Acacia CEO Discusses Q1 2011 Results - Earnings Call Transcript

| About: Acacia Research (ACTG)

Acacia Research Corporation (NASDAQ:ACTG)

Q1 2011 Earnings Call

April 20, 2011 4:30 p.m. ET

Executives

Paul R. Ryan - Chairman & CEO

Chip Harris - President

Dooyong Lee - Executive Vice President

Clayton Haynes - CFO

Analysts

Mark Argento - Craig-Hallum Capital

Paul Coster - JP Morgan

Jonathan Skeels - Davenport & Company

Walter Ramsley - Walrus Partners

Tim Quillin - Stephens Inc

William Block - WAB Capital

Operator

Good afternoon, and welcome ladies and gentlemen, to the Acacia Research First Quarter Earnings Release Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation.

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.

In today’s call, the terms we, us and our, refer to Acacia Research Corporation and/or its wholly and majority owned operating subsidiaries. All intellectual property acquisitions, development, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation’s wholly and majority owned operating subsidiaries. With us today are 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.

First of all, we welcome and thank our new shareholders who participated in our recent stock offering. We also want to thank our long-term shareholders who increased their investment in Acacia through the offering. This significant increase in capital will enable Acacia to accelerate its market leadership in this new asset class.

Acacia had a great first quarter, as we continue to build our leadership position and patent licensing. Acacia had record first quarter revenues of $61.1 million, record trailing 12 month revenues of $153.2 million, and with the completion of our stock offering, we increased our cash position to a record $314 million.

Our first quarter GAAP net income of $12.4 million was significantly impacted by a foreign tax withholding expense of $7.4 million and $2.4 million of accelerated patent amortization related to our recruitment of upfront advances for patent portfolios. Clayton Haynes will provide you with specific details regarding these expenses in his financial presentation.

Acacia continued to build its leadership position in the first quarter by completing 35 new licensing agreements, including agreements with AT&T Mobility, Cisco, General Electric, Hewlett Packard, IBM, Microsoft and Samsung. With the recent licenses completed in early April, Acacia has now reached the milestone of completing over 1,000 patent licensing agreements.

Acacia generated revenues from 32 different licensing programs in the quarter, including eight new programs generating initial revenues. And, we have now generated revenues from 99 different licensing programs. Acacia also acquired control of eight new patent portfolios in the first quarter, including over 200 3G and 4G patents from a major telecommunications company, DDR SDRAM patent from a major technology company, flash memory patent from a major technology company and DRAM patents from a major semi-conductor company. We continue to build shareholder value by acquiring significant economic interest in valuable patent portfolios and now control over 170 different patent portfolios.

We continue to see rapidly growing interest in patents as a new asset class from both corporations and the investment community, and think Acacia is extremely well positioned to expand its leadership role, given the breadth of our business model. Acacia is beginning to benefit from two major trends which are impacting our business.

The first trend is the rapidly growing interest of large companies worldwide in generating revenues from their patent portfolios. Even companies who historically have not generated any revenues from their patents are for the first time considering how they can monetize their patent assets, if only to offset their payment obligations to other companies. Many large companies are beginning to focus on their IP balance of payments. And realize they need to generate returns from their own R&D investment to offset their payment obligations to other companies.

Companies essentially have four choices. One, they can do nothing and face increasing deficits in their IP balance of payments. Two, they can start building an internal patent enforcement business. Three, they can outsource the enforcement and licensing to a specialized company like Acacia. Or four, they can sell patent assets.

Both of the last two options present great opportunities for Acacia to expand its business. We think a number of companies will choose to outsource the enforcement and licensing or sell patents rather than try to build an internal enforcement and licensing business, which usually presents significant risk and complications to their core operating business and requires them to build a new business.

As the number one outsourced patent licensing company, Acacia’s partnering business model is very attractive to companies who want to generate financial returns from their patents without having to create a distraction from their core business, be involved in litigation or have to make additional investments of capital and human resources to earn those returns.

Acacia’s corporate IP partners are recognizing that we have built a highly specialized company for patent licensing, they increasingly recognize the value of our multi-disciplinary teams of engineers, patent attorneys and licensing executives who can screen large patent portfolios for licensing opportunities, our due diligence teams that can validate licensing opportunities, our broad partnering relationships with leading law firms for enforcement and the proven track record of our licensing teams in generating revenues. A good example of this is our strategic patent licensing alliance with Renaissance Electronics, the world’s third largest semi-conductor company, which has a portfolio of over 40,000 patents.

The second major trend that is beginning to impact our business is the growing interest of large companies and entering into structured term agreements with Acacia, which enable them to in-license patent portfolios from us. Companies are deciding that it makes economic sense for them to enter into these structured agreements with Acacia that will facilitate periodic licensing negotiations and license renewals and eliminate litigation. This trend is being driven by the scale we are building in total patent portfolios, the accelerating growth of our intake of new portfolios and the increasing depth and quality of many of our new portfolios. This trend benefits Acacia and our IP partners by bringing more certainty to the licensing process, shortening the time to money, reducing legal expenses and improving profit margins.

Companies are beginning to realize that Acacia can provide three strong value propositions to significantly improve their IP balance of payments. First, Acacia can be a very cost efficient aggregator of needed in-licenses. Second, Acacia can monetize their non-performing patent assets without any cost or distractions. And third, Acacia can acquire valuable third party patent assets and turn potential problems into profits. Our goal is to enter into a limited number of these strategic relationships.

In summation, Acacia currently has the largest number of licensing opportunities in our history. We expect continued growth and new licensing programs and new patent portfolios for future licensing. Our quarterly revenues will continue to be uneven. Our key internal performance metrics are growth in patent assets, growth in new licensing programs, growth in 12-month trailing revenue, and growth in annual profits. Again, we welcome our new shareholders and thank them along with many of our long time shareholders for providing us with the additional capital to grow the business.

