Acacia Research Corp (ACTG) 2005 Q4 法說會逐字稿

Please stand by, we are about to begin.

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

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

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

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

Please go ahead, sir.

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

Clayton Haynes, our Chief Financial Officer; and Rob Berman, our Chief Operating Officer and General Counsel.

Today, I will give you an overview of the progress we are making in building the business.

Clayton Haynes will provide with you an analysis of our financial results, and Rob Berman will provide a brief update on the litigations we have initiated.

We will then open the call for questions.

As we just reported, Acacia Technologies Group revenues for the fourth quarter of 2005 increased to $8,246,000, compared to $779,000 in the year-ago period.

Revenues for the year increased to $19,574,000 compared to $4,284,000 in 2004.

Acacia is building the country's premiere patent licensing Company.

We are meeting a huge unserved need in the market from inventors and small and mid-sized technology companies that do not have the resources, experience or scale to effectively execute patent licensing and enforcement programs.

It is far more effective for them to outsource the licensing of their patented technologies to Acacia.

We are at a very early stage in the growth of our business.

Our licensing success in 2005 is creating new business opportunities for us and given the current pipeline of patented technologies we are evaluating, we expect to significantly expand our business in 2006.

During the fourth quarter, we added five new patent portfolios.

These patented technologies relate to computing device performance, continuous TV viewer measuring, information monitoring, archiving and transmitting medical images, and micro mesh laminates.

During the fourth quarter, we completed the first license for our resource scheduling technology, and with the first licenses for our web conferencing technology being signed in January, we now have begun generating revenues from 13 different patent portfolios.

The creation of Acacia shareholder value is built in three phases.

The first step in creating shareholder value starts with the acquisition of new patent portfolios from our partners.

Acacia's share of the licensing revenue, after legal fees and expenses, generally ranges from 50% to 85%, depending on whether we make upfront cash payments or advances to our partners.

The second step in creating shareholder value is launching the licensing and enforcement programs and completing initial licensing agreements.

Generally, the first license is the most difficult and is very important because it significantly increases the probability of completing additional licenses.

The third step in creating value is expanding the licensing and enforcement efforts and initiating litigation when necessary to generate significant revenues from fully licensing the market for each technology.

In 2005, our licensing, engineering, and business development teams did a great job in all three areas of building shareholder value.

We added 37 new patent portfolios, initiated 11 new licensing programs that generated revenues, and increased our revenues by over 350% from the prior year.

Our policy is not to give future revenue guidance due to the lumpy nature of our revenues, particularly in the early stages of our growth.

What we can say is that our revenue opportunities for 2006 greatly exceed those of the past year, as we are beginning the year with a larger number of patent portfolios for licensing and a much larger number of active revenue-generating licensing programs already in place.

However, we can't predict the timing of realizing those revenues, particularly on a quarterly basis.

Acacia is at a very early stage in generating revenues from its patent portfolios.

We have only begun generating revenues from 13 of our patented technologies, and have realized only a small percentage of the potential revenues for many of these 13 licensing programs.

We will continue to be aggressive in adding new patent portfolios, which will continue to build our future revenue base.

In summary, Acacia is very well-positioned for future growth.

We have very talented licensing, engineering, and business development teams in place.

We are establishing a very successful track record in licensing.

We are attracting new business.

We have a strong balance sheet and we have built a large base of potential future revenues from our 40 patent portfolios.

We see a major business opportunity for our Company in serving this unmet need in the marketplace.

In addition, it was announced in January that our Board of Directors has approved a plan for CombiMatrix to become an independent public Company and expects to complete the transaction in the second quarter subject to receiving satisfactory tax opinions and completing the required SEC filings.

And with that, I will now turn the call over to our Chief Financial Officer, Clayton Haynes.

Thanks, Bob.

And thank you to everyone joining us on today's fourth quarter 2005 and year-end 2005 conference call.

First, I would like to provide a review of the Acacia Technologies Group's fourth quarter 2005 operating results.

Then I will provide a review of the operating results for the year ended December 31, 2005.

And finally, I will summarize the Acacia Technologies Group's financial position as of the end of 2005.

As Paul indicated, the Acacia Technologies Group posted another strong quarter of revenue growth in the fourth quarter of 2005.

Fourth quarter 2005 license fee revenues totaled $8,246,000 as compared to $779,000 in the fourth quarter of 2004.

