Acacia Research Corp (ACTG) 2006 Q1 法說會逐字稿

Good afternoon and welcome ladies and gentlemen to the Acacia Research First Quarter Shareholder Conference Call.

[OPERATOR INSTRUCTIONS]

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

Clayton Haynes, our CFO; and Bob Berman, our COO and General Counsel.

Today, I will give you an overview of the progress we are making in building the business, Clayton Haynes will provide you with 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 expects significant growth in 2006 annual revenues, compared to the 19.5 million generated in 2005.

Revenues for the first quarter of 2006 increased to 4,717,000, compared to 1,186,000 in the year-ago period.

During the first quarter we generated revenues from nine difference licensing programs, including three new licensing programs covering our laptop connectivity, web conferencing, and enhanced Internet navigation technologies.

We have now begun generating revenues from 16 different patent portfolios.

New licensees in the quarter included Automatic Data Processing, Boston Scientific, and Hitachi for our multidimensional barcode technology;

Fujitsu and Sony for our laptop connectivity technology;

Air Canada and Jet Blue for our interstitial Internet advertising technology;

American Eagle Outfitters and Charlotte Russe for our credit card fraud protection technology;

WiredRed and Convoq for our web conferencing technology;

Surgical Information Systems and Prophecy Transportation Solutions for our resource scheduling technology; and Fujitsu for our audio-video enhancement technology.

During the first quarter we added four new patent portfolios.

These patented technologies relate to remote video cameras, audio communications fraud detection, file locking and shared storage networks, and micro mirror digital display technologies.

Acacia does not give specific revenue guidance due to the lumpy nature of our quarterly revenues, particularly in the early stages of our growth.

However, we do expect significant growth in 2006 annual revenues compared to 2005, given the increased number of patent portfolios we control and the larger number of active revenue generating licensing programs already in place.

We measure our performance on a 12-month trailing revenues, which have been growing steadily over the past few quarters and reached 22.4 million as of the end of the first quarter.

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

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

We have only begun generating revenues from 16 of our patented technologies and have realized on a small percentage of the potential revenues from many of these 16 licensing programs.

We will continue to be aggressive in adding new patent portfolios which will continue to build our 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 42 patent portfolios.

We have built the foundation to become the leader in technology licensing and continue to see a major business opportunity for our company in serving this unmet need in the marketplace.

I will now turn the call over to our CFO, Clayton Haynes.

Thanks, Paul.

And thank you to everyone joining us on today's first quarter 2006 earnings conference call.

As indicated in today's press release the first quarter 2006 license fee revenues totaled 4,717,000 as compared to 1,863,000 in the first quarter of 2005, reflecting another strong quarter of revenue growth over the prior year comparable quarter.

During the first quarter of 2006, we generated revenues from nine of our ongoing technology licensing programs, including the execution of initial licenses for three of our licensing programs during the quarter.

Keep in mind that the Acacia Technologies Groups' license fee revenues fluctuate from period to period based on the mix of specific terms and conditions of license agreements executed 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 licensees; the timing of the receipt of periodic license fee payments or periodic reports from licensees; and other factors.

Due to the wide variety of terms and conditions associated with our licensing, our license agreements, management is of the view that it is no longer appropriate to classify the Acacia Technologies Groups' revenue between the paid up license fee and recurring license fee categories.

We have currently executed agreements and anticipate that future agreements will not fit into either category based on their unique and varying terms and conditions.

Management's measure and assessment of results is based on total license fee revenues on a trailing 12-month basis irrespective of the specific terms of the underlying license agreements executed each period.

Our goal is to monetize and realize the value of our patented technologies on behalf of our shareholders and inventors with whom we partner and the number of different types of license agreements executed will increase in future periods which precludes us from defining periodic revenues by generic categories.

The first quarter 2006 net loss in accordance with U.S.

GAAP was 2,409,000 versus 1,664,000 in the first quarter of 2005, as illustrated in our comparative income statements provided in today's press release and related 8-K filed with the SEC.

