Acacia Research Corp (ACTG) 2002 Q1 法說會逐字稿

At this time I would like to inform you that this conference is being recorded for a rebroadcast and that all participants are in a listen only mode. At the request of the company we will turn the conference to questions and answers after the presentation.

I will now turn the conference over to Mr. Paul Ryan, Chairman and CEO of Acacia Research. Please go ahead sir.

Thank you and welcome to our first quarter conference call. Before I start I would like to make a statement that today's call may involve what the SEC considers to be forward looking statements. Please refer to our 8K, which was filed with the SEC today for our forward-looking statement disclaimer. You may get an opportunity. We put our numbers shortly after one o' clock.

Revenues for the first quarter were 249000 compared to 2 million and 623 in revenues in the comparable period in 2001. First quarter 2002 revenues all of which related to our majority on subsidiary CombiMatrix Corporation were comprised of revenues recognized under US department of defense grant. One-time contract research and development revenues and revenues recognized under the stage-I National Institutes of Health grant for the development of its protein biochip technology.

The first quarter net loss from continuing operations was 6.427 million or 33 cents per share, compared to a net loss of 9.479 million or 50 cents in the comparable period in 2001. Excluding non-cash comp charges after minority interest, the first quarter net loss was 5.615 million or 29 cents a share compared to last year's 4.631 million or 24 cents per share. Total assets at the end of the quarter were 102.6 million compared to a 110.9 million at the end of the year of 2001 and cash in short term investments on a consolidated basis were 75.8 million as of March 31 compared to 84.6 million at the end of 2001.

The highlights for the quarter certainly include the addition of several key executives. We expanded our management team with the addition of some of the industry's most experienced executives including Roy Mankovitz who joined us as Senior Vice President of Intellectual Property, Mr. Mankovitz is best know for his position as a Director and Corporate Counsel of Intellectual Property of Gemstar TV Guide. Mr. Mankovitz was with Gemstar from 1991 to 98 where he was responsible for intellectual property including technology licensing, litigations, strategic alliances, and the establishment and acquisition and protection of intellectual property rights. He was also a member of the R&D group for new product development and was the main on more than two-dozen US informed patents assigned to Gemstar.

We also named Andrew Duncan as Vice President of Business Development. Mr. Duncan was formerly Vice President of Consumer Electronics, Gemstar TV Guide with direct reporting responsibility to the CEO. Mr. Duncan was with Gemstar from 1994 to 2001, where he was responsible for licensing and marketing of the highly successful DCR plus and electronic program guide. At Gemstar he developed and controlled the licensing and marketing policy with all the major consumer electronic manufacturers including Sony, Philips, and RCA. Prior to Gemstar Mr. Duncan was European marketing and product manager for Thomson Multimedia where he was responsible for the company's consumer electronics business.

We also named John Roop as Vice President of Engineering. Mr. Roop was formerly Senior Vice President of technology and development at Starsight Telecast where he was responsible for cable industry, licensing and partnership management. Mr. Roop also served as the director of engineering at Insight Telecast where he managed engineering partnership with companies such as General

, Scientific Atlanta, Thomson, Sony, and Panasonic.

In addition we have also retained outside legal and technical advisors with exceptional industry experience including, Robert Berman,

, was formerly the chief outside trial counsel for Gemstar for a number of years. Lee

of Christy Parker and

who was Gemstar's patent prosecution counsel and John Eastman, who was formerly a product manger and systems engineer with Direct TV and Director of Strategic Planning for Pioneer North America.

I believe that we have assembled and exceptional team to execute our business strategy for our digital media transmission technology which we believe represents an enormous opportunity for our company and Chip Harris will talk about this opportunity following my comments.

