Acacia Research Corp (ACTG) 2003 Q3 法說會逐字稿

Good afternoon and welcome ladies and gentlemen to the Acacia Research third quarter earnings release conference call. (Caller Instructions) I will now turn the conference over to Mr. Paul Ryan.

Please go ahead, sir.

Thank you.

Good afternoon and 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.

Earlier today, we reported third quarter consolidated financial results as well as the results for the Acacia Technologies Group and the CombiMatrix group.

Today, I will review operating activities for the Acacia Technologies Group and give you an overview of our progress and the rollout of our licensing program for the DMT technology.

I will then turn the call over to our President, Chip Harris, who will give you a more detailed report on our progress and then we will entertain questions regarding the Acacia Technologies Group.

This will be followed by a presentation and Q&A session regarding CombiMatrix Group, which will be led by CombiMatrix's CEO and President Dr. Amit Kumar.

During the third quarter, Acacia's licensing program made significant progress in a number of areas.

Licensing fees from the number of our licensees commenced in the third quarter resulting in recognized revenue of $186,000.

Licensing fees from a number of other companies also commenced in the third quarter.

However, we will not recognize these revenues until the fourth quarter when we have received the cash payments.

Our estimate of annualized revenues from these initial licensees is between $1.1m and $1.5m, based on information provided by our licensees.

The range in expected annualized revenues is a result of the fact that Acacia's licensing revenues in many cases are a percentage of future sales revenues of our licensees.

We have now entered into licenses with a number of companies representing different industry sectors, such as LodgeNet, the industry leader for hotel video-on-demand.

Grupo Pegaso, partner with Spain’s Telefonica and Mexico's second largest wireless company, Virgin Radio, a leading digital broadcast company, CinemaNow, a leading Internet movie company, and online adult entertainment companies, such as Hustler and New Frontier Media.

The wide range of media and communication companies, which have licensed our technology, is a demonstration of the breadth of coverage of our patented digital media transmission technology across many different industry segments.

During the third quarter, we rolled out our licensing program in a number of new sectors, including online learning companies, news, sports, and entertainment, Internet sites, and corporate websites utilizing video on-demand.

We also moved into discussions with cable TV companies, which represent the most important industry segment for potential licensing revenues.

Cable TV companies are now utilizing our technology not only for the rollout of video on-demand, but also for their new digital ad insertion initiatives as well as the delivery of pay per view and basic non-live programming.

There are 72m US cable households, so obviously this represents an enormous licensing opportunity for us.

We also plann to rollout our licensing programs in the areas of wireless content distribution as well as satellite TV in the near future.

We are very pleased with the progress of our discussions with a wide range of potential licensees as well as the rapid growth in the use of our technology by media and communication companies.

I will now turn the call over to our President, Chip Harris, who will provide you with some of the specifics of our licensing activities in each of the industry segments.

Thanks, Paul.

To recap, we now have 54 license agreements, and all these license agreements provide for recurring license fee payments.

As you are aware, one of the initial industry sectors that we commence licensing was the online adult entertainment sector.

Companies in this sector are generating significant revenues utilizing our technologies.

We have now licensed a number of leading companies in this sector.

Some of our licensees, such as Hustler and New Frontier Media, agreed to license our technology and resolve the path litigation we had initiated.

In fact of the original 39 companies named in our litigation only 13 remain, and we are currently in discussion with a number of these companies.

In addition last week, we sent out notices to a large number of adult online entertainment companies notifying them that as of November 30th, we will no longer offer the waiver for certain past infringement, and that we are raising the licensing fees for those companies who delay taking licenses until after the November 30th deadline.

We are now in discussions with a large number of these companies.

As you are probably aware, this is a very fragmented industry, which includes many small companies, but the cumulative licensing revenue from this sector could be significant to us.

As Paul noted earlier, the cable TV industry represents one of our most important licensing opportunities.

As he mentioned a few months ago, we notified cable, -- the cable companies, which serve the vast majority of the 72m US cable households, and gave them a reasonable period of time to review our demonstration of their use of our technology.

We have now begun to enter into business discussions.

We believe our timing is good because most of these companies are beginning to derive new revenues using our technology for not only video on-demand, but for the digital ad insertion which Wall Street analysts predict will generate several billion dollars per year in new revenues.

