Acacia Research Corp (ACTG) 2007 Q2 法說會逐字稿

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

At this time, I would like to inform everyone that the 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 would now like to 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 and disclaimer.

With me today are Chip Harris, President of Acacia Technologies Group; Dooyong Lee, Executive Vice President; and Clayton Haynes, our Chief Financial Officer.

Today I will give you an overview of the progress we're making in building the business and Clayton Haynes will provide you with an analysis of our financial results.

We will then open the call for questions.

As we just reported, Acacia Technology revenues for the second quarter of 2007 were $5.9 million compared to $14.4 million in the year-ago period.

Trailing 12-month revenues were $46.8 million compared to $34.1 million in the year-ago period.

Acacia Technologies' second quarter GAAP net loss was $3.6 million, or $0.13 per share, including non-cash patent amortization and non-cash compensation charges totaling $2.5 million.

Cash and cash equivalents were $50.4 million at the end of the second quarter compared to $45 million at the beginning of the year.

Acacia entered into 20 new licensing agreements in the quarter and generated revenue from eight different licensing programs.

New licensing agreements included licenses to Altera, Sage Software, Palo Alto Software, Nuance, Skechers, Jones Apparel, Hugo Boss, Goodyear Tire, Whole Foods, Payless, Dick's Sporting Goods, Sears and LG-Philips.

During the second quarter, we acquired control of 11 new patent portfolios and now control 76 patent portfolios.

Dooyong Lee and his business development team continue to do an exceptional job in acquiring new patent portfolios for licensing which is significantly increasing shareholder value.

Over the next 12 months Acacia Technologies expects continued growth in revenues and an acceleration of both new licensing programs and the acquisition of new patent portfolios for future licensing.

Our licensing success continues to increase opportunities for partnering with owners of patented technologies and our acquisition of new patent portfolios is increasing opportunities for future revenue growth.

Acacia is building the country's leading patent licensing company.

We're meeting a huge unserved need in the market from small technology companies, research labs and inventors who do not have the scale, expertise or experience to effectively execute patent licensing and enforcement programs.

Currently, these small companies, individual inventors and research labs who hold over 60% of technology patents generate only 1% of patent licensing revenues.

By partnering with Acacia, these smaller companies now have an opportunity to generate significant revenues from their patented technologies.

Acacia is at a very early stage in the growth of its business.

Our recent licensing success is creating new business opportunities for us, and given the current pipeline of patented technologies we're evaluating, we expect to significantly expand our business over the next year.

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

What we can say is that our revenue opportunities over the next 12 months greatly exceed those of the past 12 months as we will be launching several new licensing programs and have a larger number of existing licensing programs already in place that are beginning to generate revenue.

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

We have only begun generating revenues from 25 of our 76 patented technologies and have realized only a small percentage of the potential revenue for many of these 25 licensing programs.

We will continue to be aggressive at adding new patent portfolios which increases shareholder value and expands our future revenue base.

We continue to see a major business opportunity for Acacia as the lender in serving this unmet need in the marketplace.

I would now like to turn the call over to our chief financial officer, Clayton Haynes.

Thank you, Paul.

As indicated in today's earnings press release, second quarter 2007 license fee revenues totaled $5.9 million as compared to $14.4 million in the second quarter of 2006.

License fee revenues for the six-month period ended June 30, 2007 totaled $31.1 million as compared to $19.1 million for the comparable 2006 period.

During the second quarter of 2007, the Acacia Technologies Group generated revenues from revenues from eight of our technology licensing programs, including initial license fees from our virtual computer workspace technology and fees from the licensing of our DMT technology, audio communications, fraud detection technology, audio-video enhancement and synchronization technology, credit card fraud protection technology, image resolution enhancement technology, pop-up advertising technology and our portable storage devices with links technology.

To date, the Acacia Technologies Group has generated revenues from 25 of its technology licensing programs.

It is important to keep in mind that license fee revenues fluctuate from period to period primarily as a result of the following four factors -- one, the dollar amount of agreements executed each period, which is primarily driven by the nature and characteristics of the technology being licensed and the magnitude of infringement associated with a specific licensee; two, the specific terms and conditions of license agreements executed each period and the periods of infringement contemplated by the respective license fee payments; three, fluctuations in the total number of agreements executed each period; and four, fluctuations in the sales results or other royalty per unit activities of our licensees that impact the calculation of license fees due.

Acacia Technology's group management continues to measure and assess the performance and growth of our business based on total license fee revenues recognized across all of our licensing programs on the trailing 12-month basis.

Trailing 12-month revenues for the Acacia Technologies Group were $46.8 million as of June 30, 2007, as compared to $34.8 million as of December 31, 2006, and $34.1 million as of June 30, 2006.

Our average margin, defined as gross license fees, less inventor royalty expense, and contingent legal fees for the portfolios generating revenues during the period, was approximately 35% in the second quarter of 2007 as compared to 42% for the second quarter of 2006.

Quarterly average margins fluctuate period to period based on the mix of patent portfolios that generate revenues each period and the related economics associated with the underlying adventure agreements and contingent legal fee arrangements, if any, related to the revenue-generating patent portfolios each period.

For the second quarter of 2007, the Acacia Technologies Group reported a GAAP net loss of $3,588,000, or $0.13 a share versus GAAP net income of $1,157,000, or $0.04 a share, in the second quarter 2006 as illustrated in the Acacia Technologies Group 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 $1.3 million and non-cash compensation charges of $1.1 million, the Acacia Technologies Group's second quarter 2007 net loss was approximately $1.1 million as compared to net income of $3.4 million for the second quarter of 2006.

