Acacia Research Corp (ACTG) 2005 Q2 法說會逐字稿

Thank you for standing by everyone and welcome to the Acacia Research second quarter earnings release conference call.

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

Also at the request of the Company we will open up the conference for questions after each presentation.

At this time I'd now like to 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 8-K, which was filed with the SEC today for our forward-looking statement disclaimer.

With me today are Chip Harris, President of Acacia Technologies Group, Robert Berman, our Chief Operating Officer and General Counsel, and Clayton Haynes, our Chief Financial Officer.

Today I will give you an overview of our operating results for the second quarter.

Clayton Haynes will provide you with an analysis of our financial results.

And Rob Berman will provide a brief update on new litigation.

We will then open the call up for questions.

Acacia Technology Group revenues for the second quarter of 2005 were $2.682 million representing a 44% increase over the first quarter and over 300% from the year ago period.

Acacia generated revenues from 6 patent licensing programs, including revenues from 3 new programs with initial licenses to Nokia for our multidimensional barcode technology, National Instruments for our computer simulation technology, and Funai for our high capacity compact disk technology.

We added Sony as a licensee for our interactive television technology, Patriot Media for our Digital Media Transmission technology, and Foot Locker, Petco, Too Inc., Tuesday Morning and Sterling Jewelers for our credit card fraud protection technology.

In addition to these 6 revenue-producing programs, Acacia Technologies is also pursuing 12 additional licensing programs. 17 of these 18 programs are new for Acacia within the past 5 months.

Most industry licensing programs take a minimum of 6 to 12 months to start generating revenues.

So we have achieved excellent early stage results in just the first 5 months.

Of course our second quarter revenues represent a small fraction of the revenue potential from just 6 of our 18 licensing programs.

So our revenue growth is just beginning.

On the business development front, we acquired 2 new patent portfolios since the beginning of the second quarter, our laptop connectivity technology and the hearing aid ECS technology, which we announced last week.

We also have a full pipeline of potential deals that we are evaluating.

Our success in completing license agreements with major companies and increasing visibility is driving deal flow to us.

And we expect to acquire a number of new patent portfolios in the second half of the year.

We also made a great addition to our business development team in the second quarter with the addition of Moses Mares, who has an extensive background in intellectual property and licensing with Siebel Systems, Baker and McKenzie, and Knobbe Martins Olsen and Bear.

Early in his career he was a program manager with Intel and an R&D engineer with IBM.

Moses is a registered patent attorney who holds multiple master degrees in chemical, electrical, and computer engineering.

In summary, Acacia is very well positioned with our licensing and engineering teams pursuing 18 licensing programs, all of which have significant revenue potential, and an experienced business development team who will continue to acquire new patent portfolios to rapidly grow our business.

I would now like to turn the call over to Clayton Haynes, our Chief Financial Officer, who will provide you with an analysis of the second quarter financials.

Thanks, Paul.

First I will provide a review of the Acacia Technologies Group's second quarter 2005 operating results, then touch on cash flows for the quarter, and finally summarize our financial position as of the end of the second quarter.

As Paul mentioned earlier, total license fee revenues for the second quarter of 2005 were $2.682 million.

Revenues were comprised of recurring license fee revenues of $832,000 and paid up license fee revenues of $1.85 million.

In general, recurring license fee revenues are recognized from licensees that make recurring quarterly or annual license fee payments under their respective license agreements.

Paid up license fee revenues are recognized from licensees that make paid up license fee payments for past infringement and future use of our technologies under their respective license agreements.

Certain of our paid-up license agreements provide for potential additional payments based on future activities.

The second quarter 2005 GAAP net loss was $1.76 million versus a loss of $1.153 million in the comparable 2004 period as illustrated on the income statement provided in today's press release and related 8-K filed.

Excluding the impact of non-cash amortization charges of $1.336 million, the second quarter 2005 net loss was $424,000.

Total net cash outflows from operations for the second quarter of 2005 was $1 million, was approximately $1.5 million.

And in addition to the $424,000 included the payment of approximately $1 million of accrued liabilities including contingent legal fees and inventor royalties during the second quarter that were expensed in previous periods.

Second quarter 2005 operating expenses were $4.751 million as compared to $1.861 million in the comparable 2004 period.

The main drivers of the increase in operating expenses were an increase in contingent legal fees and inventor royalties expense, an increase in non-cash patent amortization charges, and an increase in MG&A related to the addition of licensing and business development personnel and related to the consulting agreement executed with the former CEO of Global Patent Holdings.

Second quarter 2005 patent related legal fee expenses were $536,000 and were relatively flat compared to the prior year quarter.