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 first quarter 2011 earnings conference call. As indicated in today’s earnings press release on a consolidated basis Acacia reported record first quarter 2011 revenues of $61.1 million as compared to $39.8 million in the first quarter of 2010. First quarter 2011 revenues included license fees from 35 new licensing agreements covering 32 of our technology licensing programs as compared to 40 new licensing agreements covering 29 of our technology licensing programs during the comparable prior year quarter. For more details please refer to today’s earnings press release for a summary of technology licensing programs contributing to revenues during the quarter.

We continued our trend of trailing 12-month revenue growth over the comparable prior year quarter with consolidated trailing 12-month revenues totaling a record $153.2 million as of March 31, 2011, as compared to $90.2 million as of the end of the prior year quarter.

Currently, on a consolidated basis our operating subsidiaries have generated revenues from 99 of our technology licensing programs up from 73 technology licensing programs as of the end of the comparable prior year quarter.

License fee revenues continue to fluctuate from period to period based on the various factors discussed on previous earnings conference calls and as disclosed in our periodic filings with the SEC.

For the first quarter of 2011, Acacia Research reported net income of $12.4 million or $0.34 per fully diluted share versus net income of $18.5 million or $0.55 per fully diluted share for the comparable prior year quarter.

Net results for the first quarter of 2011 as compared to the first quarter of 2010 included the impact of the following items. First, an increase in our effective tax rate resulting from Korean foreign withholding taxes totaling $7.4 million withheld by the Korean Tax Authority pursuant to the requirements of US and Republic of Korea income tax convention on a payment in connection with a licensing arrangement executed with a Korean company in the first quarter of 2011.

Foreign withholding taxes are included in tax expense in the consolidated income statement. In general, foreign taxes withheld may be claimed as a deduction on future US corporate income tax returns or as a credit against future US income tax liabilities.

Results also included a 121% increase in patent amortization expense due primarily to the acceleration of $2.4 million of scheduled patent amortization expense related to recoupable upfront patent portfolio acquisition costs that were recovered from related net licensing proceeds in the first quarter of 2011 pursuant to the provisions of the underlying inventor agreements.

And lastly, results also included a 58% increase in marketing, general and administrative expenses due primarily to an increase in non-cash stock compensation charges resulting from an increase in average grant date fair value of restricted shares expense during the first quarter of 2011, an increase in annual one time variable performance based compensation charges recorded in the first quarter of 2011 and increases in other variable performance based compensation charges.

First quarter 2011, non-cash patent ammonization charges and non-cash stock compensation charges combined totaled $6.7 million as compared to $3.6 million in the comparable prior year quarter.

Our average margin defined as gross license fees less inventor royalties, non-controlling interests and contingent legal fees for the portfolios generating revenues during the period was 61% for the first quarter of 2011 as compared to 78% for the comparable prior year quarter.

Average margins continue to fluctuate period-to-period based on the mix of patent portfolios that generate revenues each period, the terms and conditions of license agreements executed each period and the related economics associated with the underlying inventor agreements and contingent legal fee arrangements if any.

Inventor royalty’s expense in non-controlling interests for the first quarter of 2011 increased to $14.3 million versus $4.4 million for the comparable prior year quarter, due primarily to the related increase in revenues though partially offset by a decrease in the inventor royalty component of average margins for the same periods.

Contingent legal fees for the first quarter of 2011 increased to $9.4 million versus $4.4 million for the comparable prior year quarter. Again, relatively consistent with the related increase in revenues though partially offset by a decrease in the contingent legal fee component of average margins for the same periods.

On a combined basis, inventor royalties, non-controlling interests and contingent legal fees as a percentage of total revenues increased to a 39% as compared to 22% in the comparable prior year quarter, primarily due to higher inventor royalties and contingent legal fee expenses associated with the revenues generated in the first quarter of 2011 versus the comparable prior year quarter.

First quarter 2011 litigation and licensing expenses totaled $3.5 million and were relatively flat versus the comparable prior year quarter reflecting relatively comparable net levels of related patent enforcement and prosecution activity associated with our continued investment in ongoing licensing and enforcement programs and new licensing and enforcement programs commenced since the end of the applicable prior year quarter.

Looking forward for fiscal 2011, we expect MG&A, excluding non-cash stock compensation charges to be in the range of $20 million to $20.5 million including the impact of variable performance based compensation cost described earlier. For fiscal 2011, we estimate patent related litigation and licensing expenses to be between approximately $13.5 million and $14 million.

From a balance sheet perspective, cash and cash equivalents and investments totaled $315.6 million as of March 31, 2011, compared to $104.5 million as of December 31, 2010. Working capital increased to $286.1 million as of March 31, 2011, from $92.3 million as of December 31, 2010. Net cash inflows from operations for the first quarter of 2011 totaled $36.5 million versus net cash inflows of $19.1 million for the first quarter of 2010. Including cash flows from investing and financing activities, total cash inflows for the first quarter of 2011 totaled $211.1 million as compared to $15.8 million for the first quarter of 2010.

Cash inflows from financing activities for the first quarter of 2011 included the impact of the net proceeds from the stock offering completed in March 2011 mentioned earlier on the call. First quarter of 2011 patent related acquisition costs totaled $680,000 as compared to $1.3 million in the first quarter of 2010.

Again, thank you for joining us for today’s earnings conference call and I will now turn the call back over to Mr. Paul Ryan.

