Acacia Research Corp (ACTG) 2004 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Acacia Research Corporation second quarter earnings conference call.

As a reminder, today's call is being recorded, and at the request of the Company, we will open the conference up for questions and answers after each presentation.

Now for opening remarks and introductions, I would like to turn the conference over to Mr. Paul Ryan, Chief Executive Officer and Chairman of Acacia Research.

Thank you for being with us today.

Today's call may involve what the SEC considers to 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 second-quarter consolidated financial results, as well as results for the Acacia Technologies Group and CombiMatrix Group.

Today we will start with a review of the operating activities of the CombiMatrix Group (indiscernible) led by Dr. Amit Kumar, CEO and President of CombiMatrix.

This will be followed by a presentation and Q&A session for the Acacia Technologies Group, led by Chip Harris and myself.

Before turning the call over to Dr. Kumar, I want to congratulate him and all the employees of CombiMatrix for this morning's announcement that CombiMatrix will be receiving an additional $2.3 million from the Department of Defense for the development of their bio-defense detector system.

CombiMatrix, as you may know, began work on this project earlier this year through a Department of Defense contract worth 5.9 million, so total funding for the project now exceeds $8 million.

I also want to congratulate the CombiMatrix team on their announcement earlier this week that their siRNA drug discovery collaboration has generated two compounds that have demonstrated tremendous efficacy in in-vitro testing on the HIV virus, and have been selected for preclinical development.

And with that, I would like to turn the call over to Amit Kumar.

Thank you very much, Paul.

During the second quarter of 2004, CombiMatrix achieved significant progress in executing its business strategy, and we are now in stronger and better-positioned Company than at any point in our history.

The activities of this quarter were underscored by two key events in addition to the Department of Defense funding, which was mentioned earlier.

The first key event was the on-time commercial launch of our second microarray product, which will, we anticipate, make significant inroads into the market.

The second key event, which Paul just mentioned and was announced this week, was an update on our progress in our viral drug development program.

During my remarks, I will discuss these two events as well as highlight the other activities and achievements of the quarter and provide an update on all four of our business initiatives, which, as many of you know, are first, DNA microarrays for research and diagnostic application; our strategic relationships in the nanotechnology area; our funded work for the DOD, Department of Defense; and finally our siRNA viral drug development program.

After my remarks, I will take questions.

Let me first address the microarray and genetic analysis business.

As stated earlier this quarter, subsequent to our financing, one reason for strengthening our balance sheet was to invest in our commercialization infrastructure for microarray products.

Consequently, we have added to our sales, marketing and customer support staff and we will continue to do so throughout the year.

We have now launched two microarray products under the CustomArray brand.

There are low-density customizable microarray and our mid-density customizable microarray.

In addition, we have begun the design and launch of a series of catalog arrays for specific types of pharmaceutical research.

They include the human metabolism and the human toxicology arrays.

These gene expression arrays contain probes for key genes that have been linked to human's ability to metabolize drugs, as well as key genes linked to toxic responses to drugs.

Researchers will be able to use these arrays to evaluate potential metabolic and toxic responses to drugs, resulting in development of superior pharmaceuticals.

These arrays will be constantly updated as additional genes are linked to metabolism and toxicology.

The new arrays address the most common reasons for failure of drugs in clinical trials.

Toxicology and metabolism are also the causes of hundreds of thousands of deaths in the U.S. alone from adverse reactions to approved drugs or combinations of them.

As we move forward, we will continue to release additional specific microarrays focused in the areas of oncology, central nervous system diseases, cardiovascular disease, metabolic diseases, as well as other areas.

Our technology is ideally suited to this effort since we are able to rapidly customize the design and synthesis of genetic probes for any gene.

Therefore, as new links are identified for particular disease areas, we will rapidly incorporate them into our arrays.

Our current products have been on the market for roughly three months and our sales infrastructure is just being built.

However, we have seen good traction and results with new customers.

Our chip sales for this quarter, though modest, have grown rapidly and we hope to continue that trend as our sales force becomes fully deployed, our early customers begin publishing data using our products, and as we gain overall greater visibility for our Company and products in the industry.

In addition to our direct efforts, we have established two strategic comarketing relationships.

The first was with Axon Instruments, which was recently acquired by Molecular Devices.

Axon is the market leader in sales and placements of reader instruments for microarray analysis.

As many of you know, our microarrays are designed in a format that enables them to be read on most readers that are already in place.

Our comarketing relationship with Axon enables us to promote their readers for use with our microarrays, enables them to promote our arrays for use with their existing customer base, as well as their new customers.

We also recently announced our strategic comarketing relationship with Strand Genomics.

Strand Genomics has developed a software application for analysis of data from microarrays.

Strand will customize their software for use specifically with our CustomArray platform, and we will aid in marketing this software product to our customers.

Strand will pay us a royalty on all customers we refer to them.

With these two relationships, we are now able to offer our customers a nearly complete package, which includes microarrays, instruments, and data analysis software.