Second quarter patent related legal fees include $278,000 in fees incurred in connection with licensing programs for patents acquired in the GPH acquisition.

Excluding the impact of the GPH acquisitions, patent related legal expenses decreased to $258,000 due to a decrease in costs incurred in connection with our ongoing DMT patent commercialization and enforcement programs.

Other than our DMT patent portfolio, all other current litigation is handled on a contingent basis.

However, the Acacia Technologies Group is required to pay the out of pocket expenses incurred by these firms in connection with the ongoing litigation on a monthly basis.

Based on first and second quarter results, the Acacia Technologies Group's fixed costs for the fiscal year ended December 31, 2005 are expected to be in the range of $6.5 million to $7 million.

Fixed costs include salaries, facilities costs, certain consulting costs, corporate legal, accounting, and admin costs.

Variable costs including vendor royalties, contingent legal fees, patent related legal fees, and patent related research, consulting, and maintenance expenses can fluctuate based on licensing revenues received, enforcement activities, and patent related prosecution activities respectively and hence vary from period to period.

It is important to keep in mind that these variable costs represent important strategic investment in our patents, in our business, and in our overall strategy and are key in driving shareholder value.

The Acacia Technologies Group's financial position as of June 30, 2005 continues to be strong.

Cash and short term investment balances total $39.2 million at June 30, 2005 as compared to $28.6 million at December 31, 2004.

Total assets at June 30, 2005 were $67.7 million as compared to $33.1 million as of December 31, 2004.

In conclusion, during the second quarter of 2005 in comparison to the prior quarter and the prior year quarter, the Acacia Technologies Group experienced a strong quarter of revenue growth in our recurring and paid up license fee categories.

We generated revenues from 6 of our patent licensing programs and are pursuing 12 additional licensing programs.

I continue to be excited about our opportunities for revenue growth in future periods as we continue to execute our business strategy.

I will now turn the call over to Rob Berman, Chief Operating Officer and General Counsel of Acacia for his remarks.

Thanks, Clayton.

As most of you know, our revenues are derived from a combination of licensing and litigation activities.

The initiation of patent infringement lawsuits may be necessary in certain circumstances including those instances where we are seeking a significant amount of money for past damages.

We currently have 18 patent infringement matters pending, some of which involve single defendants and some of which are against multiple defendants.

A current listing of our patent litigation, including the patent technologies that they relate to, will be listed in our upcoming 10-Q.

Since last quarter we became engaged in 5 new patent infringement lawsuits.We have a new case with Intel Corporation regarding our dynamic manufacturing modeling technology, which we believe is used in the manufacturing of certain computer chips.

We sued Texas Instruments and Intel regarding our microprocessor enhancement technology, which we believe is being infringed by Intel's Titanium line of processors and certain processors made by Texas Instruments.

We initiated suit against Microsoft regarding our spreadsheet automation technology, which we believe is used in certain versions of Microsoft Excel and Microsoft Access.

We brought an infringement lawsuit against British Airways, Continental Airlines, and Priceline.com for infringing our interstitial Internet advertising patents.

And we sued Advanced Micro Devices and Intel Corporation in connection with our computer memory cache coherency technology.

In each of these cases our attorneys have engaged on a contingency fee basis.

We will of course continue to announce material events arising from any of our pending litigation.

And if you have specific questions on any case, you are welcome to ask them during our Q&A session.

Paul?

Yes, operator, we'd now like to open up the call for questions.

Thank you very much, sir.

This will begin the Acacia Technologies Group Q&A session. [Operator Instructions] And we do have a question from Peter Martin with Prosedio Management.

Paul just wanted to see if we could get the margin breakdown between the recurring and one-time revenue?

Yes.

If you look at the paid up licenses, we generated $1.85 million.

And if you look at the payout to inventors and the contingency law firms, you'll see that our gross margins are about 40%.

On the recurring we have an obligation to our inventors of 15% but that's of net revenues.

So we actually took in all 100% of that revenue cause right now we've extended certain costs.

But basically that's the breakdown.

In DMT we basically have 85% margins.

And I think the licensing in the second quarter is pretty typical of most of our other portfolios that we acquired where basically our gross margins are about 40%, if we use outside contingency law firms.

And just a follow-up, when you went over the operating expenses, you mentioned some payments to the former CEO of GPH.

That's a consulting agreement that was part of the acquisition.

And it goes for 2 years.

So it started the day of acquisition, end of January.

And that's $1 million per year, roughly $250,000 a quarter.

So we have about 6 more quarters under that consulting agreement where that will impact our operating statement on the expense side.

