Acacia Research Corp (ACTG) 2003 Q4 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Acacia Research fourth-quarter earnings release conference call.

At this time I'd like to inform you that this conference is being recorded and all participants are in a listen only mode.

At the request of the Company we will open up the conference for questions and answers after the presentation.

I'd now like to turn the conference over to Mr. Paul Ryan.

Please go ahead, sir.

Thank you, operator.

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 fourth quarter and year end consolidated financial results as well as for the Acacia Technologies group and the CombiMatrix Group.

Today, we will start with a review of operating activities of the CombiMatrix Group and a Q&A session led by Dr. Amit Kumar -- CEO of CombiMatrix.

This'll be followed by a presentation and Q&A session for the Acacia Technologies group led by Chip Harris and myself.

With that I will now turn the call over to Dr. Kumar.

I'd like to begin by stating that the fourth-quarter of 2003 and in fact the full year are extremely exciting and productive for CombiMatrix.

In fact, 2003 was the most productive year in the history of our Company.

We achieved many significant technical milestones -- strategic milestones -- as well as financial milestones.

Our performance and achievements of 2003 have positioned us for continued success in 2004 and in the future.

During the quarter and year, we achieved many milestones and disclosed through public releases a number of achievements, initiatives, and relationships.

Now while I'll not have time to discuss all of them I will highlight some.

I'll also highlight some key financial performance metrics and during this call, I will update and discuss the status of our relationship with our largest strategic partner, Roche, and by finally I'll discuss our activities and goals for 2004.

At the risk of being redundant for many of our long-time shareholders, I'd like to set the context for my remarks by describing the four major initiatives currently being undertaken by CombiMatrix.

They are as follows.

The first is to DNA MicroArray market for applications in research and development as well as diagnostics in pharmacogenomics.

Products include the arrays themselves and other items which will be used by researchers and clinicians to understand and diagnose diseases at the genetic level as well as develop potential therapies and cures.

This is a large rapidly growing opportunity where our products we feel will have well-defined and considerable advantages over competitors.

This market is very competitive with existing clearance and new interest coming into the market.

However, this activity underscores the attractiveness of this market.

The second area of focus is sensor applications for new end products, and homeland security and national defense.

This is an emerging and potentially large market which we can address using our core technologies.

We plan to develop a core detector module that can detect the presence of biological and chemical agents in the battlefields as well as in non battle fields situations.

Though it's difficult to identify the ultimate size and growth of this commercial opportunity we feel that the potential threats from chemical or biological agents are real and will continue to be a major domestic and international concern.

The third area that I'd like to discuss and like to note is nucleic acid discovery -- I am sorry -- nucleic acid discovery and development of drugs against viral diseases.

Again, we leverage the capabilities of our chip technology to synthesize nucleic acid compound which can potentially function as drugs against very deadly viral diseases.

Though this is early stage work the market for antiviral drugs is immense and if this program is even partially successful, this opportunity has the potential to dwarf everything else we're doing combined.

The last area I would like to note are the nonbiological applications of our chip technology which we categorize as nanotechnology applications.

Though all of our work can be classified as nanotechnology in nature for the sake of labels we typically used the term nanotechnology when referring to non biotech application of our core technology.

In this arena we leverage the capabilities of our chips, enable the synthesis and discovery of chemicals and materials to perform certain sensing tasks as well as other related applications.

It's important to note that we are investing in all four of these commercial areas alongside a number of strategic partners.

Our partnerships -- some of which I will discuss in this call -- provide us cash and/or capabilities and infrastructure which are necessary to our operations in which we choose not to invest.

By leveraging our partnerships we're able to undertake initiatives in these four major commercial areas while managing, effectively, our operating cost.

Our cash flow for the fourth-quarter was negative by only $2 million.

Looking at our cash flow over the last four quarters our net burn has only been roughly $3.4 million for an average quarterly burn of about $850,000 (ph) recorded for the four quarters of 2003.

We also finished the year with roughly $17.3 million in cash on our balance sheet and no debt.

With that as a background, let me discuss some key achievements for the year and subsequent events.

In 2003, we sold two prototypes DNA MicroArray synthesizers to customers in Japan, we built the first commercial SARS DNA arrays one day after the virus's genetic code was sequenced and published on April 14.