Excluding the impact of non-cash patent amortization charges of 1,343,000 and non-cash stock compensation charges of 1,048,000, the Acacia Technologies Groups' first quarter 2006 results from continuing operations were nearly break even, versus a net loss of 748,000 in the first quarter of 2005.

It is worth highlighting that the new accounting standard that requires all companies to expense stock options and other stock-based awards in the income statement was adopted by Acacia Research Corporation effective January 1, 2006.

As such, expense related to all stock-based awards will be reflected in our financial statements on a go-forward basis The fair value of such awards is based on an estimate of fair value using the Black-Scholls option pricing model.

We expect that stock compensation charges will continue to be significant in future periods as a result of the adoption of the new standard.

Despite the impact of the new standard on the financial statement, management continues to view stock-based compensation as a key tool for attracting and retaining quality personnel and to appropriately align the interest of our employees with the interest of our shareholders.

First quarter 2006 operating results were 7,517,000 as compared to 3,734,000 in the first quarter of 2005.

The primary drivers of the quarter-to-quarter increase in operating expenses include a $1.6 million increase in inventor royalties and contingent legal fees expense, which are directly related to the increase in license fee revenues recognized in the current quarter; a $1,048,000 increase in non-cash stock compensation charges, resulting from the adoption of the new stock option expensing standard effective January 1, 2006.

An increase of 427,000 in non-cash patent amortization charges, due to three full months of patent amortization related to the GPH acquisition and additional amortization related to other patent acquisitions since the end of the prior period quarter.

An increase in MG&A related to the addition of licensing and business development personnel since the end of the prior year quarter; and an increase in G&A cost related to various corporate matters in other G&A associated with ongoing licensing and enforcement activities.

First quarter 2006 patent-related legal expenses were 366,000 compared to 561,000 in the first quarter of 2005.

Patent-related legal expenses include patent-related prosecution and enforcement costs incurred by outside patent attorneys engaged on an hourly basis, and the out-of-pocket expenses incurred by law firms engaged on a continent fee basis.

Patent-related legal expenses fluctuate from period to period based on patent enforcement and prosecution activity associated with ongoing licensing and enforcement programs and with the commencement of new licensing and enforcement programs in each period.

As previously indicated, other than our DMT patent portfolio, the majority of current litigation is handed by outside law firms engaged on a contingent basis.

Estimated fixed costs for the Acacia Technologies Group for FY 2006 are expected to be in the range of 7.6 million to 8.1 million.

Fixed costs include employee salaries, facilities costs, certain consulting costs, corporate, legal, accounting, and other G&A costs.

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.

As of the end of the first quarter, cash and short-term investment balances totaled approximately 37.7 million, versus 39 million as of the end of December 31, 2005.

Receivables from licensees totaled 3.6 million at quarter end, the majority of accounts receivable are scheduled to be collected within 10 to 30 days of the execution of the related agreement.

Inventor royalties payable and contingent legal fees payable scheduled to be paid in the second quarter of 2006 totaled 2.1 million at the end of the quarter.

In conclusion, the Acacia Technologies Group posted another strong quarter of performance, and I look forward to continued success for our clients and our shareholders in future periods.

I will now turn the call over to Rob Berman, COO and general counsel of Acacia, for his remarks.

Thanks, Clayton.

Since the day of our last call, one new lawsuit has been initiated and we dismissed lawsuits against seven new defendants.

We currently have 29 lawsuits pending to enforce our patented technologies against a total of 104 defendants.

The new lawsuit was initiated with respect to our multidimensional barcode technology and defendants were dismissed in lawsuits involving our broadcast data, computer docking station technology, interstitial internet advertising technology, and multidimensional barcode technologies.

We have several court dates and activities scheduled in the coming months in many of our lawsuits and as always, you can get more information by accessing the Pacer System for any of our lawsuits.

Paul?

Yes.

With that I would like to open up the call for questions and answers.

Operator?

Thank you very much, sir.