That's, services are being performed for that.

The ex-CEO is involved in a number of our licensing initiatives.

Okay.

I'll drop back into queue.

Okay.

[Operator Instructions] We do have a question from Philip Giamarino (ph) with Wachovia Securities.

Hey, Paul.

How are you?

Great.

Can you just give a quick overview on what's going to happen in September with the end of the, or I guess the testimony that's going to be given at the Markman (ph) hearing?

Well we're currently scheduled for September 8 and 9, which basically will be a rehearing of the Markman with our expert witnesses.

I don't know if you want to add anything to that, Rob Berman?

The judge wanted to give those parties that were not part of the litigation at the time of the original Markman hearing an opportunity to be heard.

He also wanted to give us an opportunity to be heard again on those definitions that we were not happy with.

And finally, he wanted to, the ability to hear from outside experts.

And so all that testimony will be given as Paul mentioned September 8 and 9.

And a revised Markman decision should come down at some time after that depending on how busy the judge's schedule is.

We'll get a better idea of when that might be.

But certainly there is not going to be any ruling or any event that happens on the 8 and 9 in terms of a decision.

Thank you.

Sure.

[Operator Instructions] And we'll go to Greg Lewin(ph) of Lewin Capital Partners (ph).

Greg, your line is open.

Hi, Paul.

How are you?

Hi, Greg.

When you look at the other licensing programs that you've started, does that, the Nokia is the name that were mentioned.

Do they also have first mover arrangements in those?

No.

Typically what they do in particular the new licenses that we did, which were paid up as Clayton, our CFO, pointed out.

Even though they are paid up licenses, a number of our paid up licensees have additional potential payments to make to us.

And the reason is typically an initial license fee, let's say there's a technology where a dozen companies infringe, will want to see, to make further payments of the ability to get other companies licensed and not to be the only company paying.

So we do have the potential for receiving additional payments on some of those quote paid up license deals.

Okay.

But on these programs you haven't been, I know in the DMT area you're using sort of first mover programs to get people moving a little quicker.

And that's not been the case in some of these others, I guess.

Hi.

This is Rob Berman.

In all of our licensing programs, generally the companies that sign up earlier get better rates.

And we generally raise our rates over time.

However, all of our deals have an impact on for example damages, if we do go to trial and get a judgment.

So there are no quote sort of sweetheart deals or discount deals.

All of the deals that we do are substantive deals because they may affect for example the damages phase of our litigations.

Okay.

Does that answer your question?

Yes.

I understand.

Okay.

Thank you.

We'll next take a question from Daniel Katz of Apex Capital.

Hello gentlemen.

Two questions, can you give some kind of general guidance on the other revenue line as it relates to the rest of the year?

I know some of that came from the Global Tech portfolio.

And then secondly, can you comment on whether or not the contingency payments and the investor payments as a percentage of revenues will decrease over time?

Yeah, let me answer the second question first.

As I commented that this quarter if you take a look at the payouts to the inventors and to the contingency law firms, our gross margins were about 40%.

And, I think that, yeah it varies across all of these portfolios, there is a total of 31 portfolios now.

But, I would say that that is fairly typical.

So, I would not expect a dramatic change in our income, from licensing revenues from the balance of those portfolios.

DMT is the exception right now, where we are paying for our own legal expense.

So there is no contingent legal fees.

And again, the inventor royalties in that particular portfolio are 15%.

On the first question, obviously we are very engaged on a number of licensing programs right now.

And certainly, based on the indications of the dialogue we have, we think we will, should do very well on the second half of the year.

But we did not make any financial projections as to potential revenue growth.

Simply, because we want to get the deals completed.

Fair enough.

Thank you.

Okay.

We will next take a follow-up question from Peter Martin with Presidio Management.

Paul, I don't obviously see you doing a lot of marketing, so is the G&A expense at the 1.7 - 1.8 level, is that a good base number going forward?

Does that incorporate the people you have hired and kind of a run rate we should look at?

Yes, it does.

Yes, Clayton pointed out based on our existing infrastructure and personnel, the total costs are about 6.5 to 7 million over the course of this year.

It is more than likely that we will probably be adding a handful of people to engineering and licensing to continue the revenue growth as we continue to bring in new fattened portfolios, which we expect to do in the second half of the year.

But, probably that would be an increase of maybe three or four people, total.

So that 6.5 - 7 million is really the SG&A line in total for '05?

Yes.

Okay.

And is that 250 to the GPH in that number?

Yes.

Okay.

Thank you.

(Operator Instructions) With no further questions, that will conclude the question and answer session for the Acacia Technologies Group.