We initiated an alliance with Toppan (ph) Printing Company -- a diversified Japanese company with over $12 billion of annual revenue.

And today we have received more than $2 million in payment from Toppan under the terms of our agreement.

We completed a private placement transaction of about $5 million to fund our new drug discovery effort, primarily focused on SIRNA (ph) drug discovery.

Subsequent to that we initiated our SIRNA drug discovery efforts.

We also hired retired Col. David Danly to lead our programs in homeland security and national defense.

We added two new members to a scientific advisory board.

The first was Dr. Shane Gray -- an expert in metabolic diseases.

And the second was Dr. Cameron Ezot (ph), a surgeon at Stanford Medical School who pioneered the process of video laproscopy for abdominal surgery.

Also we established a number of other collaborations with companies and academic institutions such as the University of Washington, Harvard University, Nanomaterials Discovery Corp., Seattle Biomedical Research Institute, and others.

In addition in 2003, we completed the bulk of our commitments to Roche, under our fifteen year relationship resulting in total payments of nearly $27 million over the 2 1/2 years during which we have been engaged in that partnership.

Additionally, in the first few weeks of 2004 we announced our collaborations with Cyrano Sciences in Washington University in the nanotechnology area.

We also added Mark McClusky (ph) one of the nation's top experts in nanotechnology to our scientific advisory board.

And we also built the first commercially available DNA race for bird flu -- two days after the World Health Organization asked the general life science community to help provide tools to combat this new emerging disease.

Now for an update regarding Roche.

As many of you know our strategic partner informed us last year that they would not be launching Matrix Array in 2003.

As of the current date we have completed most of our obligations under our agreement with Roche and Roche has informed us that their continued commitment to Matrix Array that has not provided an updated schedule for launched [indiscernible].

Until they provide us information or comment publicly regarding their plans, we have no additional information to provide.

Meanwhile our launch of customer ray (ph) is progressing on plan and we expect to introduce this product to the general lifetime community in March with the launch of our 1K fully customizabled MicroArrays.

This will be followed by the launch of our 10-K fully customizabled MicroArray in May.

Needless to say, all of us at CombiMatrix are excited at the first major launch of our product.

Now let me make some comments regarding our goals for 2004.

In addition to the custom array product introductions I just mentioned, we will continue to develop and expand our technology and product (inaudible)[indiscernible].

We also -- we will also expand our efforts in the drug discovery area as we are choosing good results from our SIRNA program.

You should expect here more about our drug discovery and development efforts into the next few quarters.

In addition, we plan to begin work on our biowarfare agent detection program under government funding.

We're completing the final activities and discussions with (indiscernible) agencies that are necessary before beginning this program.

In keeping with our strategy of working with partners, we will continue to establish relationships with partners both small and large to leverage our internal efforts.

And, lastly, we hope to aggressively partner our technology with non biotechnology partners in the nanotechnology area.

I want to end by stating that 2003 (ph) was an exciting and productive year for CombiMatrix.

We hope to make 2004 even more so and with that I'll turn the call over to the operator to assemble questions for the CombiMatrix group.

[Operator Instructions].

Jonathan Aschoff with Breen Murray.

I was wondering why was there no amortization of the Toppan upfront payment?

I was expecting a quarter's worth of that?

Well, again, this goes back to GAAP accounting rules and the determination by our auditors was that we weren't able to amortize that.

We've received the cash and the cash belongs to us and there's no giveback but according to the rules (inaudible) [inaudible].

According to the rules do you know when you can start amortizing that?

Jonathan, this is Paul.

On the accounting side, it's a multi element deal, similar to Roche, so basically we will take a look at the -- once we have the completed work on the front end, there will be done in determination of what value the 3 percent royalty is in the future and we will look at that time and see if we take the revenues [indiscernible] that order until that time will not be amortizing into the [inaudible]

So it'll be pretty much identical to the Roche terms in terms of when things flow through.

-- very similar, yes.

On emerging diseases can you tell us how that's going to impact the business model?

I think the two events related to that area were our announcement of our Star (ph) MicroArray very quickly after the genome was published and recently our announcement of the breakthrough MicroArray.

