacia’s third highest revenue quarter to date. Trailing 12-month revenues were $41.9 million compared to $47.9 million at the end of the third quarter of 2007. Acacia Research reported third quarter GAAP net loss from continuing operations of $2.4 million or 0.08 a share including noncash charges of $3.1 million. Excluding noncash charges, we recorded net income of approximately $680,000.

Acacia Research’s subsidiaries entered into 20 new licensing agreements in the third quarter and generated revenues from 18 different licensing programs, including eight new licensing programs. We also acquired control of five new patent portfolios in the quarter for future licensing and ended the quarter controlling 99 patent portfolios. With the eight new licensing programs that began generating revenue in the third quarter, we now have generated revenue from 43 different patent portfolios.

Our cash, cash equivalent and investments totaled $45.4 million at the end of the third quarter, essentially unchanged from $45.7 million in the prior quarter. Our business outlook is very positive, the licensing success that we’ve achieved in negotiating over 590 licensing agreements and generating over $160 million in licensing revenues combined with the scale we have now achieved in controlling 100 patent portfolios is enhancing our position in the marketplace and increasing our opportunities for strategic initiatives. Acacia is very well positioned with the assets and talent to grow our business and we are fortunate to be in a business, which is uncorrelated with current difficulties in the economy.

With that I would like to turn the call over to our Chief financial officer, Clayton Haynes.

Clayton Haynes

Thank you, Paul, and thank you to everyone joining us for today’s third quarter earnings conference call.

As indicated in today’s earnings press release, third quarter 2008 license fee revenues totaled $13,796,000 as compared to $9,544,000 in the third quarter of 2007. License fee revenues for the nine months ended September 30, 2008, totaled $29,960,000 as compared to $40,594,000 for the nine months ended September 30, 2007.

Third quarter 2008 license fee revenues included license fees from 20 new licensing agreements and revenues from 18 of our technology licensing programs, including initial license fees revenues for our vehicle antitheft parking systems technology, online auction guarantee technology, projector technology, web personalization technology, vehicle maintenance technology, physical access control technology, high resolution optics technology, and software license management technology, eight new programs in all in the quarter.

Third quarter 2008 license fee revenues also included license fees from our audio communication fraud detection technology, DMT technology, popup internet advertising technology, portable storage devices with links technology, remote management of imaging devices technology, rule based monitoring technology, telematics technology, image resolution enhancement technology, electronic address list management technology and high quality image processing technology.

By way of comparison, third quarter 2007 revenues included license fees from 27 new licensing agreements and revenues from seven of our technology licensing programs. As Paul mentioned to date we have generated revenues from 43 of our technology licensing programs.

License fee revenues continue to fluctuate from period to period based on fluctuations in the dollar amount of individual agreements executed each period which is primarily driven by the nature and characteristics of the technology being licensed and the magnitude of infringement or use associated with a specific licensee to the specific terms and conditions of license agreements executed each period and the periods of infringement contemplated by the respective license fee payment, and lastly fluctuations in the total number of agreements executed each period.

Trailing 12-month license fee revenue were $42 million as of September 30, 2008, as compared to $37.7 million as of June 30, 2008, $52.6 million as of December 31, 2007, and $47.9 million as of September 30, 2007.

Our average margin defined as gross license fees less inventor royalties expense and contingent legal fees for the portfolios generating revenues during the period was approximately 40% for both the third quarter of 2008 and 2007. These margins fluctuate period to period based on the mix of patent portfolios that generate revenues each period and the related economics associated with the underlying inventor agreements and contingent legal fee arrangement, if any.

For the third quarter of 2008, Acacia Research reported a consolidated GAAP net loss from continuing operations of $ 2,420,000 or $0.08 versus a net loss from continuing operations of $4,674,000 or $0.16 in the third quarter of 2007 as illustrated in our comparative income statements provided in today’s press release and related 8-K filed with the SEC.

Excluding the impact of noncash patent amortization charges of $1.2 million and noncash stock compensation charges of $1.9 million, we reported third quarter 2008 net income of $681,000 as compared to a net loss excluding noncash items of $1.4 million from the third quarter of 2007. For the nine months ended September 30, 2008, Acacia Research reported a GAAP net loss of $11.9 million or $0.41 a share versus a GAAP net loss of $3.8 million or $0.14 a share for the nine months ended September 30, 2007. Excluding the impact of noncash patent amortization charges of $3.7 million, and noncash stock compensation charges of $5.7 million, Acacia Research’s net loss for the nine months ended September 30, 2008, was $2.5 million as compared to net income excluding noncash items of $4 million for the nine months ended September 30, 2007.