Revenues were comprised of paid-up license fees of $7,384,000 versus no paid-up license fee revenues in the fourth quarter of 2004, and recurring license fees of $862,000 versus $779,000 in the fourth quarter of 2004.

During the fourth quarter of 2005, we generated revenues from five of our ongoing technology licensing programs.

The increase in license fee revenues in the fourth quarter of 2005 and for the entire 2005 fiscal year was primarily due to the timing of the execution of paid-up license fee agreements for patent portfolios acquired in the January 2005 GPH Acquisition and net organic growth within our recurring licensing revenue category.

License fee revenues will continue to fluctuate from period to period based on the timing of the execution of license agreements, the mix of paid-up license agreements and recurring license fee agreements in each period, fluctuations in the number of license agreements executed each period, fluctuations in the sales results or other royalty per unit activities of our license fees, the timing of the receipt of periodic license fee payments and/or periodic reports from license fees and other factors.

The fourth quarter 2005 net loss, in accordance with generally accepted accounting principles, was $1,083,000 versus $1,559,000 in the fourth quarter of 2004 as illustrated in the Acacia Technologies Group comparative income statements provided in today's press release and related 8-K files with the SEC.

Excluding the impact of non-cash patent amortization charges of $1,336,000 and non-cash stock compensation charges of $233,000, the Acacia Technologies Group recorded fourth quarter 2005 net income from continuing operations of $513,000, versus a net loss from continuing operations of $1,433,000 in the fourth quarter of 2004.

Fourth quarter 2005 operating expenses were $9,648,000, as compared to $2,507,000 in the fourth quarter of 2004.

The primary drivers of the quarter-to-quarter increase in operating expenses include $5,400,000 in inventor royalties and contingent legal fees expense, which are directly related to the paid-up license fee revenues recognized during the fourth quarter of 2005 compared to no inventor royalties or contingent legal fees expense in the prior quarter.

An increase of $1.2 million in non-cash patent amortization charges related to the GPH acquisition, an increase in MG&A related to the addition of licensing and business development personnel, an increase in consulting expenses related to the consulting agreement executed with the former CEO of Global Patent Holdings, an increase in patent development and commercialization expenses primarily related to several of the patent portfolios acquired in 2005, and the impact of non-cash stock compensation charges previously mentioned.

Fourth quarter 2005 patent related legal expenses were $295,000 compared to $781,000 in the fourth quarter of 2004.

The decrease in patent-related legal expenses was due to period-to-period fluctuations in ongoing patent prosecution and enforcement activities associated with our ongoing technology licensing programs.

As a reminder, other than our DMT patent portfolio, the majority of current litigation is handled by outside law firms 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.

I will now move on and summarize the results for the year ended December 31, 2005.

Total revenues for 2005 were $19,574,000 comprised of $16,165,000 of paid-up license fee revenues and $3,409,000 of recurring license fee revenues. 2004 revenues totaled $4,284,000 and were comprised of $2,784,000 in recurring revenues and $1.5 million of previously deferred V-chip license fee revenues.

During fiscal 2005, we generated revenues from 12 of our ongoing technology licensing programs.

The Acacia Technologies Group recorded a GAAP net loss of $6,275,000 for the year ended December 31, 2005, as compared to $5,543,000 in 2004.

The 2005 net loss included net accrued expenses related to discontinued operations of $237,000 as compared to $104,000 in 2004, and $225,000 in V-chip-related inventor royalties expense related to the completion of all V-chip activities in 2005.

Excluding non-cash patent amortization of $4,922,000, non-cash stock compensation charges of $356,000 and the impact of discontinued operations and V-chip related royalties expense, the Acacia Technologies Group recorded a net loss from continuing operations of $535,000 for 2005, versus $4,938,000 in 2004.

The 2004 results included a non-cash V-chip-related impairment charge of $1.6 million.

Total operating expenses for 2005 were $26,820,000 versus $10,339,000 in 2004.

The primary drivers of the increase in operating expenses in 2005 versus 2004 include $11 million in inventor royalties expense and contingent legal fees, which are directly related to the paid-up license fees recognized in 2005, a $4.4 million increase in non-cash patent amortization charges related to the GPH Acquisition, an increase in MG&A related to the addition of licensing and business development personnel, an increase in consulting expenses related to the consulting agreement executed in connection with the GPH Acquisition, an increase in patent development and commercialization expenses primarily related to several of the patent portfolios acquired in 2005, and the impact of non-cash stock compensation charges as previously mentioned.