We think emerging diseases which tend to be viral in nature are here to stay.

We anticipate that there will be more diseases, especially in this era where people are traveling; and we hope that we will be able to provide user technology to provide MicroArrays very rapidly for any new diseases that are of interest.

Our technology is very powerful and in principle if the genome is available we can overnight make a MicroArray a DNA MicroArray for that particular disease.

Lastly, can you comment on how your cash use might change compared to the 1.7 million for the fourth quarter?

Our cash use?

Burn use.

In general, it's not our policy to provide projections as we go forward, but as we stated before our plan is to watch our burn very carefully and leverage our relationships in such a way that we don't burn tremendous amounts of cash.

[Operator Instructions].

Paul Burger with Heiman (ph).

Amit, could you tell us on the balance sheet what's the breakout in liability and how much is deferred revenue?

Sorry, I missed some of that.

On the balance sheet what's the breakout between liabilities which includes deferred revenues?

How much is deferred revenues?

We have $20.4 million in deferred revenues.

The bulk of that are payments that we've received from Roche but in addition to that are payments that we received from Toppan.

So, approximately about 18 million will be from Roche?

Roughly.

Virginia Daney (ph) with Maxim Group.

Hello.

I had a question with regards to your initiative on the nanotechnology applications and how your strategy and/or platform's going to differ from the managing of the other people in that sector?

I don't want to comment on the technologies and platforms of other companies but our goal is to design partnerships that leverage our technology and investment we've made in our technology with product opportunities that are being developed by outside groups.

All of our programs are designed to be low risk and low-cost to us so what we essentially do is we provide our chip and license our technology for applications where we ordinarily would not be developing products internally.

We provide the chip for licenses for support which is very low-cost for us with partners funded development either at their costs or some government support and as products are developed our partners will sell those products and our economic benefit will be sales of chips formatted into those nanotechnology products.

The three partnerships we've announced to date are with Nano Materials Discovery Corporation which is using our chips for the discovery of new materials and the development (indiscernible) from materials discovery.

The second partnership is with Cyrano Sciences for the development of electronic nodes and something called Electronic Nodes Technology which is a new nodality for sensing.

Third partnership is with Washington University in St. Louis under a grant funded by the National Science Foundation for synthesis of new chemical compounds on our chips.

These are all very exciting and potentially very valuable programs and we anticipate doing a lot more in these areas.

But the key here is, in keeping with our strategy, we're letting our partners fund much of the development effort while we take advantage of the investment we've already made in our chip technology.

Thank you -- in addition to that, one other question.

In addition to that, you just mentioned the $17.3 million in cash?

And you came out with a shelf offering or proposed shelf offering a couple of days ago along with Acacia Research, can you comment on what you'd use that if you have enough -- had a good funding?

Let me ask (indiscernible) to address to address that question [indiscernible]

Yes we filed on a Tuesday as you know (indiscernible) simply we don't have any current plans in place to raise money or any agreement.

We simply think doing a shelf will give us registered stock which will provide us with greater flexibility should we decide to raise additional capital in the future.

I think both operating groups particularly [indiscernible] adequate capital but if capital is available to us at the right price we are always looking at that situation to invest interest in stockholders so I will turn it back to Amit on his operating budget -- again, he doesn't want to do a lot of forward looking statements but certainly he was very successful last year in managing all four initiatives while using up less cash and actually the Company finished the year with more cash than it started last year.

So, hopefully, we'll stay on that target but if we get an opportunity to raise additional capital attractive prices is certainly something we will consider.

Bennett Chumain, private investor.

The question I have is regarding the Defense Department and our receiving of the grants.

I understand we still haven't received the grant money and with the war on terrorism and the commercialization of this for office buildings and plants what are you -- how soon do you foresee us receiving the grants and what do you see taking place in that field over the next year?

Well I think that field -- my prediction for that field is obviously driven by what is happening with regard to wars and terrorism.

Specifically with respect to our program, we are continuing discussions with agencies and the government.

We hope to begin work on this project soon, perhaps as early as this coming month.

We have to understand that this is the first major contract with the government for CombiMatrix so we have to go through a number of different issues.

We're learning as we go along.