Currently, our customers purchase reagents from other vendors, but we are in discussions with a number of those vendors to supply reagents through us.

We at CombiMatrix are excited about the launch of our products and look forward to additional launches and continued execution of our business strategy as we continue our transition from a research and development focus to a commercial market focus.

In the area we call nanotechnology, we continue to see progress from our strategic partners and we anticipate establishing some additional partnerships.

As a reminder, we use the term nanotechnology to refer to all of our nonbiological work, though by commonly held definitions, all of our technology is nanotech in nature.

Our third area of business focus is the Homeland Security and national defense market.

As many of you know, we were awarded our nearly $6 million contract in March, so we are roughly four months into this program and have made great progress on this front.

In addition to this existing contract, as released this morning, we have been informed by the office of U.S.

Senator Patty Murray from the state of Washington that the U.S. budget has allocated an additional $2.3 million for fiscal 2005 for continued work on our detector system.

This budget has to be signed by the President before it is considered law, and we are pleased by the continued support by our government in this endeavor, and we look forward to great progress and additional achievements in this area.

I want to underscore the point that this $2.3 million is in addition to our existing $5.9 million contract.

I also want to remind everyone that the work we are doing in this area, though focused on bio and chemical threats, is directly applicable for more traditional life science applications in R&D -- research and development -- and diagnostics.

Therefore, the defense-related work, which is fully funded by our DOD contract, is leveraged to enable the development of novel life science projects which utilize electrochemical detection.

I also want to note that we continue our discussions with large defense contractors regarding strategic alliances in this area.

The last area I would like to discuss is our siRNA program.

As many of you know, the bulk of our efforts in this program have been on HIV, with our collaborators in Spain.

We have just recently expanded the program to include Hepatitis C. In the HIV area, we and our collaborators have identified two specific sequences of RNA that target two genes of the virus.

The first gene silence (ph) codes for the enzyme HIV-1 reverse transcriptase, which is used by the virus to convert its RNA into DNA, which can then be incorporated into the genome of the infected human host.

Many of the best-known and successful HIV drugs available today inhibit the activity of reverse transcriptase, so we know that this is a commercially validated target.

With siRNA technology, it appears that the synthesis of the reverse transcriptase enzyme could be virtually shut down, providing a potentially more powerful therapeutic approach to inhibit the virus.

The second gene silence is known as HIV-1 Nef, which codes for a regulatory protein which is responsible for weakening the human immune system, thus enabling the HIV virus to rapidly replicate within the human host.

Both of these targeted genes, HIV-1 reverse transcriptase and HIV-1 Nef are critical for the viability of the virus in a human host.

Our in-vitro experiments indicate that one or both of our RNA compounds inhibit the virus by over 99 percent.

This is a very powerful response, which we feel is comparable or better than anything else that has been reported in the literature.

I want to note that though these results are exciting, this is early-stage work, and in order to achieve an FDA-approved drug, there are a number of significant risk-laden steps, which include animal studies as well as human clinical studies.

We hope to make progress in this area rapidly and will provide guidance on this program in the coming quarters.

CombiMatrix is in the process of filing patent applications in and around these specific RNA molecules and has entered into a three-year strategic relationship with our collaborators, as announced this week.

Under the terms of the relationship, CombiMatrix will fund additional work at the IrsiCaixa Foundation.

The total funding will be $450,000 over the next three years, and CombiMatrix will pay modest milestones and royalties to the Foundation when and if the compounds enter clinical trials and our approved for sale and are marketed as commercial drugs.

In exchange, CombiMatrix will either own or have an exclusive license to all intellectual property developed under its funding.

In keeping with our overall strategy, this relationship enables us to conduct state-of-the-art research without having to invest in building infrastructure, which already exists at the IrsiCaixa Foundation.

Background information on the Foundation and its founder and director, Dr. Bonaventura Clotet, can be found at their Website, www.irsicaixa.org.

But I want to highlight a few points here.

IrsiCaixa is a nonprofit research foundation dedicated to the study of viral diseases, with an emphasis on HIV and AIDS.

The Foundation is associated with one of the leading hospitals for the treatment of HIV and AIDS in Western Europe.

Dr. Clotet is the director of the Foundation and the chief of the AIDS unit of the University Hospital.

Dr. Clotet has published more than 150 peer-reviewed papers, books, and chapters on HIV retrovirology, HIV-HCV co-infection treatment, HIV resistance and siRNA research.

He is on the editorial boards of the AIDS Journal and the Journal of the International Association of Physicians in AIDS care.

Professor Clotet is a member of the governing council of the International AIDS Society and the Drug Resistance Mutations Group belonging to the International AIDS Society.

Please go to the Foundation website for more information.

In addition to our collaboration on HIV, we have initiated a similar program to address Hepatitis C virus, HCV.

Over 4.5 million Americans and over 200 million people worldwide are infected with the Hepatitis C virus, and most of these cases will lead to chronic liver disease.

Viral hepatitis and HIV are infectious diseases that are transmitted in many of the same ways and have severe medical implications.