Patent-related legal fees in 2004 included $668,000 in previously deferred V-chip related legal fees.

Excluding these amounts, patent-related legal fees were relatively flat in 2005 compared to 2004.

As indicated earlier, patent-related legal fees will fluctuate based on the level of patent prosecution and enforcement activities occurring in each period.

Based on the results and activities for 2005 and budget estimates for 2006, the Acacia Technologies Group's fixed costs for fiscal 2006 are expected to be in the range of $7.5 million to $8 million.

As indicated on previous calls, variable costs include inventor royalties, contingent legal fees, patent-related legal fees and patent-related research, consulting and maintenance expenses, and will fluctuate quarter-to-quarter based on licensing revenues recognized, patent-related enforcement activities, and patent-related research and prosecution activities, respectively.

The Acacia Technologies Group's year-end 2005 financial position continues to be strong.

Cash and short-term investment balances totaled $39 million at December 31, 2005 versus $41 million as of the end of the third quarter of 2005, and $28.6 million at December 31, 2004.

The change in cash and short-term investments during the fourth quarter of 2005 reflects the impact of operating activity as reflected in the fourth quarter income statement and the impact of the timing of the receipt of cash payments from licensees and the timing of payments of inventor royalties, contingent legal fees and other accrued expenses quarter-to-quarter.

Accounts receivable from licensees increased during quarter by $4.2 million, primarily due to the timing of the execution of certain paid-up license agreements in late December 2005.

The majority of accounts receivable at year end has been collected by the Acacia Technologies Group subsequent to year end in accordance with the terms of the underlying license agreement.

During the fourth quarter, current liabilities, including accrued expenses and inventor royalties payable and contingent legal fees payable increased by $1.7 million.

The majority of year-end current liabilities will be paid by the Acacia Technologies Group during the first quarter of 2006.

Total assets at year end were $68.9 million as compared to $33.1 million as of the end of 2004.

At December 31, 2005, working capital was $38.9 million versus $38.7 million at September 30, 2005, and $27.1 million at December 31, 2004.

In conclusion, 2005 was a strong year for the Acacia Technologies Group.

The GPH Acquisition and other patent portfolio acquisitions have increased our revenue generating base and significantly diversified our IP licensing and enforcement business.

In 2005, consistent with our strategy, we were able to continue to efficiently leverage our in-house house staff of licensing, engineering and business development professionals, and other resources, allowing us to significantly increase revenues and patent portfolio acquisitions in 2005 with modest increases in related fixed personnel costs.

I would like to congratulate the inventors whom we serve in our team of licensing, business development, and engineering professionals for the work done this year to accelerate Acacia strategy of becoming the leader in technology licensing.

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

Thanks, Clayton.

As Paul Ryan pointed out in his opening remarks, litigation is sometimes a necessary step towards realizing revenue from our licensing and enforcement programs.

Since our last report to you, we have become involved in seven new lawsuits involving our credit card fraud protection, laptop connectivity, multidimensional bar code, user-activated Internet advertising, and resource scheduling patent portfolios.

We have also terminated three lawsuits involving our user-activated Internet advertising, image resolution enhancement, and V-chip portfolios.

These terminations resulted from settlements.

In the case of the V-chip, we resolved the last dispute in which a defendant was seeking reimbursement for certain legal fees.

All litigation with respect to the V-chip is now finished.

In addition to initiating new lawsuits, we also added new alleged infringers to some of our existing cases.

Between our new lawsuits and adding additional companies to our existing cases, we engaged in lawsuits with 26 new parties since our last report and have terminated lawsuits with six parties.

Overall, we currently have 27 active lawsuits to enforce our patented technology.

The next hearing for our DMT litigation is this coming Friday, February 24, in San Jose.

At the hearing, we expect a judge to hear arguments regarding our recent motion to immediately appeal certain claims construction issues to the Federal Circuit Court of Appeals.

If the judge grants our motion, we will appeal these issues while the rest of our infringement case continues.

If the judge denies our motion, we will delay our appeal until the conclusion of the case at the trial court level.

In either event, we are continuing to move forward against the cable and Internet defendants and will also discuss with the judge a schedule for the next steps in the case, including additional claim construction, discovery and trial preparation.

As always, if you would like additional information on any of our ongoing litigation, you can get information on the online pacer system.

Paul?

Thank you, Rob.

And with that, we would now like to open up the call for questions.

Thank you, sir.