In addition, this is also a contract that not only has us receiving funding for development, but also receiving and having access to real biological agents such as anthrax and other pages which I am not prepared to disclose publicly.

Therefore the process is very new for us and to some degree also very new for the government.

Once we've completed this process in becoming validated -- "validated" -- barring drastic changes in the future we anticipate subsequent programs should go much more smoothly and much more rapidly.

As far as what I can predict about this market opportunity, that's difficult.

I think you just watch the news and see what's going on and political instabilities and fears of terrorism and things like ricin seen in government offices are things that are going to drive how big this market is going to be/

Well, it's been about 2 1/2 years since the attack in New York.

Is the federal government -- do you believe -- going to be speeding up some of these programs?

I think the federal government itself is determining what its strategy is going to be and a lot of that is driven by what is actually happening in the world.

Luckily, there haven't been too many events that have occurred in the United States and even outside of the United States the things that have occurred have not been biological and chemical agent in nature.

That being said, no one knows what's going to happen in the future and so there are certain things that the federal government is moving forward very quickly on and certain things they're moving slowly on.

One of the issues with this program -- this type of program -- as I said earlier is that government is used to providing capital to companies to develop products or do research, it's not often the case or hasn't been the case in the past where the government regularly provides access to commercial entities to certain things that are potentially very deadly like anthrax and like other biological agents.

And in order for us to do this work, we have to receive those agents, and as a result that and among other things the fact that this is our first contract where it's taken a little bit of time.

With that being said we're excited about the project and we anticipate beginning it very shortly.

Virginia Daney.

My question was answered by the last gentleman.

Thank you.

I will now turn the conference over to Chip Harris.

Please go ahead, sir.

Oh, okay.

Actually why don't I take the -- I'm going to do the intro and then Chip will go over the operations for the Acacia Technologies Group in detail?

During the fourth quarter the Acacia Technologies Group continued to roll out its licensing program for our digital media transmission or DMT technology.

We entered into 72 new licensing agreements during the quarter bringing total DMT licensing agreements to 115.

Fourth quarter licensing revenues increased to 481,000 from 186,000 in the previous quarter and did not include fourth quarter license fees due from a number of licensees which we recognized these revenues when received from the first quarter of 2004.

Importantly all of our licensing agreements provide for recurring payments, which we will recognize on a quarterly basis.

We also completed our first licensing agreement in the e-learning sector with their 24 7 University and now have entered into licenses with a number of companies representing a variety of industry sectors.

The wide range of media and communication companies which have already 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 fourth quarter, we focused our licensing program in a number of additional sectors, including online learning companies, new sports of entertainment Internet sites and corporate Web sites, utilizing video-on-demand.

We also continued our discussions with cable TV companies which represent an important industry segment for potential licensing revenue.

Cable TV companies are increasingly utilizing our technology with their rollout of video-on-demand and also for their new digital add insertion initiatives.

There are 72 million U.S. cable households so this obviously represents a large licensing opportunity.

We are very pleased with the progress of our discussions, with a wide variety 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 specifics of our licensing activities in each of these industry segments.

Chip.

Thanks Paul.

Just a recap of what Paul said we now have 115 license agreements through the end of last year.

And all these licensing agreements provide [indiscernible] [inaudible] which is important.

A brief update on the (inaudible).

As you're aware that was one of the initial industry sectors that we commenced licensing because companies in sectors are generating significant revenues utilizing our technology.

We now license many of the leading companies in this sector.

One example is a group called Cyberheat [indiscernible] in the fourth quarter and what's important to know is they receive traffic from over 3000 Web sites.

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

Something that's happened in the cable arena, we believe our timing is good because of this is the new rollout using our technology for not only video-on-demand but the digital and insertion that Paul just referred to.

This is an area that the Wall Street analysts predict will generate several billion dollars per year in new revenues for the cable industry.

A brief description of digital insertion which utilizes our technology now enables cable TV companies to compete with broadcast networks for spot advertising dollars.

Up until recently cable had not been receiving its fair share due to its inability to sell those advertising spots on a nationwide basis.

Recent reports predict cable TV companies will gain approximately 4 billion in incremental annual revenues.

And about 65 percent of that going to the bottom line.