Operating expenses for the third quarter of 2008 and 2007 included inventor royalties expenses of $4.3 million and $2.7 million respectively and contingent legal fee expenses of $3.9 million and $3 million respectively. Inventor royalties and contingent legal fee expenses fluctuate period to period based on the amount of revenues recognized each period and the mix of specific patent portfolios with varying economic terms generating revenues each period. The third quarter 2008 increase in inventor royalties expenses and contingent legal fees expenses was primarily due to the increase in license fee revenues in the third quarter of 2008 versus the third quarter of 2007 as described earlier.

Third quarter 2008 marketing, general and administrative expenses excluding noncash stock compensation charges increased $331,000 to $3.9 million from $3.6 million in the comparable 2007 period. The net increase was due primarily to the addition of licensing, business development and engineering personnel since the end of the prior year quarter, and an increase in facilities, corporate and general and administrative costs.

Patent related legal expenses decreased to $1.2 million in the third quarter of 2008 from $2 million in the third quarter of 2007. Patent related legal expenses fluctuate from period to period based on patent enforcement and prosecution activity associated with ongoing licensing and enforcement programs and the timing of the commencement of new licensing and enforcement programs in each period. We continue to expect patent related legal expenses to fluctuate quarter to quarter based on the factors summarized earlier in connection with our current and future patent commercialization and enforcement programs.

Looking forward for fiscal 2008, estimated fixed costs are expected to be in the range of $13.4 million to $13.5 million, which is on the low end of the previous guidance provided. Fixed costs include employee salaries and benefits, facilities costs, corporate legal accounting and other general and administrative costs and are included in the marketing, general and administrative expenses line in our income statement. Variable costs include patent related legal expenses, patent related research, consulting and maintenance expenses, and other patent related development and licensing expenses. These costs fluctuate quarter to quarter based on business development, licensing, 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 statements.

Estimated variable costs for fiscal 2008 are expected to be in the range of $8 million to $8.5 million consistent with previous guidance provided. Variable costs included in MG&A for the third quarter of 2008 totaled approximately $647,000 versus approximately $600,000 in the third quarter of 2007. Total consolidated assets as of September 30, 2008 totaled $72.2 million compared to $71.1 million as of December 31, 2007. As of September 30, 2008, cash and investment balances totaled approximately $45.4 million versus $51.4 million as of December 31, 2007.

Including the impact of collections on accounts receivable and payment of accruals during the period, net cash flows from operations for the third quarter of 2008 were approximately breakeven versus net cash inflows from operations of $4.8 million for the third quarter of 2007. Net cash outflows from operations for the nine months ended September 30, 2008 totaled $4.2 million versus net cash inflows from operations for the nine months ended September 30, 2007, of $8.4 million.

Accounts receivable from license fees totaled $10.5 million at the end of the quarter compared to $1.4 million as of December 31, 2007. The majority of receivables at September 30, 2008 were collected shortly after quarter end in accordance with the terms of the respective underlying license agreements. Net cash outflows related to patent portfolio acquisitions for the nine months ended September 30, 2008 totaled $1.8 million versus $1.6 million for the nine months ended September 30, 2007.

I will now turn the call back over to Paul Ryan to begin the Q&A portion of today’s conference call.

Paul Ryan

Thank you, Clayton. Operator, can you open the line for questions, please?

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions). Our first question is from Bennett Notman from Davenport & Company. Please go ahead.

Bennett Notman – Davenport & Company

Congratulations on a nice quarter guys.

Paul Ryan

Thank you.

Bennett Notman – Davenport & Company

Paul, you guys had a real nice quarter with sort of first time programs, I think eight is the most I’ve ever seen in one quarter. Could you just talk a little bit about any of those that might be poised on a flurry of activity, as these things tend to hit their various stages? Are there any of these new programs in particular that we should be keeping an eye on?

Paul Ryan

Well, I don’t think we’ve want to specify specific programs. Obviously, we are engaged in a wide variety of negotiations on all those newer portfolios. And as we outlined last call, what was a little surprising is I think of the 18 newer portfolios that are kind of queued up for licensing, there was only a couple of them that actually were amongst the new eight. So sometimes you get surprised, the ones that we were anticipating that we will have coming on probably this quarter and certainly during the course of 2009. But a number of those – but I can’t get specific about other deals that we are negotiating with some of those newer portfolios, but it was good, yes, the most new licensing programs we’ve had in a single quarter.