The question-and-answer session will begin for the Acacia Technologies Group. [OPERATOR INSTRUCTIONS] Please stand by for the first question.

And our first question comes from Harris Hall, Singular Research.

Please state your question.

Great quarter, guys, congratulations.

Thank you.

A couple of questions.

You guys covered a lot of numbers there.

I caught $7.5 million to $8 million in costs.

Can you go over what that was again?

That was -- Clayton, do you want to address that?

That was the estimate for 2006.

Yes, based upon activities for 2005, as well as our budgeting process for 2006.

We are expecting our fixed costs, which includes basically personnel costs, costs associated with facilities and other fixed costs, we expect those to range between $7.5 million and $8 million for 2006.

Okay.

So just to be specific, that would be your marketing and general, your legal expenses with the DMT --

No, that would not include the DMT legal.

It would not include DMT legal?

No.

It would exclude the costs that we define as variable costs, which are our contingent legal fees, our inventor royalties, our variable legal costs, as well, it would exclude those costs.

So it would be amortization, marketing and general --

That does exclude amortization, as well.

Does it include stock compensation?

It would also exclude stock compensation, as well.

Those particular line items we break out separately on the P&L and so we are sort of just talking about the fixed component of our marketing, general and administrative line.

Okay.

So it’s just the marketing and general line?

Yes.

Okay.

I get it.

The -- your gross margin -- what I am considering gross margin which is your sales minus contingent legal expenses and inventor royalties, that dropped a little bit.

I was a kind of surprised this quarter down to 34.5%.

Do you see that getting back above 40% next year?

Yes, Harris.

It varies quarter-to-quarter, obviously, depending on which portfolio.

We have a number of revenue splits with the patent owners, and in this particular quarter, a significant portion of our income came from one of the ones where the split is higher than normally the case for the original inventor of the technology.

If you look at the total year, and you take the inventor royalties paid out and the contingent legal fees it would show us with, in effect, what you are characterizing as gross margins as about 43%.

In the fourth quarter, you are right, it was about 35%, and we think long term probably it is a reasonable assumption to assume that we will generate about 40% of our gross margins.

Okay.

And you said current liabilities were up $1.7 million?

Did I get that right?

Yes, in the quarter.

From the end of the third quarter to the end of the fourth quarter.

From the third quarter?

Yes.

Okay.

Great, thanks, I will jump back into queue.

[OPERATOR INSTRUCTIONS] This will conclude the question-and-answer session for the Acacia Technologies Group.

You will now be placed on hold until 2 p.m. when the CombiMatrix presentation will commence.

Okay.

We would like to thank everybody for being with us and the CombiMatrix portion of the call will start at 2:00 West Coast time.

Thank you.

At this time the CombiMatrix Group presentation will begin.

I would like to turn the 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 today is Scott Burell, our Vice President of Finance.

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 statement disclaimer.

During my prepared statement, I will highlight the financial performance for the quarter and year, provide more color on our numbers, which were released earlier, and discuss the specific events of the quarter.

I will also take the time to discuss and update everyone on all of our key operational and strategic initiatives.

Before I begin, I want to note that despite the current challenges for CombiMatrix and our current stock price, we are positioned for an exciting and successful year and have assets, programs, and plans that we feel will enable shareholder value growth throughout the year.

One of these plans is the recently announced splitoff of CombiMatrix from Acacia Research.

The process to affect this transaction continues and we will provide updates as appropriate.

During the last quarter of 2005, we continued our progress in commercialization and transitioned to our new strategic direction, which I will describe in a moment.

Our GAAP revenues for the quarter were $3,644,000 and our net loss was $1,785,000.

This brought our total revenue for 2005 to $8,033,000, and our net loss for 2005 was $12,401,000.

Our plan is to continue to grow our sales throughout 2006, but we are not ready to provide guidance until we have gained significant experience with all of our newly released and soon-to-be released products.

With that being said, as I noted earlier, we feel we are positioned well for a prosperous 2006.

Now, I would like to discuss our operations, strategic initiatives, and plans for 2006 beginning with our upcoming product launches and corresponding sales and marketing efforts.

At the beginning of 2005, our product offerings were comprised only of our CustomArray 12K product and a handful of Catalog Microarrays.

As we continued throughout year, we expanded our portfolio to include our CustomArray synthesizer, a large series of CatalogArrays, sectored, custom and CatalogArrays, reagents and other items.

Even this portfolio expansion was not complete and our upcoming product launches will expand our suite of products as well as our sales potential.