You will now be placed on hold until 1.45 p.m. when the CombiMatrix presentation will commence. (Break)

Now at this time I would like to turn this conference over to Dr. Amit Kumar.

Please go ahead, sir.

Thank you, operator.

And thank you all for joining us for this call.

With me I have Scott Burell our VP of Finance.

And, 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.

The second quarter of 2005 was another stellar quarter for CombiMatrix as we continued to build on the momentum of previous quarters.

This quarter we achieved our primary goal which included strong revenue growth, advancement of many of our existing initiative and alliance projects; the establishment of a key new milestone and the formation of CombiMatrix molecular diagnostics or CMD to execute our strategy in the emerging molecular diagnostics market.

During my prepared statements I will highlight our financial performance and provide more color on our numbers which were released earlier.

I will discuss the specific events of the quarter including our new deal with ST Microelectronics.

I will then discuss progress in each of our strategic focus areas including diagnostics and CMD as well as our recent financing and then I will take questions.

Our total revenues for the quarter were $1.856 million.

This represents a gain of 74% over revenues for the first quarter of 2005 and a gain of 147% over revenues of the second quarter of 2004.

Array and equipment revenues related to CustomArrays were $565,000 which represents an increase of 103% relative to such revenues earned in the first quarter of 2005.

And over 1200% greater than such revenues for the second quarter of 2004.

This quarter is the fourth sequential quarter where we have more than doubled the previous quarter's product sales.

In the first quarter of this year, we achieved our first $1 million quarter and during this last quarter we nearly achieved our first $2 million quarter.

CombiMatrix continues to execute on its plan as our products become accepted in our industry.

In addition to the aforementioned sales growth, we made advances in all facets of our business and began execution of our diagnostic strategy by establishing CombiMatrix Molecular Diagnostics.

Needless to say, these are cutting times for CombiMatrix as we expand our commercialization efforts.

With regard to continued growth of revenues we have several major products in development which will be introduced over the next few quarters.

The major products we will be introducing during this time include our high-density arrays, our desk top sensitizer manufactured by our partner Furuno and sectoring of our arrays which will bring down costs to our users.

We will also introduce a series of other products in and around these major introductions.

These product introductions will fill out our product suite and expand revenue opportunities.

Although these products will be addressing the R&D market, they will also enable our diagnostic efforts.

I will speak about our diagnostic efforts at the end of my prepared comments.

I also want to note another milestone achieved by one of our customers.

A research group at the University of California in San Francisco published a scientific research paper based on data obtained from our arrays.

This paper studies certain mechanistic actions of a pathogenic agent as it evades attempts by the human immune system to neutralize it.

The study identified the genes that are utilized by this pathogen to escape and cause illness thus enabling a better understanding about how this bug operates and how it might be battled.

This paper is available online and those who are scientifically minded can call us to get information on how to get access to this paper.

For CombiMatrix this is a milestone, since this is the first peer review of scientific publication of data utilizing our MicroArrays.

This is a major step in gaining credibility in the scientific community.

We anticipate additional scientific papers to be published soon.

On the sales and distribution side, we established two distribution relationships in Japan.

The agreement with Inter Medical was announced during the quarter and with J.K.

International during the first week of July.

Both are modest sized distributors of life science instrumentation.

Inter Medical distributes axon scanners among other products and J.K.

International distributes products from Bio-Rad, Roche and other companies.

As we go forward, we will be establishing other distribution relationships.

Also, during the quarter we announced the new relationship with ST Microelectronics, the third largest semiconductor company.

ST has a $16 billion market capitalization and is one of the many semiconductor and microelectronic companies that has identified biotechnology as a potential growth market.

The initial phase of our joint projects, which will begin after the summer, will be to incorporate our technology with ST technologies and capabilities into a combined product.

ST will support all of this work with the exchange of technologies and capabilities and most importantly; with full financial support.

This is a great opportunity for CombiMatrix to leverage the capabilities of ST with ours, to develop some revolutionary products.

I would like to note that this relationship is not in conflict with the relationship we have in place with our other high technology partners, which include Toppan and Intel.

Those alliances continue at their individual paces.

In the defense area, we continue to work on our contract with DOD, U.S.

Department of Defense and in fact, as indicated on our income statement, we had a high level of activity on that program this quarter.

I prefer not to get specific about the activities that resulted in this high level of work.

But I want to note that there maybe some quarters when this may occur.

On the drug development side, our minority owned subsidiary Leukemics continues to make progress with its leaf compound addressing acute myelogenous leukemia or AML, a deadly form of blood cancer.