Also, about 25 percent of HIV-infected individuals in the U.S. are also infected with Hepatitis C. We hope our collaborative work in Hepatitis C and our continued work with HIV will be successful as we move forward.

And we'll provide additional information on progress and plans in the upcoming quarters.

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

Thank you. (OPERATOR INSTRUCTIONS) This question-and-answer session is for the CombiMatrix group.

Jonathan Ashcroft (ph).

I was wondering, given the 16,000 and the 44,000 in chip sales, and certainly understanding the difference in value between a 1K and a 12K density, what can someone reasonably expect for the rest of the year, or at least what sort of order flow have you seen for the 12K in the last few weeks and compare that to the 1K?

Obviously, the 1K has been about out for a little bit longer than the 12K.

I want to make it clear that we have only had our product on the market for about three or four months, and even though the sales are modest, they are relatively good when considering the sales (indiscernible) for new products in this industry.

And during that three or four month period, we have begun hiring our sales force and established some strategic relationships, and then begun investing in our advertising and marketing campaign, which includes direct-mail, trade shows, and ads in journals and so forth.

Typically, with products introductions like these, early customers will use the products and eventually publish results based on those products.

And other early customers will compare the performance of these products to competing systems.

And as these events occur and in concert with our efforts to educate the marketplace, we anticipate seeing a corresponding growth in our sales, with appropriate impact on our financials.

Our policy is not to make projections, especially at such an early stage of commercialization.

But shareholders can get an understanding of how this product will roll out by looking at the revenue growth of other companies in this industry that have launched similar chip-based products.

In fact, you can even take an early look at the revenue growth of companies like Affymetrix and I would say that our growth will be similar in nature.

But has the 12K chip solicited more calls into you, or hits on your site, to order the 12K chip? .

The 12K chip has elicited more calls, and we have received orders for the 12 K chip, although that has only been on the market for weeks.

And we anticipate as we go forward that the bulk of the interest will be in the 12K chip.

And the 2.3 from the government, that is pretty much a 2005 booking?

That is a fiscal year 2005 event.

And we anticipate that we will begin receiving that hopefully sometime early in that year.

How much outside of IrsiCaixa will you spend on siRNA?

We're looking at a number of different additional partnerships.

IrsiCaixa has capabilities to do a number of things; however, there are additional activities that are going to be necessary.

It is not going to be a significant amount, and we will leverage the relationship to the extent possible.

But frankly, this is one of the most exciting things that we have seen with our research, and we'll provide more guidance as we go forward.

All right, thanks a lot.

Principal Capital's Bob (indiscernible).

Just wondering if you can give some details about -- you just talked about hiring some sales people and trying to improve the -- charge up commercialization effort behind the microarrays.

I was wondering if you can describe what you've accomplished so far and where you want to take it.

Just a little bit about our philosophy.

We chose to begin the commercialization effort -- or I should say building the commercialization infrastructure -- after we had the product ready and launched, as opposed to spending a fair amount of money ahead of that launch.

And so, once we had the products ready, we began hiring sales people, and to date we have seven people in our sales and marketing group, and we anticipate expanding that as we go forward to anywhere from 12 to 15, depending on what people we are able to find.

We want to hire the right people.

In addition, if you read some of the trade journals, you will start -- you will have seen our advertisements in those trade journals.

We will be at a number of different trade shows this year and early next year, as indicated on the events section of our Website.

We are also involved in a number of direct mailings and other types of marketing activities of that nature.

Right.

And are any of the subset of seven people, are they actually sales representatives who go around calling on labs and researchers?

Most of them are all sales representatives that are calling on labs.

We have just recently had a full training session with all of them together at our facilities in Seattle, and a number of them are located on the East Coast, Southwest, different regions of the United States, and they are now calling on accounts.

Right, great.

I wanted to ask just another question about this relationship with Axon Instruments.

You said they were acquired by -- I think it was Molecular Devices.

That's correct.

And I guess the benefit is that they have a reader that can read your arrays.

I guess the question is given their acquisition by Molecular Devices, has that put any slowdown in terms of their ability -- direction in terms of promoting or making available readers that could read your chips?

We have not seen any slowdown of that.

Axon Instruments is the market leader for microarray readers.

And as you know, strategically we made the decision to design our microarray so it would be an open system and could be read by most of the readers out on the market.

And Axon is the clear leader and will continue to be so for some time.

The bulk of Axon's revenue came from sales of those readers, so Molecular Devices obviously has an interest in continuing the growth of that particular market segment.

Right.

If you looked at the overall marketplace, is there any sense of how much of the marketplace are folks buying integrated systems from one vendor versus buying a system which has separate microarrays and separate readers and perhaps even separate software from multiple vendors?

I'm trying to understand does that create some sort of barrier to entry.

There is really no one that sells a completely integrated system that has everything involved.

Affymetrix is certainly the closest.

They obviously sell readers, reagents, as well as the microarrays and some software.

However, many of the users of Affymetrix's systems also use secondary software and other components that are necessary to gain information from these types of experiments.

