Patent Properties' CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Walker Innovation (WLKR)

Patent Properties, Inc. (GLOI) Q3 2013 Earnings Call November 15, 2013 9:00 AM ET


Garrett Edson – ICR, IR

Jon Ellenthal – Vice Chairman and CEO

Jay Walker – Executive Chairman and Lead Inventor

Karen Romaine – CFO


Joel Marcus - Network 1 Financial

Frank Teti - BMO Capital Markets


Greetings and welcome to the Patent Properties, Inc. Third Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question and answer session will the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Garrett Edson, Senior Vice President, ICR.

Garrett Edson

Thank you Jessi and good morning. By now, everyone should have access to our earnings announcement, which we released prior to this call. These documents may also be found on our website at Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements based on management’s expectations, estimates and projections as of today. The forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Patent Properties, Inc. We disclaim any intentions or obligations to update or revise any forward looking statements, except to the extent required by applicable law. Also our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found on our website at

I would now like to introduce Jon Ellenthal, CEO of Patent Properties, Inc.

Jon Ellenthal

Thank you, Garrett. Good morning and welcome to our third quarter 2013 earnings conference call and our very first call as a public company. I’m here with our Executive Chairman Jay Walker and our CFO Karen Romaine, who will be available for the Q&A portion of the call.

Since we recently became a public company through a merger in September, I think it would be helpful to spend a few minutes to introduce Patent Properties to those of you on the call who are new to our story and our industry.

Patent Properties is an intellectual property company that develops and commercializes its unique portfolio of assets and is currently creating a disruptive licensing solution for the mass market of patent owners and users. The company was formed when we merged a subsidiary of Walker Digital, LLC with a non-operating public entity. Walker Digital LLC is the research and development lab founded and led by Jay, who is of course best known as the founder of For those who may not know Jay beyond Priceline, let me briefly mention that Jay has twice been named by TIME magazine as one of the top 50 business leaders of the digital age and currently ranks as the 11th most patented living inventor in the world, based on U.S. patents issued. All of the patents owned by Patent Properties were developed internally at Walker Digital, and Jay is a named inventor on all issued patents and the lead inventor on the majority.

I’d like to turn the call over to Jay to discuss our vision, then I’ll provide some additional information regarding our patent portfolio and other business activities. Jay?

Jay Walker

Thank you, Jon.

Beginning in 1994, Walker Digital set out to invent and commercialize entirely new business solutions that relied on emerging digital tools to unlock unrealized value for consumers and businesses.

The lab invented new business systems to solve large and complex problems in multiple industries located at the intersection of human behavior and large-scale digital networks. Whenever possible, the lab secured patents to protect its inventions.

Over the past 20 years, we have invested tens of millions of dollars to create what is now a broad and growing portfolio of inventions.

We have historically pursued a flexible monetization strategy regarding our intellectual property. We have built new businesses. We have partnered with organizations large and small to bring our inventions to market. More recently, we have enforced our intellectual property rights in court.

While we continue to enforce our current portfolio, which Jon will discuss in a little while, we believe one of the biggest opportunities we have today is to tackle the inefficiencies in the patent market with a disruptive new business solution. In many ways, we consider ourselves the perfect people for the job. After all, we are commercial system designers by trade and, over the past 20 years, we have sat in pretty much every seat around the patent table. At one time or another we have been inventors, patent holders, licensees, licensors, defendants and plaintiffs. We have experienced all sides of the patent debate.

The new opportunity we see today is similar to opportunities we have addressed before. Ironically, the world of innovation needs some real innovation itself. Specifically, we need an “innovative way to license innovation.” We are hard at work on a solution that will unlock America’s innovation assets in a way that benefits everyone.

The U.S. patent market is a goldmine of innovation surrounded by a kind-of high-voltage fence – namely, the cost and expense of doing business through the federal court system. “Trapped” inventions can’t create jobs, product improvements, business expansion and, ultimately, global competitiveness for America. This commercial dead-end ultimately undermines the incentive to invent and works against everybody’s interests.

While we have the ability to enforce patents in our portfolio in the court system, a large majority of patent owners are not as fortunate. Over 95% of patents do not generate a single dollar in licensing revenue. This has a lot to do with the need for a federal judge to determine with certainty what exactly a patent covers and whether or not another company is using the protected property. Most inventors simply cannot afford the high costs and complexity of litigation and, without a credible threat of litigation, very little licensing activity takes place. This forces most inventors to the commercial sidelines with limited or no other options for generating a return on their investment in R&D. Lacking the resources to participate in the legal system directly, some patent owners decide to sell their patents to enforcement companies for whatever they can get or, more likely, give up hope of generating any return on their investment of creating and acquiring a patented invention. To put this in perspective, 60% of patents are owned by small companies, individual inventors, universities and research labs, but they account for only 1% of reported patent licensing revenues.

