When I wrote my first article titled "Why Spherix Inc. Could Double Or More in 2013" about Spherix Inc. (SPEX) on July 8th 2013, the stock was trading around $6 per share. Yesterday it closed at $10.25. However, the events that have transpired since then have made me more bullish on this company's future value.
As I stated in my first article, Spherix Inc. is a shell that has sold off most of its core operations and now is in the process of purchasing over 222 patents and converting to a business model that to me is very similar to Acacia Research Corporation (ACTG), which has a billion dollar market cap.
SPEX and ACTG have several things in common. They both started as reverse splits with floats under one million shares. They then both devoted resources to purchasing and monetizing patents. They both have invested in a broad portfolio of patents, not just focusing on one patent or industry. ACTG did this years and years ago and has been very successful. SPEX is at the phase ACTG was at in its inception.
Since my last article, SPEX has announced a "monetization partnership" with the famous Rockstar Consortium, the owner of the world famous Nortel Networks patent portfolio of over 4,000 patents, to acquire a suite of patents. Rockstar Consortium is owned by Apple (AAPL), Microsoft, (MSFT), Sony, (SNE), Ericcson (ERIC), Blackberry (BBRY) and EMC (EMC).
Spherix Interim CEO Harvey Kesner stated, "We believe that we have entered a new phase of our development and are pleased to announce successful completion of our recent patent and monetization partnership with Rockstar. We have been working with our colleagues at Rockstar to identify opportunities for collaboration between us and this resulted in the selection of this suite of seven patents that cover mobile communication devices. We selected a suite of patents with well documented and easily understandable technology so that we can quickly proceed to seek agreements to support commercialization efforts and enforcement, if required. This acquisition, coupled with our recently announced acquisition of several hundred patents issued to Harris Corporation, allows us to expand our activities in the wireless communications and telecommunication sectors including antenna technology, Wi-Fi, base station functionality, and cellular.
In addition to this, Rockstar has become a shareholder in SPEX, acquiring approximately 177k shares at $5.65 per share. The shares are subject to a lockup agreement restricting future sales, subject to the satisfaction of certain price and volume targets. The price restriction is that SPEX must trade above $13 for at least 5 business days.
Spherix previously announced an agreement to acquire 222 patents from North South Holdings, Inc. principally developed by inventors at Harris Corp. (HRS), a 118 year old pioneer in wireless communications and equipment and a $6 billion defense contractor. The Harris portfolio has applicability in law enforcement communications, military and homeland security, satellite communications, portable electronics, Wi-Fi, microwave and cellular transmission, and solar concentrator technologies. Additional North South patents cover automated pharmacy ordering practices. Just yesterday, SPEX stated that North South Holdings announced its first settlement and license agreement with "a leading technology company". The interesting thing is the North South division mentioned only has filed lawsuits against multi-billion dollar grocers and I do not see any technology companies on this list. If a technology company settled then in my opinion that could bode well for the other cases with these particular patents. Lastly, this settlement represents just one segment of the multiple industries that these patents serve, again following the ACTG model.
It should be noted that North South Holding's CEO, Anthony Hayes, is going to become CEO of SPEX and is a successful veteran in patent litigation. In the last press release it stated, " As has been widely reported, Anthony is a seasoned monetization executive with numerous 'wins' under his belt, who will oversee our licensing and enforcement efforts and has broad access to patent owners and inventors." More info is found on the company's website, "Mr. Hayes has successfully monetized patents through all known monetization methods, including price arbitrage and litigation licensing brought against companies such as Cisco (CSCO), Broadcom (BRCM), Nokia (NOK), Ericsson (OTC:ERIAF), Tellabs (TLAB), and Alcatel-Lucent (ALU). Mr. Hayes is also a litigation consultant to several IP litigation companies. Mr. Hayes has received national recognition during his legal career, including: Special recognition by President George W. Bush, American Board of Trial Advocates Young Lawyer of the Year; and City of Columbia "20 Under 40." Mr. Hayes earned a Juris Doctor from Tulane University School of Law in 1995 and prior to law school, Mr. Hayes worked on the floor of the NYMEX on Wall Street. He also has his B.A. in Economics from Mary Washington College in Fredericksburg, Virginia."