Paul Ryan

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

Question-and-Answer Session

Operator

Thank you, sir. The question-and-answer session will begin. (Operator instructions) Please standby for your first question, sir. Our first question comes from the line of Mark Argento of Craig-Hallum Capital, please state your question.

Mark Argento – Craig-Hallum Capital

Good morning, guys or good afternoon. When you are thinking about the new capital you just raised and the opportunities to deploy that capital, could you give us a little bit of color on the kind of what you see out there different possibilities of ways, you could put that capital work and earn some good returns?

Clayton Haynes

Sure. As I said in a prepared remarks, a number of companies who are facing IP balance of payments deficits are considering selling assets, we think that’s going to be an increasing trend of (inaudible), unlocking patents and we would like to be participants in purchasing those in some cases directly and in other cases in combination with strategic partner. We think that a lot of companies that haven’t previously considered selling patents are going to be doing that and we are already seeing evidence of it. I mean, if you just looked at the last couple of weeks, you saw where HTC paid $75 million for some patents from ADC Telecommunications, where OmniVision, paid $65 million for some patents from Kodak. So, I mean it’s in the news all over the place.

Obviously, you’ve got situations where, Google has made an opening offer of $900 million on the Nortel patents and RIM has already made a statement that they’re going to exceed that number. So, all you got to do is open up the Wall Street Journal, look and see everyday patent assets are beginning to come on the market. And so, this capital will enable us to accretively acquire we think valuable assets either as a standalone or in combination with other partners.

Mark Argento - Craig-Hallum Capital

And in terms of kind of the processing going about doing that, I mean, are you actively out there, I’m going to push out there looking. But, what expectations in terms of your ability to get something done and deploy this capital whose – sometime a 2011 event, I mean, what kind of expectations should we have to see you guys be active with that capital?

Chip Harris

Yeah Mark, this is Chip. I think 2011, yeah, we’ll start to deploy some of the capital or maybe a large chunk of the capital in 2011. But, we’ve already said this business is kind of two degrees of separation. I think you can be rest assured that if people are starting to pedal very valuable IP, Acacia where we’re positioned is seeing those packages. We don’t know that there is anything that’s being trafficked in the industry that we are not getting, very early, if not first look. We’ve positioned ourselves as kind of the partner of choice for major corporations as well as hopefully the acquirer of choice.

Mark Argento - Craig-Hallum Capital

Great, that’s helpful. And then, in terms of, and the quarter looks like you’ve signed at least one or two pretty good sized deals. You had the tax withholding. Could you walk me through a little bit about kind of how that works with the Korean tax authorities, and do you expect to be able to recoup some of that withholding over time now or should we really think of you guys as a kind of a full 35% tax bear here going forward?

Clayton Haynes

No, definitely we’re not a full 35% taxpayer. The irony is this. The fact, that we have 100 million of NOLs that caused us to have to expense this withholding. So, eventually, we will get used of it, but ironically it’s our existing as we’ve told the market, we have about a 100 million NOL. But, given the accounting regulations, say withholding from a foreign tax authority given the large NOL forces us to expense that.

Paul Ryan

So, you can always see us as a large taxpayer if we continue the deals with Koreans.

Chip Harris

Until, we’ve recouped our entire NOL.

Clayton Haynes

And that’s an aberration, we don’t, like I said, outside of doing other deals with other Korean national firms, we would not have this treatment.

Mark Argento - Craig-Hallum Capital

Got you, and then…

Clayton Haynes

Actually, the other issues are pretty good one to have. The $2.4 million of accelerated patent amortization was taking the risk out for our shareholders. As we told people, we are beginning to make advances on certain portfolios, and obviously as soon as we recoup those advances, we have eliminate the financial risk and in this particular quarter, we did that very successfully. But again, you can book a profit from recouping advances.

Paul Ryan

Yeah, in a large number of our deals, we have advanced some hard dollars. We in effect take a preferred position that we take that capital back first. And, you know, we think it's very accretive. We don’t think we are going to change the way we operate, now that we have over 300 million to back when we didn’t have any money, we are running still that same discipline and looking at patent portfolios. IEB it’s always been kind of our policy and our behavior that to get our shareholders money back early in the process. And so, we can work – we’ve always been return on investment focused, in the early stages because we didn’t really have much capital with the investment. We think, if we take that discipline that we have learned over last five or six years that we can continue to make very, very accretive acquisitions for our shareholders.

Mark Argento - Craig-Hallum Capital

When you think about the returns profile of kind of deploying capital versus the partnership model. Do you expect to be able to achieve similar types of returns or I mean, what kind of, how do you guys think about that type of return profile?

Clayton Haynes

Well, I think, we have been asked this question on the road, a number of times and when you don’t have any capital, it’s all infinite from a return standpoint. But in the times that we have started to – we’ve always looked at kind of four to as much as ten times depending on – yeah, each one of these portfolios has different potential licensees. One of the assets we have is our own intangible asset, which is we’ve done over thousand deals. We with great certainty think we can anticipate a certain portfolio and how it gets rolled out to a certain industry because of our experience in doing that. And, as you see us start to deploy capital, rest assured, that we’re doing it with benefit of knowing how and who and what and when and where, those things get done, we don’t want to change the discipline that for us, we used to put forward maybe $200,000, it's very important for us to get back that 200,000 right away to start some momentum and get it returned.

The same thing with the hundreds of millions dollars we have, we are not going to change our philosophy, its tried and true and we think there are opportunities. There is more opportunities now for the reasons that Paul said in his opening remarks. Board rooms all over the world are waking up to the fact that these are monetizable assets. And by and large they are going to decide to do one of the four things, the alternatives that Paul laid out. We think we are very attractive, we’ll look for ourselves in two of those respects up against anybody in that kind of beauty contest.

