Acacia Research Corp (ACTG) 2005 Q1 法說會逐字稿

Please stand by, we're about to begin.

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

[Operator Instructions]

At the request of the company, we will open the conference up to questions and answers after each presentation.

I will now turn the conference over to Mr. Paul Ryan.

Please go ahead, sir.

Thank you 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 8K which was filed with the SEC today, for our forward looking statement disclaimer.

With me today are Chip Harris, President of the Acacia Technologies Group;

Robert Berman, our Chief Operating Officer and General Consul; and Clayton Haynes, our Chief Financial Officer.

Today, I will give you an overview of our financial results for the first quarter, and then I will outline the progress we've made so far this year in moving toward our goal of becoming the leader in technology licensing.

I will then turn the call over to Rob Berman, who will give you detailed information regarding a number of our new patented technologies, and provide you with an overview of our current litigation.

We will then open the call up for questions.

Acacia Technologies Group revenues for the first quarter of 2005 were $1,863,000, consisting of licensing revenues from four of our patented technologies -- Our digital media transmission technology, our credit card fraud protection technology, our digital video production technology, and our interactive television technology.

We also received $527,000 in payments from licensees in the first quarter, that we recorded as deferred revenues.

The revenues from some of these payments will be recognized over the term of the license, and other payments will be recognized as revenues in a future period, when all of the revenue recognition criteria have been met.

Since the end of the quarter, we completed our first license for the multidimensional barcode technology and have now begun generating revenues from five of our patent portfolios.

We are currently in discussions with a number of additional potential licensees for these technologies.

The Acacia Technologies Group is also now actively pursuing ten additional licensing and enforcement programs covering our patented technologies that relate to audio/video enhancement and synchronization, broadcast data retrieval, computer memory cache coherency, data encryption and product activation, dynamic manufacturing modeling, image resolution enhancement, interstitial Internet advertising, microprocessor enhancement, spreadsheet automation, and resource scheduling.

We will also be launching additional licensing programs for our other patented technologies, including our recently acquired laptop connectivity technology.

We continue to be very active in acquiring additional patent portfolios.

We are currently in the process of completing our due diligence on a number of new patent portfolios we plan to acquire.

Our recent success and increasing visibility is generating many new opportunities for us on the business development front.

We have made exceptional progress in the early part of this year in moving toward our goal of becoming the leader in technology licensing.

We now control 30 patent portfolios with 128 U.S. patents, and we have begun generating revenues from five portfolios, and with the additional ten licensing and enforcement programs, we now have 15 portfolios in active licensing.

We have also increased our cash position to over $41 million, which will enable us to continue acquiring portfolios while maintaining a strong financial position, which is important in licensing negotiations and settlements of litigation.

We have also significantly expanded our external litigation resources, with the engagement of a number of leading law firms who are working for us on a contingency basis.

We also significantly strengthened our business development team, which is responsible for bringing in new licensing opportunities, with the addition of Dooyong Lee, as our executive vice president.

Mr. Lee was formerly a licensing executive with ATT Bell Labs / Lucent, prior to cofounding an intellectual property consulting firm under the sponsorship of Fish and Richardson, and then became president of a patent licensing company that's now part of the Thomson Corporation.

Mr. Lee joined us following our acquisition of Global Patent Holdings where he was responsible for acquiring rights to 20 patent portfolios.

And finally, our legal, engineering, and licensing teams have demonstrated that they can move quickly in both evaluating new patent portfolios for acquisition and then launching licensing enforcement programs for those portfolios.

The expanded licensing opportunities from our 30 patent portfolios provide the opportunity for us to significantly grow our revenue base this year.

I will now turn the call over to Rob Berman, who will give you an update on some of our new patent portfolios and the current status of our litigation initiatives.

Thanks, Paul.

As you all know, the completion of our recent acquisition with Global Patent Holdings has brought several patented technologies under our control.

A description of each of these technologies is located on our website, at www.acaciatechnologies.com and is included in our filings with the SEC.

We would like to familiarize our shareholders and the rest of the investing community with each of these technologies, so that you have a better understanding of what we believe these patents cover, and what we are doing to realize their value.

You should also note that in our recent 10K filing, and in our upcoming 10Q filing, we will list all of our current litigation.

We will continue to update this list on a quarterly basis in our filings.

Additional information on most federal court litigation is available to the public and can be accessed online through the PACER system at pacer.uspci.uscourts.gov.

The first technology I'd like to talk about is microprocessor enhancement.

In the world of microprocessors, speed is very important.

Our microprocessor enhancement technology addresses this issue and we believe is being used by some of the major microprocessor manufacturers.