Risks could include the failure to monetize patents and the need for more cash to execute the strategy causing dilution (It should be noted that North South has $2 million in cash and SPEX had $3.4mm at the last Balance Sheet date however). Lastly, SPEX is a low float stock which tends to be very volatile and in my opinion these stocks can be extremely risky and can see rapid price fluctuations.
After considering the recent events since my last article, I think SPEX could appreciate from the current levels, due to the following reasons:
1) Rockstar Consortium could have chosen to work with anyone (or go it alone) and they chose SPEX.
2) The first collaboration between Rockstar and SPEX resulted in the selection of a suite of seven patents that cover mobile communication devices. I am purely speculating that if this means smartphones/tablets, then Google (GOOG), Samsung (OTC:SSNHY), and HTC (OTC:HTCCY) could be possible defendants as they are leaders in this field.
3) The relationship between Rockstar and SPEX is described in the press release as a "monetization partnership". If they were to choose to, Rockstar could continue to partner with SPEX to monetize many of their patent collection, which was purchased originally for over $4 billion and was developed by Nortel.
4) Instead of requiring a large piece of equity from SPEX, Rockstar agreed to 177k shares and to share in profits going forward. To me that speaks confidence in the enforceability and value of the patents and future partnership.
5) Rockstar agreed to a minimum lockup of $13 per share. Much has been said about the shares to be issued for the North South Holdings patents and their affect on the share price. Well Rockstar as an investor, had to have knowledge of the shares to be issued for North South as well as the value of the North South patents and they agreed to be locked up at a minimum of $13. That dismissed for me any negative theory about the North South shares to be issued or the value of the patents. Additionally, the fact that Rockstar is a shareholder and is sharing in monetization profits, says to me that they are incentivized by creating shareholder value beyond the $13 floor.
6) North Star Holdings shares that they receive for the merger will also be subject to ownership, volume , and price restrictions ($12 and $15 prices are mentioned post-merger). The fact that North South's CEO is going to be CEO of the surviving company gives me confidence that the North South holders have confidence in the future.
At no time may shares of Series D Preferred Stock be converted if such conversion would cause the holder to hold in excess of 4.99% of the issued and outstanding Common Stock of the Company, subject to an increase in such limitation up to 9.99% of the issued and outstanding Common Stock on 61 days' written notice to the Company. The Series D Preferred Stock is subject to adjustment in the event of stock dividends, splits and fundamental transactions.
Additionally, subject to the beneficial ownership limitations described above, holders of Series D Preferred Stock may not convert such shares in excess of the "Conversion Limit". The "Conversion Limit" is defined as that number of shares of Common Stock as shall equal 15% (the "Volume Percentage") of the greater of (I) the trading volume of the Company's Common Stock on such conversion date or (ii) the average trading volume of the Company's Common Stock for ten trading days immediately prior to such conversion date. If the Company's Common Stock trades at a price of at least $12.00 per share on the conversion date, then the Volume Percentage for purposes of the foregoing calculation shall equal 20%. Notwithstanding the foregoing, holders of the Series D Preferred Stock may convert such shares without regard to the aforementioned conversion limit if the Company's Common Stock trades at a minimum price of $15.00 per share on the conversion date.
7) SPEX has one of the lowest tradeable floats of approximately 668k shares. With the restrictions on Rockstar and North South's new shares to be issued, this is likely to be a low float stock for the near future, barring other deals that require equity issuance.
8) Other patent monetization companies, some which have yet to realize any revenue have market caps as follows:
- Vringo Inc. (VRNG) - $259 million (Pre-revenue)
- Parkervision Inc. (PRKR) - $360 million (Pre-Revenue)
- VirnetX Holding Co. (VHC) - $986 million (pre-revenue but has won big cases)
- Acacia Research Corporation - $1.1 billion (Revenue generating and profitable)
When I take into account the SPEX share structure post-merger and compare to the market caps of the above four companies in patent monetization, SPEX would have a price per share of approximately $14-$61. (It is interesting to me that the low end of that range is around the price restriction language of the new shares). Depending on their success, SPEX shareholders may be in for a bright future.