So this is a very profitable venture for the cable companies and they're clearly using our technology in their rollout of this digital ad insertion.

In addition in the past we've made some estimates as to the penetration of video-on-demand by cable TV.

Recent reports have accelerated our earlier projections and it's now predicted to reach 85 percent of all U.S. cable households within two years.

That generates several billion in new revenues for the cable industry. [indiscernible] [inaudible] scores the area is using our technology are being rapidly employed and very profitable areas for the cable industry.

As Paul also mentioned in the discussion many companies are rapidly growing e-learning section.

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

We're in the process of negotiating industry licensing agreements which should accommodate the various business models within that industry.

Many analysts are projecting rapid growth for this industry and our potential licensing revenue could grow the next few years will be organic growth for the industry and the increasing utilization of video-on-demand as a core element of those online classes.

We're also moving forward with discussions with a wide variety of new companies that are beginning to build significant traffic along sports, news, and entertainment and we're in the process of negotiating licensing rights which will accommodate those various business models as well.

All of the major sports categories such as Major League Baseball, National Football League, National Basketball Association, even NASCAR have developed online websites along with popular websites such as ESPN.com.

And all those groups have been notified.

Major media companies are now aggressively developing online news and entertainment sports sites and we expect that trend to continue as a number of high-speed Internet homes reach critical mass of 40 million U.S. households by 2005.

We're also in discussion with companies that are now using our video-on-demand technology in significant ways on their corporate websites and are working with them to enter into appropriate licensing agreements.

As you can see we've now actively rolled 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 in the next few quarters.

One of the things I would like to point out is the potential for organic growth which I believe has been overlooked by many of our shareholders.

A good example would be a company like Lodgenet (ph) which is expanding the use of our technology.

Last July when we licensed Lodgenet, they had converted 323,000 of their rooms and they have about a million rooms to their digital systems.

Our license agreement covers the number of digital rooms they have in place.

By the end of this year they were up to 385,000 rooms.

And they are now projecting that they will have converted over 500,000 of total gross by the end of this year.

This represents a a growth of 55 percent over the first 18 months of our license agreement.

So it's a very very big opportunity for us.

As the businesses of our licensees grow, so do the amount of our royalties.

So we will not only continue to grow revenues through the continued licensing agreements but we should expect added revenue growth to come from our existing licenses.

On the litigation front, the judge in our case against certain online adult entertainment companies has begun to hear testimony on the meaning of certain patent claim terms.

Additional court dates for this purpose have been scheduled in April and May and we don't expect any rulings in this area before summer at the earliest.

Of the original 39 companies named in our litigation only 9 remain so we've added 8 additional companies to the litigation.

An update on our V-chip litigation against the foreign license television manufacturers.

We have filed the briefs for the V-chip appeal with the Court of Appeals but the dates for oral arguments have not yet been set.

We also continue to evaluate new opportunities to acquire and/or master license IPs we've talked about in the past currently owned by both private and public companies.

We continue to analyze a number of these patent portfolios which come to us.

On a vast majority these IP portfolios have not met the rigorous standards which we require.

We have negotiated business terms with only two portfolios that we own or optioned.

These portfolios could potentially represent significant additional licensing opportunities for our Company.

We're now conducting final in depth due diligence on both these portfolios and should reach a final bottom decision regarding these opportunities in the near future.

We've also added to our patent acquisition team a new executive by name of Jennifer Hart, the Vice President of business development.

Miss Hart was formerly with Rockwell Technologies where she reported to the president of intellectual property management group and was involved with the commercialization of Rockwell's patent portfolio.

I guess I'll now turn the call back over to Paul for final comments before we start the Q&A system.

Yes, thank you.

Operator, you may now open up the call to questions and answers.

[Operator Instructions] David Reese, private investor.

My question was a more general question and I tried to get it in before but maybe this is not the time to ask it but I'm interested in some discussion of your capital structure of the whole company and what are the major reasons for doing it this way and do you plan to continue to [indiscernible] capital structure indefinitely?

Yes the capital structure of the company at Acacia Research is the holding company of the two operating groups and both we issued classes of stock to reflect the value of each of those two operating groups.