In addition CombiMatrix continued to make great progress. We announced that they have completed their major milestones in the strategic alliance with Roche. In addition in February, CombiMatrix was awarded at the National Institute of Health Grant for the development of its protein biochip technology. In addition in April CombiMatrix's Japanese subsidiary entered into a technology access and purchase agreement in Japan with the CBRC, which is a division of the Japanese National Institute of Advanced Industrial Trials and Technology. The CBRC has purchased and installed the CombiMatrix GeneChip synthesizer and entered into a multiyear agreement to purchase chips. This is a highly prestigious organization in Japan and it is a reflection of the successful joint venture that CombiMatrix has done with

in Japan and we look forward to a number of additional deals in the Asian market.

In addition to those, on the corporate side, we announced in March that our Board of Directors have approved the plan to divide Acacia Research's common stock into two new parts of common stock. CombiMatrix and Acacia Technologies, the plan is subject to several conditions, including shareholder approval. If the recapitalization proposal is approved and the other conditions are satisfied, Acacia Research's stockholders would receive shares of both the new classes of stock in exchange for existing Acacia Research shares. That new shares would be separately listed on NASDAQ national market peripherals. We also announced that both Acacia and CombiMatrix Board of Directors have approved and agreement for Acacia Research to acquire the minority stockholder interest in CombiMatrix. The proposed acquisition will be accomplished through a merger which the minority stockholders of CombiMatrix would receive shares of the new Acacia Research CombiMatrix common stock in exchange for their existing shares. This proposed will also be submitted to stockholder and CombiMatrix for approval.

In that regard, you know this on our release today, on April 25 Acacia Research sold its interest and Advanced Material Sciences to CombiMatrix. We were issued 180,000 shares approximately for the exchange of our 58 percent interest in the company and now CombiMatrix owns 87 percent of Advanced Material Sciences. Obviously as we released on March 20, we

that his recapitalization and merger will be of great benefit to Acacia shareholders. We believed separate shares for CombiMatrix and Acacia Technologies would increase the market awareness of our two distinct businesses, attract new industries specific investors as stockholders, attract institutional research coverage by industry specific analysts, and create separate

to pursue strategic opportunities. We believe that this is an important step towards realizing the full market value of our separate businesses.

And with that I would like to turn the call over to Chip Harris, who will give you an update on activities at Acacia Technologies.

Thanks Paul, I think that you must have realized by now we didn't have any new additional settlements on the V-Chip and this was probably by design we in the first quarter, we think that farther we go into the case, the better success we have had with regards to with the remaining defendants.

We are currently discussing settlements with all but one of the major groups that is still left in the litigation. We have still some pretrial that have been heard, that have been ruled on. We do have a core date set yet, but assuming any significant changes in the success of the litigation, which we have currently, a fall date for the trial is not unexpected. We think that the opportunity for us as we get closer to a core date is of better leverage and would be more advantageous to us and our shareholders. We don't have a current date, but we think that the time line looks like the, earliest date would be this fall. We continue to raise the bar as I said with regard to the settlement; we don't feel that right it is now in our best interest or the shareholders best interest to backtrack this for the sake of some general or royalty, which in the long run would be not in the best interest.

I want to move now what we call our DMT, digital media transmission process, the passage of, most of you know as the video on demand. We have recently started our licensing program, thanks to the efforts of the people that Paul mentioned earlier, we have mapped out and laid out an aggressive licensing program that we think, has a lot of advantages and a lot of opportunities to the market place.

And I want to part with the estimate wins; I know lot of you will ask, you know, when do you think this first deal will be done? We want to make sure that it is the right deal, but it is hard to estimate when this first deal will be concluded, but we would expect, and we put our goals internally here to have a major alliance done by this fall.