The four key products we plan to launch are our electrochemical detention unit to scan arrays, our laboratory synthesizer we are building with our Japanese partner, Furuno, our higher density CustomArray 90K product, and our first Molecular Diagnostic products and services from our diagnostics subsidiary.

Let me discuss the launch timing of each of the four.

We plan to launch our electrochemical detector system as part of a complete system to perform pathogen detection and identification within the first quarter of 2006.

The scanner will retail for roughly $20,000 compared to other commercial scanners that retail for up to $200,000 or more.

We hope the modest capital cost of the scanner will enable us to access customers who have previously been unable to utilize Microarrays due to their prohibitive cost.

The system is designed to be an open-source system and will enable customers to develop unique pathogen detection arrays independently or in collaboration with our technical support.

Our plan is to initially launch this product for research use followed by obtaining FDA approval for the product.

The first pathogen shipped in the suite of products is our Influenza A typing array, which I will discuss in greater detail in a few moments.

Additional arrays include those being developed for our military customers and partners.

Also in the second quarter, we plan to launch our second major product, the laboratory microarray synthesizer being co-developed with our partner Furuno Electric.

This synthesizer is more compact and is designed for laboratories with limited space and certain other requirements.

When this synthesizer is available we will have two versions of our array synthesizer on the market, each meeting the needs of different customer segments.

Additionally, we plan to launch our 90K microarray in the second quarter of this year.

This array will enable our customers to analyze the full human genome, as well as the genomes of other species on a single chip.

In parallel with the launch of the CustomArray 90K, we will launch a series of CatalogArrays that capture the full human genome, mouse genome, rat genome and other organisms.

While our current 12K product is a good product, it does not allow us to access customers that want to study the whole human genome.

With the launch of the 90K array, we will have products that are comparable to all products offered by our competitors.

Therefore, we feel that this is a milestone launch for our Company.

As we go forward, additional increases in density will enable cost reduction and greater resolution in many studies.

Finally, Combi Molecular Diagnostics, or CMD, our wholly-owned subsidiary, plans to launch mid-year our first home-brewed diagnostic service for melanoma diagnosis and typing.

This product is being developed with the UCLA School of Medicine and is a component of our broader effort in cancer diagnosis.

By the time we have launched this product, we anticipate that CMD will have obtained CLIA certification, as well as some other state mandated certifications for its laboratories.

In addition to CMD's already announced product launch, we are in the process of expanding the capability of CMD into an area known as comparative Genomic Hybridization Arrays.

I will provide more detail momentarily.

With the launch of these exciting products and the products that are already on the market, it is important to understand our sales and commercialization strategy.

First, one guiding principle for our products is their open-source nature.

Our goal is to enable our customers by providing them the tools to use our products in their own research efforts and also to allow them to develop applications that they can promote and even sell.

Another guiding principle for our sales and marketing effort is to take advantage of the networking, or viral nature of our products.

For example, the sale and installation of one of our synthesizers essentially builds a mini-CombiMatrix at the facility where it is installed.

Each installation becomes a distributed manufacturing facility for CombiMatrix arrays.

Each of these facilities will use a synthesizer to make arrays for itself as well as for others and each array will require purchase from CombiMatrix.

Another example is our CombiCore Program, which has signed two major universities with several others in the queue.

The CombiCore Program encourages core laboratories to promote and sell our arrays to users at their university.

This program utilizes the resources of the university core facility to promote our products, thus extending the reach of our marketing and sales organization.

The goal of our sales and marketing strategy is to utilize the resources of our customers in parallel to ours to promote, sell, and manufacture CombiMatrix chips and products.

Consequently, we have structured our sales and marketing organization to most efficiently utilize our limited resources as we focus on sales of our CustomArray synthesizer, as well as blank arrays and reagents enabling in-house fabrication of microarrays by our customers.

If we are able to build a large installed base of so-called mini-CombiMatrixs, we anticipate that product sales will grow exponentially and new array applications will be developed by our customers.

In addition, we will continue sales and marketing efforts on the next version of our laboratory synthesizer to be manufactured by Furuno and the additional products I mentioned earlier.

As we launch our other products, such as our new Custom and CatalogArrays, we will utilize them to continue to drive sales of our synthesizers, which will, in turn, drive sales of blank and Catalog arrays and reagents.

We will also continue to utilize distributors.