Bennett Notman – Davenport & Company

Okay. And then are any particular legal events or dates of major import that we should be keeping our eyes on at this point in time?

Paul Ryan

I don’t think so. We’ve actually as you know, Bennett, because these court calendars are so subject to change even from week to week, we have made a conscious effort not to try to guide people and looking at target dates because of the variability. Obviously, the information is public on our cases and people can track them independently, but we just wait, let those events occur, and they always are subject to change. So I think early on, a couple years ago, when we did mention target dates, we found that consistently they were getting moved and were just creating really more confusion than clarity.

Bennett Notman – Davenport & Company

Okay. And then Clayton, I think you mentioned that much of the 10 million receivables has been collected. So if you would have published a cash balance as of today, is it more like $50 to $55 million than the $45 million number?

Clayton Haynes

You do have to take a look at the payables that we also had as of the end of the quarter as well, and so I imagine that the increase in cash through today is roughly an increase of around $3 million to $4 million just based up on the collections on accounts receivable net of the amounts paid out to the various inventors and legal firms we have.

Bennett Notman – Davenport & Company

Okay. And then last question for me, Paul, I know your business is not correlated to the general economic environment, but do you have any impacts either maybe companies more willing to come to you because they don’t want to take on the cost or headache in this environment of pursing the earn cases or possibly guys on the other side that push you off a little bit more just because they feel like they are either don’t have the cash or don’t want to deal with legal issues if they can avoid them at this point?

Paul Ryan

Well, on the buy side, I think there is no question that there is greater opportunities than there was previously given the current financial pressure on some public companies, particularly smaller NASDAQ public companies that may have valuable IP portfolios, that we’ve encouraged them to partner with us and monetize. And in the past, I think there had been more resitance, and with the current climate change, we are definitely seeing a change in attitude there. So I think that’s going to be a positive for us in terms of having additional portfolio to license. On the licensing side, we’ve really not noticed any significant change in behaviour based on the current economy. I think each company looks at their potential liability in licensing and makes an indepenednet decision around the economics of that. So I think it’s a plus on the business development side and neutral as far as we can see on the licensing side.

Bennett Notman – Davenport & Company

And has there been any impact on the pricing of IP that you might be looking to buy or availability of good IP as well?

Paul Ryan

Well, quite frankly, we determine the pricing. I mean we’ve probably got the best due diligence team in the country and actually some of the people have IP kind of rely on us in terms of valuing that IP or making a reasonable determination, because if you really think about it, only a company that monetizes IP as its regular business has a much better idea of how to value IP. So quite frankly some of the companies that we are in discussions with have shows us the IP they are interested in partnering, but they kind of really rely on us to come up with a valuation because in some cases they are going to want to be sharing in the revenue participation from that licensing.

Bennett Notman – Davenport & Company

Right, thank you.

Paul Ryan

Okay.

Operator

Our next question is from Paul Berger [ph] from AMIC Investors [ph]. Please go ahead.

Paul Berger – AMIC Investors

Good afternoon, Paul.

Paul Ryan

Good afternoon.

Paul Berger – AMIC Investors

Can you update us, is there any movement on the DMT technology?

Paul Ryan

Nothing is significant. We have a hearing I think in the next couple of weeks, but we are not expecting. I think the court, the Northern District California Court will probably continue to do additional claims until spring, and we probably realistically won’t get a chance to go up to the appeals court until at least mid year next year, and that will be our intent. There is a handful of claims that we think are critical, that we think the appeals court will look at and determine that they are fixed and definite and those would be key to our prevailing in the case. So we are expecting right now that we will appeal the claims construction but we probably won’t have an opportunity to do that until some time first or second quarter of next year.

Paul Berger – AMIC Investors

Okay. So that mean she’s [ph] already turned down some of your clients?

Paul Ryan

No, it just means there’s been a very – but there’s been a whole series as you know. Historically five and half years of claims construction that needs patent, and actually there’s been changes in those claims as different parties have made different assertions and different classes of infringers have taken different positions. So the court actually has had a variety of interpretations and given the current standing, unless they change that, we plan on appealing those, because we think there are certain claims that are fixed and definite and that affects our plan. But probably nothing will happen at least until the first or second quarter on an appeal.

Paul Berger – AMIC Investors

Okay. So we still have a long way to go with this?

Paul Ryan

It appears that way, yes.

Paul Berger – AMIC Investors

Okay. A general question, when you are looking at a portfolio, is there an average amount that you guys think you are going to get from one before you would acquire it, and if so what’s that just general number?