Last week, we announced that we filed a patent infringement lawsuit against Intel and Texas Instruments in the Central District of California.

Although microprocessor manufacturers keep sales numbers for individual processors close to the vest, we have reason to believe that sales of infringing processors have already been significant, and will continue to increase through the expiration of the patent in 2012.

Another technology that we have that relates to processors is our computer memory cache coherency technology.

In addition to speed, another important factor in the processor world is memory.

Our computer memory cache coherency technology enables different memories to communicate and synchronize with each other, allowing peripheral devices to operate at faster speeds.

Our Computer Cache Coherency Corporation subsidiary has a lawsuit pending against Via, a major chipset manufacturer, which was recently moved from the central district of California to the northern district of California.

We are currently finishing our analyses of other potentially infringing products, and will likely be adding other chipset manufacturers to this litigation.

The next technology that I would like to discuss relates to multidimensional bar codes.

A multidimensional bar code consists of an array of data cells surrounded by a border.

The data matrix has a much higher information density and can therefore contain much more data than an ordinary barcode.

In addition, a data matrix does not have a preferred scanning direction and is readable at various orientations.

Multidimensional barcodes are being widely used for a number of purposes.

For example, distribution companies are using them to track the movement of goods.

Information technology companies are using them as a way to collect data.

And manufacturers are using them to improve production capabilities and reduce counterfeiting of products.

A few weeks ago we announced our first license agreement for this technology with Nokia.

As we have discussed in the past, the first agreement is usually the hardest to complete.

We also have ongoing patent infringement litigation against Adidas, which puts multidimensional barcodes in their shoes;

Advanced Micro Devices, which uses them on processors;

Boston Scientific, which uses the barcodes on surgical tools;

Stamps.com, which uses them on postage; and Hitachi, which uses them on circuit boards.

This litigation was filed in October 2004 and is in its early stages.

Along with the litigation we are continuing in our efforts to execute licenses.

Nokia, for example, signed a license without first being sued.

Another of our technologies which we are pursuing with a combination of licensing and litigation strategy is dynamic manufacturing modeling.

Dynamic manufacturing modeling allows a manufacturer to create a model of its manufacturing facility on a computer.

It then gives the manufacturer the ability to experiment with the model, as opposed to its actual manufacturing operations.

For example, time can be accelerated, the effects of new equipment can be tested, and new manufacturing processes can be evaluated before large capital expenditures and retooling efforts are implemented.

Finally, with an operational model, predicted results can be used to monitor actual results to insure that once changes are made to the manufacturing process, everything is working according to plan.

This type of modeling has become very popular and is particularly useful when products need to be manufactured to exacting standards, such as in the semiconductor industry.

Our information technology innovations subsidiary has litigation against Motorola in the district court in Illinois.

A Markman hearing has been set for September 2005, and a trial date has been set for August 2006.

We also have contacted several companies about licensing our technology, and those discussions are ongoing.

Another technology that is most often used in a commercial environment is data encryption and product activation.

One use of our data encryption and product activation technology involves a situation where multiple people have access to data, such as in an office environment, and the user would like to limit access to the data to certain individuals.

This is accomplished by encrypting the data on a file by file basis, down to the block level through commands initiated through the computer's operating system.

What this means is that a user can easily, quickly, and transparently encrypt the data through the use of the computer's operating system.

We are currently completing our analyses of some very well known and widely used operating systems, and expect to be in a position to further report on our licensing and enforcement efforts for this technology in the upcoming quarter.

In the area of broadcasting and television, we have several technologies that we are pursuing.

Two of those technologies include audio/video enhancement and synchronization, and image resolution enhancement.

The patents that we have rights to pertaining to audio/video enhancement and synchronization and image resolution enhancement cover a wide variety of products, including CRTs, flatscreen and projection televisions, DVD recorders and players, personal video recorders, MPEG encoders and decoders, settop boxes, consumer printers, commercial printers, and industrial broadcast equipment.

These patents have generated millions of dollars of licensing royalties prior to Acacia's acquisition that was completed this past January, and have the potential to generate significant additional revenue.

We currently have lawsuits pending against Lexmark and Dell in the Illinois district court, where we are expecting a Markman ruling.

We also have newer litigation pending against Sony and Matsushita in Illinois where we have a status hearing on April 27 to set a trial date and discovery schedule.

Finally, we also have litigation pending in Thomson, in the eastern district of California, where fact discovery is just ending and where we will soon be beginning expert discovery.

Also in the television field, we have several patents covering interactive television.

Interactive television has become a rather broad term that generally describes a user's ability to participate, usually via a television remote control, in certain aspects of television programming or to customize television programming that the user is able to view.