Our network of distributors as of the end of 2005 include INBIO in Australia and New Zealand, JK International and Inter Medical in Japan, Cell Sciences for certain countries in East Asia, and VWR Scientific.

Related to our efforts to most efficiently utilize our resources, we have transferred majority ownership of our Japanese subsidiary, CombiMatrix KK, to our distributor and partner INBIO.

By doing so, we have eliminated roughly $1 million of annual expenses, which will be reallocated to other needs.

INBIO will pick up all expenses and liabilities of running the KK and we will retain one-third ownership with no obligation to fund the operation.

All of our past and new strategic relationships in Japan, which include Furuno and Toppan, will be managed from U.S. headquarters and the KK and INBIO will focus on sales of CombiMatrix products.

Now let me take a moment to update our drug development efforts.

At our minority owned subsidiary, Leukemics, we are continuing the required toxicology studies necessary before human clinical trials on our first drug candidate for Acute Myelogenous Leukemia.

These studies are progressing well, and we are determining the appropriate oral formulations.

Provided that these studies demonstrate adequate safety we intend to begin human clinical trials in Acute Myelogenous Leukemia in 2006, followed by trials in Chronic Lymphositic Leukemia.

In addition, we are working on other compounds that we hope to move into pre-clinical development in 2006.

Also, internally at CombiMatrix, we have made progress in our other drug development efforts, including programs in anti-bacterials, as well as our KM class of compounds for anti-terror applications.

These programs are at the early pre-clinical stages and we will provide updates as we achieve materially relevant milestones.

Let me switch subjects and discuss our continuing and defense-related work.

At the end of 2005, we completed work on our initial contract with the United States Department of Defense.

Under this contract, we developed our electrochemical detector unit, which as I stated earlier will be launched this quarter for civilian applications.

During this quarter, we began work on our next contract with the Department of Defense.

This contract is for $2.1 million for this year.

I also want to note that we have another $2.4 million contract for this year waiting in the wings.

Also, we have applied for several million dollars in additional funding.

Some of these applications are on behalf of ourselves.

Others are in conjunction with alliances with major defense contractors and DOD laboratories.

In addition to the $4.5 million of funding from the D.O.D., we have also announced a modest program with the United States Air Force of $338,000 to build and evaluate an array that can be used to analyze upper respiratory infections.

This chip will be an expansion of our Influenza A array.

The first version of this chip has already been designed, and we are finalizing protocols and validating its performance.

If this program is successful, we anticipate additional larger contracts with the Air Force and other government agencies.

As noted, there appears to be high interest in our products from the military, as well as other government agencies.

Last week, I was in Washington D.C. meeting with several U.S.

Representatives, U.S.

Senators, as well as officials of the Bush Administration, and senior officials of several other government agencies.

Based on these meetings and other discussions we have had, we anticipate that our defense-related work will continue to grow.

Now I would like to discuss some details about our Influenza A array, as well as related subjects.

I will spend a few moments on this topic since we are constantly getting questions regarding bird flu and our efforts in this area.

Let me make a few comments about bird flu first.

The pathogenic strain of Avian Influenza, known as H5N1, appears to kill roughly half of those that are infected.

Though the remaining half do not die, there is a tremendous amount of suffering.

To date, the only verified infections of humans has occurred through direct contact with infected birds.

It is expected that the migratory patterns of birds returning from their winter migrations will most likely bring infected birds into Africa, Europe, North America and other regions.

In fact, recent news indicates that this is happening now and will continue as we enter the spring.

Despite the spread of this highly pathogenic strain, it is unlikely to become a major public health concern unless a strain appears that is easily transmitted directly from human to human.

If such a communicable strain appears, predictions indicate that this virus may cause the worse pandemic in history.

The emergence of such a strain will require mutation and modification to the genes of the current H5N1 or other pathogenic virus.

Though many scientists indicate that the probability of this happening is very high, it has not happened to date.

However, our studies indicate that there are already several sub-strains of H5N1, including highly pathogenic and moderately pathogenic strains.

Therefore, we know that mutation and recombination is occurring within birds, as well as in other animals.

I bring up these points to provide context for a discussion of our array and its capabilities in comparison to other available tests.

Currently, there are tests on the market that can identify influenza, but they do not provide any strain identification.

There are also tests on the market that can identify specific strains such as H5N1.

In fact, the CDC has received FDA approval for one such test.

But this test does not provide information on other strains or information regarding mutations or genetic drift.