But the bulk of the market, or a large component of the market, uses readers that are purchased from one vendor, reagents that are purchased from another vendor, and microarrays that either are purchased from another vendor or perhaps prepared themselves, using various types of robotic systems.

And so we don't think that is a barrier to entry.

What we found is when we went out into the marketplace, that people were asking us to recommend certain readers and certain software applications, and so we said, why don't we establish relationships with some of these companies that are compatible with our technology and our products and enable a win-win situation for both partners.

Great.

And the company that -- I think it was Strand Genomics -- that is providing some sort of customized software, what is their time table in terms of developing a system that will be able to read the data that comes off of your microarrays?

It is available already.

Okay, great.

Good.

Thanks very much.

Alan Dubrow (ph) with AG Edwards.

I noticed on Irsi's website that one of the last major drugs to be introduced in HIV, coincidentally, was from Roche.

And in reading the Wall Street Journal just a couple days ago, I noticed that Roche divested one of their businesses and this week raised $3 billion.

In the last paragraph of the article, it said they wanted to focus on certain things, one of them the diagnostics business.

Would we be interested -- with them raising this kind of money, would be interested in any kind of equity partnership?

And if we were, how would we consider doing it with a $3 stock price?

Absolutely we would be interested in talking with Roche on a number of fronts.

Certainly, we are continuing our discussions with them regarding matriXarray and that discussion is ongoing.

Roche still has not announced the date for the launch of the product.

But we're constantly having meetings and discussions about that.

In the past, there have been discussions regarding equity and maybe in the future as well, but I really can't comment on the structure of those types of potential discussions, as well as anything substantial, until they are ready to be announced publicly.

Is OGT still an issue?

We haven't heard much about them lately.

OGT is around and we have talked to OGT on a number of occasions and that's really all I can say.

Thank you.

That's all I've got.

(OPERATOR INSTRUCTIONS) Joe Thomas (ph) with Franklin Investments.

Dr. Kumar, when you were giving your presentation, I had to jump on a different call real quick.

Did you go into your discussions with Roche and where we stand exactly with those?

On the possible launch?

Our discussions with Roche our ongoing.

We just recently had some meetings with senior management of Roche Applied Sciences when they flew out to Seattle to spend a couple of days with us.

And they informed us that they are keenly interested in launching matriXarray, but are still dealing with certain issues internally.

And unfortunately, these are issues which I can't discuss and we have further meetings and discussions pending.

As far as our position is concerned, we have completed our work for them and are continuing to make progress on launching and commercializing our version of the product, CustomArray, and we would hope Roche will announce the launch of matriXarray soon, but that is really under their control.

I'm aware that neither of the Acacia companies give forward-looking statements.

Last year, you said that your goal was to be cash flow neutral or close to it.

Have you given a statement recently with regard to how you expect to finish 2004?

Last year was the first year we were public, and there was really no history of our Company, CombiMatrix, in the market.

And so we had to provide a little bit of guidance to the marketplace and we indicated what we were going to attempt to do.

For 2004 and '05 we have not made any forward-looking statements, and that is not our plan, especially for a Company at this early stage in its development.

But I think there is an earlier caller who had asked a question regarding projections on sales figures, and I suggested a good way to determine what we will probably do for the year is to look at a number of companies that have launched products in this industry, and that will provide a pretty good guidance of what kind of numbers to expect from our sales effort.

But we are also very aggressively trying to establish additional strategic relationships, and we will continue to do that.

Excellent.

Last question, where do we stand with the Toppan product development?

I know it was delayed and I haven't heard anything recently in your press releases.

I am not sure when you say it was delayed, I think Toppan is a large company and our program continues with them.

We have a number of wafer designs that are being fabricated by their infrastructure.

Toppan is a multibillion dollar company, and this program is a small component of their overall operations.

And so this program has to fight for resources, which include the multibillion dollars fabrication facilities that they have, with other programs.

And so, being a large Japanese company with billions of dollars in sales, this program is in the queue and we will get information. we will get the chips and we will try the chips out and then we will iterate as we continue that progress.

But we are constantly talking with them.

They have come out to Seattle to visit us and we have had engineering meetings here and in Japan.

So the relation is still on good footing, to sum it up?

Absolutely.

Yes.

Excellent.

Keep up the good work.

I appreciate it.

Virginia Dady (ph) with Maxim Group.

My question was about Toppan, so it has already been answered.

Thank you.

Tyson Chapelford (ph) with Santa Barbara Water.

I had a quick question.

After watching what happened to the two companies when the Markman ruling came down, it was really evident to me that the companies really need to be split up.

And I remember last conference call, I think someone had mentioned that it is in the government's hands as far as allowing the two companies to split.

Has there been any progress on that or what is happening with that?

Well, I wouldn't say it is in the government's hands.

I would say that --.

Why don't I respond to that?

We have no present (indiscernible) of changing the structure that we have.

It was done for a very significant reason, basically around taxes, because if CombiMatrix's stock would have been spun out, it would have been roughly a $60 million taxable event, and the dividend of all that stock to shareholders would have been taxable.