We will be giving a full presentation of the Digital Media Transmission Technology at our annual meeting along with a full description of the company on the Acacia Media Technology side and all the ramp occasions associated with that, I would advise and encourage all of you to if you can't attend there will be a audio link like we are doing right now. That will give you the opportunity to really understand what we have done in the S4 and how we think that it is in the best interest of the shareholders and the opportunity to present ourselves. We will talk to you about potential licenses, the areas of which our technology and our process has its most uses, and we think you will be very

of the opportunity and more specifically with the focus of the opportunity by the management. We are also looking at several additional patent portfolios in the market place now. One of the opportunities that we see out there is in the

gives the opportunity of some very attractive intellectual property that by itself may not commit much, but in association with the tremendous that we have already assemble could be very beneficial to our shareholders in a long-term and we purchased that at a very very low level.

As I said before, I would urge you to tune in for the annual meeting which is next Tuesday, a very through analysis and presentation will be done on Acacia Technologies. Most of you are pretty at the speed on the CombiMatrix, but a lot of you have not heard, as we have not really made it public, what's our intent, what our strategies will be, and will be delineated next Tuesday.

Now we will turn it over to Dr. Kumar at CombiMatrix.

Thanks Chip, in the first quarter of this year we continued execution of our business strategy and our development efforts, and as we have stated previously there are several areas of primary focus for most of our development efforts, and let me list out as follows.

First area is continued development of our genomics products and platforms which includes chips, reagents, hybridizer reader systems, instruments, and chip synthesizer, and as most of our shareholders are aware, much of this work has been performed and supported by our primary corporate partner Roche Diagnostics. The bulk of our operations at CombiMatrix are focused on this partnership going forward and we are incredibly pleased with the progress that we have made.

Second area of focus is our proteomics product platform, which includes electrochemical detection technologies. We are now at a stage with our proteomics platform where we are beginning discussion with early access customers as well as strategic commercialization partners and it has been stated before and as Paul underscored in his comments, we have recently funding for some proteomics work for the NIH which underscores the credibility of our platform as an approach to developing products for protein analysis.

In addition as has been stated before, much of this work especially electrochemical detection development has been funded by the department of defense through a number of research grants.

The third area of focus is software and informatics products which provide not only basic functionality for our proteomics and genomics product, but additional bioinformatics capabilities which we feel our customers will require to utilize data which is generated by our hardware products in the genetic analysis and protein analysis areas.

We continue to believe that standalone bioinformatics products are very difficult to sell and commercially not as viable as if they were coupled in a similar way with hardware products such as our chips, our biorating technologies in both our genomics and proteomics area. Therefore as we roll out our genetic analysis and protein analysis hardware products, we anticipate tremendous opportunities for additional sales to these same customers of informatics and software capabilities, which

with those products.

In addition another area of focus is continued development of a prototype biological warfare agent detector for the department of defense and perhaps other military and civilian applications. We are on schedule for demonstration of a functional prototype later this year and in keeping with our business model of leveraging corporate partnership we are in the process of engaging in discussions with a number of government agencies and we are engaged in discussion with a number of government agencies as well as strategic partners to fund and commercialize these products.

Significant achievements for the quarter included continued development of our products with Roche, including initiation of key research that have been scheduled as per our agreement and many of these R&D programs which are budgeted to begin this year. We anticipate we will be announcing later on in the year. We also as Paul indicated purchased and have engaged in a relationship with our first customer in Japan, which is by country the second largest market for biotechnology products and by region the third largest behind the United States and Europe. We are extremely pleased with our Japanese subsidiary CombiMatrix KK as well as our Japanese Partner

. CombiMatrix KK was established in the fourth quarter of last year and already has signed the first key customer this quarter. That customer was the Computational Biology Research Center or CBRC, which is a center of excellence that has been funded and mandated by the Japanese government to increase the ability of the Japanese biotech community to compete in genomics, proteomics, and informatics. We feel that adoption of our platform by CBRC will influence significantly other potential customers and partners in Japan, which often take their queue from organizations and centers of excellence like CBRC.