Although all of these tests are useful for certain purposes, to our knowledge there is no commercial test that can provide the breadth of information that is available through our product.

Even the tests that are genetically based using PCR may not able to identify the pathogenicity of the virus.

Also it is very possible that if the pathogenic H5N1, or another strain, becomes communicable, its genes may have changed enough that the existing test, including the CDC test will no longer detect it.

At that point, our tests will be the only tests that will be useful in monitoring and surveillance of influenza.

Our microarray is a compilation of all known Influenza A strains, therefore, our microarray will provide strain identification and sub-strain information to determine pathogenicity, or drug resistance, as well as provide information on the genetic drift of the virus as it mutates.

If a new communicable strain is observed, our array will provide information on its origin from the other strains of influenza, and our array can be rapidly updated with new sequence information so that this strain and sub-strains can be easily identified.

By far, our array is the most powerful tool to study influenza.

I also want to note that our first scientific paper on this subject is scheduled to be published in the April 2006 issue of the "Journal of Clinical Microbiology."

Despite its superior capabilities, our array is a relatively new and sophisticated product for the infectious disease community.

Also, it is currently expensive, especially for regions in southeast Asia where bird flu is a major health concern.

We are working on substantially bringing down the cost of the array, and we continue to work on getting exposure for and demonstrating the merits of our technology in the field.

As we do so, we expect our efforts to result in greater sales.

We expect -- however, we expect sales of this product and related services to be modest unless influenza becomes communicable in its pathogenic form, in which case in a potential pandemic, our tests may be the only useful test available and cost concerns may no longer be important as large numbers of infected individuals are dying.

Another minor note I want to make has to do with the length of time necessary to run the test.

Our test is completed in four hours from sample availability to report.

There are other tests that are advertised to be shorter in operation, however, they do not consider certain preparation steps that take longer.

Therefore, it is difficult to compare time requirements for tests directly.

We have used our array to evaluate a number of human and bird influenza samples, including birds from North America.

A number of these samples were sent to us from World Health Organization affiliated laboratories.

All of these samples were inactivated before being delivered to us so there was no danger of infection.

Our findings have been sent back to the WHO, where they are being analyzed, and though I cannot comment on our findings today, at the appropriate time, they will be publicized.

I will say, however, that in samples where we found H5N1, we did identify the mutations that indicate either high or low levels of pathogenicity.

This level of detail, as I stated earlier, is not possible through other methods.

Related to influenza surveillance and monitoring, we are engaged in collaborative work with Novavax Corporation.

Rahul Singhvi, the CEO of Novavax, and I are personal friends and we previously collaborated and co-authored papers and patents in the early '90s while he was at M.I.T. and I was at Harvard.

Novovax is a developer of vaccines utilizing a new methodology that may be faster than conventional approaches.

As viruses replicate during vaccine development and manufacture, there often is a tendency for genetic drift.

Such drift can render a vaccine ineffective if it’s being developed for a very specific genetic strain of a virus.

Since our chip technology is very powerful at evaluating genetic drift, we are demonstrating that it can monitor the level of genetic drift in Novavax's research efforts.

This project will continue and may expand as Novavax makes progress in its vaccine development program.

Switching subjects to Molecular Diagnostics, our efforts at CMD continue to progress.

We are now working with the UCLA School of Medicine and Dr. Scott Binder, a world leader in melanoma, to gain access to patient samples that are enabling the development of our first Molecular Diagnostics product, a melanoma typing test.

This product, as I mentioned earlier, is expected to be launched mid-year, once we have completed development and obtained appropriate licenses including CLIA certification.

Also we continue to expand the capabilities at this laboratory, including developing additional technology platforms which include Comparative Genomic Hybridization arrays, or CGH arrays.

CGH arrays are different from our gene expression CustomArrays in that they utilize very long sequences of DNA, and are useful in studying chromosomal rearrangements associated with genetic maladies and syndromes.

We anticipate launching a number of array CGH products and services in parallel with our melanoma typing product and in a similar, or earlier, time frame.

I want to note that our plan with CMD is to launch a series of home-brew services to enable rapid market penetration and revenue generation, but eventually we will seek FDA approval for many of these products.

Finally, let me provide short updates on other projects at CombiMatrix that were not discussed in the previous comments.

Our collaboration with Intel Corporation continues to progress, though I cannot discuss the subject of this collaboration due to confidentiality requirements from Intel.

We also continue to work with STMicroelectronics and our relationship continues to expand and strengthen.