Operating companies are similarly aggrieved by the current environment. Even with new search tools, it’s nearly impossible for a business to understand all of the patents that may be relevant to its products or services. There is even a legal disincentive for companies to study patents that may be useful to their product development efforts, because doing so could open them up to charges of willful infringement and potentially treble damages. What’s worse, faced with an increasing number of patent lawsuits, many operating companies decide to pay settlements, regardless of the merits of the suit, rather than take on the costs and complexity of mounting a full legal defense.

Patent owners clearly need a new option, an alternative to litigation. This new option would provide an alternative to selling assets to an enforcement company and an alternative to giving up completely on generating any return on their property. Patent users need an alternative to expensive legal defenses, an alternative that provides an easy and affordable way to obtain the rights and protections they need to build their own businesses.

We believe there is an opportunity for the private sector to step up with a voluntary, market-based solution for patent licensing – a solution that serves the commercial interests of all of the parties – patent owners and patent users alike.

Patent Properties is in the process of developing just such a new patent licensing system. This will be an entirely new approach, Big Data driven business system that offers an alternative to the current inefficient and litigation-based model for patent enforcement and licensing.

The new system will be designed to live entirely outside the courtroom and will not require any changes to the law or to the Patent and Trademark Office administrative processes. Our approach will emphasize statistical probability over certainty, software over lawyers, commercial markets over the court system and affordability over exclusivity. And again, our system will be strictly voluntary – the new system will not litigate or threaten to litigate.

Essentially, what we are building with this new system is “no fault patent licensing.” Users will be able to license a package of relevant patents at disruptively low prices. Many patent owners will begin to generate their first dollars of licensing revenues. Ultimately, we believe our new system will unfreeze the economic value of America’s patents and allow for more innovation, more development and greater economic expansion.

Our goal is to launch this new system in the second half of 2014. As we get closer to launch, we will provide more extensive updates on the system.

With that said, let me turn it over to Jon.

Jon Ellenthal

Thanks Jay.

For those of you who didn’t meet us on our roadshow, let me tell you a little about our intellectual property. As of September 30, our portfolio consists of 386 granted patents, 85 pending patent applications and 19 active litigation matters. We are still building the portfolio and expect to grow it over time as new patents issue and as we file new applications based on the current patents in our portfolio. More than 50 of our patents were granted in the last 2 years, including 16 since the 3rd quarter of this year began.

As Jay indicated, we still have a three-pronged approach to creating value for our shareholders – legal enforcement, partnerships with other companies and commercialization of new businesses. Let’s discuss each of these in a little more detail.

We believe our current patent portfolio is well positioned for enforcement, and we’re off to a very good start – since April 2011, we have recorded over $65 million in gross settlement income and patent sale proceeds. We now have more than 60 licensees of our patents, including industry leaders in multiple fields and 23 of the Fortune 500 companies. And, we believe the previous couple of years are an indicator of good things to come. Right now, while we still have 19 active litigation matters which can be viewed on our website at, we expect to file additional suits with multiple large and mega cap defendants over the next few months. We believe that our patents are very strong as is evidenced, in part, by the number of forward citations our patents and published applications have received from some of the largest companies in the world. More than 100 patents in our portfolio have 20+ forward citations; more than 50 patents have 50 forward citations; and, 20 patents have more than 100 forward citations.

Over time, we expect to see revenue generated from current defendants, new defendants involving previously asserted patents and new defendants involving patents that have not yet been asserted. We will be very flexible in terms of how we monetize these patents – while we have the capital to take any case to its ultimate outcome in the courts, we will obviously be open to settlements and licensing our patents, just as we have done in the past. In addition, we might determine that a strategic partner is in a better position to contribute the operational resources to build and scale an invention. If those partnership opportunities are presented, we will remain open to pursuing them.

You will be seeing news of our latest enforcement activities in the next few months, but the nature of enforcing patents is that revenue contributions from these activities will naturally fluctuate and don’t lend themselves to a quarter-by-quarter evaluation. Thus, you can expect to see lumpy results on a quarterly basis as we settle, license and/or win our current suits. To us, each wave of lawsuits looks a bit like a barbell. Our recent revenues have been light as we transition from a cluster of early settlements with some defendants to the longer cycle revenues that come as we get deeper into the legal process with the remaining defendants.

From an expense perspective, our model has low fixed costs and only modest variable costs. Enforcement and licensing revenue will have a significant flowthrough to our operating income line. Our new patent licensing system that Jay described will take some time to develop, but it will be a subscription-style, recurring revenue model that will eventually generate high margins.

I’ll touch upon our third quarter results briefly. During the quarter, we generated total revenue of $1.0 million versus $6.2 million in the prior-year period, primarily due to recording revenue from one licensing agreement in the third quarter 2013 compared to ten licensing agreements in the prior-year period. As I mentioned previously, revenue will fluctuate from quarter to quarter based on resolutions to our enforcement actions until we introduce our patent licensing system, at which time we expect revenue will begin to become more recurring and, therefore, more predictable.

Legal and consulting contingent fees for the third quarter 2013 were $400,000 versus $2.9 million in the prior-year period. As a percentage of revenue, legal and consulting contingent fees were 44% for the third quarter 2013 and 47% for the prior-year period. Legal and consulting contingent fees are dependent upon the realization of revenue.