Mark Argento - Craig-Hallum Capital

Great, and that’s helpful. And then, when you think about kind of the new intake side of the business, on the new IPs brought in, I think you said, like there was eight new portfolios brought in. I mean, the size and scope of these portfolios continue to increase. In terms of time-to-money and your ability to monetize these, are you seeing acceleration in the kind of the time-to-money and even some of these bigger portfolios as you get them and bring them in and start working with them?

Paul Ryan

Well, we’ve certainly exhibited that on the Palm Source excess portfolio, that’s one that we brought in. And we’ve done two very significant licenses, one without litigation with Microsoft and one with litigation with Samsung that we have announced. So, we think we’ve got the skill set and the ability on larger portfolios to get deals done in fairly short timeframes.

Mark Argento - Craig-Hallum Capital

Great. Thanks, guys.

Paul Ryan

Okay. Thank you, Mark.

Operator

Our next question comes from the line of Paul Coster of JP Morgan. Please state your question.

Paul Coster - JP Morgan

Yes, thank you. Good afternoon. Let me start by just focusing on the comments around future growth. Paul, I think you mentioned in your prepared remarks that you expect to see growth in profits. When you talk about growth in profits, what metrics should we use, should we use the EPS or EBITDA or operating income?

Paul Ryan

Well, whatever – different analysts are going to use different approaches, it’s our stated goal. Obviously, we are not promising any growth. But it's one of our key four metrics, we have reached the point. In the earlier years it was about gathering assets, number one of them starting licensing programs and then up until about a year ago, it was growing 12-month trailing revenues. Obviously, we’ve now scaled to the company where it’s becoming profitable and so the goal is to continue to increase those profits. But –

Clayton Haynes

But on both on EPS and EBITDA.

Paul Coster - JP Morgan

Okay. So, for instance, I mean, just nitpicking here. But obviously, because the tax, certainly EPS was a little bit lower than perhaps we even might have anticipated yet EBITDA was really quite strong. So, when you say you’re going grow profits on a trailing 12-month basis, do you think that’s going to include EPS, when you have such kind of random?

Paul Ryan

Surely, yes. This quarter I think was zero, we had a couple of aberrant events in there that accounted for about $10 million compared to $12 million in earnings. So, certainly without those, your earnings would have been 180% of what they were.

Paul Coster - JP Morgan

Okay. The other thing is on the comprehensive deal that you did this quarter. Can you confirm that it was of a similar size or even bigger than the prior, two deals that you’ve done there. And also that you’re still on track for achieving something in the region of 12 of these deals over a two year period, I guess, starting in 2010.

Paul Ryan

Yes, I think you’ll see the progression in each of our 10-Q as obviously we have to report concentration of revenues from customers. And so, that’s available in all of those periods in where we did structured deals and I think you will see a continued increase in the size of this deal compared to the earlier ones.

Paul Coster – JP Morgan

And how many deals do you think you will be doing this year and do you think that will be of similar magnitude or even bigger?

Paul Ryan

Our goal is to do two more, we want to do three this year. So, and we would hope that there would be – and yeah, it’s going to depend on the size of the company. The relationship, there’re some strategic advantages to us with certain companies. Some will be larger, some will be smaller, but I think on average we’re going to see given the fact that we have more and more assets under our control, the deals on average are going to become larger.

Chip Harris

One other things, we would like to do Paul, this is Chip Harris. And one of the things we’d like to deal with is, we see that the combination of quality and the quantity of the licensing opportunities we present to any one potential customer, with this new found, with this new cash totals, we think that we can go out and buy numerous other significant portfolios. And if you think about that, we would hope that the purchase of those portfolios would lead to a larger structured deals. Because some of the – when we talk about these structured deals inclusive are those, for instance are the license, longstanding besides that’s side by side is the license with the Palm Source, which is driving a lot of interest into structured deals. So, if we have two or three of those Palm Source type of portfolios, one can only assume that the amount of the structured deal will be significantly larger.

Paul Coster – JP Morgan

Got it. Is there any way of helping us project forward a patent amortization and FAS 123 expenses?

Clayton Haynes

Sure, sure, this is Clayton here. With respect to patent amortization and the current assets that we have carrying values for on our balance sheet. For the remainder of 2011, currently we have scheduled about 4.1 million of additional patent amortization for 2011.

Paul Coster – JP Morgan

So, that should fall pretty significantly in the subsequent quarters then?

Clayton Haynes

Correct, correct, correct – and, I’m sorry, go ahead.

Paul Coster – JP Morgan

No, I’m sorry, can you continue on FAS 123?

Clayton Haynes

Sure, sure. And then, with respect to FAS 123 projected stock compensation expense for the rest of 2011, it should be roughly around $10 million.

Paul Ryan

We’re sorry, that keeps going up, but the stock price keeps affecting that.

Paul Coster – JP Morgan

Okay. And my last question really is, do you think you are going to see a mix shift towards medical technology type licensing moving forward or is there anything, any kind of color you can provide us on the kind of the nature of the pipeline that’s coming up?

Paul Ryan

Well, we’ve said that we think we can grow the medical technology business to the size our tech business is currently in about three years. It took us about five years to grow the tech business. And we think, given our experience and brand name in the market that we should be able to accomplish the same thing there in three years.

Clayton Haynes

We’ve got about what a dozen portfolios, active portfolios right now in the medical tech, I mean, by certain estimate that business is the same size of the tech business depending on how you define it, and there is no reason it should take us five or six years to do the same thing given the platform what we have. We want to move very heavily into that area. There is a sophistic group of potential licensees who really understand the IP business, but think that what we come to offer will be very valuable. We want to do some strategic partnerships like we’ve done with the Renaissance. There is a lot of disaggregated R&D out there, both at the, let's say the doctor level as well as the corporate level, as well as the university level areas that we’ve been very successful in tapping into. We’ve hired, as you know, we’ve hired an executive out of the industry. And it’s an area that we think we can build probably in half the time what we’ve done on the tech side. We’re really excited about it.