So the current status is there are tax regulations, and we will take a look at the situation from time to time in the future, and if the Board decides that there is a time where there is not a significant tax liability, which would have to be the first condition, then we will take a look at a later date of doing that.

But right now, actually, both operating groups are benefiting significantly by the structure in terms of regulatory costs and overhead to the tune of about $1 million a year.

So right now, during this early stage, where cash is dear to us as we're developing our revenue streams, it is actually a benefit to have the structure.

So we have no present intent of changing the structure.

Thank you for clearing that up.

Okay.

Operator, I think we can go ahead and start the other portion of the call now.

Thank you, gentlemen.

Please go ahead, Mr. Ryan.

Before turning the call over to Chip Harris for a review of the second (technical difficulty) activities of the Acacia Technologies Group, I want to give you a quick overview, particularly for our new stockholders of our business strategy.

Acacia Technologies' goal is to become the leading intellectual property licensing company.

We intend to build on our early successes in licensing the television V-chips and the digital media transmission technology by acquiring patents covering a wide range of technologies that have significant outlicensing potential.

We plan to leverage the talent of our engineering and licensing teams to build a growing steam of licensing revenue from a variety of patented technologies.

As some of you may be aware, our first licensing opportunity was the television V-chip.

We generated over $25 million of licensing revenues from 13 of the 17 leading TV manufacturers, and have the potential to generate additional revenue if we're successful in our litigation against the 4 majors who have not yet licensed our technology.

Our second licensing opportunity is the digital media transmission technology, or the DMT technology.

We are in the very early stages of our licensing program, and have generated approximately $2 million of licensing revenues to date.

The DMT technology has significant licensing opportunities, including cable and satellite television, the Internet, fiber optics and wireless delivery of digital media, and to build a strong base of growing revenues for our Company as our licensing program continues to gain momentum.

Yesterday, we announced the acquisition of our third licensing opportunity, which relates to DSL registrations, wireless hot spots and hotel high-speed Internet access.

We also have a fourth patent portfolio under option and recently entered a letter of intent to acquire our fifth patent portfolio.

We also have a number of additional patent portfolios under active review for acquisition, some of which have come to us as a result of a feature article about Acacia in the IEEE Standard, which is the leading engineering journal.

Many companies see us as an ideal partner to take over the outlicensing of their patented technologies, and we think this will continue to expand the number of potential opportunities that are coming to us.

The Acacia Technologies group has assembled a very experienced team, which has a variety of unique skill sets that are required to identify significant licensing opportunities and then monetize those opportunities.

We are well funded, with over $30 million in cash, and have an opportunity to build significant stockholder value as (technical difficulty) business strategy.

With that, I will now turn the call over to our President, Chip Harris, to give you a review of our current operating activities.

Thanks, Paul.

I am going to discuss our DMT licensing program, our new business development program, give you an update on the V-chip litigation, and then I will have Rob Berman review the recent Markman Order.

On the DMT licensing front, we now have 160 licensees for DMT, including 9 new license agreements since the Markman Order 10 days ago.

These include e-learning, corporate and our second cable company.

The most significant of the new licensees is On Command Corporation.

On Command, a subsidiary of Liberty Media Corporation, is the second largest provider of in-room entertainment to the hospitality industry in the U.S.

With this new license, we now have agreements with companies that provide over 90 percent of the in-room entertainment to the hotel industry in the United States.

As we mentioned in our previous conference calls and as Paul mentioned earlier, we been becoming the leading IP licensing company.

As Paul mentioned, we announced yesterday our purchase of our third portfolio and (ph) licensing opportunity.

This purchase from LodgeNet Entertainment, one of our licensees, will continue to expand our potential licensing and revenue opportunities.

This new acquired patent has several potential licensing opportunities, including DSL registrations, wireless hotspots, hotel, high-speed Internet access.

The patent covers technology and methods for redirecting users to a log-in page when accessing the Internet.

It is a large and growing industry.

It is important to note that this expires (ph) in 2018.

Acacia expects to have launched a licensing enforcement program for the redirection patent in this third quarter.

The LodgeNet patent is one of the two patents that we had previously mentioned we had under option.

We still have the other patent portfolio under option and just entered into a letter of intent to purchase an additional portfolio.

This purchase of the LodgeNet patent and the contract for the new IP portfolios is consistent with our strategy of becoming the leading IP licensing company.

For those of you new to the Company, we also own the V-chip technology for our televisions, and we are currently in litigation, as Paul said with the remaining four companies.

The oral arguments on our appeal will be heard this August.

We understand and have received a number of different calls from shareholders regarding issues involving litigation, and that that can be confusing to people.

And in an effort to provide more detailed information regarding the Markman Order, we're going to have Rob Berman, our Executive VP and General Counsel, give you an update on our recent Markman ruling.

I would like to start by making a few general comments about patents and the process of patent litigation.

I will then focus on the recent developments in our patent litigation against the adult entertainment defendants.

In 1996, the US Supreme Court held that claim interpretation is a matter to be decided by the judge rather than a jury.