For the six months ended June 30, 2007, the Acacia Technologies Group reported GAAP net income of $847,000, or $0.03 a share, versus a GAAP net loss of $1,221,000, or $0.04 a share, for the six months ended June 30, 2006.

Excluding the impact of non-cash patent amortization charges of $2.6 million and non-cash stock compensation charges of $1.9 million, the Acacia Technologies Group's net income for the six months ended June 30, 2007 was $5.4 million as compared to net income of $3.4 million for the comparable 2006 period.

Second quarter 2007 total operating expenses, which includes inventor royalties and contingent legal fees, totaled $10 million as compared to $13.5 million in the second quarter of 2006.

The primary drivers of the quarter-to-quarter change in operating expenses include a $4.4 million decrease in inventor royalties and contingent legal fees expense which is directly related to the decrease in licensee fee revenues recognized in the second quarter of 2007 versus the second quarter of 2006; an increase in personnel costs related to the addition of licensing, engineering and business development personnel since the end of the prior-year quarter which is reflective of the continued growth and expansion of Acacia Technologies Group's ongoing business; an increase in facilities costs and other corporate, general and admin costs related to ongoing operations; and, an increase in employee non-cash stock compensation charges related to the issuance of additional equity-based incentive awards to new and existing Acacia Technologies employees.

Second quarter 2007 patent-related legal expenses remained relatively flat at $1.1 million for the second quarter of 2007 and 2006.

Patent-related legal expenses include 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 contingent fee basis.

Patent-related legal expenses include case related-costs billed by outside counsel for economic analysis and damages assessments, expert witnesses and other consultants; case-related audio-video presentations for the court and other litigation support and administrative costs.

We expect that patent-related legal expenses will continue to 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 each period.

For fiscal 2007, estimated fixed costs for the Acacia Technologies Group are expected to be in the range of $11.5 million to $12.5 million.

Fixed costs include employees' salaries and benefits, facilities costs, corporate, legal and accounting and other general and admin costs and are included in the marketing and general admin expense line in our income statement.

Estimated variable cost for fiscal 2007, excluding inventor royalties and contingent legal fees, are expected to be in the range of $4.5 million to $5 million.

Variable costs include patent-related legal expenses, patent-related research, consulting and maintenance expenses and other patent-related development and commercialization expenses.

These costs fluctuate quarter-to-quarter based on business development, licensing, enforcement, research and prosecution activities each quarter.

All variable costs excluding patent-related legal costs are included in the marketing, general and administrative expense line in our income statement.

The variable costs included in MG&A for the second quarter of 2007 totaled approximately $361,000 versus $530,000 in the second quarter of 2006.

Moving on to a brief summary of our financial position as of the end of the second quarter of 2007, total assets for the Acacia Technologies Group were $71.8 million as of June 30, 2007 compared to $65.8 million as of December 31, 2006.

As of June 30, 2007, cash and short-term investment balances totaled $50.4 million versus $45 million as of December 31, 2006.

Net cash inflows from operations for the six months ended June 30, 2007 totaled approximately $3.9 million versus net cash inflows from operations of $2.8 million for the six months ended June 30, 2006.

Accounts receivable from licensees totaled $2.2 million at June 30, 2007, compared to $269,000 as of December 31, 2006.

Net cash outflows related to patent portfolio acquisitions for the six months ended June 30, 2007 totaled $1.4 million versus $1 million for the six months ended June 30, 2006.

In conclusion, the Acacia Technologies Group's management, licensing and business development executives and engineers look forward to continuing to build on our year-to-date growth and results throughout the remainder of fiscal 2007.

I will now turn the call back over to Paul Ryan to begin the q-and-a portion of today's conference call.

Thank you Clayton.

Operator, could you open up the call for questions?

(OPERATOR INSTRUCTIONS).

Bennett Notman, Davenport.

Paul, could you talk a little bit about if you are seeing any change in the time to generating revenue from the new IP that you're bringing in?

Now that you're sort of -- more of a known quantity in the marketplace, is that changing your ability to monetize?

I think there will be a number of opportunities based on prior licensing activity.

Now that we have licensed most of the major companies in the country as we bring in new portfolios, it certainly gives us opportunities to do early licenses with some of those companies that we have negotiated other licenses with.

So, yes, I think overall, definitely, we're in a position how having developed this track record and experience to be able to step up at least in some early monetization of certain portfolios.

And could you talk a little bit about maybe the number of -- I don't know if you call them contracts or offers or negotiations that you're in the middle of -- quantify how many negotiations that might be in the realm of being closed and generating revenue for you guys are ongoing now as opposed to a quarter ago or a year ago or six months ago?

What is the overall magnitude of that?

Certainly, we have more licensing programs that have begun generating money, and certainly we're in the process right now of initiating a number of new licensing programs.

So certainly, the amount of discussions that could lead to potential licensing agreements is probably at the highest level is has ever been for our Company.

Again, a lot of them, we now as you're well aware have licensed many large companies and so it facilitates early discussions on many of these newer portfolios with potential licensees.

And as some of the newer portfolios become aged and get to the point where they're generating revenue, should we expect the average deal size to start moving up as we get beyond credit card fraud and some of the smaller deal sizes to -- are we going to start seeing bigger deals on average?