Digital ad insertion, which utilizes our technology, is now enabling cable TV companies to compete with broadcast networks for spot advertising dollars.

A recent report by Merrill Lynch predicts that cable TV companies will gain approximately $4b in incremental annual revenues, and 65% of that going directly to their bottom line.

The aggressive roll out of video-on-demand by the cable TV companies have accelerated from earlier projections, and is now predicted to reach 85% of all US cable households within two years, generating several billion in additional revenues.

As we have said in the past, we have recently begun discussions with companies in the rapidly growing e-learning sector.

Many of these companies are beginning to use our DMT technology as part of their online course offerings.

We are pleased by the initial responses and are in the process of meeting with many of them --, many of the major players in this industry.

Analysts are projecting a rapid growth rate for this industry and our potential licensing revenues could grow rapidly over the next four years from the organic growth of the industry.

And the increased utilization of video-on-demand as a core element of the online classes.

We have also recently notified a wide variety of companies that are beginning to build significant revenues from online sports, news, and entertainment sites.

And we have commenced discussions with a number of these companies.

All the major sports categories such as MLB, NFL, the NBA, and NASCAR have developed online websites along with such popular websites as ESPN.com.

Major media companies are now aggressively developing online news and entertainment sports sites.

And we expect that trend to continue as the number of high-speed Internet homes reaches a critical mass of 40m US households by 2005.

In the past couple of weeks, we have also begun to notify a number of Fortune 500 companies that are now using our video-on-demand technology in significant ways on their corporate websites.

As you can see, we are now actively rolling out our licensing program to a wide variety of companies in a number of industry sectors.

We anticipate the momentum we are gaining will continue over the next few quarters

We are also evaluating new opportunities to acquire and/or master license IP, currently owned by both public and private companies.

We have received and analyzed a number of patent portfolios over the last six months.

While the vast majority of these IP portfolios have not met the regular standards, which we require, we've negotiated business terms regarding two additional portfolios that we currently have under option.

These portfolios will require very modest up-front payments and could potentially observe significant additional licensing opportunities for our company.

We are now conducting a final in depth due diligence on both these portfolios.

We'll make a decision regarding these opportunities by the end of the year.

I'll now to turn the call back over to Paul who has some final comments before we start the Q&A session.

Thanks, Chip.

The goal of Acacia Technologies Group is to become the leading technology licensing company.

We have both the capital and the management team, including an experienced legal and engineering talent to execute our strategy.

Many smaller and mid-sized public companies are now realizing they may have valuable IP, but do not have the internal resources or want to invest in building an entire in-house team to monetize their intellectual property.

New accounting rules are now requiring public companies to evaluate the potential impairment of the carrying value of intangibles on their balance sheet and this is forcing CEOs to either monetize their IP or write it down.

For many companies, the Acacia Technologies Group may be an ideal partner because we have the expertise to both evaluate and monetize intellectual property, which could provide partner companies with a new source of revenue, which drops directly to their bottom line.

For Acacia's stockholders, it provides us with the opportunity to generate new revenues with potentially very high profit margins from a diversified portfolio of intellectual property.

This could be accomplished with very limited up front investment, no R&D expense, and no cost of goods sold.

The economics of our business is exceptional and we believe this is an ideal time to build the business.

With that, operator, I would like to turn the call over for questions.

Thank you.

The question-and-answer session will begin for the Acacia Technologies Group. (Caller Instructions) No one else is in queue right now. (Caller Instructions)

[s1]

Thank you.

Our first question comes from Oerin Hershmen, a private investor.

Hi, how are you?

Great.

Can you comment a little bit on some of the portfolios that you've seen in the patent area, whether they’re a similar type of technological portfolios related to compression or video or, something of that nature or they are totally in different businesses?

They are totally in different technology sectors.

We've been reviewing, as Chip indicated, over the last six months, a large number of portfolios.

And often times the catalyst is these public companies are now beginning to realize they, either have to monetize their IP or write it down.

So, we're looking at a wide variety of different technology, licensing opportunities, but actually none of them are in the sector that we're currently licensing -- anywhere near the area of digital media transmission.

Is it a technology though where the existing team can add value to it, besides the actual process on the prosecution?