The name of the case decided by the Supreme Court was Markman versus Western Instruments.

The claims are the part of the patent that define what the patent covers.

The language used in patent claims is generally more formal and technical than everyday language.

As a result, questions often arise as to what certain claim language means.

The process of determining the meaning of claim language is often referred to as claims interpretation or claims construction.

Although the Markman case determined who was to make claim interpretation decisions, the judge rather than the jury, the Supreme Court did not mandate how and when these claim interpretation decisions are to be made.

As a result, judges handle the claims interpretation process in a variety of ways.

Some judges have a special hearing or series of hearings to resolve claim interpretation issues.

These hearings have come to be known as Markman hearings, named after the Supreme Court case.

Other judges appoint experts, known as special masters, to preside over these hearings and make recommendations to the court.

And some judges do not have special hearings for claim construction at all, but rather decide these issues as part of the overall trial.

It is up to the discretion of the judge to determine how and when claim construction issues are decided.

It is important for our shareholders to understand these processes because Acacia has and will continue to be involved in numerous patent litigations.

In each litigation, it will be up to the judge to decide how and when he or she would like to handle claim construction issues.

Judge Ware, the judge presiding over our adult entertainment litigation, elected to conduct separate Markman hearings early on in the litigation to determine claim construction issues.

The Judge decided to preside over these hearings himself as opposed to appointing an expert or special master to do so.

These hearings took place over several days.

The Judge's Markman Order, in which the Judge decided certain claims construction issues, was released on July 12.

In the order, the Judge ruled on the meaning of certain claim language and requested expert testimony, additional briefing, and motions to be filed on other claim language.

Up until now, no expert testimony has been presented at the Markman hearings.

The Judge has set a conference call for August 17, 2004 to discuss case management issues.

At that time, we expect the Judge to set a schedule for the expert testimony, briefing and motions he has requested.

We expect that the briefing, motions and expert testimony will take place over several months, but should have a better sense of the timing for these activities after the August 17 conference call.

We do not expect any substantive rulings on the 17th other than setting forth that schedule.

After the call on the 17th, we expect certain motions will be filed with the court by Acacia and the defendants, including motions for summary judgment on certain issues.

The motions will be filed to resolve the unanswered claim constructions issues and are the vehicle to present the expert testimony to the court.

As is typical in Markman rulings, in the July 12th order, the court ruled in Acacia's favor on certain claim constructions issues and ruled in the defendant's favor on certain claim constructions issues.

Other claims construction issues are yet to be decided and will depend, in part, upon the expert testimony that has been requested and will be heard by the court.

Even if all unanswered claim constructions questions are ultimately decided in defendant's favor, we believe that, based on the Markman Order that was issued on the 12th, we have several patent claims that will survive the Markman process that are being infringed by the adult entertainment defendants.

Claim construction issues are one aspect of patent litigation.

As stated earlier, Judge Ware has decided to hear these issues early on in the case.

The parties have not yet engaged in other aspect of patent litigation, such as discovery, during which the parties will exchange information and participate in depositions relating to issues of infringement, validity, and other issues.

The discovery process generally takes about a year.

For this reason, we do not expect a trial, during which a jury will determine infringement and other issues, to take place in the adult entertainment case for at least a year.

We will be urging the court to begin the discovery process as soon as possible and to set a trial date, and will let you know when a schedule has been set for these activities.

At this point, I will turn things back over to Paul Ryan and invite you to ask questions during the Q&A period.

Thank you, Rob, for that.

Operator, if you could now open up the lines for the Q&A.

The question-and-answer session for the Acacia Technologies Group will now begin. (OPERATOR INSTRUCTIONS) Virginia Dady with Maxim Group.

Good afternoon, gentlemen.

Can you just discuss what you are seeing with regards to -- I saw you got an additional 9 licensings, even after the Markman hearing ruling came down earlier this month.

If you're seeing normal flow with regards to licensing or is it slowing down or speeding up or what effect that ruling has had, if any.

We're seeing normal flow.

The companies that we are engaged in licensing discussions with are sophisticated and understand that this Markman Order is one of many elements and that we're very early stage in the litigation process with certain unlicensed defendants.

So we don't expect it to have any significant effect.

The people in the case are very knowledgeable that we're licensing with the intellectual property attorneys and understand the issues.

So we certainly have not experienced any change to date and don't expect any.

In addition to that, this only covers the Internet application, so it has no bearing whatsoever on the satellite, wireless end (ph) or cable, correct?

Let Rob Berman answer that.

When you say it has no impact whatsoever, I think that that's taking the statement a little bit too far.

Some of the patents that we are asserting in the adult entertainment litigation are also being asserted against cable and satellite companies as part of that litigation, and so will certainly have an impact on that.

Now, the Judge has not been definitively decided in the cable and satellite litigation.

So to the extent that Judge Ware ends up being the judge on that case, it may have more of an impact than if another judge is assigned to the case.

But there are several patents that we are asserting against the cable and satellite companies that are not being asserted in the adult entertainment litigation.