[OPERATOR INSTRUCTIONS]

Our first question comes from Harris Hall.

Please proceed with your question, sir.

Thanks.

What were the shares outstanding in the quarter?

Shares outstanding?

Yes.

27.7 million, I think it's exactly the same amount as last quarter.

Okay, same as last quarter.

Also, the 7.6 million to 8.16 million costs for 2006, is that just a marketing in general line that includes your stock compensation and legal expenses or does it exclude that?

That excludes our stock compensation, our non-cash stock compensation charges, and really just includes our budget as it relates to fixed costs which include salaries, facilities costs, and certain accounting and legal-related MG&A costs.

So it mostly would be the marketing and general line item and maybe your legal expenses line item?

That excludes our legal expense patent line, so really it is just a marketing general and admin line, excluding stock-based compensation charges.

So would you expect that the marketing and general expenses exclusive of stock compensation would be lower in future quarters?

No, the range of 7.6 to 8.1 already excludes stock-based compensation charges.

Right, but it's about 8.5 million a quarter in the first quarter when you back out the 1,048,000.

So that would be 10 million for four quarters, right?

Yes, there are some charges in the first quarter related to the proposed corporate split-off.

There are some additional charges in the first quarter that would not be recurring on a regular basis.

Oh, okay.

Great.

So there's a little more on the MG&A expense in the first quarter than will be typical in subsequent quarters this year.

Oh, okay.

I get it.

Also, can you give us a little more color on the sequential revenue decline from the fourth quarter?

What happened in the fourth quarter that was different than what happened in this quarter on different licensing portfolios or whatever you can tell us?

Sure.

Well as we said, we're really managing the company is for 12-month trailing revenues.

The sequence of how deals happen to fall in particular quarters, that's why we, on all of our conference calls, have told people that our quarterly revenues will be lumpy.

We don't want to be under pressure and try to give guidance on a quarterly basis and feel compelled to settle deals that we can probably settle for larger amounts of money if we're not under a time constraint.

So we really manage the business on a year-over-year basis, so I wouldn't draw any conclusions from a sequential difference from the fourth quarter and the first quarter.

Again, predictably we will have very lump revenues during the course of this year and probably subsequent years.

So it doesn't reflect anything relative to our business.

Obviously our revenue potentials continue to grow as we bring in patent portfolios and we continue to add new licensing programs.

So that's simply the amount of money that was recognized in that particular quarter.

Okay.

Got you.

What we said at the [inaudible], I think to address that issue, is that we do expect significant revenue growth for the year of 2006 over 2005.

So the first quarter revenues may not be indicative of the balance of the year.

Okay.

Got you.

And then just lastly, you decide not to do recurring versus paid up license fee breakout.

I know you addressed that a little bit in your prepared remarks.

Can you elaborate a little why you don't want to break that out anymore?

Yes, we are doing a wide number of deals that don't neatly fall into either category and it really would be more of a disservice to investors from a disclosure standpoint.

A lot of the deals that we do have elements of recurring, but they're not pure recurring.

Some are purely paid up and it really, we don't think, offers any clarity and indeed might confuse people, and we certainly can't break it up into a dozen categories that all of these types of different deals would fall into.

So in the very early stages, when DMT, the Digital Media Transmission Technology was a significant portion of our revenues, we think it was a little more meaningful.

But as we continue to expand the licensing programs and add a wide variety of types of licenses, it really no longer fits from a disclosure standpoint.

Great, thanks, Paul.

I'll jump back in the queue.

Sure.

Our next question comes from [Daniel Cass] of Apex Capital.

Please proceed with your question.

Good afternoon, gentlemen. [Case] has been able to close a larger number of higher dollar amount deals over the last three quarters then previously.

Is that due to the high quality of the patents you purchased from Global last year, or the persuasive personality of Rob Berman's team or what?

Why [haven't] they been able to succeed in consummating bigger deals, and will be increasingly difficult to win those deals as the dollars per deal go up?

Well, no, I don't think you can draw any necessary conclusion.