Paul Ryan

From a disclosure standpoint and because these conversations would get used in litigation against us and our shareholders, we’d rather not [ph] talk specific numbers because that information then would be used by defense counsels for all kinds of purposes. But obviously at our run rate and you can see where our revenue growth is beginning to go, yes, they have to be portfolios that have significant levels of revenue to be interesting to us. And then of course the other variables are, we want high quality patents that we are sure that would have a very high probability of succeeding if we did need to litigate them, and also it comes down to oftentimes who we are going to need to license these patents and what our history has been. So, it’s a combination of variables, but obviously the revenue potential is a key one, and it has to be significant but we for disclosure purposes do not want to put a fixed dollar number on that.

Paul Berger – AMIC Investors

Okay. And final question, considering what the price is, can we expect to see after the quiet period any entire purchases or the company considering a buyback?

Paul Ryan

Individuals have to independently make their own decision. They can’t act in concert, so I don’t know. That would be up to different members of the team. Certainly given where our price is, our Board from time to time has taken a look at the pluses and minuses of doing a stock buyback and we continue to evaluate that, but the decision today has been to deploy our capital in the business rather than trying to shrink the float of stock.

Paul Berger – AMIC Investors

Okay. And one final question, anything more on the partnership that you are looking to set up to buy other – acquire other IP?

Paul Ryan

We don’t have anything to report today. We have had a variety of discussions with potential financial partners, and we expect that we’ll probably be doing some transactions in the future with financial partners but we don’t have anything specific to report now.

Paul Berger – AMIC Investors

Okay. But that’s still on the drawing board?

Paul Ryan

Yes.

Paul Berger – AMIC Investors

Okay, thank you.

Paul Ryan

Okay.

Operator

(Operator instructions). Our next question is from Dan Katz from Apex Capital. Please state your question.

Dan Katz – Apex Capital

good afternoon, gentleman.

Paul Ryan

Good afternoon.

Dan Katz – Apex Capital

I thought we were in the DJ era where you got little or no settlements without lawsuits. So can you comment on what may be changed this quarter to enable you to do well?

Paul Ryan

Well, I think most of those new licensing programs, the first licenses did follow our initiation of filing litigation although obviously they came very quickly. We still given the new court guidelines are very cautious and generally it’s prudent on behalf of our shareholders and our IP partners to at least have the litigation filed prior to initiating licensing discussions to avoid that potentiality. But I think we are seeing – I think there is a combination of events, Danny. I think we’ve done a lot more deals with some of these companies, so sometimes immediately when we file now, they are ready to start negotiating. So I think the more deals we’ve done with the company in the past, the higher probability of getting deals done earlier. I also think just based on our experience and the overall market, I think more companies are responding to us a little faster than they used to in terms of licensing discussions.

Dan Katz – Apex Capital

So it sounds like maybe the time factor that worked against you the last couple of quarters, work in your favor going forward, is that fair to say?

Paul Ryan

Well, there’s a combination of things. I think at some of these new programs, if we licensed those to some of the companies before, certainly I think that’s accruing to our benefit and speeding up the process. But a number of the ones that were related to kind of the slower growth in the first and second quarter were really more based on court calendars where we ran into some technical provisions and we got some delays in the court. On a couple of those cases, they are now kind of back on track and another one is still a little slower than we expected, but as we said on the second quarter call, yes, we expect to generate those revenues, it’s just a timing issue, and depending on court calendars and motions that certain defendants bring, sometimes judges are willing to entertain those and they slow you down for 60 or 90 days, and if you got active licensing negotiations going on, oftentimes the other side will kind of back off until you get through that next hurdle.

Dan Katz – Apex Capital

So of the eight new licensing programs you did in the quarter, how many of those are with companies that you’ve already done business with, or had a relationship with?

Paul Ryan

I don’t have an accurate number. But again on your first point, I think virtually every license that we did, of those new licensing programs, did follow the filing of initial litigation. So because we don’t as a regular course go out and offer licenses on a voluntary basis, it’s just far too risky in terms of exposing yourself to (inaudible) judgments. So all of those were a result on having at least filed litigations, but again we are getting people willing to negotiate with us I think early in the process, but I don’t have the number.

Dan Katz – Apex Capital

That’s fine. And then do you have any other opportunities to achieve sort of semi recurring revenues, any that you are working on?