So again, it is too far to say no impact whatsoever, but the important thing is that even if it has impact, we feel we have a number of claims that are still being infringed and that are valid by all of those parties.

Thank you.

(OPERATOR INSTRUCTIONS) (indiscernible)

Paul, quick question for you.

Is the majority of your time and focus spent on Acacia Technologies or rather the CombiMatrix side of the business?

All of my time is spent on Acacia Technologies.

I am the CEO of the Acacia Technologies Group.

I just also happen to be the Chairman of the holding company, which is Acacia Research.

But Amit Kumar is the CEO and he and his team obviously manage that operating group.

Great.

Thank you very much.

John Sneller (ph) with Knott Partners.

Thank you for taking my question.

I really have two questions.

One, what is the breakeven operating income level?

In Acacia Technologies Group right now, we have indicated to people basically our team and our cost structure is about 3 million a year.

It's about another one million a year to be a public franchise and regulatory and accounting and legal costs.

So it is about $4 million, and then you add whatever the outside litigation is.

And we have given guidance that we anticipate currently that our outside litigation costs would be around $2 million a year, so a total of about 6 million.

Okay.

And so, if you were to split the overhead costs down the middle, it would be 5.5 million between the two companies?

Now what I'm referring to are the costs for the Acacia Technologies Group.

Okay.

Our portion of the costs.

Okay.

Well, $0.5 million either way is (multiple speakers) material.

One other question with respect to the licensed licensees.

Why would companies now -- why are companies licensing and not waiting for more of the trial proceedings to occur?

For the same reason that they have been licensing over the past year, is that we will continue to raise our licensing rates.

We offer introductory rates, as we did in the adult entertainment area, and we have raised those rates as of December 1 of last year.

So early licensees that don't require us to litigate with them get much more favorable rates.

A good example is the television V-chip, where our first licensee, Philips Electronics, licensed it at significantly less than people who licensed it at a later date.

So the motivation is most companies realize that they do infringe our technology.

They do recognize that we have a broad portfolio of patents with 137 claims, and it is an issue they need to deal with.

And if they deal with it earlier, they can probably get a much better rate than if they cause us to have to litigate with them, in which case, not only could they have the expense of the legal, but they could be found as a local infringer and pay significantly higher rates down the road.

Does that carry treble (ph) damages?

It is possible, if you demonstrate willful infringement on top of a higher rate level, yes.

Okay, thank you very much.

David Reese (ph), a private investor.

Thank you.

Have you indicated at all how much you spent to acquire this most recent patent portfolio?

And did it come with any signed licensing agreements?

No, it did not come with any signed licensing agreements, and the terms of the acquisition are confidential.

We did not release the terms of the revenue split.

So we have not released that information.

Doesn't it reduce your cash significantly?

Can you say that much?

It did not reduce our cash significantly, no.

Philip Giamarino (ph), Wachovia Securities.

Thanks for taking the question.

Basically, I just want to congratulate you on the second cable TV license.

I think that is a pretty significant step.

Can just expand on how the negotiations in that particular area are going?

And do you see this as, with the first two licenses there, something that is going to accelerate the pace of signing other companies there?

Well, historically, it has been our experience that in each licensing category or industry segment, certainly getting the first one or two deals completed generally does increase the momentum.

Many companies, even though they realize they may need to take a license, are hesitant to be the first company in their industry category to take a license.

And so certainly our experience has been, not only with the television V-chip but with the digital media transmission technology in each licensing industry segment, that once we've gotten initial deals done, we have gained momentum.

So it is certainly very helpful to get the early deals done, absolutely.

Have you disclosed any information on subscriber numbers for those cable companies that have signed?

We have not.

Again, our agreements are confidential.

These are private companies.

We do not have the authority to release their numbers.

But both of these cable companies are small cable companies.

We continue -- there's over 200 cable companies in the U.S.

Some of the very large cable companies comprised a significant portion.

But there is a broad spectrum of licensing opportunities of mid-and small-sized cable companies as well as large ones.

So we are actively engaged in negotiations and discussions with a significant number of them.

Thank you.

Jeff Mullins (ph), a private investor.

Good afternoon.

As well, painfully aware of the place (ph) on Acacia Technologies Group dropped from over 7 to just under 3 at one point in the last few days.

My belief is that this understanding of what the Markman hearings are is what caused most of that.

What can Acacia do or anybody do to reeducate both Wall Street and the investors to try to change that and bring our price and value back?

Well, I think the most straightforward thing, if we continue to do deals, people will realize that that was not any kind of a seminal event; it's just part of a process and people can interpret the ruling in different ways.

It is difficult for the investment community oftentimes to understand the nuances of patent litigation, and I think some people may overreact to information that is just part of the process.

But as Rob Berman explained, when we do have to litigate with certain companies, it typically is a very lengthy and sophisticated and complex process.

And for people to overreact to events that occur step-by-step in that process, we would hope wouldn't happen.

