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Editor's Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

Over the last year, much more attention has been focused on a very exciting group of companies, patent trolls that are seeking enormous paydays from wealthy companies for infringement of their intellectual property, property that is claimed in some cases to be fundamental to the business operation of the alleged infringers. Some of the intellectual properties were organically generated by companies that are actually operating a business in a certain sector and some of the properties were acquired by companies whose sole focus (a true patent troll) is to acquire patents for the purpose of seeking damages from infringers, whereas the original patent holder may not have the resources, motivation or expertise required in going after potential violators.

In this article, I will list in order from #1 to #3, my top three patent litigation stocks that I feel have the greatest chance of significant price appreciation and why. Some of these companies have already seen their stock price advance to a certain degree prior to certain events and some haven't.

Coming in at #1 is Zecotek Photonics Inc. (OTCPK:ZMSPF) (or ZMS.V on the TSX Venture Exchange in Canada). Founded in 2003, it's a Canadian operated company that operates three divisional companies, Zecotek Imaging (medical, industrial and research), Zecotek Lasers (industrial and research) and Zecotek 3D (monitors for multimedia, entertainment, industrial and medical). The company has labs located in Canada, Singapore and Russia, with affiliated R&D and production facilities in the USA, China and South Korea.

Back in February of last year, Zecotek filed a patent infringement suit against two multi-billion dollar giants, Saint-Gobain and Philips (NYSE:PHG) for violation of U.S. patent #7,132,060 that covers the substances and chemical formulations used to grow lutetium fine silicate (LFS) scintillation crystals which are characterized by their combined high light yield and ultra-fast decay times and are typically used in medical scanning devices. The lawsuit alleges that Saint-Gobain's LYSO crystals infringe Zecotek's patent and that Philips infringes by using those crystals in the PET scanners it sells. Zecotek's Chairman & CEO, Dr. A.F. Zerrouk, says "We believe that this patent is fundamental and that damages are very substantial."

In speaking with Zecotek's CFO, Michael Minder, he tells me that the company introduced and shared with Saint-Gobain, their chemical formulas associated with scintillation crystals, planning on selling these crystals to Saint-Gobain who would then in turn sell them to Philips. What Zecotek didn't plan for was Saint-Gobain stealing the generously shared chemical formulas and then leaving Zecotek hanging out to dry with no deal at all and thus they not only willfully stole Zecotek's "secret sauce," but willfully infringed upon the patent.

Obviously, Saint-Gobain realized at the time that Zecotek had little cash in which to legally pursue them, but after the patent teams of the intellectual property law firms Graybeal Jackson and Susman Godfrey reviewed the case, they jumped in with both feet to help Zecotek take on these Goliaths. The potential mega-million payday (around $200 million by many estimates and to be discussed in a future article) that Zecotek stands to gain as a result of their lawsuit isn't the only reason I make this my #1 patent litigation stock.

The company has 55 patents and patents pending in many specialized areas and the company is by no means a one-trick pony. Just last month, the company announced that the European Organization for Nuclear Research (CERN) is working with Zecotek to assess the optimum size configurations for its patented LFS crystal material for use in new experiments clarifying the existence of the Higgs Boson. In March 2013, CERN scientists confirmed that a new subatomic particle discovered at the world's most powerful particle accelerator is the Higgs Boson. This relationship with CERN also has the potential to add mega-millions to Zecotek's bottom line.

With the company's quarterly cash burn dropping by nearly 50% during the last three-month reporting period, sophisticated investors have been rushing in to be included in the latest non-brokered private placement at .36 cents, which was first seeking $1.3 million, then bumped up to $1.5 million and finally due to demand wound up at $2.4 million, most likely providing Zecotek with enough cash to see it all the way through the trial, assuming some sort of settlement or deal for scintillation crystals hasn't been reached by that time.