We are also continuing our discussions with several corporate partners and customers regarding commercialization of genomics and proteomics products, as the discussions come to solutions, we anticipate we will be announcing that in the near future. And in addition another activity is continued discussions on other strategic plans to build synergistically our core competence in technology and product development. We feel that our current technology competency is very broadly applicable and there are number of other technologies available out there which we can couple with our core competence that will enable us to develop additional synergistic products which we think we can eventually distribute to corporate relationships, similar to the one that we have with Roche Diagnostics.

With that I would like to go ahead and turn it over to Paul and we can address some questions.

Sure moderator, if you can open it up for questions and answers.

Thank you, ladies and gentlemen the question and answer session will now begin. If you are using a speakerphone, please pick up your handset before pressing any numbers. Should you wish to ask a question you may do so by pressing star one on your pushbutton phone. Should you wish to withdraw your question, you may do so by pressing one three. Your questions will be taken in the order they are received. Please standby for your first question.

Your first question comes from Ron Levin. Please state your affiliation followed by your question.

Ron Levin, Ron Levin Associates of New York. Paul my question is concerned with the V-Chip and going forward if the TV manufacturers switch to digital TV, what effect will that have on your V-Chip revenue, and as your V-Chip replaced by the Canadian model?

No, it is not and they won't affect our revenues, as you realize there is a very insignificant penetration of digital television and our V-Chip patent in the US only extends through July of 2003, and the agreements that we have entered in today really won't be impacted by that nor do we believe the additional agreements probably longer-term perhaps 10 or 15 years, but our royalties will go only through July of 2003. So, we won't have any material impact.

So, after 2003 you have no revenues, is that right?

Yes, our patents are in the US which is the only market in which there is a V-Chip technology required currently and our patents only go out through July of 2003.

Ok, thank you.

Again ladies and gentlemen should you wish to ask a question, you may do so by pressing star one on your pushbutton phone.

Your next question comes from Allen Rosen. Please state your affiliation followed by your question.

Yeah Allen Rosen from AG Edwards. Paul and Chip, how are you? Just three quick questions. Could you go through the cash flow for the quarter and explain how the cash was used during the quarter?

Let me get

in my hands. We have obviously

gone though just the broad categories. Research and Development was roughly 3.1 million and marketing general and administrative was about 5.1 million and then we deducted our minority interest and our financials are obviously this is one issue that if we have the recapitalization completed we will no longer be dealing with these minority interest issues, but basically as an accounting requirement in the

the minority interest and wind up with a loss of 6.4 million for the quarter and that does include the non-cash items such as the amortization expense and the step in the valuation of the CombiMatrix stock from the end of the year 2000 as well as the amortization of patents and goodwill which are non-cash items which were about 600,000 dollars in the quarter.

Ok, that is fine, wasn't the amount of cash at the end of the quarter about 8 million or so less?

Yes, yeah we have other amortized expenses and other investments that we have made as well, but on a pure cash basis, that is the key numbers are roughly about 8 million in cost, R&D expenses and MG&A expense and then the deduction of the minority interest and loss of about 6.4 million. And out of that 6.4 million about 600,000 of it relates to amortization expenses. So, on a pure cash basis related to expenses it was though to be about 5.8 million.

Ok, thank you.

Your next question comes from Ooozi Zimmermon. Please state your affiliation followed by your question.

Hai JMG Capital. Could you give an idea of when will the cash be in the

or what rate of cash burn you are going to have for the rest of the year?

Well to break it out as a segment Acacia Technologies which is everything right from CombiMatrix and Advanced Material Sciences, our current overhead, I would estimate at roughly somewhere between 2 and 2.5 million dollars a year and we have still over 50 million dollars in cash on the Acacia Technology side. CombiMatrix currently has I believe approximately 25 to 26 million dollars and there are several payments that are schedule to come in under the Roche agreement during the course of this year which would cover about half of their overheads and the company's goal, if I

and we would adopt other strategic partnerships which would offset and additional amount of that cash, but probably the total cash requirements of CombiMatrix is somewhere in the area of 22 to 24 million offset by roughly half of that amount and anticipated payments from Roche.