There will certainly always be a mix in our business.

We will have a certain percentage of portfolios that -- where licensing revenues are at lower thresholds, depending on the companies used and the value of the technology.

Certainly we're moving into a period now where on some of the earlier portfolios that we have had that may only apply to a handful of companies which is based around litigation, we're certainly getting more mature into that process where it's much more likely that we could reach much larger settlement agreements on some of those technologies.

So I think going forward, we will continue to have a mix of -- probably 70% to 80% of our portfolios will be ones where there is a large volume of licenses basically at lower price points and then probably 20%, 25% of our portfolios that will be a much fewer number of deals, but at much, much higher royalties, licensing rates.

But even within those lower price points is just the quality of the IP that's coming in allowing you to move up a little bit in what the average deal size would be?

Yes.

I would think overall, definitely, the trend, certainly as we keep building our experience on the due diligence side, we are being -- we get a lot of looks at different portfolios, and certainly I think we have raised our standard in terms of revenue expectations for portfolios.

Last one from me, then I'll get back in the queue.

Can you also just talk about how the new people you've brought on board, where they are in their cycle of beginning to contribute to revenue generation, how ramped-up they are and how long we should think it takes one of these new guys to get on board and then start to be productive?

The people we bring in have a great deal of prior experience, so there's no warming up period.

They immediately take on assignments both either in the business development and/or the licensing side.

So they're up and running immediately when they come in.

So all of the new people are actively involved in both areas.

Great, thank you.

[Chris O'Brien], [MFC Global].

Could you just give me a brief explanation of how the transaction with CombiMatrix will be taking place?

I guess it looks like -- if you could just explain the mechanics of how you plan to do that?

Sure.

It's all set in place.

It will occur on September -- I'm sorry -- on August 15.

Everything is in place.

CombiMatrix's S1 has been approved by the Securities and Exchange Commission.

Their listing has been approved by NASDAQ so it's simply an automatic function of the completion of the redemption period.

There was a mandatory redemption period which concludes on September -- I'm sorry -- August 14, so the stock will start trading on August 15.

The Acacia stock will remain the same.

It will be the same symbol, ACTG.

The CombiMatrix stock will start trading independently.

And what will happen at that time is, we will make an announcement that day, some of the board members we're moving over to the CombiMatrix board and we will probably be adding some people on the Acacia board and will announce that on August 15.

But if you are an Acacia shareholder, it has absolutely no impact on you because 100% of both classes of stock have already been issued to the respective holders.

It's simply a function of the completion of the split-off of CombiMatrix becoming a freestanding public company.

So from a practical standpoint as an ACTG shareholder, there will be no effect.

The stock will continue to trade under ACTG that day.

That's great.

Thanks.

(OPERATOR INSTRUCTIONS).

Abhiram Eleswarapu, Thomas Weisel Partners.

So the first question is about the graphical user interface patent portfolio that you licensed to Apple this quarter.

Could you tell us which portfolio was it part of amongst the eight that you generated revenue from this quarter?

It's the virtual workspace.

As Clayton mentioned earlier, it's the new licensing program.

It's described on our website as a virtual workspace technology.

Okay, thank you.

In the past, you said that it takes 18 months for you for a patent portfolio to mature, as in when you could do your due diligence and things like that.

So given that you probably have a lot of mature portfolios right now, how many of them do you think you can work on given the resources that you have, let's say within a six-month period or a one-year period?

I think our cycle is continuing to move at a faster rate.

That is more of a general guideline what we want to create is the expectation amongst our shareholders to expect and can take up to 18 months to start generating revenues.

Certainly we're hopeful that many of these new portfolios will start generating revenues far earlier than that, particularly if there's a large number of potential licensees to go out and license and now that we have the experience of doing licenses with many of those perspective companies.

So it's not a hard and fast rule, it's kind of a guideline not to expect us to bring a portfolio in and immediately turn around and start generating revenue, although I think we will certainly speed up the time to monetization of the ones we're bringing in now.

Actually part of my question was -- given the resources that you have and then team size that you have, does that limit you on the number of portfolios you can work on in a quarter or in a year?

No.

We've got -- the full capability of all the portfolios we have are assigned and we will continue to gradually expand our team.

But, certainly, there is no portfolio that we have in that we aren't working actively on right now that isn't assigned.

All of them are assigned to licensing people who are very active in initiating the programs.

So we would have no capacity problem whatsoever in bringing in more portfolios.

One last question.

Given that you have been acquiring portfolios quite rapidly, maybe you've answered this question before, but could you tell us if the value of the portfolios you're acquiring has been increasing and if there's some sort of a minimum revenue potential you look at when you're acquiring a new portfolio?

Certainly, we want the revenue potential to meet certain internal requirements.

I would say on average, certainly we're getting the opportunity to look at more portfolios than we ever have before, so it certainly gives us the opportunity to be more selective in terms of both quality and breadth of coverage of the patents as well as the revenue opportunity.

So yes, I think we will continue to move in a direction where we are probably in general getting higher quality patent portfolios.

Thank you very much.

Seth Teich, Apex Capital.

Good afternoon.

If I'm doing the math right, it seems that you spent more on acquisitions this quarter than you have any prior five combined and I was just curious to know if perhaps you can describe if there were any larger deals in that, and then perhaps also give some more information on the pipeline of acquisitions going forward?

I think we're just using capital.