It's a structure that's been used by a number of other companies, there are a couple of prominent New York stock exchange companies applied by [indiscernible] systems and a player that operates under the same structure.

We initially entered into the structure to complete a merger to acquire 100 percent of CombiMatrix.

Also there are considerations for both economic efficiencies as well as tax.

If we would have divested in dividend (indiscernible) CombiMatrix stock to the shareholders of Acacia directly, that would've been a taxable dividend and would have bad tax consequences.

We evaluate the structure periodically.

We've recently done that that and it's been our Board's determination that, certainly for the next year, we will continue with this structure.

One of the benefits is particularly in this regulatory climate we estimate that probably saving about 1 million to $1.5 million that would be required as additional regulatory Sarbanes Oxley and accounting and DNO insurance -- if the two were operating as total separate public entities.

So in the interim period, there are economic efficiencies and the Board will continue to evaluate the structure in the future.

Virginia Daney, Maxim Group.

Good afternoon.

Chip, last quarter you came out with a run rate with 55 licensees approximately of $1.3 million.

Looking back at their revenue flow and what your royalty was on that, have you matriculated what you think would be these -- what, 115 license fees?

We talked about trying to give guidance for that going forward in the future.

But as you can see just by the explanation of the -- for instance in our Lodgenet licensees, our royalty revenues are dependent on the royalties that other people pay us and for us to give any meaningful estimates on how fast some of these companies' businesses grow wouldn't just be helpful at all.

So we decided that we really can't give any meaningful guidance on the future because we -- like with Lodgenet they have accelerated so much quicker than what I think they had originally anticipated.

Anything that we would have given in July based on what we thought they would've done would've fallen well short of what they actually identified.

So it would be probably just useless information so we decided to stay away from that because it's just problematic in us trying and having to estimate how well our licensees do with their own business in fields we really don't understand.

(MULTIPLE SPEAKERS)

Let me just add a brief comment.

We did, in the third quarter -- because it was the first time we had any revenues and we wanted to give investors some parameters, obviously, the fourth quarter revenues on a prorated example, the guidance we've given is 1.1 to 1.5 so, obviously, we've exceeded that significantly already in the first quarter.

But, again, we think as the numbers grow, it's going to become less predictable to us -- particularly larger companies -- how fast they're going to grow their revenues.

And I think this quarter and the next quarter you will start to see the revenue growth that, obviously, everybody can multiply their quarterly number by 4 and I think it will -- we won't need to give guidance because it could be problematic.

Even if you backed out organic growth?

Out of your current licenses?

Well it's also going to be so sporadic.

Obviously there are some large companies which we enter into licenses that would dwarf our total amount and we don't want to be giving people guidance if they're not following it.

The guidance could be off by a factor of 10.

So we just think now that we've established the second quarter of licensing we've demonstrated that even with these initial licenses we're nearly $.5 million a quarter.

The people can get some idea of the magnitude of the royalty rates and that we would rather not be in the situation of giving guidance on revenues on a go forward basis.

Okay, that's completely understandable.

You did see an influx in licensees when you were going to raise your rates with regards to some of the people that signed up, I think that was the SCN in November?

(MULTIPLE SPEAKERS) Yes --

When do you have it next slated to raise your rates again because often you see an influx at that point if people (MULTIPLE SPEAKERS) [indiscernible]

(MULTIPLE SPEAKERS)

There's only one category that we've done that to date.

Otherwise we've dealt with it on a company by company basis, kind of a deadline issue in terms of rates -- our introductory rates vs. rates that will be increasing and we'd rather keep that confidential.

Basically we did on the onetime basis because a number of those companies we had been in discussions for a lengthy period of time and we decided that November 31st was a deadline to protect that rate.

We do have -- in some conversations -- some other cutoff dates but I would rather not go into those publicly.

We're dealing on a company by company basis with a lot of that.

Orin Herschmen with OH Investments.

Could you just once again recap any other major legal milestones?

Have there been any challenges that appear to have any -- even if they're not going through the court system any bearing on the validity of just so many of the courts have been through that already and it is really a matter of just approaching the licensees one by one?

And my second question is can you go into any greater detail in terms of some of the other patent portfolios?

You know how advanced in the stages you are and is there more than one that you're looking at in an advanced stage?