Examples include voting for a choice of options, interactive gaming and betting, and customizing viewing screens to include data such as stock quotes, sports scores, and weather information.

A variety of types of companies are included in various aspects of interactive television, including broadcasters, settop box manufacturers, television manufacturers, other equipment providers, and cable and satellite companies.

In the first quarter of 2005, we announced a license agreement for one set of our interactive television patents with Thomson.

We are in discussions with several other parties with respect to that particular set of patents.

We also have other portfolios of interactive television patents which cover other aspects of the interactive television process, and expect to remain very active in this area as the adoption of interactive television functionality continues to grow.

Finally, we continue to pursue our DMT patents in connection with the transmission and receipt of digital content via cable, satellite, the Internet and other means.

As previously announced, our application to the multi-district panel to consolidate our DMT cases to one jurisdiction has been granted.

That jurisdiction is the northern district of California.

All of the case records from our cases in Arizona, Minnesota and the northern district of Ohio are in the process of being transferred to the northern district of California.

A scheduling conference has been set for June 14, 2005.

After that conference, we should have more information on how the judge wants to handle the Internet and cable cases and we are hoping to have trial dates set for both cases.

We are continuing our licensing efforts outside of litigation for our DMT technology.

We are engaged in licensing discussions with several parties and will continue to announce licenses when they occur.

Moving from television to radio, we have our Broadcast Data Retrieval technology.

This technology relates to the transmission and receipt of programming along with supplemental data.

A key element of the invention is the ability to store the data and recall it at a later time.

We believe that this technology is currently being used by both satellite radio providers XM and Sirius.

Supplemental data such as the name of the song or artist is being transmitted along with the song itself.

This information is displayed on the screen of the radio receiver.

The user can store this information into memory at the push of a button and recall this information at a future time.

Some traditional non-satellite broadcasters are also now transmitting supplemental data along with their programming.

We are not aware of any non-satellite radio receivers that allow for the storage and retrieval of this data, but we'll continue to monitor this market for additional licensing opportunities.

When consumers purchase their XM and satellite radios, many of them use a credit card, which brings us to our Credit Card Protection technology.

Several states have passed laws requiring merchants to take certain steps to protect customer credit card information.

This patent covers a system for protecting financial transactions against fraud and includes card readers with connections to a transaction center and a computer that holds the cardholder information, including a transaction number.

On many credit card receipts, a portion or all of the customer's credit card number may be crossed out and a transaction number is used to later reference the transaction.

This may indicate that that system is covered by our patent.

We have currently entered into 13 licenses for this technology, including three this past quarter.

This past quarter we also launched an in-house licensing campaign where we notified all companies with annual sales of at least $300 million that are suspected of infringement.

In addition, we have litigation pending in Georgia against Kroger where we are waiting for a Markman ruling, and also have litigation pending in Texas against Costco, Linens & Things, and Williams Sonoma.

This patent expires in October of 2005.

Upon the expiration of a patent, the patent holder is prohibited from seeking damages for the period after the expiration of the patent.

However, the patent owner is not prohibited from seeking damages that occurred prior to the patent's expiration.

As a result, we will continue to pursue infringers after October of 2005 if necessary for past infringement.

Finally, and I do mean finally this time, I want to briefly mention our Interstitial Advertising technology.

Companies are continuing to find new ways to build brand awareness and generate advertising revenue.

On the Internet, logos and advertising messages are often used to fill the void when consumers are waiting for search results.

As the Internet gets faster, there is less need for these types of fillers, which is why they are primarily now used in conjunction with the searching of large databases such as travel and reservation sites.

The New York Times, Expedia, Travelocity, and Orbitz have already been licensed under these patents.

A few weeks ago we filed patent infringement lawsuits against Priceline, Continental and British Airways in the District Court for the northern district of Texas and are continuing our licensing efforts in this category.

We will continue to update you on new technologies and licensing programs, such as our recently purchased Laptop Connectivity technology, when the information becomes available and we will regularly update you on our licensing and litigation activity each quarter.

As you can see from my update, we are now a well-diversified patent licensing and enforcement company with patents covering large markets with significant revenue potential.

We will continue to add additional patents that meet our standards and will aggressively pursue opportunities for our existing patents to ensure that we realize their full potential.

Now I would like to turn the call back over to Paul Ryan, who will open up the call to questions.

Paul?

Thanks, Rob.

Operator, if you could open up the call for the Q&A session?

Thank you sir.

[OPERATOR INSTRUCTIONS]

And we'll take our first question from John Schneller (ph) with Knott Partner (ph).

I was wondering if you could walk me through, and I'll try and define the term, what would be a cash earnings number if we were to withdraw -- or if we were to pull out the amortization number and completely remove CombiMatrix from the total group.