Were getting an opportunity and we're much more aggressive when and where we can to use our capital accretively to complete deals or particularly increase our percentage of the royalty participation in deals.

So it's highly accretive to our shareholders.

So where we can use our capital and in effect buy a larger economic interest in the royalty stream, we will continue to do that.

And I'm sorry, the second part?

The pipeline?

We're certainly looking at more portfolios than we ever have in the past right now.

We're looking at some very high-value portfolios, some of which have significant asking prices or terms.

So where we can use our capital, obviously we've grown cash about $15 million over the last nine months, so we want to deploy our cash if it's accretive wherever we can.

We have talked about in the past, we have added in the past about one portfolio every three weeks.

But as you saw in the second quarter, we added 11 portfolios and basically 12 weeks worth of work.

I think it's a little bit of what's happening in the marketplace.

As you guys and most of the shareholders have known for a long time, we self-generated the vast majority of our deals.

As our reputation has grown and our success has grown, we have been approached by a number of groups looking to have us license their portfolios and I think it's because of the profile we've cut in the marketplace.

So I would guess now that about half of the opportunities that we eventually close on are coming in from people who are contacting us, but we've continue to add to Dooyong's team from a business development standpoint.

We think that's the greatest investment we can make for the shareholders, and because of the ability of our team to identify, analyze and monetize these portfolios.

So we continue to invest in the business development and I think we're starting to see the fruits of that and I think we are continuing to look for more people for business development opportunities.

That's great.

I was curious also if you could perhaps give us some more information on the Alliance Semiconductor portfolio, that was three portfolios I believe.

Was that a big acquisition for you?

And maybe perhaps, a little bit more information on what you guys are thinking there.

Yes.

That was an acquisition where we have complete economics in that transaction.

It was an outright acquisition.

So there's no revenue share in that particular portfolio so it will be a very high-margin portfolio for us and it covers basically three separate potential licensing programs.

As we stated in the press release, we have a number of patents dealing with Flash memory, another portfolio dealing with DRAM, and finally another fairly sizable portfolio dealing with graphics applications.

So we're building our licensing program, doing our claim charts and shortly we expect to be launching a major licensing reinforcement program to monetize it.

Great, thank you very much.

Peter Norton, Norton Capital Management.

I was wondering if you would just do the CombiMatrix one more time?

How does that accrue to shareholders of Acacia?

Actually 100% of both classes of stock have already been distributed, so it has absolutely no impact on your Acacia ownership.

In other words, there aren't any additional share transactions involved.

The day of the split-off, our stock will continue to trade under the same symbol and you'll own the same shares because it has already been previously issued to another class of shareholders.

So there's no money coming into Acacia for the issuance of those shares?

No, it's simply the completion of the split-off of CombiMatrix as a freestanding public company.

Thank you.

Surely.

Harris Hall, Singular Research.

I was wondering if you could elaborate.

Normally you guys give kind of an update on the number of law suits you have and it looked like a bunch were settled with your licensing programs.

Can you give an update of that, especially if there's any news on stuff that is pending, like you have a Microsoft case or a DMJ?

There is a description at the very end of our press release today that basically states that in the quarter we dismissed lawsuits, six lawsuits against six parties.

Obviously those were settlements where we did a licensing agreement, and then we dismissed an additional 10 parties from litigation from several other portfolios which basically we dismiss it after their settlement.

Some of our licenses as you know are voluntary licenses and some of them are settlements of litigation.

So basically, all of the settlements that are mentioned in the press release resulted in licensing agreements.

I think at the end of the period, we currently now have 31 ongoing litigations that involve a total of 233 companies.

So we brought some additional ones.

We settled I guess it was a total of 16 people that we dropped out of litigation as a result of total settlements in the quarter.

Okay.

We initiated, the newer ones, there were four new law suits that were filed that cover 120 parties.

Okay.

Any update on stuff that's pending like the DMT case or the Microsoft case?

They followed their normal procedure.

They are both on course.

We have not been notified of any changes as to be schedule, which is listed on the Web sites.

So we have not heard of any.

And the Microsoft case is in November or October?

The trial is scheduled for the first week of November.

The [marksman] was completed on that.

And basically on the DMT, both sides have submitted written briefs relative to the motion for reconsideration on some of the claims interpretations by the Northern District Court.

And I expect that sometime in the fall more than likely the Court will probably may well entertain oral hearings.

We don't know yet.

Both sides have submitted written briefs.

Of the new patent portfolios you have this quarter, which are you most excited about?

I know you could specifically quantify the opportunity, but can you at least give us more color on what type of infringement there might be or how widespread it might be?

We generally as a rule don't want to talk about it in advance before we either launch the licensing programs or launch the litigation.

Obviously, we provide a fairly general description and the reason that it's general is we don't want to give too much detail in advance of the licensing programs.

But you can see from the 11 we did, certainly the Alliance ones we gave I think a great deal of description covering Flash memory and covering DRAM.

And certainly [Text Auto] completion and some of the other ones I would think are self-explanatory.

But we don't want a favor one over any other one.

Obviously we have partners on most of these technologies and we're going to give the optimum effort for all of them and we think they all have significant opportunities.

Great, thank you and good luck.

Paul Berger, PLA Associates.

Could you give us your thoughts on the new legislation that has gone through courts about the new patent law?

Well, there's two things.

There has been some court decisions and then obviously there's some proposed legislation in Congress.

On the actual court decisions, we think this it's very beneficial to our business.