Paul Coster - JP Morgan

But, what percentage of revenues does Medtech represent at the moment?

Paul Ryan

Right now, I would say, it’s probably less than 5%.

Clayton Haynes

Yeah.

Paul Ryan

And certainly, less than 10%.

Clayton Haynes

It’s kind of hard fall, it’s all definitional. I mean, Medtech, if you think about some of the imaging technologies, those imaging technologies really probably came out of the photocopier business that made their way into medical technologies, into the CAT Scans and the MRIs. So, it’s some of the software related technologies, we’re just not exclusive to Medtech. But, with the healthcare and issues going on are making big inroads on that side of the browser. So, we need to be careful when we define something as tech or Medtech because those two worlds are converging.

Paul Coster - JP Morgan

Got it. Thank you.

Operator

Our next question comes from the line of Jonathon Skeels of Davenport & Company. Please state your question.

Jonathon Skeels – Davenport & Company

Hi guys, I just wanted to focus in on the structured term deals. You said, you’ve planned to do a limited number of these agreements in kind of specific vertical markets. And this should generate demand I guess from multiple companies to sign the deal on that specific vertical. Have you started to see this happen where you have multiple companies interested in signing a deal?

Paul Ryan

We actually, vis-à-vis a recent structured term deal are no longer offering a structured term deal to another company to answer your question.

Clayton Haynes

Yeah, we understand that, we understand the attractiveness of the scarcity.

Jonathon Skeels – Davenport & Company

Got you, okay. And then, on the term deals, you said the plan is for two more this year which would bring you to three total. And I believe you said four in 2012, what’s the total number that you see signing out over the next couple of years?

Clayton Haynes

Well, it’s really hard to say. I mean, there are companies – if we really push into the medical tech area, we could see doing a couple in that area that weren’t anticipated originally. There are some companies that we could describe and nine out of ten people say they’re technology companies when in fact more than 50% of their business is coming out of the Medtech. So, I wouldn’t give – like I said, we have always said we think we can do somewhere between 8 and 12, over kind of the starting in ’09 last year and we’re still comfortable with that. We think that right size is the market.

As I said, if we’re successful in deploying this capital and buying a number of new kind of what we call tadpole patent portfolios, we will be asking for significantly larger amounts in these structured deals. So, you might do one or two fewer than 12, but it might be at 30% or 40% more in aggregate. So, it’s a little hard to do, but rest assured, we understand the power in our model and the ability to generate good returns and we’re going to continue to focus on that.

Jonathon Skeels – Davenport & Company

Got you. And then, when looking out, I guess past 2012 and 2013 that should be when you start to see the first renewals from the agreements you signed in 2010, right?

Clayton Haynes

Potentially, yes.

Jonathon Skeels – Davenport & Company

And then, kind of the second aspect of the structured deal is the idea to partner with some of these companies to monetize their non-core assets. Have you started to see that happen, have you started to receive portfolios from your structured term licensees?

Paul Ryan

We can’t comment on that. Obviously, we’ve stated that it makes sense for us to do these strategic term licenses with companies that are IP rich because it may afford the additional opportunity and value add to them quite frankly of us monetizing their non-performing assets. I think you’ll see us do both that, as well as jointly acquired third party patent.

Jonathon Skeels – Davenport & Company

Okay. And does the discussion turn around making the relationship profitable with you, so if the company is paying you X amount for the term deal, you’re in discussions with them to potentially generate at least that much on monetizing?

Clayton Haynes

No, that’s not a quid pro quo, but certainly companies are increasingly getting very sophisticated around IP. And certainly the companies we’ve done deals with are very sophisticated in the IP sector. And they were one of the first companies to realize there is this IP balance of payments as a corporation and how are they going to deal with this long term. And they put together strategic plans to make sure that’s a profit center for them not a loss center. So, certainly that comes into their thinking but there is no contractual obligation to do this, it’s just that there are – and also in certain markets there is competitors and there is common sense of your line up. For certain companies, you are probably not going to line up with our archrivals.

Jonathon Skeels – Davenport & Company

And then on the acquisition front, will the acquisitions only be made with the select structure deal partners that you signed up, is that who you are looking to jointly buyback portfolios with?

Clayton Haynes

Oh, no. We will buy somewhat 100% directly on balance sheet. So, that will make sense and we want to bring a partner in either for economies or they have a strong interest and that makes sense and it’s accretive for us then we will do it together.

Jonathon Skeels – Davenport & Company

Then last one, I will ask, on the Renaissance Portfolio, you signed a number of licenses this quarter to, I believe some patent portfolios that belong to Renaissance, are you seeing momentum pickup there and can you comment at all on maybe the number of licensing programs you currently have with Renaissance or how many you are generating revenue from now?

Clayton Haynes

I think we have six portfolios, distinct portfolios that we now have gone through the signing process.

Jonathon Skeels – Davenport & Company

I think three of them have started generating revenues to my recollection.

Clayton Haynes

Yeah, and I think there is a couple more actions getting ready to start.

Paul Ryan

Right, yeah, we have been active, if you think about, yeah the relationship only started at the end of last August. So literally, in six or seven months we have gotten a half a dozen programs up and half of those are already producing revenue.

Jonathon Skeels – Davenport & Company

And looking out longer term, I mean, how many licensing programs do you think could come out of a patent portfolio of that size?