Sure.

As part of the -- we report, as you know, on both a consolidated and a segment basis.

There's a separate financial breakdown operating result for the Acacia Technologies Group and the revenues obviously, reported revenues, were 1.863 million.

On the expense side, the non-cash item, 916,000, was patent amortization, which was a non-cash expense.

So from an operating statement, also there was a one-time charge of a former subsidiary of 210,000 in our financials.

So if you take out the non-cash amortization and you take out the one-time charge, it shows an operating loss on a cash basis of about 750,000.

But then if you were to -- and this is not obviously GAAP accounting -- but just on a cash operating basis we did also receive 527,000 in cash payments in the quarter, although they are deferred revenues and won't be recorded.

So if you effectively strip out the non-cash items and the one-time items, you'd come up with a loss of about 750.

And then if you added back the 527,000 in cash, on a pure operating basis the division probably was negative 220,000 in the quarter.

Okay.

And then of the roughly 780,000 or so recurring revenue, how would that look sequentially relative to fourth quarter's number?

In other words, what was a recurring number for the fourth quarter?

I believe the fourth quarter -- well the year over year numbers, the revenues were 599 year over year.

Clayton has got it, yes.

Last quarter, the fourth quarter was 790, so it would be comparing 790 to 1,863,000 from the sequential quarter basis.

Right, but the 1.863, that's not a total recurring number, so if you pull out the one-time, the paid up fees?

Okay, it's roughly 790 for both quarters.

The recurring component of the top line revenues?

Right.

Approximately about the same number, about 790,000.

Okay.

My expectation would have been that that number would have gone up.

I'm sure there's a reason why it didn't or why my expectation is not correct.

Well, on the recurring side, most of the new licenses were on the non-recurring side or the revenue got recorded -- not the revenue, the payments got recorded as deferred revenue that'll be taken over subsequent quarters.

Okay.

But there wasn't a significant amount of new licensing activity that happened to fall into the recurring column this quarter.

[OPERATOR INSTRUCTIONS] And we do have a question from Bruce Rotto (ph) with A.G. Edwards.

Paul, you guys are hell on modeling in terms of trying to help us out here to model going forward.

Just a couple of brief questions.

Is there anything left in the V-chip that we can expect in the future?

No, we've completed all the licensing for the V-chip and all the revenues have been recognized.

Okay.

And in terms of the DMT litigation and remaining potential licensees, other than the large cable companies are there significant numbers of other smaller potential licensees that are still out there?

Oh, sure.

We've only licensed 2 to 3% of the total market.

We've probably licensed about 20% of the Internet applications.

To date there's probably about 80% of the Internet related market left to license.

There's 100% of the wireless market to license and 100% of the fiber optic market still left to license in addition to all the international opportunities.

So, yes, we've barely made a dent in the market.

Our current revenues only represent about 2 to 3% of the potential market.

So are those people then going to be included in the litigation or there are separate pending discussions going on with these remaining people?

Where do things stand?

Yes, we have discussions going on with a wide range of companies in a number of these categories.

The litigation right now is with the Internet companies and with the cable and satellite TV companies.

There's two separate litigations, but they're both being consolidated in the northern district of California.

But obviously we're continuing discussions with companies, internet companies, cable companies, fiber optic companies, wireless companies and obviously this area is going to be subject to tremendous growth over the next few years in terms of applications of our technology.

So we're just at the very beginning of the DMT licensing program from a revenue standpoint.

Okay.

And then finally, with respect to any of these other new patent portfolio potentials, somebody like Nokia, when you say that you've licensed them, I know in the past you've certainly not broken out any specific types of fees or licensing arrangements, although you have given broader, I don't know if guidance is the word, but some maybe more definitions surrounding what you might be looking for under DMT for the cable companies.

Is there something that you might be able to tell investors relative to what you're looking for?

Say, for example, for the barcode technology or how that might work?

No, we really haven't broken that out on DMT because we have such a large number of current licensees.

We've told people what our rate card is and it's kind of in the public market.

With these other newer technologies that we're licensing, we have not disclosed that and it probably won't be until we have a significant number of licensees in each category.

Most of all of the deals that are done, the licensors require confidentiality.

The licensee really doesn't want to disclose what their payment structure is, their royalty rate structure.

But over time, as we get more licensees for each one of these technologies I think we'll be able to give a little better guidance as to what the royalty rates are in the particular type of industries.

And then the investment community obviously can look at the size of those markets and make their own determinations.

The last question, Paul.

With the patent portfolios out there, with the things that you're starting to enforce and have Markman hearings on, in your opinion, what provides the closest in terms of realization to fruition for licensing first?