Some of the decisions I think have made it a little more sophisticated and complex to enforce intellectual property, and that is to our benefit.

Certainly we're seeing more people who want to partner with us as the process takes on new characteristics.

There was one court case called the SanDisk ST Micro case which basically lowered the threshold.

If you're out -- let's you're a university and you're offering your patented technology for license.

Now the people that it's being offered to, if they so chose, could follow declaratory judgment and challenge your patents.

So it's becoming a more sophisticated business in licensing and we think that's going to bring more partnering deals to us and make our Company more valuable.

On the congressional legislation, there are some proposed bills in Congress and they keep adding and deleting proposals.

We're just going to wait and see what the ultimate outcome of that is.

But I think from a macro standpoint, the more sophisticated and complex patent licensing and patent enforcement become, the more valuable our Company becomes by definition.

So while some of the changes that have been proposed in Congress may be less than ideal for the country, I think they're going to be beneficial for us.

Do have any lobbyists working on the bill or are you working with any?

We have not paid any corporate money for any lobbyists.

Certainly, we have been in touch with key people in the industry and we have given assistance in terms of ideas, but not in terms of any money.

Great, thanks.

Alex [Zinger], Deutsche Bank.

How do I think of when you are starting to license a portfolio sort of the upfront revenues versus the more stable licensing revenues?

I'm (MULTIPLE SPEAKERS) not asking for numbers, I'm asking for what percent comes quicker and then what is sort of the steady-state.

Historically, the vast majority of our transactions to date have been paid-up licenses.

We do have a handful of licensing programs that do have regularly recurring royalties based on unit sales or based on revenues of the Company's.

And then there's more that we will be rolling out that would fit that description.

It depends on many characteristics.

One, if it's an early stage technology where the patents have several years to go and it's an emerging technology, it's in our shareholders' best interest to do a long-term deal on a unit rate because it will yield the most money over the life.

If it's a portfolio, a patent that only has two or three years to go or less, it's probably going to make much more sense for us to enter into a fixed payment transaction, which basically is the net present value of the identified past and anticipated future use of the technology.

So it really depends on each portfolio, but I think over time our mix will increase to some degree they have more regularly recurring revenues.

And if you just take the historical portfolios, how much is the mix between recurring and nonrecurring?

Right now, our pure recurring revenues are less that $1 million a quarter, but how we look at it, Alex, is each one of these patent portfolios essentially is a product line for us, and most of them will probably generate revenues for us from three to five years.

And so while each individual license or transaction may be a paid-up deal, many of these portfolios will have 25 to potentially over 100 licensing transactions during the life of that product line over the three to five-year period.

So a portfolio will generate recurring revenues over three to five years even though individual licenses could be paid out.

Alright, thanks a lot.

Bennett Notman, Davenport.

Given that you added 11 portfolios in the second quarter and you're already out of the box with a couple of portfolios in the third quarter, and we had generally been thinking of five portfolios as a solid quarter worth of portfolio adds for you guys, and I'm not expecting to repeat 11 every quarter, but should be raising the bar there and starting to think maybe in the six to ten range is a more normal run rate for you?

Let me have Dooyong respond to that.

I don't think we can give you a precise estimate as to how many portfolios we're going to sign up, but if you look at the big picture, this is the way I look at it.

Two years ago, we did nine portfolios, and last year we did 20, and this year, a little bit over six months I guess, we did 19 already.

So clearly without doing the math, we are accelerating the growth of our portfolios.

So while I cannot pick the exact number as to how many we're going to have for the rest of the year, but I think clearly we're going to do substantially more going forward than what we have been doing in the past.

As Chip indicated, there's no better use of our shareholders' capital than on the business development side.

As you are aware, in most of these transactions, we will receive about 50% of the revenues.

So Dooyong and his team on behalf of the shareholders are acquiring very valuable assets, or a 50% economic interest, and in some cases more of these assets generally at very nominal upfront cost to our shareholders.

So it is very accretive for our shareholders and we're going to continue to expand Dooyong's team to enable him to keep growing the acquisition of portfolios I think similar to the pace we have been doing this year.

Okay.

You stated that you initiated four new cases with 120 defendants in the quarter.

That seems like a lot of defendants per case.

Is that a result of the SanDisk/ ST Micro decision and you guys may be as you're rolling out some of the more broad-based licensing agreements just putting everyone on the docket at the outset?

No, not really.

We don't really fear the decision because our legal agreements provide for our outside law firms to defend any potential DJ action.

So in our position with all of our legal partnerships, we don't have that concern.

Quite frankly it was a result of one particular lawsuit where the patent has expired and we needed to put a large number of infringers on notice.

I believe it was -- one patent portfolio was nearly 100 infringers, and it simply was a function that the patent had expired and we had a time frame that we had to put everybody on notice.

So it isn't an indication that we're going to be filing many more lawsuits against broader people early in the progress.

And which portfolio was it that had the 100 defendants?

It's the credit card fraud protection technology.

And the reason was that that patent has now expired, and so we had to put people on notice within a certain time frame of the expiration of the patent.

So is that a newly filed suit then, or is that just an expansion of an existing?

It's an expansion of an existing suit.

As you know, we have done probably, my guess is 35 or 40 licenses on the credit card fraud protection technology.

It is a basic technology that protects consumers and merchants and we have partnered with the inventor who for 15 years literally was not able to get a single licensee.

So we've been very happy as well as he.