I mean, going back two years ago, our only licensing program was for digital media and that was all on a recurring basis.

I think the breadth of our licensing programs now, we certainly do have a lot of very high quality patent portfolios and important patented technologies, which lend themselves to larger payments.

And certainly in our focus going forward, in the new portfolios we're selecting, we're obviously targeting portfolios where they have significant economics.

So I would think if anything, the trend would continue in that direction, that we would probably continue to do significantly larger deals than we've done generally in the past.

And can you -- I've heard you say in the past, Paul, that you - the value was achieved when you purchased the patent portfolios.

Can you compare or contrast the potential of the portfolios you've purchased post Global with the ones that you bought from Global that you've achieved so much success with?

Sure.

We think there is -- yes.

I would say -- Dooyong Lee, who is our head of business development, was involved in the acquisition of many of those Global patents when he was at that company, and he continues with us.

And I would say they are of similar quality across the board.

I think we've acquired 14 additional patents since Dooyong joined us and built the business development team a year ago.

And I would say they are of very similar quality in terms of the economics of the ones that we purchased.

Okay.

And then -- that's great.

And then lastly, can you give me an update on the spin off with CombiMatrix, the timing?

Is that a Q2 event?

We would hope so.

We're still going through the tax issues with the IRS.

We want to make certain for our shareholders that this transaction would not be deemed a taxable transaction and indeed, we will want to get a private letter ruling from the IRS to [lend] that certainty before we proceed with finalizing the transaction.

So we're still dealing with the tax issues and hopefully we can get them resolved during the second quarter.

Thanks guys.

Sure, thank you.

Thank you, Mr. Cass.

Our next question comes from [Michael Norman], a private investor.

Please proceed, sir.

Good afternoon.

I'm a private investor and I am an owner of CombiMatrix and I never understood quite the relationship of the two companies with each other, i.e., do they share product, product development, finances, and why are you issuing separate stock?

I don't understand the financial activity that's going to happen that you just discussed.

Thank you.

Yes.

Both operating groups are sister companies owned by a common parent, which has issued classes of stock representing the interest in both of the operating groups.

We have proposed in the board we announced in January, proposing a split off whereby CombiMatrix will become an independent public company.

The only thing they really share is the common ownership of the parent and a common board of directors.

After the split off, Combi would have their own separate board of directors obviously as an independent public company.

So the relationship is that there are two classes of stock owned by a common parent, but from the day-to-day operations, CombiMatrix is located in -- has offices in Seattle and Irvine.

Acacia Technology is in Newport Beach with totally separate management.

There is no joint product development or any other relationships between the companies.

Thank you, very much.

Sure.

Thank you, Mr. Norman.

Our next question comes from [Philip Giomarino] of Wachovia Securities.

Please proceed, sir.

Thank you.

Congratulations guys.

Congratulations guys on a good quarter.

Just a question, can you just give a little more update on the court progress on the DMT case?

I mean, I know it -- I believe you were in -- you had some hearings and what not, on the Markman hearings during April.

Has that happened or not happened yet?

I'll let Rob Berman address that.

Rob?

Sure.

The judge has set two additional dates for claim construction hearings in the DMT case, one of which is at the beginning of June and the second of which is at the beginning of August.

So basically, we're still fairly early on in terms of litigations go, and that we're still in the process of construing claim turns, which is what's done in what's called a Markman hearing.

Discovery has not begun in the case yet and so we keep pushing the judge to hopefully move the case along as quickly as possible, to schedule a trial date, et cetera, but those things have not been done yet and we're still, like I said, fairly early on in the case.

Would you view that as somewhat of a disappointment that they haven't progressed to that stage?

Is this just a tactic by the opposition, or you know, what's the reason that the judge hasn't been able to get a court date set?

Well, frankly, it's really up to each judge in each case to control the speed of the case and their own dockets, and I'm not certainly going to second guess what the judge has done in this case, but it's basically up to each individual judge in each jurisdiction to decide how quickly or slowly they want to move the case along.