Is that 22 to 24 million per year?

Yes.

Ok thank you.

Your next question comes from Jerry Jerome. Please state your affiliation followed by your question.

Jerry Jerome, Jerome and Company. Hello guys, I have got three questions. The first one is why no the license income shown for the first quarter from the V-Chip and was there no CombiMatrix income in the first quarter? Secondly, are non-cash compensation charges against operating income

upon a 900 million dollar valuation by Solomon, I guess, a year and a half or so ago. Are we stuck with that 900 million dollars or are we going to adjust that number if for evaluation comes in significantly less than that?

Ok thank you Jerry, let me answer your last question first. Yes it is a requirement when you follow up for an IPO to maintain adjustment and a look back and to the anticipated price versus the options and unfortunately that becomes a one-time event and here respect of subsequent events that becomes charge that becomes amortized over a period of years and we have chosen to accelerate that expense. The actual dollar amounts have been outlined in our 10K's and 10Q's, but it has been a significant component from our GAAP reported numbers, but it is a non-cash item, but the answer to your question is yes, we will continue to take those amortization charges, year-over-year respect of those future evaluations. And we have no ability to change that. On CombiMatrix, the revenues which we spoke of the 279,000 were related to the two grant programs from the government agencies, the NIH and the US Department of Defense as well as a one-time R&D project that was done. There were some additional cash payments, but they won't able to recognize it as revenues. Part of the situation would be Roche strategic alliance, again it is an accounting issue because of a long-term relationship, until we actually complete several components of that total relationship, the cash that comes in from Roche can't be considered as earned revenues until that is totally complete and then there will be a one-time booking of all those revenues, when the entire project is complete.

The V-Chip, we did not have revenues as Chip outlined earlier in the call, we have made a decision unless the remaining potential licenses are

relative rates that we think are appropriate and Chip did mention we are in settlement conversations and discussion with several of those entities and probably given the life of the patent going out the July of 2003, it would not be unusual to expect that when we do receive those payments, there would be lump payments, not only for past but paid up through the life of the patent. So, we do not have continuing payments, there are obligations of current licensees fro additional payment, but those will be triggered by either settlements with certain parties or the outcome of the litigations, but we do not have it on a recurring basis.

Well about the DMT technology has a

2001 and 2012, and that will have more flexibility when we receive revenues to make sure that we are recurring, rather than these one-time payments.

Are we saying guys, that the revenues from the current licensees are not on a continuing monthly basis or quarterly basis, but are one-time payments only?

Yes, exactly yes. And some of them have additional contingement payment that are triggered upon, either the successful outcome of the litigation or our entering into arrangements with other major manufacturers. So, there are contingent upon future events occurring.

On the last conference call you said that the deferred revenues from last year would be probably recognized in the second or third quarter of this year. Do you still feel the same way including the deferred revenues from the first quarter of this year? That those could be recognized this summer or this fall?

Yeah, that issue. Probably our best estimate would be in the third quarter when the completion of several of the milestones under the Roche alliance is completed, then all of those deferred revenues would be taken as recognized revenues.

Your next question comes from Jerry Russel. Please state your affiliation followed by your question.

Hai, Paul. Jerry Russel at Morgan Stanley. Could you give us.

a little bit here on the video on demand status and what the future is as far as Acacia is concerned?