Other legal and consulting expenses for the third quarter 2013 were $300,000 versus $800,000 in the prior-year period, mainly attributable to the number of active patent infringement and licensing cases. We expect other legal and consulting expenses to continue to fluctuate period to period in connection with upcoming scheduled trial dates and our current and future patent development, licensing and enforcement activities.

Total general and administrative expenses for the third quarter 2013 were $7.3 million versus $1.5 million in the prior-year period, primarily due to $5.6 million in professional fees related to the Merger and stock-based compensation on awards earned concurrent with the Merger. Of the $5.6 million, $800,000 was professional fees and $4.8 million was stock-based compensation. Excluding professional fees and stock-based compensation, total general and administrative expense for the third quarter 2013 would have been $1.7 million.

On a pro-forma basis, excluding the professional fees related to the Merger, net loss for the third quarter of 2013 would have been $1.5 million and loss per share would have been $0.16.

To conclude, we are excited about the opportunity we see present to solve a major problem limiting intellectual property in the United States. We are on schedule to launch our disruptive patent licensing solution in the second half of 2014 and we look forward to providing additional details on future calls. We are well capitalized and have the flexibility necessary to execute our business plan and monetize our vast portfolio of intellectual property.

And with that, I thank you for your time and would like to open the call for Q&A – Operator?

Question-and-Answer Session


Thank you. Ladies and gentlemen we will now be conducting our question and answer session. (Operator Instructions)

Thank you. Our first question is coming from the line of Joel Marcus with Network 1 Financial. Please proceed with your question.

Joel Marcus - Network 1 Financial

Hi, good morning, and thank you so much, a wonderful presentation. And my question, I may be simplistic but, okay, I’m looking at your balance sheet as of September 30th. Why is there no valuation given whatsoever to the portfolio of patents that were acquired in this merger? Is it that because the merger didn’t close until after the quarter, and I guess – and I’m sorry if this is simplistic or if I missed it. Do we own these patents or does Mr. Walker still own the patents, and we just have a license to develop the patents and enforce the patents? So I would just like some clarification of what the asset base of this company is, and I thank you so much for a wonderful presentation.

Jon Ellenthal

Great. Thank you very much Joel, good morning. A couple of questions there. Let me answer your second question first which is to clarify the legal relationship between Patent Properties and the patent portfolio. All of the patents that have been previously owned by a subsidiary of Walker Digital and had been created by Jay and his invention team are now owned by Patent Properties. So Jay essentially placed his patent portfolio into the new entity by virtue of the merger. I believe the balance sheet does reflect the value of that asset as owned by the company.

Joel Marcus - Network 1 Financial

I’m sorry, I don’t see that, I see cash and some rather small amounts, total current assets and then total assets; I see no valuation given whatsoever to the patent portfolio at least on the balance sheet as contained in your September 30, 2013 Q.

Karen Romaine

There will not be -- I’m sorry, this is Karen Romaine the CFO. Good morning. There will not be a direct valuation; all the costs were internally developed, so they were all R&D costs at the time they were developed here. However, when we transferred those assets into the new company, you’ll see that the value of them is really displayed in the equity section with the transfer of the assets in exchange for some of the common stock and preferred stock issued.

Joel Marcus - Network 1 Financial

Okay. If you’re waiting for me to say something, okay, I understand, that’s a great clarification. So we actually are not the licensees of these patents, we actually own all these patents in our company?

Jon Ellenthal

That’s correct Joel.

Joel Marcus - Network 1 Financial

Okay and I would guess that maybe it’s smart not to value them because if you value them you would have huge amortization or depreciation that would mask earnings progress of the company. So perhaps that’s a good thing that there is not a large valuation of this on the balance sheet.

Jon Ellenthal

Correct. Thank you, Joel.


Thank you. Our next question is coming from the line of Frank Teti with BMO Capital Markets. Please proceed with your question.

Frank Teti - BMO Capital Markets

Hi, Jay, how are you? Just - I had a quick question with regards to the merger listing, and obviously at the closure I saw that obviously the name change will happen. Do you have a time table for that?

Jon Ellenthal

Hi, good morning, Frank. This is Jon. Yeah, the name change to Patent Properties was fully finished off this week. The formal name of the company is now Patent Properties, Inc. We expect to have a new ticker symbol very shortly. We're waiting on that process but it should be a matter of days.

Frank Teti - BMO Capital Markets

Jon, is that going to happen - will you seek listing on the NASDAQ or are you planning on continuing to trade on the over the counter?

Jon Ellenthal

We do expect to pursue an up-list to the NASDAQ or similar when the company is ready to do so.

Frank Teti - BMO Capital Markets

Okay, great. Thank you.


Thank you. (Operator Instructions) It appears we have no further questions at this time. I will turn the floor back to management for any concluding comments.

Jon Ellenthal

Great. Thanks everybody for joining us for our third quarter results. We will look forward to speaking with you again on our fourth quarter earnings call.


Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.

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