And so we've tried to clarify and educate and answer as many questions as we can from shareholders about what a Markman Order is, put it into context of the overall litigation and then also put it into context of our overall business.

But I think the clearest thing to do is for us to continue to demonstrate and continue our licensing program.

And I think then people will realize that this was not an event which should have caused that kind of change in the valuation of the Company.

Thank you.

Greg Luen (ph) with Luen Capital Partners.

I don't know if you are capable of doing this yet, but I know you've taken an extremely conservative posture in recognizing revenues from your current licensing base.

And I know the licensing base is subject to fraud -- lots of things.

I don't want to use that word, but it's tough to account for, so you have taken the conservative approach.

Do you have enough information yet in your hands to give us a judgment on what the revenue potential simply from the 160 licensees you signed might be over time?

We still are going to continue not to give forward guidance, and there is two related issues.

One is many of the companies we have licensed are private companies.

There isn't public information available, and until we get a pretty lengthy experience level of payments, we are only taking the revenues on a cash basis.

Even though the revenues may be accruing during the quarter, we don't recognize them until the subsequent quarter and we've actually received the cash.

With other licensees, it is very difficult for us to predict what the revenue stream is going to be, because in many cases it is a function of their revenues.

And we really have no way of forward estimating what the revenues of other companies are going to be because we get paid a percentage of that.

So I think over time, I don't think it will be that dramatic of a factor.

It will all get absorbed into the quarterlies.

So we have made the decision to be conservative, and on companies where it is not absolutely fixed and guaranteed that the payment will be received, we don't record it until we actually receive the cash.

Thank you.

Jerry Jerome (ph) with Jerome & Company.

For Rob Berman, please excuse my hesitancy here.

You recently said that the Supreme Court said that this would be decided by the judge rather than jury trials.

Yet later on in the presentation, something came up about a jury trial a year from now.

What is the difference there, please, if any?

What I explained is that the Supreme Court held in this case in 1996 that claim construction issues are issues that are to be decided by the judge, not the jury.

And that is only one part of the issues that are raised in patent litigation.

Issues of infringement and invalidity and other issues are still resolved at trial.

And in our litigation with the adult entertainment defendants, this will be a jury trial.

So what I was referring to is only one particular issue, meaning claims construction issues, not overall infringement and validity of the patents.

Thank you very much for the clarification.

Sure.

Paul Berger (ph) of L.A.

Partners (ph).

A couple questions for Rob.

Rob, play "what if" with me for a minute.

My understanding on the summary judgment, if they ask for a summary judgment and the judge granted it, does that mean he basically throws the patent out and (indiscernible) and tells the adult entertainment people?

Well, it is very difficult to speculate, but I can give you at least this guidance.

Summary judgment would be with respect to certain claims, not the patent itself.

And if we have claims that survive the Markman process, which we are very confident that we are going to have, then this litigation will continue.

So we don't see this as an event that is going to potentially end the litigation.

And that is even if he would grant a summary judgment on those claims?

Again, summary judgment would be decided on a claim-by-claim basis and we have got lots of claims and five patents, two of which are asserted in this litigation.

Okay.

And the second question -- and I am not necessarily asking for your legal strategy, but just in general -- my understanding is that in some of the briefs they filed they talk about sections of the Sarnoff (ph) Report, which said that the patent wasn't novel and some of the other terms that you need to have a patent.

It is that true and have you looked at that and is there a way around that?

Number one, we're not even at the point in the litigation where testimony on novelty has been delivered and accepted by the court.

So anything in the Sarnoff Report that you're talking about so far has no influence whatsoever on these Markman-related issues.

With respect the Sarnoff Report, certainly we are aware of the report, and we disagree with the defendant's interpretation of the report.

So those are issues that will be decided much later on in the litigation, and we don't foresee the Sarnoff Report as a large obstacle that we are going to have to get over.

All right.

Thank you.

Gentleman, we have time for one final question from Jack Armstrong (ph) with NAV Capital.

As far as the new patent goes, you stated, I believe, that you would like at least $10 million of revenue generated per patent portfolio.

Am I correct in assuming that this one will generate that amount of money?

It is a general goal.

Certainly, we think the growing size of these markets -- it's always difficult to know the true growth rate.

But certainly the market research that we've done to date and the growth of these, particularly Wi-Fi hotspots, certainly indicate that it can grow into that opportunity.

Would that be on a per-year basis or an over the life of the patent basis?

On a per-year basis.

Per-year basis.

Okay, thanks.

We set 10 million as a minimum for patents that we will look at.

And so, we are not saying that that is what we have estimated that these patents will generate.

Right, but that's where the goal is of where you guys want --.

Sure.

Looking at any future patent portfolios, right.

All right.

Thanks.

Mr. Ryan, I will turn the conference back over to you for additional or closing remarks.

Okay.

I want thank you all for being with us today and if you do have additional questions, please feel free to give us a call and look forward to speaking with you on our next quarterly call.

Thanks.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 888-203-1112 or 719-457-0820, and please use ID number 690397.

This concludes today's conference call.

Thank you and have a good day.