Well, certainly the five portfolios that we've -- are generating revenues from, there are significant additional licensees there which we indicated we're in active discussions with a number of additional licenses, certainly for those five portfolios.

The 10 additional portfolios that we're now pursuing, we're at the very early stages.

But many of them we think we will get a lot of volunteer licensing without the need of litigation with certain companies based on our discussions to date.

Other of the technologies and some of the larger potential licensees probably will take going down the litigation road, at least to some point in the litigation process.

But as you can see now in our 10-K and the 10-Q that'll be out shortly, we have a wide range of litigation initiatives at various stages.

And oftentimes those will lead to settlements.

The vast majority of intellectual property infringement litigation does not go to trial; it usually gets settled.

So I think it's a reasonable expectation that it gives us the opportunities to do a lot of settlements related to these new licensing programs that are accompanied with current litigation.

Okay.

And I lied in terms of the final question.

Are your expenses expected to go up in the future?

I know that Rob had mentioned a number of litigation sites.

What percentage of the litigation is being outsourced versus in-house?

All the litigation with the exception of Digital Media is currently being done on a contingency basis.

So the legal expense would only be related to revenue events that occur.

So it's only the Digital Media that we are in effect paying out of pocket legal costs for because we think it has such a large revenue opportunity we don't want to give up a portion.

But all of the other litigation that we have ongoing is being done on a contingency basis.

So our cost structure should stay pretty much intact.

Our headcount is pretty much consistent and we don't expect any dramatic increase in our fixed expenses.

With any potential acquisition going forward of a patent portfolio, are you going to do similar to what you had done with this last acquisition in terms of integrating the teams that you -- ?

I think most opportunities are one patent portfolio at a time.

The acquisition of Global was a little unusual opportunity and a great one for both groups because there was a great deal of synergy and it was a large number of existing portfolios.

But I think most of the acquisitions going forward will be portfolio by portfolio.

And with the exception of maybe some consulting by the inventor probably will not include bringing additional people over.

This will conclude the question and answer session for the Acacia Technologies Group.

Operator, I see it's 1:45, so why don't you turn the call over to the CombiMatrix Group.

And I thank everybody on the Acacia Technologies side.

Sorry we didn't get time for many questions.

If you have more, please feel free to give the company a call if we can clarify anything.

Thank you.

Thank you.

I will now turn the conference over to Dr. Amit Kumar.

Please go ahead, sir.

Thank you, operator, and thank you all for listening.

Before I begin I want to note that today's discussion 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 statements disclaimer.

Along with me today is Scott Burell, who is our vice president of finance.

The first quarter of 2005 was a spectacular quarter for CombiMatrix operationally and strategically.

We achieved many of our goals, which included sales growth, advancement of our drug development program, advances in programs with our existing alliance partners, establishment of additional strategic alliances, continued progress with our government contract work, and other general business activities.

During my prepared statements I will highlight our financial performance, provide an update on our business and progress in each of our strategic focus areas.

We'll discuss the specific events of the quarter and then I will take questions.

Our revenues for the quarter were 1,069,000.

This represents a doubling of our revenues from the previous quarter.

More specifically, this is a gain of 105% over revenues of the fourth quarter of 2004.

Product and service revenues related to custom arrays were 338,000, which represents an increase of 156% relative to such revenues for the fourth quarter of 2004.

We have more than doubled revenues quarterly in our custom array business over the last three consecutive quarters since we launched our 12K custom array product.

As we move forward, we continue to anticipate strong growth in sales of our existing products and new products, including a high-density array, as well as our bench top synthesizers with associated blank arrays, which will allow our customers to perform custom synthesis in their own labs.

This quarter represented our first million-dollar quarter.

I'm not counting the first quarter of 2004 because, as many of you are aware, our GAAP revenues for the first quarter of 2004 included over $17 million of deferred revenues which were generated over a two year period and all recognized in one quarter.

This modest milestone of our first million dollar quarter is a major step in our transformation from an exclusively R&D focused company to a fully commercial organization.

In addition to and in fact due to the sales growth achieved in the quarter, our operating cash outflows were slightly less than $3 million during the quarter.

This modest cash outflow was achieved despite the continued addition of infrastructure for sales, marketing and distribution.

Now I will discuss progress in each of our four business focus areas, which, as many you of know, are number one, DNA microarrays and diagnostics, two, nanotechnology, three defense and security and four, drug discovery and development.

Let's begin by discussing the DNA microarray business.

I have already highlighted the financial performance and sales growth of this business and I want to underscore that we continue to build momentum.