Paul Ryan

We do on some of them. The vast majority of our licenses to date still have been paid up deals, the individual licenses. But again to get new licensing programs started with the first or second licensees, obviously we are anticipating a number of those. The licensing program itself will have recurring revenues for the next two or three years although each individual license more than likely will be a paid up deal.

Dan Katz – Apex Capital

And lastly, what’s your current employee count, Paul?

Paul Ryan

47.

Dan Katz – Apex Capital

Thank you, gentlemen.

Paul Ryan

Thank you, Danny.

Operator

Next question is from Marco Petroni from MG Capital Management. Please go ahead.

Marco Petroni – MG Capital Management

Out of the eight new portfolios, roughly what percentage have you collected in this quarter and how much do we have to go?

Paul Ryan

Of the eight new portfolios, well, obviously, these are just first licensing deals on most of them. So, I think you can assume that a very small percentage of the total potential revenue would have been generated from the first of one or two licenses in each of these new programs.

Marco Petroni – MG Capital Management

So we are talking maybe 10%, 15% of the total dollar volume on these new portfolios that we’ve collected in the third quarter or (inaudible) the first quarter?

Paul Ryan

It’s hard to say. Overall, that probably is not an unreasonable guess. I mean they are very early stage, obviously, a number of these have numerous potential licensees, and in the quarter we only licensed one or two parties.

Marco Petroni – MG Capital Management

With regards to – you said that these were kind of unexpected new portfolios coming in. The other ones that you expected, are you expecting that now in Q2 and Q3?

Paul Ryan

Well, I think on the second quarter call, we went over it and it was a total of about 18 new licensing programs. We wanted to give our shareholders kind of a feel of what we thought were going to be the portfolios that will drive a significant portion of future revenue growth. And as it turns out, we did get a number of other licensing programs, got their first deals done actually earlier. But again I think if you go back and look at the transcript on the second quarter call, probably over time those portfolios are the ones that are going to drive the majority of our revenue growth over the next couple of years.

Marco Petroni – MG Capital Management

And these new eight portfolios, are these small, medium size, what kind of range are these portfolios in terms of dollar amounts?

Paul Ryan

Well, again, we don’t want to bias – these are public calls that we are making, and so if we characterize new portfolios are a less or more than each other, that would be an unadvisable thing to do.

Clayton Haynes

Or small, medium or large.

Paul Ryan

So we have to stay away from that from a litigation perspective. It’s not that we don’t to share the information with shareholders but it’s not in our best interest or yours for that information to be used by the other side. I think the ones for the key looking forward, if you look at the programs that we outlined in the last conference call, again, those are ones with large numbers of potential licenses, that we think are very high value patent portfolios, like the location based cell phone services where you’ve got companies such as AT&T and Verizon, Sprint, Alltel, T-Mobile, the cell phone (inaudible) programming, those are a lot of longer term programs that we expect to come into fruition shortly but none of those really were contributors in the third quarter.

Marco Petroni – MG Capital Management

In the last conference call you withdrew your guidance for year-over-year revenue growth. Now it’s your third best quarter and with eight new coming on and potentially some more coming on, would you feel more comfortable going back to that old guidance of positive revenue growth it doesn’t really matter?

Paul Ryan

No, it’s really the same. Obviously now through the first nine months, we’ve done about $30 million. To exceed last year, we need to do $53 million plus, so we need a $23 million fourth quarter. We will just have to wait and see what the revenues are. So, we are not changing from the second quarter. We said in the second quarter is we may not hit the number, we wanted to put people on notice that we may not achieve it. But that is where we are right now, we are at $30 million at nine months, and we need to get above $53, so we need $23 in the first quarter.

Marco Petroni – MG Capital Management

That’d be a great quarter. All right, thank you.

Paul Ryan

Okay.

Operator

The next question is Irvine Featherbaum [ph]. Please go ahead.

Unidentified Speaker

No, this is (inaudible). Hello?

Paul Ryan

Yes, we are here.

Unidentified Speaker

Yes, on the noncash expenses, are they ISOs?

Paul Ryan

Most of them are not. Now the vast majority has a combination of restricted stock and incentive stock options, and the balance is from the acquisition and merger with global patent. We amortize the cost of the acquisitions of those patent portfolios. So it’s a combination of noncash compensation and noncash amortization of acquisition of patent portfolios.

Unidentified Speaker

Is this the noncash compensation for employees of our company?

Paul Ryan

Yes.

Unidentified Speaker

Well, the fact that we are not making a profit seems to be (inaudible) by giving out I call it bonuses. How do we justify that?