Let me handle the first part on the legal.

No.

The only -- we've brought the litigation on the adult online -- a number of companies in that sector were nonresponsive to us.

So we needed to initiate the litigation and get people's attention.

We were down to 9 remaining litigants.

We have added a -- we're at a very very early stage of the litigation against the online adult companies and that (inaudible) (indiscernible) and the earliest we will know anything even from (indiscernible) would be the middle of the summer.

The only other legal issue is the -- we have filed a lawsuit (indiscernible) On Command, as you may be aware in the hotel Video-on-Demand market we've already licensed the leader Lodgenet net as well as we've licensed General Dynamics Interactive D&B.

We weren't able to reach an agreement on a royalty rate with On Command after extensive discussions with them and we felt it appropriate to protect the integrity of our other licensees if they hadn't entered into an agreement and we filed litigation.

We continue to have discussions with them and we will see if that moves into a further level of litigation but no, there's not been any other legal actions.

We are, obviously, as part of the ongoing case, we are aware of all of the purported prior [indiscernible] demonstrated and nothing we've seem to date causes us any concerns.

Even in terms of the On Command litigation it sounds like against the description of publicly at least documents as well as what you just described that they were willing to pay a royalty -- it just was not satisfactory and did not compare with the world rate that perhaps your other licensees were getting and that was the reason for the litigation?

It wasn't them denying the validity of the patents, correct?

Well I can't comment specifically but, obviously, if we were in discussions over rates and couldn't come to an agreement you could -- one could draw whatever conclusions they want to but I can't comment on the economic specifics.

Okay and in terms of...

We do have, I can comment to the degree that, obviously, in certain industry sectors with industry leaders the deal oftentimes do include what is known as a most favored nation's provision which precludes us really from granting licenses to other parties, subsequent to that fact of lesser rates (inaudible) earlier rates which comes into play at any negotiation after you license kind of an industry deal with one of the leaders in the industry.

Chip, maybe you can address on the other patent for portfolios?

We've taken a little more time to do due diligence that we had originally thought, but we obviously want to be very -- a lot of due diligence before we take on portfolio No. 3 and 4 [indiscernible]?

Chip, maybe you can add a few comments to that.

Yes, and part of that has been the reason for hiring Jennifer.

She has a lot of experience in analyzing portfolios and tried to set standards as to what we expect out of the existing mix [indiscernible] I will remind everybody that we've looked at the DMT portfolio for all parts of the year.

We have started to simplify that process, we think we're better at it.

And you know its patent licensing has a component to it kind of art as well as science -- science is pretty much identified.

You can negotiate the business structure, the business deal and then you really sit back and have to figure who are the potential licensees and make your best guess as to what is their ability to pay a license what are their margins so you get into more of the art than the science.

But it is our goal to add a number of new patent portfolios.

We think that the business -- that of licensing -- has come first and forefront into the marketplace with tremendous margins that are really hard to duplicate in most manufacturing areas, as well as recurring revenue that don't require the level of support that a product placement does.

And if we can find another half dozen portfolios over the next couple of years we think it will be well served to our shareholders.

You think, then, that it's possible to find another one in this current year.

Oh, yes, yes, no, no.

I mean, I think we would like to -- we haven't set goals internally because one portfolio could be worth a lot more than another portfolio.

But I think we would like to have a couple done by the first half of this year and then add additional ones the second half of the year.

The great thing is is from our engineering standpoint once we've done the initial engineering on the DMT we can then reapply all that engineering talent onto the second and the third one.

And so it's very leverageable.

We don't need to add incrementally the whole new engineering staff to identify the second and third and fourth and the same with the licensing group.

The licensing group as they get through the notifications of the DMT can then move on to the second and third.

You have a very modest additional expense requirement for some potentially significant revenues on a quarterly basis into the future and it also starts to diversify our risk reward away from just DMT as our only portfolio.

If there are no further questions I will now turn the conference back to Mr. Paul Ryan to conclude.

OK, I want to thank you all for being with us on this conference call.

Looking forward to speaking with you on the first quarter conference call.

In the meantime if you have specific questions that we can address, please feel free to give us a call.

Thanks.

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 337 810.

This concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.