Our toxicology study in small and large mammals continue and has shown no negative affects to date.

Upon completion of these studies we look forward to filing our first investigational new drug application or IND with the FDA and beginning human trials.

Now, I want to shift back to MicroArrays but I want to focus on the opportunity for CombiMatrix in diagnostics.

This portion of my prepared comments will repeat some of the information we discussed during our May 23rd, conference call.

So, please bear with the repetition.

But, it is important to understand the tremendous opportunity that exists in this molecular diagnostic space.

First of all, I want to distinguish between the two markets for MicroArrays.

The first and most exploited market is known as the R&D market.

This market consists of researches in academia, biotech and pharma who are using DNA MicroArrays to understand disease and identify points of intervention that might cure such diseases.

To date, virtually all DNA MicroArray sales by CombiMatrix and all other MicroArray companies have been into this market.

The second and much larger market is the molecular diagnostic market.

The molecular diagnostic market will warp by several orders of magnitude and we are in the earliest days of the development of this market.

Every MircoArray company including CombiMatrix wants to sell into this market.

This market consists of clinical laboratories, hospitals, physicians, and other healthcare providers using DNA MicroArrays to diagnose disease and treat individual patients.

The market is highly regulated and only recently did the United States FDA provide guidelines on the methodology that can be used to get MicroArray products approved for this market.

To date, only one product has been approved for sale.

This market is often referred to as Pharmacogenomics or Molecular Diagnostics or Personalized Medicine, along with many other terms.

The key point is that five years after sequencing of the human gene, the scientific community is now at a stage where our understanding of genetic factors, such as expression patterns, nuclear tied mutations and other characteristics can help diagnose and help treat disease.

In lay terms, this means that if we are able to study a person's gene, we can treat that person's disease in a manner that has never been available before.

Our understanding of these genetic factors is growing everyday and this body of knowledge along with technology such as DNA MicroArrays will over the next few years revolutionize how patients are managed and treated.

We at CombiMatrix plan to be at the forefront of this paradigm shift through the unique capabilities of our technology.

To take advantage of our opportunity in this area, we have formed CombiMatrix Molecular Diagnostic or CMD as a wholly owned subsidiary of CombiMatrix.

The management of CMD is led by Matt Watson and Dr. David Baunoch who are respectively the Chief Operating Officer and Vice President of R&D of US Pathology Laboratories.

They joined US Pathology Laboratories when it was a small operation with less than $3 million in revenue.

Within four years, they along with the rest of the U.S.

Lab team built a highly profitable business that was generating $73 million in annual revenue.

US LABS was acquired by LabCorp the second largest Lab company in the U.S., in February of this year for $155 million.

Matt and Dave agreed to come on board at CMD and lead our effort into molecular diagnostics.

In addition to these gentlemen we have filled out the management team with a stellar group of industry-veterans.

The backgrounds of each of these individuals are available in our previously published press releases which can be found on our web site.

Our strategy at CMD is to focus initially on oncology or cancer and to utilize key characteristics of our technology that benefit from current regulatory guidelines.

Let me elaborate on the regulatory landscape.

Current guidelines state that a company may sell a device such a DNA micro array for diagnostic applications only if that specific array has been approved by the FDA.

However, there is a group of tests that are classified as laboratory developed tests that are exempt from FDA approval.

Virtually all of the sophisticated esoteric and molecular tests that are run today by laboratories fall into this laboratory developed test categories.

I should also note that almost all of the $73 million in annual revenue that was billed at US LABS was in the laboratory developed test category.

These laboratory developed tests do not require FDA approval if they meet certain strict guidelines.

First, the lab must be a CLIA certified laboratory.

CLIA stands for Clinical Laboratory Improvement Amendments and certification indicates that the lab is a highly sophisticated facility.

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 the key point I want to underscore in relation to our market opportunity.

If a vendor wants to sell a pre-made micro array for a diagnostic application that vendor must first seek and gain FDA approval.

Which can require significant time and cost.

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

CombiMatrix's desktop synthesizer enables CombiMatrix Molecular Diagnostic to make its own micro arrays and run them for physicians and patients as laboratory-developed tests.

Therefore the tests we develop at CMD will be available to patients as soon as we have completed internal development and validation.

They will not be delayed by an estimated 18 months for regulatory approval.

This is the reason why we feel that CombiMatrix will be able to own a large share of this market even though our competitors are bigger and better financed.

All of the major DNA micro array companies will have to spend time and resources gaining FDA approval whereas our tests will initially be exempt by virtue of our desktop synthesizers.

As I indicated earlier our first products will address the oncology market and will be focused on the treatment of patients who already have been diagnosed with cancer.