Yes, these are patents -- portfolios that we believe obviously from our analysis that are extremely well prosecuted patents, and basically, what we're looking for is areas often times outside the core strategic business of the company that's developed these patents.

There may be licensing opportunities outside their business area, which could be additional revenue.

And in many cases, there are companies that have what we believe are valuable patents, but they've never been developed by the company or viewed as an out-licensing opportunity and the economics were such that if they partner with us basically.

We can leverage our core team and monetize those and all that revenue that we could develop, this boat would go directly to their bottom line.

So, the first criteria we're looking at is, what is the market opportunity?

We're looking for patent portfolios that can be licensed widely, so that it is a very modest royalty rate from a large number of licensees similar to DMT, rather than an opportunity that only has one potential licensee.

But we're looking across technology sectors.

But as I said, there are none that are in the fields directly that we’re involved in currently.

And in terms of actual patent litigation or dealing with any of the potential licensees of the existing DMT patents.

Anything new creep up in terms of court challenges or anything of the like or nothing special in this quarter?

No, we are going through the process actually as Chip indicated the vast majority of the dependants and the only litigation that we have brought to date have actually all settled with us and even a significant number of the remaining ones there have also settled.

No, there's nothing that we have seen from a legal perspective that would cause us any concern.

Okay.

Thanks a lot.

Our next question comes from Andy [Nedward] from [N Network Consulting].

Please state your question.

Hi.

This is Andy Nedward.

I am just curious as to regarding all these licenses that have been issued so far as to when the revenue might start to -- start to flow into the company?

I think we addressed that in our financials, the third quarter was really the beginning of significant licensing revenues for the company.

Many of the licenses that we have negotiated and completed recently, called for the initiation of payments in the third quarter and obviously, we reported on only those revenues that were recognized.

We also – there are substantial amount of revenues from -- actually due from third quarter fees, but we will not recognize those as revenues until we collect them in the fourth quarter.

So, there could be something then this year that would show up significant as far as the revenues are concerned?

Well, there will be the fourth quarter revenues, whatever gets recognized plus new revenues from new licensees would show up in the fourth quarter.

I see; so we can certainly expect to see something starting to flow in this year as opposed to the previous three quarters?

Absolutely, because the third quarter and this quarter was the first time we have actually recognized any significant level of revenues and where licensers have checked in with the payment obligations beginning this quarter.

Correct.

Thank you.

Sure.

Thank you.

Our next question comes from Jack Armstrong from NIB Capital Management.

Please state your question.

Yes, my question is how do you plan to monetize your DMT technology patents in Europe and Asia, and could you elaborate on the market there?

We are working on that right now as we speak.

We will probably choose to partner some of the licensing opportunities with specialized groups in Asia and Europe.

There are equivalent opportunities in those international markets as you are probably aware, our patent coverage not only includes the US, but all major European countries as well as a number of countries in Asia, such Japan and Taiwan.

So, it is a large opportunity.

We wanted to get the momentum going first in the United States, but we will be rolling that out probably at the beginning of next year.

Thanks.

Sure.

Thank you.

Our next question comes from Chris Roberts, Shareholder.

Please state your question.

Yes, hi.

You've made reference to some of the shareholders, you guys have signed licenses with in the hotel industry and in the adult entertainment industry.

You have fairly vague about what additional licensees you found in the third quarter; could you elaborate on that?

Well, many of our agreements have confidentiality provisions.

Our policy has been to announce material agreements if the companies are well-recognized companies or if the agreements are of significant material impact.

For instance, we announced agreements with companies like Dellwood Holdings, which aren’t well known, but they are very large players in the field.

So, we don't plan on issuing a press release, obviously.

Every day when we do a new deal, we will do it with major well-recognized companies and on licensing agreements that are material to our company.

Okay, thank you.

Thank you.

Our next question comes from Philip [Giama] from Wachovia Savings.

Please state your question.

Yeah, hi.

Thank you.

Paul, can you just talk a little bit about the cost structure of the company.

What we should expect cost wise assuming no major litigation just under normal circumstances, what kind of cost structure are we looking at?

Sure.

Right now our annualized operating cost structure is about $3m for our core team, and actually about another million for being a public franchise, for B&O, auditors, accountants.