Our collaborations with Washington University, the Biodesign Institute at Arizona State University, Case Western Reserve University and Nanomaterials Discovery Corporation continue at their individual paces.

These projects have resulted in some sales of products, publications of papers and filing of patents.

As additional material events occur, we will provide appropriate updates.

Our collaboration with Cyrano Sciences has been discontinued subsequent to their acquisition.

We have also deemphasized our efforts in siRNA drug development.

Though we made promising early progress with our partner, the [Ursi Tyksha] Foundation, certain technical difficulties related to systemic delivery of siRNA drugs prompted us to re-evaluate that program.

I want to note that these delivery issues are not unique to CombiMatrix, but are common to everyone developing siRNA drugs.

Therefore, we have established an alliance with Benetech Corporation, a leader in siRNA drug development, to work on some issues together, but our efforts in this area are modest and they may pick up if certain fundamental science issues related to delivery are overcome.

Finally, our alliance with SAIC continues to go extremely well, as they have developed a number of products on our array platform which they hope to sell for some specific needs, to some specific and undisclosed agencies of our government.

In conclusion, I've tried to be as comprehensive as possible without compromising any confidential or classified information.

I hope that I have provided a complete picture of the many assets and plans that CombiMatrix is developing.

We feel that we are well-positioned to have a great 2006 and we hope you will stay tuned and look for word of progress in all areas that I mentioned.

Operator, I will take questions now, and also I will request that callers please limit themselves to one question with one follow-up.

If you'd like to ask an additional question, please get back in the queue, or call us offline.

Thank you, Doctor.

The question-and-answer session will begin for the CombiMatrix Group. [OPERATOR INSTRUCTIONS] Our first question comes from [Alan Dubrow] with A.G. Edwards.

Please state your question.

Hey, Amit, how are you?

Hi, Alan.

Quick question.

I recently read that [Alumina] was getting some contract wins over Affymetrix.

Now that you commented that you feel we have got similar products to our competitors, what would the catalyst be where we can read about CombiMatrix getting some contract wins?

We -- CombiMatrix has already gotten some contract wins over our competitors.

I don't want to specifically state which competitors, but there are several in this market.

And as we continue, I think -- as I mentioned earlier in the conference call, one of our big product launches will be our 90K array, which will bring us into the realm where we can do full human genome analysis.

Okay.

And then a quick follow-up question.

I notice you have got about $20 million in liquid assets.

Launching four products this year won't be cheap.

Any clue as to what kind of burn rate we are expecting?

Well, although we don't provide guidance on the expense side, or the revenue side, last year, on a GAAP basis, we burned a little over $12 million.

We hope that we're going to be able to do better than that this year.

Okay.

[OPERATOR INSTRUCTIONS] Our next question comes from [Paul Berger] with [Hemmick Investors].

Hi.

Did you mention any work we are doing with CACI.

Is that still online, Amit?

I am sorry with who?

I believe it was CACI?

You mean [Ursi Tysha]?

No, CACI.

Didn't we have an arrangement with them?

I am not sure what you are referring to, Paul.

All right, I will check that and get back to you later.

Also, can you maybe elaborate a little bit more of how people are actually using the chip for the bird flu?

Primarily those have been in services.

A number of people have evaluated the chip in typing bird flu, but a lot of the work that has been done has actually been sent to us, and we have been running it primarily because most of the laboratories are inundated with a tremendous amount of work and haven't had the time to install systems.

But as we go forward, we expect to be able to put a bunch of these systems out there.

The bottom line is that our chip is the most powerful technology out there for analyzing bird flu.

I understand we say that -- do we think that the rest of the world is starting to recognize that?

We think that the rest of the world -- yes, the rest of the world is starting to recognize that.

In fact we have people going out to Europe within the next month to -- to help in some of their efforts.

I think as -- as the birds start their seasonal migration back to the Northern Hemisphere, we are going to start seeing a lot more infection, at least in the birds in North America and western Europe and places where we haven't seen too much until now.

Okay, thanks.

[OPERATOR INSTRUCTIONS] It appears we are out of time.

At this time, we will turn the call back over to Dr. Kumar for any additional or closing remarks.

Okay.

Those are all my remarks for today.

Thank you all for joining us on this call.

And if you have additional questions, please call us.

Thank you.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 888-203-1112, or 719-457-0820 with ID number of 7684427.

This concludes our conference for today.

Thank you all for your participation and have a nice day.