As we all know cancer is a class of diseases which usually leads to death and with our aging population the incidence of cancer will only grow from its current level.

When a patient presents with cancer there are three major questions the physician would like answered.

What type and grade of cancer is it; what drugs will benefit the patient, and what the potential outcome for this patient is.

CMDs first products will be bioinformatic products that will enable us to analyze the genetic characteristics of the cancer and the patient and provide answers to those three major questions.

Currently there is nothing on the market which can comprehensively address all of these issues.

We feel that this technology will revolutionize the way that cancer is treated and will enable us to save many more lives that would ordinarily be lost.

On the operational side, CMD has subleased a fully functional facility from LabCorp. in Irvine California and has approved for CLIA and other relative certifications.

The team has begun discovery operations as well as alliance discussions.

At the end of the second quarter CombiMatrix executed a small $3 million financing in order to strengthen the balance sheet and to enable us to provide the initial funding for our new CMD subsidiary.

In conclusion it's difficult to discuss all of the opportunities in this market and all of the subtle technical and business nuances on a short conference call.

I just want to note that CombiMatrix continues to execute its strategy and we're continuing to build momentum.

The next few quarters will be very exciting for us as we unveil and introduce our products for R&D and diagnostics.

Please continue to look for great things from our company.

Operator I can take questions now.

Thank you very much sir.

The CombiMatrix Q&A session will now begin. (Operator Instructions) And our first question will come from Alan Dubrow (ph), with AG Edwards.

Oh hello Amit, congratulations on a good quarter.

Quick question, you had mentioned on a previous conference call that you had a goal of 20 sales people by the end of the year and last time I checked were at about seven.

And we started the year at seven, any progress in that area?

Yes, our goal was to have about 15 to 20 sales people by then end of the year and we're roughly midway through the year and we have in our sales effort we have nine people.

In marketing we have a couple of other people.

And that's still the goal 15 to 20 by the end of the year?

Yes, in that range, that's correct.

Okay.

Thank you.

(Operator Instructions) And we'll go to Peter Shaw with Blue Wing Capital Management.

Hello Amit, good job this quarter.

Were there any synthesizer sales in the quarter that showed up in the $565,000?

There were synthesizer sales however, at the current time, for competitive reasons we don't plan to provide a lot of detail on synthesizer or chip sales for that matter.

We plan not to disclose the number of synthesizers sold or to whom they were sold, or the geographic region in which they were sold.

But the answer to your question is yes.

So is it -- sequentially is it an apples-to-apples comparison or --.

Sounds like you don't want to add much color there.

Well there are reasons why we don't necessarily want to -- eventually our competitors in the industry will learn where our synthesizers are placed.

And eventually when we have a large number out in the field it won't matter where we --.

It doesn't matter who we -- whether we tell people what, who the customers are, but for right now we would like to keep those names confidential.

Okay.

Regarding the government bump you had in the quarter, $500,000.

You said that in any given quarter you may see an increase.

If you don't see the increase should we model in about 7 to $750,000 of quarterly R&D?

Yes, that's probably reasonable.

Occasionally we see these increases based on certain activities that for various reasons are accelerated in a particular quarter and in this quarter we had some extra activity.

Okay.

Any updates on the KM family, in regards to --?

Those are still in animal tests right now and we don't -- as we achieve certain announceable milestones we'll provide updates.

Because there are -- there's currently a pile of money out there, right, that's been allocated but hasn't been spent?

That's correct.

There's quite a bit of money in BioShield 1 as well as -- there's money in BioShield 2 is making its way through Congress right now.

There's a number of issues with certainly both of those programs and the details of which are somewhat complex and we can discuss offline, but there is quite a bit of capital out there, available for programs like that.

Okay.

And just lastly Furuno, it sounds to me like it's on track and we're hopefully going to see something out of there by year-end?

That's correct.

Furuno is on track and we will have a series of introductions of new products certainly by year-end as well as the beginning of '06.

Great, thanks.

I'll get back in the queue.

We'll next take a question from Tom Wunderlic (ph) of St. Joe. (ph)

Amit how are you doing?

I'm doing well Tom, thank you.

Last week we had a conversation regarding the potential about breaking out sales.

How do you -- if a shareholder can't figure out what the chip sales were and the synthesizer sales can you go over and let me know how you are booking the sales for chips versus synthesizers?

Well we're booking the sales as products and our intent is to provide information on top line revenue.

The reasons we don't want to disclose -- there are several reasons why we don't want to disclose synthesizer sales and distinguish them from chip sales.