Paul Ryan

It’s hard to predict. Obviously, they have a very deep portfolio and we are continuingly mining it and in discussions with them. But, yeah, it’s hard to predict ultimately how many there would be. But certainly, today it has been a very mutually beneficial relationship.

Jonathon Skeels – Davenport & Company

Okay, and then one more and I will get off. Other partnerships with large companies Renaissance relationships, you know, you’re acquiring patents from large companies according to press releases that you have put out there, do these relationships usually starts small and grow larger and should we expect other partnerships of much larger (inaudible).

Paul Ryan

Yeah, I mean, that’s our goal. I mean, the large relationships we have today started small, you can earn your stripes and they see it, hopefully we are able to accelerate that. But before any company is going to turn over the remits of billions and billions of dollars of R&D. You know, common sense says that maybe there is a dating period before you start to have a family.

Jonathon Skeels – Davenport & Company

Okay, thanks I will get back in the queue, thank you.

Operator

(Operator Instructions) Our next question comes from the line of Walter Ramsley of Walrus Partners. Please state your question.

Walter Ramsley – Walrus Partners

Thank you. Congratulations that was another terrific quarter. Got a question for Clayton actually, the non controlling interest, who owns those or what are they exactly?

Clayton Haynes

In the first quarter of 2011 that particular amount relates to one of our partners in the Acacia Intellectual Property Fund.

Walter Ramsley – Walrus Partners

The fund, okay. All right. And looking forward, I mean, was that kind of one shot deal or is that sort of a recurring number to look forward to?

Paul Ryan

I’m sure our partner hopes it’s a recurring number.

Walter Ramsley – Walrus Partners

Yeah.

Paul Ryan

That will be made a limited number of investment in the fund with our institutional partner and we are beginning to generate returns very early for them and they are very pleased with that.

Walter Ramsley – Walrus Partners

Okay, so that’s the full extent of it?

Paul Ryan

Yes.

Walter Ramsley – Walrus Partners

That’s the fund.

Paul Ryan

That I do, yes.

Walter Ramsley – Walrus Partners

All right, and that money just gets reinvested in the fund, I mean they don’t take it out or anything?

Clayton Haynes

It's not. No, it’s a onetime investment and there are no returns and that is not automatically reinvested.

Walter Ramsley – Walrus Partners

Oh I see. Okay. All right. And also on the Korean transaction, could you tell us what the tax rate was the withholding tax rate?

Clayton Haynes

Sure, sure. Pursuant to the treaty between the United States and the Republic of Korea, the withholding percentage on royalty base payment is approximately 16.5%.

Walter Ramsley – Walrus Partners

Okay. And that’s after, how much cost did the company deduct before they whacked you with the tax?

Clayton Haynes

Yeah, that withholding is on the actual payment from the Korean entity to –

Walter Ramsley – Walrus Partners

Okay. So that’s just the gross amount. Okay. And just kind of ballpark, do you have an estimate for what the share count might look like in Q2?

Clayton Haynes

The total outstanding shares?

Walter Ramsley – Walrus Partners

Well, the diluted number that you plan to hope to report?

Clayton Haynes

It will be slightly higher. No, I’m sorry. Is your question for, the second question standalone or –

Walter Ramsley – Walrus Partners

Right, just all by itself, with all the new shares?

Clayton Haynes

It will be slightly higher than the 36.4 that we are showing now, I mean just, yeah.

Paul Ryan

Yeah, it’s 41.

Clayton Haynes

Yeah, roughly. Yeah.

Walter Ramsley – Walrus Partners

Say that again 41.

Clayton Haynes

Roughly, yeah.

Walter Ramsley – Walrus Partners

Okay. All right. And I mean this is kind of after all, it might be the last question. The Chinese are considered to be the worst patent infringers in the universe. Is there any chance of ever getting any money out of them?

Clayton Haynes

They are actively building a patent office and they anticipate having four times the patent application in the Chinese office that we do in the United States within five years. So, apparently they are realizing that IP has value and they’ll probably start paying once they have a lot of it.

Paul Ryan

And I think, in the past we’ve licensed a couple of change in the companies.

Walter Ramsley – Walrus Partners

So, that could actually turn into a business for you guys down the road?

Clayton Haynes

We’re beginning to respect IP because they understand the importance of it. Internally in China, they are making, there’s a major initiative to develop intellectual property for Chinese companies.

Chip Harris

And these Chinese products get more accepted by tech products, get more accepted into the US marketplaces, they’ll pay us licensing revenues, just like anybody else.

Walter Ramsley – Walrus Partners

Okay. That will be something to look forward to. Anyway great going, I appreciate it. Thanks a lot.

Operator

Our next question comes from the line of Tim Quillin of Stephens Inc. Please state your question.

Tim Quillin - Stephens Inc

Good afternoon. Thanks for taking my questions. First, Clayton, I just want to make sure I understand MG&A expense in the quarter, you explicitly breakout the non-cash stock compensation expense which was up about a million year-over-year. But, even the part that’s not explicitly, the increase in MG&A that’s not explicitly listed as stock comp, there was also a large degree of non-cash compensation in that as well, is that the right way to think about that?

Clayton Haynes

No, the non-cash stock compensation relates specifically to the non-cash charges that we do reflect.

Tim Quillin - Stephens Inc

That’s that $1 million increase?

Clayton Haynes

Yes, yes.

Tim Quillin - Stephens Inc

Well, it appears then MG&A was up $2.6 million or $2.7 million excluding that?

Paul Ryan

Yes, there was a lot of significant including onetime payment in the first quarter that related to performance bonuses, but it’s not necessarily – you shouldn’t count that as a recurring number because it was a one time – and many of them were onetime payments.