Lastly, Zecotek's Markman hearing is rapidly approaching, as the hearing takes place on July 2nd and unlike many other patent litigation stocks that have risen significantly into Markman hearings, Zecotek didn't begin to see any rise in volume or price until this past week, slight at that and mostly due to the fact that very few investors in this sector are even aware of the company since it's not based in the USA and thus have little to no idea what it brings to the table. My guess is that at least 75% of investors who read this article and follow the many patent litigation stocks will have never even heard of Zecotek.

ZMSPF 1 Year Chart

With a $31 million market cap at .42 cents and no toxic funding to worry about, my analysis tells me that a successful Markman will lead to significant price appreciation. Philips desperately needs Zecotek's scintillation crystals since they are fundamental to PET scanning devices and it won't surprise me to see this case settled with cash and a multi-year purchase order, leaving Saint-Gobain empty-handed deal wise and also having to cough up millions in damages for blatant theft.

Coming in at #2 is MGT Capital Investments, Inc. (NYSEMKT:MGT), a company that is engaged in the business of acquiring, developing and monetizing intellectual property rights.

Back in November of last year, the company filed a patent infringement suit against multi-billion dollar gamers, Caesars Entertainment Corporation (NASDAQ:CZR), MGM Resorts International (NYSE:MGM), WMS Industries Inc. (NYSE:WMS), Penn National Gaming Inc. (NASDAQ:PENN) and Aruze Gaming America Inc., claiming each of these companies were violating patent #7,892,088 entitled "Gaming Device Having a Second Separate Bonusing Event," which is directed to a gaming system in which a second game played on an interactive sign is triggered once specific events occur in a first game. The suit alleges that the defendants either manufacture, sell or lease gaming systems in violation of MGT Gaming's patent rights, or operate casinos that offer gaming systems in violation of MGT Gaming's patent rights.

MGT says it's happy that the gaming industry has embraced its technology by embedding it in several gaming systems, including several very popular games, but that now it's time for fair compensation and thus MGT is seeking treble damages dating back to 2001 when the patent application was filed, as well as future royalties. MGT has the very successful IP law firm of Nixon & Vanderhye P.C. carrying the case and negotiations forward.

The stock was introduced to me in early April by an investor (Dennis Pannullo) that I consider to be one of America's top 10 microcap experts. Pannullo's uncanny knack for finding microcap multi-baggers has earned him quite a reputation amongst microcap traders and investors. I have found his research to be second to none.

MGT 6 Month Chart

At the time Pannullo introduced MGT to me, the stock was barely known by the investment community, trading at $3.10, not on anyone's radar as certainly evidenced by the volume and touted solely on the merits of the infringement suit and nothing else. What's happened since early April is the reason MGT now jumps to #2 on my list and possibly #1 at some point.

On April 22nd, MGT sent a message to the investment community that it is no longer to be viewed as just a patent troll, as the company acquired a majority stake in fanthrowdown.com, a new daily fantasy sports gaming site. On this news, I immediately contacted FanTD LLC and inquired about the business. I discovered that the site was just four months old and already had 11,000 subscribers. My channel checks since that time reveal the number of subscribers is now up to nearly 20,000 only 1 1/2 months later, so obviously the daily fantasy sports gaming business is booming.

As if the company's surprise entrance into the online mobile gaming and wagering space wasn't enough, MGT made yet another surprise and unexpected announcement last week, stating it was now creating its own mobile gaming platform, aside and completely separate from their fanthrowdown.com acquisition. MGT brought in ex Electronic Arts Inc. (NASDAQ:EA) V.P. and video game expert, Michael Haller, to head up the year-end launch. What's even more eye-catching is that Haller agreed to a performance-based employment contract and my guess is that we'll soon see the terms spelled out in an 8-K, thus giving investors a better idea of what's to come.

The initial reaction to Haller's arrival was misunderstood by investors, as they thought Haller was being brought in for fanthrowdown.com and when they saw the word "year-end," the portfolio managers I spoke with interpreted that to mean that the company wouldn't be seeing any revenues until that time, when in fact, fanthrowdown is already seeing its subscriber numbers explode, bringing in more and more revenue and having absolutely nothing to do with the company's new platform that Haller is putting together.