One is we don't necessarily want to telegraph specific prices to specific customers and at this stage we're not selling hundreds of them we're selling hundreds of them we're selling small numbers and we anticipate that could be the case in the next couple of quarters.

And so we don't want customers to know what prices we're selling those for.

And in addition, for competitive reasons, we don't necessarily want to tell our competitors in what geographic regions we have sold those machines in.

So, but every synthesizer sale will result in a recurring revenue of chip sales, because each of those machines will require chips as well as reagents to operate.

I understand that, but it makes it hard for a shareholder to analyze how chip sales are going by doing it that way.

Now --.

That's right, I think -- I agree.

You know there's a tremendous amount of detail we could provide on sales of all of our products including chips.

And among chips themselves we have several different versions, we have blank chips, we have CustomArray chips, DNA synthesized chips.

We have unique DNA synthesized chips in some cases we have sold for several thousand dollars a chip and our intent is not to provide a lot of detail on that.

I think the best way for shareholders to evaluate the performance of the company is just to look at overall sales because all of our equipment sales will result in additional re-usable chip sales, you know --.

But if a potential synthesizer can cost 1, 2, $300,000 and you had a synthesizer sale I'm led to believe that maybe chip sales weren't as good as I was hoping for.

Well again, I think the way to look at our performance is to look at what our overall sales are.

And I just -- we're just not ready at this point to provide a lot of detail.

Do you think that's two or three quarters away, one quarter away, or do you have any idea?

It's hard to say.

Certainly after the Furuno synthesizer is available on the market and we've sold a large number of them then we should be in a better situation to break them out.

And in the beginning of the conference call you said that you had several new products the 90k chip, the synthesizer, you know, Furuno synthesizers that would be released in the next few quarters and then you just told the caller before me that you thought it might happen about the end of the year, early next year.

Do you think those new products will be released in the next two or three quarters, can you be more definitive on that?

That's correct.

We anticipate in the next two or three quarters that several of those products will be released as well as some additional products that we have not discussed with the market, for competitive reasons.

So we do anticipate significant product introductions in the next two or three quarters.

Okay.

Excellent.

Thank you Amit.

(Operator Instructions) We will next take a question from Noble Trenham, with First Global Securities.

Amit, congratulations on a good quarter.

You're certainly on track, but I don't hear in those nice, positive momentum discussions anything about the former potential called Roche [ph], is that in your future in any way.

We've talked about Roche on a number of occasions.

The deal still exists and just to reiterate at the risk of being too repetitive we completed our project with them and received all the appropriate payments and now it's in their hands.

They have to decide when and if they're going to launch the product.

If they do, when and if they do launch the product we'll receive the significant level of royalties that are due to us.

But it's really in their hands and so we -- as we go forward we continue to build momentum on our own commercialization effort.

And when and if they launch then that will simply be an added upside for us.

Good to hear.

Keep that momentum going, thanks.

We'll now go back to AG Edwards, Alan Dubrow.

Amit, on the last conference call you -- when you talked about Leukemix you described the progress as spectacular.

Well will that word spectacular still hold true on the progress over the last quarter?

Well yes absolutely I think last quarter I had described some of the efficacy results, the effectiveness of the drug in pre-clinical tests in animal models as well as in laboratory tests.

And everything looks great.

Now we are engaged in toxicology studies which are somewhat boring from a technical standpoint, but they're absolutely necessary before our FDA will allow us to do human testing.

Many of the - keep in mind, AML is a very deadly disease and most people who will get it will die very shortly after diagnosis.

In fact sometimes in a matter of weeks or a couple of months.

And so the physicians who treat those patients are very eager to try anything that has shown any effectiveness.

However, regulatory guidelines require us to complete some significant levels of toxicology studies in a small mammal's model as well as a large mammal model before you can put it into a human.

And so for the last couple of months and for the next two or three months we will continuing those studies, and we're not going to be getting any new efficacy data.

It's just boring toxicology data to show that these compounds don't have some unanticipated toxicological effect that we will document for the FDA before they will allow us to go into some ---.

How far are we into that?

We're getting good results obviously so far.

Yes so far we haven't seen anything negative and in fact it's looking very good.

We're probably a good two to three months away from completing the studies and then a couple of months of analysis, and so we anticipate to be on track, and having discussions with the FDA before the end of the year.

So there's a chance for a January/February human trials?

Yes.

Okay.

First quarter that's correct.

And then on the HIV front there's some delivery issue you talked about last quarter.

Are we progressing at all on that front?