Okay, and then just one other point.

All this you see every day, everybody talking about video on the iPods, on cell phones, and all that.

Obviously I believe you guys have discussed already that companies like -- the cell phone companies like Verizon and a company like Apple, they would be part of the DMT patent.

They haven't been named in any of the lawsuits at this point.

Is that correct?

Well, we continue to monitor new technologies as they come out on the market, and are continuing to send out letters to companies to put them on notice if we believe that they are infringing.

And so, and frankly, continue to sign license agreements from time to time with the DMT licensees.

So even though litigation is moving -- not moving along perhaps as quickly as we would like, we're still very active in the marketplace and putting companies on notice and in trying to get licenses done.

Great, thanks guys.

Sure.

Thank you, sir.

Our next question comes from Mr. [Bill Lemon] Wedbush Morgan.

Please proceed with your question, sir.

Thank you.

I had to jump on and off, and if I missed any explanation of my question, I apologize in advance.

And also I'm not familiar with your company and how you handle these types of questions, so I'll just go ahead and ask.

Could you possibly share with us any color on your Stamps.com settlement, whether it's -- the [size], which I don't expect you to answer, but whether it's a recurring deal?

And for those of us who are not that familiar with your company, just in what percentage of cases do you settle before going to trial?

In other words, was this a regular type of settlement or is it an anomaly that you didn't go to trial?

And that's it.

Okay, the answer to the first question, virtually all of our licensing agreements have confidentiality provisions that exclude the disclosure of any information other than the existence of a license, and that's usually insisted upon by the licensee or the other side.

They don't want people knowing what the terms and conditions and whether their payments are recurring or the size or level of their payments.

And so to get deals done, we generally have to agree to keep that confidential, which would be the case in the Stamps.com case.

As a percentage of licensing deals, I think historically, probably about 80% of our deals have come without litigation.

We sign lots of licenses.

Usually the larger dollar amount cases oftentimes do require litigation.

So if you look at the licensing program for the multi-dimensional bar codes in the past quarter, some of those licenses were in settlement of litigation and some were voluntary licenses where we've never brought litigation.

Our preference is always to sell a lot on a voluntary basis and only add people in the litigation if they refuse to negotiate on a reasonable basis.

So a significant portion of our business is voluntary, but given the nature of our business, we are required to enforce our patents and engage in litigation.

One final point with respect to your question.

I believe you asked, is it unusual for us to settle cases before they go to trial?

Generally, 95% of the patent cases that are brought never make it to trial either because of some prejudgment or settlement.

And so it's certainly ordinary in patent litigation in general for a large majority of the cases to never make it to trial.

Thank you, very much.

Thank you, Mr. Lemon.

Our next question comes from Mr. [Greg Luman] of [Cellfish Capital].

Please proceed with your question, sir.

Hello.

Rob, would you go through and kind of lay out to your best judgment what are the most important legal events of the second half that we should expect in terms of what is scheduled and what may be scheduled?

With the number of litigations that we have, that would not really be possible at this point.

Frankly, when you have particular portfolios, it is difficult to predict whether a portfolio will be a large revenue generator or a more moderate revenue generator, and a lot of times, that's up to decision by a judge or a jury.

So it would be very difficult for us to try and predict in advance which ones would be "major" and which ones would be more minor in terms of proceedings.

If you have questions with respect to any of our upcoming proceedings on any of our portfolios, I'd be happy to try and answer them for you.

And as I mentioned during my part of the presentation, as I do every quarter, there is scheduling information available through the pacer system.

Okay, thank you.

Sure.

Thank you, Mr. Luman.

Our next question comes from [Jack Armstrong], a private investor.

Please proceed, sir.

Hi.

Could you -- what were the gross margins for this quarter?

I didn't catch them.

Well, if you take out the inventor royalties and if you take out the contingent fees paid legally, in this particular quarter, our margins were 53%.

As we explained last quarter, there will be high quarter-to-quarter variability.