And then we have budgeted about $1m additional for outside expertise in the area of patent prosecution which we have invested a lot of money in this year, as well as patent litigation.

So if you roll that together our total cost structure is about $5m per year.

Okay.

Can you also just touch on the legal team that you guys have brought over from [Gemstar]?

How are those guys; are they employees or are they on a contract basis?

They are all employees; they are all officers of the Company.

Thank you.

Sure.

Thank you.

Our next question comes Daniel Zuckerman from First Global Securities.

Please state your question.

Yes, I just want to clarify something Chip had said about recurring payments in the licensing agreements.

You spoke about 54 deals.

In the press release it talks about 16 new licensing agreements, I am assuming the 16 is part of the 54?

Actually we did one, since we issued the press release this morning, that is why the current count is 54.

There were 16 done in the third quarter.

There are an additional 12 in the three weeks following the end of the third quarter and actually an additional license today.

So as of this moment there are 54.

Okay, if we were just looking at the run rate, if you will on the 186,000 provided by those 16 licensees.

Is that run rate going forward going to be fairly consistent?

Well we hope it will expand dramatically.

What we tried to do is give the guidance, which is a more annualized revenue licenses is to-date.

And that we estimate would be between $1.1m and $1.5m on an annualized basis of the amount of licenses that we completed thus far.

So any new licenses obviously would add to that annualized royalty revenue stream.

Yes, but I am just talking about the amount the average per licensee of those 16.

Would you think that amount moving forward would be pretty much consistent?

No, not at all, There are certainly larger companies where we expect that potentially the licensing revenue is going to exceed from one company, the total aggregate amount.

Because most of our licensees today are the smaller companies, but if your looking for an aggregate number between $1.1m and $1.5m, divided by 53 companies would be the arithmetic average .

But I don't think you can draw any forward conclusions from that number.

We will continue to do a number of licenses with smaller companies where the licensing revenues will be nominal and we may do deals with companies where as I said, a license may exceed the total amount of annualized projected revenues we currently have.

So I don’t think you can read anything into that.

So what we are talking about is a different kind of system than the one-time payments which you had received due to the V-Chip?

Absolutely.

All of the deals for DMT call for recurring royalty payments for the life of the agreement.

The V-Chip was quite different because that patent as you recall was near its expiration and so most of the licenses there were for -- many of them were paid up licenses.

That's not the case with DMT because obviously these patents go out till 2011 and 2012.

Okay, thank you very much.

Sure.

Okay thank you operator and thank you for joining us for a discussion of CombiMatrix.

The third quarter of this year was very exciting for CombiMatrix and I am pleased with our performance.

During my prepared comments, I'll bring everyone up to date on the four major initiatives that we are executing at CombiMatrix.

I also want to note that unlike most biotech companies at our stage of development, we are able to undertake all of these initiatives while remaining close to cash flow neutrality, which has been one of our stated goals.

We are able to achieve this goal by leveraging strategic alliances and I would like to highlight some key financial points before discussing the activities of the quarter.

We received payments from Roche this quarter totaling more than $3m.

In total, we have received close to $26.5m from Roche in the roughly 26 months since we entered the collaboration.

Added to the Roche payments was approximately $700,000 of other payments including interest, sales, sales from our Japanese subsidiary and other sources.

Total cash inflow for the quarter was roughly - was greater than $3.8m and close to $4m.

Total cash outflow was $4.72m.

So net cash outflow for the quarter was a little bit over $200,000.

Our balance sheet at the end of Q2 was $19.263m of cash and no debt and we ended this quarter again with no debt in $19.41m.

As I mentioned earlier, our financial goal for the year is to achieve cash flowing neutrality plus or minus a small percentage while still investing in our full growth initiatives which are our MicroWave Platforms, our Electrochemical Detection and Defense Programs, our new siRNA Drug Discovery Programs and our nanotechnology initiative, as well as some additional initiatives which are confidential at this time.

The primary activity during the quarter as has been the case in previous quarters was focused on the Matrix array of products suite being developed in partnership with Roche, the bulk of the development efforts have been completed for which we have received our R&D in milestone payments totaling close to $26.5m.

Our focus currently is on the manufacturing scalability of the arrays as well as quality control and other production metrics that are critical to the commercial success of the product.