Tim Quillin - Stephens Inc

Okay. So, there is cash compensation as well?

Clayton Haynes

Yes, yes.

Tim Quillin - Stephens Inc

And the guidance, the $20 million to $20.5 million, so that include, tell me what exactly that includes or kind of how I should think about that for the rest of the year?

Clayton Haynes

Sure, sure. Just from a standpoint of attempting to estimate, that number includes the impact of the performance based charges in the first quarter and then an estimate for the remaining of the year as far as performance based compensation will be similar to what it was in the second, third and fourth quarter of last year. So, that’s what the estimate currently reflects. But, if we have great quarters with really larger revenues it could be higher, which will be a good problem to have.

Tim Quillin - Stephens Inc

Right, right, understood. And the taxes, the Korean taxes, again, I just want to make sure I am understanding this correctly is that because of the NOLs, you don’t really have anything to deduct it against. And so, you – was it a cash tax expense in Korea that may be sometime down the road, you will be able to get a credit for but for now there is going to be a cash outflow?

Clayton Haynes

Yes, currently the taxes were withheld by the Korean Tax Authority. So that is an actual cash outflow. What we would then do is for tax return purposes is we would have either a future deduction or a future credit that we potentially could utilize in the future.

Tim Quillin - Stephens Inc

Okay, but timing wise, because the NOLs, you don’t think you will be able to use that anytime soon?

Clayton Haynes

Timing wise –

Paul Ryan

It is a good quarters away.

Clayton Haynes

Yeah, yeah. It really depends upon the actual results but –

Paul Ryan

Yeah, as soon as we use up our NOL we will get a credit for it.

Tim Quillin - Stephens Inc

Certainly.

Clayton Haynes

Or have the ability to utilize that credit.

Tim Quillin - Stephens Inc

Right. And on the net income attributable to non-controlling interest, I can understand how that arises. But is there any way to help us, think about that. I mean what is the ownership in the IP portfolio, what ownership does your partner have?

Clayton Haynes

Right now, personally, it’s roughly about 40% after our fees and after our joint investment in the fund.

Tim Quillin - Stephens Inc

How about specific?

Clayton Haynes

Well, it’s about 60-40 split, we generate about 60% of the returns and the institutional partner about 40.

Tim Quillin - Stephens Inc

Right. And that’s on how much or how many patents?

Clayton Haynes

25 million of capital.

Tim Quillin - Stephens Inc

Excuse me.

Clayton Haynes

Approximately, 25 million of dedicated capital for the fund.

Tim Quillin - Stephens Inc

Okay, okay. And then in terms of, and this is splitting, Harris, I understand. But I understood you had talked about potentially getting to 12 structured term licensees. And then, my understanding that may be Medtech would be on top of that. And I understand, it seems to be hedging a little bit in terms of the numbers, but maybe because they might be increasing in size. And so now are you saying kind of 8 to 12 structured licensees altogether, but maybe in the larger size?

Chip Harris

I think, we’ve always said, two last year, three this year, four the following year. And it’s kind of in the –

Clayton Hayes

Kind of total, but we have set 12 in total. So eventually, a patent would be an addition to that.

Paul Ryan

It depends on who they are quite frankly. There are certain companies that if we do these deals with them, it would eliminate other companies from an exclusivity standpoint, so.

Clayton Haynes

There are certain companies that have big investments in the tech side as well as the Medtech side. I wouldn’t get too focused on the absolute number. I think we’re going to keep driving the revenues the way we have. But I mean your model is going to be wrong, because we just don’t know. But I wouldn’t start splitting hairs between 11, 12 or 10. We’re going to try to maximize revenue potential. If we can do as much money as we thought we can do in 12 in 6 deals, we do six, because it’s driving more of the capital without putting those companies on the bench so to speak. But we think that we can drive their revenue somewhere between that 9 and 12 number. We’re not trying to hedge on any of them, we see these things getting more and more valuable when assets come into our hands. And we’d like to drive that -- frankly, we’ve done every licensing program. We tried to offer attractive terms early on to help us get our shareholder’s capital back and then drive the pricing as we get farther along into the process. Same thing with these.

Tim Quillin - Stephens Inc

Right, fair enough. All right, thank you.

Clayton Haynes

Okay, thanks Tim.

Operator

Our next question comes from the line of Bill Block of WAB Capital. Please state your question.

William Block - WAB Capital

I had a couple of questions. One, can you give us the percentage breakdown of the concentration of your customer mix, like, A, customers account for more than 10% of revenue in the quarter?

Clayton Haynes

Yeah, Bill. We traditionally do that and we’ll continue to do that in our Q, which we will get filed, what, in another 10 days.

Paul Ryan

Yeah, you’ll see that.

Clayton Haynes

Yeah, you’ll have that in the next 10 days. But, we don’t do it on the conference call, we put it in the Q.

William Block - WAB Capital

Okay. Now, another comment that I have is, I’ve mentioned this to Rob before, but when you make an announcement that, one of your subsidiaries and company actually agreed to settlement. Why don’t you announce the number of patents that were involved in that settlement?

Paul Ryan

Well, generally, it depends, we have not done that historically and don’t plan on doing it in the future.

Clayton Haynes

It’s not relative.

Paul Ryan

Because it’s really not relative in the sum of it. Sometimes they’re settling on certain patents that are only a litigation. So, it really wouldn’t I think be very informative that he want to detail exactly how many patents there were.

Chip Harris

Well, there is no linear relationship between patents and revenue for people who are trying to figure out revenue per patent. There is no relationship. So, we don’t want to confuse people.

William Block - WAB Capital

Okay. And then, my last question is, this is based on comment that was made by Clayton. On the stock based compensation, like for example, the first quarter is significantly higher than it had been a year ago. And it was mentioned they had to do with the price of the stock. So, when did you –

Clayton Haynes

Correct.