Yes from a technical standpoint our HIV sequences have just sort of reiterate again, and bring it back into context, as we announced previously our HIV, the two sequences that we've identified along with our partner in Spain showed effectiveness at knocking down greater than 99% of the HIV virus in petrie dishes.

However, getting it into humans and into the right cells requires a delivery approach that I think the whole industry right now is grappling with.

So though our scientific breakthrough was significant the actual practical aspect of delivering that is something that we're looking into, and it's very difficult to identify when it breaks through and that will occur, although there are a number of promising avenues.

Okay and then going back to the issue before, I don't know if you could talk about this or not, but with the chip sales some of the other callers were trying to figure chip sales or some product sales.

Could you at least indicate if we had an increase in chip sales versus a decrease or you really don't want to go there?

Well again, it's difficult for me to provide that information at this stage without essentially saying a lot about the synthesizer sales and our intent is to maintain as much confidentiality about the synthesizer sales as possible.

Once we're selling dozens of them then it becomes less of a mote point, but at the early stages we don't want to provide a lot of information.

Okay.

Thank you.

We will next take a question from Harry Haskell (ph), who is a private investor.

Amit, are you going to analyze Lance Armstrong's genes in the process here?

I think that would be an interesting exercise.

We haven't talked to Lance, but it's an interesting idea.

We'll now go back to Peter Shaw.

Amit, you were talking about product highlights and sectoring arrays came up and I had not heard of that before.

Could you provide a little color as to what that is?

As you know our current array product is a 12,000-site array and we have coming out our high-density array which is a 90,000-site array.

When you sector these arrays we have a manifold that sits on top of these arrays and enables that single 12,000-site array to become four 2,000-site arrays.

And there are many studies where customers don't necessarily need that full 12,000-gene analysis, but 2,000 or less is better.

By sectoring that 12,000-site array into four 2,000-site arrays they get four -- many arrays so to speak at one-fourth the cost of a 12,000-site array.

So one of the activities as we go forward not only the sectoring activity ,but some other things that we have in the works that we haven't discussed in detail, we anticipate will enable us to bring the cost of these arrays down significantly down into the tens of dollars range as we go forward into next year.

And that we think is going to be revolutionary for the industry and it's going to expand the use of these products not only in R&D but also in diagnostic applications.

And so we're pretty excited about that.

And did you go down this path after feedback from scientists or, I mean what kind of demand?

I mean it sounds very intriguing to me.

Not necessarily feedback.

Certainly our users provided feedback on how we build their specific product, but cost reduction has always been an issue for this industry since the early days.

And I think by reducing the costs to more reasonable levels while maintaining the margins we anticipate expanding the market by factors of ten or more.

Thus resulting in a nice gain for whoever is the first company that's able to reduce costs significantly and we think we're going to be that company.

Okay.

And then one final thing on the material sciences side.

Have there been any new developments on the fuel cell front?

We're in a period of high-energy costs and a lot of people are intrigued by getting into a hydrogen economy and so forth, any color you can provide?

There's still, that's still at a discovery stage and so discovery is to some extent doing new science and there's no -- if you're asking has there been progress, there has.

But if you're asking if -- have we discovered the next new catalyst that's going to make the fuel cell industry commercially viable, the answer is no, but that effort goes on.

Fair enough.

Thanks.

Keep up the good work.

The final question for today will come from Tom Wunderlic.

Amit I've got a couple of more questions regarding the balance sheet.

So your balance sheet you approximately have 19, $20 million with the money that you just raised.

Do you expect in the third or fourth quarter any significant milestone payments from any of your partnerships?

And a follow-up to that would be, with CMD and what's on the horizon for CMD and since they're still wholly owned by CombiMatrix can you give any direction on when you expect cash flow, what quarter or how many quarters are out from there?

Yes, as a general rule Tom, as we've stated in the past we don't make projections, but there are payments coming in from various partners including ST, as we go forward.

I don't want to discuss the magnitude of those payments and that's -- CMD has already begun some discussions on some strategic relations, potential strategic relationships and as those are closed CMD will again start generating either a cash flow or revenue depending on how the accounting treatment -- what the accounting treatment is.

And I think that's basically all I can say.

We do anticipate payments we do anticipate good things from CMD before the end of the year.

Okay.

Thank you.

That does appear to be the last question.

I'd like to turn it back to Dr. Kumar for any additional or closing remarks.

Well I'd like to thank you again for being with us on this conference call and please stay tuned for more exciting from CombiMatrix.

Thank you.

That does conclude this conference call.

If you wish to access the replay for this call you may do so by dialing 888-203-1112 and use ID 1494274.

Once again this does conclude this conference for today.

Thank you for participating and have a great day.