I would like to note that the launch date, launch plan and launch strategy from Matrix array is completely under the control of our partner Roche.

CombiMatrix is focused on achieving each of its milestones and other R&D deliverables.

We have met the bulk of the deliverables and are currently completing others, including some R&D projects that will continue into next year.

As soon as we have better visibility about the launch dates and plans, we will issue a statement providing more details.

Regardless of the date, we are excited about the launch and the commercial potential of Matrix array.

In our defense related, our efforts with the US government to finalize project details continue.

Meanwhile, a recent press release by a Washington State Congressman Rick Larson indicated that we have been awarded an additional $3m for the period following the first award of $3.6m.

Our plan is to combine both of these into a 12-month to 24-month program with the military.

As part of our effort in this area, we are establishing relationships with a number of military and government organizations to provide access to chemical and biological agents such as smallpox, anthrax, plague, and other agents, and are necessary for our work but are ordinarily unavailable.

We are also in discussions with some of these organizations to develop subcontracting relationships, so that they will be able to perform testing functions in their laboratories which function at high levels of securities as well as high levels of bio-safety.

These discussions take time and we hope to complete the agreement soon.

We will issue a public statement when we have officially begun work on these funded programs.

Related to our defense efforts, we continue to develop new chip designs with [Topen], our second strategic partner and plan to have some first fabrication runs of second generation for electrochemical detection soon.

We are working on achieving the next milestones in our agreement with [Topen] for which we will receive a payment.

In the nanotechnology and nanomaterials area, our partner in nanomaterials, Discovery Corporation, recently announced the allowance of a number of key claims in a patent application titled, [indiscernible] for development and testing of materials.

As we had announced previously, NDC will utilize CombiMatrix's micro array technology to discover new nanostructure materials and develop a workstation for sale.

Both CombiMatrix and NDC will share the revenue from any material discoveries as well as sales of the discovery workstations.

This intellectual property along with the existing electro property both ours and NDC's strengthens and enables our collaborative effort.

One of the key reasons we chose NDC as our partner was their suite of intellectual property which when coupled with our IP and our array technology is a formidable combination.

Now for perhaps our most exciting initiative, siRNA drug development.

In the siRNA area, during the quarter and surely after the quarter, we continued work on our existing collaborations and entered into a new collaboration with the Seattle Biomedical Research Institute.

Just to review our efforts in siRNA drug discovery and target discovery and the validation to utilize the tremendous power of our array technology to both synthesize potential drugs and test their effectiveness.

To date, all of our efforts have been in vitro.

Eventually, our goal would be to develop compounds, which have potent anti-viral activity in vitro and then continue development of these compounds in partnership with other biotech and pharmaceutical companies who have the resources and the strategic interest in the diseases being addressed.

For this program is early, this area is perhaps the most active area of drug discovery worldwide and we are pleased with our progress to date.

Finally, I'd like to take a moment to comment on the strategy behind our academic collaborations, since we have announced several in the last few months and discussing each one in detail would take too much time.

Our collaboration strategy is designed to augment our expertise with the capabilities of our collaborators.

Each type of collaboration has one or more of the following goals.

One goal is to develop new applications of our technology.

The flexible nature of our technology allows us to fabricate arrays that have characteristics not obtainable with other platforms.

For example, we can build arrays of genes from different gene [inaudible] on the same array, for example we can put genes from the virus and a host together.

There are many other attributes of our arrays that are also unique.

As a result, we feel that some of our collaborations will help extend the application of arrays into new areas besides gene expression and mutation analysis.

Another goal is to develop diagnostic markers that can be placed on our arrays from a [indiscernible] diagnostic applications.

An example of this is type of collaboration is the one with the University of Washington and Rational Diagnostics.

University of Washington and Rational Diagnostics have identified genetic markers, which pace and important for the diagnosis and perhaps treatment of lymphomas, a type of cancer.

They have assembled patient samples with corresponding clinical data, and would like to co-relate clinical outcomes with genetic information.

Our customizable arrays enable that study and eventually will enable the use of these markers to diagnose Lymphomas.

As we establish collaborations like this for other diseases, we hope to establish our array platform as the standard for discovery and delivery of molecular diagnostics.