During the quarter we announced a distribution agreement with InBio for the region of New Zealand and Australia and we continue discussions with other distribution partners.

Additionally, we plan to undertake certain activities in the molecular diagnostics arena during this quarter.

Though I cannot discuss all of the specifics about our activities at this time, I will discuss the general strategy and our competitive advantage in this arena.

Those of you who may have attended or heard some of my recent public presentations may already be aware of this information.

We feel that the recent advancements in our understanding of certain genes in the genome coupled with advances in technologies for analysis have now enabled certain early approaches to performing diagnostics with DNA microarrays.

Our initial area of interest is in oncology, or cancer diagnostics, where we feel that genetic analysis by microarrays can have a revolutionary impact on the treatment of patients who are suffering from cancer.

Though cancer is our initial focus, we anticipate developing diagnostic applications in infectious diseases, metabolic diseases and methodologies to understand whether patients might have adverse reactions to certain drugs such as Vioxx and Bextra, for example.

Let me talk about the cancer diagnostics opportunities for now and discuss the various reasons why we feel that CombiMatrix is the only company that can enable this opportunity today.

Under current regulatory guidelines, a company may provide a device such as a DNA microarray for diagnostics applications in the U.S. only if it has been approved by the United States FDA, Food and Drug Administration.

The guidelines for approval have just recently been provided and they require a substantial amount of work, cost and time for approval.

Though approval takes time and cost, we are encouraged that the FDA is now enabling this environment.

Current regulatory guidelines also provide for a class of tests known as laboratory developed tests which are also referred to in the industry as home-brew tests.

Virtually all of the genetic analysis that is done by reference laboratories done today are home-brew, or laboratory developed tests, which are not FDA approved, yet they provide critical information to physicians treating deadly diseases.

Additionally, even though these tests are not FDA approved, they are reimbursed by Medicare and private insurance carriers.

The first question is why would the FDA allow these types of tests to be used for the management of patient care?

As it turns out, the reference laboratories themselves are the most adept at developing tests that are useful to physicians and patients.

By allowing the labs to provide these services, the FDA enables these very innovative organizations to develop tests that have a significant impact on patient care without the added cost and time constraints required for regulatory approval.

Essentially, these are the leading edge diagnostic assays.

Much of what is used in healthcare today, including fully FDA approved tests, was developed this way.

Eventually these tests will go through the approval process, but the regulatory guidelines enable them to manage patients' illnesses and provide enormous benefits to patients long before the FDA approval has been achieved.

However, in order for a test to be considered a laboratory developed or home-brew test, there are some strict guidelines.

First the laboratory must be a CLIA-certified facility.

CLIA, or CLIA stands for "Clinical Laboratory Improvement Amendment" and certification indicates that the lab is a highly sophisticated laboratory.

There are several thousand CLIA certified labs in the United States.

Second, though the laboratory can purchase components from vendors, it must develop, make and run the tests itself.

It cannot purchase a pre-developed or manufactured test from a vendor.

This is a key point that I will underscore in relation to our market opportunity.

If a vendor wants to sell a premade microarray for a diagnostic application, that vendor must first submit the array for FDA approval, which can require a significant time and cost.

However, if a vendor sells components and enables the lab to build the array and perform the test, the test is covered under the laboratory developed category, and FDA approval is not required.

As many of our shareholders know, CombiMatrix can provide these laboratories all of the components necessary, including our benchtop synthesizer to develop, manufacture and run microarrays under these guidelines.

The other leading manufacturers are not able to do so and must take their arrays through regulatory approval one at a time.

For these and other reasons which I will not go into at this time, we feel that we are the only company that can take advantage of this opportunity to develop this business.

Our plan is to aggressively move forward into this business in parallel with our sales growth in the traditional R&D applications of our microarrays.

That's all I can say at this time, but this is an exciting opportunity for us, as well as cancer patients and we will be providing more information about our activities in this arena very shortly.

Moving on to our work in nanotechnology, or the non-biological applications of our technology, our work with Intel Corporation continues, though I am not able to discuss it due to our confidentiality agreement.

Our other collaborations are moving forward as well and the work on combinatorial synthesis of compounds on our chips with Washington University is moving the most aggressively with some technical milestones that have been reached.

In our defense business, we continue our progress, funded by the government, and though we have not established a large corporate collaboration with a major defense contractor, we continue with those discussions.

As we move forward, there will be several opportunities where we will be publicly presenting the results of our research under this Department of Defense program.

Of our committed funding, there remains roughly $5.5 million that we will continue to draw down for this project.

In addition, we hope to receive additional funds as we achieve our technical goals.

In addition to our funded detector program, we did initiate and announce early studies on our KM class of compounds to address attacks by so-called dirty bombs.

