I've covered the story of Internet Patents Corporation (NASDAQ:PTNT) in detail over the last sixteen months. The company, formerly known as InsWeb, sold off its lead generation business in late 2011, distributed roughly half of the proceeds from the sale to shareholders via a $5 per share special dividend, and focused on licensing and/or litigating efforts to protect its portfolio of six patents.
Roughly a year into that effort, IPC now has five lawsuits filed alleging infringement of two patents: 6,898,587, covering "event logs" on websites; and 7,707,505, covering "dynamic tabs" for online user interfaces. IPC appears to have focused on smaller e-commerce companies as targets, among them eBags, auto insurance provider The General, and online event manager Active Network, Inc. (NYSE:ACTV).
The release of the company's 10-K earlier this year this month offered little news on the status of the suits, nor did the company's fourth quarter release. CEO Hussein Enan did write in the release that the company was continuing to "review and identify other potential infringers," but gave no update on the company's current litigation.
Enan did give new guidance on the company's spending going forward, and the 10-K updated the company's current financial condition. That data shows that PTNT still offers a great deal of downside cushion. The company has $33.6 million in cash and short-term investments, with minimal liabilities. The company is guiding for quarterly expenses going forward to be between $0.6 and $0.8 million, as IPC attempts to limit cash burn.
Including unexercised options, IPC has 7.98 million shares outstanding, putting its cash per share at $4.21 per share, relative to Monday's close of $3.80. Total liabilities are just $681,000; lease commitments are $1.5 million, net of a small amount of income from a sub-lease of office space in San Francisco. As such, if IPC shut its doors today and liquidated its assets, PTNT shareholders would receive, at the least, $31.5 million, or $3.95 per share, assuming all options were exercised and the lease paid off early and in full (according to the 10-K, that lease is non-cancelable and expires in early 2017).
Of course, it seems highly unlikely that IPC will shut its doors without giving its patent cases time to develop. But given the company's guidance, cash burn should be modest. Even if IPC is unsuccessful for two years, and expenses are at the high end of the company's range, in a liquidation shareholders would still receive about $3.15 per share, representing 17% downside from current levels.
And it's important to point out that, if the litigation strategy fails, the company will liquidate. CEO Enan owns 25 percent of PTNT shares (and the majority of outstanding options); his share of the company's cash is about $8 million, relative to total executive compensation of $770,000 in 2010 and 2011 combined. The estimated $3 million cash burn in 2013 will cost Enan about $750,000 from his claim on the company's cash, far more than he will earn in his role as CEO.
Of course, if the litigation strategy succeeds, Enan will profit, as will his fellow shareholders. The question, of course, is how likely that success is and how much IPC will profit from a legal victories and/or licensing agreements. As seen elsewhere -- whether in the drama at Vringo (NASDAQ:VRNG) or in the battle between Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) -- patent lawsuits are extremely difficult to predict.
Personally, I'd like to see the stock drop a little bit before I bit -- perhaps down to about $3.55, where one year's cash burn was fully priced in. The stock hasn't seen those levels since late 2012, but given its thin trading (average volume is around 10,000 shares daily), a 6.5 percent drop from current levels is certainly not out of the question. At $3.55, downside becomes limited to roughly 11-12 percent even if the new business is an abject failure, while any success in litigation or licensing at all would make PTNT a profitable buy.
But even at current levels, PTNT offers an interesting way to invest in a patent holding company without the volatility or risk associated with other stocks in the sector. It's a long-term play, no doubt, but the company's new updated numbers show that even if PTNT requires patience, it doesn't require a substantial amount of risk.