Much of the income we derived this quarter did not come from litigation and there weren't contingent legal expenses attached to it.

And then it depends on a given quarter just what our splits with the owners of the technology are.

But in this quarter, it was 53%.

So do you think still you're targeting the 40%, that 40% is a good number?

Yes.

We think on average for some of the larger dollar amount ones, that it probably will result from litigation and there will be those expenses, so we're planning and have given guidance that we expect our margins to be 40% on a long-term basis.

And now, can you discuss the pipeline?

I mean, is it all private individuals that you're talking to?

Are you talking to companies?

Kind of what's the split on that?

And if you can -- do you have a number that you could give us on the number of portfolios that you're looking at right now?

You mean in the business development pipeline?

Yes.

The patents come from -- everywhere from Fortune 500 companies, the majority I would say are small and mid-sized tech companies, and a significant amount continue to come from independent invention groups, but they really come from all spectrums.

We have a very full pipeline right now.

I don't want to get into any specific numbers, but it's in the dozens that we're looking at.

At various stages, some are in our phase 1 due diligence.

Others we've actually entered into letters of intent, and others we actually are in post closing activities right now of various natures.

So we continue -- it continues to accelerate.

We've expanded our business development team.

Dooyong has added additional people and our visibility from licensing is driving more deal flow to us.

The more successful we become in licensing and the more visibility we have, the more people are wanting to partner with us.

One additional source of patents that we see coming is actually companies that we contact that may be infringing other portfolios.

Once they see how we handle ourselves and how we do business, in many cases, companies have said to us, once we have resolved this particular issue, we've got some patents that we'd like you to look at, that you'd consider representing us on.

So that's an additional source of new portfolios that seems to be recurring.

Okay, thank you.

Thank you, Mr. Armstrong.

And our next question comes from [Paul Berger] of [TLA].

Please proceed, sir.

Hi Paul.

My questions have been answered, thanks.

Thank you, sir.

Once again, Mr. Harris Hall of [UVA] Research.

Please proceed, sir.

Hi.

Thanks.

Just a quick follow-up.

What was your free cash flow in the first quarter?

I'll let Clayton dig that out.

Obviously, at the end of the quarter, I know that we had, what, 3.5 million in receivables and about 2.1 to pay out, so there was about a million and a half net positive on top of our 37.7 million in cash.

Net cash outflows from operations were in the first quarter of 2006, roughly 903,000 net cash outflow.

And a significant portion of that was acquisition of new patents.

During the quarter, we acquired four new patent portfolios and there was some financial consideration in some of those transactions.

Oh, really?

I know that you'd said earlier you were structuring more of those deals as a revenue share with less--

They are all revenue shares, but on a handful of portfolios, we will occasionally if we think it's appropriate, make some cash payment up front.

So that accounted for some of the cash in the first quarter.

Okay, good.

And then the last thing was, do you have any estimate of what you think your first GAAP EPS breakeven quarter might be?

We don't give any guidance on a quarterly basis.

Obviously we've said we expected significant growth over the course of this year, with 40% profit margins, it won't take a very large quarter to have a profitable quarter.

Well, I had to try, Paul.

All right, thanks a lot.

My question is answered.

Okay, thank you.

Thank you, Mr. Hall.

Our next question comes from Mr. [John Schneller] of (Knot) Partners.

Please proceed, sir, with your question.

Mr. Schneller?

You may have your line on mute.

I'll go ahead and proceed with the next question, from Mr. [Jack Armstrong], a private investor.

Please proceed, sir.

All right.

I'm going to try now too. [Inaudible] finding significant revenue in new growth, are you going to put a percentage on that one?

No.

We, by design, use the word significant so as not to put a specific number on it because quite frankly, while we have greater clarity now in terms of how we think the year will unfold based on negotiations and discussions and transactions we're involved in, we certainly don't want to try to quantify it at this time.

Okay.

So the -- so is the significant revenue growth just your day-to-day business without any large settlements?