Sure I would like Chip to handle this and I will take a first crack at it. We have assemble this team along with Chip and Bob Bermer then responsible for the V-Chip licensing program, and we have added to that team obviously a number of very experienced executives. We have taken a considerable amount of time here, because the markets are already multibillion-dollar markets with potential of several categories of and Chip will outline some of the categories and again at the annual meeting we will cover them more thoroughly. We have initiated discussion with some potential partners and our early strategic licensees for this technology. It is a multibillion dollar market that has expanded to go into the tens of millions over the life of this patent and we have assembled what we think is probably is the most experienced team in the country to conduct this licensing program and it is going to drive our evaluations certainly in the Acacia Technologies side for a very long time and as Chip indicated we have a good shot of getting the orders early as this fall from initial deals and these are huge markets this technology covers basically anytime you take analogue data converted to digital and compress that to store it and then redistribute it, and that just covers enormous markets which will include things that your satellite radio, video on demand through the cable systems, all of the current digital media transmission streaming technologies that currently exist, so there is a very large markets, Chip you may want to add to that.

I think you have said

otherwise we didn't want to do it on the conference calls. We felt that this was such a major milestone for the company that to wait four more days and do a audio as well as visual presentation makes probably a lot more sense because we go over the potential markets, the size of the market, the potential licensees, we will go over a very detailed analysis of how our process actually works and how it is compared to additional opportunities in the market place, but I think if you can hold on four more days, I think you will find a real complete explanation of your question.

Thank you.

Your next question again comes from Allen Rosen.

Hai, I am back to ask this question if the

more possible if you are still on. I was wondering if you could speak more specifically about the recent deal in Japan as to the any payment made of front? How do you see that deal going forward? That is question one, and secondly based on Paul's comments that sometime by the third quarter you may be able to recognize revenues from last year's payments from Roche and it sounds like you are getting to another milestone here in the second or third quarter with Roche again. Would all that be taken at one time, I mean, are you looking at the possibility of let us say somewhere between 10 and 50 million dollars in revenue recognized from that during the third quarter or whenever that is recognized, is that the way I am reading, is that right?

Yes, I think the

get it under the one phase that we have to accrued until we take it as recognized revenue, it is somewhere between 10 and 12 dollars. Is that right Allen?

It is in that range, let me actually address that question in a slightly different way Allen. Roche has asked us not to disclose how big the deal is in detail and we want to respect that, however, as Paul indicated it is in that range and we anticipate that we will be recognizing all of that one time later on this year. So, it is going to be comprised of payments that we received last year, which we have deferred as well as additional payments, which we will be receiving as we go forward and all of that will be recognized at one time later on this year. And, additional details are details, which we have decided not to disclose primarily because our strategic partner, for very good reasons has asked us not to disclose those details, and we will disclose what is necessary as required, whatever is material to our business, but we want to respect our partner's request. You have a ballpark idea of exactly what it is going to be and it will be recognized at one time. With respect to the Japanese deal, the relationship is with a major institute that is well funded by the government of Japan and it is mandated by the government to be a center of excellence. What that means is as Japanese biotech and pharmaceutical companies look to evaluate what technologies they would like to use for their own internal development efforts, they will do to the CBRC to get guidance on what areas, which technologies they feel are the most appropriate, and the financial terms of that relationship haven't been disclosed, but the purchase was made for several 100,000 dollars as well as a long-term agreement to purchase blank chips which they will use to synthesize content chips for their own internal use and use of other partners that they have and you know those are going to be probably on the order of that frame level financial.

Ok, thank you.

Ladies and gentlemen, at this time I will now turn the conference back to Mr. Ryan to conclude.

Ok, I want to thank you all for being with us on our first quarter conference call and again to reiterate Chip's comment I really do encourage you to, if you can't attend in person, where there will be both a webcast and a telephone conference hookup for the annual meeting, and that is next Tuesday starting at 9:00 PCT or 12:00 noon on the East Coast, and I think it will be very informative and enable us to give a full presentation of these technologies, so please tune in for that. I addition to that we look forward to speaking with you on our next conference call which will be in August. Thank you.

Ladies and gentlemen that concludes your conference call for today. Should you wish to access the rebroadcast of this call you may do so by dialing 1800-428-6051 and for international dialers 973-709-2089 with the user ID of 240174.

Thank you all for participating and have a nice day. All parties may now disconnect.