We've generated I think 35 to 40 licenses and we had the potential to do equal that amount in the future.

But because the patent was expiring, we're under a deadline to put people officially on notice to preserve our legal rights.

Thank you.

Rob Ammann, RK Capital.

Can you talk about the landscape of legal firms that you work with on a contingency basis and how that might be changing over time?

Over the course of this year, quite frankly we have been contacted by number of very well-known law firms with an interest in partnering with us.

I think as intellectual property takes on increasing importance in the economy, many of these leading law firms kind of see us as the go-to company.

We're an ideal client for them because we have many cases we do a lot of the work up front.

And so as an ideal client, we're getting approached and our group of partnering law firms is expanding dramatically and -- which is great for our shareholders because it gives us a great deal of flexibility in certain matters to choose to partner with a firm that we think is ideal in that circumstance.

Early on, one of our considerations was would there be a limitation to our business model in terms of outside law firms who had partnered with us on contingency, and certainly this year has demonstrated that not to be a constraint whatsoever.

We now actually have more law firms wanting to partner with us right now than we do cases for them to take, which is a good situation to be in.

Any kind of update you could offer on the fund side?

We have nothing to report at the time, at this time.

If we do, we will certainly put out an announcement on that.

We don't want to get into any timeframes.

The only time I have ever mentioned a time frame was on the CombiMatrix split-off.

We missed it by a year.

So I'm not going to repeat that mistake.

We got caught up in some regulatory and legal issues that -- it was a reasonable expectation that it was going to get done in a time frame and it took far longer than we expected.

So we certainly don't want to put out any expectations, but we will let people know when and if there's news there.

Thank you.

Mr.

Ryan, I have no other questions in the queue at this time.

I want to thank you all for being on the second quarter call and look forward to speaking with you again in three months.

Thank you.

Thank you.

That will conclude the Acacia Technologies Group question and answer session.

The CombiMatrix Group presentation will begin an approximately two minutes.

We do appreciate your participation.

I will place you on hold with music until we begin the other call.

Thank you.

The CombiMatrix Group presentation will now begin.

I would like to turn the conference over to Dr.

Amit Kumar.

Please go ahead, sir.

Thank you very much for joining us for this call.

With me today is Scott Burell, our Chief Financial Officer.

As we're just weeks away from our separation from Acacia Technologies Group, we expect this to be our last joint call.

I want to note that today's discussion may involve what the SEC considers to forward-looking statements.

Please refer to our 8-K, which was filed with the SEC today for our forward-looking statement disclaimer.

During my prepared statements, I will discuss the key events and activities of the quarter, including our progress in developing our molecular diagnostics business.

I will comment on our efforts to reduce our costs which have resulted in much better financial performance this quarter.

I will also discuss our plan for the remainder of the year and our overall financial position.

Let me begin by highlighting some key financial matters which are discussed in greater detail in our press release released earlier today.

Our revenue for the second quarter of 2007 was $1,336,000.

This represents a quarter-over-quarter increase of 18% over the first quarter of 2007.

In parallel to our increase in revenue, our cash burn for the quarter was only $2,721,000 compared to $4,192,000 for the previous quarter.

This represents a 35% reduction in our quarter-over-quarter cash burn.

We are pleased to see increases in our revenue, even while we significantly decreased our cost.

Contributing to these improvements were dramatic cost-cutting measures recently implemented.

We have made a number of organizational changes as well as reductions in fixed and variable costs and we expect these measures along with increases in revenues to improve our financial performance throughout 2007.

Consequently, we ended the second quarter of 2007 with nearly $13 million in cash, cash equivalents and short-term investments on our balance sheet.

As we have discussed previously, for the last few quarters, CombiMatrix has had a focus on our array-based molecular diagnostics or personalized medicine business as we feel that we have a significant competitive advantage over others in this market segment.

Before discussing our business operations, let me make some contextual remarks regarding the emerging molecular diagnostics market and specifically the microarray opportunities.

In general, the concept of personalized medicine is changing medical practice and will continue to do so through continued development of molecular diagnostic products.

At the risk of being redundant, I want to remind everyone that molecular diagnostics refers specifically to the analysis of genes and genetic information while traditional clinical diagnostics refers to the measurement of blood chemistry, proteins and other markers.

The basic premise is that an analysis of individual patients' specific genetic factors will enable personalized medical decisions for the diagnosis, prognosis and management of disease.

Each of our competitors seeks to enter the molecular diagnostics business as that will be a growth driver and provides strong recurring revenue streams.

And one might argue that, considering the multiple of revenues and earnings at which they trade, most of our competitors' stock prices already anticipate big successes of their molecular diagnostic strategies.

The markets for personalized medicine will be served by multiple technology platforms, each of which will have distinct applications.

The applications where microarrays excel are in situations where multiple genetic factors must be analyzed simultaneously.

In this arena, there are only a few companies that operate due to the technical complexity of developing, manufacturing and operating microarrays.

Each microarray company like ours is executing a strategy driven by unique characteristics of their technology platforms, their access to capital and their existing business infrastructure.

We have already demonstrated and will continue to demonstrate that our competitive advantage will enable rapid entry into this marketplace.

As many of you know, CombiMatrix began selling microarray products to researchers roughly 2.5 years ago.

It was necessary for us to enter this market to validate our technology and products, but our eventual goal was to sell to physicians, patients and clinical laboratories for diagnostic applications in a way that provides meaningful and sometimes life-saving benefits to patients.