Another goal is to develop new knowledge or inventions, which can then be licensed to other parties with CombiMatrix sharing in the economic value with our collaborator.

We've already had some success in this effort with one of our Japanese collaborators.

In September, a discovery was made using arrays of CBRC, the Computational Biology Research Center in Japan.

I should say in September, the announcement of the discovery was made.

A patent on this discovery was filed and sublicensed to another Japanese company, undisclosed Japanese company and CombiMatrix and CBRC both shared in the payment for the license.

Another goal is to utilize the expertise of our collaborators to further development of drug candidates, our siRNA Collaborations are designed for this particular goal.

For example, our goal is to be eventually working in a dozen or more disease areas with our siRNA platform.

Obviously, we don't have the clinical or even biological expertise in our stated areas of interest.

Our expertise is in the development and synthesis of compounds.

Our collaborators have expertise in the virology of each disease as well as appropriate cultures and assays.

If we were required to develop these cultures and assays ourselves, capital constraints would limit our efforts to one or utmost two diseases.

By working with collaborators, we diversify our opportunity without adding cost.

All these collaborations are designed to be low cost until significant technical progress is made at which point we'd decide to further invest in the program or seek partners to co-invest with us.

Ultimately our goal is to have many activities ongoing without the tremendous capital burn that is usually required for conventional biotech research.

In addition to the operational activities, which I have just described, we augmented the strength of our scientific advisory board by adding Dr. Shane Grey, formally of the School of Medicine at Harvard University and currently at the Garvan Institute in Australia.

In addition, we had Dr. Camran Nezhat of Stanford University.

Dr. Grey is an expert in using the nucleic acid base therapies to treat autoimmune and inflammatory diseases such as diabetes.

Dr. Nezhat of Stanford University Medical School is an internationally renowned surgeon who pioneered the technique of video laproscopy that has revolutionized modern abdominal and pelvic surgery.

Dr. Nezhat is also one of the world's expert's in endometriosis, Fibroids and other gynecological conditions.

As CombiMatrix continues to develop as a broad based life science company, the experience and advice and contacts of our SAB members will be tremendously helpful.

With that, I would like to turn the call back over to the operator to take questions.

Thank you Sir.

The question and answer session will begin for the CombiMatrix Group. (Caller Instructions) Our first question comes from Bennett [Chemine], a private investor.

Please state you question.

Yes, hi Dr. Kumar.

I'm wondering if you are entertaining the possibility of some acquisitions?

And I'm thinking mainly of the nanotechnology field, which is just unbelievable potential.

Anything going on in that area?

Well, obviously I can't comment on anything specific.

We're always looking for opportunities to build value for shareholders in all fields and nanotechnology is an initiative that we are looking at.

However, most of that work is being done through our partnership with Nanomaterials Discovery Corporation.

I wonder too, Amit, if you could tell me if you're doing anything in the fuel cell industry which is obviously exploding or hopefully exploding in this country?

That's correct, in fact the goal of the materials discovery efforts with Nanomaterials Technology NDC is primarily focused on conducting polymers and electrocatalysts for applications in areas such as batteries, electric energy storage as well as energy generation or conversion for fuelcell applications.

How far off would you indicate we have some income from that?

Well, it's difficult to speculate because we are at an early stage of development.

However, we hope that we don't need to wait until we have a functioning fuel cell to bring in income, we would like to establish them, corporate relationships like we have done with our Roche relationship.

Okay.

Thank you.

Thank you. (Caller Instructions) If there are no further questions, I'll turn the conference back over to Paul Ryan.

Sir?

Thank you operator.

I appreciate you all being with us here today, and obviously, if anyone has questions regarding the ACACIA Technologies Group or CombiMatrix, they can get in touch with the appropriate people of each group.

Thank you and we look forward to speaking with you next quarter.

Thank you ladies and gentlemen.

If you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 309899.

This concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect. [s1]This text has been transposed to its proper place in the chronology of the call.

In this call, there were two different presentations, separated by a question-and-answer period relating to the first presentation.

The first presentation is concerning the Acacia Research Group.

After this presentation is a Q&A session for this presentation.

After this Q&A session, another presentation is given by the President and CEO of CombiMatrix.

After his presentation, there is a second Q&A session relating to his presentation.