The initial animal studies are ongoing and we will disclose information as we obtain material results.

Also during the first quarter we announced a cross licensing agreement with Benetech (ph) Corporation for access to their intellectual property for certain therapeutics that would be used in the event of acute exposure to weapons.

Our plan here is to develop early proof of concept demonstrations followed by seeking government funding for further development similar to our detector program.

Ultimately, the goal is to provide developed therapeutics to the government under the BioShield program.

These internal development programs are early stage programs at this time and as we achieve notable results, we will provide appropriate information publicly.

In our drug development program, we continue to make progress internally as well as with our minority-owned subsidiary Leukemics (ph).

At Leukemics, our lead compound, noted as LC-1 is addressing acute myeloid leukemia, or AML, a deadly form of blood cancer.

As a reminder, we have shown that LC-1 is very powerful in treating this cancer in patient samples tested in vitro or outside the body.

We are now engaged in toxicology studies in vivo in mammals and all studies are moving forward.

Though we have not yet completed the toxicology studies, we have seen nothing so far that would hold us back from filing with the Food and Drug Administration for human trials this year.

In parallel, we have done additional detailed studies of this same molecule against CLL, or chronic lymphoid leukemia in patient samples.

These studies show that LC-1 is equally efficacious against this additional cancer.

In addition, we have identified and filed patents on another series of anti-cancer drugs that show efficacy in preclinical tests, thus we are continuing to build our pipeline of compounds.

We expect material events to be disclosed in our programs at Leukemics during this calendar year.

With that, operator, I will turn the call over for questions.

Thank you sir.

The question and answer session will begin for the CombiMatrix Group.

[Operator Instructions]

And we'll take our first question from Paul Burger (ph) with CLA.

Mr. Burger, your line is open if you do have a question.

No, my question was for Acacia Technologies.

OK.

Thank you sir.

We'll move on to Kerry Nevins (ph), private investor.

Hello, do you still have an ongoing strategic alliance with Smiths Industries?

We do have an alliance with Cyrano Sciences which was acquired recently by Smiths Technologies and that alliance continues.

Would you want to share any more details about that?

That alliance was to evaluate whether our chips could be used for certain types of chemical sensing applications related to vapors, things like various types of weapons, bombs and explosives.

And though due to the acquisition, that has slowed down a little bit but we plan to continue moving forward in that area.

OK.

Thank you very much.

And just as a reminder, if you are using a speakerphone, please pick up the handset before pressing any numbers.

Should you have a question, please press star one on your pushbutton telephone.

If you wish to withdraw your question, please press the pound.

And we'll pause a moment.

And we'll move to Peter Shaw (ph) with Louing (ph) Capital Management.

Hi, Amit, how are you doing?

Hi, Peter.

Question on the number of direct salespeople that you have in the organization right now?

We have in direct sales we have seven people plus a number of people that are not directly in sales but are field applications support as well as marketing and customer support, so total in that group is 10 to 12.

And what's the kind of number that you would like to see that end up at?

As we continue to achieve our sales growth, we anticipate getting up to close to 20 plus or minus a little bit by the end of the year.

OK.

Great.

I was just listening to one of your presentations, you were talking about access to the DoD infectious lab.

And I know you negotiated that agreement some time ago, but it sounded like you were just now getting the actual access into the lab.

Have you actually been in?

Are you talking about the ...

On the biowarfare, on the bio-detector.

You're referring to USAMRIID, I assume?

Ah, yes.

Yes.

We are talking with them all the time.

We have access to information and the people there at all times.

USAMRIID is going to conduct most of the live agent tests with our technology.

As you may know, at CombiMatrix we are not equipped to be handling anthrax and plague and so forth in our labs.

Not only are we not secure enough to do that but we don't have the facilities for safely handling those types of samples.

So all of the live agent tests will be done eventually at USAMRIID but we are constantly working with them, speaking with them, as we develop our program.

OK.

I guess I was just looking for some light as to where we stood in development there.

I was listening with a larger defense contractor and they indicated that the new Homeland Defense Director wants to put a push on for funding next generation of detection devices.

Are you getting an inkling of that and then is there some hope that we could perhaps see some committed funding and move forward on a deal?

Well, there are two types of funding that comes out of the government.

There is the funding to develop the technology and product, which is what we already have and then there is funding to actually procure products.

And as of today, as of this date, there has not really been any commitment to procure products besides what has been done at the U.S.

Postal Service.

So the Department of Defense has not specifically stated that they are going to buy any of these new bio and chemical weapons detection systems, but we anticipate that that will happen in the near future.

And so it's hard for me to say what will happen.