We have now achieved that goal and are in the process of expanding our scale.

While we continue to sell products to researchers, our goal is to leapfrog this market and focus on the larger, more meaningful diagnostics market.

To this end, we have launched several array-based diagnostic services in the areas of congenital genetic disorders, oncology and infectious diseases.

Already, we have launched and are operating more DNA microarray diagnostics than any other company in the world.

This achievement was a stated goal for the Company.

We also have a rich pipeline of pending products to be launched during the second half of 2007 beyond.

We are making progress in establishing our presence in the molecular diagnostics market, building our diagnostics sales and marketing infrastructure and entering relationships with other labs -- laboratories to expand the reach of our diagnostic services.

Our tests are called laboratory developed tests and are regulated under guidelines cast in 1988 known as the Clinical Laboratory Improvement Amendment, or CLIA.

Our ability to develop and commercially launch services under CLIA guidelines underscores our competitive advantage relative to the other major microarray manufacturers.

I want to remind everyone that we operate two array-based platforms, each of which addresses different types of genetic analysis.

Both platforms enable the development and launch of diagnostic services through our CLIA-certified laboratory.

Based on our understanding of technology, regulatory guidelines and other factors, our larger publicly traded array-based competitors have not launched and may not launch array-based diagnostics under CLIA guidelines.

In fact, recently published guidelines from the FDA provide additional support for our assertion that our products and not those of our competitors are governed under CLIA guidelines.

The U.S.

FDA is currently engaged with industry, patients and the general medical community to formally determine what type of products they will regulate and what products they will enable to operate under CLIA.

Their initial thoughts were published in a guideline document in September of 2006, and just a couple of days ago they published a refinement to their initial document.

Meanwhile, to secure clarity for our Company, we met with the U.S.

FDA last year and received written confirmation that our initial products were to be regulated under CLIA.

To the best of my knowledge, we're the only company that has received such written confirmation from the U.S.

FDA.

Information regarding this letter can be found on our web site in the press release issued on on October 18, 2007 -- I'm sorry October 18, 2006.

In previous calls, I have discussed the specifics of one or more of our products.

As our product portfolio grows, it will be impossible to discuss all of our products, but I and appropriate staff are happy to discuss these products off-line with those who are interested.

I do want to note that our products have been used on over 500 patients now and that number continues to grow.

These products are being paid for by third-party health care reimbursement, from Medicare and from private insurance companies.

I now want to take a moment to talk about some, not all, the products in our pipeline.

One of our current diagnostic offerings is our constitutional array, which is used for pre and postnatal analysis of congenital disorders.

This array focuses on genetic aberrations that result in developmental delays in children.

This test utilizes a series of successively upgraded DNA arrays, each of which improves upon the previous array.

To date, we have launched three versions of this array, the most recent of which is the CA 1000 launched this month.

This array continues to be upgraded and upcoming versions will encompass the genetic markers that characterize multiple diseases as well as different degrees of autism.

Our goal is to launch this array before the end of this year.

Additional specific areas we have considered include solid tumors, such as prostate, breast and other cancers.

For strategic reasons as well as certain technical issues, our near-term oncology products will focus on hematological disorders, but we are addressing the solid tumor market as well and will provide additional information later in the year.

On the sales and marketing front, we have recently hired a stellar vice president of sales and have hired additional salespeople.

We have established a number of distribution partnerships with regional labs and we are receiving patient samples from both coasts of the U.S., as well as the interior.

We are also receiving international patient samples.

From prescribing physicians and laboratory directors, we have noted the high quality of our tests and the beneficial impact they are having for individual patients.

Therefore, we're excited about the growth of our diagnostic business as we continue to build commercialization infrastructure and scale the business.

In the infectious disease arena, we have utilized our influenza array for a number of funded studies of birds and humans.

We continue to upgrade this array and we feel it is the most comprehensive influenza A testing product on the market.

It is being used by U.S.

government laboratories, international government laboratories, as well as private sector health organizations.

Additionally, we consistently receive government support for this program and its expansion, and we expect this to continue.

Please stay tuned for additional announcements in this area.

Before I finish my prepared comments, I want to provide an update on the drug candidate for acute myelogenous leukemia being developed by our minority-owned subsidiary [Leukemix].

We're not incurring any cost with this program and we expect the drug to be in patients this year.

Delays in this program have been due to two factors.

First, there have been some recent changes in regulations regarding initiation of clinical trials in the UK, which is where we anticipate beginning our patient trials.

And also, we have been developing and finalizing the protocols for large-scale manufacture of the compound.

We remain excited -- we remain as excited if not more about the potential of this compound based on the recent additional data that we have generated.

With that, operator, I will take questions.

(OPERATOR INSTRUCTIONS).

[Steve Ellenbecker].

Dr.

Kumar, thank you for your report.

Congratulations on the quarter.

My question is, it seems that the key to our future now will be exponential growth in patient count and diagnostic services both.

Can you give us more insights into your anticipated growth in patient counts, as well as introduction of new diagnostic services?

We anticipate, are continuing to introduce new products addressing life-threatening diseases as we go forward certainly much faster, as I've stated, than any of our competitors.

To the extent that our revenues will increase, that will be driven by increased utilization of each of these products, as well as the additional product that we release.

Typically in situations like this, you have initial early adopters of new products, as well as thought leaders who will publish their results and physicians who will speak about the benefit of these products for their patients amongst themselves.