That's just kind of like your day-to-day stuff or is that taken into account some large wins that are in current litigation?

Oh, no more than normal.

I mean, our day-to-day and quarterly activities do reflect some settlements and some what you would probably categorize as day-to-day, so it's a mix.

We don't expect any significant mix in our business from that standpoint.

No, we're not relying on a big one-time settlement in terms of our statement that we expect significant revenue growth.

We think it will just come from the normal business that we have.

That was my question.

Okay, thanks.

Thank you, Mr. Armstrong.

Our final question comes from Michael Needleman of Ridgecrest.

Please proceed, sir.

Maybe the question could be answered a different way, but on a breakeven basis on revenues, given the cost infrastructure that you currently have, what do you actually need to do on a revenue basis to show GAAP earnings?

Well, if you look at it on a 12-month basis, which is how we look at it, if you normally have 40% margins with a 25 million gross revenues, you generate the 10 million that covers your cost.

And that would include the contingent payments and the royalty sharing payments with the inventors, so basically the annualized breakeven is 25 million or roughly a little over 6 million a quarter.

As you can see in this particular quarter, we're 4.7.

Once you took out the non-cash compensation and non-cash patent amortization, we were basically breakeven, at a lower revenue rate because our margins this quarter happened to be 53%.

But overall, I think people should look at 25 million annualized is basically a break even point on a cash operating basis.

And just to follow up to make sure that I think I heard your answer to this, but you're not legally allowed to say what percentage of your current portfolio or patents actually have reoccurring revenue streams?

Well, look, we have hundreds of licensing deals and our licensing attorneys in-house are very proactive in structuring deals that meet the needs of the other side, or the licensor, and so we have a wide variety of deals that simply don't neatly fall into the categories of paid up or recurring.

They have varying elements of both.

So we just think going forward, we know that will continue and will be a larger component and it really wouldn't benefit our shareholders to arbitrarily try to breakout subsets of our revenue base because we really don't think they'd learn anything from that.

So the deals provide all of those elements, and so going forward we think it's more appropriate just to have a top line revenue.

And then last.

I didn't catch the complete documentation.

Cash on the balance sheet at the end of the quarter was what?

37.7 million.

Thank you very much, gentlemen.

Sure.

Thank you, Mr. Needleman.

And finally we have the next question from DeYoung Jamie of Grupa McBaine.

Please proceed.

Thank you for taking my call.

It's Jamie DeYoung at Gruber McBaine.

Could you just walk through again you plan on spinning off the CombiMatrix next quarter.

How many shares current Acacia shareholders will be receiving?

Well first of all on the timing it's dependent on our getting and securing tax opinions so the timing is controlled by outside forces.

The actual transaction there mostly - a 100% of both [inaudible] of stock have been issued to the shareholders, so post transaction CombiMatrix shareholders will continue to hold their CombiMatrix shares as a direct independent company, and Acacia Technology shareholders will hold theirs.

So there's no percentage that goes to anybody.

A 100% of each price is -- all that will happen on the day of the split off is, CombiMatrix will start trading under the same symbol the next day, but as an independent public company and that day our stock will continue to trade as it is today.

Okay thank --

The number of shares so there's no share transaction involved.

Can you give me an update on the total diluted shares outstanding in the quarter?

Acacia's outstanding is 27.7.

I know we had no warrants, but with full options is -- how much? 6.3 million in options and 27.7 million outstanding. 6.5 million in options and 27.7 million outstanding.

And CombiMatrix?

I believe the numbers are 38.9 on an outstanding and I don't know, Clayton do you have the numbers on options?

I think it's about a similar -- actually you can address that on the next call.

Combi's call will start here any minute as soon as we're finished with our Q&A, and you should probably address that to their VP of Finance on their call.

Okay terrific.

I was going to ask you for that number for the next call, but I'll take that up.

It's the same number if you just stay on the call.

The Combi call will start immediately after close of our call.

Terrific.

Thank you, very much.

Okay.

Great.

This concludes the Acacia presentation of the conference call.