Our goal is to continue using the R&D funding to develop our products and then when the military or civilian organizations decide they want to buy these products, then we'll be there with the product for that application, for that market.

OK.

Then, I don't want to hog the line here, but one last question.

Regarding home brew, in the absence of the Furuno Bench-Top Synthesizers, would the diagnostic labs be under that loophole if they are doing design work, let's say, via the Internet, and then you're actually synthesizing the chips and delivering them or do they have to synthesize them in house?

First of all, I don't want to characterize laboratory developed tests as a loophole.

That is something that the FDA enabled because it allows us as patients and consumers to get the best, most advanced technologies before they have to go through FDA approval.

But anyways, to answer your question, you're absolutely right, if the laboratory designs and has us synthesize the arrays it will most likely require FDA approval, so the laboratory will have to have one of the synthesizers in house.

Eventually they will be the Furuno desktop synthesizers, which they will manufacturer, but in the meantime we anticipate providing interested laboratories with the synthesizers that we are manufacturing right now.

OK.

Great.

And that's actually the quote-unquote phone booth synthesizers.

Yeah, we don't call it the phone booth any more because it is much smaller than that.

If you actually go to our Website, you will see what it looks like, and it is about the size of a large computer terminal.

OK.

Great.

Thanks.

And we'll move to David Reese (ph), a private investor.

Yeah, Amit, how are you?

Hi, David.

I just wondered if you could make any comment at this point about your longer term desire to possibly sign up another -- a large company to act as a distributor.

I'm not talking about exist - Roche, but I mean, is it still a desire and are you actively ...

It is still a desire and we are actively having a number of discussions but until we actually sign a distributor, I hesitate to make any commitment.

OK.

I understand, I understand.

Have you made any comment about your hope to significantly ramp up your own product sales at a fairly impressive rate?

Well, we, as I indicated earlier, quarter over quarter doubled our sales, although, it is at a relatively modest level.

But we anticipate momentum continuing to grow for our products and we hope that though we don't provide forward guidance as a policy, we hope to continue our growth rate.

Do you recall what the cash drain was in the fourth quarter?

I mean, the first quarter showed an improvement over the cash drain, I assume.

Yeah, I think the - Scott?

It was approximately $3.5 million in the previous quarter.

You knocked it down by 500.

That's correct.

OK.

That's the only questions I have.

Thank you.

And we'll take our next question from Al Rosenthal (ph) with Merrill Lynch.

Hi, Amit, how are you?

Hello.

Well.

I have two sets of questions, Amit.

I want to follow up on the bench-top synthesizer.

Given that Furuno is supposed to come on at some point in the future.

Can you discuss the opportunity there for you guys, how much these cost, what the margins are and what happens when Furuno comes on and if there's milestone payments and if you're still going to continue sell these, it's a little bit confusing - can you ...

There are a lot of questions there, Al.

Let me address them all one at a time.

Sure.

We are not disclosing the price of those synthesizers but they are several hundreds of thousands of dollars.

One of those synthesizers costs as much as a small home and the gross margins are spectacular on those synthesizers at those prices.

There are milestone payments associated with certain activities in our relationship with Furuno and whether - I don't remember all the specific questions you asked.

I think I answered all of them.

Just, what's going to happen when Furuno comes onboard versus if you sell some of these on your own right now, are you going to stop selling them on your own?

You going to let Furuno do them by themselves?

Well, Furuno is not - Furuno is just a manufacturer of synthesizers.

We are going to distribute them ourselves or through other partners.

Furuno is just going to be the manufacturer.

Our goal as a company is not to become capital intensive manufacturing organization, so though we manufacturer our chips, the machines are going to be manufactured by Furuno, which has all of the infrastructure to do that.

So we are still going to be selling them, it is just going to be a different model.

No, I understand that, fine, I'll just go to my next question, which is I know that you have had a lot of discussions with some Japanese potential partners.

Can you discuss what's gone on with that area of the world and what you see going on in the future.

Japan is a very active area for us right now for many reasons, one of which is the Japanese government's strategic interest in making biotechnology their next wave of economic growth.

They want to do with biotech what they have done, essentially, with semiconductors, automobiles, consumer electronics and so forth.

And as a result, there are a lot of organizations in Japan that are ordinarily not known for their biotech efforts that are making significant investments in this area.

And one way of doing that is to work with companies that are leaders in certain market areas and so we're in discussion with a number of these organizations.

Obviously I can't tell you who they are but they are Fortune 50 companies.

They are companies that would be recognizable to everyone on this call.

Thank you very much.

I appreciate your time.

OK.

I'm sorry, but we have run out of time.

[Operator instructions]