And all of that builds upon itself and supported by sales and marketing efforts by us.

We anticipate that we will be able to increase our revenue as we go forward.

(OPERATOR INSTRUCTIONS) [Alan Dubrow], A.G.

Edwards.

Congrats on a nice quarter.

Did I read it right that the total assets are about $41 million?

Yes, that is correct.

Okay, because I'm looking here at it.

The market cap of the Company looks like it's about $36 million.

So I guess one could maybe ascertain that the stock is trading under book value.

Just wondering, on the Leukemix, is that into the asset number, and now much is that factoring, that 41 million?

Leukemix is approximately $2.5 million on our balance sheet as an investment in other assets.

We own a third of that company so we don't consolidate the company, we just it carry it -- our one-third ownership on our balance sheet.

But it's not considered a current asset?

That's correct.

Okay.

Is that technically in phase I?

What phase is that in, Leukemix?

It's about to enter phase 1.

Just from something I read quite some time ago, in Barron's it talked about different -- the marketplace for compounds.

And if I recall, it talked about some Phase I compounds being worth as much as -- north of $50 million.

Any comment on -- just general comments on what the value of those Phase I compounds might be worth?

It's hard to say what its value is going to be until we have seen the initial data.

The preclinical data, meaning data in animals, shows very good results indicating that it's a very promising compound.

Should that preclinical data continue into the human side, which we hope is the case, we think this compound could be worth quite a bit.

In fact, over the last 24 months or so, 18 to 24 months, there have been multiple pharmaceutical company deals with smaller biotech companies that are developing leukemia drugs in the range of anywhere from $500 million to $1 billion.

It's hard to speculate whether our drug will be worth something in that range, but the key point is, leukemia and liquid tumors so to speak are a very -- an area of great interest for pharma companies that are trying to fill their pipelines.

However, we do need to wait until we see some initial human patient data, which we hope to have by the first quarter of this coming year.

We hope to be in patients in a few months and then have an initial data report by the beginning of next year.

Okay.

I got on a little late.

Can you just in one minute or so tell me what the sales side of the business looks like?

I know we hired a sales executive.

Is it just him right now?

Do we plan on expanding the sales team, and what does that look like?

We have hired a sales executive and we have also hired several additional, very stellar salespeople from the laboratory business to come on board, and they are all -- most of these people, all of these people in fact, are highly experienced people that understand the laboratory business and the diagnostics business where the only training that they need is on our products because these are revolutionary products that really have -- in most cases have never been seen before.

So we provide that training to them and then they go out on the street and start knocking on doors.

These are full-time salespeople working just for us?

That's correct.

Thank you, I appreciate it.

(OPERATOR INSTRUCTIONS).

David [Reese].

Nice to hear your voice.

Is there anything more you can say about the military?

Because that represents potential cash coming into the Company?

Let me just comment on that.

The relationship with the military and other government agencies is very strong.

We have provided a number of technologies and products and capabilities to them that are very valuable, we feel.

And as such, we expect that relationship to continue and I think a year ago roughly or some time ago in a previous conference call, I indicated that we would be -- we expect to be receiving a substantial amount of monetary support from the military, and we have.

That will continue.

Without providing any information that I'm not able to, I want to state that I am incredibly bullish about that relationship and that we should -- you should stay tuned for additional announcements in that area.

One follow-up question if I might.

Are you beginning to assemble a potential Board of Directors for the Company that would be impressive?

We have an initial Board of Directors, three outside directors that are listed in our S1 filing.

And as we go forward, once we are separated, there are additional individuals that we will be recruiting, primarily from the diagnostics -- the world of diagnostic.

How about anybody in the business end of it?

Well, all of these people are in the business end, but their industry experience is going to be in the diagnostics arena.

So you're going to be about to assemble an impressive Board of Directors?

I hope so.

I think that's important.

That gives conference to people.

I agree.

What?

I agree.

That's what I got right now unless I think of another one.

Paul Berger, PLA Associates.

I missed part of it.

Could you go over again what you're working on for the autism?

Absolutely.

I didn't mention a lot about it, but essentially over the last few months, there have been a number of seminal publications of very comprehensive studies about autism, and the prevailing theory about autism is that there are genetic predispositions which are often and can be triggered by environmental factors.

And so we are utilizing the information that has been gleaned from these comprehensive studies and putting them on our diagnostic arrays in such a way that when children primarily exhibit the symptoms, the physical symptoms of autism, we'll be able to evaluate their genetics and provide to their parents and their physicians, their medical team, information on what we think the progression of that disease is going to be.

As you may know, autism is one of those spectrum disorders where you can have very, very mild autism as well as very severe and anything in the middle.

We feel based on these recent studies that the genetic factors of the individual can help predict whether that individual is going to be a severely artistic person or very mildly autistic.

And so we are in the process of medically validating the research publication -- information from the research publications, and after we have done that, we will release that on an array that can be used to evaluate autistic children.

And we expect -- our goal is to launch that array before the end of this year.

Great, thank you.

Dr.

Kumar, we have no other questions in the queue, so I would like to turn the call back to you for any closing comments.

Thank you very much for attending this call, and we look forward to updating you as the year continues.

Thank you.

Thank you, ladies and gentlemen, that does conclude the call.

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 4360878.

The replay will be available until midnight of August 24.

This does conclude our conference for today.

Thank you all for participating.

Have a nice day.

All parties may now disconnect.