Paul Ryan

Well, most of those stock options are at $15 dollars a share. Our stock’s currently at $2, so they are very big bonuses at the moment, but you still nevertheless because of the Black-Scholes model, have to take the charge and a lot of our options were granted when we were recruiting new people, when the stock was at $15 and basically the charge was 70% of the $15. So you could look at the charges were incurring are pretty inflated but nevertheless those are the accounting rules we operate under.

Unidentified Speaker

Last question, in the 10-Q there was mention that and that had been an expression that you made, we do not expect to make any profit in the future. I was disappointed to read that.

Paul Ryan

I think that’s a risk factor that probably says we may not achieve profitability in the future, it doesn’t predict the future, but it’s a fairly standard risk disclosure item in a 10-Q from a developmental stage company that has not had a long track record of consistent revenues, that it advises shareholders and potential shareholders that we may not. It doesn’t say we will not.

Unidentified Speaker

Okay. One last question really, a prior person did ask about repurchasing of stock on the market. At the price today, it appears to be a terrific bargain. I hope some more attention is given to that.

Paul Ryan

We thank you and we are monitoring that and our Board has discussed that.

Unidentified Speaker

Okay, thank you.

Paul Ryan

Okay. Thank you, Farvy.

Operator

Our next question is from Allen Armin [ph] from Wachovia. Please state your question.

Allen Armin – Wachovia

Hi, Paul. About a year ago, you were bringing on board a number of new high quality employees with great background bios, and it was always understood it was going to take those new employees some time to get up to speed where they were going to begin to be bringing in new business. Are these new portfolios a reflection of those new employees and the beginning of what will come out of those hires?

Paul Ryan

Well, I think you have to look at it. The process starts really with Dooyong Lee and his team, and Dooyong’s responsible for bringing in the portfolios. Dooyong has added new people to this team which are beginning to contribute. On the licensing side, on the monetization, yes, we have brought some in and obviously now they are beginning to have a sufficient amount of time to be assigned portfolios and start generating money. So, yes, I think the overall development, we continue I think to increases the quality of the people here and the experience. And clearly in our view we have the best in class team. There’s no one we think in the marketplace that has as good a talent as we do, and so we are very fortunate. We’ve got I think right now we’ve got great assets. I mean we’ve 100 net patent portfolios and we’ve got a great team. And we expect, it’s never easy, the key really is bringing in the portfolios and developing the partnerships obviously to have the assets we’ve got monetized. Yes, we will continue to try to identify people in industry that we can bring in that will contribute.

Allen Armin – Wachovia

Congratulations on a great quarter, keep up the good work.

Paul Ryan

Okay, thank you.

Operator

Our next question is from Fred Falkenberg from Bishop, Rosen & Co. Please go ahead.

Fred Falkenberg – Bishop, Rosen & Co.

Yes, hi. The $45 million, could you break that down, do you still have that note, whatever the heck you bought, that $6 million note?

Clayton Haynes

Yes. We currently have about 4.9 million in auction rate securities, which is included in that 45.4 number, which is comprised of our cash, cash equivalents and investments. Of that 4.9 million balance of auction rate securities as of the end of the quarter, there is a schedule approximately 1.2 million in redemptions in October that we are looking for on those, I guess which will bring the balance down to roughly 3.7 million. So we are still working with our brokers with respect to the auction rates in attempting to get those redeemed at par.

Fred Falkenberg – Bishop, Rosen & Co.

Has there been any loss on that taken into or not?

Clayton Haynes

We did record an estimated loss on the student loan backed auction rate securities back in the first quarter of roughly 9% to 10% of the par value of those securities.

Paul Ryan

Now as well our 230,000.

Clayton Haynes

250,000.

Paul Ryan

But we have the potential if it gets paid up at par to recover that.

Clayton Haynes

(inaudible) to date has been at par.

Paul Ryan

Correct.

Fred Falkenberg – Bishop, Rosen & Co.

So, it will be 3.7 million that you are exposed to there?

Paul Ryan

Correct.

Fred Falkenberg – Bishop, Rosen & Co.

Okay, thank you.

Operator

We’ll conclude the question and answer session. I will now turn the call back over to Mr. Ryan.

Paul Ryan

Okay. I want to thank you all for being with us for this quarterly call. Look forward to the next quarter and in the meantime if any of your have any questions, please feel free to give us a call. Thank you.

Operator

Thank you. Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 888-346-3949 or 404-260-5385 with the pin code 4322297#, dial 4 for the replay and enter the confirmation code 20081002188535#. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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