William Block - WAB Capital

Yeah, so at what point do you determine that the price of the stock, is it at the end of the quarter or at the particular time that you decide to issue the shares to that particular individual?

Clayton Haynes

Bill, we have a policy, the comp committee does annual grabs consistently in January. And so, it just depends on the price of the stock on the day that they do that grant in January.

William Block - WAB Capital

And so, if it’s –

Paul Ryan

Obviously, this is January was much higher than it was in the previous January.

William Block - WAB Capital

Yeah, but now look what happens is they in quarters two, three and four, you would be granting, there will be additional –

Clayton Haynes

We don’t do grant. We do only to new employees basically, our grants for the year are done in January, one time. So, there won’t be additional grants every quarter to the whole company, it’s only done once a year.

Chip Harris

And the non-cash stock compensation charge is based upon the grant date for value. And doesn’t get modified in future course.

Paul Ryan

No, you actually gave that number. We have a number, we can give you for the year, basically.

William Block - WAB Capital

I think it’s 10 million.

Paul Ryan

Right, exactly.

Clayton Haynes

For the remainder of the year.

William Block - WAB Capital

Ten million, so that means for the full year it will be approximately $12 million?

Clayton Haynes

Correct, correct.

William Block - WAB Capital

Okay. Those are my questions. Thank you.

Clayton Haynes

Okay. Thank you, Bill.

Operator

Our next question comes from the line of Mark Argento of Craig-Hallum Capital. Please state your question.

Mark Argento – Craig-Hallum Capital

Hey guys, just one of a housekeeping question for Clayton. Could you just, you guided to the patent amortization expense I believe for the remainder of the year. I think you said you have roughly $4 million left or $4.1 million. So, when we are going to have the income statement here in the quarter, the quarter that you guys just reported, you guys realize roughly it was about $3.8 million in amortization of patent expense in the quarter. So, is it safe to assume we basically take, we are just taking the $4 million that you have left and we can burn that off for the rest of this year or is there something else that goes into the line item in the income statement?

Clayton Haynes

Well, the number of 4.1 million is the scheduled amortizations for the remainder of fiscal 2011. Of course, the number may be impacted by future recoveries of advances paid. But, as far as what is scheduled for the remainder of 2011, that’s the 4.1.

Mark Argento – Craig-Hallum Capital

Okay. So, assuming you guys, if you have any other large license deals above and beyond, kind of whatever schedule you have used that could drive that number higher. So, it’s probably not the right thing to do to run $4 million through there. But probably adjust that up assuming higher revenue levels?

Clayton Haynes

Well, we’ve recouped a lot of our advances this quarter. So, I don’t think those advances would be a big impact for the rest of the year.

Paul Ryan

We don’t have a model so we don’t really worry about it.

Chip Harris

But you have to, right.

Mark Argento – Craig-Hallum Capital

I just want to, if I hear a number like that, I just want to make sure, I know how to – the context of it a little bit. So I’ll –

Clayton Haynes

I think it’s going to be pretty close to the scheduled amortization number.

Mark Argento – Craig-Hallum Capital

Okay, good. I appreciate the help there guys. Thanks, again.

Clayton Harris

Okay.

Operator

Our next question comes from the line Jonathon Skeels of Davenport & Company. Please state your question.

Paul Ryan

Again?

Jonathon Skeels - Davenport & Company

Hey, earlier you said that or you made the comment that, you guys have over $300 million in cash on the balance sheet. I think you’ve said that you’d like to keep about a $100 million, which leaves north of $200 million left on the balance sheet. And you said earlier that you could see yourselves spending a large chunk of that in 2011. So, I guess that would imply that you are looking at large acquisitions, I mean, how much money –

Paul Ryan

Or a lot of small ones.

Jonathon Skeels - Davenport & Company

How much money would you see committing or what’s kind of the maximum amount of capital that you would commit?

Clayton Haynes

Probably not more than $316 million. I mean, who knows, I mean, when we do it, we’ll tell you. And we’ll give you a new schedule. I understand you guys want to build the model and want to build it correctly. But, we can’t help you in this quarter-to-quarter stuff. But, when we do it, we’ll tell you exact where it is and your models will be accurate at that point. I don’t mean to be flipping about it but it’s hard. There is a huge amounts of opportunities. We can get a call tomorrow which change anything we give you today. I mean, it’s moving that fast. Paul read off a couple of examples. We had actually looked at one of them. I mean, it’s – they are popping up everywhere.

Paul Ryan

Yeah. We could have been the buyer of one of the ones I just mentioned.

Clayton Haynes

And, we understand that all of a sudden the models go up and then we could do one deal and we can accelerate a lot of that.

Jonathon Skeels - Davenport & Company

Okay. Well I wasn’t so much asking as with respect to the model. But, more or less trying to find out if some of the portfolios you’re looking at are large in size?

Paul Ryan

They are, yes.

Clayton Haynes

Yeah, okay, we wouldn’t have diluted the shareholders.

Jonathon Skeels - Davenport & Company

Got you. Okay, great, thanks.

Paul Ryan

Okay. Thanks, Jonathon.

Operator

This will conclude the question-and-answer session. I will now turn the call back over to Mr. Ryan.

Paul Ryan

Thank you, operator. I want to thank everyone for being on the call today. If you’ve got follow-up questions, you can either give myself or Rob Stewart a call. We look forward to talking to you again on the next quarter.

Operator

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 800-642-1687 or 706-645-9291 with confirmation code 52505878. This concludes our conference for today. Thank you all for your participating and have a nice day. All parties may now disconnect.

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