With a current market cap of $27 million at $4.47, no debt and approximately $8.5 million in cash after the company sold its Medicsight patents, investors that are interested in either the patent litigation or online and mobile gaming sector, should definitely have MGT on their radar, especially with events unfolding rapidly. Who would have thought just two months ago that a cult-followed stock like Zynga (NASDAQ:ZNGA) is now listed (page 26 of the latest 10-Q) as a competitor of MGT's? What started out as solely a patent litigation play has evolved into a booming fantasy gaming business that's experienced subscriber growth of almost 100% in just the last 1 1/2 months and now we'll see what MGT's new mobile gaming platform can do.

Coming in at #3 is Worlds Inc. (OTCQB:WDDD), a true patent troll unlike the companies mentioned above that have operating businesses aside from their patent suits and a company that I first wrote about back in February.

WDDD 6 Month Chart

For Worlds, their entire future basically comes down to one day, June 27th. This is the highly anticipated day when the company squares off against Activision Blizzard, Inc. (NASDAQ:ATVI) at the Markman hearing. If Worlds has an unsuccessful hearing, it's game over, plain and simple, followed by the company's stock quickly heading to $0.01

With that said, the very same notorious IP law firm that is handling the Zecotek case mentioned above (Susman & Godfrey) is also handling this case and the firm's patent team spent nine months executing extreme DD and examining prior art before even deciding to take the case. On top of that, Susman Godfrey has faced off with Activision Blizzard before on behalf of Paltalk and an undisclosed settlement was reached out of court and if you've ever used Paltalk before, you'd swear their virus-filled technology was created by a 1st-grader, but nonetheless, they prevailed against Activision.

Recently, a very well known patent litigation blogger who also happens to be an attorney, wrote a very detailed synopsis about Worlds' case against Activision and then followed up with a detailed article about the upcoming Markman, stating that Worlds could in fact receive a greater amount in their case against Activision than Vringo (NASDAQ:VRNG) would against Google (NASDAQ:GOOG). To date, no one on the planet has provided more insight into patent infringement cases than this attorney/blogger, so I would advise paying close attention to what he has to say. It's also been rumored that another notorious patent litigation blogger (James Altucher) is currently working on a very large spread about Worlds, set for some time in mid-July and after the Markman. With his massive following, you'd better believe the stock would make it on several thousand more radar screens.

On May 25th, Worlds filed a preliminary proxy statement seeking an increase in authorized shares from 100 million up to 150 million and solely for the purpose of being compliant with respect to the terms of the Hudson Bay/Iroquois $2.3 million financing deal back in March. In the same statement, Worlds also said they wanted to execute a possible reverse split after the Markman hearing for purposes of uplisting to a senior exchange and thus institutional investors that have been knocking on Worlds' door could finally get involved. I applaud this move 110% and although many of the message board comments I read are negative about such a move, it just goes to show you that the stock is currently filled with novice retail investors who have probably been burned in the past by a pink sheet scam or two and lack experience as to what happens when institutions get the chance to invest.

With plenty of cash (over $2 million) and no debt, Worlds can last all the way through a trial without raising further capital. The market cap is $35 million at the current PPS of .43 and a successful Markman hearing at the end of this month will result in not only a huge increase in the price of the stock, but probably result in subsequent lawsuits filed against other MMORPG'ers who are also allegedly in violation of Worlds' "Virtual Space" patents.

Conclusion:

While nothing in the patent litigation space is guaranteed, none of the above mentioned companies would have ever seen these high-powered IP law firms take their cases on a contingency if they felt like they wouldn't be successful. Patent litigation costs generally run from $1 million to $5 million, so these IP law firms must choose their battles wisely. There are many patent litigation stocks to evaluate and choose from, but I can't find anything better situated for potential significant gains than the three stocks mentioned above.

Disclosure: I am long OTCQB:WDDD, MGT, OTCPK:ZMSPF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: My Top 3 Patent Litigation Stocks